Fenchurch: Treasury Deliveries and the Cheapest-to-Deliver Squeeze

The alleged Fenchurch Treasury note squeeze led the company to agree to a $600,000 civil penalty to settle Commodity Futures Trading Commission allegations that it cornered the cheapest-to-deliver note and increased the value of its futures position. The alleged strategy depended on keeping securities away from traders who needed to deliver them. A repo employee could see the lending restrictions, while a futures controller could see why receiving a different note would pay.

Fenchurch Capital Management, Ltd., a Chicago commodity trading advisor and commodity pool operator, traded government securities and futures for two commodity pools. The CFTC’s July 10, 1996 settlement concerned the June 1993 ten-year Treasury note futures contract on the Chicago Board of Trade. The agency described manipulation through control of deliverable supply after futures trading had already ended, while counterparties still had securities to deliver.

How the Cheapest-to-Deliver Treasury Note Squeeze Worked

The cheapest-to-deliver Treasury note was the security sellers could deliver most economically against the futures contract. The contract allowed delivery from a basket of eligible Treasury securities, but its expiration price reflected the cash value of the cheapest issue. The CFTC’s order identifies that issue in June 1993 as the 8 1/2% Treasury note maturing February 15, 2000.

According to the CFTC’s order, Fenchurch stood for delivery on about 12,700 contracts at the end of trading on June 21, representing 76% of the contract’s open interest. That meant it had committed to receive securities against a dominant share of the outstanding futures positions. The sellers, known as shorts, could deliver through June 30, and the interest-rate conditions made waiting until the last delivery day economical.

The repo market supplied the securities those sellers needed. A repurchase agreement combines a sale of securities for cash with an agreement to buy the same securities back later. It lets one participant finance securities and the other obtain securities against cash. Shorts preparing for delivery could borrow the required note or recover notes they had already lent.

The CFTC described a change beginning June 25: the cheapest note became scarce, and the next-cheapest issue became more valuable to receive against the same futures contract. That alternative was the 8 7/8% Treasury note maturing May 15, 2000. The order put the extra value at approximately 5/32 of a point. Sellers forced to substitute it would hand over a more valuable security without receiving compensation for the difference.

The Repo Rate Showed Where the Pressure Was

A falling repo rate for a particular note can reveal that traders increasingly need the security itself. The order explains that ordinary general-collateral transactions do not depend on obtaining one specific security, while a particular note’s repo rate responds to its own supply and demand. It reports that between June 25 and June 29, the cheapest note’s rate fell as low as 0% and then below zero, while general collateral traded as high as 3.20%.

According to the CFTC, Fenchurch already controlled approximately $1.4 billion of the cheapest note through cash and repo transactions when the scarcity developed. The agency alleged that Fenchurch then increased that position to more than $2 billion and withheld notes from the market. The original issue had been much larger, but portions had been converted into zero-coupon securities, used for municipal financing or held by long-term investors. The practical question was how much of the note sellers could actually obtain before delivery.

The order describes Fenchurch lending cash at low rates to obtain the scarce notes, then borrowing cash against those notes at higher general-collateral rates. The restriction attached to that second transaction explains why the worse financing terms mattered:

The agency also alleged that Fenchurch deliberately failed to return borrowed notes to counterparties, several of whom were preparing to deliver against the futures contract. Holding those notes meant giving up interest Fenchurch otherwise would have received. We see the point in that apparent bad bargain: the financing book bore the cost of keeping securities out of reach, while the futures position stood to receive something better.

The Federal Reserve Released Collateral, but the Notes Stayed Away

According to the order, the Federal Reserve Bank of New York tried to make scarce notes available by asking Fenchurch, through its primary dealer, to substitute other collateral. The bank held approximately $837 million of the cheapest note from a prior transaction and made the request as delivery approached. Fenchurch agreed to the substitution.

According to the order, Fenchurch then placed $800 million of the returned notes with its London parent in an overnight repo. The parent rarely participated in the U.S. repo market and did not relend them. Fenchurch placed the remainder with an entity it controlled, which also kept the notes out of the market. To us, that is the absurdity in the agency’s account: the notes changed hands, but the sellers who needed them still could not get them.

Why the Repo Book and Futures Book Belong Together

The CFTC alleged in its settlement order that the funds advised by Fenchurch received approximately $480 million of the more valuable security on about one-third of the futures position. The agency said this substantially increased the position’s value. The order says that once delivery finished and the alleged restrictions ceased, the supply of the cheapest note and its repo rates returned to normal levels.

The June 2024 working paper An Analysis of Market Manipulation Definitions Around the World, prepared for a World Federation of Exchanges research project, explains the broader economics of market manipulation across linked positions. It describes corners in which a large futures position creates delivery pressure, and strategies in which activity in one market benefits a position elsewhere. The expense and the benefit may sit on different desks or in different instruments.

That perspective gives an insider’s account its value. A financing trade that sacrifices interest can make sense to a desk whose futures deliveries improve as a result. In Fenchurch, the agency connected the unfavorable repo terms, restrictions on relending and failed returns to the securities the funds ultimately received.

The timing also separates the case from settlement-window manipulation, where trades target the price being calculated near the close. Fenchurch’s alleged restrictions began after the futures contract had stopped trading. The pressure worked through what counterparties had to deliver against a bargain already struck.

What Fenchurch Agreed to Pay and Report

Fenchurch agreed to a civil monetary penalty and reporting requirements aimed at the connection between Treasury futures and available notes. The CFTC’s announcement said payment of its penalty would also satisfy the company’s payment obligation in a related SEC settlement. The Commission coordinated its investigation with the SEC and the Chicago Board of Trade, which brought related charges.

For two years, the order required Fenchurch to report its holdings of the cheapest-to-deliver note across all markets when it ended trading with a large long Treasury futures position. Reports ran each business day through the last delivery day. The remedy followed the alleged mechanism closely: the regulator wanted to see the securities positions during the period when deliveries could still change the value of the futures bargain.

What an Insider Sees in a Treasury Delivery Squeeze

For suspected Treasury delivery manipulation, we connect the cash-note inventory, repo lending and returns, futures exposure and securities actually delivered. The Fenchurch order shows why the instructions connecting those records matter: who required that notes stay out of the market, who chose to leave returns unfilled, and which position benefited. The employee who understands those decisions can explain what an inventory total alone leaves out.

A repo trader may know the financing terms and the restriction on relending. A securities-finance or operations employee may see the collateral substitution and failed returns, while a futures risk controller understands the delivery exposure. Position records, transaction records and trading communications let those different views be examined together. We work with insiders to explain the commercial purpose the desk claimed and the economic result it pursued.

Delivery purpose also matters in the allegations against Kraft and Mondelez. The CFTC’s wheat complaint alleged that Kraft acquired a large futures position to make sellers believe it would take and use the wheat, despite lacking the need and storage capacity for that quantity. In both accounts, the useful insider question connects the delivery position to the business’s actual purpose and capability. The Fenchurch order adds the repo instructions that allegedly kept a particular security away from the people obliged to deliver it.

What a Whistleblower’s Information Can Be Worth

For comparable conduct today, the CFTC whistleblower reward is a combined 10% to 30% of qualifying monetary sanctions collected, shared among eligible whistleblowers in an action. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Our work with a Treasury-market insider centers on the CFTC program and the trading decisions their information can explain.

You Know Why the Desk Kept the Notes

If you saw instructions to withhold Treasury notes, accept worse repo terms or leave securities unreturned, speak with our whistleblower experts about the trading purpose behind them. We build your case around the connection between the financing and futures books, bring in CFTC whistleblower lawyers who understand delivery squeezes, and stay with you through the case.