June 30, 2022

Volume XII, Number 181

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Derivatives & Futures Update September 2012

CPO/CTAS

CFTC Responds to Questions Regarding CPO and CTA Registration and Compliance

In response to concerns regarding the implications of CPO and CTA registration for certain exempt funds, CFTC staff has issued a series of responses to frequently asked questions (FAQs) regarding registration and compliance by CPOs and CTAs.  The FAQs focus on questions raised by market participants as a result of recent amendments to CFTC rules, which include the narrowing of CFTC Rule 4.5 and the rescission of CFTC Rule 4.13(a)(4)—the so-called “sophisticated investor” exemption—from CPO registration. In particular, the FAQs provide guidance with respect to key issues such as timing for claiming an alternate exemption, registering with the CFTC, when guidance on Forms CPO-PQR and CTA-PR will be available, complying with certain CFTC requirements and whether certain relief, such as CFTC Advisory 18-96, remains available.

NFA Reminds Members of Major Changes to CPO and CTA Exemptions

The NFA has issued guidance regarding the CFTC’s rule amendments that rescinded the exemption from CPO registration granted under CFTC Rule 4.13(a)(4). Persons currently exempt from registration as a CPO under Rule 4.13(a)(4) may continue to operate qualifying pools until December 31, 2012. After December 31, any pool operator relying on the Rule 4.13(a)(4) exemption must register with the CFTC, unless the operator qualifies for another exemption from registration.

The rule amendments also require any person that claims an exemption from CPO or CTA registration to reaffirm its claim of exemption within 60 days of the end of each calendar year.  After December 31, any NFA member that carries an account or transacts business with any person that is currently exempt from CPO registration under CFTC Rule 4.13(a)(4) must assure that the person has filed a claim of exemption under CFTC Rule 4.13(a)(3) or has properly registered and become an NFA member. In addition, any NFA member that carries an account or transacts business with an unregistered person claiming an exemption from registration must verify that the unregistered person has properly filed the annual notice reaffirming the exemption.  FCMs must adopt adequate policies and procedures to identify accounts of exempt persons and conduct annual reviews to assure that the notices of exemptions are properly reaffirmed.

FCMS

FIA and ISDA Publish Cleared Derivatives Addendum

The FIA and ISDA have published the FIA-ISDA Cleared Derivatives Addendum, which is a template that can be used by U.S. FCMs and their customers to document their relationship with respect to cleared OTC swaps. The addendum, which is designed to supplement a futures and options agreement between a U.S. FCM and its customer, includes representations for each party to make regarding certain clearing-related matters, such as the treatment of customer collateral. The addendum also sets forth the close-out methodology for cleared OTC swaps, the triggers for liquidation and provisions for valuing the terminated trades. In addition, the addendum contains provisions governing tax issues regarding cleared OTC transactions.

Court Rules That Trustee of Failed FCM Cannot Recover Customer Funds From Bank

The Seventh Circuit Court of Appeals has ruled that the trustee for a failed FCM—Sentinel Management Group—may not recover from the Bank of New York ("BONY") customer funds used by the FCM to secure an overnight loan.  After Sentinel (an investment manager for FCMs) collapsed, it was discovered that it had pledged hundreds of millions of dollars in customer assets to secure the loan from BONY. Sentinel’s trustee sought to dislodge the bank’s secured position, but the Seventh Circuit ruled that the trustee’s claims and its efforts to void the contracts with BONY were deficient. According to the court, Sentinel’s failure to keep client funds properly segregated was not, standing alone, sufficient to rule as a matter of law that Sentinel acted with the actual intent to hinder, delay or defraud. Given that the bank was not an insider for purposes of the analysis, the trustee needed to demonstrate that BONY acted in a gross and egregious manner in order to obtain an equitable subordination, evidence that the trustee did not demonstrate.

NFA Strengthens the Protection of Customer Funds Held by FCMs

The CFTC approved new financial rules submitted by NFA that seek to enhance protections to customer funds held by FCMs. The rules are set forth in NFA Financial Requirements Section 16 and an Interpretive Notice entitled “NFA Financial Requirements Section 16 FCM Financial Practices and Excess Segregated Funds/Secured Amount Disbursements.” The new rules require FCMs to strengthen their controls over the treatment and monitoring of funds held for customers trading on U.S. contract markets (segregated accounts) and for funds held for foreign futures and foreign options customers trading on foreign contract markets (Part 30 secured accounts).

Among other things, the new rules provide that FCMs must maintain written policies and procedures governing the maintenance of excess (i.e., proprietary or residual) funds in customer segregated accounts and Part 30 secured accounts. Any withdrawals that are in excess of 25% of the excess segregated or Part 30 secured funds that are not for the benefit of customers must be pre-approved in writing by senior management, and FCMs must file notice with NFA of any such withdrawal.

NFA Proposes New Transparency Rule

In August, NFA proposed to require every FCM member to provide its designated self-regulatory organization (DSRO) with view-only Internet access to account information for each of the FCM’s customer segregated funds and secured amount accounts. Further, to remain an acceptable depository, a bank or trust company will be required to allow the FCM to provide its DSRO with view-only Internet access to such information held at the bank or trust company.

SWAPS/DODD-FRANK ACT

CFTC and SEC Finalize Definitions of “Swap” and “Security-based Swap”

The CFTC and SEC jointly finalized rules defining “swap” and “security-based swap,” terms that form the cornerstone of the Dodd-Frank Act. Under the Dodd-Frank Act, the CFTC has regulatory authority over swaps, the SEC has regulatory authority over security-based swaps, and the CFTC and SEC jointly regulate mixed swaps.

Generally, instruments on interest rates and other monetary rates (including interbank offered rates, money market rates, government target rates, general lending rates, rates from indexes and other monetary rates) are swaps, while instruments on “yields”—where yield is a proxy for the price or value of a debt security, loan or narrow-based security index (but not certain government debt obligations)—are security-based swaps.

With respect to some other popular products, a total return swap (TRS) on a single loan or narrow-based security index is a security-based swap. If a TRS includes embedded interest rate optionality or a non-securities component, such as the price of oil or a currency hedge, it is a mixed swap. A TRS based on a broad-based index or on two or more loans is a swap (not security-based swap). A credit default swap (CDS) based on a broad-based security index is a swap, while a CDS based on a single name, loan or narrow-based security index is a security-based swap. FX swaps and forwards are swaps, subject to a determination by the Secretary of the Treasury to exempt them from regulation. (In April 2011, Treasury issued a notice of proposed determination exempting FX swaps and forwards from the swap definition, but a final determination has not yet been made.) If an index CDS is based on a broad-based security index and includes mandatory physical settlement, the CDS is a mixed swap, which is subject to regulation by both the CFTC and the SEC.

If you would like to receive a chart that describes the categorization of more than 50 products, please contact us.

CFTC Approves Clearing Dodd-Frank Act Implementation Schedule

The CFTC has announced that the path to mandatory clearing begins with the publication of a proposed clearing determination for a particular class of swaps, which will then be followed by a 30-day public comment period and a final clearing requirement determination that must be made within 90 days of the publication of the proposed determination (unless the CFTC decides to stay its decision for up to 90 days).  The CFTC must adopt a clearing requirement determination in order for the compliance schedule to begin to run.

The compliance schedule for the clearing requirement is based on the type of market participants entering into a swap subject to the clearing requirement. The compliance schedule defines three categories of market participants:

  • Category 1 includes swap dealers, MSPs and “active funds” (i.e., any private fund as defined in Section 202(a) of the Investment Advisers Act of 1940 that is not a third-party subaccount and that executes 20 or more swaps per month). Category 1 entities will have 90 days from the date that a final clearing requirement determination is published in the Federal Register to comply.
  • Category 2 includes commodity pools, “private funds” as defined in Section 202(a) of the Investment Advisors Act of 1940 other than active funds, and persons predominately engaged in banking or financial activities. Category 2 entities will have 180 days to comply.
  • Category 3 includes all other market participants, which will have 270 days to comply.

If the counterparties comprise two different categories, the swap is subject to the latest compliance date for one of the counterparties. Thus, a swap between a Category 1 Entity and a Category 2 Entity must comply within 180 days. The triggering event for the compliance schedule will be the CFTC’s issuance of a final clearing requirement determination (see next article).

CFTC Proposes Clearing Determination for Credit Default Swaps and Interest Rate Swaps

The CFTC has proposed rules to require certain credit default swaps (CDS) and interest rate swaps to be cleared by a registered derivatives clearing organization (DCO). The proposed rule is the first clearing determination by the CFTC under the Dodd-Frank Act. Under the proposed rules, market participants would be required to submit a swap that is identified in the rule for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution.

CFTC Finalizes “End-User” Exception

The CFTC has finalized the scope of the “end-user” exception to the Dodd-Frank Act’s mandatory clearing requirement. Under the final rules, the clearing requirement that forms the heart of the Dodd-Frank Act will not apply to a swap if one of the counterparties to the swap: (a) is not a “financial entity”; (b) is using the swap to hedge or mitigate commercial risk; and (c) notifies the CFTC as to how it meets certain financial obligations associated with entering into non-cleared swaps (the “end-user exception”).

The end-user exception permits non-financial entities to continue using non-cleared swaps to hedge risks associated with their underlying businesses. (A financial entity is a swap dealer, a security-based swap dealer, a major swap participant, a major security-based swap participant, a commodity pool, a private fund, one of certain types of benefit plans as defined under ERISA or a person predominantly engaged in activities that are in the business of banking or in activities that are financial in nature.) The CFTC’s rules also provide an exclusion from the definition of “financial entity” for smaller financial institutions with $10 billion in total assets or less.

The CFTC’s rules implement the end-user exception by: (a) establishing the criteria for determining whether a swap hedges or mitigates risk; (b) specifying the information that a counterparty must report about how it satisfies its financial obligations; (c) establishing an exemption for smaller financial institutions; and (d) requiring reporting of certain information to enable the CFTC to monitor compliance.

CFTC Issues Final Rules Relating to Swap Trading Relationship Documentation, Confirmations and Portfolio Reconciliation and Compression

The CFTC has published final rules related to swap trading documentation for swap dealers and major swap participants. The final rules establish the standards for the timely and accurate confirmation of swaps, mandate the reconciliation and compression of swap portfolios and set forth requirements for documenting the swap trading relationship between swap dealers and their counterparties.

The rules regarding swap trading relationship documentation require each swap dealer and major swap participant, subject to some exceptions, to establish policies and procedures reasonably designed to ensure that the parties have agreed in writing to all terms governing their trading relationship. The confirmation rules require each swap dealer and major swap participant to send an acknowledgment of the transaction as soon as technologically practicable, but no later than the time periods set forth in the rules. Swap dealers and major swap participants are required to establish and maintain written policies and procedures reasonably designed to ensure that they execute a confirmation for each swap transaction within the prescribed time frame. The rules also require swap dealers and major swap participants to adhere to certain portfolio reconciliation and compression requirements and related recordkeeping obligations for swap transactions that are not cleared by a DCO.

CFTC Proposes Inter-Affiliate Clearing Exemption

The CFTC has proposed to exempt swaps between affiliated entities within a corporate group from the clearing requirement of the Dodd-Frank Act. The proposed rule seeks comment on whether inter-affiliate swaps pose less counterparty risk than swaps transactions with third parties. The exemption would be subject to the following conditions:

  • Limited to swaps between majority-owned affiliates whose financial statements are included in the same consolidated financial statements.
  • Require the following: (a) centralized risk management;
    • (b) swap trading relationship documentation; (c) variation margin payments; and (d) satisfaction of reporting requirements.
  • Permit affiliates of the same corporate group to elect the exemption for their inter-affiliate swaps if any four conditions is satisfied for each affiliate: (a) the affiliate is located in the United States; (b) the affiliate is located in a jurisdiction with a comparable and comprehensive clearing requirement; (c) the affiliate is required to clear all swaps it enters into with non-affiliate counterparties; or (d) the affiliate does not enter into swaps with non-affiliate counterparties.

ISDA Publishes Dodd-Frank Act Protocol

ISDA has published an important new protocol—the “ISDA August 2012 Dodd-Frank Protocol.” The so-called “DF Protocol” is the first in a series of protocols designed to assist compliance with certain rules governing derivatives markets that will soon commence under the Dodd-Frank Act.

The purpose of the DF Protocol is to offer a streamlined method for swap counterparties to supplement all master agreements under which swaps are traded between a swap dealer and its counterparty. ISDA also provided a means for swap counterparties to incorporate certain provisions of the DF Protocol into a swap trading relationship that is not governed by an existing master agreement, such as prime-brokered swaps. The DF Protocol adds notices, representations and covenants responsive to certain Dodd-Frank Act requirements, including requirements relating to business conduct standards, position limits, reporting and recordkeeping.

The DF Protocol applies to all swaps, including all interest rate swaps, FX swaps, credit default swaps, total return swaps, interest rate and currency exchange options, commodities options and swaps, metal swaps and energy swaps.

CFTC Issues Proposed Guidance on Extraterritorial Application of Swaps

The CFTC has issued its highly anticipated proposed interpretive guidance and a policy statement concerning the extraterritorial application of certain swaps provisions of the CEA that were added by the Dodd-Frank Act. 

The proposed interpretive guidance and policy statement specify how the CFTC intends to interpret its jurisdiction over foreign swaps transactions and entities in light of Section 722 of the Dodd-Frank Act, which provides that the CEA’s swaps provisions will not apply to activities outside the United States unless those activities (a) have a direct and significant connection with activities in, or effect on, U.S. commerce or (b) contravene CFTC rules that were promulgated to prevent the evasion of the CEA’s swaps provisions.

The proposed interpretive guidance and policy statement address (a) swap dealer and major swap participant registration requirements for non-U.S. persons, (b) the applicability of the CEA to the swaps activities of non-U.S. swap dealers, non-U.S. major swap participants, and the foreign branches, agencies, affiliates and subsidiaries of U.S. swap dealers, and (c) the applicability of the clearing, trade execution, recordkeeping, and reporting requirements with respect to cross-border swaps involving one or more counterparties that are not swap dealers or major swap participants. The proposed interpretive guidance and policy statement also provide for substituted compliance with comparable foreign regulatory requirements by non-U.S. swap dealers and non-U.S. major swap participants, with CFTC approval.

CFTC Proposes to Exempt Certain Transactions of RTOs and ISOs

The CFTC has proposed to exempt certain transactions of Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) from provisions of the Commodity Exchange Act. The proposed order is in response to a petition from various RTOs and ISOs that are subject to regulation by either the Federal Energy Regulatory Commission or the Public Utility Commission of Texas.

The proposed order would exempt the purchase or sale of specifically defined “financial transmission rights,” “energy transactions,” “forward capacity transactions” and “reserve or regulation transactions” that are offered or sold in a market administered by one of the petitioning RTOs or ISOs pursuant to a protocol that has been approved or permitted to take effect. The proposed order also would exempt persons offering, entering into or rendering advice or other services with respect to those transactions.

To be eligible for the proposed exemption, the transactions would have to be entered into by persons who are “appropriate persons” or “eligible contract participants.” The CFTC’s anti-fraud, anti-manipulation, enforcement, and books and records inspection authorities would continue to apply.

CFTC Proposes Rules to Identify Traders

The CFTC has published for comment proposed rules and related forms that would enhance its identification of participants in futures and swaps markets. The proposed rules would require the electronic submission of expanded trader identification and market participant data. In addition, the proposed rules would strengthen the CFTC’s existing trade practice and market surveillance programs for futures and options on futures, and facilitate surveillance programs for swaps. The CFTC is also withdrawing its previous proposal to collect an ownership and control report for trading accounts active on designated contract markets or swap execution facilities.

CFTC Designates DTCC-SWIFT To Provide CICIs

The CFTC has designated DTCC-SWIFT as the provider for the CFTC’s Interim Compliant Identifiers (“CICI”). CICIs are interim legal entity identifiers that must be used by registered entities and swap counterparties to comply with the CFTC’s swap data reporting regulations.

CFTC—OTHER REGULATORY MATTERS

CFTC Issues Temporary Relief from Aggregation Requirements of Position Limit Rules

CFTC staff has issued a no-action letter to provide relief from certain of the aggregation provisions of the final position limit rules issued in November 2011, which established a position limits regime for certain commodity futures and options contracts and economically equivalent swaps. The position limit rules set forth criteria to be used in determining when accounts and positions held by a person must be aggregated for purposes of determining compliance with the position limit levels.

CFTC Re-Proposes Block Trade Rules for Swaps

The CFTC has re-published for comment amendments pertaining to block trades in swap contracts. The proposed amendments would (a) prohibit the aggregation of orders for different trading accounts in order to satisfy the minimum block size or cap size requirements, except for orders aggregated by certain commodity trading advisers, investment advisers and foreign persons, if such qualifying persons have more than $25 million in total assets under management; (b) provide that parties to a block trade must individually qualify as eligible contract participants (ECPs), except where a designated contract market allows certain commodity trading advisers, investment advisers and foreign persons to transact block trades for customers who are not eligible contract participants, if such qualifying commodity trading adviser, investment adviser or foreign person has more than $25 million in total assets under management; and (c) require that persons transacting block trades on behalf of customers must receive prior written instructions or consent from the customer.

Enforcement Actions—CFTC

CFTC Sues Trading System Program Provider for Fraud and Failure to Register as a CTA

The CFTC recently filed a complaint and issued an order against an unregistered firm that offers automated trading programs. The complaint charges that the firm failed to register as a commodity trading adviser (CTA) and the firm and its principals fraudulently solicited clients to subscribe to its trading systems, which were used by clients to trade E-mini Standard and Poor's 500 Stock Index futures contracts. The firm sold subscriptions to its Trading Systems for $5,000 to $6,000 and has sold subscriptions to more than 1,000 clients. The CFTC has received an order from a federal court that freezes all of the firm's and principals’ assets and imposes a preliminary injunction. The case remains pending.

CFTC Sues PFG and Russell R. Wasendorf, Sr. For Fraud, Misappropriation of Customer Funds, Violation of Customer Fund Segregation Laws and False Statements

The CFTC filed a complaint against Peregrine Financial Group Inc. (PFG), an FCM, and its owner, Russell R. Wasendorf, Sr. The complaint alleges that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws and made false statements in financial statements filed with the CFTC.

NFA is PFG’s designated self-regulatory organization and is responsible for monitoring and auditing PFG for compliance with the minimum financial and related reporting requirements. According to the complaint, in July 2012 during an NFA audit, PFG falsely represented that it held in excess of $220 million of customer funds when in fact it held approximately $5.1 million.

The CFTC’s complaint further alleges that from at least February 2010 through the present, PFG and Wasendorf failed to maintain adequate customer funds in segregated accounts as required by the Commodity Exchange Act. The complaint also contends that PFG and Wasendorf made false statements in filings required by the CFTC regarding funds held in segregation for customers trading on U.S. exchanges.

In the litigation, the CFTC seeks a restraining order to freeze assets, appoint a receiver and preserve records. Further, the litigation seeks restitution, disgorgement and civil monetary penalties, among other appropriate relief. 

CFTC Sues Forex Firm for Fraud and Failure to Register as a CTA

At the request of the CFTC, a federal court entered an emergency order freezing the assets of defendants Victor Yu and his company, VFRS, LLC. The court’s order also prohibits the destruction or alteration of books and records, and grants the CFTC immediate access to such documents.

The order arises out of a civil enforcement action filed by the CFTC in July 2012, charging the defendants with defrauding at least 100 clients in connection with off-exchange foreign currency (forex) trading. The CFTC’s complaint also charges Yu with failure to register with the CFTC as a commodity trading adviser (CTA). The defendants misrepresented to clients that the trading software made forex trading “extremely safe,” prevented clients from ever reaching certain loss thresholds, and guaranteed that clients would not have a losing trade, according to the complaint.

To solicit new clients, Yu held face-to-face meetings with prospective clients in various clients’ homes, obtaining leads primarily through word-of-mouth, according to the complaint. Yu allegedly promised existing clients a referral fee or a percentage of any profits earned in the new clients’ forex accounts. When opening accounts, clients signed agreements promising to pay the defendants a service fee of 30% of their net profits, and the defendants provided log-in and password information so that clients could “hook up” to the defendants’ trading software. The complaint alleges that by this conduct, Yu acted as a CTA and was required to register with the CFTC.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, trading and registration bans, and preliminary and permanent injunctions against further violations of the federal commodities laws, as charged.

The case is U.S. Commodity Futures Trading Comm’n v. Welsh, Case No. 1:12-cv-01873 (S.D.N.Y.).

CFTC Orders FCM to Pay $700,000 for Large Trader Reporting and Supervision Violations

The CFTC has issued an order filing and settling charges against Interactive Brokers, an FCM, for filing inaccurate large trader reports and failing to diligently supervise the handling and reporting of accounts. The order requires Interactive to pay a $700,000 civil monetary penalty and prohibits Interactive from violating Section 4g of the Commodity Exchange Act and various CFTC rules.

The order found that Interactive repeatedly failed to aggregate positions for related accounts that it reported to the CFTC in its daily large trader submissions. Interactive primarily supervised the aggregation aspect of its large trader reporting using an automated system that lacked functionality sufficient to aggregate accounts owned and/or controlled by the same traders, according to the order. Moreover, Interactive failed to take reasonable steps to correct its automated system after it learned that the system was repeatedly failing to identify and aggregate related accounts, the order finds.

According to the order, Interactive also failed to file updated Form 102s when large traders opened related accounts or changed information concerning their trading accounts. The CFTC requires futures commission merchants, such as Interactive, to submit Form 102s identifying account holders and entities exercising trading control over certain accounts in order to evaluate potential market risks. Interactive failed to supervise the employees responsible for submitting Form 102s because Interactive did not instruct them to submit updated Form 102s to the CFTC and did not provide a means by which its employees could determine when an updated Form 102 was required, the order finds.

CFTC Orders Barclays to pay $200 Million for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Interest Rates

The CFTC issued an order settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc. (Barclays Capital). The order found that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions over a four-year period, commencing as early as 2005.

According to the order, Barclays, through its traders and employees responsible for determining Barclays Bank’s LIBOR and Euribor submissions, attempted to manipulate and made false reports concerning both benchmark interest rates to benefit Barclays Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.

The order also found that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, Barclays Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.

The CFTC Order requires Barclays to pay a $200 million civil monetary penalty, cease and desist from further violations as charged and take specified steps, such as making the determinations of benchmark submissions transaction-focused to ensure the integrity and reliability of its LIBOR and Euribor submissions and improve related internal controls.

Federal Court Orders Pro Trading Course, LLC to Pay More than $600,000 in Restitution and Civil Monetary Penalties to Settle CFTC Anti-Fraud Action

At the request of the CFTC, a federal district court entered an order of default judgment and permanent injunction against Richard C. Regan and Pro Trading Course, LLC. The court’s order stems from a CFTC enforcement action charging the defendants with fraudulently soliciting members of the public to enroll in a commodity futures training program.

The order finds that PTC, through Regan and its employees, used false and misleading promotional material and sales solicitations, which overstated the advancement opportunity and profit potential of PTC’s commodity futures training program. The defendants also failed to disclose that not one of the 126 clients who completed PTC’s training and became PTC proprietary traders ever advanced beyond Level 1 of the program, according to the order. In addition, no PTC trader ever met the monthly profit targets set by Regan or received profit “payouts” approximating those depicted on the “Payout Charts” Regan prepared, the order finds.

The order further finds that PTC, through Regan and its sales associates, used false and misleading promotional material and sales solicitations to sell access to PTC’s Virtual Trading Room (VTR). This created the impression that VTR sessions involved actual commodity futures trading, but they failed to disclose that Regan and his team placed only simulated trades while conducting VTR sessions.

The order requires the defendants to pay a $461,100 civil monetary penalty and restitution of $232,200. The order also imposes permanent trading and registration bans against the defendants and prohibits them from violating the Commodity Exchange Act.

Enforcement Actions—CME Group

In re Credit Suisse Securities (USA)

Pursuant to an offer of settlement, the NYMEX Business Conduct Committee (the “Committee”) found that Credit Suisse’s affiliates inadvertently maintained an aggregate open March 2011 Brent Crude futures position in excess of the position limit in effect for trades in that product at that time. Upon learning of the inadvertent overage, Credit Suisse immediately reduced its excess position to bring the aggregate position under the applicable limit, resulting in a profit of $9,610. The Committee ordered Credit Suisse to pay a fine to the exchange in the amount of $25,000 and a disgorgement of profits of $9,610.

In re Wisnefski

Pursuant to an offer of settlement, the CME Business Conduct Committee found that on multiple occasions the trader entered orders on the CME Globex electronic trading platform during the pre-opening session that were not made in good faith for the purpose of executing bona fide transactions. Wisnefski entered and subsequently canceled orders in an attempt to identify the depth of the order book at different price levels. In attempting to discern market depth in this way, Wisnefski caused the publicly displayed Indicative Opening Price (“IOP”) to fluctuate and reflect artificial prices. The Committee fined Wisnefski $40,000 and suspended his membership privileges for 20 business days.

In re Ye

Pursuant to an offer of settlement, the NYMEX Business Conduct Committee found that a trader left an automated trade execution system (“ATES”) operating unattended. The trader was responsible for turning the ATES on and off, for setting the ATES parameters and for monitoring the ATES. As a result of an inadvertent human error, the ATES was not shut down and continued to operate unattended in the July 2011 Natural Gas futures contract. The ATES was not designed to operate during periods of low liquidity because of the risk of financial losses. During a period of approximately two minutes of the total time the ATES was running unattended, the ATES entered buy orders at progressively higher prices and sell orders at progressively lower prices. Although the ATES had certain automated controls that limited the size of the orders entered and positions established by the ATES, it did not have controls that would have automatically shut it down. The Committee ordered the trader to pay a fine to the exchange in the amount of $25,000.

Enforcement Actions—NFA

NFA Issues $200,000 Fine Against Forex Firm

NFA ordered Alpari US, an FCM and forex dealer member, to pay a $200,000 fine as a result of violations of several NFA requirements, including improperly cancelling forex trades and removing profits from customer accounts, failing to timely report trade data and other required information to NFA, failing to observe high standards of commercial honor, failing to comply with NFA’s Enhanced Supervisory Requirements, and failing to keep accurate records. The decision also found that Alpari and its principals failed to supervise. In addition to the $200,000 fine, Alpari is required to refund within 30 days to customers losses they incurred as a result of the price adjustments that Alpari made to their accounts in connection with an October 2011 “market event.”

In re Angus Jackson of Florida

NFA’s Appeals Committee affirmed a hearing panel's findings of violations and sanctions that it imposed on Angus Jackson of Florida, Martin Bedick and Michael Rose. NFA had issued a complaint charging the respondents with submitting false and misleading information to NFA, failing to uphold high standards of commercial honor and just and equitable principles of trade, doing business with a non-NFA member that was required to be registered, and allowing an unregistered individual to solicit customers. Bedick was suspended for seven years and permanently barred from acting as a principal of an NFA member. Rose was suspended for two years and permanently barred from acting as a principal of an NFA member. Angus Jackson was suspended acting as a principal of an NFA member for seven years.

In re Peregrine Financial Group and Peregrine Asset Management

In July, NFA took an emergency enforcement action against Peregrine Financial Group (PFG), an FCM, and Peregrine Asset Management (PAM), a CTA and CPO. NFA took the Member Responsibility Action in an effort to protect customers because PFG failed to demonstrate that it met capital requirements and segregated funds requirements. NFA also stated that it had reason to believe that PFG does not have sufficient assets to meet its obligations to its customers.

RETAIL FOREX—BROKER DEALERS

In August, the SEC asked for additional comments on its interim Rule 15b12-1T under the Securities Exchange Act of 1934, which allows a registered broker-dealer to engage in a retail forex business if the broker-dealer complies with the Securities Exchange Act of 1934 and the SEC’s rules. Rule 15b12-1T is designed to preserve the existing regulatory structure for broker-dealers while providing the SEC with an opportunity to receive comments and evaluate whether to prescribe additional rules and to further consider investor protection concerns as they affect the regulatory treatment of retail forex transactions by broker-dealers.

© 2022 ArentFox Schiff LLPNational Law Review, Volume II, Number 262
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