NOTICE OF DISCIPLINARY ACTION

MEMBER:

J. Aron & Company LLC

COMEX RULE VIOLATIONS:

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.

COMEX Market Regulation Advisory Notice RA1908-5R (in relevant part)

11. Use of Nonpublic Information Regarding Block Trades (in part)

b) Pre-Hedging/Anticipatory Hedging

Parties to a potential block trade may engage in pre-hedging or anticipatory hedging of the position that they believe in good faith will result from the consummation of the block trade, except for an intermediary that takes the opposite side of its own customer order. In such instances, prior to the consummation of the block trade, the intermediary is prohibited from offsetting the position established by the block trade in any account which is owned or controlled, or in which an ownership interest is held, or for the proprietary account of the employer of such intermediary. The intermediary may enter into transactions to offset the position only after the block has been consummated.

A party acting principally in a block trade negotiation that plans on engaging in pre-hedging activity must ensure it is clear to its counterparty that the party is trading principally, and, as such, owes no agency duties to the counterparty. In that regard, initial disclosures in account opening agreements or other similar communications may be deemed insufficient in the event that the block trade negotiation itself is indicative of the party assuming agency duties to the counterparty.

Representations by a party that they will “work an order” on behalf of a counterparty, or block trade negotiations where the price of the block trade is tied to the price of the party’s pre-hedging activity plus a “markup” or “basis” are viewed by Market Regulation to imply that such agency duties are owed to the counterparty. In such scenarios, pre-hedging is prohibited.

Representations by a principal in the negotiation of a block trade that the party is intending to act as a principal is sufficient proof there are no agency duties (express or implied) owed to the counterparty provided that such representations are made prior to engaging in any pre-hedging activity. For example, disclosures in the header/footer of a party’s instant message communications advising that the party is acting principally and owes no agency duties to the counterparty would suffice in lieu of direct communications during the negotiation. Alternatively, such disclosures could be made on recorded phone lines or sent via email prior to the principal engaging in pre-hedging activity related to the block trade negotiation.

FINDINGS:

Pursuant to an offer of settlement in which J. Aron & Company LLC neither admitted nor denied the rule violations upon which the penalty is based, on May 17, 2022, a Panel of the Commodity Exchange, Inc. (“COMEX”) Business Conduct Committee (“Panel”) found that on several occasions in May 2020 and July 2020, J. Aron, prior to engaging in any pre-hedging activity, failed to make clear to its counterparty that it was trading principally. Specifically, in each instance, J. Aron relied on its terms of dealing and course of dealing and failed either to make, or timely make, representations in the negotiation of the block trades that it intended to act as a principal prior to engaging in any pre-hedging activity. After receiving a solicitation from a counterparty to participate in a block trade in various metals futures contracts, but prior to consummating the block trade with the counterparty, J. Aron traders executed trades on Globex in the same product on the opposite side of the market that J. Aron ultimately took in the block trade and (conversely) on the same side of the counterparty’s block trade. By entering into the hedge transaction and establishing the price of the hedge transaction prior to consummating the block trade with the counterparty, J. Aron was able to realize a profit on the subsequent execution opposite the counterparty.

The Panel concluded that J. Aron thereby violated COMEX Rule 526.

PENALTY:

In accordance with the settlement offer, the Panel ordered J. Aron to pay a fine in the amount of $125,000 and to disgorge profits in the amount of $10,825.