Commentaries

Bridging the Weeks by Gary DeWaal: December 21 – 31, 2015, and January 4, 2016 (MF Global; Blue Sheets; New Product Blues; Tag 50s; The Big Short)

Jump to: Bridging the Week    Compliance Weeds    My View    Totally Irrelevant (But Is It?)    Customer Protection    AML and Bribery    Exchanges and Clearing Houses    Cybersecurity    Uncleared Swaps    Cleared Swaps    APAC Regulation (sans Capital and Liquidity)    Blue Sheets    MF Global   
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Published Date: January 02, 2016

Happy New Year and welcome to 2016! Last year ended quietly at financial service industry regulators worldwide. In the United States, counsel for Jon Corzine and the Division of Enforcement of the Commodity Futures Trading Commission traded very different views over Mr. Corzine’s responsibility for the collapse of MF Global in 2011. Meanwhile, the Financial Industry Regulatory Authority sanctioned one broker-dealer US $2.95 million for allegedly submitting inaccurate blue sheets, and another, US $7.3 million for purportedly selling unregistered microcap stocks and anti-money laundering offenses in the face of red flags. I also reflect on the film The Big Short. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:

Former MF Global CEO Claims CFTC Charges Against Him Are Meritless.

Jon Corzine, former chief executive officer of MF Global Inc. (MFG), objected to a proposed motion for summary judgment to be filed by the Division of Enforcement of the Commodity Futures Trading Commission in its lawsuit against him and Edith O’Brien related to their alleged role in the collapse of MFG in October 2011, claiming that the CFTC “grossly mischaracterizes the evidence.”

The CFTC filed a civil lawsuit against Mr. Corzine and Ms. O’Brien—the assistant treasurer of MFG at the time of the firm’s collapse—as well as against MFG itself and its parent company, MF Global Holdings Ltd. (MFGH), in June 2013 in a federal court in New York. The firm—a CFTC-registered futures commission merchant prior to its collapse—filed for bankruptcy protection in October 2011 after using nearly one billion US dollars of customer-segregated funds to support its own proprietary positions.

The CFTC charged all four defendants with failing to segregate customer funds as required by law and for misusing customer funds. MFGH and Mr. Corzine were charged as controlling persons of MFG; Ms. O’Brien was charged with aiding and abetting MFG’s wrongful conduct; and MFG and Mr. Corzine were also charged with failure to supervise. MFG and MFGH subsequently settled the CFTC actions. (Click here to access the CFTC’s complaint.)

In a letter to the court dated December 16, 2015, informing it of its intent to file a motion for summary judgment, the CFTC’s Division of Enforcement claimed that there were “[u]ndisputed facts [that] reveal that Corzine failed to act in good faith to prevent [MFG’s] segregation violations and, further knowingly induced the violations.” Among other things, the CFTC alleged that “Corzine knew that one policy—one that was specifically designed to protect customer funds—was ignored and/or violated on multiple occasions.”

Responding in a letter to the court dated December 22, 2015, Mr. Corzine argued that he “never directed, authorized, or countenanced any violations of [relevant law or CFTC rules] by MF Global or any of its employees.” Moreover, he claimed he delegated responsibility for matters related to customer funds protection “to experienced and competent personnel in the finance, treasury, compliance and legal departments.”

No date was set for a hearing on this matter.

All customers of MFG were repaid all balances the FCM owed them. (Click here for details of this distribution in the article, “MF Global Inc. Trustee Announces Final 100% Distribution to Customers” in the April 7, 2014 edition of Bridging the Week.)

My View: Time will tell whether the CFTC possesses sufficient evidence to prove its case against Mr. Corzine, or whether, beforehand, the relevant judge will grant a Commission motion for summary judgment. However, more than four years after the collapse of MFG one thing is clear: in the face of potential material issues, regulators expect senior officers to do more than simply take a verbal or even a written assurance from subordinates that “all is well—don’t worry,” or, even worse, a vague response. Where there is a potential material breach of law, regulators expect the senior officers to take some purposeful or affirmative action to ensure themselves that representations by staff can be reasonably relied on. As David Meister, the then Director of the CFTC’s Division of Enforcement, said at the time of the filing of the agency’s enforcement action against MFG and Mr. Corzine, “ [t]urning a profit is not the only job of the person at the top of a CFTC-regulated firm. Particularly in times of crisis, the person in control, like the CEO here, must do what’s necessary to prevent unlawful uses of customer money, so that customers’ money is still there if and when the music stops.”

Briefly:

Compliance Weeds: Maintaining accurate books and records and producing accurate information to regulators is required both in the regulated securities and futures industries. Both the Securities and Exchange Commission’s and the Financial Industry Regulatory Authority’s rules require broker-dealers to provide trade data upon request. The SEC requires broker-dealers to submit “legible, true, complete and current” blue sheet data (click here and here to access SEC Rules 17a-4(j) and 17a-25, respectively), while FINRA has a similar obligation (click here and here to access FINRA Rules 8211 and 8213, respectively). The Commodity Futures Trading Commission has similar recordkeeping and production requirements for future commission merchants as well as other industry participants. (Click here and here to access CFTC rules 1.35 and 1.31, respectively.)

Compliance Weeds: The Haitong disciplinary action should remind non-member traders that they have express obligations when they access CME Group markets electronically, and could be held liable if they fail to fulfill their obligations. Among other things, each person entering orders manually or automatically into CME Globex must ensure that the order is accompanied by an operator identification known as a “Tag 50 ID.” This identification must be unique to the individual entering the order or, in the case of an automated trading system, the team of persons on the same shift responsible for the ATS’s operation. All Tag 50s must also be unique at the level of the clearing member firm. Only certain Tag 50s must be affirmatively registered with CME Group—those associated parties receiving preferential fees or those requested by Market Regulation or the Globex Control Center (typically when the participant generates significant messaging volume). Individuals and team members may not permit their unique Tag 50s to be used by other persons. (Click here for a CME Group summary of Tag 50 requirements, and here for access to relevant CME Group rules 576 and 536B2.) Other exchanges have equivalent requirements (e.g., ICE Futures U.S.; click here to access IFUS Rule 27.12(f)).

More briefly:

And finally:

For more information, see:

Broker-Dealer Agrees to FINRA Sanction of US $2.95 Million for Alleged Blue Sheet Failures; Another to Pay Almost US $13 Million for Mutual Fund Suitability Violations:

Barclays:
http://www.finra.org/sites/default/files/Barclays_AWC_122915.pdf
Macquarie:
http://www.finra.org/sites/default/files/Macquarie_AWC_122315.pdf

Broker-Dealer to Pay FINRA Almost US $7.3 Million to Resolve Claims It Sold Unregistered Microcap Shares and Committed AML Violations:
http://www.finra.org/sites/default/files/Cantor_AWC_122115.pdf

CFTC Chairman Blasts Congress and President for No Budget Increase:
http://www.cftc.gov/PressRoom/SpeechesTestimony/massadstatement122115

CFTC Seeks Comments on Technical Elements for Swap Reporting:
http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/specificationsswapdata122215.pdf

Former MF Global CEO Claims CFTC Charges Against Him Are Meritless:

CFTC Letter:
/ckfinder/userfiles/files/Corizine%20CFTC%20Motion%2012%2016.pdf
Corzine Letter:
/ckfinder/userfiles/files/Corzine%20Letter%2012%2022.pdf

HK OTC Clearinghouse Granted DCO Registration Exemption:
http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/otccleardcoexemptorder12-21-15.pdf

IOSCO Recommends Best Practices for Financial Markets and Intermediaries for Business Continuity:

Trading Venues:
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD522.pdf
Intermediaries:
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD523.pdf

Non-Member Trading Firm Settles Disciplinary Action With CME Group for Allegedly Self-Matching Orders and Not Using Unique Tag 50 IDs:

Abengoa:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CBOT-14-9831-BC-ABENGOA-BIOENERGY-OPERATIONS-LLC.html#pageNumber=1
ABN AMRO:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9528-BC-ABN-AMRO-CLEARING-CHICAGO-LLC.html
Benn:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9587-BC-2-AARON-BENN.html#pageNumber=1
Catalano:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9664-BC-4-FRANK-C-CATALANO.html#pageNumber=1
Haitong:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CBOT-14-9707-BC-HAITONG-INTERNATIONAL-FUTURES-LTD.html#pageNumber=1
Heynen:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9323-BC-2-DREW-HEYNEN.html#pageNumber=1 

Loftus:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CBOT-10-04523-BC-KEVIN-PATRICK-LOFTUS.html#pageNumber=1
McGrath:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9587-BC-CHRISTOPHER-MCGRATH.html#pageNumber=1
Taylor:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9665-BC-DAVID-EDWARD-TAYLOR.html#pageNumber=1

Weber:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-8664-BC-3-PATRICK-J-WEBER.html#pageNumber=1
Wharton:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-12-9055-BC-ROBERT-WHARTON.html
Zee:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9323-BC-1-RYAN-VAN-ZEE.html

SEFs Granted No-Action Relief by CFTC Staff From Post-Trade Recordkeeping Requirements for Allocations:
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-68.pdf

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of December 31, 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.

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ABOUT GARY DEWAAL

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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