This month, CME Group announced fines totaling $1.75 million against derivatives broker Newedge USA for violations of exchange rules in certain metal markets over the course of two years. Newedge agreed to the fine pursuant to an offer of settlement in which Newedge neither admitted nor denied the rule violations upon which the penalty was based. Specifically, Panels for both the NYMEX Business Conduct Committee and the COMEX Business Conduct Committee found that Newedge violated exchange Rule 432, Rule 529, Legacy Rule 538.A, Legacy Rule 538.G, and Legacy Rule 538.H., while a clearing member of the exchange.
According to the disciplinary action notices released by the exchange, on multiple occasions over a two year period, employees working for Newedge, but trading accounts of a Newedge affiliate, executed EFRPs as a counterparty with its customers that were not bona fide. While trading in Gold and Silver futures, Newedge employees received orders from customers, including market and limit orders, which were executed as EFRPs instead of directly on Globex as was expected by the customers. In executing the EFRPs, Newedge typically entered them with a liquidity provider and then entered a separate EFRP at a marked-up price with the customer. The Panel found that at times the price of the EFRP with the customer was simply set by Newedge and was therefore not negotiated in those instances. In addition, the Panel found that for the OTC leg of the EFRP transactions, Newedge had inadequate documentation. Further, in many instances Newedge did not designate the trades on the customer account statements as EFRPs because of an operational error. Of the $1.75 million fine, $650,000 was allocated to NYMEX and $1,100,000 was allocated to COMEX. (more…)