## Facts

- TeraExchange L.L.C. operated a swap execution facility (SEF) and listed for trading a non-deliverable forward based on the relative value of U.S. dollars and Bitcoin (the “Bitcoin swap”).
- At the relevant time, only two market participants had completed membership and obtained trading privileges on Tera’s SEF.
- On October 8, 2014, those two participants entered into two opposite Bitcoin swap transactions with the same notional amount, price, and tenor, fully offsetting each other within minutes.
- Tera arranged the transactions, including telling one participant the trade was to “test the pipes” by executing a “round-trip trade” with “no P/L consequences,” and Tera personnel communicated with the traders during execution.
- The trades involved no fee and were structured to be riskless to the counterparties.
- The next day, Tera publicly announced the transactions as the first Bitcoin derivative transaction executed on a regulated exchange, and later made similar statements to a CFTC advisory committee without disclosing the trades were prearranged wash-type system tests.
- Tera’s SEF rules prohibited wash trading and prearranged trading, and federal law and regulation required SEFs to establish and enforce rules barring such abusive practices.

## Issues

1. Whether Tera, as a provisionally registered SEF, violated CEA § 5h(f)(2) and CFTC Regulation 37.203 by failing to enforce rules prohibiting wash trading and prearranged trading.
2. Whether Tera’s role in arranging and facilitating the October 8, 2014 offsetting Bitcoin swap transactions constituted a failure to enforce its own trade-practice prohibitions.

## Decision

- The CFTC instituted administrative proceedings and accepted Tera’s offer of settlement, resolving the matter without an adjudicatory hearing.
- The CFTC found Tera violated CEA § 5h(f)(2) and CFTC Regulation 37.203 by failing to enforce its prohibition on wash trading and prearranged trading on its SEF.
- The CFTC ordered Tera to cease and desist from further violations related to its SEF rule-enforcement obligations.

## Legal Principles

- A SEF must not only maintain written trade-practice rules; it must enforce rules prohibiting abusive practices, including wash trades and prearranged trading. (CEA § 5h(f)(2); 17 C.F.R. § 37.203.)
- Fully offsetting, riskless, prearranged “round-trip” transactions may constitute wash trading and prearranged trading prohibited by CEA § 4c(a).
- System testing may be permissible when conducted as testing (including simulated activity) and, if publicly known, is clearly described as not representing actual market liquidity; undisclosed on-platform wash-type testing does not satisfy SEF enforcement obligations.

## Conclusion

The CFTC concluded that TeraExchange failed to enforce SEF trade-practice prohibitions when it arranged and facilitated offsetting Bitcoin swap transactions characterized as riskless test trades, then publicly presented them as genuine market activity, and it imposed a cease-and-desist order to address the SEF’s enforcement failures.


In re TeraExchange L.L.C., CFTC Docket No. 15-33 (C.F.T.C. Sept. 24, 2015)