• NOTICE OF DISCIPLINARY ACTION

      • #
      • CBOT-16-0477-BC
      • Effective Date
      • 25 May 2018
    • FILE NO.:

      CBOT 16-0477-BC

      MEMBER FIRM:

      Wells Fargo Securities LLC

      CBOT RULE VIOLATIONS:

      Rule 526. Block Trades (in relevant part) (LEGACY)

      The Exchange shall designate the products in which block trades shall be permitted and determine the minimum quantity thresholds for such transactions. The following shall govern block trades:

      F. Unless otherwise agreed to by the principal counterparties to the block trade, the seller, or in the case of a brokered transaction, the broker handling the block trade, must ensure that each block trade is reported to the Exchange within the time period and in the manner specified by the Exchange. The report must include the contract, contract month, price, quantity of the transaction, the respective clearing members, the time of execution, and, for options, strike price, put or call and expiration month. The Exchange shall promptly publish such information separately from the reports of transactions in the regular market.

      CME Group Market Regulation Advisory Notices RA1510-5 and RA1519-5 (in relevant part) (LEGACY)

      Use of Nonpublic Information Regarding Block Trades (in relevant part)

      Pre-hedging or anticipatory hedging of any portion of a block trade in the same product or a closely-related product based upon a solicitation to participate in a block trade is not permitted. A closely related product is a product that is highly correlated to, serves as a substitute for, or is the functional economic equivalent of the product being traded as a block.

      Counterparties to a block trade are permitted to initiate trades to hedge or offset the risk associated with the block trade following the consummation of the block trade, including during the period preceding the public report of the block trade by the Exchange.

      Except as provided above, parties privy to non-public information attendant to a block trade are prohibited from trading in the same product or closely-related product for the purpose of taking advantage of such information prior to the public report of the block trade by the Exchange. This prohibition is not intended to preclude such parties from continuing to transact in the marketplace in the context of their normal business; rather, it precludes parties in possession of actionable nonpublic information regarding an imminent block trade or report of a block trade from specifically using such information to their advantage. Information regarding a block trade is considered to be nonpublic until such time that the block trade details have been disseminated to marketplace by the Exchange or the information can be otherwise be demonstrated to have become stale or obsolete.

      Rule 432 (“General Offenses”) (in relevant part)

      It shall be an offense:

      W. for any party to fail to diligently supervise its employees and agents in the conduct of their business relating to the Exchange.

      FINDINGS:

      Pursuant to an offer of settlement in which Wells Fargo Securities LLC (“Wells Fargo”) neither admitted nor denied the Rule violations upon which the penalty is based, on May 23, 2018, a Panel of the Chicago Board of Trade Business Conduct Committee (“Panel”) found that on August 25, 2015, and January 15, 2016, Wells Fargo pre-hedged block trades in the U.S. 30-Year Bonds futures, U.S. 5 Year Note futures, and U.S. 10-Year Note futures by executing trades on Globex on the opposite side of the market in the same products as the relevant requested block trade prior to consummation of such block trade. As a result of this activity, Wells Fargo realized an aggregate profit of $117,187.50. In addition, Wells Fargo failed to report one of the block trades to the Exchange within the applicable time limit following execution.

      The Panel further found that Wells Fargo failed to diligently supervise its trader in the conduct of its business relating to the Exchange, by failing to provide sufficient training regarding the prohibition on prehedging block trades.

      The Panel concluded that Wells Fargo thereby violated CBOT Rules 526, 526.F., and 432.W.

      PENALTY:

      In accordance with the settlement offer, the Panel ordered Wells Fargo to pay a fine of $70,000, and disgorgement in the amount of $117,187.50.

      EFFECTIVE DATE:

      May 25, 2018