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      • CBOT 13-9350-BC
      • Effective Date
      • 24 July 2015

      Gavilon, LLC


      538.A. Nature of an EFRP

      An EFRP consists of two discrete but related simultaneous transactions. One party to the EFRP must be the buyer of (or the holder of the long market exposure associated with) the related position and the seller of the corresponding Exchange contract. The other party to the EFRP must be the seller of (or the holder of the short market exposure associated with) the related position and the buyer of the corresponding Exchange contract.

      Market Regulation Advisory Notice Exchange for Related Positions Rule 538
      RA 1006-5: (in part)

      Q9: In which products are transitory EFRPs permitted?

      A9: Transitory EFRPs are EFRPs in which two parties contemporaneously execute an EFRP transaction and additional cash or OTC transaction that offsets the cash or OTC component of the EFRP; such transactions are permitted exclusively in NYMEX energy and metals products, COMEX metals products, and CME foreign exchange (“FX”) products.

      Q11: Is there a specified minimum time period for which the initiating swap must be in force before it is unwound such that the EFR would not be considered transitory?

      A11: While the length of time between the transactions may be a consideration in assessing whether the EFRP is transitory, the legitimacy of the transactions will be evaluated based on whether the transactions have integrity as independent transactions exposed to market risk that is material in context of the transactions. Transactions that do not meet this test are considered prearranged futures trades that circumvent the open market execution requirement.


      Pursuant to an offer of settlement in which Gavilon, LLC (“Gavilon”) neither admitted nor denied the rule violations upon which the penalty is based, on July 22, 2015, a Panel of the Chicago Board of Trade Business Conduct Committee (“Panel or BCC”) found that Gavilon is subject to the BCC’s jurisdiction pursuant to Rules 402 and 418, and that on March 7, 2013, Gavilon sold an OTC put swaption contract opposite another party. Contemporaneous with the execution of the OTC put swaption, Gavilon entered into an Exchange traded Wheat calendar spread put option transaction via an Exchange of Options for Options (“EOO”) transaction opposite the same party. The execution of the EOO thereby terminated the swaption, offset the cash component of the EOO, and allowed Gavilon to establish a long futures position. The Panel concluded that the execution of the EOO and swaption transactions constituted a transitory EFRP, which is prohibited in agricultural products.

      The Panel concluded that Gavilon thereby violated CBOT Rule 538.


      In accordance with the settlement offer, the Panel ordered Gavilon to pay a fine of $15,000.


      July 24, 2015