Commentaries

Bridging the Week by Gary DeWaal: February 8–12 and 16, 2016 (Cross-Border Security Swaps; London Whale; Transatlantic Accord; Spoofing; MiFID II Delay; MF Global; Cybersecurity)

Jump to: Bridging the Week    Compliance Weeds    My View    Managed Money    Block Trades and EFRPs    Customer Protection    Exchanges and Clearing Houses    Position Limits    Cybersecurity    Credit and Risk    Uncleared Swaps    Supervision    EMEA Regulation (sans Capital and Liquidity)    Fraud and Anti-Fraud    MF Global   
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Published Date: February 14, 2016

International developments dominated regulatory news involving the financial services industry last week. The European Commission and the Commodity Futures Trading Commission finally inked a deal to recognize clearinghouses under each other’s oversight as subject to equivalent regulation, while the EC formally proposed to delay for one year the roll-out of MiFID II. In addition, the head of the investment office that housed the so-called “London Whale” agreed to settle charges with the Financial Conduct Authority for his alleged lack of forthrightness with the regulator in early 2012. Finally, MF Global Inc., whose sudden collapse rocked the futures industry in Fall 2011, effectively shut its doors for good when the US federal judge overseeing its liquidation formally closed the firm’s estate and ended its liquidation proceeding. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:

Briefly:

Compliance Weeds: Block trade reporting rules are specific by exchange, and can vary by product and time. On CME Group block trade reporting obligations for principal transactions lie with the seller unless agreed otherwise by the parties to the transaction. For brokered transactions, the reporting obligation lies with the broker unless agreed by the principal counterparties to the trade. (Click here for details regarding the reporting of block trades on CME Group (see Item 9: “Block Trade Price Reporting Requirements”) and here for details regarding the reporting of block trades on ICE Futures U.S. (see Q&A 9: “What are the reporting requirements for block trades).)

My View: The resolution of the debate between the European Commission and the Commodity Futures Trading Commission over the equivalency of regulation of clearinghouses has taken far too long. However, both Jonathan Hill, the EC Commissioner for Financial Stability, Financial Services and Capital Markets Union, and Timothy Massad, CFTC Chairman, must be credited for finally ending this too drawn-out ordeal. As J. Christopher Giancarlo, another CFTC Commissioner recently wrote, the discord “was triggered by the previous CFTC administration acting unilaterally to impose US-trading requirements on participants in overseas markets and on non-US participants in American markets. …European regulators rightly viewed these requirements as a massive regulatory overreach.” It can only be hoped that this new accord will be a harbinger of greater coordination and cooperation between the EC and the CFTC built on respect and reliance for comparable if not equivalent regulation in different jurisdictions. Safe and liquid global markets will not exist if each global regulator seeks to impose its rules not only on transactions within its borders, but on extraterritorial transactions too.

Compliance Weeds: National Futures Association’s requirement for members to adopt and enforce a written information security program applies to all members no matter what size. Although the contents of an ISSP will likely vary greatly from member to member, it must be “reasonably designed to provide safeguards, appropriate to the Member's size, complexity of operations, type of customers and counterparties, the sensitivity of the data accessible within its systems, and its electronic interconnectivity with other entities, to protect against security threats or hazards to their technology systems.” NFA’s interpretive notice regarding ISSPs sets forth what must be addressed in each written ISSP (click here to access), and the NFA has also posted on its website additional materials, including an audio recording, to help members comply with their requirements by March 1 (click here to access). Members that are part of larger holding company structures may rely on a consolidated group-wide ISSP. However, such group-wide ISSP must be appropriate to the NFA member’s security risks, and must be maintained in a readable and accessible manner that can be produced, upon request, to the NFA or the Commodity Futures Trading Commission.

And more briefly:

Compliance Weeds: In the middle of its formal budget submission to Congress (page 19), the Commodity Futures Trading Commission noted that “[s]taff has also been conducting [future commission merchant] compliance reviews regarding Regulation 1.73, which requires FCMs to conduct screening of orders, to stress test customers and proprietary positions, to evaluate their ability to meet initial margin requirement and make variation margin payments, and to evaluate their ability to liquidate positions quickly.” Under the CFTC rule, FCMs are required to formally establish and maintain written procedures to comply with CFTC Rule 1.73 (click here to access a copy of the rule). The beginning of the year is a good time to double check that these procedures are sufficiently robust and reflect actual firm practices. It is never helpful to have written procedures that contradict day-to-day practices.

Compliance Weeds: The Commodity Futures Trading Commission’s relief granted to certain members of the Korea Exchange only relates to such members’ transactions in futures and options on futures traded on KRX. The relief does not apply to members transacting in options on securities such as the Kospi 200 index options that do not reference a futures contract.

For more information, see:

CFTC Staff Grants No Action to Non-US IBs, CTAs and CPOs for Activities Involving Non-Mandated to Be Cleared Swaps for Non-US Persons:
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/16-08.pdf

CFTC Requests FDY 2017 Budget Increase of US $80 Million and 183 More Full-Time Staff:
http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcbudget2017.pdf

See also Timothy Massad’s Testimony before the US House Committee on Agriculture:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-41

CFTC TAC to Discuss Regulation AT Rescheduled for February 24; EMAC to consider Swap Dealer De Minimis Exception Two Days Later:
http://www.cftc.gov/PressRoom/PressReleases/pr7324-16
http://www.cftc.gov/PressRoom/PressReleases/pr7325-16

CME Group Sanctions Members and Non-Members for Block Trades, EFRPs and Position Limits Infractions:

BNP Paribas:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-15-0210-BC-2-BNP-PARIBAS-ENERGY-TRADING-GP.html#pageNumber=1
CHS Inc.:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-15-0210-BC-1-CHS-INC.html#pageNumber=1
Fednav International:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-14-0037-BC-FEDNAV-INTERNATIONAL-LIMITED.html#pageNumber=1
TFS Derivatives:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-13-9263-BC-2-TFS-DERIVATIVES-CORP.html#pageNumber=1
TFS Energy:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/NYMEX-13-9263-BC-1-TFS-ENERGY-FUTURES-LLC.html#pageNumber=1
Zhou Peng:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/COMEX-14-0043-BC-ZHOU-PENG.html#pageNumber=1

Common Approach to Transatlantic CCPs Finally Agreed by EC and CFTC:
http://www.cftc.gov/idc/groups/public/@newsroom/documents/speechandtestimony/eu_cftcstatement.pdf

See also Commissioner Statements:
http://www.cftc.gov/PressRoom/SpeechesTestimony/massadstatement021016
http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement021016
ESMA Statement:
https://www.esma.europa.eu/press-news/esma-news/esma-resumes-us-ccp-recognition-process-following-eu-us-agreement

Defendants in Pending Alleged Spoofing Case Told by CFTC Evidence Might Be Expanded to Include New February 2016 Conduct:
/ckfinder/userfiles/files/CFTC%20v%203Red%20Evidence%20Expansion%20Motion.pdf

EC Formally Proposes Delaying MiFID II Rollout For One Year:
http://europa.eu/rapid/press-release_IP-16-265_en.htm

See also, Proposed European Parliament and Council Directive:
http://ec.europa.eu/finance/securities/docs/isd/mifid/160210-directive-amending-mifid_en.pdf

FCA and PRA Propose Formal Complaints Against the Regulator Regime:
http://www.fca.org.uk/static/documents/consultation-papers/cp16-06.pdf

Korean Exchange Members Authorized by CFTC to Deal with US Persons for KRX Futures Contracts:
http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister020816.pdf

Manager of Investment Office Housing London Whale Fined Equivalent of More Than US $1.1 Million by Financial Conduct Authority for Lack of Forthrightness:
http://www.fca.org.uk/static/fca/documents/final-notices/achilles-macris.pdf

MF Global Inc. Estate Resolution Totally Wrapped-Up:
/ckfinder/userfiles/files/MF%20Global%20Estate%20Closing.pdf

NFA Reminds Members of March 1 Compliance Date for Cybersecurity Written Policies and Procedures:
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4690

Overseas Entities: Count US-Arranged Security-Based Swaps in Security-Based Swap Dealer Calculation Says SEC:

Fact Sheet:
http://www.sec.gov/news/pressrelease/2016-27.html
Final Rules:
http://www.sec.gov/rules/final/2016/34-77104.pdf

Principals of Former Precious Metals Dealer Agree to Settlement With CFTC Over Alleged Illegal Sales to Retail Customers:
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfvandivier020516.pdf

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of February 13, 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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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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