May 11, 2021

Volume XI, Number 131


May 11, 2021

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May 10, 2021

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Bridging the Week: June 12 to 16 and June 19, 2017 (Protectionism; CCPs; Volcker; TAS; FinTech)

The European Commission proposed a protectionist regime for the oversight of third-country clearinghouses, while the US Department of Treasury recommended mostly keeping the Volcker Rule “as is,” but simplifying the definition of proprietary trading and adding increased flexibility for authorized market-making activity. Moreover, in New York City, employers must soon stop requesting information on prior compensation history from job applicants or risk fines and payment of compensatory damages. As a result, the following matters are covered in this article:

  • EC Proposes Two-Tier System for Classifying Third-Country CCPs; Certain Systemically Important CCPs May Be Required to Relocate to the EU (includes My View);

  • US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation (includes My View);

  • NYMEX Charges Rule Violation for Entering Incomplete TAS Orders to Gain Queue Advantage (includes Compliance Weeds);

  • NYC-Based Employers: Don’t Ask for and Don’t Rely on Prior Compensation History When Considering Applicant’s Potential Hiring Beginning October 31 (includes Legal Weeds); and more.

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  • EC Proposes Two-Tier System for Classifying Third-Country CCPs; Certain Systemically Important CCPs May Be Required to Relocate to the EU:

The European Commission proposed measures that would substantially amend its process for the approval of clearinghouses (CCPs) operating outside the European Union that provide services in the EU.

Today, CCPs subject to third-country regulatory oversight can provide their services in the EU after the regulatory and supervisory regime they are subject to is recognized as equivalent by the European Securities and Markets Authority. To date, 28 non-EU-based CCPs have been so recognized, and 12 are pending.

Last week, the EC proposed that non-systematically important third-country CCPs – so-called Tier 1 CCPs – continue to operate under the same equivalency regime going forward. However, CCPs determined to be systemically important by ESMA – so-called Tier 2 CCPs – would be subject to stricter requirements, including (1) prudential requirements applicable to EU CCPs (e.g., capital requirements and business conduct rules); (2) any additional requirements established by relevant EU central banks; and (3) obligations to provide ESMA with relevant information and to submit to on-site examinations, and legal assurance that such obligations are valid in the CCP's third country. These requirements are in addition to those imposed by a CCP’s home regulator.

Finally, if a CCP is determined by ESMA (in agreement with a relevant EU central bank) as “substantially systemically important,” the CCP might be required to locate in the EU and be formally authorized by the appropriate EU member state regulator. A CCP might be designated as substantially systemically important if “the additional requirements for systemically-important CCPs are insufficient to mitigate the potential risks.”

My View: The EC proposal seems principally directed at UK-based CCPs that handle substantial products denominated in Euros or other EU member state currencies in anticipation of Brexit. However, the proposal seems sufficiently open-ended to worry all significant CCPs worldwide that are utilized substantially by EU-based entities. According to the EC, EU rules "...on equivalence and recognition have demonstrated certain shortcomings as regards ongoing supervision in third countries, meaning that EU authorities may not become aware of new or growing risks to the EU financial system. Furthermore, the actions of a third-country CCP can have an impact on the financial stability of the EU and its Member States and therefore raise significant concerns for EU central banks." To me this sounds like a desired outcome in search of a justification. However, protectionism is a bad idea no matter which jurisdiction implements it.

  • US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation:

The US Department of Treasury proposed substantial amendments to the Volcker Rule and made other recommendations regarding the regulation of banks and credit unions, in response to President Donald Trump’s Core Principles for the federal regulation of the US financial system issued earlier this year. (Click here for background on the Core Principles in the article “Making Regulation Great Again: President Trump Requires Loss of Two Regulations for Every New One and Orders Review of All Financial Services Laws and Rules” in the February 5, 2017 edition of Bridging the Week.)

Although the Department of Treasury expressed its continued support for the principle that banks with access to the “federal safety net” (e.g., FDIC insurance and the Federal Reserve discount window) should not be permitted to engage in speculative trading for their own account, Treasury indicated that “[i]n its design and implementation … the Volcker Rule has far overshot the mark.” According to Treasury, the Volcker Rule’s definition of proprietary trading should be simplified by eliminating the subjective “purpose test” to determine whether a trade is principally for the purpose of short-term resale (and thus prohibited), and by adding increased flexibility for market-making activity.

Treasury also recommended that Congress take measures to reduce “fragmentation, overlap and duplication in the US regulatory structure.” This could include “consolidating regulators with similar missions and more clearly defining regulatory mandates.”

Additionally, Treasury recommended that a number of bank regulations implementing Dodd-Frank should be reconsidered to mitigate their negative impact on market liquidity – particularly the supplementary leverage ratio and the enhanced supplementary leverage ratio. Treasury said that measures of bank total exposure in such calculations should exclude initial margin for centrally cleared derivatives. Adoption of such relief would help make futures commission merchant activity more attractive to banks. According to Treasury, "[b]ecause of the low-margin and high-volume nature of the business of providing clients access to central clearing, high leverage ratio capital charges discourage firms from providing such services." 

Treasury’s recommendations were in a report addressing the depository system, including banks and credit unions. Treasury will also issue other reports to implement the Core Principles, including one addressing capital markets, which will contain recommendations regarding debt, equity, commodities and derivatives markets as well as central clearing.

My View:​ In making a recommendation to rationalize financial regulation, Treasury echoed recommendations of the Volcker Alliance in 2015. Then, not-for-profit think tank headed by Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System, called for a substantial overhaul of the federal regulatory system that oversees US financial services, including merging the Commodity Futures Trading Commission and the Securities and Exchange Commission. Claiming that the oversight of US financial institutions “is highly fragmented, outdated, and ineffective,” the Volcker Alliance issued a report that recommended the creation of a so-called “twin-peaks” model of regulation. This paradigm would consolidate prudential oversight currently administered by a number of banking and financial regulators into one new independent federal agency—a prudential supervisory authority—and collapse the CFTC and the SEC’s investor protection and capital markets oversight functions into another new independent body. I thought this recommendation merited further consideration then and I continue to think it is worth further evaluation now. It would be critical, however, to ensure that any successor regulator is not a behemoth and is organized efficiently. (Click here for background in the article, "Volcker Alliance Calls for CFTC and SEC Merger Among Other Financial Oversight Agencies’ Reform" in the April 26, 2015 edition of Bridging the Week.)

  • NYMEX Charges Rule Violation for Entering Incomplete TAS Orders to Gain Queue Advantage:

Eldorado Trading Group LLC agreed to pay a fine of US $125,000 to resolve a disciplinary action brought by the New York Mercantile Exchange alleging that, on multiple occasions in December 2016 and January 2017, the firm knowingly placed Trading at Settlement orders in multiple products with incomplete and wrong information in the “sender location” field (Tag 142) to gain queue priority when the TAS market opened, then later modified the problematic data to correct it. NYMEX claimed that this practice continued even after it warned the company to stop the allegedly problematic conduct.

NYMEX also charged Eldorado with failing to supervise its traders, and for not preventing its traders from using Tag 50 identifications that were registered to different traders. (Under CME Group rules, an individual may only use his/her own unique Tag 50 ID.)

In January 2017, NYMEX summarily denied the firm authority to place trading at settlement orders on any CME Group markets; this summary denial was lifted shortly afterwards. (Click here for background on Eldorado’s summary access denial and the lifting of its denial order in the article “CME Group Member’s Summary Suspension Ended” in the February 12, 2017 edition of Bridging the Week.)

Separately, Aspire Commodities LP and Merrill Lynch Commodities Inc. settled NYMEX disciplinary actions alleging violations of the exchange’s position limits by agreeing to pay fines of US $50,000 and $25,000, respectively. Merrill Lynch was also required to disgorge profits of US $11,560.20.

Sean Cooper agreed to pay a fine of US $20,000 to ICE Futures U.S. as a result of his automated trading system malfunction on multiple instances between January 1 and May 31, 2016. The exchange claimed that, as a result of the malfunction, Mr. Cooper’s ATS mistakenly entered and cancelled buy and sell orders at various price levels that moved away from the prevailing best bid and offer on an ongoing basis in financial natural gas markets.

Compliance Weeds: TAS transactions permit trades to be executed at the current day’s settlement price or in designated price increments above or below such price. Related to TAS transactions are Trading at Marker and Basis Trading on Index Close trades. TAM trades are similar to TAS trades and permit trading at a differential to a not-yet-known marker price. TAS and TAM orders may be placed on Globex at limited times only and subject to other conditions (e.g., TAS and TAM transactions may not be used to disrupt orderly trading). Also, traders cannot manipulate or attempt to manipulate a settlement or market price to benefit a pending TAS or TAM order. A BTIC order may be placed at a differential to an eligible futures contract’s current day’s not-yet-known underlying cash index closing price.

More briefly:

  • Acting CFTC Chairman May Soon Be Acting No More: The confirmation hearing for J. Christopher Giancarlo to serve as Chairman of the Commodity Futures Trading Commission is scheduled for June 22 before the Senate Committee on Agriculture, Nutrition & Forestry. Mr. Giancarlo currently serves as Acting Chairman. President Donald Trump recently nominated Brian Quintenz, founder of Saeculum Capital Management, and Dawn DeBerry Stump, president of Stump Strategic, a consulting firm, to also serve as CFTC commissioners. Mr. Quintenz was previously nominated for the same position by President Barack Obama. Ms. Stump previously worked at the CFTC overseeing legislative matters (click here to access a biography of Ms. Stump).

  • FINRA Launches Outreach Initiative to Better Understand FinTech Innovations and Impact on Securities Industry: The Financial Industry Regulatory Authority introduced a new initiative to increase dialogue in the securities industry and better understand developing innovative financial technology. The new program aims to track FinTech developments across the securities industry through new committees, roundtable discussions and training. The initiative is the latest in a series of steps taken by FINRA to better understand FinTech. FINRA previously introduced a FinTech website highlighting materials and developments in digital investment advice and blockchain technology. The Commodity Futures Trading Commission announced a similar new initiative last month. (Click here for background in the article “CFTC Creates New FinTech Initiative – a Lab, Not a Sandbox” in the May 21, 2017 edition of Bridging the Week.)

Overlooked but not forgotten:

  • NYC-Based Employers: Don’t Ask for and Don’t Rely on Prior Compensation History When Considering Applicant’s Potential Hiring Beginning October 31: On May 4, New York City enacted a local law barring employers from asking about a prospective employee’s salary history (including benefits or other compensation) or conducting an investigative search into public records or reports for the purpose of obtaining an applicant’s salary history. In addition, if an employer knows of an applicant’s past compensation, NYC’s new law prohibits it from relying on that information when determining future compensation. According to a press release issued by NYC at the time, the new law endeavors to ensure “equal pay for equal work.” According to NYC Mayor Bill de Blasio, “The simple fact is that women and people of color are frequently paid less for the same work as their white, male counterparts.” The new law does not prohibit employers from asking applicants about their expectations of compensation, or from relying on an applicant’s salary history when the information is voluntarily provided by an applicant without prompting, Employers may also request “objective measures” of an applicant’s productivity, including information related to sales, revenue or other production reports. The NYC Commission of Human Rights is empowered to fine employers with civil penalties of up to US $250,000 for willful and malicious violations of the law and can also award compensatory damages. The new law becomes effective on October 31.

Legal Weeds: Companies located in New York City should amend their procedures by October 31 to ensure that they do not affirmatively search public records or reports regarding job applicants’ compensation history or that they ask questions of job applicants regarding their salary history. Unless voluntarily provided without prompting, salary history of a job applicant cannot be used to determine potential wages. These new requirements apply to applicants for all jobs, whether non-professional or professional.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VII, Number 170



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...