UPDATE: CME Suspends 2 Traders For Running Up $40 Million Margin Deficit

CME Group Inc. (CME) said Tuesday it has suspended two traders who avoided risk controls and left a client account with margin shortfall of more than $40 million.

The futures exchange said it took "emergency action" against member Kent Whitney and barred him from all CME markets for six months.

Traders run orders through designated brokers, who collect collateral, known as margin, against positions in case a market movement leaves clients unable to pay out on contracts.

Whitney was already meant to be barred from all CME markets under an existing action, but used floor clerks to place orders on April 16 in options on S&P 500 index futures last month on behalf of David Parrish, a non-member, who also received a six-month ban from CME.

"The execution of these orders created a margin deficit in excess of $40 million, which would have caused Parrish's account to be far under-margined," said CME in a notice to members.

If the market had moved against the options positions, the unnamed brokerage would be responsible for paying out claims.

CME declined to name the broker involved or comment on how Whitney evaded his existing ban, but said it was continuing its investigation. It's not known whether the positions were profitable.

Whitney and Parrish couldn't be reached for comment.

Risk-management functions across the U.S. exchange sector are under intensifying scrutiny following the highly volatile market gyrations of May 6.

The disciplinary panel convened by CME on Monday found that both Whitney and Parish have been or will be "conducting business in a manner that cannot be permitted to continue without jeopardizing the safety of customer funds, members or the exchange," according to the Tuesday notice.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

(Doug Cameron contributed to this article.)

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