## Facts

- Fenchurch Capital Management, Ltd. (Fenchurch) was registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and a commodity pool operator.
- In June 1993, Fenchurch held large long positions in June 1993 ten-year U.S. Treasury note futures, which entitled it to take delivery of Treasury notes on the contract’s delivery date (June 30, 1993).
- The futures contract permitted delivery of any Treasury note meeting specified contract characteristics, rather than a single identified issue.
- At the time, the cheapest-to-deliver (CTD) security into the contract was the 8.5% Treasury note due February 15, 2000, and the futures price reflected the cash-market value of that CTD note.
- As the delivery date approached, Fenchurch accumulated a substantial portion of the available supply of the 8.5% February 15, 2000 notes in the cash market.
- By accumulating and holding a large share of the CTD supply, Fenchurch created scarcity in the CTD note market for market participants who needed CTD notes to make delivery.
- The scarcity increased the likelihood that shorts would deliver a more expensive eligible note (identified by the CFTC as the next-cheapest deliverable, the 8.875% note), which would increase the economic value of Fenchurch’s long futures positions.
- The increased value of the futures positions benefited Fenchurch and the commodity pools it managed.
- The CFTC initiated an administrative enforcement matter alleging violations of Commodity Exchange Act (CEA) §§ 6(c) and 9(a)(2).
- The matter was resolved through an accepted offer of settlement, with Fenchurch consenting to entry of the order without admitting or denying the CFTC’s findings.

## Issues

1. Whether acquiring a substantial portion of the available supply of the CTD deliverable Treasury note near expiration, to create scarcity and affect delivery economics and futures pricing, constitutes manipulation or attempted manipulation in violation of CEA §§ 6(c) and 9(a)(2).
2. Whether the CFTC may impose remedial sanctions and a civil monetary penalty through a settled administrative order based on its findings that such conduct violated the CEA.

## Decision

- The CFTC instituted administrative proceedings pursuant to CEA §§ 6(c), 6(d), and 8(a) and accepted Fenchurch’s offer of settlement.
- The CFTC found that Fenchurch’s conduct violated CEA §§ 6(c) and 9(a)(2).
- The CFTC ordered Fenchurch to cease and desist from further violations of CEA §§ 6(c) and 9(a)(2).
- The CFTC imposed a $600,000 civil monetary penalty.
- The order resolved the matter without a contested evidentiary hearing, based on the settlement and the Commission’s findings.

## Legal Principles

- A trader may violate CEA § 9(a)(2) by intentionally creating an artificial condition affecting the price of a futures contract, including through conduct directed at the deliverable supply for a physically deliverable contract.
- Conduct aimed at restricting access to the cheapest-to-deliver instrument near expiration, so that delivery is made with a different and more expensive instrument, can constitute a manipulative “squeeze” affecting futures value.
- Manipulative conduct may be found where a firm combines (i) a significant futures position with (ii) acquisition of a substantial share of deliverable supply and (iii) intent to benefit from the resulting noncompetitive delivery conditions.
- The CFTC may resolve an enforcement matter through an administrative settlement order that includes findings of violations and imposes cease-and-desist relief and a civil monetary penalty, even when the respondent neither admits nor denies the findings.

## Conclusion

In the Matter of Fenchurch Capital Management, Ltd. is a CFTC administrative enforcement order arising from Fenchurch’s large long position in June 1993 ten-year Treasury note futures and its accumulation of a substantial portion of the cheapest-to-deliver 8.5% February 15, 2000 Treasury notes as expiration approached. The CFTC found that this created scarcity in the CTD market, altered delivery economics in a way that increased the value of Fenchurch’s futures positions, and violated CEA §§ 6(c) and 9(a)(2); the case ended by settlement with a $600,000 civil penalty and cease-and-desist relief.


In the Matter of Fenchurch Capital Management, Ltd., CFTC Docket No. 96-7 (1996)