United States: FCM Settles Charges Involving Misallocations Of Trades

A registered futures commission merchant ("FCM") agreed to pay $250,000 to settle CFTC and National Futures Association ("NFA") charges relating to an unlawful post-execution allocation scheme. The CFTC alleged that X-Change Financial Access LLC ("XFA") did not properly supervise its employees or retain the necessary records as to a commodity pool operator (the "Client") that engaged in the unlawful post-execution allocation of bunched orders.

According to the CFTC Order, between January 2013 and 2014, the Client executed bunched orders on behalf of its customer and proprietary accounts through an XFA floor broker ("Broker") and then sent allocation instructions to the Broker. During this time, the Client allocated profitable trades to accounts where the Client or its associates had a proprietary interest, and less profitable trades to customer or pool accounts, in violation of CFTC Rules requiring that such allocations be "fair and equitable," with no accounts receiving consistently favorable or unfavorable treatment. Despite various red flags and two member responsibility actions issued by the NFA against the Client, XFA employees allowed the Client's activities to continue. The CFTC alleged that XFA was at fault for failing to (i) conduct proper training for its employees and (ii) implement policies or procedures for the post-execution allocation of bunched orders.

Additionally, the CFTC discovered that XFA failed to preserve the timestamps on instant messages between the Client and Broker. The CFTC asserted that although XFA had retained the instant messages, its failure to preserve the timestamps violated relevant recordkeeping requirements.

XFA also settled charges with the NFA for failing to (i) detect and respond to "unusual allocation activity" and (ii) prevent the Client from committing the violations described in the member responsibility actions issued by the NFA. The NFA Business Conduct Committee had previously fined XFA $75,000 and ordered XFA to withdraw as an FCM for failing to operate, maintain and enforce its risk management program.

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