May 24, 2022

Volume XII, Number 144

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May 23, 2022

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Cadwalader Cabinet: January 5, 2022

FCA Announces LIBOR Terminations

The UK Financial Conduct Authority ("FCA") announced changes to LIBOR on January 4, 2022. The following LIBOR settings that have ended and are no longer representative include (i) all euro and Swiss franc LIBOR settings, (ii) the overnight/spot next, one-week, two-month and 12-month sterling and Japanese yen LIBOR settings, and (iii) the one-week and two-month U.S. Dollar settings.

The one-month, three-month and six-month sterling and Japanese yen LIBOR settings are Article 23A Benchmarks. They are permanently unrepresentative and panel banks will no longer provide submissions to create these rates.

The FCA published a compatible Notice to the September 2021 draft (see previous coverage) and a Notice that aligns with the November 2021 draft (see previous coverage).

Synthetic yen LIBOR will cease at the end of 2022, and the availability of synthetic sterling LIBOR is not guaranteed to be available after the end of 2022. New use of synthetic LIBOR is prohibited for market participants.

The remaining five U.S. Dollar LIBOR settings will be calculated using the panel bank submissions until June 30, 2023.

Treasury Grants Small Broker-Dealer Recordkeeping Exemption for QFCs

Treasury announced that, after the necessary consultation with the FDIC and the SEC, it is providing a retail broker-dealer with a conditional exemption (see Dodd-Frank Section 210(c)(8)(H)) from certain Dodd-Frank recordkeeping requirements for certain of its qualified financial contracts (“QFCs”).

The exemption was granted in consideration of the relevant QFC portfolio’s (i) size, risk, and complexity, (ii) trading frequency and leverage, and (iii) the interconnectedness of the broker-dealer to the rest of the financial system. As described in the exemption, the broker-dealer primarily engages in client brokerage agreements, cash market QFCs governed by the brokerage agreements and a master clearing agreement with the broker-dealer's clearing firm, an unaffiliated broker-dealer. The broker-dealer also represented that the only counterparties to the QFCs would be "customers" for purposes of the Securities Investor Protection Act ("SIPA"), and that the broker-dealer was not registered as a futures commission merchant under the Commodity Exchange Act. (The effect of these representations is that the QFCs are limited to margin loan agreements, and would not include repo agreements (since repo counterparties are not "customers" for purposes of SIPA.)

Treasury ultimately determined that (i) the portfolio does not present a high likelihood of meeting the financial stability exception to the transfer requirement of Section 210(a)(1)(O) of the Dodd-Frank Act, and (ii) if it did not meet the financial stability exception, the FDIC would not require detailed records. In addition, Treasury stated that it intends to reassess the exemption in five years, and may request updated information from the firm.

Commentary by Steven Lofchie

This exemption is relevant to other retail-oriented, bank-affiliated broker-dealers, the primary credit activity of which is lending under margin agreements. 

Money Services Business Settles OFAC Charges for Cuba Sanctions Violations

A California-based registered money services business (an "MSB") settled potential civil liability for alleged violations of the Cuban Assets Control Regulations.

According to OFAC, the MSB, which is the wholly-owned subsidiary of a global online travel services platform, (i) processed payments related to guests traveling for reasons outside of OFAC's authorized categories, (ii) failed to keep certain required records associated with Cuba-related transactions and (iii) processed payments related to transactions involving non-U.S. persons engaging in Cuba travel transactions on the parent company's platform prior to OFAC issuing a specific license to engage in such conduct. According to OFAC, the parent company's scaling up of services in Cuba outpaced that company's ability to manage associated sanctions risks on its technology platforms, which led to some of the apparent violations.

OFAC stated that the MSB voluntarily self-disclosed the relevant conduct, which constituted a non-egregious case. OFAC cited as a mitigating factor the company's agreement to implement, as part of its sanctions compliance program, an IP blocking regime capable of discerning between (i) individuals located in Cuba who are seeking to act as "Hosts" on the parent company's platform (which may be permissible) and (ii) individuals located in Cuba who are seeking to transact as "Guests" (which generally is not permissible). The MSB also committed to the collection of country of residence information and payment instrument information in order to determine whether users are nationals or residents of Cuba.

To settle the charges, the company agreed to pay $91,172.29.

Binary Options Markets Operator Settles CFTC Charges for Registration Violations

A New York City-based company settled CFTC charges for offering off-exchange, event-based binary options contracts and for failing to obtain designation as a designated contract market ("DCM") or registration as a swap execution facility.

The CFTC alleged that, beginning in June 2020, the company, through its website, operated an illegal, unregistered or non-designated facility for event-based binary options online trading markets ("event markets"). According to the CFTC, event market contracts, each composed of a pair of binary options, constitute swaps and, therefore, fall under the CFTC's jurisdiction and can only be offered on a registered exchange in accordance with the CEA and CFTC regulations. As a result, the CFTC charged the company with violations of Commodity Exchange Act Sections 4c(b) ("Prohibited transactions") and 5h(a)(1) ("Swap Execution Facility Registration"), and CFTC Rules 37.3 ("Requirements and procedures for registration") and 32.2 ("Commodity option transactions").

To settle the charges, the company was required to (i) pay a $1.4 million civil monetary penalty, (ii) wind down markets displayed online that do not comply with the CEA and applicable CFTC regulations, and (iii) cease and desist from violating the CEA and CFTC regulations as charged.

SIFMA Recommends Changes to SEC-Proposed Electronic Recordkeeping Requirements

SIFMA recommended substantial changes to the SEC's proposed rulemaking on electronic recordkeeping requirements for broker-dealers, security-based swap dealers and major security-based swap participants (see previous coverage).

In their comments to the proposed rule, SIFMA recommended the following:

  • eliminate third-party recordkeeping requirements, since service providers often don't have access to the data if it is encrypted;

  • distinguish the term "senior officer" from the "senior officer" term that is found in various other security-based swap regulations;

  • explicitly permit entities to designate multiple officers for accessing and producing records;

  • permit senior officers to provide only the required records to which the officers have been designated as having access;

  • adjust audit trail requirements to permit documents with tracked changes rather than requiring firms to have the ability to reproduce every iteration of a document;

  • eliminate various audit trail sections, or amend them to exclude bank security-based swap entities from the new technical requirements;

  • adjust various phrases and terms to provide additional clarity and technological neutrality; and

  • grant entities an 18-month window to comply with the amended rules.

SIFMA asserted that its recommendations would make the regulations more technologically neutral.

IOSCO Assesses Risks within Global Investment Funds Industry

In an Investment Funds Statistics Report, IOSCO assessed the risks within the global investment funds industry.

IOSCO reported that leverage across the global investment funds industry is relatively low. IOSCO found that:

  • hedge funds have sufficient portfolio liquidity to meet liquidity demands by investors during normal times;

  • open-ended funds ("OEFs") do not have large aggregate exposures through derivative positions, so they are not meaningfully leveraged by any metric; and

  • using the metrics in the report, closed-ended funds ("CEFs") exhibit little to no leverage.

The report includes analyses of hedge funds, OEFs and CEFs. The report's purpose was to facilitate the regular collection and analysis of investment fund data that would enable regulators to share information and observe trends regarding trading activities, leverage, liquidity management, markets and funding by investment funds globally.

Primary Sources

  1. FCA News Release: Changes to LIBOR as of End-2021

  2. FCA Press Release: Further Arrangements for the Orderly Wind-down of LIBOR at End-2021

  3. FCA Press Release: FCA Confirms Rules for Legacy Use of Synthetic LIBOR Rates and No New Use of U.S. Dollar LIBOR

  4. FCA Notice: Article 23A Benchmarks Regulation - Notice of Designation

  5. FCA Notice: Article 23D Benchmarks Regulation - Notice of Requirements

  6. FCA Notice: Article 23C Benchmarks Regulation - Notice of Permitted Legacy Use by Supervised Entities

  7. FCA Notice: Article 21A Benchmarks Regulation - Notice of Prohibition on New Use of a Critical Benchmark

  8. 87 FR 271 - Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority

  9. OFAC Settles with Airbnb Payments, Inc. for $91,172.29 Related to Apparent Violations of the Cuban Assets Control Regulations

  10. CFTC Order: Blockratize, Inc. d/b/a Polymarket.com

  11. SIFMA Press Release: Electronic Recordkeeping Requirements for Broker-Dealers

  12. SIFMA Comment Letter: Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers and Major Security-Based Swap Participants

  13. IOSCO Media Release: IOSCO Report Provides New Global-Level Data on Global Investment Funds Industry

  14. IOSCO Investment Funds Statistics Report

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 5
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