January 26, 2023

Volume XIII, Number 26


January 26, 2023

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Bridging the Week: May 22 to June 2 and June 5, 2017 (Spoofing Again; Principles-Based Rules Rule; Insider Trading; Source Code Theft; Whistle-Blowing While You Work)

Criminal actions naming individuals dominated news regarding the US financial services industry the past two weeks. Last Friday, a former junior bank trader pleaded guilty to criminal charges for spoofing, manipulation and attempted manipulation of gold and silver futures from December 2009 through February 2012, while earlier last week a former proprietary trader who admitted stealing his former employer’s trading system’s source code was sentenced to one year and one day imprisonment.  Two weeks ago, a health care consultant, a former colleague at a federal agency, and three partners of an investment adviser were criminally charged with engaging in a scheme to obtain confidential proprietary information from the federal agency  and trade on it for profit. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

  • Former Newbie Bank Trader Pleads Guilty to Criminal Charges and Settles CFTC Civil Charges for No Fine for Spoofing, Attempted Manipulation and Manipulation of Gold and Silver Futures (includes Legal Weeds);

  • Principles-Based Rules Rule in CFTC Record Keeping Rule Amendment (includes Compliance Weeds and My View);

  • Alleged Conduit to Hedge Fund for Confidential Non-Public Government Information Criminally Charged for Insider Trading Along with Three Fund Partners and Government Employee (includes My View);

  • CFTC Strengthens Protections for Whistle-Blowing While You Work (includes Legal Weeds);

  • Proprietary Trader Who Admitted Stealing Employer’s Source Code Sentenced to One-Year Imprisonment;

  • CME Group Exchanges Charge One Trader With Impermissibly Entering Orders To Test Gold Market Latency and Another With Failure to Timely Complete Delivery (includes Compliance Weeds);

  • Follow-up: FCM Broad Strict Liability Globex Audit Trail Rule Amendment Revised to a Known or Should Have Known Standard by CME Group (includes My View); and more.

Video Version:

Former Newbie Bank Trader Pleads Guilty to Criminal Charges and Settles CFTC Civil Charges for No Fine for Spoofing, Attempted Manipulation and Manipulation of Gold and Silver Futures:

David Liew, a former junior trader that many media sources have indicated was based in Singapore and associated with Deutsche Bank, pleaded guilty in a federal court in Chicago on June 1 to engaging in spoofing, manipulation, and attempted manipulation of gold and silver futures on the Commodity Exchange, Inc. from December 2009 through February 2012.

On June 2, Mr. Liew also settled charges brought by the Commodity Futures Trading Commission related to the same matter by agreeing never to trade commodity interest contracts under the CFTC’s jurisdiction and never to associate with any CFTC registrant as a principal, officer or employee, among other penalties. However, as part of his CFTC settlement, Mr. Liew was not assessed a fine. The CFTC said that Mr. Liew received "meaningful cooperation credit" because he entered into a formal cooperation agreement with it, provided the Commission with substantial assistance to date, and promised to continue to cooperate with the Commission and other government agencies.  

According to the CFTC and the plea agreement entered by Mr. Liew, during the relevant time, Mr. Liew entered into “hundreds of bids and offers” with the intent to cancel the orders before execution. He did this either to facilitate the execution of an order he placed on the opposite side of the market, or that other unnamed persons associated with his employer placed. Typically, after the desired order was filled, the spoofing orders that were previously placed to move the market were cancelled.

Mr. Liew acknowledged that all the orders subject to his two settlements were spoofing orders although, in some cases, the spoofing orders did not work as anticipated to drive the market up or down, and in some other cases, all or part of the spoofing orders were executed. Mr. Liew placed his orders manually by clicking a computer mouse or using his keyboard.

In addition, both the CFTC and the plea agreement referenced that, on occasion, Mr. Liew coordinated with an unnamed trader at “another [non-specified] major global bank” to engage in manipulation or attempted manipulation in order to move the gold and silver futures market to activate resting stop orders. After the stop orders were elected, Mr. Liew would liquidate his position by buying or selling back positions to profit.

According to Mr. Liew’s plea agreement, Mr. Liew “was taught to spoof by other metals traders, including other metals traders” at his employer.

In his criminal matter, Mr. Liew was formally charged with one count of conspiracy to commit wire fraud affecting a financial institution and spoofing.  For this, he faces potential imprisonment from 24 to 30 months according to applicable sentencing guidelines. However, the Department of Justice indicated that it would recommend a lower sentence if Mr. Liew continued to provide “full and truthful cooperation.”

In connection with his CFTC Charges, Mr. Liew was charged with attempted manipulation and manipulation for his conduct prior to August 15, 2011. He was also charged with spoofing and using or attempting to use a manipulative device for this conduct on and after August 15, 2011 – express prohibitions of law that first became effective during July 2011 (one year after the enactment of the Dodd Frank Wall Street Reform and Consumer Protection Act).

Mr. Liew had only just begun working as a metals trader in December 2009 when he initiated his spoofing conduct, following completion of his employer’s global analyst program in approximately July 2009, according to Mr. Liew’s criminal plea.

Legal Weeds: The criminal action against Mr. Liew marks the third criminal action brought against an individual for spoofing.

In the first action, Michael Coscia was criminally charged with spoofing in October 2014 after settling civil actions related to the same conduct with the CFTC, the UK Financial Conduct Authority and the CME Group in July 2013. He was convicted of this offense in November 2015 and is currently serving a three-year prison term. 

Mr. Coscia’s conviction is currently being considered by a federal appeal court based in Chicago. Mr. Coscia had argued, among other things, that the provision of law prohibiting spoofing under which Mr. Coscia was prosecuted had not given him adequate notice of what trading activity was precisely prohibited.

In the second action, Navinder Sarao was criminally charged during April 2015 with engaging in manipulative conduct, including spoofing, involving E-mini S&P future contracts traded on the Chicago Mercantile Exchange between April 2010 and April 2015 including specific conduct that contributed to the May 6, 2010 flash crash. He pleaded guilty to his charges in November 2016 and awaits sentencing. For his offenses, Mr. Sarao was also charged by the CFTC. He settled with the Commission by agreeing to pay over $38.6 million in penalties and other sanctions. (Click here for background regarding Mr. Sarao’s criminal plea and CFTC settlement.)

Just a few weeks ago, the CFTC resolved charges against Stephen Gola and Jonathan Brims, former associated persons of a futures commission merchant that recently settled its own CFTC charges, for engaging in spoofing activities from July 16, 2011, through December 31, 2012. According to the CFTC, the individuals engaged in spoofing conduct on more than 1,000 occasions by placing bids or offers for US Treasury futures products with an intent to cancel the orders before execution.  (Click here for background.)

Given Mr. Liew’s cooperation agreement and language in both Mr. Liew’s plea agreement and the CFTC settlement order, more legal actions related to the conduct underlying Mr. Liew’s charges appear highly likely.

Principles-Based Rules Rule in CFTC Record Keeping Rule Amendment

The Commodity Futures Trading Commission amended its recordkeeping requirements to eliminate many existing antiquated requirements and to be “technology neutral” in order to accommodate future advances in recordkeeping technology. 

Among other things, the amended rule eliminates the existing requirement that,

  1. electronic records be maintained in their native file format and preserved exclusively in a non-rewritable, non-erasable format (commonly referred to as write once, read many or “WORM”) and

  2. records holders use a third-party technical consultant to provide certain representations to the Commission regarding access to a record holder’s required electronic records.

Instead, the amended rule solely requires that all “regulatory records” be maintained in a way that “ensures the authenticity and reliability of such regulatory record” in accordance with applicable law and CFTC regulations.

The CFTC’s amended rule apples to all records that applicable law or CFTC regulations generally requires any person (including a legal entity, such as a corporation) to keep  – whether a CFTC registrant or not (such records are termed "regulatory records" while such a person is referenced as a "records entity"). A regulatory record includes all books and records required to be kept, as well as any correction or amendment, and for electronic records,

(i) any data necessary to access, search or display any such books and records; and
(ii) all data produced and stored electronically describing how and when such books and records were created, formatted and modified.

However, to the extent other existing rules today relax certain recordkeeping obligations for certain persons, those rules will continue to trump the new amended recordkeeping rule. (e.g., recordkeeping obligations for trade option counterparties who are not swap dealers or major swap participants, or of unregistered members of exchanges regarding text messages and maintaining required records in a particular way; click here to access CFTC Rule 1.35(a)).

All records entities maintaining required books and records electronically must “establish appropriate systems and controls that ensure the authenticity and reliability of electronic regulatory records” However, the Commission determined not to require records entities to adopt specific policies and procedures reasonably designed to ensure the person’s compliance with the new recordkeeping requirements, as originally proposed. The Commission determined that, given the specificity of record keepers obligations under the amended rule, the proposed requirement for written policies and procedures was unnecessary. 

The CFTC determined not to change the duration of recordkeeping requirements in its amended rule with one exception. The CFTC agreed with two commentators’ request that the retention duration for electronic pre-execution communications that are required to be kept by swap dealers and major swap participants should be reduced to five years from the date of creation of the required record, not for five years from after the termination of the swap as currently is the obligation. (Click here for background regarding this requirement in CFTC Rule 23.202(a)(1).)

Because the amended rule was not intended to change what constitutes required records, the CFTC said that it would not provide guidance regarding requests for algorithmic trading systems’ source code, in response to a request from one commentator. The CFTC’s proposed amended rule does not impact record-keeping requirements of the Securities and Exchange Commission.

The CFTC’s amended recordkeeping rule will go into effect 90 days after it is published in the Federal Register.

  • Compliance Weeds: Although the new amended CFTC recordkeeping rules eliminates the anachronistic formal requirements that electronic books and records be maintained in WORM format and the need for an electronic records keeper to engage a third-party technical consultant, the new requirements are still very strict, albeit principles-based, with an eye towards accommodating evolving technologies.
  • As the Commission noted in issuing its amended rule,
  • [T]he obligation to satisfy the [new amended requirements] is one that a records entity ignores at its peril. It is ultimately the duty and responsibility of records entities to ensure accurate and reliable records.
  • Moreover, the new amended rule, does not require record entities to draft new policies and procedures.
  • That being said, persons impacted by the new amended rule, particularly non-registrants who may be required to maintain required records, should carefully review the new requirements to ensure their retention system comports with the Commission’s new expectations. For most firms, the amended rule will prove beneficial as it provides flexibility. But for others that may have overlooked compliance previously, now’s the time to get it right!

My View: Kudos to the Commission and staff for processing this helpful amended rule in only 64 days, from the close of the time period for public comments on March 20 to May 23.


  • Alleged Conduit to Hedge Fund for Confidential Non-Public Government Information Criminally Charged for Insider Trading Along with Three Fund Partners and Government Employee: Four persons were criminally charged in a federal court in New York City for participating in a scheme to obtain confidential proprietary information from a federal agency and to trade on it for profit from at least 2012 through 2014. The four persons and their alleged jobs during the relevant time were: David Blaszczak, a health insurance consultant; Christopher Worrall, a senior staff manager in the Centers for Medicare and Medicaid Services (CMS), part of the US Department of Health and Human Services; and Theodore Huber and Robert Olan, partners and analysts at Deerfield Capital Management. Criminal charges were also filed against Jordan Fogel, a former Deerfield partner and analyst who pled guilty and is helping the government. Civil charges were similarly filed against Messrs. Blaszczak, Worrall, Huber and Fogel in the same federal court by the Securities and Exchange Commission related to the same essential alleged facts. According to an Indictment filed by the US Attorney’s Office in NYC and the SEC’s complaint, Mr. Blaszczak a former CMS employee, allegedly obtained confidential proprietary information from his former colleague and friend, Mr. Worrall, regarding pending announcements from CMS that would impact the price of various health care issuers’ securities. He purportedly passed this specific information on to the three named Deerfield partners and analysts who used it to fashion trades for Deerfield-managed hedge funds. These funds, allegedly generated over US $3.5 million in trading profits as a result of this information. The criminal complaint charged that Mr. Blaszczak induced Mr. Worrall to provide him proprietary confidential government information in reliance on their friendship and promises to help Mr. Worrall gain private sector employment after leaving the government. The US Attorney’s Office seeks prison time against all defendants, while the SEC seeks disgorgement and fines, among other penalties.

My View: Just a few weeks ago, David Humphrey, a former branch chief in the SEC’s Division of Corporate Finance, pleaded guilty to criminal charges of making false statements in government filings in order to conceal his unauthorized trading of options and securities at various times while employed by the SEC from 1998 through 2014.  On the same day, Mr. Humphrey also agreed to settle civil charges brought by the SEC related to the same matter. He consented to pay the SEC a fine of US $51,917 and disgorge profits of the same amount plus interest.

Under Regulation Automated Trading as initially proposed, the Commodity Futures Trading Commission would have been permitted to obtain proprietary source code of so-called “AT Persons” pursuant to its general inspection authority. Subsequently, the CFTC modified its proposal to limit such access to requests made pursuant to enhanced special call procedures, but did not restrict such access to requests through subpoena only.

The current pending criminal and civil action against Mr. Worrall, and the recent criminal prosecution and civil action against Mr. Humphrey, evidences one of the many potential concerns of critics fearful of turning over proprietary source code to staff of the CFTC or Department of Justice other than pursuant to lawful subpoena.

Although Mr. Worrall’s and Mr. Humphrey’s alleged wrongful conduct likely represents only the rarest of potential behavior by otherwise ordinarily and overwhelmingly very honest and ethical government employees, it illustrates how, over a relatively long period of time, a rogue government employee could disregard important safeguards to routinely and flagrantly engage in illicit activity right under the nose of his/her employer – including potentially misappropriating confidential information such as source code provided by a private entity.

Only in connection with the issuance of a lawful subpoena can a private entity have an effective opportunity to address in federal court concerns about confidentiality and attempt to tailor government access to proprietary source code subject to reasonable conditions.

  • CFTC Strengthens Protections for Whistle-Blowing While You Work: The Commodity Futures Trading Commission amended its whistle-blowing rules to augment anti-retaliation protections for whistleblowers. Simultaneously the CFTC issued guidance that it had the authority to bring enforcement actions against violators of its anti-retaliation rules, revoking a contrary 2011-issued interpretation. This is in addition to private rights of action already provided for under existing rules. (Click  to access the CFTC’s 2011 interpretation.) Moreover, the amended rules prevent any person from impeding another person from communicating with the CFTC’s staff about a possible violation of applicable law (i.e., the Commodity Exchange Act) by enforcing, threatening to enforce a confidentiality agreement or pre-dispute arbitration agreement regarding such communication. (The CFTC previously prohibited a waiver of any of its whistleblower rights and remedies in any agreement, policy, form or condition of employment.) Moreover, under the amended rules, the CFTC’s anti-retaliation requirements apply whether a whistleblower qualifies for an award under the CFTC rules or not. Additionally, the CFTC amended its process to review potential whistleblower awards, relying going forward on claims review staff, as opposed to a whistleblower awards termination panel. As before, the Division of Enforcement will administer the whistleblower program for the CFTC. In general, qualified whistleblowers who voluntarily provide the CFTC with original information about a violation of relevant law that results in monetary sanctions in excess of US $1 million, are eligible for awards of between 10 – 30% of collected sanctions.

Legal Weeds: All companies subject to the Commodity Exchange Act should review confidentiality provisions in their employment and severance agreements with employees to ensure that they do not expressly or implicitly prohibit an employee or ex-employee from taking advantage of CFTC rights and remedies under the Agency’s whistleblowing rules. Moreover, companies must be careful not to take action that could be deemed to impede an employee or employee from taking advantage of such provisions.

The CFTC adopted its current rules to more fully parallel equivalent rules previously enacted by the Securities and Exchange Commission. Using these rules, the SEC has actively pursued enforcement actions against many firms that utilized confidentiality agreements that the Agency believed discouraged employees from reporting potential violations of federal securities laws to it. (Click here for an overview of these enforcement actions.)


  • Proprietary Trader Who Admitted Stealing Employer’s Source Code Sentenced to One-Year Imprisonment: David Newman, a former trader for a Chicago-based proprietary trading firm (believed to be WH Trading LLC), was sentenced to 12 months and 1 day imprisonment and a fine of US $100,000 for stealing his former employer’s trading software and source code. He was indicted for this offense in December 2014, and pleaded guilty to his charges in April 2016.  According to his indictment, Mr. Newman was alleged to have copied computer files of his former employer on three occasions in 2013 and 2014 for use by a new company he established (NTF LLC) to access the CME Group in order to speculate in futures markets. Mr. Newman’s plea declaration acknowledged that he engaged in such theft although his former employer “took reasonable steps to keep its proprietary trade secrets secret,” including requiring Mr. Newman to execute a document where he agreed not use the firm’s trade secrets without its “express authorization.”

  • CME Group Exchanges Charge One Trader With Impermissibly Entering Orders To Test Gold Market Latency and Another With Failure to Timely Complete Delivery: Glory Sky Precious Metals Limited agreed to settle charges brought by the Commodity Exchange, Inc. that, from May 1, 2015 through May 1, 2016 it entered and cancelled over 7,100 orders in the gold futures markets allegedly to test the latency within those markets. The orders were not intended to be executed, claimed a COMEX business conduct committee. COMEX also charged that multiple persons entered the problematic orders using the same Tag 50 identification, when each person should have used his/her own unique Tag 50. Glory Sky, a COMEX non-member, consented to pay a fine of US $55,000 to resolve this matter. Separately, Kolmar Americas Inc., a non-member of the New York Mercantile Exchange, Inc., settled a disciplinary action brought by the exchange against the firm for purportedly not timely completing a delivery of 70 June 2015 Central Appalachian Coal futures contracts by the last calendar day of the month. The firm agreed to pay a fine of US 40,000. Additionally, Chinaway HK Industrial Limited was assessed a fine of US $100,000 and barred from access to all CME Group exchanges for five years by a Chicago Board of Trade BCC for allegedly, through one employee, entering matching buy and sell orders for one Chinaway account for 21,434 Soybean futures contracts from January 2015 through May 2015. These trades self-matched, claimed the CBOT BCC. The CBOT BCC had presumed all facts alleged against Chinaway were true as the firm did not present a defense. A NYMEX BCC also accepted a settlement from Tae Hyung Kim to pay a fine of US 25,000 and be barred from access to any CME Group exchange for five business days for permitting his market-making and market-taking automated trading systems to run inadvertently during pre-opening periods in the E-mini Crude Oil and Natural Gas futures contracts. The market-taking orders – which were not intended to be executed – caused “flickering price quotes,” said the NYMEX BCC. None of the defendants settling disciplinary admitted or denied any rule violations.

Compliance Weeds: Testing trading software or placing trades to sense market depth or latency in live markets risks the wrath of CME Group exchanges if the testing involves the placement of orders without the intent for execution. According to CME Group, “The entering of an order(s) in a non-test product without the intent to execute a bona fide transaction, including for the purpose of verifying connectivity or checking a data feed, is not permissible.” (Click here for further information in the CME Group MRAN RA1516-5 – Disruptive Practices Prohibited, Q/A 21.) Moreover, the CME Group does not consider the execution of an order, in whole or part, as necessarily dispositive of a bona fide intent to complete a trade. According to CME Group, “A variety of factors may lead to a violative order ultimately achieving an execution. Market Regulation will consider a multitude of factors in assessing whether [its Disruptive Trading rule] has been violated" (CME Group MRAN RA1516-5, Q/A 6).

More briefly:

  • Commissioner Bowen Votes to Process CFTC 2018 Budget Proposed by Acting Chairman Despite Disapproval: Despite her own significant reservations, Commodity Futures Trading Commissioner Sharon Bowen agreed to the forwarding of the agency’s proposed 2018 fiscal year budget, as drafted by J. Christopher Giancarlo, the Acting Chairman, to the Committee on Appropriations of the US Senate for its consideration.  Mr. Giancarlo’s proposed budget requests $281.5 million, a 12.6% increase over the agency 2017 FY budget. Ms. Bowen objected to the budget recommended by Mr. Giancarlo because she did not think it was sufficient for the agency to adequately perform its function. Ms. Bowen’s assent was necessary because the agency is currently understaffed with only two Commissioners. Ms. Bowen suggested that, to ameliorate the CFTC’s budget insufficiency, it should be allowed to retain a portion of user fees that, she argued, should be assessed on market participants. Separately, the White House proposed a 2018 FY budget that does not appear to call for any increase in funding for the CFTC.

My View: The CFTC is underfunded. Despite its hard-working staff, the agency is challenged to fulfill its regulatory mission, let alone timely assist industry participants to approve new products and initiatives. Those of us who interact with CFTC staff regularly can see first-hand how stretched they are and how urgently they require more resources, A solution to obtain more funding for the Agency must be found.

  • Central Banks and FX Market Participants Publish Global Principles of Good Practice: A partnership of central bank regulators and private sector market participants issued the FX Global Code  to “promote the integrity and effective functioning of the wholesale foreign exchange market.” The Code focuses on six central topics: ethics, governance, execution, information sharing, risk management and compliance, and the confirmation and settlement process. The Code is not meant to impose legal or regulatory obligations on any market participant; instead it is intended solely to identify good practices and processes. (Click here for additional information on the Code.) Separately, BNP Paribas agreed to pay a US $350 million fine to the New York State Department of Financial Services as a result of allegations that the bank and its NY branch failed to implement adequate controls over its foreign exchange trading business that permitted traders to engage in "collusive and manipulative FX trading conduct" from 2007 to 2013. Additionally, the Board of Governors of the Federal Reserve System imposed a US. $1.2 Million fine and a lifetime prohibition from working with an insured depository institution on Christopher Ashton, a former Global Head of Foreign Exchange Spot Trading at Barclays Bank PLC. The FRB imposed the sanction against Mr. Ashton – who did not participate in the FRB's proceedings – for his purported role in Barclay's alleged manipulation of foreign exchange pricing benchmarks from 2010 to 2013. (Click here for background on Barclays prior settlement with the FRB.)

  • Dubai Regulator Offers Special License for FinTech Firms to Escape Ordinary Regulatory Requirements: The Dubai Financial Services Authority has issued guidance outlining how FinTech firms can apply for special innovative testing licenses which will allow them to test new products or new technology for existing products without complying with all current industry regulations for up to 12 months. The new special license will only be issued to firms operating in or from the Dubai International Financial Centre and dealing with innovative FinTech. Moreover, the applicable products must be ready for live customer testing immediately to be eligible.

  • Senior Brokerage Firm Officer Suspended by HK Regulator Six Months for Allegedly Failing to Stop Third Party Fund Transfers: The HK Securities and Futures Commission suspended for six months Hui Lam Chiu, a former Guoyuan Securities Brokerage Limited responsible officer, for failing to adequately investigate transactions involving third party fund deposits and withdrawals. Previously SFC also fined Guoyuan  Securities HK $4.5 million (approximately US $590,000) for not identifying and conducting adequate due diligence to assess whether “a large number of frequent and unusual transfers” between the firms’ clients and third parties were suspicious transactions warranting follow-up. Unrelatedly, the Federal Reserve Board announced a $41 million penalty and cease and desist order against Deutsche Bank AG for alleged deficiencies in its anti-money laundering program. Also, the Monetary Authority of Singapore penalized  both Credit Suisse and United Overseas Bank for purported control lapses and deficiencies in their AML programs.

  • Covfefe! NFA Reminds Swap Dealers of Upcoming Monthly Risk Reporting Requirements: The National Futures Association reminded all swap dealers that, beginning January 31, 2018 (as of December 29, 2017), they must file monthly risk data reports with it. These reports must include specific risk metrics enumerated by NFA. Separately, NFA submitted a proposed guidance to the Commodity Futures Trading Commission for its approval that would obligate SDs to electronically notify it of a reportable swap valuation dispute in excess of US $20 million by completing an NFA form with specific information. NFA has been receiving notices of reportable swap valuation disputes from SDs since March 2016; however it believes receipt of standardized notices with specified information will be more useful.


  • FCM Broad Strict Liability Globex Audit Trail Rule Amendment Revised to a Known or Should Have Known Standard by CME Group: CME Group amended its recently amended rule that affirmatively requires all persons that enter orders electronically into Globex to ensure that all mandatory audit trail fields are input accurately in the first instance. As recently amended, clearing members that authorized such persons’ access to Globex would have been “responsible for the Globex terminal operator’s compliance with this rule” even when such operator was a third-party client. This potentially would have made clearing members responsible for the accurate input of all CME Group-required audit trail field information by all direct access clients, as opposed to some of the information as is currently the case. CME Group has modified this rule again to make clear that clearing members are only responsible for the accurate input by their direct access clients of the fields related to an operator’s user ID, CTI code, (e.g., customer type of trade; click  to access CME Group Rule 536.D) automated or manual indicator and account number. However, CME Group made clear in its revised amendment that a clearing member must only take “appropriate action” for a direct access client’s input of each mandatory audit trail field “if it has actual or constructive knowledge that a non-member has failed to accurately input” mandatory audit trail fields. (Click here for background on CME Group’s originally proposed rule amendment.)

My View: It never appeared to be the intent of CME Group to extend strict liability obligations to clearing members for the failure of such firms’ direct access clients to enter accurately all mandatory audit trail fields. There is no way, realistically, a clearing member could ordinarily know of such issues. Once CME Group realized that a prior amendment had inadvertently accomplished this unintended result, staff rapidly re-amended the relevant rule to restore the status quo. Moreover, CME Group made clear that the potential liability of a clearing member for a direct access client’s incorrect input of mandatory audit trail information would be conditioned solely if the member knew or should have known of such violation. This is consistent, generally, with existing standards under a separate CME Group rule (click here to access CME Group Rule 574 – last paragraph). Not a perfect outcome and perhaps some tinkering of language is still required, but it’s better than where it was.

©2023 Katten Muchin Rosenman LLPNational Law Review, Volume VII, Number 156

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...