‘Pay Up – $1.5 Million’ CFTC Orders FCStone

A leading US futures brokerage has received a penalty by the CFTC after failing to maintain systems and controls that

cftc logoUS based Futures Commission Merchant (FCM), FCStone LLC, has been ordered to pay a civil monetary penalty of $1.5 million for failing to diligently supervise its officers and employees relating to its business as an FCM  by the country’s financial regulatory authority. The firm is believed to have violated the Commission Regulation 166.3, 17 C.F.R. § 166.3 (2008).

FC Stone whose history spans over 90 years has been an active and serious player in futures trading market, during the volatile period of 2008, post global recession, the firm had failed to implement adequate customer credit and concentration risk policies and controls, which consequently allowed one account (client account) to acquire a significant options position that it could not afford to maintain. As a result the brokerage firm was forced to take over the account, and lost approximately $127 million.

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The CFTC Order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures, and cease and desist from violating its supervisory obligations.

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David Meister, the CFTC’s Director of Enforcement said in an official statement: “The Commission’s supervision regulation helps ensure the financial integrity of the markets and safeguard customer funds. When an FCM’s financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure that their risk controls are in order.”

Futures brokers have been facing criticism after major players such as MF Global and PFG Best were ‘caught out’ and filed for bankruptcy, which resulted in clients losses of $1.6 billion and $200 million respectively.

Details revealed by the regulator highlight how the FCM was weak in ensuring it had adequate systems and controls when dealing with high risk derivatives contracts.  During the period of January 1, 2008 through to March 1, 2009, FCStone failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and with the client account, which was primarily controlled by two individuals who traded natural gas futures, swaps, and option contracts. Because FCStone did not have adequate credit and concentration risk policies and controls, the two account owners accumulated a massive position — more than 2.5 million relatively illiquid commodity option contracts, which the account owners could not afford to maintain. After the value of the positions deteriorated over the course of 2008, the account owners were unable to meet their financial obligations with respect to the account. As FCMs are required to do in that situation, FCStone assumed the financial obligations to the clearing house that carried the positions. Unable to successfully manage the positions.

The US based FCM has witnessed natural organic growth and through a combination of high profile mergers and acquisitions, primarily between International Assets Holding Corporation (INTL) and FCStone Group in 2009 the firm has become an international, Fortune 500 financial services organisation called INTL FCStone Inc.

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