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

reviewed in detail the letter from the Eurex Exchange to MSUSA and the specific transactions referred to therein;

analysed in detail all futures orders placed by the Desk and transactions for five other days, selected randomly, in June and July 2016;

reviewed orders and transactions conducted between January and May 2016 – one day per month, selected randomly;

interviewed Mr Heiberg, Mr Urra, Mr Lopez and Mr Sheth;

reviewed the Desk’s organisation, strategy, performance, limits and exposure;

reviewed electronic communications: e-mails for the period January to July 2016 and Bloomberg chats for the period April to July 2016; and

reviewed telephone calls between Mr Urra, Mr Sheth and Mr Lopez for the period April to July 2016;

The Desk “appears to have operated within its mandate and end of day limits”.

The placing of multiple large orders when a smaller order on the other side was being executed “appears to have been a regular practice and was not confined to the two instances highlighted by Eurex”. The Desk has stated that in many cases it had not intended to place multiple large orders, rather the trader(s) were seeking to update the price of an existing order and in doing so did not cancel previous orders (which they felt were unlikely to be filled because they were away from the prevailing price / not attracting interest). This resulted in large cumulative outstanding orders. “If this is the case, it would appear to us to be poor practice in terms of order entry and management.”

The Head of the Desk had informed them that the practice of placing larger orders had been used since around April 2016 when the Desk was asked to serve a wider client base.

The futures orders placed by the Desk were fully transparent and available to the market for execution. The orders are visible for a sufficient period of time to enable market participants to decide whether or not to act on them.

“Our review also indicates that large orders are not solely placed at times when the traders are seeking to execute smaller orders on the other side. On the days we sampled, 33% of large orders were not placed whilst a smaller order was in the process of being executed on the opposite side. This appears to indicate that the sole purpose of placing the large orders is not necessarily to seek to influence the execution of the smaller lot on the other side.”

“We have noted that, when a large order has been placed in the Italian Government Bond futures market and a smaller order is being executed on the other side of the Eurex order book, the large order is usually cancelled a short time after the smaller order has been executed – literally within seconds. It could be said that this indicates that there was never any intention to execute such orders and that their sole purpose was to enable the Desk to execute the smaller orders at a better price.”

Compliance had undertaken surveillance of the Traders’ Bloomberg messages and chat (from January to July 2016) and e-mails (from April to July 2016). This was in addition to the ongoing electronic monitoring of such traffic. This did not reveal any evidence of manipulative or abusive behaviour.

The Traders had explained that the purpose of the large orders is to seek to build “basis/curve” positions at relatively cheap levels if possible. Where such orders are not filled they provide the Desk with useful information as to the depth and direction of the market (the Desk has referred to this as “price discovery”). The Desk thinks clients could be dealing through multiple market makers.

At the time at which these order placing and cancellation practices were taking place, neither the Front Office nor Compliance were able to monitor such activity, as orders were routed through MSUSA and MHI maintained records of trades executed, but not orders. Orders were being monitored by MSUSA. Arrangements are currently underway to ensure that Eurex orders are captured within Trading Hub.

The orders could be regarded as “genuine” or “legitimate” in the sense they would have been honoured if they had been filled. MHI had put its capital at risk.

The practice of placing orders which resulted in multiple outstanding orders when this was not the intention indicates a lack of sufficient due care and poor practice in terms of order management. Such conduct is not in accordance with the standards accepted by MHI.

The pattern of activity could give the perception that the purpose of the large orders was to facilitate the execution of the smaller order on the other side of the order book. We have received explanations from the Traders in relation to the Desk’s activities from which it could be concluded that these were legitimate. However, there is sufficient doubt as to the credibility of these explanations to leave open the possibility that the trading patterns could be regarded as abusive. We have not found conclusive evidence in this regard.

The trading practice described above does not appear to have resulted in any abnormal impact on the market. It may be that the Desk’s dealing pattern did not result in “creating a false or misleading impression” as to the supply or demand for the relevant futures contracts. There does not appear to have been any significant distortion in the way in which the market was operating.

Even if the conduct does not result in a clear breach of the market abuse regulations, such conduct was not in accordance with the standards expected by MHI and put the Desk and the firm at risk of being accused of not complying with high standards of market conduct.

There is a case for disciplinary proceedings to be taken against Mr Urra, Mr Lopez and Mr Sheth for not acting with sufficient due skill, care and diligence, and possibly in relation to adherence to high standards of market conduct, and they referred these issues to the Head of HR in order that they may institute a disciplinary investigation.

An outright transaction of 500 lots of Futures equated to approximately £1.3m of VaR; 2,000 lots equated to approximately £3.3m.

2,000 lots would equate to $186,000 of PV01 Hedge risk. The table in the report sets out that the exposure on 500 lots would be $2,000. On the basis of all of the evidence, the Tribunal determines that this is a typographical error, and should be in the region of $40,000-50,000 (but in any event within the Desk limit).

Review of Bloomberg Messages and Chats - Searches were performed for all Bloomberg messages and chats exchanged between Mr Urra, Mr Lopez and Mr Sheth between 1 January and 31 July 2016. No Bloomberg messages were sent between Mr Urra, Mr Lopez and Mr Sheth during this period. All chats between Mr Urra, Mr Lopez and Mr Sheth during this period were reviewed and no issues were identified.

Review of Email Communications - Searches were performed for emails sent by Mr Urra, Mr Lopez and Mr Sheth where one or more of the others were recipients between April and July 2016. No issues were identified.

Review of Telephone Records - Searches were performed for all telephone calls made between Mr Urra, Mr Lopez and Mr Sheth in all combinations between 1 April and 31 July 2016. Only one call was found, a 50 second conversation between Mr Urra and Mr Lopez on 21 June at 11:26. The call was in Spanish and did not appear to be related to the trading of Eurex contracts.