Friday, March 11, 2016

CFTC Fines FCM $1 Million for Persistent Position Report Errors

By Lene Powell, J.D.

A cooperative corporation and futures commission merchant (FCM) agreed to pay $1 million to settle CFTC charges relating to persistent errors in reporting corn and soybean futures positions, in violation of Regulation 19.01. Instead of reporting updated trading data, an employee responsible for filing Form 204 reports entered an incorrect fixed-price cash position every month for 13 years, causing positions to be reported inaccurately. After discovering the error in 2013, the firm took steps to strengthen its internal controls and risk management procedures, which the CFTC recognized in accepting the settlement offer (In the Matter of CHS, Inc., March 9, 2016).

Inaccurate reports. CHS, Inc. is an agricultural cooperative based in Minnesota that offers various agricultural processing, sales, and financial services to its members. CHS operates a commodity brokerage subsidiary, CHS Hedging, which is registered as an FCM with the CFTC. To hedge the risk exposure of cash corn and soybean positions in three CHS business units, CHS Hedging entered into sizable futures and options contracts between 2000 and 2013. The contracts triggered the obligation to file Form 204 reports, which document fixed cash price positions and allow firms to qualify for a bona fide hedging exemption, which in turn allows position holders to exceed spot month position limits. CHS Hedging was in charge of obtaining trade and position data from the three business units for use in compiling and filing the Form 204 reports.

According to the CFTC order, CHS Hedging began reviewing its Form 204 filings in 2013 when the CFTC Division of Market Oversight began looking at CHS’ spot month positions for corn and soybeans. The firm discovered that in preparing the Form 204 reports, an employee had consistently failed to obtain updated trade and position data for one of the business units and, instead, had used a static fixed-price cash position number each month. Consequently, the firm’s Form 204 reports were inaccurate going back to at least January 2000.

Upon discovering the error, CHS updated its compliance procedures and hired a permanent trade risk compliance officer and director of enterprise risk management.

$1 million fine. In a consent order, the CFTC held that the incorrect filings violated Regulation 19.01 relating to bona fide hedging positions and that CHS Hedging had aided and abetted the violation. CHS agreed to the order without admitting or denying the order’s findings or conclusions. In imposing the $1 million civil monetary penalty, the CFTC noted that CHS had already taken remedial action to strengthen internal controls and policies relating to preparation of the Form 204 reports.

In a news release, the CFTC called attention to Staff Advisory No. 13-42, which reminds reportable market participants of their obligation to submit accurate Form 204 reports for wheat, corn, oats, soybeans, soybean oil, and soybean meal on a monthly basis.

The matter is CFTC Docket No. 16-07.

No comments: