CME RULE VIOLATIONS:
Rule 538. EXCHANGE FOR RELATED POSITIONS
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 RA0910-5 (October 2, 2009)
Q8: In which products are transitory EFRPs permitted?
A8: Transitory EFRPs are EFRPs in which two counterparties contemporaneously execute an EFRP transaction and an additional cash or OTC transaction that offsets the cash or OTC component of the EFRP; such transactions are permitted only in NYMEX energy and metals products, COMEX metals products and CME foreign exchange (“FX”) products.
Pursuant to an offer of settlement in which Scott Shepard (“Shepard”) neither admitted nor denied rule violations upon which the penalty is based, on November 15, 2011, a Panel of the CME Business Conduct Committee found that on October 9, 2009, while acting in his capacity as an employee of JBS USA, LLC, Shepard appeared to contemporaneously execute Exchange For Related Position (“EFRP”) transactions with the futures component being October 2009 Live Cattle futures and the related position being an over-the-counter (“OTC”) swap opposite a counterparty contingent upon executing an equal and offsetting EFRP transaction on October 12, 2009, opposite the same counterparty. The Panel found that Shepard’s intention in executing these EFRPs was to freshen a 4,495 contract long October 2009 Live Cattle futures position by liquidating its futures position through the EFRPs executed on Friday, October 9, and then reestablishing the same long futures position through the EFRP executed on Monday, October 12.
The Panel found that the EFRPs were non-bona fide transactions because the OTC components to the EFRPs offset and the parties were able to establish or change their futures positions without any change to their OTC positions or economic risk. The Panel found that in so doing Shepard violated CME Rule 538 and associated MRAN RA0910-5.
In accordance with the settlement offer, the Panel ordered Shepard to pay a fine of $20,000 and barred Shepard from placing orders or executing transactions on any contract market or trading platform owned or controlled by CME Group Inc., including CME Globex, for a period of ten business days, beginning on the effective date below and continuing through and including December 1, 2011.
November 17, 2011
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