CFTC Fine JPMorgan Chase $20 Million


Fresh from prosecuting and fining a range of foreign exchange brokers the CFTC have now started to fry some bigger fish. Referring to a by now familiar misuse of supposedly segregated funds, and using a by now familiar form of words, they just announced that they have:

Filed and simultaneously settled charges against JPMorgan Chase Bank, N.A. (JPMorgan) for its unlawful handling of Lehman Brothers, Inc.’s (LBI) customer segregated funds.

Do you remember Lehman Brothers? It seems that the CFTC:

Finds that from at least November 2006 to September 2008, JPMorgan was a depository institution serving LBI, a futures commission merchant (FCM) registered with the CFTC. During this time, LBI deposited its customers’ segregated funds with JPMorgan in large amounts that varied in size, but almost always more than $250 million at any one time.

During the same time period, JPMorgan extended intra-day credit to LBI on a daily basis to facilitate LBI’s proprietary transactions, including repurchase agreements, or “repos.” JPMorgan would extend intra-day credit to LBI to the extent that LBI’s “net free equity” at JPMorgan was positive. As of November 17, 2006, JPMorgan included LBI’s customer segregated funds in its calculation of LBI’s net free equity, even though these funds belonged to LBI’s customers

This sort of behaviour is prohibited by the Commodity Exchange Act (CEA) but it happened anyway, so:

The CFTC order imposes a $20 million civil monetary penalty against JPMorgan. The order also requires JPMorgan to implement undertakings to ensure the proper handling of customer segregated funds in the future and to release customer funds upon notice and instruction from the CFTC.

In another announcement earlier this week the CFTC filed, but just for a change didn't settle, charges against:

The Royal Bank of Canada (RBC), a Canadian bank and financial services firm doing business in New York, with conducting a multi-hundred million dollar wash sale scheme in connection with exchange-traded stock futures contracts.

In this case it seems that the Royal Bank of Canada is going to contest the CFTC allegations that:

From at least June 2007 to May 2010, RBC allegedly non-competitively traded hundreds of millions of dollars’ worth of narrow based stock index futures (NBI) and single stock futures (SSF) contracts with two of its subsidiaries that RBC reported as “block” trades on OneChicago. The CFTC’s complaint alleges that RBC’s NBI and SSF trading activity, which accounted for the majority of OneChicago’s volume during the relevant period, constituted unlawful non-competitive trades, wash sales and fictitious sales.

I wonder what other tricks the CFTC might have up its sleeve, particularly with elections on the horizon in the not too distant future? They themselves put it this way:

Today’s action should make clear that the CFTC will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain.

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