The Commodity Futures Trading Commission (CTFC) has come to a settlement with the registered futures commission merchant (FCM) CHS Hedging LLC, of Inver Grove Heights, Minnesota, after charges for anti money laundering (AML), risk management, recordkeeping, and supervision violations.

These violations charges come as a result of CHS Hedging’s failure to implement an adequate AML program, especially regarding a futures and options trading account controlled by one of its customers, where CHS Hedging also failed to implement risk-based trading limits.

Exceeded trading limits

According to the CFTC, from January 2017 through December 2020, one of CHS Hedging’s customers was “engaged in speculative trading that sustained millions of dollars in losses in the ranching company’s account at CHS Hedging”.

The customer, who owned and controlled a ranching company and other related businesses, made net margin payments of more than $147m to CHS Hedging over the course of those four years, payments made out from himself and the company.

According to the order, CHS Hedging accepted the payments without adequately investigating the source of the funds, and never reported the transactions in a Suspicious Activity Report to the Department of the Treasury. 

The customer also frequently exceeded his trading limits, which CHS Hedging raised at times, but continued to perform speculative trading and sustain even more losses.

“FCMs must implement reasonable procedures to verify the identity of any person seeking to open an account, [..] and to determine whether they appear on any lists of known or suspected terrorists or terrorist organizations.” 

Kristin N Johnson, Commissioner CTFC

$6.5m fine

The CTFC’s order finds that the customer’s trading losses were facilitated by CHS Hedging’s failure to impose and enforce appropriate trading limits on his account, limits that were inconsistent with the customer’s financial resources and hedging needs.

The order also finds that CHS Hedging failed to maintain certain required records for pre-trade communications, and failed to produce these records promptly or when requested by the CFTC staff.

The CFTC has simultaneously filed and settled charges with CHS Hedging, and imposed a civil monetary penalty of $6.5m on the company. CHS Hedging will also have to undertake certain remedial measures in relations to the violations.

“The Commodity Exchange Act and accompanying regulations require FCMs to have and actually implement adequate AML and risk management policies and procedures,” said Acting Director of Enforcement Gretchen Lowe.

“These are critical components to ensure customers are protected from fraud, and the CFTC will not hesitate to take action and require significant sanctions and remediation,” Lowe added.

Spotting terrorists

Commissioner Kristin N Johnson commented on the violations in a statement and voiced the importance of recordkeeping rules, which are essential to the Commission’s oversight of market participants and the integrity of the derivatives markets. 

“Under the statute and our regulations, FCMs are subject to AML obligations. FCMs must implement reasonable procedures to verify the identity of any person seeking to open an account, to maintain records of the information used to verify the identity of transacting persons and to determine whether they appear on any lists of known or suspected terrorists or terrorist organizations.” 

“CHS ignored obvious red flags and failed to implement fundamental risk controls required by banking laws and Commission regulations, leading to the systemic failures outlined in the Commission’s order.”