Upper Tribunal Tax and Chancery Chamber

UT (Tax & Chancery) UT-2022-000134 UT-2022-000135 UT-2022-000137 - [2025] UKUT 00214 (TCC)

Fecha: 31-Ene-2025

Eurex Letter

Eurex Letter

226.

The Eurex Letter was sent to MSUSA as the member firm on the Exchange on 26 July 2016 and that letter was forwarded by MSUSA to MHI on 28 July 2016.

227.

The Eurex Letter asked about two instances which occurred on 29 June 2016:

“On 29^th June 2016 starting from 12.58.50 pm (CET) four bid orders of 200 and 500 contracts were entered in the order book of the FBTP SEP 16. Some seconds later starting from 12.58.57 pm (CET) ask orders with a volume of 25 contracts in total were executed. Immediately after that, the four bid orders of 200 and 500 contracts had been cancelled without execution.
Almost the same scenario could be observed on the same day at 15.30 pm (CET).
The two described trading scenarios could constitute a breach of §17 of the Exchange Rules of Eurex Deutschland and Eurex Zürich and §20a of the German Securities Trading Act (WpHG).
…
3.
Please explain the underlying strategy of the orders and transactions as detailed as possible. Please describe in particular why you entered bid orders with a high volume and traded on the ask side. Please also explain why you deleted the bid orders without execution.”

228.

The two instances identified are now referred to as F174 and F176, ie they are within the Instance Pool. These instances involved orders placed by Mr Lopez and Mr Sheth; no orders were placed by Mr Urra in these instances, although the Small Order in F176 was a hedge for a bond in Mr Urra’s book. More particularly:

(1)

F174 involved Mr Sheth placing three buy orders of 500 lots each and Mr Lopez placing a buy order of 200 lots at the same time as Mr Lopez had a 25 lot sell order on the market. The buy orders were cancelled after the sell order traded.

(2)

F176 involved Mr Sheth placing a series of seven buy orders of 500 lots each (not all of which overlapped) whilst having an 80 lot sell order on the market, followed by a 10 lot sell order. Some of the buy orders were cancelled before the sell orders had traded fully, and once the sell orders had traded the remaining buy orders were cancelled.

229.

Mr Urra was informed of this letter on 28 or 29 July 2016. He attended an interview with Compliance at 8.30 am on 29 July 2016, returned with a note of his initial thoughts at midday, produced a revised note on 2 August 2016 and was interviewed again on 5 August 2016. Mr Sheth was interviewed by Compliance on 3 and 10 August 2016. (Mr Lopez was on holiday for the first two weeks in August 2016 and he was not interviewed by Compliance until 29 September 2016, ie after MHI had responded to the Eurex Letter.)

230.

The pattern of trading activity ceased immediately. On 28 July 2016 there were nine instances (F225 to F233) which between them involved each of the Traders, with F233 taking place at around 4pm on 28 July 2016. The Tribunal finds that Compliance told Mr Urra that the Desk must no longer place large orders in Futures away from the touch and that he informed Mr Lopez and Mr Sheth of this instruction.

231.

MHI responded to MSUSA on 22 August 2016. That letter, which was sent by Mr Joshi, had been reviewed by Mr Heiberg and others at MHI, as well as MHI’s legal advisors. MSUSA then provided this response to the Exchange.

232.

MHI’s response to MSUSA included:

(1)

Futures are used for hedging of positions (or potential positions) arising from cash bond transactions executed with clients.

(2)

The desk also seeks to build “basis/curve” positions using cash bond positions and futures positions at levels which would be attractive for clients.

(3)

The “ask” orders were entered and executed to hedge transactions in cash bonds, the “bid” orders were “to establish a “basis/curve” position of some size within the firm’s market making book at an attractive level for clients. These orders also help traders to understand the direction and depth of the market”. The “bid” orders were placed at about the same time as the ask orders as the “desk was of the view that there may have been interest in an order of this size due to potential wider selling activity in the government bond market at that time”. The bid orders were deleted without execution as the desk determined that the market interest at this size and price level had not materialised.

(4)

MHI’s traders have emphasised that the orders put to the market are real executable orders; if the order is filled, this is fully honoured and the transaction is settled. MHI has in an economic sense its capital at risk.

(5)

The large multiple orders were a result of a trader who intended to amend the bid price for an existing order but instead entering new orders and failing to cancel the previous orders and as being a mistake.

(6)

MHI’s management has instructed its traders “not to place these types of order on the Exchange until further notice”.

233.

The Exchange acknowledged receipt of this letter and did not ask any further questions.