On January 20, 2015, the CFTC issued a settlement order imposing a US$3 million civil monetary penalty on Olam International, Ltd. (“Olam International”) and its wholly-owned subsidiary, Olam Americas, Inc. (“Olam Americas”) for position limits violations due to a failure to aggregate their positions (and related violations). This substantial penalty takes on added significance in light of the expanded aggregation requirements that the CFTC has proposed.
Olam International is a Singapore-based entity that, among other things, operates a futures trading desk in London. Olam Americas is based in New Jersey and operates a futures trading desk there. Both companies trade cocoa futures on ICE Futures U.S. Inc. (“ICE”).
The violations found by the CFTC all stem from the inter-related nature of the two affiliates’ operations. Specifically, the CFTC stated that:
- Traders from both companies had access to each other’s position information,
- Traders from both companies regularly discussed the cocoa markets,
- Olam Americas’ traders placed orders for futures contracts on behalf of Olam International’s operations in Ecuador, and
- A trader from Olam Americas supervised certain of Olam International’s futures trading activities for five months.
Based on the inter-related nature of their operations, the CFTC determined that the two companies had committed the following violations:
- Position limits violations: Because Olam International and Olam Americas “directly or indirectly controlled the other’s cocoa futures trading activities and/or acted pursuant to an express or implied agreement or understanding,” their positions should have been aggregated together for position limits purposes under CFTC Rule 150.5(g) and ICE Rule 6.12. When aggregated, the two companies exceeded the position limits established by ICE for cocoa futures trading in the spot month on 6 occasions in one year (and a seventh time two years later).
- Exchange of futures for physical transactions (“EFPs”): Olam International and Olam Americas executed 64 EFPs, which entail the noncompetitive exchange of one company’s futures position in a commodity for the other company’s physical commodity, with one another over a 2-year period. EFPs are permissible so long as they are done pursuant to the rules of an exchange. Since ICE’s rules only permit EFPs between independently controlled accounts, however, the CFTC found that Olam International and Olam Americas violated ICE’s rules (and certain CFTC regulations) by executing the EFPs.
- Form 40 Violations: A Form 40 request is a special call issued by the CFTC to traders who hold certain large derivatives positions. The Form 40 requires a reporting trader to identify whether, among other things: (i) the trader controls the trading of any other persons or entities and (ii) any other persons control the trading of the trader. Olam International and Olam Americas both submitted a Form 40 to the CFTC that responded to these questions in the negative. The CFTC concluded that these statements were untrue because neither company was independently controlled.
Notably, CFTC rules currently require aggregation based on control of another entity’s trading, which the CFTC found to exist here. The CFTC has proposed, however, to extend its aggregation requirements to certain situations in which one entity owns more than 50% of another entity—regardless of whether it also controls the other entity’s trading. The sizeable penalty imposed by this order demonstrates the potential consequences if the CFTC adopts new aggregation rules as proposed.
