• NOTICE OF DISCIPLINARY ACTION

      • #
      • NYMEX 15-0115-BC-2
      • Effective Date
      • 19 July 2019
    • FILE NO.:

      NYMEX 15-0115-BC

      MEMBER:

      SG Americas Securities, LLC (as successor to Newedge USA, LLC)

      NYMEX RULE VIOLATIONS:

      Rule 432. (“General Offenses”) (in 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.

      (LEGACY) Rule 526 Block Trades (in part)

      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 five minutes of the time of execution; except that block trades in interest rate futures and options executed outside of Regular Trading Hours (7:00 a.m. – 4:00 p.m. Central Time, Monday – Friday on regular business days) must be reported within fifteen minutes of the time of execution. 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.

      NYMEX Market Regulation Advisory Notice RA 1327-4 (in relevant part)

      5(b). Reporting Obligation (in part)

      Price reporting obligations are the responsibility of the seller, unless otherwise agreed to by the principal counterparties to the block trade; however, in the case of a brokered transaction, the price reporting obligation is the responsibility of the broker handling the block trade, unless otherwise agreed to by the principal counterparties to the block trade. For purposes of the foregoing, the term “seller” refers to the principal counterparty acting as the seller of the block trade.

      The failure to submit timely, accurate and complete block trade reports may subject the party responsible for the reporting obligation to disciplinary action. Parties shall not be sanctioned for block reporting infractions deemed to arise from factors beyond the reporting party’s control (e.g. the block trade fails the CME ClearPort automated credit check).

      10. Use of Nonpublic Information Regarding Block Trades (in 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 nonpublic information attendant to a block trade are prohibited from trading in the same product or a 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 the marketplace by the Exchange or the information can otherwise be demonstrated to have become stale or obsolete.

      FINDINGS:

      Pursuant to an offer of settlement in which SG Americas Securities, LLC (“SGAS”) (as successor to Newedge USA, LLC)) neither admitted nor denied the rule violations upon which the penalty is based, on July 17, 2019, a Panel of the New York Mercantile Exchange Business Conduct Committee (“Panel”) found that on multiple occasions between January 14, 2014, and January 26, 2016, SGAS had a riskless principal mandate in effect. Three traders employed by SGAG’s Canadian affiliate entered into separate transactions with third parties prior to consummating the block trades with customers and despite having previously received nonpublic information attendant to the customers’ requested block trades. Specifically, in each instance, after receiving a solicitation from a customer to participate in a block trade in various energy futures and options on futures contracts, but prior to consummating the block trade with the customer, the traders executed a separate block trade with a liquidity provider in the same product and on the same side of the market as the customer’s proposed block trade in order to hedge the block trade subsequently executed opposite the customer. By entering into the hedge transaction and establishing the price of the hedge transaction prior to consummating the customer block trade, SGAS was able to guarantee a profit on the subsequent execution opposite the customer. Moreover, the Panel found that on multiple occasions between June 2015, and October 2015, a trader employed by SGAS in New York, after receiving the solicitation of a block trade but prior to consummating the block trade with the customer, either executed a separate block trade with a liquidity provider or executed a trade on CME Globex in the same product and on the same side of the market as the customer’s proposed block trade in order to hedge the block trade ultimately executed opposite the customer. By entering into the hedge transaction and establishing the price of the hedge transaction prior to consummating the customer block trade, SGAS was able to guarantee a profit on the subsequent execution opposite the customer.

      As a result of this pre-hedging activity, SGAS realized profits in the amount of $142,910.

      In addition, SGAS failed to report certain of these block trades within the specified time period following execution, as well as reported inaccurate execution times of block trades.

      The Panel also found that, in connection with this activity, SGAS failed to diligently supervise its traders in the conduct of their business relating to the Exchange by failing to give sufficient guidance and adequately train its employees on how to comply with its riskless principal mandate without pre-hedging block trades.

      The Panel concluded that as a result of the foregoing, SGAS violated NYMEX Rules 432.W. and legacy Rule 526.

      PENALTY:

      In accordance with the settlement offer, the Panel ordered SGAS to pay a fine in the amount of $350,000 ($300,000 of which is allocated to NYMEX) and to disgorge profits in the amount of $142,910.

      EFFECTIVE DATE:

      July 19, 2019