Bridging the Week by Gary DeWaal: November 24 to 28 and December 1, 2014 (CME Group Report Cards; Cross-Border Regulation; CCP Recovery; Spec Limits and EFRP Fines; Edge of Eternity)

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Published Date: November 30, 2014

Last week was an abbreviated work week in the United States for many, but it did not stop the Commodity Futures Trading Commission from issuing some report cards to CME Group exchanges, or from the Securities and Exchange Commission from sanctioning two firms each more than US $10 million: one for issues related to the dissemination of equity research and the other for acting in an unregistered capacity. Moreover, an organization of international regulators published a thought piece on issues related to cross-border regulation, and I review Ken Follet’s newest novel, Edge of Eternity.

As a result, the following matters are covered in this week’s Bridging the Week:

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Article Version:

CFTC Issues CME Group Report Card: Scores Generally Good But NYMEX and COMEX Directed to Continue to Enhance Spoofing Surveillance

The Chicago Mercantile Exchange Group found early presents under its Christmas tree this year in the form of reasonably favorable rule enforcement reviews by the Commodity Futures Trading Commission’s Division of Market Oversight.

CFTC staff examined the enforcement of audit trail requirements by the Chicago Board of Trade and the CME, trade practice requirements by the New York Mercantile Exchange and The Commodity Exchange, and the disciplinary program of all four CME Group entities.

The CFTC staff found that the CME Group exchanges generally complied with all core principles relevant to the specific reviews. CFTC staff recommended, however, that the CBOT and CME design and implement a procedure to “review and enforce” at least annually the exchanges’ process to assign a unique identifier—known as a “Tag 50”—to individual automated trading system operators or teams, and to increase the minimum summary fines relevant to audit trail deficiencies “to defer recidivist behavior;” that NYMEX and COMEX “continue” to enhance their capability to identify spoofing; and that all CME Group exchanges “ensure that internal deliberations do not interfere with the prompt resolution of disciplinary matters.” CFTC staff, in one of the reports, discussed seven matters at CBOT and two at CME that apparently were delayed because of “protracted deliberations” among senior management regarding the exchanges’ pre-hedging rules applicable to block trades.

Just a few weeks ago, CME Group brought and settled over 20 disciplinary actions for payment of fines between US $400 and $5,000 for violations of its requirements related to Tag 50. (Click here for further details in the article “CME Brings Over 20 Disciplinary Actions for Incorrectly Identifying Globex Terminal Operators” in the October 27 to 31 and November 3, 2014 edition of Bridging the Week.)

Compliance Weeds: After the Commodity Futures Trading Commission issued an August 2013 rule enforcement review of CME Group related to its market surveillance and encouraged it to enhance its monitoring of exchange for related positions transactions, CME Group banned transitory EFRPs and brought and settled numerous disciplinary actions involving EFRPs. (Click here to access the article “CME Publicizes a Plethora of EFRP Fines Involving Incomplete Documentation, Late Submissions and Improper Parties,” in the February 24, 2014 edition of what is now known as Between Bridges). Just a few weeks ago, CME Group brought over 20 cases related to Tag 50 infractions—just a short time before the CFTC issued its current report card encouraging CBOT and CME to enhance its summary fines around these identifiers. The CFTC has also asked NYMEX and COMEX to enhance their monitoring of spoofing. Accordingly, it appears timely for trading organizations to update and enforce their internal procedures related to potential disruptive trading practices—if not already done by now. (Click here for details regarding the CME Group’s new rule (Rule 575) prohibiting spoofing and other disruptive trading practices in the article “CME Group Issues New Rule Regarding Disruptive Trading Practices” in the September 4, 2014 edition of Between Bridges.)

IOSCO Consults on Cross-Border Regulation

The International Organization of Securities Commissions published a consultation report discussing different theoretical approaches to cross-border regulation, evaluating such approaches, and ruminating regarding the challenges and opportunities for greater cross-border regulatory cooperation. Analysis in the report derived from an IOSCO member survey from October 2013 to April 2014.

IOSCO is an international body that brings together most of the world’s principal securities regulators. Currently, the organization estimates that its members regulate more than 95% of the world’s securities markets. Its members include over 120 securities regulators and 80 other securities market participants, including exchanges.

In the first instance, IOSCO identified three principal approaches to cross-border regulation: (1) national treatment—meaning the application of applicable rules generally the same to both domestic and foreign persons; (2) recognition—meaning that a domestic regulator relies on a foreign jurisdiction’s regulatory scheme because it assesses that it is “sufficiently comparable; and (3) passporting—meaning that a single jurisdiction’s authorization is satisfactory to permit activities in other jurisdictions.

According to IOSCO, jurisdictions using national treatment do so typically to maintain “a high level of investor protection, maintain market integrity and reduce systemic risks by ensuring that all entities and their activities within a particular market are subject to the direct oversight of the local regulator of that market.” Some survey respondents claimed that this method of regulation helps smaller jurisdictions compete with larger jurisdictions. This is because,

…national treatment does not require the host regulator to conduct an assessment of a regulatory regime that applies to a foreign entity in its home jurisdiction or to issue any type of determination with respect to that regime, there is less of a risk that participants from smaller markets would be excluded by virtue of the fact that authorities would target evaluations of foreign regulatory regimes toward larger and more sophisticated markets which, regardless of any lack of discriminatory intent, could have a discriminatory impact.

Survey respondents using the recognition approach, however, claimed they did so because it improved capital flows and domestic market access to oversee environments; attracted foreign investment to the domestic market; helped ensure adequate investor protection, maintain market integrity and reduce regulatory arbitrage where foreign services, products and market structures were accessible by domestic persons; and enhanced ties with foreign regulators.

The IOSCO survey provided insight into some practical obstacles inhibiting the recognition approach. These included limitations on “human or other resources” necessary to evaluate foreign regulatory regimes; insufficient knowledge and expertise to assess foreign regulatory regimes—particularly when there may be constant changes and language barriers; and regulatory gaps due to differences in basic frameworks and concepts.

Ultimately, claimed IOSCO, the decision on approach will depend on the type of activity and perceived risk; the “robustness and effectiveness” of the foreign regime; and an assessment of the costs and benefits to regulators and markets.

To help promote international cooperation, some survey participants recommended that IOSCO enhance international dialogue between policy makers and regulators in different jurisdictions; provide a “central hub” for information; develop guidelines for assessing different regulatory regimes; and increase the granularity of IOSCO’s own standards and principles, among other measures.

Comments to IOSCO’s consultative report will be accepted through February 23, 2015.

And briefly:

Compliance Weeds: Repeatedly, exchanges are requiring disgorgement of profits as part of a sanction related to a speculative limit violation. Here the majority of Deutsche Bank’s sanctions by ICE Futures US was repayment of trading profits. This is consistent with a prior action by the same exchange also involving a speculative limit violation earlier this year. (Click here to access the article “ICE Futures U.S. Sanctions Energy Fund for Alleged Position Limit Violations” in the August 11 to 15 and 18, 2014 edition of Bridging the Week.) The Chicago Mercantile Exchange Group has likewise required disgorgement in connection with speculative limit violations. (Click here to access the article “CFTC and CME Bring and Settle Actions for Speculative Position Limit Violations; One CME Action Is for an Intra-day Violation.” In the April 28 to May 2 and May 5, 2014 edition of Bridging the Week.)

And even more briefly:

And finally:

For more information, see:

Canadian Securities Regulators Propose Adoption of International Standards for Clearing Agencies:

CFTC Issues CME Group Report Card: Scores Generally Good But NYMEX and COMEX Directed to Continue to Enhance Spoofing Surveillance:

CFTC Staff Grants CTA Registration Relief to Family Offices Trading for Family Clients:

Citigroup Unit Sanctioned US $15 Million by FINRA for Equity Research Dissemination Practices:

See also:
Massachusetts 2012 Action:
Massachusetts 2013 Action:

Deutsche Bank Sanctioned Almost $200,000 by ICE Futures U.S. For One-Time Speculative Limit Violation; CME Group Fines Three Firms For Documentation Issues Related to EFRPs:


FIA Updates Guide to Customer Fund Protections:

Hong Kong SFC and HKMA Announce Conclusions on Reporting and Record Keeping Related to OTC Derivatives:

HSBC Swiss Private Banking Unit Penalized US $12.5 Million by SEC for Providing Services to US Clients While Being Unregistered:

IOSCO Consults on Cross-Border Regulation:

ISDA Issues Principles for CCP Recovery:

SEC Sues Former Principals of Sanctioned Broker-Dealer for Causing Firm Not to Pay Agreed-Upon Fine:

Treasury Entities Entering Into Swaps for Non-Financial Affiliates Extended Further Relief by CFTC from Swaps Clearing Requirement:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of November 29, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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