T Myun–Uk Choi v. Tower Research Capital LLC, US District Court for the Southern District of New York, February 8, 2018
This putative class action includes allegations that the US defendants, including a high-frequency trading firm and its executives, violated the CEA by placing fictitious trades to manipulate the price of Korean futures contracts traded on a “night market” at the Chicago Mercantile Exchange (CME) Globex Platform. As reported in the Spring 2016 issue of this report, the court initially dismissed the complaint and allowed the plaintiffs to expand their allegations. In this opinion, the Court dismisses the complaint again, finding that it alleges conduct that would require an impermissibly extraterritorial application of the CEA to constitute a violation.
The Court found the geographic scope of the CEA to be the same as for the principal US securities law anti-fraud provisions, and therefore that the CEA had no extraterritorial effect. The plaintiffs thus were required to allege that relevant transactions occurred on a “US exchange” or that they had been “made” in the US, meaning either that “irrevocable liability” for the transaction was incurred, or that title was transferred, in the US.
The Court concluded that, while the CME was a “US exchange,” the Globex platform was not, citing the platform’s lack of “its own set of rules or a mechanism for enforcing them” and that its structure did not resemble that of a traditional “exchange.” The US Commodities Futures Trading Commission (CFTC) and financial publications characterized Globex as an exchange, but the CFTC did not identify it as a “registered” exchange, which the Court took to be the decisive factor. The Court also rejected the argument that use of Globex to handle the relevant transactions placed the transactions under the jurisdiction of the CME, noting that the Globex platform merely was being used by the Korean securities exchange as a means to implement transactions in Korea through use of a “matching engine with servers in the US.”
The Court also rejected the alternative basis for jurisdiction, that “irrevocable liability” for the transaction was incurred in the US. It read the applicable rules of the Korean exchange to mean that trades made on Globex do not become binding until they are “settled” on the following day, in Kore, once the Korean exchange has opened for regular trading.