The U.S. Commodity Futures Trading Commission (CFTC) has settled charges against TeraExchange for “failing to enforce its prohibition on wash trading and prearranged trading on a Swap Executive Facility (SEF) platform”. According to the CFTC, Tera, a provisionally registered SEF, failed to enforce a prohibition on wash trading and prearranged trading on the platform. As a provisionally registered SEF, Tera is required under the SEF Core Principles of the Commodity Exchange Act (CEA) and CFTC Regulations to enact and enforce rules prohibiting certain types of trade practices on the SEF, including wash trading and prearranged trading. Tera’s internal policies prohibited these practices.
The CFTC said that Tera offered for trading on its SEF a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin. On October 8, 2014, the only two market participants authorized at that time to trade on Tera’s SEF entered into two transactions in the Bitcoin Swap. The transactions were for the same notional amount, price, and tenor, and had the effect of completely offsetting each other. At the time, these were the only transactions on Tera’s SEF
Tera arranged for the two market participants to enter into the transactions. Tera brought together the market participants, telling one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian required”.
The CFTC explained that Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee (GMAC) announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap. Neither Tera’s press release nor the statements at the GMAC meeting indicated that the October 8 transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems.
The Order stated that “these facts should be distinguished from a situation where a SEF or other designated contract market runs pre-operational test trades to confirm that its systems are technically capable of executing transactions and, to the extent that these simulated transactions become publicly known, makes it clear to the public that the trades do not represent actual liquidity in the subject market.”
