ARM fined $200,000 for failing to register as an exchange execution facility
Houston-based Asset Risk Management LLC (ARM) has been accused of failing to register as a swap execution service (SEF) and ordered by the Commodity Futures Trading Commission (CFTC) to pay a fine of $200,000.
ARM has been ordered to cease and desist any further violations of the Trade in Commodities Act (CEA) and its regulations.
“Failure to register as required by the CEA undermines the CFTC’s ability to monitor exchange markets and threatens the integrity of the industry,” said acting chief enforcement officer Gretchen. Lowe. “The Enforcement Division will continue to take action against companies that operate unregistered swap execution facilities, including those that offer non-electronic trading methods.”
ARM since September 2017 operated an unregistered SEF that allowed customers to execute swaps by accepting bids and offers from participants on a trading system or platform in various swap tenors and volumes, according to the CFTC. The company would communicate with customers and counterparties and execute swaps via interstate commerce, including telephone, instant messaging and email.
The CFTC said ARM often recommends customers execute swap transactions in which the underlying commodity is natural gas, natural gas liquids or crude oil. In a typical swap transaction, ARM received a swap price request from a customer and then submitted the price request, and sometimes other terms, to counterparties with whom the relevant customer had an agreement with the International Swaps and Derivatives Association.
Once potential swap counterparties respond to ARM with a price quote, ARM – if authorized by the customer – would approve or reject a price based on the customer’s pre-approved threshold. ARM would then separately confirm execution of the trade with the customer. If ARM did not have the authority to execute the swap on behalf of the customer, it would typically join the customer in a phone call with the relevant counterparty, during which ARM’s customer would agree to the terms.
ARM is a marketing and infrastructure services company founded in 2004 that provides risk management and hedging strategies to producers.
The Dodd-Frank Act introduced regulations to improve the transparency of swap transactions, including the requirement to execute certain transactions on SEFs. In 2021, the CFTC clarified the requirements that require certain commodity trading advisers and introducing brokers to execute hedging trades on SEFs.
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Aegis Hedging Solutions LLC in July became the first approved SEF since the clarifications were made.
CEO Bryan Sansbury said Aegis filed for SEF certification due to the CFTC clarification. Additionally, the means by which Aegis conducted its core business – via interstate commerce – quantified it as a commercial facility.