2nd UPDATE: CME Suspends 2 Traders For $40 Million Margin Deficit
May 25 2010 - 6:24PM
Dow Jones News
CME Group Inc. (CME) said Tuesday it has suspended two traders
who avoided risk controls and left a client account with a
potential 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.
Market sources said Whitney improperly sought to run orders
through an account carried by Penson GHCO, though he had no
relationship with the clearing firm, a unit of Penson Worldwide
Inc. (PNSN).
Whitney was 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
the 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.
PensonGHCO said its risk-management system spotted the improper
trade, immediately froze and then liquidated the position to
mitigate the potential $40 million shortfall, and informed the
CME.
The CME declined to comment on how Whitney evaded his existing
ban, but said it was continuing its investigation. It isn't 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 the 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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