For Release: November 13, 2009
Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against EMF Financial Products, LLC (EMF), a CFTC registrant based in New York, N.Y., for making false statements and failing to disclose material information concerning its market positions and financing to the Chicago Board of Trade (CBOT). The CFTC also charged that EMF failed to diligently supervise the handling of its commodity interest business.
The CFTC order requires EMF to pay a $4 million civil monetary penalty and restricts for three years its registration as a Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA).
The CFTC order concludes that, in August, 2005, EMF concealed and misrepresented material information about its positions and financing as the CBOT was conducting surveillance on the September 2005 U.S. Treasury Note Futures Contract (the September 2005 Contract) that was expiring on September 30. Prior to the commencement of the delivery period on the September 2005 Contract, EMF misrepresented and failed to disclose to the CBOT its full position in, and control of, up to $11.9 billion of the underlying cheapest-to-deliver (CTD) security on the September 2005 Contract at the same time that it held a significant large long position in the September 2005 Contract. The order further finds that EMF eventually fully disclosed the information to the CBOT and that an orderly liquidation of the September 2005 Contract occurred.
Specifically, the CFTC order finds that, in August, 2005, the CBOT conducted market surveillance to ensure an orderly liquidation of the September 2005 Contract. Because of EMF’s long futures position, the CBOT contacted EMF on two occasions to determine EMF’s delivery intentions and market positions. In its communications with the CBOT, EMF misrepresented the size of its cash position in the CTD, stating in one conversation that it had approximately $200 million when, in fact, EMF held a cash position of $2.2 billion. In addition, EMF failed to disclose that it held a large position in the CTD in the repurchase (repo) market of more than $10 billion. The order also finds that EMF did not inform the CBOT that it was financing its large long position in the CTD through a repo financing mechanism known as General Collateral Financing (GCF), which made those notes unavailable to market participants. As of August 26, 2005, EMF had $11.9 billion of the CTD financed through GCF.
According to the CFTC order, EMF disclosed its full position in the CTD only after CBOT made a written request for the information. In response, the CBOT, through its Business Conduct Committee, took the extraordinary step of issuing a letter directing EMF not to increase its position in the September Contract and stated its expectation that EMF would take no action that would constrain the freely available supply of the CTD. EMF complied with the CBOT’s directives, the order finds.
The CFTC order finds that EMF failed to have an adequate system of supervision and internal controls to detect and deter possible wrongdoing and to reasonably oversee the handling of its business. According to the CFTC order, EMF did not have appropriate oversight procedures in place to manage and control the large concentrated positions taken by its traders. The order further finds that EMF did not have policies and procedures in place to oversee communications with regulators to ensure that full, complete and truthful information was provided in a timely fashion.
In addition to the $4 million penalty and the restricted registration, the CFTC order requires that EMF comply with certain undertakings, which include: (1) reporting requirements to the CFTC related to its trading; (2) establishing and maintaining a risk management committee; (3) designing and implementing a system of internal controls, policies and procedures; (4) submitting a report on its compliance with the undertakings to the CFTC; and (5) disclosing the CFTC order to employees and investors.
The CFTC’s Enforcement Division thanks the CFTC’s Division of Market Oversight, the Federal Reserve Bank of New York and the U.S. Securities and Exchange Commission for their assistance in this matter.
The following CFTC staff members are responsible for this case: Stephen M. Humenik, Maura M. Viehmeyer, Anne M. Termine, Gretchen L. Lowe, Phyllis J. Cela and Vincent A. McGonagle.
Last Updated: November 13, 2009