Key Takeaways
- • The CFTC imposed a $4 million civil monetary penalty on hedge fund EMF Financial Products, LLC for making false statements and failing to disclose material information about its market positions and financing to the Chicago Board of Trade in August 2005.
- • EMF concealed its control of up to $11.9 billion in the underlying cheapest-to-deliver (CTD) security on the September 2005 U.S. Treasury Note Futures Contract while simultaneously holding a significant large long position in the same contract during the pre-delivery period.
- • Beyond the monetary penalty, the CFTC restricted EMF's registration as both a Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA) for three years, and charged the firm with failure to diligently supervise its commodity interest business.
- • The settlement was announced on November 13, 2009 following an investigation into EMF's conduct surrounding the expiring September 2005 Treasury Note Futures Contract; the firm eventually disclosed the full information to CBOT and an orderly liquidation of the contract occurred.
Summary
The U.S. Commodity Futures Trading Commission (CFTC) announced enforcement action against New York-based hedge fund EMF Financial Products, LLC, levying a $4 million civil monetary penalty for material misstatements and omissions disclosed to the Chicago Board of Trade. The settlement resolves CFTC charges filed and simultaneously settled on November 13, 2009, addressing conduct that the regulator determined violated its disclosure and supervision requirements.
At the center of the enforcement action was EMF's conduct in August 2005 regarding the September 2005 U.S. Treasury Note Futures Contract. During pre-delivery surveillance, the CBOT discovered that EMF had misrepresented and concealed its full position in, and control of, up to $11.9 billion of the underlying cheapest-to-deliver (CTD) security. Critically, EMF held this substantial CTD position concurrently with a significant large long position in the September 2005 Contract itself—a concentration that constituted material information required for market surveillance purposes. The CFTC order concludes that EMF failed to make timely disclosure of these interconnected positions before the delivery period commenced on September 30, 2005.
Beyond the $4 million penalty, the CFTC imposed operational restrictions on EMF, suspending its registration as both a Commodity Pool Operator and Commodity Trading Advisor for three years. The regulator also charged EMF with failure to diligently supervise the handling of its commodity interest business, reflecting deficiencies in the firm's internal compliance infrastructure. The CFTC order notes that EMF eventually provided full disclosure to the CBOT, and that an orderly liquidation of the September 2005 Contract followed, preventing market disruption.
This enforcement action underscores the CFTC's focus on large position transparency in expiring futures contracts and the regulatory obligation for commodity market participants to promptly disclose material information regarding their holdings and control relationships. The three-year registration restriction represents a significant operational sanction for a commodity pool operator and trading advisor, constraining EMF's ability to manage client assets during the penalty period.
At the center of the enforcement action was EMF's conduct in August 2005 regarding the September 2005 U.S. Treasury Note Futures Contract. During pre-delivery surveillance, the CBOT discovered that EMF had misrepresented and concealed its full position in, and control of, up to $11.9 billion of the underlying cheapest-to-deliver (CTD) security. Critically, EMF held this substantial CTD position concurrently with a significant large long position in the September 2005 Contract itself—a concentration that constituted material information required for market surveillance purposes. The CFTC order concludes that EMF failed to make timely disclosure of these interconnected positions before the delivery period commenced on September 30, 2005.
Beyond the $4 million penalty, the CFTC imposed operational restrictions on EMF, suspending its registration as both a Commodity Pool Operator and Commodity Trading Advisor for three years. The regulator also charged EMF with failure to diligently supervise the handling of its commodity interest business, reflecting deficiencies in the firm's internal compliance infrastructure. The CFTC order notes that EMF eventually provided full disclosure to the CBOT, and that an orderly liquidation of the September 2005 Contract followed, preventing market disruption.
This enforcement action underscores the CFTC's focus on large position transparency in expiring futures contracts and the regulatory obligation for commodity market participants to promptly disclose material information regarding their holdings and control relationships. The three-year registration restriction represents a significant operational sanction for a commodity pool operator and trading advisor, constraining EMF's ability to manage client assets during the penalty period.
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