• #
      • CBOT 15-0204-BC-2
      • Effective Date
      • 14 July 2016


      CBOT RULE VIOLATION: EXCHANGE RULE 538.A. (Legacy) Nature of an EFRP

      An EFRP consists of two discrete but related simultaneous transactions. One party to the EFRP must be the buyer (or 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.

      However, a member firm may facilitate, as principal, the related position on behalf of a customer, provided that the member firm can demonstrate that the related position was passed through to the customer who received the Exchange contract position as part of the EFRP.

      MRAN RA1006-5 - Exchange for Related Positions

      Q10: In products in which transitory EFRPs are not permitted, can a swap be negotiated to settle an EFR?

      A10: Yes, parties to a swap may agree to settle a swap via an EFR. However, at the time of origination, the prices of the swap and the EFR may not be pre-negotiated such that market risk is negated.

      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 the time between the transactions may be a consideration in assessing whether the EFRP 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 the 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 JPMorgan Chase Bank N.A. (“JPMorgan”) presented at a hearing on July 12, 2016, in which JPMorgan neither admitted nor denied the rule violation upon which the penalty is based, a Panel of the CBOT Business Conduct Committee (“Panel”) found it had jurisdiction over JPMorgan pursuant to CBOT Rules 402 and 418 and that, on March 6, 2014, JPMorgan executed two contingent Exchange for Related Position (“EFRP”) transactions in which the related positions for the transactions appeared to have been designed in a manner to avoid material market risk. The transactions were transitory in nature and therefore non-bona fide.

      The Panel found that, as a result, JPMorgan violated Legacy Exchange Rule 538.A (“Nature of an EFRP”)


      In accordance with the settlement offer, the Panel ordered JPMorgan to pay a fine to the Exchange in the amount of $20,000.


      July 14, 2016