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NY Trade Board Tries to Make Amends with Nymex
New York Board of Trade reached an agreement last week to "make whole" all floor operators whose funds were used to meet margin obligations of Klein and Co. Futures Inc. NYBOT said it will pay back the innocent traders and customers of Klein. NYBOT's decision came not long after the New York Mercantile Exchange and 15 of its members filed a class action complaint against NYBOT, New York Clearing Corp. (NYCC) and Klein, alleging that NYBOT improperly used funds of Klein customers who also traded Nymex energy, oil and metals contracts to satisfy obligations of an unrelated Klein customer on the New York Futures Exchange, a unit of NYBOT.
Last Tuesday, NYBOT halted trading of its cotton, coffee, cocoa, orange juice and sugar futures contracts for nearly an hour after it revoked clearing privileges for Klein. NYBOT alleged that Klein had failed to meet the minimum financial requirements of the NYCC. Apparently, one of Klein's customers failed to meet margin calls in transactions on the New York Futures Exchange, a unit of NYBOT. Klein allegedly lost between $40 million and $50 million.
The Nymex complaint, filed in U.S. District Court, alleges that NYBOT and the NYCC acted in bad faith because they knew the funds belonged to innocent, non-defaulting customers. Further, the lawsuit alleges that NYBOT's board of directors represent other clearing members who could otherwise be assessed to make up the shortfall. According to the lawsuit, "they are acting for their own self interest or other ulterior motive to the detriment of the public, including plaintiffs; and their conduct in this regard, which is their sole and dominant motive, is unrelated to and contrary to proper regulatory concern."
The Nymex lawsuit requests a temporary restraining order and injunctive relief to block NYBOT from using innocent, third-party customer funds to meet margin obligations.
Nymex said that the Commodity Futures Trading Commission "has indicated a willingness" to support the lawsuit, and may consider filing an amicus brief.
"As an exchange and a clearing organization, we are particularly disturbed to see other such organizations threaten to and seize identifiable funds of individual customers to satisfy the obligations of a separate customer," said R. Patrick Thompson, president of Nymex. "This is an amount which should be covered by the Clearing Corp.'s guarantee fund, which is intended for such purposes. These actions not only impact traders who cleared through Klein and Co. at our exchange, but taint the image and integrity of the entire futures industry."
NYBOT President and CEO Mark Fichtel said Nymex was in a position to monitor Klein's activities as a Designated Self Regulatory Organization, and he said that it had failed to make note of Klein's treatment of customer funds.
"I am especially surprised and disappointed that NYBOT has been served with a lawsuit by Nymex on behalf of its members who cleared through Klein," Fichtel said. "Through conversations with their senior management, they were made aware of the valiant efforts of our board to do the right thing. They are falsely looking like a wrong party through this outright grandstanding."
Fichtel said he is "pleased at the speed and sense of fairness with which the NYBOT board has moved in addressing this serious issue. The board obviously has taken into account the concerns and best interests of our members and the members of other exchanges who cleared through Klein and Co. Futures Inc. by deciding to 'make whole' the losses they incurred."
Carolyn Davis, Houston
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