Release: #3922-96

For Release: July 10, 1996

CFTC Order Imposes $600,000 Civil Penalty Against Fenchurch Capital Management Inc. of Chicago, In Connection with Market Manipulation and Cornering

WASHINGTON - The Commodity Futures Trading Commission (CFTC) announced today that it has issued an order instituting an administrative proceeding against Fenchurch Capital Management, Inc. (Fenchurch) of Chicago, Illinois, and has simultaneously accepted its offer of settlement under which Fenchurch will pay a $600,000 civil penalty, among other remedial sanctions. Fenchurch is registered with the CFTC as a commodity trading advisor and commodity pool operator, and it trades extensively in the U.S. government securities cash and futures markets on behalf of two commodity pools.

Without admitting or denying the CFTC's findings, Fenchurch consented to the entry of an order finding that in June 1993, Fenchurch manipulated the value of its position in a U.S. treasury note futures contract, which traded on the Chicago Board of Trade (CBT), through the cornering of the cheapest-to-deliver note on the contract, in violation of the U.S. Commodity Exchange Act (CEA).

Fenchurch is simultaneously settling related charges by the Securities and Exchange Commission (SEC). Fenchurch's payment of a $600,000 civil penalty pursuant to the CFTC's order will also satisfy its payment obligation under the terms of its settlement with the SEC. The CBT is also settling a related action.

The CFTC's Director of Enforcement, Geoffrey Aronow, commented: "This action addresses acts of manipulation and cornering that occurred after trading on the futures contract had expired and resulted in an exacerbation of congestion in the markets as shorts were preparing to make delivery on the futures contract. Manipulation of this sort can and did affect improperly the value of the bargain struck before trading had expired."

Aronow also commented on the cooperative efforts of the SEC, CBT, and the Federal Reserve Bank of New York in bringing this action, stating that "through such joint efforts, regulators can effectively let market participants know that we will act to ensure that the markets remain free of illegitimate forces."




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The CFTC order finds that in June 1993, Fenchurch committed to take delivery on a large long position in the June 1993 Ten-Year U.S. Treasury Note Futures contract (June contract) traded on the CBT. The order finds that during the last four business days of the delivery period and after the last trading day on the June contract, Fenchurch intentionally gained and maintained control over a dominant portion of the available supply of the cheapest-to-deliver Treasury notes on the June contract. The terms of the June contract allowed a range of Treasury notes to be delivered but typically one note becomes the cheapest-to-deliver and the price of the futures contract converges with the cash market value of the cheapest-to-deliver at expiration of trading on the contract. The CFTC finds that Fenchurch increased its position in the cheapest-to-deliver note through a series of transactions in the repurchase market at a time when the notes were in tight supply.

The repurchase market functions as a collateralized borrowing market where participants can borrow money against securities or borrow securities against funds. The CFTC finds that Fenchurch exacerbated the tightness in the supply of the cheapest-to- deliver note by increasing its position and intentionally withholding the notes from the market. As a result, the CFTC's order finds that shorts on the futures contract were unable to obtain sufficient quantities of the notes and had to deliver a more valuable security.

The CFTC's order also finds that the funds advised by Fenchurch received approximately $480 million of the more valuable security on approximately one-third of Fenchurch's futures position, thus enhancing the value of the position.

In addition to the $600,000 civil penalty, the CFTC order:


directs Fenchurch to cease and desist from further violations of Sections 6(c) and 9(a)(2) of the CEA, which prohibit acts of manipulation and cornering;


requires Fenchurch to report for two years to the CFTC's Division of Economic Analysis its gross long positions in the cheapest-to-delivery security in all markets each business day until the last delivery day of an expiring Treasury securities futures month, if its futures position equals or exceeds 5,000 gross long futures contracts as of the close of the last trading day on the contract;


requires Fenchurch to review its policies and procedures 1) to determine whether they are reasonably designed to provide diligent supervision and to deter, detect, discipline, and correct conduct of the type found by the Commission in this matter to be violative of the CEA, 2) to reform such policies and procedures, if necessary, and 3) to submit a report to the Division of Enforcement regarding the results of its review; and


requires Fenchurch to have all its employees with trading or supervisory responsibilities sign a statement affirming that they have read and reviewed the Commission's order.


Also available: full text of the Commission's Action