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Interactive Brokers Fined $1.75M for Failures Amid Oil Futures Price Collapse

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What You Need to Know

  • The firm's trading system was unprepared when prices turned negative in April 2020, according to the CFTC.
  • Interactive Brokers says it has paid more than $102 million to affected clients.
  • Hundreds of client accounts were affected, and their trading losses were initially determined by Interactive Brokers to exceed $82.57 million.

The Commodity Futures Trading Commission on Tuesday ordered Interactive Brokers to pay a civil monetary penalty of $1.75 million for allegedly failing to diligently supervise the handling of its client accounts by not adequately preparing and configuring its electronic trading system to receive negative prices and calculate margin on April 20, 2020.

The order also required Interactive Brokers to pay restitution of $82.57 million to its clients. But the firm was “credited the full restitution due to its compensation payment” to clients, CFTC said.

The order recognized Interactive Brokers’ “substantial cooperation and systems remediation in the form of a reduced civil monetary penalty,” CFTC added.

The firm’s alleged supervisory failures, which violated CFTC Regulation 166.3, were discovered on April 20, 2020, when the benchmark West Texas Intermediate light, sweet crude oil (CL) futures contract on CME Group Inc.’s New York Mercantile Exchange (NYMEX) traded into negative prices, settling at negative $37.63 per barrel for the May 2020 contracts set to expire the following day, according to CFTC.

Hundreds of client accounts were affected, and their trading losses were initially determined by Interactive Brokers to exceed $82.57 million.

“The events of April 20, 2020, were one-of-a-kind in the history of the oil futures markets and presented unique challenges to all market participants,” an Interactive Brokers spokesperson said Tuesday.

Although the firm had “engaged in extensive systems testing and had begun implementing necessary coding changes in advance of April 20, it was not able to fully deploy new software before crude oil futures traded in negative territory,” the spokesperson said. “After April 20, 2020, the firm promptly put in place measures to ensure that our systems are prepared for similar negative-pricing of futures products going forward.”

Shortly after that “unprecedented negative pricing event,” the firm “voluntarily and proactively made payments of more than $102 million to customers it determined were potentially impacted by its systems issues,” the spokesperson said.

The firm was “pleased to resolve this matter and pleased that the CFTC recognized our proactive compensation of our affected customers (exceeding our restitution obligation) and substantial cooperation in reaching this settlement,” the spokesperson added.

The enforcement action “demonstrates that the CFTC will hold registrants responsible for their handling of customer accounts and ensuring the integrity of trades on their trading platforms and electronic systems, including during instances of market volatility,” according to Vincent McGonagle, its acting director of enforcement.

(Image: Shutterstock)