SMW TRADING COMPANY, INC.
CBOT RULE VIOLATIONS:
11102.F. Soybean Futures – Termination of Trading
No trades in soybean futures deliverable in the current month shall be made after the business day preceding the 15th calendar day of that month. Any contracts remaining open after the last day of trading must be either:
a. Settled by delivery no later than the second business day following the last trading day (tender on business day prior to delivery).
b. Liquidated by means of a bona fide Exchange of Futures for Related Position no later than the business day following the last trading day.
(legacy) 538. Exchange of Futures for Related Positions
The following transactions shall be permitted by arrangement between parties in accordance with the requirements of this rule:
1. Exchange for Physical (“EFP”) - A privately negotiated and simultaneous exchange of a futures position for a corresponding cash position.
. . .
For purposes of this rule, all EFPs and EFRs shall be referred to as Exchanges of Futures for Related Positions (“EFRP”).
. . .
9. Clearing firms on opposite sides of an EFRP must subsequently approve the terms of the transaction, including the clearing firm (division), price, quantity, commodity, contract month and date prior to submitting the transaction to the Clearing House. All EFRP transactions must be submitted to the Clearing House by a clearing firm acting on its own behalf or for the beneficial account of a customer who is a party to the transaction. Clearing firms are responsible for exercising due diligence as to the bona fide nature of EFRP transactions submitted on behalf of customers.
Pursuant to an offer of settlement in which SMW Trading Company, Inc. (“SMW”) neither admitted nor denied the findings, on March 16, 2010, a Panel of the CBOT Business Conduct Committee found that on Friday, September 12, 2008, the last trading day for the September 2008 Soybean futures contract, an SMW customer trading from a remote location held a short September 2008 Soybean futures position beyond the contract’s expiration. At the time, environmental conditions were stressed from hurricanes in the Gulf of Mexico, there was a severe shortage of deliverable soybeans in the cash market, and SMW neither owned, nor was able to obtain, shipping certificates that would allow the firm to meet its delivery obligations on Monday, September 15, 2008.
SMW therefore executed transitory EFPs with the same counterparty and the same underlying cash in the September and November Soybean futures contracts to liquidate the short September futures position prior to the delivery deadline and roll the position to the November contract. The two EFPs were not bona fide EFPs. Given the shortage in the cash soybean market and other market conditions, the transitory EFPs avoided a delivery default and discharged SMW’s obligations to the Exchange. The Panel found that in so doing, SMW violated CBOT Rule 11102.F. and legacy CBOT Rule 538.
In accordance with the settlement offer and in consideration of SMW’s cooperation with Exchange staff, and its enhanced procedural safeguards and policy changes since implemented, the Panel fined SMW $150,000.
March 18, 2010
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