Amendments to CME/CBOT/NYMEX/COMEX/CME SEF Rule 432 (General Offenses) Chapter 4, Enforcement of Rules

Emmett McGrathMarket Rules & Responsibilities

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Amendments to CME Rule 432 (General offenses) went into effect February 16, 2017. These amendments expand upon the protective measures previously found in CME Rule 432. The amended rule now extends liability for fraud and bad faith (432.B.1); manipulative devices, schemes, and artifices to defraud (432.H.); and delivery of false, misleading or inaccurate crop or market information (432.J.) to include mere attempts to engage in such activities.

The goal of the amendment to Rule 432 is to mirror the bars on fraud and manipulation found in CFTC Regulation 180.1, which prohibits the use or attempted use of “any manipulative device, scheme, or artifice to defraud” in connection with “any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules” of any entity registered with the CFTC. 17 C.F.R. § 180.1.

Under the revised rule, the Market Regulation Department of the CME will determine whether an impermissible “attempt” has been made. If the Market Regulation Department believes there is reasonable cause to support a claim of attempt, the Probable Cause Committee of the CME (PCC) will then conduct its own investigation. If the PCC determines that a violation has occurred, it will issue a charge and direct the Market Regulation Department to give notice to the offending party. A hearing will then be carried out before the Business Conduct Committee (BCC) of the CME, or a panel of the CME’s Board of Directors.

After a conclusive hearing, the BCC will address both the offending party and the Market Regulation Department. Under CME Rule 408.E.:

BCC Panel shall issue to the Market Regulation Department and to respondent a written decision of the Panel’s findings, which shall include: the notice of charges (or a summary thereof); the answer to the charges, if any (or a summary thereof); a brief summary of the evidence produced at the hearing; a statement of findings and reasoned conclusions with respect to each charge, including the specific Rules which the respondent is found to have violated; a declaration of any penalty imposed and the effective date of such penalty; and the availability, if any, of an appeal of the decision within the Exchange or to the Commodity Futures Trading Commission.

https://www.cmegroup.com/rulebook/CME/I/4/4.pdf.

If a respondent is found guilty of attempting to engage in fraudulent or manipulative schemes or to disseminate misleading market information, the Market Regulation Department may impose a variety of punishments: fines, disgorgement, restitution, member suspension, and member expulsion. In particular, unlike under the rule as it stood until last week, proof of actual bad faith, market manipulation, or dissemination of misleading materials is not required, so long as the respondent is found to have attempted to achieve such wrongful ends.

The amendments reflect the desire of regulatory authorities to further isolate and eradicate fraudulent trading activity in the securities and derivatives markets. Since the financial crisis, regulatory bodies have expanded trade restrictions to accommodate the exponential growth of new trade technology. The amendments to Rule 432 aim to continue this trend and harmonize Rule 432 with the already solid CFTC regulations, which come down heavily on offenders.

 

 

 

 

 

 

 

Emmett McGrath

Emmett McGrath

Emmett McGrath joined Ziliak Law in November 2016 as an Associate and focuses his practice on securities, financial industry, and corporate law. Emmett received his B.A. in Political Science from Saint Louis University and his J.D. from The John Marshall Law School.
Emmett McGrath