In the Matter of Cargill, Inc.

Cargill Inc. (defendant) was an agricultural, commodity, and financial-services conglomerate headquartered in Minnesota. Through a subsidiary business, Cargill offered swaps to its customers as a service designed to allow customers to hedge their commodity risks. Some of the swaps were standardized in the industry, whereas other swaps were highly complex and often customized to customers’ particular needs. Most of the customers either produced the relevant commodities or purchased them as end users. Prior to registration with the Commodity Futures Trading Commission (CFTC) (plaintiff), Cargill’s policy was to disclose to customers the market value of the swap based on an amortization of Cargill’s expected revenue over the first 60 calendar days of the swap. Through this methodology, Cargill was able to avoid disclosing their entire markup to customers on the first day of the swap. In 2013, when Cargill sought registration with the CFTC as a swap dealer, Cargill realized that the Commodity Exchange Act (CEA) and CFTC regulations would require disclosure of an objective and transparent mid-market mark, which allowed prospective customers to see the swap dealer’s potential profits. Cargill was concerned that compliance with the mid-market-mark requirement would result in lower profits from their swap business. Accordingly, Cargill explored various methodologies for calculating the mid-market mark for regulatory-disclosure purposes. Cargill decided not to contact the CFTC for guidance, even though the CFTC was available. Ultimately, Cargill employed a similar methodology as it was using preregistration, in which Cargill amortized its expected revenue over the first 60 days. The only meaningful modification was that Cargill’s formula recognized 10 percent of expected revenue on the first day of the swap, with the remaining 90 precent amortized over the next 60 days. The result was that the disclosures provided to prospective customers pretrade on the transaction date concealed 90 percent of expected revenue. The exact nature of the formula was not disclosed to Cargill customers. Eventually, Cargill employees expressed concern to internal compliance management that this methodology was not in compliance with the CEA and CFTC regulations, but Cargill’s management declined to make any changes. The CFTC investigated the matter and entered into an offer of settlement with Cargill.