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The Wall Street Journal, Bloomberg, and Reuters have all reported that the Commodity Futures Trading Commission ("CFTC") is allegedly examining whether high-frequency-trading firms are violating rules by using wash trades to artificially inflate volume and distort markets in futures contracts. Wash trading is the buying and selling of identical futures contracts through different futures commission merchants at the same time. Repeated wash trading is done to manipulate the market and induce others to trade.

Wash trades are banned under U.S. futures law. When wash trades occur, "it might appear to be liquidity, but it is not. It isn't really there. It's fantasy liquidity," Bart Chilton of the CFTC was to say in a speech last Sunday.

The CFTC investigation centers on trading related to crude oil, precious metals, agricultural commodities and the Standard & Poor's 500 stock index. The two primary exchange operators that handle such trades are the CME Group Inc. ("CME") and IntercontinentalExchange Inc. ("ICE"). Regulators reportedly are examining whether these exchanges' systems are sophisticated enough to prevent such trades from occurring.

"We actively enforce rules prohibiting wash trading, and we are in the process of developing technology to prevent wash trades as prohibited by CME and CFTC at the trading-engine level," a CME spokeswoman told the Wall Street Journal.

CME plans to introduce new technology in the middle of this year, she said. An ICE spokeswoman told the newspaper that the exchange operator has employed wash-trade filters for years, and "we continue to enhance them."

Neither CME not ICE would discuss details of communications with regulators about their filters. No exchange operator has been accused of wrongdoing, according to the Wall Street Journal.

Continue Reading "Commodity Futures Trading Commission Investigating Wash Sales of Futures Contracts at CME Group, Inc. and IntercontinentalExchange, Inc." »

Posted in: Futures Commission Merchant

Early in 2012, the National Futures Association ("NFA"), seeking to better protect customer funds, approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer funds, including banks, clearing Futures Commission Merchants ("FCMs"), broker-dealers and money market accounts to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCMs designated self-regulatory organization ("DSRO"). Each DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to ensure that the figures corroborate each other.

In November, the NFA Board of Directors approved an amendment to Financial Requirements Section 4, requiring each FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances on a daily basis to a third party designated by NFA. The first phase of the daily confirmation system, which relates to banks, was expected to be fully implemented by December 31, 2012. Other categories of depositories will be added in 2013.

Another amendment approved by the NFA Board of Directors in November of 2012 was to increase the capital requirements for FCMs acting as counterparties in FOREX transactions in off-exchange foreign currency transactions with eligible contract participants ("ECPs"). NFA noted that three FCMs ceased to act as FOREX dealer members and were almost exclusively acting as counterparties to FOREX transactions with ECPs. NFA had concerns that these firms could be subject to inadequate capital requirements. Additionally, NFA could not find a rationalization that an FCM that acts as a counterparty to a retail FOREX transaction must maintain at least $20 million in adjusted net capital while an FCM that engages in an identical type of transaction with an ECP must only maintain a minimum of $1 million in capital. NFA has submitted the amendment to the Commodity Futures Trading Commission for approval.

Posted in: Futures Commission Merchant

Peregrine Financial Group, Inc. ("PFG") has been shut down by enforcement actions filed against it by the Commodity Futures Trading Commission ("CFTC") and the National Futures Association ("NFA") on July 9, 2012. The regulators discovered that the firm's founder, Russell Wasendorf, Sr., had been falsifying bank statements about the amount of funds held by PFG. It is estimated that more than $200,000,000 in customer funds are missing. Wasendorf Sr. claims that he has spent the vast majority of that money. PFG filed for bankruptcy protection on July 10, 2012.

The scheme came to a head when the NFA required PFG to confirm its capital electronically rather than to submit bank statements. Wasendorf Sr. unsuccessfully attempted to commit suicide the next day by hooking a hose up to the tailpipe of his car. A suicide note found by the FBI in Wasendorf Sr.'s car stated that he had been lying to regulators for twenty years and he admitted to stealing $100,000,000 dollars.

Wasendorf Sr. was arrested on July 13, 2012. Wasendorf Sr. is charged criminally with making false statements to Commodity Futures Trading Commission regulators about how much client money the firm had on deposit. He, along with his son, Russell Wasendorf Jr., and two other executives at PFG have been named in a class action case.

This is the second major case with missing customer segregated funds in the last year, following the collapse of MF Global. In January of this year, the CFTC conducted an audit of futures commission merchants and found no irregularities with PFG.

Posted in: Futures Commission Merchant