CBOT RULE VIOLATIONS:
538. EXCHANGE OF FUTURES FOR RELATED POSITIONS (Legacy) (In Relevant Part)
The following transactions shall be permitted by arrangement between parties in accordance with the requirements of this rule:
4. An Exchange of Futures for a Related Position (“EFRP”) consists of two discrete, but related simultaneous transactions. One party must be the buyer of (or have the long market exposure associated with) the related position and the seller of the corresponding futures, and the other party must be the seller of (or have the short market exposure associated with) the related position and the buyer of the corresponding futures….
538. EXCHANGE FOR RELATED POSITIONS (Effective September 14, 2009) (In Relevant part)
The following transactions shall be permitted by arrangement between parties in accordance with the requirements of this rule.
Exchange for Physical (“EFP”) – A privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding cash position.
Exchange for Risk (“EFR”) - A privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding OTC swap or other OTC instrument.
432.Q. GENERAL OFFENSES – Acts Detrimental
It shall be an offense to commit an act which is detrimental to the interest or welfare of the Exchange or to engage in any conduct which tends to impair the dignity or good name of the Exchange.
Pursuant to an offer of settlement in which Benjamin Hutchen (“Hutchen”) neither admitted nor denied the findings upon which the rule violations are based and the panel having jurisdiction over Hutchen as he was employed by a member firm at the time of the subject transactions, on November 26, 2012, a Panel of the CBOT Business Conduct Committee found that from April 2008 through October 2009, Hutchen executed 119 customer orders, 115 of which involved Treasury futures. All the transactions were submitted for clearing as EFRP transactions. However, the subject transactions were not bona fide EFRPs because they involved the simultaneous purchase and sale of futures contracts without any corresponding transaction in a cash or OTC derivative instrument or without a corresponding transaction where the quantity covering the cash or OTC derivative was approximately equivalent to the quantity covered by Treasury futures. As such, the transactions initiated by Hutchen and submitted to the Exchange as EFRPs were, in fact, multiple noncompetitively executed futures transactions that circumvented the Exchange’s competitive execution requirements.
The Panel concluded that Hutchen’s noncompetitive execution of 115 transactions that involved Treasury futures, violated CBOT Rules 432.Q. and 538.
In accordance with the settlement offer, the Panel fined Hutchen $90,000 and suspended his access to all CME Group Inc. trading floors and direct and indirect access to all electronic or clearing platforms owned or controlled by CME Group for 10 months. In levying this penalty, the Panel took into consideration the CFTC’s corresponding action against Hutchen in connection with the subject activity as well as the Memorandum of Understanding between Hutchen and his employer. The suspension will commence on November 27, 2012, and will run through September 26, 2013, inclusive. The suspension will run concurrently with the suspension imposed in related action CME-09-06544-BC.
November 27, 2012
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