Chicago based FCM and its officers fined: Supervision & Risk Issues

Elise Fleischaker Industry News

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CFTC Press Release PR7449-16

CFTC Orders Chicago-based Advantage Futures LLC, its CEO Joseph Guinan, and Former Chief Risk Officer William Steele Jointly to Pay a $1.5 Million Civil Monetary Penalty for Supervision, Risk Management Failures, and Making Inaccurate Statements in Required Filings with the CFTC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Advantage Futures LLC (Advantage), a Chicago-based Futures Commission Merchant (FCM), for failing to diligently supervise the handling of certain commodity interest accounts, for deficient risk management and credit risk practices, and for knowingly making inaccurate statements to the CFTC through the submission of required risk manuals and the Annual Chief Compliance Officer’s Report. The CFTC Order also charges Advantage’s Chief Executive Officer Joseph Guinan, a resident of River Forest, Illinois, with supervision failures and former Chief Risk Officer William Steele, a resident of Vernon Hills, Illinois, with failing to supervise Advantage’s risk management program. The violations of the Commodity Exchange Act (CEA) and Regulations began in or about November 2011 to at least August 2015, according to the Order.

The Order requires Respondents Advantage, Guinan, and Steele to pay, jointly and severally, a $1.5 million civil monetary penalty. The Order also requires Advantage to comply with undertakings to improve the implementation of its policies, procedures, and oversight practices, including the implementation of strengthened procedures related to its Risk Management Program and Risk Department to prevent and detect violations of the CEA and Regulations.

CFTC Regulations 1.11 & 1.73

This is the CFTC’s first action enforcing CFTC Regulations 1.11 and 1.73, which involve risk management program and supervision obligations for FCMs and clearing FCMs’ risk management obligations, respectively.

According to the CFTC Order, Advantage and Guinan failed to diligently supervise the handling of certain commodity interest accounts, despite being on notice from three exchanges about what they characterized as unlawful trading in several futures contracts by one of Advantage’s customers. The Order finds that three exchanges independently notified Advantage that they had observed the same Advantage customer engaging in a problematic pattern of trading in several contract markets, consistent with spoofing and/or manipulative or deceptive trading. According to the Order, Advantage did not promptly or thoroughly investigate the identified trading activity, although Advantage eventually did not allow the customer to continue trading the particular futures contracts identified by the exchanges. In addition, despite knowing that the customer employed the same strategy in all contract markets in which he traded, Advantage did not otherwise increase scrutiny over or further inquire about the customer’s trading in other markets, the Order finds. As a result, the customer continued to engage in the suspect trading activities, the Order also finds.

The Order further finds that, in violation of Regulation 1.11, Advantage had deficient risk management and credit risk practices for which Steele was responsible, including Advantage’s failure to follow its risk management, credit, and risk policies. According to the Order, as of July 2014, Advantage, as an FCM, was required by CFTC Rule to establish and enforce a system of risk management policies and procedures, i.e., the Risk Management Program, including establishing risk tolerance limits, review of those limits and process for exceptions, and supervision requirements. The Order finds that although Advantage possessed written policies and procedures that appeared to comply with Regulation 1.11, Advantage did not in practice follow them, including as they related to the role of the Credit Committee, the use of risk ratings, the account opening process, and review and implementation of risk tolerance limits.

Risk-Based Limits

As of October 1, 2012, CFTC Regulation 1.73(a)(1) requires FCMs to “[e]stablish risk-based limits in the proprietary account and in each customer account based on position size, order, margin requirements, or similar factors.” According to the Order, Advantage established pre-trade limits for its customers, but those limits were not established and modified in accordance with Advantage’s policies, nor did they adequately factor in the risks that any individual customer’s trading activities presented to Advantage. Moreover, the Order finds that Steele and Guinan did not adequately advise the risk department of the process and requirements for setting pre-trade limits such that they would be risk-based.

According to the Order, as a result of these failures, Advantage:

  • Set position and order size limits for multiple contract markets without aggregating the limits for all traders in a firm and across all contract markets;
  • Extended position and order size limits to customers without duly considering risks posed by the customers’ ability to fully use them;
  • Did not assign limits in line with leverage ratio(s) that its policies deemed appropriate;
  • Did not provide additional scrutiny for customers using a front end system that did not have the margin correlation capability enabled (such that the limits would be automatically correlated to account balance and margin requirements); and
    Did not always tie limits to the entity’s liquid assets (like its account balance, or assets that an FCM could justifiably rely upon).
Advantage’s Inaccurate Statements

Finally, the Order finds that Advantage further knowingly made inaccurate statements to the CFTC through the submissions of its required risk manuals and Annual Chief Compliance Officer’s (CCO) Report that represented that certain policies and procedures were in place and followed when they were not. The misstatements and omissions in Advantage’s manuals and CCO report are material, according to the Order. The Commission relies upon the accuracy of an FCM’s manuals and CCO Reports to meet its oversight obligations and to assess FCM’s compliance with required risk management programs.

The Order recognizes the Respondents’ cooperation with the CFTC during the investigation of this matter.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Joy McCormack, Elizabeth Streit, Scott Williamson, and Rosemary Hollinger, with assistance of Thomas Griffin in the CFTC’s Division of Clearing and Risk.

CFTC Media Contact

Dennis Holden
202-418-5088