CFTC fines CHS Hedging $6.5 million for lack of risk-based limits
The Commodity Exchange Act and accompanying regulations require FCMs to have and actually implement adequate AML and risk management policies and procedures. 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.”
The Commodity Futures Trading Commission has fined CHS Hedging LLC a civil monetary penalty of $6.5 million for anti-money laundering (AML), risk management, recordkeeping, and supervision violations.
The CFTC simultaneously filed and settled charges against the registered futures commission merchant (FCM), which will also have to undertake certain remedial measures relating to the violations.
Anti-money laundering (AML), risk management, recordkeeping, and supervision violations
These violations are primarily a result of CHS Hedging’s failure to implement an adequate AML program, particularly as applied to a futures and options trading account controlled by one of its customers. In addition, CHS Hedging failed to implement risk-based limits concerning trading by that customer.
Acting Director of Enforcement Gretchen Lowe, said: “The Commodity Exchange Act and accompanying regulations require FCMs to have and actually implement adequate AML and risk management policies and procedures. 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.”
According to the CFTC, from January 2017 through December 2020, one of CHS Hedging’s customers owned and controlled a ranching company and other related businesses, and engaged in speculative trading that sustained millions of dollars in losses in the ranching company’s account at CHS Hedging.
Inappropriate limits fueled customers’ trading losses
This customer and the ranching company made net margin payments of more than $147 million to CHS Hedging over the course of those four years.
CHS Hedging allegedly accepted the margin payments from its customer without adequately investigating the source of the funds or reporting the transactions in a Suspicious Activity Report to the Department of the Treasury.
The CFTC found the trading losses were facilitated by CHS Hedging’s failure to impose and enforce appropriate trading limits on his account. Such trading limits were inconsistent with the customer’s financial resources and hedging needs.
Because this particular customer frequently exceeded his trading limits, CHS Hedging even raised those limits, which allowed the user to continue speculative trading and sustain more losses.
In addition, CHS Hedging allegedly failed to maintain certain required records for pre-trade communications and failed to produce certain required records promptly or in the form requested by CFTC staff.
