NOTICE OF DISCIPLINARY ACTION

FILE NO.:

CME 10-07408-BC

MEMBER:

HARRIS KLEIN (HRIS)

CME RULE VIOLATIONS:

Rule 432 – GENERAL OFFENSES
It shall be an offense to:
B. to engage in . . . bad faith or in conduct or proceedings inconsistent with just and equitable principles of trade.

Rule 536 – RECORDKEEPING REQUIREMENTS FOR PIT, GLOBEX, AND NEGOTIATED TRADES
A. General Requirements for Open Outcry Pit Trades
. . .
Each member shall provide his clearing member with any trading documents which are relied upon for transactional information necessary for submission to the clearing system containing those trades that have been executed thus far during that day. Trading documents include trading cards of members' personal and proprietary trades, trading cards of one member reflecting trades executed on behalf of another member and floor order tickets. Such trading documents must be submitted and timestamped no later than 15 minutes after the end of each half-hour interval . . .

Rule 547 – DISCRETIONARY ORDERS
Other than DRT orders, no Member (as defined in Rule 400) shall accept an order that gives more latitude than price and time in execution of the order, except in accordance with the provisions of Rule 956 . . .

FINDINGS:

Pursuant to an offer of settlement in which Harris Klein (“Klein”) neither admitted nor denied the rule violations upon which the penalty is based, on December 19, 2012, a Panel of the CME Business Conduct Committee (the “Panel”) found that from May through July 2010, Klein executed 26 trades of Standard and Poor’s 500 Stock Price Index (“S&P”) flexible options and S&P weekly or end-of-month options set to expire the following trade date that he described as errors, but which in many instances were not undertaken as a result of bona-fide errors, in an effort to profit from premiums associated with the expiring options without having sufficient capitalization to trade such products.

In all 26 instances, Klein improperly executed trades that were either: (i) not associated with an actual executable customer order; (ii) associated with a customer order with no specified quantity attached; or (iii) associated with a customer order that Klein knowingly overfilled. Klein described the trades as being trades the customer declined to accept. On each of the days the trades were consummated, Klein failed to keypunch or timestamp his cards associated with the “customer declined trades” at issue and failed to submit the cards to his clearing firm. As a result of this practice, Klein was able to avoided margin calls.

Further, in each of the 26 instances, the trades cleared in Klein’s error account the following business day, which was also the expiration date of the options contracts. Klein effectively positioned himself to collect the premium on these out-of-the-money options that usually expired worthless, by shifting the overnight margin risk to his clearing firm. As a result, Klein profited $69,875 in his error account.

The Panel found that in so doing, Klein violated CME Rule 536, 547, and 432.B. (with regard to the cited language above)

 

PENALTY:

In accordance with the settlement offer, the Panel ordered Klein to: (i) pay a fine of $100,000; (ii) disgorge $69,875; and (iii) serve a suspension for a period of four (4) months of his: 1) membership privileges; 2) access to all CME Group Inc. trading floors; and 3) direct and indirect access to all electronic trading and clearing platforms owned or controlled by CME Group, including, but not limited to CME Globex, CME ClearPort and CME Direct. The suspension shall run from December 21, 2012 through April 20, 2013, inclusive.

EFFECTIVE DATE:

December 21, 2012