The U.S. Commodity Futures Trading Commission (CFTC) charged the New York Mercantile Exchange, Inc. (CME NYMEX), which is owned and operated by the CME Group, and two former employees, William Byrnes and Christopher Curtin, with violation of the Commodity Exchange Act and CFTC regulations. Specifically, the groups were charged due to repeated disclosures of material containing nonpublic customer information over a period of two and a half years to an outside commodity broker who was not authorized to receive the information, according to a press release issued by the CFTC.
The charges mark the first time the CFTC has sued CME in federal court, drawing more attention to regulators, the financial markets, and exchanges. CFTC commissioner Bart Chilton told The Wall Street Journal how, “Markets are too important for this to be taken lightly.”
The CFTC’s complaint, as outlined in their press release, also brings up allegations from four years ago. In July 2009, a market participant complained to CME NYMEX that the participant believed nonpublic information about trades cleared through the CME ClearPort had been disclosed by a CME NYMEX employee named “Billy.” CME NYMEX Managing Director investigated the market participants complaint, identifying “Billy” to be William Byrnes, although CME NYMEX did not question Byrnes at this time. Byrnes’ illegal disclosures continued for over a year, until CME NYMEX terminated his employment in December 2010, after another market participant complained about disclosures of nonpublic customer information. Curtin, who was also charged, had previously left CME NYMEX voluntarily.
The Wall Street Journal reports that CME has responded to the CFTC’s allegations, and will fight the lawsuit, opting not to agree to a potential settlement and penalty. Last November, CME sued the agency over new requirements for reporting derivatives transactions – claiming they were duplicative and overly expensive. The CME dropped the suit a few weeks later after the regulator changed some policies.
The CFTC’s argument against the exchange hinges on a specific part of the Commodity Exchange Act which outlines the legal framework for the U.S. futures-trading business. The Wall Street Journal indicates that in order to prove that the exchange was at fault, derivatives lawyers said the CFTC would need to prove that the two brokers used information gleaned as part of their day-to-day jobs at the New York Mercantile Exchange. Regulators will also attempt to prove that the exchange had control over its staff, and could have discovered the alleged misdeeds earlier.
CME is expected to argue that Curtin and Byrnes overstepped their job descriptions in allegedly providing customers’ trading details to the unnamed broker and were acting in their own interest. CME might also argue that making the actions of staff a representative of the exchange runs counter to other parts of U.S. futures law that detail the liability of exchange employees.
In their ongoing litigation, the CFTC seeks civil monetary penalties, trading and registration bans, and a permanent injunction prohibiting further violations of the federal commodities laws.