Bridging the Week by Gary DeWaal: June 26 to July 7 and July 10, 2017 (Wash Sales; Books, Records and WORM; Non-Prosecution Agreements)

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Published Date: July 09, 2017

During the prior two weeks, a trading firm agreed to pay a fine of US $5 million to the Commodity Futures Trading Commission to resolve charges that it engaged in wash trades in three ways. Separately, the CFTC entered into non-prosecution agreements with three traders for their cooperation in a CFTC enforcement action against their former employer – despite their own admitted spoofing activity. This marked the first time the CFTC entered into this type of agreement. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Compliance Weeds: Under applicable law, it is prohibited for a person to enter into or offer to enter into transactions that are “commonly known” as wash sales. (Click here to access Commodity Exchange Act Sec. 4c(a)(2)(A)(i), 7 U.S.C. Sec. 6c(a)(2)(A)(i).) For the CFTC to show that a wash sale has occurred it must demonstrate that a wash result occurred (e.g., a purchase and sale of the same delivery month of the identical futures contract (or option strike price) at the same price), and that the wash result was intended. Intent can be demonstrated by specific prearrangement or inferred through conduct. CME Group arguably has a broader view of wash sales and wash trades. For CME Group, it is prohibited for a person to place or accept buy and sell orders for the same product and month (or option strike price) “where the person reasonably should know that the purpose of the orders is to avoid taking a market position exposed to market risk.” (Click here to access CME Group Rule 534 and here for the applicable CME Group Market Regulation Advisory Notice.) On CME Group exchanges, buy and sell orders for different accounts with common beneficial owners can be deemed wash sales. ICE Futures U.S. has equivalent prohibitions. (Click here to access the applicable IFUS guidance.) Firms with multiple traders that independently place orders through automated trading systems or manually may, on occasion, have offsetting trades inadvertently match. Provided such matching is de minimis, CME Group and IFUS typically will not consider such transactions as wash trades. However, firms are expected to have policies to minimize such matching. (See relevant CME Group MRAN, Q/A 13; IFUS Guidance Q/A 12.)

Compliance Weeds: In May 2017, the Commodity Futures Trading Commission approved a revised records retention rule that aims to eliminate many existing antiquated requirements and to be “technology neutral” in order to accommodate future advances in recordkeeping technology. Among other things, the revised rule will eliminate the existing requirement that electronic records be maintained in WORM format. Instead, the revised rule is more principles-based and solely requires that all “regulatory records” be maintained in a way that “ensures the authenticity and reliability of such regulatory record” in accordance with applicable law and CFTC regulations. (For background, click here to access the article “Principles-Based Rules Rule in CFTC Recordkeeping Rule Amendment “ in the June 4, 2017 edition of Bridging the Week.) The CFTC’s amended recordkeeping rule is effective August 28 (click here to access). As recommended by the Futures Industry Association, the SEC should also consider adopting equivalent modernized recordkeeping requirements for broker-dealers (click here to access the relevant FIA recommendation; see bottom of page 2).

Legal Weeds: David Liew, a former junior trader who many media sources have indicated was based in Singapore and associated with Deutsche Bank, recently settled charges brought by the CFTC that he engaged in spoofing, manipulation, and attempted manipulation of gold and silver futures on the Commodity Exchange, Inc. from December 2009 through February 2012. To resolve this action, Mr. Liew consented never to trade commodity interest contracts under the CFTC’s jurisdiction and never to associate with any CFTC registrant as a principal, officer or employee. However, as part of his settlement, Mr. Liew was not assessed a fine by the Commission. The CFTC said that Mr. Liew received “meaningful cooperation credit” because he entered into a formal cooperation agreement with it, provided it with substantial assistance to date, and promised to continue to cooperate with the Commission and other government agencies going forward. (Click here for details regarding Mr. Liew’s CFTC action and criminal prosecution in the article “Former Newbie Bank Trader Pleads Guilty to Criminal Charges and Settles CFTC Civil Charges for No Fine for Spoofing, Attempted Manipulation and Manipulation of Gold and Silver Futures” in the June 4, 2017 edition of Bridging the Week.) Both the CFTC’s non-prosecution agreements with the three traders and its settlement terms against Mr. Liew suggest that the CFTC’s Division of Enforcement is willing to minimize sanctions against some wrongdoers in return for their meaningful assistance in building enforcement actions against other alleged wrongdoers whose conduct the Division considers more problematic.

More briefly:

For further information:

Broker-Dealer Pays $1.5 Million to Settle FINRA Charges for Failing to Maintain Books and Records in WORM Format:

CFE Clarifies Requirements Related to Order Entry Operator IDs and Other Audit Trail Obligations:

CFTC Inks Non-Prosecution Agreements With Three Traders Who Admit to Spoofing:

Global Regulator Coordinator Cites Significant Interdependence Among CCPs and Clearing Members:

See also, FSB Analysis of Post-Crisis Resolution Reform:

ICE Europe Resolves Disciplinary Action Against Warehouse for Not Following Exchange-Mandated Grading and Warehousing Procedures:

ICE Futures U.S. Expands Definition of Agents to Include Automated Trading Systems, and Extends Obligation of Supervision to All Agents:

LedgerX Approved as SEF by CFTC; Intends to List Bitcoin Options for Trading:

LME Implements Accountability Levels and Position Limits for LMEprecious Contracts Beginning July 10:

Trading Firm and Individual Trader Settle CFTC Allegations of Engaging in Wash Sales to Obtain Exchange Fee Rebates:

Two Designated Contract Markets Excused by CFTC Staff From Reporting Swap Transactions to Swap Data Repositories:

UK Regulator Proposes to Adopt Requirements on Fund Managers to Act in Investors’ Best Interest:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 8, 2017. 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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