FCStone fined $1.5 million for risk controls failings

FCStone has paid $1.5 million to settle charges brought by the Commodity Futures Trading Commission (CFTC) for risk management failings, which resulted in a $127 million loss for the futures broker.

According to a statement issued by the CFTC on May 29, FCStone failed to implement adequate customer credit and concentration risk policies and controls in 2008 through to March 1, 2009, allowing one account to acquire a massive commodity-linked options position that it could not afford to maintain. As required by futures commission merchants (FCMs), FCStone was forced to take over the account, and lost approximately $127 million.

"When an FCM's financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure their risk controls are in order," said David Meister, the CFTC's director of enforcement.

The CFTC order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures and avoid violations of supervisory obligations.

Full details are available here.