Clarksons Platou Futures, part of London-listed Clarksons, could be liable to pay up to $2m in fines following a complaint by a US derivatives regulator.
The National Futures Association (NFA)’s business conduct committee filed a complaint in April that charges the derivatives brokerage with failing to retain pre-trade communications and disclosing confidential information.
It also alleges that Clarksons’ brokers quoted prices that were not supported by bids and offers, and changed clients’ bids without their knowledge.
The NFA has also charged Clarksons with failing to register three individuals as NFA associates, including the head of its wet freight derivatives desk, who was not named in the document.
Ben Courtney is currently managing director of Clarksons’ wet FFA desk.
“These and other deficiencies revealed a lack of supervision at the firm,” the complaint states.
Clarksons must respond to the claim or risk a fine of up to $500,000 for each violation found by the NFA.
It faces four counts of potential violations, which means fines could theoretically extend to $2m.
However, brokers fined in similar circumstances previously have settled with the regulator for $140,000 (see box).
Brokers could also have their NFA memberships revoked or suspended by the regulator.
Clarksons declined to comment on the matter.
Prices quoted
Derivatives brokers are bound by rules on communications set by the Commodity Futures Trading Commission, a US-based regulator.
Clarksons is regulated by the NFA as an execution-only introducing broker for block trades of FFAs, fuel oil and iron ore derivatives.
An introducing broker that generates more than $5m in aggregate gross revenue over three years must keep records of all business-related and transaction-related communications and retain them for five years.
The complaint follows a review of Clarksons’ forward freight agreement desk activity in August 2022.
The NFA said its review identified instances where brokers quoted prices in the market that were not supported by offers and bids.
In one example, a broker quoted a price to a client based on Bloomberg’s real-time reporting of exchange-trading prices but did not tell the client that the price had come from Bloomberg, not the market.
Believing that the quote constituted a valid offer to sell, the client accepted the price.
The NFA said the broker had assumed a market maker would step in to fulfil any bid she received.
The regulator also identified an instance where a broker appeared to change a client’s bid to a less favourable price without permission.
The client told the broker it was willing to buy at “14000” but the broker changed the bid to “14100”.
The broker told the regulator he believed the initial bid was not within the market range and, therefore, would not generate interest, so he changed it without informing the client.
He claimed the bids he quoted were indicative and that clients would have known they were not tradeable unless he confirmed the price with them, the NFA said.
Clarksons reinforced this to the regulator by saying that dry FFAs are “small, illiquid, predominantly voice-brokered, and highly specialised”.
It claimed market participants would, therefore, understand that quoted prices were indicative and not executable until confirmed by both trading parties.
The NFA said Clarksons could not substantiate this claim or that it had permission to change clients’ bids and offers to less favourable pricing.
Disclosure
Clarksons’ brokers disclosed the identity of clients to other traders, the review found.
When negotiating a block trade, brokers are barred from discussing the details of communications with any other party, including the counterparty, without explicit permission from the customer.
But the NFA said Clarksons’ brokers had broken these rules in May and June 2022 in response to questions such as “Who sold to us?” and “Who’s main sellers?”
Clarksons was unable to show it had obtained permission to disclose clients’ identities, the regulator said.
The firm claimed traders knew its brokers did so and, “with few exceptions”, had not objected to the practice. Clarksons claimed clients had, therefore, “tacitly consented” to the disclosure of their information.
Following the review, Clarksons contacted traders to obtain consent to disclose their prices, routes and volumes to other clients, but not their names.
Six out of the 17 clients who responded told Clarksons not to disclose their names.
No records
The NFA review found that Clarksons had not kept proper records of all oral and written pre-trade communications and had used “unapproved” desktop and mobile communication channels to talk to clients since July 2019.
“Clarkson did not approve these channels and, therefore, did not record or retain any of the oral and written communications transmitted through them,” the claim document states.
“The deficiencies were due, in part, to Clarksons’ failure to maintain adequate supervisory procedures,” the NFA said in its claim.
The firm did not seem to be aware of these practices until approached by the regulator, according to the document.
“Additionally, the firm admitted that it was under-resourced from a compliance perspective and lacked adequate policies and procedures, not only for monitoring communications but also for monitoring broker trading for unusual or concerning trends,” the NFA said.
The past few years have seen other big-name derivatives brokers fall foul of NFA rules on communications and disclosures, including Clarksons’ rival Braemar and a former chairman of the Baltic Exchange’s Freight Forward Agreement Brokers’ Association.
Braemar’s freight derivatives desk was fined $140,000 by the NFA in November after a review found it had violated regulations on communications and disclosures.
In March last year, Florida-based commodities and freight derivatives broker Ocean Solutions was fined $140,000 for similar breaches to those made by Braemar.
James W Ronan, senior vice president of Ocean Solutions, was also ordered to pay a $60,000 fine as an “associated person” of the company.
Ronan was chairman of the FFA Brokers’ Association between 2013 and 2014.
The NFA’s hearing panel found that Ocean Solutions disclosed confidential customer information to other customers of the firm.
It also breached compliance rules by failing to keep records of oral and written pre-trade communications and by failing to diligently supervise the firm and its employees, according to the decision document.
It was found that Ocean Solutions and Ronan broke compliance rules by failing to disclose to customers the conflict of interest presented by the firm, and Ronan, brokering trades on behalf of an affiliate in which the firm and Ronan had a management and/or ownership interest.
Ocean Solutions was also found to have broken an NFA bylaw by failing to register its CEO, Matthew LaFiandra, as an associated person and an NFA associate.
Freight Investor Services, the world’s biggest broker of freight derivatives, was fined $140,000 in 2021 in similar circumstances.
The NFA found the shop failed to keep complete records of transaction-related communications and had allowed an unregistered individual to act as an associated person of the company in trading.
