Bridging the Week by Gary DeWaal: January 25 – 29 and February 1, 2016 (Money Market Funds; Independent IBs; FERC Jurisdiction; Pre-Execution Communications)

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Published Date: January 31, 2016

Last week, one bank was successful in having a lawsuit against it dismissed alleging that it contributed to the demise of a futures commission merchant by prompting the FCM to invest customer funds in an ineligible investment. Also, the US Supreme Court upheld the authority of the Federal Energy Regulatory Commission to enact a regulation that encouraged wholesale market operators to pay electricity consumers not to use electricity during peak times. The Court held that, although these transactions impacted retail sales, they were not prohibited retail transactions within states' exclusive authority. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:


Compliance Weeds: Under law, CFTC-registered futures commission merchants may invest customer funds in certain government obligations. The CFTC expanded the list of permitted investments in 2000 to add money market funds among other authorized investments. However, investments in MMFs are subject to strict conditions, including that redemption requests must legally be honored by no later than the business day following a request. After the collapse of MF Global in October 2011, the CFTC restricted its previously expanded list of permissible investments of customer funds. Among other things, the version of the relevant rule now in effect precludes FCMs from investing customer funds in non-US government guaranteed corporate obligations and foreign sovereign securities, and engaging in repurchase transactions with affiliated companies. In addition, the revised rule imposes concentration limits for certain asset classes (e.g., the maximum percentage an FCM can hold of that asset type compared to its total customer funds held in segregation) and has strict issuer-based concentration limits. (Click here to access the current version of CFTC Rule 1.25.) The CFTC considers that its customer funds' investment requirements must be adhered to at all times and has already brought enforcement actions against FCMs for their failure to meticulously comply with its new post-MF Global requirements. (Click here for further information on the CFTC’s investment rule for customer funds in the article “CFTC Adopts Final Rule on Investment of Customer Funds” in the December 9, 2011 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP. Click here and here for prior editions of Bridging the Week containing articles related to CFTC enforcement actions against FCMs for not meeting new post-MF Global collapse customer funds’ investment requirements.)

Compliance Weeds: In general, for approved contracts, CME Group permits pre-execution communications to facilitate trading subject to strict requirements. Among these requirements are that the party on whose behalf a communication is being made previously must have consented to such communication and that no person involved in pre-trade communications may take advantage of information conveyed except to facilitate the relevant trade. Unfortunately, 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 varies. There are Globex Crosses, Agency Crosses, and RFQ and RFC Crosses – and now Committed Crosses too. 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. (Click here to access the article “CFTC Fines FirstRand Bank for Unlawful Pre-Execution Discussions Related to Soybean Futures Trades” in the September 1, 2014 edition of Bridging the Week.) Most simply, all non-competitive 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 January 2015) and here to access guidance with respect to executing cross orders on Nasdaq Futures, Inc.). The CME Group advisory notice that was issued in connection with its revised rule contains a very helpful matrix that sets forth the different types of cross-trade protocols that must be followed for futures and options and different products (click here to access).

And more briefly:

For more information, see:

Bank Wins Dismissal of Lawsuit Claiming It Misled FCM About the Appropriateness of an Investment for Customer Segregated Funds:

Amended Complaint:
MBF Complaint JPM.pdf
Motion to Dismiss:
MBF-JPM Brief Support Motion to Dismiss.pdf
MBF Decision JPM Motion to Dismiss.pdf

CME Group Updates Its Pre-Execution Communication Rule to Reflect New Committed Crosses:

Independent IB Agrees to Withdraw From Registration Following NFA Complaint That It Failed to Cooperate and Meet Minimum Financial Requirements:


NFA Updates NFA Regulatory Requirements Guidance:

Purposeful Large Non-Execution to Execution of Orders Ratio? — Speak to Your Lawyers Warns CFTC Chairman:

Six London LIBOR Traders Acquitted by UK Jury:

US Supreme Court Upholds FERC’s Jurisdiction to Take Actions That Impact Retail Electricity Sales:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of January 30, 2016. 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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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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