June 21, 2021

Volume XI, Number 172


June 18, 2021

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De Minimis Threshold; Position Limits; Pre-Execution Communications; Cybersecurity - Bridging the Week [VIDEO]

Last week, the Commodity Futures Trading Commission Chairman Timothy Massad said he would recommend a one-year delay in lowering the de minimis swap dealer threshold from US $8 to $3 billion. In addition, the Hong Kong Securities and Futures Commission reminded futures and options traders that position limits are not just a CFTC requirement when it fined a major international bank the equivalent of US $325,000 for violating its position limits rules. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • Just in Time for Football Season, CFTC Chairman Decides to Punt Swap De Minimis Threshold for One Year;

  • International Bank Fined by HK Regulator for Position Limit Breaches in Futures and Options;

  • CME Group Sanctions Nonmembers for Impermissible Money Transfers and Pre-Execution Communications;

  • NYS Proposes Express Cybersecurity Requirements for Banks, Insurance Companies and Other NY-Regulated Financial Institutions;

  • FINRA Fines Broker-Dealer US $850,000 for Ignoring Red Flags of Office Manager’s Theft of Client Funds; and more.


  • Just in Time for Football Season, CFTC Chairman Decides to Punt Swap De Minimis Threshold for One Year: Chairman Timothy Massad of the Commodity Futures Trading Commission announced his intention to recommend to his fellow commissioners that they delay for one year the automatic reduction of the current interim swap dealer de minimis threshold amount scheduled to occur at the end of 2017. (The threshold requiring registration as a swap dealer is US $3 billion aggregate gross notional amount measured over the prior 12-month period. However, an interim threshold of US $8 billion is in effect until December 31, 2017.) Mr. Massad said he would make the recommendation to delay the de minimis threshold lowering because “a delay is the sensible and responsible thing to do – and doing it now will provide much-needed certainty to market participants.” Mr. Massad indicated that a delay would permit the CFTC to potentially adopt a capital rule for swaps dealers, as well as to study the impact of the recently implemented non-cleared swaps margin rules, before making a final decision on the de minimis threshold. It would also allow the CFTC to obtain better data on commodity swaps – markets that are different than interest rate and credit default swaps (where there is more data currently) – said Mr. Massad. Recently, staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a final report regarding the de minimis threshold. Among other things, staff estimated that if the de minimis threshold were lowered to US $3 billion, 84 additional entities trading IRS and CDS would have to register as swap dealers. However, staff also estimated that the amount of IRS and CDS swaps activity that would be additionally covered by a lowering of the de minimis threshold would be nominal. (Click here for details of DSIO’s study in the article, “CFTC Staff Issue Another Report but Commission Takes No Action Regarding Swap Dealer De Minimis Threshold” in the August 21, 2016 edition ofBridging the Week.)

My View: The recent study by the CFTC staff provides more than adequate support to permanently cancel the lowering of the de minimis threshold despite its limited data on commodity swaps. No matter what the stated rationale, this seems to be mostly a political decision to defer the resolution of this important matter to after the election of a new US president and the possible appointment of a new CFTC chairperson. However, a one-year delay at this time will prolong unnecessary uncertainty among smaller swaps traders. This may be a punt, but it seems more like a fumble.

  • International Bank Fined by HK Regulator for Position Limit Breaches in Futures and Options: The Hong Kong Securities and Futures Commission fined The Hong Kong and Shanghai Banking Corporation Limited the equivalent of approximately US $325,000 (HK $2.5 million) for violating its position limits rules on multiple dates from May 26 through August 1, 2014. According to SFC, during the relevant time, HSBC violated its futures equivalent position limits for the Hang Seng China Enterprise Index futures contracts and options contracts traded on the Hong Kong and Futures Exchange on 18 days. HSBC’s breaches arose, said SFC, because, during the relevant time, “there were no policies and procedures in place for position limit monitoring and controls in relation to HKFE listed products” and “there was no staff responsible for monitoring the net open positions of HSCEI related products entered into by [HSBC’s] house account.” HSBC self-reported a one-time breach on July 31, 2014, as of July 30. Subsequently, on November 31, 2014, HSBC self-reported that it identified 17 days of breaches during the relevant period, and self-reported an additional day of breach on May 8, 2015. In announcing its sanction against HSBC, SFC noted that, since its violations, “HSBC has … taken steps to strengthen its internal controls on monitoring positions in HSCEI futures and options contracts to ensure compliance with the prescribed position limit.”

Compliance Weeds: Not just the Commodity Futures Trading Commission in the United States, but some foreign regulators, such as the HK Securities and Futures Commission, maintain position limits on certain futures and options contracts that must be adhered to by all persons who trade local markets. (Click here to access SFC’s position limit requirements and aggregation rules. Click here to see also, as an example, the article, “France Rolls Out Reporting and Position Limit Regime for Agricultural Commodity Derivatives Beginning July 1” in the June 14, 2015 edition of Bridging the Week.) Other jurisdictions, including Europe, are scheduled to implement a wide-ranging position limit regime, beginning January 2018. (Click here for details in the article, “ESMA Publishes Final Technical Standards for MiFID II” in the October 4, 2015 edition of Bridging the Week.) It behooves all traders accessing non-US markets to inquire, in advance, if position limits are applicable and if so, to ensure they are aware of the levels, as well as any aggregation rules and basis for exemptions.

  • CME Group Sanctions Nonmembers for Impermissible Money Transfers and Pre-Execution Communications: The Chicago Board of Trade fined Zhi Guo Zhang, a nonmember, US $100,000 for engaging in noncompetitive soybean futures trades between October 8 and November 8, 2012, in order to transfer money from another trader’s account to his trading account. He accomplished this, said the CBOT Business Conduct Committee, by prearranging 240 trades constituting 96 round turn transactions. Mr. Zhang transferred almost US $31,000 through this scheme. Mr. Zhang was also ordered to pay the amount transferred as restitution, and was permanently banned from trading on any CME Group exchange, among other penalties. Separately, Standard Chartered Bank agreed to pay a fine of US $75,000 to settle charges that it engaged in impermissible pre-execution communications in connection with transactions in soybean futures on “several occasions” between December 2012 and February 2013. CBOT claimed that, during the relevant time, SCB discussed specific information regarding contract; side of the market; time of execution; and price and quantity with employees of a counterparty in connection with soybean futures contracts executed in connection with prepaid soybean swap agreements. However, said the CBOT Business Conduct Committee, such pre-execution conversations were not permitted in connection with CBOT agricultural futures contracts.

Compliance Weeds: Generally, for approved contracts only, CME Group exchanges permit pre-execution communications to facilitate trading subject to strict requirements. Among these requirements are that the party on whose behalf a communication is made previously consented to such communication and that no person involved in pre-trade communications takes advantage of information conveyed except to facilitate the relevant trade. Other than for CBOT EU Wheat futures and options, pre-execution communications are never permitted for CBOT grain and oilseed futures at any time. Moreover, CME Group rules regarding cross trades vary by product and by futures and options. Even the mechanical steps for executing a cross trade following a conversation vary. There are Globex Crosses, Agency Crosses, Committed Crosses, and RFQ and RFC Crosses. (Click here to access the relevant CME Group Market Regulation Advisory Notice regarding Pre-Execution Communications (August 16, 2016).) However, despite the complexity, the consequences of getting it wrong can be severe, resulting in not only potential CME Group sanctions, but possible sanctions by the Commodity Futures Trading Commission too. Most simply, all noncompetitive trades are strictly prohibited under CFTC rules, and any violation of a CME Group rule regarding pre-execution communications, could also be deemed a violation of this CFTC requirement. Pre-execution communication rules of other designated contract markets are similar but contain important differences from CME Group requirements (click here to access the “Pre-Execution Communication FAQ” of ICE Futures U.S. (dated August 2016) and here to access guidance with respect to executing cross orders on Nasdaq Futures, Inc.).

  • NYS Proposes Express Cybersecurity Requirements for Banks, Insurance Companies and Other NY-Regulated Financial Institutions: The New York State Department of Financial Services proposed comprehensive cybersecurity requirements for banks, insurance companies and other financial institutions regulated by the DFS. Among other things, such covered institutions would be required to adopt a formal cybersecurity program to protect their information systems which would be broadly defined to not only include a firm’s “resources organized for the collection, processing, maintenance, use, sharing, dissemination or disposition of electronic information,” but also any specialized systems “such as industrial/process control systems, telephone switching and private branch exchange systems, and environmental control systems.” A covered institution’s cybersecurity program must “perform” certain mandatory functions including identifying internal and external cyber risks related to nonpublic information; using defensive infrastructures and implementing policies and procedures to protect the firm’s information systems and nonpublic information; detecting and responding to cybersecurity events to mitigate any detrimental impacts; recovering from cybersecurity events; and fulfilling all reporting obligations. Covered institutions must appoint an individual as the chief information security officer with certain enumerated responsibilities, including preparing a written report twice a year assessing the covered entity’s cybersecurity program. However, the proposed rules contemplate that a third party may perform the CISO function. The proposed rules also contain detailed requirements for covered entities to ensure the security of information systems and nonpublic information that may be accessible by third parties doing business with a covered entity. Comments on the proposed rules will be accepted for 45 days following their publication in the New York State Register. The proposed rules are scheduled to be effective January 1, 2017, with a 180-day transition period.
  • FINRA Fines Broker-Dealer US $850,000 for Ignoring Red Flags of Office Manager’s Theft of Client Funds: Ameriprise Financial Services, Inc., a broker-dealer, agreed to pay a fine of US $850,000 for its alleged failure to detect the conversion of US $370,000 by an office manager from five accounts of the individual’s family members from October 2011 through September 2013. According to FINRA, during the relevant time, the office manager was employed by another Ameriprise-registered representative who “ran his business through a limited liability company.” The office manager typically submitted wire request forms to transfer funds from the family members’ brokerage accounts to the LLC and then paid himself from the LLC. FINRA claimed that, during the relevant time, on a few occasions a number of wire transfers were flagged by Ameriprise for possible signature discrepancies, but were ultimately approved. Also eight of nine wire request forms were submitted to Ameriprise with facsimile cover sheets bearing the name of the LLC, were sent from the LLC’s email address, and were timed between 10 p.m. and 3 a.m. Notwithstanding the unusual requests for payment from the LLC (which was also the destination of the registered representative’s compensation), Ameriprise made payment to the LLC. Ameriprise identified the office manager’s misconduct in September 2013 after another LLC employee found evidence in a trash can that the office manager was practicing forging the signature of another family member. Ameriprise voluntarily repaid all the family members their stolen sums, interest and related fees after this discovery. FINRA charged that Ameriprise failed to have a system “reasonably designed to supervise third-party wire transfers” and failed to react to numerous red flags.

And more briefly:

  • New CFTC Commissioner Nominations Trudge Forward: Brian D. Quintenz and Chris Brummer testified before the US Senate Committee on Agriculture, Nutrition and Forestry last week in support of their March 2016 nominations to become commissioners of the Commodity Futures Trading Commission. If approved by the full Senate, Mr. Quintenz, who founded Saeculum Capital Management, a CFTC-registered commodity pool operator, would replace former commissioner Scott O’Malia. Mr. Brummer, a professor at Georgetown Law School, would replace former commissioner Mark Wetjen.
  • Australia-Regulated Trading Facility Authorized to Permit US Persons to Trade Swaps Without SEF Registration: Two divisions of the Commodity Futures Trading Commission granted no-action relief to Yieldbroker Pty Limited, an Australia-based swap multilateral trading facility, from having to register as a swap execution facility in connection with granting access to US persons. The divisions – the Division of Market Oversight and the Division of Swap and Intermediary Oversight – also exempted US persons executing swaps on Yieldbroker from having to comply with certain business conduct and other requirements related to the execution of over-the-counter swaps. Yieldbroker has been providing access to US persons to execute swaps since 2013 pursuant to other staff no-action relief.
  • SEC Soon to Seek Public Input on Disruptive Trading Practices: Mary Jo White, Chair of the Securities and Exchange Commission, indicated last week that staff is currently developing a rule proposal “designed to enhance recordkeeping and related requirements with respect to trading algorithms, while at the same time protecting the confidentiality of sensitive proprietary trading information.” She also indicated that staff will also soon be publishing their work on disruptive trading practices and asking the public to comment on it.
  • Convicted Spoofer Denied Bail Pending Appeal of Adverse Verdict: Michael Coscia, the first person prosecuted, convicted and sentenced to three years’ imprisonment under a law prohibiting spoofing that was enacted after the 2007-2008 financial crisis, lost his motion to be free on bail pending the appeal of his verdict and sentence to a US appeals court. In denying his bail request, the federal trial court judge said that Mr. Coscia failed to demonstrate that his appeal “present[ed] a substantial question of law.”
©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 263



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...