Bridging the Week by Gary DeWaal: June 22 to 26 and 29, 2015 (Clawbacks, Third-Party Payments, Block Trades, Trade Allocations, Governance; Reg SCI)

Jump to: Block Trades and EFRPs    Bridging the Week    Compliance Weeds    Culture and Ethics    Customer Protection    Cybersecurity    Exchanges and Clearing Houses    Managed Money    My View    Systems and Controls   

Published Date: June 28, 2015

Material developments in the financial services industry worldwide appeared to take a pause last week, although regulators in the United Kingdom implemented tougher new rules on senior bankers’ deferred compensations and potential clawbacks. In addition, two FINRA actions reminded brokers of the hazards of permitting third-party wire transfers, while two ICE Futures exchanges updated their block trade guidance. As a result, the following matters are covered in this week’s Bridging the Week:

• UK Regulators Implement Tougher Pay Rules for Banking Institutions’ Senior Managers (includes My View);
• Broker-Dealers Cited by FINRA for Not Monitoring Transfers From Client Accounts to Third Parties (includes Compliance Weeds);
• ICE Futures Exchanges Update Block Trade Guidance;
• Because of Past Trade Allocation Issues, Registrant Can Operate Pools But Not Individual Managed Accounts Says NFA (includes Compliance Weeds);
• CFTC Commissioner Bowen Recommends Considering EMIR Governance Clearinghouse Standards for US DCOs, DCMs and SEFs;
• Monetary Authority of Singapore Sanctions SGX for Fall 2014 Market Outages;
• IOSCO Seeks Comments on Fees and Expenses for Collective Investment Vehicles;
• SEC Commissioner Recommends Applying Reg SCI to Brokers to Enhance Cybersecurity; and more.

Video Version:

Article Version:

Briefly:

• UK Regulators Implement Tougher Pay Rules for Banking Institutions’ Senior Managers: The United Kingdom Prudential Regulation Authority and Financial Conduct Authority have adopted new rules regarding the remuneration of senior managers at UK banking institutions. These rules address the potential clawback of paid variable remuneration and deferral of unpaid variable compensation (e.g., bonuses) for performance periods beginning January 1, 2016. The goal, claim the regulators, is to better align risk and individual reward in the banking sector and to encourage more effective risk management. Under the new rules, unpaid variable remuneration will now be paid over seven years for senior managers, five years for risk managers and three to five years for material risk-takers (e.g., traders), while a clawback of variable remuneration for misconduct may occur up to 10 years after payment for senior managers.

My View: I accept that imposing deferrals and potential clawbacks on senior executives' bonuses theoretically helps improve the compliance culture at firms by better aligning compensation with risks. However, when the period of time for deferrals and potential clawbacks is too great it causes an implicit discount of potential compensation in the minds of recipients that disrupts the alignment. Potential compensation too far in the future that is effectively written off immediately is not likely to serve as an inducement to better behavior today. The durations imposed by the UK regulators are likely too long to influence behavior in the manner contemplated.

• Broker-Dealers Cited by FINRA for Not Monitoring Transfers From Client Accounts to Third Parties: Two broker-dealers were fined a total of US $950,000 by the Financial Industry Regulatory Authority for not adequately monitoring the handling of wire transfers from customer accounts to third parties. In connection with one broker-dealer, Scottrade, Inc., FINRA charged that, from October 2011 to October 2013, the firm failed to have any procedures that required customer confirmations for third-party wire transfers of less than US $200,000, and did not obtain customer approval through a supervisor who was not a producing manager, as required, when there were third-party wire transfers between US $200,000 and $500,000. During the relevant time the firm processed over 17,000 third-party wire transfers involving more than US $880 million. In 2011, FINRA cautioned Scottrade regarding its “deficient supervision” of third-party wire transfers. However, Scottrade did not upgrade its procedures, claimed FINRA, until October 2013. Scottrade settled its current FINRA disciplinary action without admitting or denying any findings by payment of a US $300,000 fine.

Compliance Weeds: Futures and securities brokerage firms should have rigorous procedures regarding the acceptance of funds from, or transmission of funds to, third parties not in the names of the accounts on their books – even if controlled by the same beneficial owner. Moreover, movement of funds and/or positions from one account to an account of a different beneficial owner – even at the same broker-dealer or futures commission merchant – other than for documented errors (and subject to non-production management sign-off) should be strictly proscribed.

• ICE Futures Exchanges Update Block Trade Guidance: Both ICE Futures U.S. and ICE Futures Europe have updated their policies regarding block trades. In general, block trades are permitted off-exchange transactions between eligible contract participants (in the United States) at specified times involving certain prescribed minimum quantities of designated futures and options contracts. Block trades on the two ICE Futures exchanges must be executed at prices that are fair and reasonable at the time, be reported accurately within prescribed time frames, and comply with certain record preparation and retention requirements (e.g., all order tickets must reflect that the transaction may be executed as a block trade). Block trades may be executed between accounts of affiliated persons provided the price is a fair and reasonable market price, each party has a separate and independent legal business purpose for entering into the trade and each party’s decision to enter into a block trade was made by a separate and independent person. There are strict requirements for revealing certain customer information in connection with block trades. Front running or pre-positioning in connection with block trades is not permitted. ICE Futures U.S. issued frequently asked questions regarding block trades on June 19, while ICE Futures Europe issued guidance last week.
   
• Because of Past Trade Allocation Issues, Registrant Can Operate Pools But Not Individual Managed Accounts Says NFA: The National Futures Association settled charges brought in June 2014 against The Barbashop LLC (TBL), a commodity trading advisor, for materially misreporting and overstating assets under management, and against TBL and Ronald Barba, the sole owner and president of TBL, for failing to supervise TBL’s activities. NFA also settled charges against TBL for not maintaining required records of bunched orders, not having adequate bunched orders office procedures, and not adequately reviewing TBL’s bunched orders procedures and customer accounts on a quarterly basis, as mandated by NFA requirements. TBL and Mr. Barba resolved this matter by paying a total fine of US $50,000 (for which they are jointly responsible), and agreeing to certain registration restrictions going forward: within 30 days, TBL, Mr. Barba or both will register as a commodity pool operator; while an NFA member, TBL will only operate as a CPO, futures commission merchant or introducing broker (but not a CTA); and while an NFA associate, Mr. Barba will only act as an associated person and/or principal of TBL, or another CPO, IB or FCM (but not a CTA). In addition, TBL and Mr. Barba agreed to other sanctions, including that neither will engage in post-execution allocations while operating as a CPO.

Compliance Weeds: Ordinarily, when placing orders on behalf of multiple accounts, account managers must provide a futures commission merchant with information at or before the time an order is placed, which identifies the number of contracts to be allocated to each account. However, certain eligible account managers, including registered commodity trading advisors, futures commission merchants and introducing brokers may place bunched orders for multiple accounts and allocate filled orders to individual accounts after execution, as long as prior to the end of the trading day. However, all trades must be allocated in a fair and equitable manner “so that no account or group of accounts consistently receives favorable or unfavorable treatment over time.” Allocation procedures must be capable “to permit independent verification of the fairness of allocations over time,” and an account manager must analyze each of its trading programs at least once a quarter to ensure that its allocation method was fair and equitable. Other conditions also apply. FCMs executing or clearing customer accounts for account managers who engage in post-trade allocations must monitor for “unusual allocation activity.” If an FCM has actual or constructive knowledge that allocation activity is fraudulent, it “must take appropriate activity.” NFA recognizes, however, that an FCM’s ability to monitor trading is a function of the amount of information it has. For example, an FCM that executes and clears for a customer will have more information than an FCM that either executes or clears. FCMs also have certain recordkeeping obligations in connection with post-execution allocation accounts. (Click here for additional details in NFA’s Interpretive Notice 9029 (2014): The Allocation of Bunched Orders for Multiple Accounts.)

• CFTC Commissioner Bowen Recommends Considering EMIR Governance Clearinghouse Standards for US DCOs, DCMs and SEFs: Commissioner Sharon Bowen of the Commodity Futures Trading Commission again called for finalizing rules on the governance of US designated contract markets, swap execution facilities and derivatives clearing organizations proposed by the CFTC in October 2010. (Click here to see Ms. Bowen’s prior comments on this subject in the article “CFTC Commissioner Bowen Says It’s Time to Consider DCO, DCM and SEF Governance” in the May 10, 2015 edition of Bridging the Week.) Among other things, Ms. Bowen advocated not only having qualitative standards regarding the number of board directors that must be public directors (e.g., the lesser of at least 35 percent or two persons), “but a holistic review of the board’s independence at regular intervals.” Ms. Bowen also suggested that governance rules for DCMs, SEFs and DCOs in the United States might borrow from regulations governing clearinghouses under the European Markets Infrastructure Regulation. Specifically, Ms. Bowen claimed that EMIR’s requirement that a clearinghouse “have robust governance arrangements, which include a clear organizational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks to which it is or might be exposed, and adequate internal control mechanisms, including sound administrative and accounting procedures” could be generally adopted by the CFTC for DCMs, SEFs and DCOs. Commissioner Bowen issued her views before the Quadrilateral Meeting of the European Central Bank on June 24, 2015.
   
• Monetary Authority of Singapore Sanctions SGX for Fall 2014 Market Outages: The Monetary Authority of Singapore reprimanded the Singapore Exchange over market outages on November 5 and December 3, 2014. On November 5, SGX sustained a multiple hour trading suspension due to a power supply problem during the afternoon; while on December 3, a software problem caused a delayed market open. According to MAS, although “SGX met its primary obligation as an exchange to maintain fair, orderly and transparent markets, it has fallen below service standards on both incidents.” In connection with the November 5 incident, MAS found that SGX was not able to recover some of its critical systems within a four-hour window mandated by MAS because SGX’s monitoring systems “were not able to identify problems quickly in order for prompt remedial actions to be taken.” In connection with the December 3 event, “the time taken to escalate and troubleshoot the errors fell short of expectations,” said MAS. Until SGX implements improvements, it will be not permitted to increase fees for securities and derivatives markets. SGX also agreed to contribute Singapore $1 million (approximately US $741,000) to its investor education fund.
   
• IOSCO Seeks Comments on Fees and Expenses for Collective Investment Vehicles: The International Organization of Securities Commissions is seeking comments on fees and expenses typically charged by collective investment schemes, disclosures regarding such fees and expenses, and proposed standards of good practice. Among other things, IOSCO recommends that regulators may decide to specify fees and expenses that may not be deducted from the assets of a CIS; CIS operators should design calculation methods for performance fees that are “proportionate to the investment performance of the fund;” and fees and expenses should be described in “easy-to-understand and summarized information” to investors. IOSCO also recommends that, in order to manage potential CIS operators’ conflict of interests, regulators should adopt rules regarding the types of goods and services that may and should not be paid for directly or indirectly as a result of commission payments by CISs. (e.g., so-called “soft-dollar” arrangements). All comments are due by close of business on September 23, 2015.
   
• SEC Commissioner Recommends Applying Reg SCI to Brokers to Enhance Cybersecurity: Securities and Exchange Commissioner Luis Aguilar said extending the reach of Regulation SCI to broker-dealers, over-the-counter market makers and transfer agents should be a “top priority” of the Commission, in order to help protect such entities against cyber attacks. Regulation SCI, adopted by the SEC during November 2014 (with a compliance date generally as of November 3, 2015), aims to improve the resiliency of the technological backbone of US securities markets and the SEC’s oversight of such infrastructures. (Click here to access additional details in the article “SEC Adopts New Rules to Beef-up Technology Backbone of Securities Markets” in the November 23, 2014 edition of Bridging the Week.) According to Mr. Aguilar, “Reg SCI will require certain key market participants, such as stock exchanges, to implement a robust set of cybersecurity protocols to ensure that their systems are secure from cyber attacks, and are also sufficiently resilient to recover should an attack succeed.” Mr. Aguilar argued that other registrants also should be required to adopt the mandatory requirements of Reg SCI to enhance their cybersecurity protections. He offered his suggestion during the SINET Innovation Summit on June 25, 2015. (Click here for an overview of current legal developments regarding cybersecurity in the financial services industry in the June 24, 2015 Client Advisory entitled “Cyber-Attacks: Threats, Regulatory Reaction and Practical Proactive Measures to Help Avoid Risks” by Katten Muchin Rosenman LLP.)

And even more briefly:

• Moody’s Proposes Standardized Rating Methodology for Clearinghouses: Moody’s Investors Service is proposing a standardized methodology to rate clearinghouses globally. It will accept comments on its proposed methodology until August 21, 2015.
   
• CFTC to Host Made Available to Trade Roundtable: The Commodity Futures Trading Commission will host a public roundtable on the process to require certain swaps to be mandatorily traded on swap execution facilities or designated contract markets on July 15, 2015, at the CFTC’s offices in Washington, DC, from 10 a.m. to 2 p.m. CFTC Commissioner J. Christopher Giancarlo roundly criticized the MAT process and other aspects of rules governing swap execution facilities in a white paper published in January 2015. (Click here for a summary of the white paper in the article “CFTC Commissioner Laments Flawed US Swaps Trading Model” in the February 1, 2015 edition of Bridging the Week.)
   
• FINRA Proposes to Decrease Delay in Publishing Historical Trade Data: The Financial Industry Regulatory Authority proposes to publicly release historical information captured by its Trade Reporting and Compliance Engine (TRACE) regarding transactions in certain fixed income securities sooner rather than later. Currently TRACE information is released after 18 months. FINRA proposes to release such information after six months. Comments are due by August 24, 2015.
   
• NFA Proposes to Change Makeup of Board of Directors: The National Futures Association submitted to the Commodity Futures Trading Commission for its approval amendments to its Articles of Incorporation that will change the makeup of its board of directors. Among other things, if approved, the board will reduce to four persons the number of representatives of commodity pool operators and commodity trading advisers (a decrease of one from the current five), one of whom is a CTA or CPO ranked within the top 5 percent of funds under management allocated to futures and swaps, and another who is ranked within the top 10 percent. Overall, the number of board members will decline from 35 to 29, including a reduction in public directors from 11 to 10. NFA proposes to make the changes effective February 2016. NFA’s board approved these changes in May 2015.
   
• Leap Second Is Here: An additional second will be added on June 30 to account for the irregular rate of rotation of Earth. This will occur between 23:59:60 on June 30 and 00:00:00 on July 1, Coordinated Universal Time, which corresponds to different local times worldwide (i.e., 19:59:59 in New York and 00:59:59 in London). As a result, this event will occur at active trading times between Tuesday and Wednesday worldwide, and may impact brokerage firms, exchanges and clearinghouses. In response, many exchanges have announced special procedures or recommendations, and the Futures Industry Association has published specific guidance for this unusual event (click here to access). (Click here for additional information in the article “Leap Second Is Coming June 30; Are You Ready?” in the June 7, 2015 edition of Bridging the Week.)

For more information, see:

Because of Past Trade Allocation Issues, Registrant Can Operate Pools But Not Individual Managed Accounts Says NFA:

Complaint:
http://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=3967
Settlement:
http://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=4198

Broker-Dealers Cited by FINRA for Not Monitoring Transfers From Client Accounts to Third Parties:
http://disciplinaryactions.finra.org/Search/ViewDocument/54140

CFTC Commissioner Bowen Recommends Considering EMIR Governance Clearinghouse Standards for US DCMs and SEFs:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-5#SpTeMBL

CFTC to Host Made Available to Trade Roundtable:
http://www.cftc.gov/PressRoom/PressReleases/pr7190-15

FINRA Proposes to Decrease Delay in Publishing Historical Trade Data:
http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory_Notice_15-24.pdf

ICE Futures Exchanges Update Block Trade Guidance:

ICE Futures Europe Guidance:
https://www.theice.com/publicdocs/circulars/15134_attach.pdf

ICE Futures U.S. FAQs:
https://www.theice.com/publicdocs/futures_us/exchange_notices/Block_Trade_FAQ.pdf

IOSCO Seeks Comments on Fees and Expenses for Collective Investment Vehicles:
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD491.pdf

Leap Second Is Here:

FIA:
https://fia.org/articles/fia-market-technology-division-releases-leap-second-recommendations

See also sample exchange notifications:
ICE Futures U.S.:
https://www.theice.com/publicdocs/futures_us/exchange_notices/ExNot060115LeapSecond062615.pdf?spMailingID=11740268&spUserID=NzgyODY3MDk5NjYS1&spJobID=561895624&spReportId=NTYxODk1NjI0S0
ICE Futures Europe:
https://www.theice.com/publicdocs/circulars/15133.pdf

Moody’s Proposes Standardized Rating Methodology for Clearinghouses:
https://www.moodys.com/research/Moodys-proposes-a-clearing-house-global-rating-methodology--PR_328529

Monetary Authority of Singapore Sanctions SGX for Fall 2014 Market Outages:
http://www.mas.gov.sg/news-and-publications/media-releases/2015/mas-reprimands-sgx-for-market-outages.aspx

NFA Proposes to Change Makeup of Board of Directors:
http://www.nfa.futures.org/news/PDF/CFTC/Articles_BoardStructureComposition_May2015.pdf

SEC Commissioner Recommends Applying Reg SCI to Brokers to Enhance Cybersecurity:
http://www.sec.gov/news/speech/threefold-cord-challenge-of-cyber-crime.html

UK Regulators Implement Tougher Pay Rules for  Banking Institutions’ Senior Managers:

Policy Statement:
http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps1215.pdf
Supervisory Statement:
http://www.bankofengland.co.uk/pra/Documents/publications/ss/2015/ss2715.pdf

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of June 27, 2015. 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 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.

Recent Commentaries

• Between Bridges Gary DeWaal: May 4, 2020 (Block Trades; EFRPs, Wash Trades; GSCs; CBDCs; Privacy Violations; Misrepresentations by IAs)
• Between Bridges Gary DeWaal: April 13, 2020 (Morphing Futures Contract; Transforming Digital Assets; Blue Sheets)
• Between Bridges by Gary DeWaal: March 30, 2020 (Unregistered Digital Securities Offering; Risk Management Breakdown; COVID-19)

Categories

• Alternative Trading Systems
• AML and Bribery
• Antitrust
• APAC Regulation (sans Capital and Liquidity)
• Arts and Science
• Attorney-Client Privilege
• Audits and Accounting
• Automated Trading Systems and Connectivity
• Background
• Bankruptcy
• Between Bridges
• Bitcoin Ecosystem
• Block Trades and EFRPs
• Blue Sheets
• Books and Records
• Brexit
• Bridging the Week
• Bunched Orders/Trade Allocations
• Business Continuity Disaster Recovery Planning
• Canadian Regulation (sans Capital and Liquidity)
• Capital and Liquidity
• Central and South American Regulation (sans Capital and Liquidity)
• Central Bank Digital Currency
• Chief Compliance Officers
• China Developments
• Cleared Swaps
• Commissions and Fees
• Commodity Pool Operators
• Compliance Weeds
• Consolidated Audit Trail (CAT)
• COVID-19
• Credit and Risk
• Cryptosecurities
• Culture and Ethics
• Customer Protection
• Cybersecurity
• Dark Pools and Internalization
• Did You Know?
• EMEA Regulation (sans Capital and Liquidity and UK after March 1, 2019)
• Employers and Employees
• Environmental, Social and Governance
• Equity Securities
• Exchanges and Clearing Houses
• Federal Energy Regulatory Commission
• FinTech
• Fixed Income Securities
• Follow-Up
• Foreign Corrupt Practices Act
• Forum Selection
• Fraud and Anti-Fraud
• Getting the Business Done
• Gifts and Entertainment
• Guest Commentary
• Hard to Believe
• High Frequency Trading
• Initial Public Offerings Including Private Placements
• Insider Trading
• Introducing Brokers
• Investment Advisers
• Legal Weeds
• Letters to the Editor
• Managed Money
• Manipulation
• Margin
• Market Abuse
• Market Structure
• Memory Lane
• MF Global
• Money Service Business and Money Transmission
• My View
• News Developments
• Non-Competitive Transactions (sans Block Trades and EFRPs)
• Off-Exchange Products (Retail Clients sans Retail Forex)
• Omnibus Accounts
• Part 30 and 15a-6
• Policy and Politics
• Position and Trade Reporting
• Position Limits
• Position Transfers
• Privacy
• Proficiency and Testing
• Random Observations
• Reg SHO
• Registration
• Regulation AT
• Regulation Best Interest
• Regulation MAR
• Retail Forex and Metals
• Sales Practices
• Security Futures
• Stablecoins
• Supervision
• Swap Dealers
• Systems and Controls
• Taxes
• Technological Innovations
• Totally Irrelevant (But Is It?)
• Trade Practices (including Disruptive Trading)
• UK Regulation (sans Liquidity and Capital)
• Uncleared Swaps
• Valuable Lessons Learned
• Volcker Rule
• Whistleblowing

Archives

• May 2020
• April 2020
• March 2020
• February 2020
• January 2020
• December 2019
• All archives in 2020
• All archives in 2019
• All archives in 2018
• All archives in 2017
• All archives in 2016
• All archives in 2015
• All archives in 2014