Chicago, IL – November 14, 2017 – The Commodity Futures Trading Commission (CFTC) today announced charges against FCStone Financial Inc. and its subsidiary, FCStone Merchant Services LLC, for engaging in fraudulent reporting practices and failing to maintain adequate supervisory systems. The companies, jointly and severally, will pay a $280,000 civil monetary penalty as part of the settlement.
The CFTC found that between December 2013 and March 2014, FCStone Merchant entered into improper Exchange for Physical (EFP) transactions involving Canadian Dollar (CAD) futures and canola seed. FCStone Financial then reported these trades to the Chicago Mercantile Exchange (CME) as legitimate EFRPs. However, the CFTC determined the transactions were invalid because CAD futures and canola seed lack the necessary relationship required by exchange rules.
According to the CFTC order, these non-competitive trades and inaccurate reports constituted “fictitious sales” in violation of the Commodity Exchange Act (CEA) and CFTC Regulations. EFPs are permitted under the law, allowing parties to exchange futures contracts for related cash or over-the-counter (OTC) derivatives, but must adhere to specific requirements.
The investigation also revealed significant deficiencies in FCStone Financial’s compliance controls. The CFTC found the company failed to adequately identify improperly designated EFRPs, verify the existence of corresponding cash or OTC derivative positions, and ensure proper documentation of transactions. Furthermore, employees involved in EFRP execution and processing lacked sufficient understanding of the applicable requirements.
As part of the settlement, FCStone Financial and FCStone Merchant are required to comply with specific undertakings to improve their EFRP practices and cease further violations of the CEA and CFTC Regulations. The case was led by CFTC Division of Enforcement staff members Amanda Burks, Michelle Bougas, James H. Holl, III, and Rick Glaser.
Source: CFTC.gov
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