Houston-based Asset Risk Management LLC (ARM) was charged with failing to register as a swap execution facility (SEF) and ordered by the Commodity Futures Trading Commission (CFTC) to pay a $200,000 penalty.

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ARM was ordered to cease and desist from any further violations of the Commodity Exchange Act (CEA) and regulations.

“Failing to register as required by the CEA impairs the CFTC’s ability to monitor swap markets and threatens the integrity of the industry,” said acting Director of Enforcement Gretchen Lowe. “The Division of Enforcement will continue to bring actions against firms that are operating unregistered swap execution facilities, including those offering non-electronic methods of trading.”

ARM since September 2017 operated an unregistered SEF that allowed clients 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 clients and counterparties and execute the swaps via interstate commerce, including phone, instant messaging and email.

The CFTC said ARM often recommended that clients execute swap transactions in which the underlying commodity was natural gas, natural gas liquids or crude oil. In a typical swap transaction, ARM received a request for swap pricing from a client and then submitted the pricing request, and sometimes other terms, to counterparties with whom the relevant client had an International Swaps and Derivatives Association agreement.

After potential swap counterparties responded to ARM with a proposed price, ARM – if authorized by the client – would approve or reject a price based on the client’s pre-approved threshold. ARM then would separately confirm the swap execution with the client. If ARM did not have authority to execute the swap on behalf of the client, it would typically join the client on a phone call with the relevant counterparty, during which ARM’s client would agree to the terms.

ARM is a marketing services and infrastructure firm founded in 2004 that provides risk management and hedging strategies for producers.

The Dodd-Frank Act introduced regulations to improve transparency in swap transactions, including requirements to execute certain transactions on SEFs. In 2021, the CFTC clarified conditions that require certain commodity trading advisors and introducing brokers to execute hedging transactions on SEFs.

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Aegis Hedging Solutions LLC in July became the first SEF approved since the clarifications were made.

CEO Bryan Sansbury said Aegis filed for SEF certification because of the CFTC’s clarification. Also, the means by which Aegis conducted its core business – via interstate commerce – quantified it as a trading facility.