Bridging the Week: September 25 to 29 and October 2, 2017 (Failure to Supervise Redux; Where Are the Digital Coins?; CFTC’s New Enforcement Math)
Last week, the Commodity Futures Trading Commission brought and settled two enforcement actions for failure to supervise against two separate commodity pool operators. In one case, the CPO purportedly failed to monitor the fund’s bank account – a failure that the Commission claimed allowed the fund’s administrator to act on fake wire transfer instructions by an unauthorized person without being caught. In the second case, the CPO supposedly did not detect the alleged spoofing trading activity of one of its employees – even after being alerted to it following the identification of such activity by a non-US exchange. Separately, the Securities and Exchange Commission filed a lawsuit against two companies and their owner for purportedly running a fraudulent initial digital coin offering that, the SEC alleged, involved no digital coins. As a result, the following matters are covered in this week’s edition of Bridging the Week:
Two Commodity Pool Operators Charged by CFTC with Failure to Supervise (includes Compliance Weeds and My View);
SEC Files Lawsuit Against Companies and Backer for Purportedly Fake Initial Coin Offerings (includes Legal Weeds and My View);
New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief (includes Legal Weeds);
CME Group Resolves Two Disciplinary Actions Alleging Market Disruption (includes Compliance Weeds);
SEC Chairman Explains EDGAR Cyber Attack to Senate Committee; Says CAT Rollout Will Not Be Delayed (includes My View);
CFTC’s Market Oversight Division Grants Ownership and Control Relief to Brokers and Traders; and more.
Two Commodity Pool Operators Charged by CFTC with Failure to Supervise: The Commodity Futures Trading Commission brought and settled enforcement actions against two commodity pool operators for failure to supervise.
In one action, the CFTC charged Tillage Commodities, LLC, a CFTC-registered CPO, with failure to supervise for not monitoring and detecting unauthorized wire transfers processed by the administrator of a fund it operated, Tillage Commodities Fund, L.P. In the second action, the CFTC alleged that Logista Advisors LLC, a CFTC-registered CPO and commodity trading advisor, failed to detect one of its employee’s alleged spoofing-type trading of crude oil futures on a non-US exchange, and then failed to provide to its futures commission merchant and the non-US exchange accurate explanations of the trading in response to the non-US exchange’s inquiry.
To resolve these enforcement actions, Tillage agreed to pay a fine of US $150,000 while Logista consented to remit a fine of US $250,000.
The CFTC claimed that, from at least March 3 through 24, 2016, Tillage’s fund administrator received seven fake requests to transfer funds from the pool’s bank account to two Hong Kong-based companies. The Commission claimed these requests were made by an unauthorized person who “spoofed” the email account of Tillage’s managing member and designed transfer requests that “in some respects” emulated the CPO’s “typical” requests. In response, the administrator transferred funds to the Hong Kong companies on five occasions during the relevant time, ranging in amounts from US $200,000 to US $3 million.
The CFTC said that Tillage only learned of the ongoing fraud on March 24 after the fund’s administrator alerted it – after 21 days and the five unauthorized transfers. This was because, claimed the CFTC, during the relevant time, Tillage had no procedures requiring its monitoring of the administrator’s transfers from the fund’s bank account. During this time, noted the CFTC, Tillage only once reviewed the pool’s bank account balance and never reviewed activity in the account although it was available on the bank’s website. As a result, alleged the CFTC, US $5.9 million (or 64 percent) of the pool’s total capital was lost. This failure to monitor its agent’s activities and to develop and put in place policies and procedures to detect potential unauthorized or fraudulent activity involving its pool’s bank account, constituted a failure to supervise under CFTC rules, charged the Commission.
However, in a lawsuit filed in a New York State court by the Tillage fund against its administrator, SS&C Technologies, Inc., the fund claimed that SS&C's gross and willful misconduct, as well as bad faith in the performance of its contractual services related to the spoofed wire transfer requests, caused the pool's losses. As alleged in Tillage fund's complaint in its lawsuit filed in September 2016, SS&C failed to utilize minimum industry-standard cybersecurity protections in handling the fake wire transfer requests, let alone the heightened protections it promised to apply, including a filtering tool on all incoming email communications. Among other deficiencies, the Tillage fund claimed that SS&C accepted wire transfer requests from an incorrect email address (@tilllagecapital.com) instead of its correct address (@tillagecapital.com – the fake email address had 3l's not 2l's). Moreover, the fake wire transfer requests, said the fund, were "wholly inconsistent" with its prior email communications in that they included "awkward syntax and grammatical errors;" were for amounts far in excess of previously requested amounts; and were for transfers to destinations (Hong Kong) never before requested. Moreover, alleged the fund, SS&C did not acknowledge receipt of the fake wire transfer requests by using a "Send Secure button" as promised, "which would have immediately routed SS&C's response to the fund's proper email domain – thus alerting Tillage of the fraud."
SS&C filed a third party complaint against Tillage and Tillage Commodities Management, LLC in June 2017 claiming that the third-party defendants' failure to oversee the fund's bank account, not its own conduct, caused the fund's losses. SS&C previously also filed a motion to dismiss the fund's lawsuit against it. The court declined to dismiss the Tillage fund's allegations of breach of contract and implied covenant of good faith and fair dealing against SS&C, but dismissed other claims it posited. SS&C denied any liability to the fund.
In settling its enforcement action against Tillage, the CFTC acknowledged that the majority of the funds in the pool had been held by the CPO’s managing member, and that following discovery of the fraud, all pool participants were offered an opportunity to redeem their fund interests in full or part at the value prior to the fraud. Most pool participants received a full redemption.
Separately, Logista was charged with failure to supervise when, from September 2013 through October 2014, one of its employees engaged in alleged spoofing-type trading involving crude oil futures on a non-US exchange, and the firm did not detect this activity. Moreover, said the CFTC, after the non-US exchange contacted Logista’s FCM regarding specific trading on August 22, 2014, the relevant trader’s supervisor “did not examine Logista’s [trading] for the date in question, even after the exchange provided specific examples of the spoofing conduct, and did not ask the trader for an explanation of the conduct.” As a result, charged the CFTC, Logista provided its FCM and the non-US exchange with purportedly inaccurate explanations for the trading and continued not to detect the trader’s alleged spoofing trading.
Compliance Weeds: Two weeks ago, Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $2.5 million to resolve charges brought by the CFTC that, from January through October 2010, the firm failed to diligently supervise responses to a CME Group Market Regulation investigation related to block trades executed by its affiliate, Bank of America, N.A. (“BANA”) on the Chicago Mercantile Exchange and the Chicago Board of Trade. However, from the facts included in the CFTC’s settlement order with Merrill as well as BANA’s separate settlement with the US Attorney’s Office for the Western District of North Carolina, it is unclear what Merrill might have failed to supervise. From all referenced facts, it appears that Merrill was misled by BANA regarding BANA’s handling of the relevant block trades and had no reason to believe it was being misled. As a result, it is hard to comprehend the legal basis for the CFTC’s failure to supervise claim against Merrill unless the CFTC is proposing some new obligation by registrants to verify information provided to them by third parties that they do not believe to be false or have reason to suspect might be false. (Click here for background in the article, "FCM Agrees to Pay US $2.5 Million CFTC Fine for Relying on Affiliate’s Purportedly Misleading Analysis of Block Trades for a CME Group Investigation" in the September 24, 2017 edition of Bridging the Week.)
The legal basis for the CFTC’s failure to supervise against Tillage and Logista appears to rest on more traditional ground, although in each action, the respondent declined to admit any findings or conclusions.
In the Tillage case, the CFTC did not charge the CPO for the actions of its fund administrator in responding to the fake transfer instructions. It solely charged the firm for not monitoring bank accounts regularly to increase its likelihood of detecting possible fraudulent transfers and for not having policies and procedures to engage in such monitoring. CPOs should consider double-checking what their policies and procedures say regarding such monitoring, as well as what their ongoing practices are.
In the Logista case, the alleged spoofing occurred on a non-US exchange. However, the CFTC did not charge the CPO with spoofing. The Commission charged the CPO with not detecting its employee’s purported spoofing even after it was alerted of the potential issue following the non-US exchange’s detection of the possible wrongful trading activity, and with not conducting a reasonable review of the trading (including talking to its trader) prior to responding to the non-US exchange’s request for an explanation of the trading. Logista, said the CFTC, also did not have policies and procedures to detect spoofing, and did not itself detect the alleged spoofing.
This matter echoes the CFTC’s enforcement action against Advantage Future LLC during September 2016, where the firm and two of its senior officers also settled charges related to the firm’s handling of the trading account of one customer in response to three exchanges’ warnings and for the firm’s alleged failure to follow its own risk management policies.
CPOs and other registrants should consider reviewing their policies and procedures to assess how effectively they address the ongoing monitoring of proprietary trading, as well as how they address the handling of all regulatory inquiries.
My View: Although the CFTC's enforcement actions against Tillage and Logista may have rested on stronger legal grounds than the CFTC's most recent enforcement action for failure to supervise against Merrill, it is not clear what public purpose was served by the legal action against Tillage.
Tillage sustained substantial losses because of the wire transfer fraud perpetuated by a third party – losses that for public customers were covered by its managing member. Moreover, at least as alleged in its private lawsuit against SS&C, Tillage's fund's administrator may have played a material role in allowing the fraud to occur by not following contracted-for processes that, if followed, might have alerted Tillage to the fraud earlier; SS&C has denied these claims. Undeniably, however, Tillage was a victim here, and although it may have failed to detect the fraud earlier itself, bringing an enforcement action against Tillage and requiring the firm to pay a fine appears harsh under all the circumstances.
SEC Files Lawsuit Against Companies and Backer for Purportedly Fake Initial Coin Offerings: The Securities and Exchange Commission filed an enforcement action against two companies and their sole owner – who also was the chief executive officer and president of both companies – for engaging in a fraudulent initial coin offering. The companies were Recoin Group Foundation, LLC (“REcoin”) and DRC World Inc. (known as Diamond Reserve Club), while the sole owner was Maksim Zaslavskiy.
According to the SEC, from July 2017 to the present, the defendants raised at least US $300,000 from “hundreds of investors” by soliciting persons through the Internet and elsewhere, to purchase digital tokens that would be backed either by real estate investments in the case of tokens issued by RECoin or diamonds in the case of digital coins issued by Diamond Reserve In fact, charged the SEC, investors received no digital tokens of any kind, and no digital tokens were backed by any of the promised assets.
The SEC charged the defendants with engaging in fraud and selling securities that were required to be registered but were not registered or lawfully exempted from registration. The SEC already has obtained an emergency court order to freeze assets of Mr. Zaslavskiy and his companies, but also seeks a permanent injunction, disgorgement, fines and other relief. The SEC’s action was filed in a federal court in Brooklyn, New York.
An ICO typically involves the issuance of a new digital token in return for an investment of fiat or an existing cryptocurrency in a fundraising related to a project. The new digital token may have the characteristics of a cryptocurrency, a security or a utility token (e.g., a preferred right to use the output of the project). The SEC has previously indicated that ICOs may involve the offering of securities that raise registration issues. A number of foreign jurisdictions have issued similar analysis as the SEC, including the Australian Securities and Investments Commission last week; at least one country, China, has banned ICOs. News reports indicated that, last week, South Korea joined China in banning ICOs, while contrariwise, Japan granted its first licenses for cryptocurrency exchanges.
SEC Enforcement Division Establishes Cyber Unit That Will Examine ICOs
Separately, the SEC announced last week the formation of a cyber unit and a retail strategy task force within its Division of Enforcement. The cyber unit will concentrate on potential cyber-related misconduct including hacking to obtain non-public information and market manipulation efforts through the spread of false information using electronic and social media, as well as violations of law involving ICOs and distributed ledger technology. The retail strategy task force will aim specifically at potential misconduct impacting retail clients.
Grayscale Investments Withdraws Request tor Approval for Bitcoin Investment Trust
Finally, unrelatedly, Grayscale Investments LLC announced the withdrawal of its application for approval from the SEC for its Bitcoin Investment Trust. Grayscale had hoped to list its trust on NYSE Arca.
Previously, the SEC disapproved the application of the Bats BZX Exchange, Inc. for a rule change to authorize it to list and trade shares of the Winklevoss Bitcoin Trust as commodity-based trust shares. Among other things, the SEC said that, for an exchange-traded product to be approved, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity, and significant markets must be regulated. Since those conditions did not exist for Bitcoin, said the SEC, BZX’s application was denied. However, the SEC subsequently agreed to reconsider its denial.
Since BZX’s denial, LedgerX has been approved by the Commodity Futures Trading as a swap execution facility and derivatives clearing organization for fully collateralized swaps based on cryptocurrencies. However, LedgerX has not yet begun trading.
Legal Weeds and My View: Under relevant law, the Commodity Futures Trading Commission has exclusive jurisdiction over all options and transactions involving swaps or contracts of sale of a commodity for future delivery traded or executed on a regulated futures exchange (known as a designated contract market) or on a regulated swaps trading facility (known as a swap execution facility; Moreover, the definition of commodity under applicable law is very broad. Generally, a commodity is defined as (1) any of certain enumerated traditional commodities (e.g., wheat, cotton, soybeans, livestock and livestock products); (2) all other goods and services (except onions and motion picture box office receipts); and (3) all services, rights and interests (except as related to motion picture box office receipts) in which contracts for future delivery are now or in the future dealt in.
Persons handling financial instruments under the CFTC’s exclusive jurisdiction typically have requirements and obligations under law (e.g., registration with the CFTC) and the same requirements cannot be imposed by other regulators.
Outside the CFTC’s exclusive jurisdiction, nothing supersedes or limits the jurisdiction of the SEC or other federal or state regulatory authorities. What this means at the highest level is that if a financial instrument involves a derivative based on an asset that is a commodity but not also a security, the derivative likely will be subject to the CFTC’s exclusive jurisdiction. If a financial instrument involves a security with no futurity, it is likely regulated solely by the SEC and/or the states.
However, a problem with this bifurcated jurisdictional oversight arises when a financial instrument has elements of both securities and futures or swaps – for example, a futures contract on a broad-based stock index futures, a futures contract on a narrow-based stock index futures contract, or a futures contract based on an individual stock.
These hybrid products gave rise to jurisdictional court battles involving the SEC and CFTC in the CFTC’s early days (after it was created in 1974) that initially were resolved by a voluntary accord between the agencies in 1981 and shortly afterwards, by Congress.
Now most potential jurisdictional issues related to futures and swaps based on securities have been resolved by law and there are relatively clear rules: for example, futures based on broad‑based indices are within the exclusive jurisdiction of the CFTC while futures based on narrow-based indices and individual securities – termed “security futures” – are under the joint jurisdiction of the SEC and CFTC (Click here, e.g., for a general background on the regulation of security futures products). An equivalent division of jurisdiction has been established for swaps and security-based swaps.
But application of the jurisdictional rules between the CFTC and SEC requires an initial assessment that the underlying asset to a derivative is a security or not. If it’s not, exclusive jurisdiction over the derivative is under the CFTC and a host of requirements potentially follow, and the SEC (and states’) oversight is excluded. Sometimes, however, the nature of an underlying asset to a derivative can change over time and the result can shift principal jurisdiction over the derivative from the CFTC to the SEC or from the SEC to the CFTC.
The characteristic of some digital tokens is similar to those of chameleon-like security futures products that change their characteristic over time. First, in some cases, it is not clear what a digital token was in the first instance. Digital tokens may, like Bitcoin, be a pure cryptocurrency, which are rewarded to miners for their own services and principally serve as a store of value, unit of account or a medium of exchange. Or digital tokens may have initially been offered and sold as, and designed with a purpose similar to, a security but morph over time into a medium of exchange. Ether, for example, the digital token associated with Ethereum, appears to be a digital token with these characteristics as it began as a crowd sale in 2014, where participants purchased what effectively were shares in the Ethereum development project; today, Ethereum is mostly regarded as a medium of exchange. Currently, almost no one would consider Ether a security despite its characteristics at birth.
As a result, because of the ambiguous nature of digital tokens in the first instance and their sometime changing purpose over time, it is imperative that potential jurisdictional issues between the CFTC and SEC be sorted out sooner, not later, in order to ensure smooth development of cryptocurrencies and the block chain. A first step would be for the CFTC and SEC to address potential overlaps voluntarily; a second, may be amendments to law.
New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief: James McDonald, the recently appointed Director of Enforcement for the Commodity Futures Trading Commission, said in a speech last week that potential wrongdoers who voluntarily self-report their violations; fully cooperate in any subsequent CFTC investigation; and fix the cause of their wrongdoing to prevent a re-occurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all. Mr. McDonald presented his views at a New York University program on Corporate Compliance and Enforcement.
According to Mr. McDonald, for a company to be credited for voluntarily self-reporting wrongdoing, the disclosure must be “truly voluntary… before an imminent threat of disclosure or of a Government investigation.” He also said the reporting must occur promptly after discovery and offer-up “all relevant facts known to [the company] at the time."
Additionally, full cooperation, said Mr. McDonald, must involve ongoing revelation of facts as a company discovers them, including facts related to particular persons. Mr. McDonald warned against revealing facts as part of a “general narrative.” Particular facts,” he cautioned, “should be attributed to particular people."
Finally, the company must “timely and appropriately” remediate the conditions that led to the misconduct “to ensure that misconduct doesn’t happen again.”
Mr. McDonald promised that self-reporting won’t be a game of “gotcha” where, down the line, a company only learns at the settlement table for the first time that it has not met the Division’s expectations. He said that to avoid that, the Division will advise a company at the beginning of the process what its expectations will be regarding self-reporting, cooperation and remediation.
Mr. McDonald indicated that one of the goals of encouraging self‑reporting and cooperation is to further the Division’s commitment to aggressive prosecution. According to Mr. McDonald,
Through this program, we’re committed to aggressively prosecuting, not just the company ultimately responsible for the misconduct, but also the individuals involved… We’ll work hard to move up the chain to the supervisors who made the decision behind the act, or who directed it.
Simultaneously with Mr. McDonald’s speech, the Division released a formal Updated Advisory on Self Reporting and Full Cooperation that memorialized and expanded the elements of Mr. McDonald’s presentation. This updated advisory amended two enforcement advisories that were issued in January 2017 – one for companies and one for individuals. (Click here for background in the article “Cooperate and Maybe Benefit Says CFTC Division of Enforcement” in the January 29, 2017 edition of Bridging the Week.)
Legal Weeds: It is very helpful that James McDonald is making cooperation with the CFTC formalistic: voluntarily self‑report + full cooperation + remediation = substantial sanctions benefit. Moreover, Mr. McDonald has indicated that cooperation is a two-way street and not a setup for “gotcha” at the settlement table. He indicated that the Division will make clear from the outset what its expectations are regarding self-reporting, cooperation and remediation. However, he made clear that this new program “should not be interpreted as giving a pass to companies or individuals” and only under “truly extraordinary circumstances” might the Division recommend not prosecuting at all.
Unfortunately, what’s not clear from Mr. McDonald’s speech, the Division’s January 19 two cooperation advisories, and last week’s updated advisory is what type of matters this new initiative applies to. It seems the new program may be intended for only significant matters. Indeed, in the January cooperation advisory, the Division expressly noted that it “may assess the value of the company’s cooperation [in light of] the Commission’s broader programmatic interest in enforcing the Commodity Exchange Act and Regulations.”
However, substantial sanction benefits should not be accorded solely for big matters important to the Commission. For minor cases (but important to an individual company or person), potential wrongdoers should also believe they have the real option of coming clean early to materially mitigate any potential sanction – particularly where the wrongdoing does not involve customer harm or a degradation of market integrity.
Moreover, as a cautionary note, unfortunately, the CFTC is not the only regulator in town. Because coming clean with the CFTC may open the door to problems with other regulators, not to mention criminal authorities, it is important to evaluate the role of other regulators and potentially consider the pros and cons of an overall coming clean strategy as opposed to solely dealing with the CFTC.
Finally, when cooperating with the CFTC or any regulator, it is very important to evaluate the implications of turning over any information subject to attorney-client or work product privilege. A privilege once waived may have unintended consequences! Hopefully, the Division will not consider the decision of a wrongdoer not to turn over legally privileged documents or advice to be evidence of non-cooperation.
CME Group Resolves Two Disciplinary Actions Alleging Market Disruption: Two respondents agreed to settle charges brought by the Chicago Board of Trade related to alleged disruptive trading practices.
In one case, Andrew Anaszewicz, a member, agreed to pay a fine of US $50,000, disgorge profits of almost US $5,300 and serve a four-week all CME Group exchanges’ trading suspension for purportedly engaging in spoofing-type conduct on “multiple dates” from September 2015 through April 2016. According to CBOT, during the relevant time, Mr. Anaszewicz would layer orders on one side of one or more various treasury futures markets “without the intent to trade” and subsequently place a smaller order on the same side of the same market or a correlated market. As soon as the smaller order traded, Mr. Anaszewicz cancelled the larger orders, charged CBOT.
Separately, Vinko Sajn, a non-member, was charged by the CBOT with entering multiple user-defined spreads in covered soybean options on two dates in October 2015, to avoid futures contract allocations that a trader would ordinarily receive from holding the options. CBOT charged this behavior was intended to deceive or unfairly disadvantage other market participants, contrary to CBOT rule. To resolve this matter, Mr. Sajn agreed to pay a fine of US $5,000 and serve a 30‑business day all CME Group Exchanges trading prohibition.
Finally, Robert Parks, a member acting as a desk clerk, agreed to pay a fine of US $20,000 and serve a 15-business day all CME Group Exchanges trading suspension for authorizing a floor broker to take into the floor broker’s error account 50 contracts of trades initially executed for a customer when Mr. Parks realized the broker had executed 435 buy contracts at various prices when the customer order was solely for 385 buy contracts. Mr. Parks allegedly authorized the floor broker to take the 50 contracts with the lowest prices, thus keeping those lower priced fills from the customer.
Compliance Weeds: Entering a user-defined spread for the purpose of disadvantaging other market participants can be a violation of general prohibitions against market disruption. In the CBOT disciplinary action against Mr. Sajn, the exchange claimed that the respondent entered a user-defined covered option spread with the intent to avoid allocation of futures contracts that should have been tied to the covered options instruments. He did this, implied CBOT, in order to obtain more favorable prices for the options instruments than were available in the marketplace. Even though CME Group’s Globex System utilizes reasonability checks aimed to prevent this conduct from occurring, its system does not prevent all incidents.
SEC Chairman Explains EDGAR Cyber Attack to Senate Committee; Says CAT Rollout Will Not Be Delayed: Jay Clayton, the chairman of the Securities and Exchange Commission, indicated there would be no delay in the effective date of the first phase of Consolidated Audit Trail (November 15), despite the 2016 hack of the SEC’s own Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system reported by the SEC two weeks ago.
Mr. Clayton made this statement in testimony last week before the US Senate’s Committee on Banking, Housing and Urban Affairs.
During his remarks, Mr. Clayton confirmed that he only learned of the possible EDGAR hack in August 2017. In response, he commenced an internal review. Mr. Clayton subsequently learned that the hack of EDGAR’s test filing system provided access to confidential filing information and may have provided a basis for unauthorized trading. The SEC’s Division of Enforcement is now investigating whether illicit trading occurred on the hacked data while the agency’s Office of Inspector General is reviewing how the intrusion occurred; the scope of non-public information compromised; and the agency’s response. OIG will also recommend how the SEC should correct any related system or control issues.
Although Mr. Clayton indicated that protection of data within CAT is of “paramount concern” to the Commission and he is “focused on issues of data security with respect to CAT,” he offered no delay in the first phase of CAT’s rollout, which involves self-regulatory organizations reporting certain data to CAT related to each quote and order in a National Market System security.
CAT is being developed pursuant to SEC rule by a third-party vendor, Thesys Technologies, LLC, in conjunction with US securities exchanges and the Financial Industry Regulatory Authority.
My View: Given the tremendous amount of information scheduled to be maintained in one location under CAT, it seems prudent to delay the first phase of CAT from being implemented until the OIG report on the EDGAR intrusion is finalized. This seems like common sense.
CFTC’s Market Oversight Division Grants Ownership and Control Relief to Brokers and Traders: The Commodity Futures Trading Commission’s Division of Market Oversight issued a no-action letter granting certain relief to brokers (including foreign brokers) and traders with specified large positions or trading activity (so-called “volume threshold accounts”) from providing certain information to it pursuant to the Commission’s ownership and control reporting regime.
Among other things, the relief delayed for two additional days (until the morning of R+3) the date by when a broker must identify to the CFTC on a Form 102A the name of a trader associated with a trading account that exceeds specified position or trade volume thresholds (250 contracts/day) for the first time, and eliminated a requirement that the names of natural person account controllers be identified. For traders, the relief eliminated a current requirement to answer a question on the Form 40 they file regarding who may have direct or indirect influence on a reporting party’s trading, as well as clarifies that updates to Form 40 are not automatically required under certain enumerated circumstances, but only when specifically requested by the CFTC. Other relief to both brokers and traders was included in the staff’s NAL.
DMO’s NAL was in response to a request by the Futures Industry Association and the Commodity Markets Council.
In response to DMO’s NAL, ICE Futures U.S. issued a guidance indicating that it will conform its own volume threshold accounts reporting trigger levels to those identified by staff. In general, the CFTC requires both brokers and significant participants in US futures and swaps markets to provide certain information to it regarding such large participants.
Earlier in September, the CFTC’s Office of Data and Technology rolled out enhancements to its portal through which certain reporting traders are required to file CFTC Form 40s. The enhancements included introduction of a wizard-style format to allow users to navigate through different sections of the form, an autosave feature, and the ability to generate a PDF version of a finally submitted form.
Market Analyst Criminally Charged with Securities Fraud for Allegedly Trading in Advance of Own Recommendations; Settles SEC Insider Trading Charges for Same Conduct: The US Attorney’s Office in Chicago filed criminal charges against Jason Napodano, a former managing director of Zacks Investment Research, for securities fraud for trading on material, non-public information he obtained while preparing equity research reports related to certain small capitalized companies (i.e., penny stocks). The Securities and Exchange Commission also brought and settled civil charges against Mr. Napodano for the same conduct, as well as for misleading investors that he wasn’t trading or holding positions in the relevant companies when, in fact, he was. To resolve this matter, Mr. Napodano agreed never to trade penny stocks, disgorge all his trading profits and pay a fine of approximately US $144,000. Two other investment bankers were charged and settled with the SEC for related conduct – Bilal Basrai and Bryce Stirton – while Mr. Basrai was also named in the criminal complaint. A broker-dealer that shares the same chief executive officer as ZIR – LBMZ Securities, Inc. – was also named in the SEC complaint for failing to have adequate written procedures to monitor the use of non-public information by its employees. LBMZ resolved this complaint by agreeing to pay a fine of US $240,000.
Affiliated Swap Dealers Settle CFTC Charges They Failed to Report Legal Entity Identifier Codes to Swap Data Repository: Citibank, N.A. and Citigroup Global Markets Limited, provisionally registered swap dealers with the Commodity Futures Trading Commission, collectively agreed to pay a fine of US $550,000 to resolve CFTC charges that they failed to properly report legal entity identifier information for certain swap transactions from at least April 2015 through December 2016. According to the Commission, Citi’s alleged failure derived from a design flaw in its swap data reporting system regarding continuation data that did not require it to re-report transactions solely because of a change in counterparties’ LEI information. The CFTC also charged that Citi failed to report LEIs correctly regarding counterparties in certain foreign jurisdictions where there might be restrictions on the identification of such persons. The CFTC acknowledged Citi’s substantial cooperation in accepting the firms’ offer of settlement.
Departing CFTC Commissioner Urges Successors to Address High Frequency Trading and Clearing Houses’ and Trading Platforms’ Governance: Sharon Bowen indicated in her last public speech as a commissioner of the Commodity Futures Trading Commission that the agency should finalize Regulation Automated Trading in order to avoid arbitrage with the European Union which has tough requirements regarding algorithmic trading firms that come into force on January 3, 2018. Ms. Bowen also called for the adoption of rules related to cybersecurity applicable to all registrants (not just financial market infrastructures such as designated contract markets and derivatives clearing organizations, as currently is the case) and for rules related to governance for clearing houses and trading platforms.
UK FCA Expects to Begin Publishing This Month Position Limits Expected To Be Effective January 3, 2018; ESMA Mandates Trading in Certain Interest Rate Swaps: The Financial Conduct Authority announced that it would start publishing position limits that will be effective January 3 under MiFID II beginning in October. FCA indicated that, if later, it became necessary for it to amend these limits because of opinions of the European Securities and Markets Authority it would give market participants “an appropriate notice period” to adjust their positions. Separately, ESMA determined to add certain fixed-to-float interest rate swaps and credit default swaps indices to its mandatory trading on-venue obligations. These swaps must be traded on a regulated market, multilateral trading facility, organized trading facility or an equivalent third country trading venue. ESMA anticipates this requirement being effective January 3, 2018, pending European Commission approval.
Canadian Securities Regulators Ban Binary Options: The Canadian Securities Administrators finalized its prohibition on the offer, sale and advertisement of binary options to individuals in Canada. Binary options permit investors to take a wager on an underlying asset; typically the pay-off is a fixed amount or nothing at all.