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