June 21, 2021

Volume XI, Number 172


June 18, 2021

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Bridging the Week: Exchange Fees; Cross Border Relief; Leaking Confidential Information; OATS; Times They Are A Changin’ [VIDEO]

The Commodity Futures Trading Commission again fined a futures commission merchant for not timely reconciling exchange fees and paying back customers that were charged too much, despite acknowledging the complexity and manual nature of dealing with exchange fees and discounts. Separately, CFTC staff again delayed the effective date of its own advisory requiring non-US swap dealers that enter into swap transactions with other non-US persons that are arranged, executed or negotiated in the United States to comply with CFTC-mandated transaction-level requirements. Additionally, EUREX continues to roll out its ISA Direct clearing membership for clients, while CME Group still awaits CFTC approval for its equivalent Direct Funding Participant clearing membership. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

  • FCM Agrees to Pay US $800,000 Fine to CFTC Because of US $1.1 Million in Erroneous Customer Exchange Fees Charges (includes My View);

  • CFTC Staff Extends Cross-Border Relief for OTC Transactions Arranged in the US;

  • Investment Bank Fined US $36.3 Million by Federal Reserve Bank in Response to Its Own Staff’s Leakage of Nonpublic Information to Ex-Employee (includes My View);

  • Broker-Dealer to Pay US $1.2 Million to FINRA for Widespread OATS Violations;

  • Nonmember Settles CME Group Disciplinary Action for $336,500 in Sanctions and Three-Year Trading Ban for Front-Running Employer Trades (includes Compliance Weeds);

  • Before There Was CME Group’s Direct Funding Participant Clearing Membership Proposal There Was Eurex’s ISA Direct (includes My View);

  • FinCEN Issues FAQs on Customer Due Diligence Requirements for Financial Institutions (includes Compliance Weeds);

  • In Memoriam: John DeWaal (My Dad): and more.


  • FCM Agrees to Pay US $800,000 Fine to CFTC Because of US $1.1 Million in Erroneous Customer Exchange Fees Charges: Barclays Capital, Inc. agreed to pay a fine of US $800,000 to the Commodity Futures Trading Commission to resolve charges that it failed to supervise it staff’s handling of exchange fees charged to customers from 2012 through 2014. According to the CFTC, after Barclays engaged an independent service provider to enhance its exchange fee reconciliation process in 2012, the provider, in August 2012, identified that the firm had failed in July 2012 to pass along to its customers discounts to ordinary fees from one exchange for one exchange-traded product. Apparently, afterwards, the firm accrued for overcharges to its customers “but failed to timely pay out $1.1 million in exchange fee rebates with respect to the discount program for this particular exchange-traded product.” The CFTC claimed that during the relevant time period, “Barclays failed to implement and maintain adequate systems for reconciling invoices from exchange clearinghouses with the amount of fees actually charged to its customers through its back-office accounting software.” In agreeing to Barclays’ offer of settlement, the CFTC acknowledged that, by now, the firm has provided refunds to almost all impacted customers and that its work with its independent service provider has improved the reliability of its reconciliation process. The CFTC also acknowledged that, for exchange member future commission merchants, like Barclays, the process to compute exchange fee discounts and credit them to customers “is typically complicated because of the myriad applicable rates, surcharges and fee structures.”

My View: This enforcement action is the CFTC’s second enforcement action grounded on the theory that it is allegedly a violation of an FCM’s general obligation to supervise accounts if an FCM fails to accurately reconcile exchange fees and ensure that customers are credited with overpayments on a timely basis. (Click here to access CFTC Regulation 166.3.) In 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $1.2 million to the CFTC related to the CFTC’s allegation that, from at least January 1, 2010, through April 2013, the firm failed to employ “an adequate supervisory system” related to the processing of exchange and clearinghouse fees charged to the firm’s customers. This large fine was assessed despite Merrill apparently self-detecting its own reconciliation issues, endeavoring to correct its problems through the use of two independent consulting firms, and paying out virtually all over-accrued amounts to impacted customers. It turned out that, during the relevant time period, Merrill Lynch paid more than $318 million in exchange fees, and its unexplained over-accruals of $415,318 for customers constituted less than .15 percent of its overall fees paid. Rather than bring enforcement actions against FCMs for managing the best they can with a very broken process, the CFTC should encourage exchanges to institute less complicated fee and discount structures.

  • CFTC Staff Extends Cross-Border Relief for OTC Transactions Arranged in the US: Staff of the Commodity Futures Trading Commission extended through September 30, 2017, no-action relief previously granted five times to non-US swap dealers that transact over-the-counter swaps with non-US persons that arrange, negotiate or execute such transactions through personnel or agents located in the United States. Under the relief, such non-US swap dealers are not required to comply with CFTC-mandated transaction-level requirements related to such swaps. (Transaction-level requirements address mandatory clearing and swap processing; margining and segregation for uncleared swaps; mandatory trade execution; swap trading relationship documentation; real-time reporting; trade confirmation; daily trading records; and external business conduct standards, among other matters.) In November 2013, the CFTC issued an advisory, which said that if a non-US swap dealer regularly uses personnel or agents in the United States to arrange, negotiate or execute swaps with non-US persons, the non-US swap dealer must comply with its transaction-level requirements. In announcing the staff relief, CFTC Chairman Timothy Massad indicated that he expected to request the Commission “consider a rule to begin to address the ‘arrange, negotiate or execute’ issues raised by the no-action relief” this fall. Contemporaneously, the CFTC issued a final response to the District Court’s remand order in September 2014 requiring it to consider the costs and benefits of the extraterritorial application of ten rules contained in eight swaps-related rulemakings. Although CFTC Commissioner J. Christopher Giancarlo acknowledged in a dissent that the CFTC “appears to have addressed” the court’s requirements in its response, he indicated that “[n]evertheless it must be noted that the Commission has repeatedly failed to coordinate effectively with foreign regulators to ‘implement global standards' in financial markets as agreed to by the G-20 leaders in Pittsburgh in 2009.”

  • Investment Bank Fined US $36.3 Million by Federal Reserve Bank in Response to Its Own Staff’s Leakage of Nonpublic Information to Ex-Employee: Goldman Sachs agreed to pay a fine of US $36.3 million to resolve charges brought by the Board of Governors of the Federal Reserve System (FRB) that it failed to maintain adequate policies and procedures to detect or prevent the unauthorized use and dissemination of confidential information of the FRB. This matter arose as a result of the illegal obtainment and use of confidential Fed information by Rohit Bansal, a former Goldman Sachs employee hired from the New York Federal Reserve Bank, which he obtained from Jason Gross, a former co-worker of Mr. Bansal’s at the FRB. The FRB claimed that Mr. Bansal subsequently shared the confidential information with other Goldman Sachs employees, including Joseph Jiampietro, a former managing director. Previously, Goldman Sachs agreed to pay a fine of US $50 million to the New York State Department of Financial Services related to this matter, and Mr. Bansal and Mr. Gross each pleaded guilty to criminal charges. Among other things, alleged the FRB, Goldman Sachs “failed to monitor electronic mail for documents containing confidential supervisory information [from the FRB].” Goldman Sachs agreed to adopt and implement enhanced procedures related to its monitoring of potential FRB confidential information and other measures to resolve the Fed’s action. Separately, the FRB filed charges against Mr. Jiampietro related to his role in this matter through its administrative process. Mr. Jiampietro, charged the FRB, allegedly used and disseminated information provided by Mr. Bansal for his own gain. The FRB seeks as damaged from Mr. Jiampietro US $337,500 and to bar him from associating with any banking institution.

My View: Nowhere in the FRB’s release related to Goldman Sachs (click here to access) was any mention of steps it would be taking to lessen the likelihood that its employees would illicitly disseminate confidential information in the future. Nor was there mention of any internal review regarding what breakdowns in oversight and internal controls might have contributed to the unlawful dissemination of confidential supervisory information by Mr. Gross. Since Goldman Sachs was publicly castigated and sanctioned twice by two separate regulators for its role in this matter, hopefully appropriate measures are being taken by the FRB too internally, even if not in the public eye.

  • Broker-Dealer to Pay US $1.2 Million to FINRA for Widespread OATS Violations: Barclays Capital Inc. agreed to pay a fine of US $1.3 million to the Financial Industry Regulatory Authority to resolve charges that, from September 2008 through April 2015, the firm violated FINRA’s order audit trail system (OATS) reporting requirements on multiple occasions and did not have an adequate supervisory system reasonably designed to achieve compliance with OATS requirements. (OATS is an integrated audit trail of order, quote and trade information for all national market system stocks and over-the-counter equity securities administered by FINRA. Under OATS, FINRA member firms must electronically capture and report to OATS specific data elements relating to the handling or execution of relevant orders.) According to FINRA, for the relevant time, its staff identified 15 systems issues that caused 3.6 billion OATS reporting violations. This constituted up to 3 percent of all reportable order events by Barclays during the relevant time, said FINRA. FINRA claimed that 2.3 billion of Barclays’ OATS errors were caused by a program failure of the firm’s trading system to report the “not held” special handling code for all orders designated by the firm as “not held.” In August 2015, three broker-dealers agreed to pay fines in excess of US $2.6 million in aggregate to resolve FINRA allegations that they failed to comply with OATS reporting requirements. (Click here for details.)

  • Nonmember Settles CME Group Disciplinary Action for $336,500 in Sanctions and Three-Year Trading Ban for Front-Running Employer Trades: Zhiyu Wang, a nonmember of the New York Mercantile Exchange, agreed to pay a fine of US $100,000, disgorge profits of US $236,530 and be barred from trading any CME Group product for three years, to resolve exchange charges that, on several occasions between December 18, 2014, and March 30, 2015, he traded ahead of orders for his employer, realizing profits of US $236,500. According to NYMEX, Mr. Wang accomplished this by first entering orders for his own account, and then subsequently offsetting his positions with trades opposite his employer’s account. NYMEX also claimed that Mr. Wang failed to appear for an interview requested by exchange investigatory staff. Separately, CME Group settled a disciplinary action with RBC Capital Markets LLC related to the firm’s alleged reporting the time of execution of a block trade in error, and reporting that the block trade was executed at a lower price than the price agreed to with the firm’s counterparty. RBC agreed to pay a fine of US $30,000 to resolve this matter. In addition, CME Group settled disciplinary actions alleging violations of its wash sales and pre-arranged trading prohibitions.

Compliance Weeds: A panel of the NYMEX Business Conduct Committee recently found that, from April 18, 2012, through December 10, 2012, Jon Ruggles, a nonmember and former trader for Delta Airlines, traded two accounts of his wife, Ivonne Ruggles, relying on confidential information of his employer in a manner that disadvantaged it. According to NYMEX’s BCC, during the relevant period, Mr. Ruggles accumulated profits in excess of US $3.3 million as a result of his unauthorized trading. (Click here for details regarding this disciplinary action.) The Commodity Futures Trading Commission previously has settled an enforcement action against an individual claiming that his trading opposite his employer’s account constituted impermissible misappropriation of confidential information, and a violation of the relatively new provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the corresponding CFTC rule that prohibit any person from engaging in “any manipulative or deceptive device or contrivance” in connection with futures trading that uses, attempts to use or employs “any manipulative device, scheme or artifice to defraud” or operates “as a fraud or deceit upon any person.” (Click here to access Commodity Exchange Act Section 6(c)(1)), US Code §9(1), and here to access CFTC Rule 180.1.)

And more briefly

  • CFTC Proposes Waiving Audited Annual Report Requirement For Certain New Pools: The Commodity Futures Trading Commission proposed an amendment to an existing rule to permit commodity pools in existence three months or less to not have to provide an independently audited annual report to investors after the pool's first fiscal year-end (as otherwise required by existing regulation; click here to access CFTC Rule 4.22) provided the pool has no more than 15 participants and the total contributions received by the relevant commodity pool operator for the pool from its formation to its first fiscal year-end did not exceed $1.5 million, among other conditions. Additionally, the CFTC proposed, under certain enumerated circumstances, to permit pool annual reports required to be independently audited to apply generally accepted accounting standards or practices of the United Kingdom, Ireland, Luxembourg or Canada, in addition to US generally accepted accounting principles or International Financial Reporting Standards. The CFTC will accept comments on its proposed new rule amendments through September 6, 2016.

  • CFTC Staff Says Matrix Reporting Okay for FCM and Swap Dealer CCOs Provided Ultimate Authority With Board or Senior Officers: Staff of the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight issued an advisory that indicated that chief compliance officers of futures commission merchants, swaps dealers and major swap participants may have other reporting line requirements other than to the senior officer or board of directors, provided that the senior officer or board of directors appoints the CCO; approves the CCO’s compensation; meets with the CCO at least annually and at the CCO’s request; and makes any removal decisions regarding the CCO. This would expressly permit a local CCO to have a reporting line into a global CCO in a parent company in a global organization, said the DSIO staff advisory.

  • MAS Issues Guidance on Outsourcing Including Using Cloud Services: The Monetary Authority of Singapore has issued guidelines on outsourcing, including the retention of cloud computing services. Among other things the guidelines describe the expected role of senior management and the board of directors in connection with outsourcing arrangements, and recommend that all outsourcing agreements have provisions addressing scope; confidentiality and security; business continuity arrangements; and audit and inspection, among other provisions. MAS claimed that cloud computing is just another form of outsourcing and that “[t]he types of risks in [cloud services] that confront institutions are not distinct from that of other forms of outsourcing arrangements.”

  • Court Orders Disbarred Attorney to Pay US $280,000 Fine to CFTC for Role in Illicit Money Passes: John Briner, a disbarred Canadian attorney, and his defunct law firm, Metrowest Law Corp., were ordered by a federal court to pay a fine of US $280,000 in response to a complaint brought by the Commodity Futures Trading Commission in connection with an alleged scheme that utilized pre-arranged, noncompetitive matched trades involving single stock futures traded on One Chicago LLC. The scheme resulted in US $390,000 being illicitly transferred from Metrowest to an account in the name of Tech Power Inc. Previously, Tech Power and its owner, Mathew Marcus, agreed to pay a fine of US $250,000 to resolve CFTC charges in this matter; the action taken against Mr. Briner and Metrowest was a default order taken after they failed to respond to the CFTC’s complaint. (Click here for background on the CFTC’s complaint.)

  • Three Federal Regulators Announce US $382.4 Million Settlement With Custody Bank for Misleading Clients About FX Mark-Ups: State Street Bank and Trust Company agreed to pay $382.4 million as part of a global settlement related to its alleged misleading of mutual funds and others related to hidden mark-ups for foreign exchange transactions. The global settlement was with the Securities and Exchange Commission, the US Department of Justice and the Department of Labor. According to the SEC, State Street allegedly misled custody clients by telling them they would receive the most competitive rates on their foreign currency transactions or be provided with best execution, when in fact the bank set prices based on predetermined uniform mark-ups with “no effort to obtain the best possible prices for these customers.”

  • Court Orders Two Web-Based Firms to Pay US $4.6 Million in Sanctions for Binary Options Trading Fraud: A federal court entered a default judgment against Vault Options Ltd and Global Trader 365, Israeli-based web companies, in connection with charges brought by the Commodity Futures Trading Commission that, from at least October 2012 to the present time, they entered into binary commodity option transactions with retail clients when they were not appropriately registered with the CFTC. The CFTC also charged that the defendants defrauded customers. The court ordered restitution to customers in excess of $1.5 million and a fine of US $3 million.


  • Before There Was CME Group’s Direct Funding Participant Clearing Membership Proposal There Was Eurex’s ISA Direct: A few weeks ago, CME Group filed proposed rule changes with the Commodity Futures Trading Commission that would create a new category of clearing membership, termed a “Direct Funding Participant.” Under CME Group’s proposal, a DFP could clear all of its eligible proprietary CME Group trades directly with the CME clearinghouse but would not be obligated to contribute to CME Group’s guaranty fund or otherwise be responsible in case of a default by another clearing member. Instead, all of a DFP’s obligations (except for obligations arising from disciplinary actions against a DFP) to CME Group would be guaranteed by at least one other clearing member – termed a “DFP Guarantor” – that must also be a CME Group clearing member and be registered with the CFTC as a futures commission merchant. Previously, EUREX rolled out its own version of DFP clearing membership called ISA Direct. Under this program, eligible insurance companies, financial institutions, pension funds and investment funds domiciled in the European Union or Switzerland can become direct clearing members of EUREX Clearing without incurring obligations for the default of other clearing members. Instead, their membership is facilitated by an existing General Clearing Member (known as a “clearing agent”) that will not guarantee its client’s performance, but will be responsible for what otherwise would be the ISA Direct member’s default fund contribution and default management obligation. The ISA Direct member’s clearing agent could also provide transaction, cash and collateral management services. Clients opting to become ISA Direct members would enhance their collateral protection through this program, claims EUREX because they will have legal and beneficial ownership of all their collateral. ISA Direct members may ultimately carry their over-the-counter interest rate swaps, listed derivatives, and secured funding and financing positions directly through Eurex Clearing. However, for now, only OTC IRS and Repo transactions are currently available under the program.

My View: As Bob Dylan sung, The Times They Are A Changin’ (click here to access a vintage 1964 recording). Eurex already has, and CME Group has proposed, clearing memberships that at least somewhat disintermediate the traditional role of what are known in the United States as future commission merchants. Instead of carriers of client accounts, FCMs would at most become facilitators of client accounts, acting as introducing brokers to clearinghouses. In the United States, CME Group has claimed its proposal will alleviate fellow customer risk for DFP clearing members and reduce certain BASEL bank charges for banks that own FCMs, while EUREX generally emphasizes only the benefits to customers. DFP members’ obligations will be fully guaranteed by another clearing member as proposed by CME Group, while no such general guarantee exists for a clearing agent of an ISA Direct member. Time will tell whether any of these proposals will fulfill their promises. However, they are worth studying, and it is likely beneficial to have a public forum in the United States — perhaps sponsored by the CFTC’s Market Risk Advisory Committee— to discuss the intricacies of CME Group’s DFP proposal and other proposals likely soon to be proposed by other derivatives clearing organizations.

  • FinCEN Issues FAQs on Customer Due Diligence Requirements for Financial Institutions: In mid-July the Financial Industry Crime Enforcement Network of the United States Department of the Treasury issued guidance in the form of Frequently Asked Questions related to its new customer due diligence requirements to identify and verify the beneficial owners of legal entity customers, subject to certain exceptions. These new requirements, which will be effective for new customers beginning May 11, 2018, will be applicable to banks, broker-dealers, future commission merchants, introducing brokers and mutual funds (collectively, “covered firms”). Under FinCEN’s new rules, covered firms must establish and maintain written procedures reasonably designed to identify and verify the identities of beneficial owners of legal entity customers unless such customers are expressly excluded (e.g., certain US or non-US regulated financial entities). Beneficial owners include each real person who directly or indirectly has a 25 percent or more equity ownership interest in the legal entity customer, and a single individual with “significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions.” Legal entity customers include corporations, limited liability companies, partnerships and other similar business entities. (Click here for background on FinCEN’s new requirements.)

Compliance Weeds

Under FinCEN’s new rules, a covered financial institution must conduct customer due diligence on all new customers’ accounts to:

  1. identify and verify the identity of customers;

  2. identify and verify the identity of beneficial owners of customers that are entities;

  3. understand the nature and purpose of customer relationships; and

  4. conduct ongoing monitoring in order to report suspicious transactions and, on a risk basis, maintain and update customer information.

FinCEN believes element (1) is already met by covered financial institutions’ customer identification program (CIP) while elements (3) and (4) are already implicitly required because of existing suspicious activity reporting requirements. It believes that only element (2) is a new requirement.

Generally, covered financial institutions must collect information regarding each of the natural person beneficial owners covered by the rule for a specific customer by:

  1. using the model form provided by FinCEN, which asks for each individual person’s name, date of birth for individuals, real address and identification number, and obligates an individual from the legal entity to certify that the information is true and correct; or

  2. taking other steps to obtain the equivalent information required by the model form with a certification from the legal entity.

A covered financial institution must verify the identity of identified beneficial owners using CIP-type procedures (e.g., receiving documentary or non-documentary evidence), although the covered financial institution need not receive original documents (copies are permissible). However, a covered financial institution is not required to independently verify the fact that an individual is a beneficial owner provided it has no knowledge that would “reasonably call into question” the reliability of provided information.

  • Bitcoin Exchange Previously Fined by CFTC Now Hacked: Bitfinex, which just a few weeks ago agreed to settle a complaint filed by the Commodity Futures Trading Commission for operating an online platform for cryptocurrencies, including Bitcoin, without registration, was the apparent victim of a cyber attack that apparently resulted in the theft of more that US $60 million of Bitcoin held for its customers. The CFTC had charged that Bitfinex’s platform permitted retail clients to borrow funds from other customers to purchase Bitcoin, but that financed Bitcoin were not delivered to such retail clients within 28 days as required by law. Bitfinex agreed to pay the CFTC US $75,000 to resolve the Commission’s charges.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 221



About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...