Bridging the Week by Gary DeWaal


Bridging the Week by Gary DeWaal: March 23 to 27 and 30, 2015 (HFTs; MF Global; Another CFTC Big Fine; ATS Breakdowns; Fed Study Assesses Clearing)

Bridging the Week    Compliance Weeds    EMEA Regulation (sans Capital and Liquidity and UK after March 1, 2019)    Exchanges and Clearing Houses    High Frequency Trading    Managed Money    MF Global    My View    Part 30 and 15a-6    Position and Trade Reporting    Reg SHO    Registration    Retail Forex and Metals    Supervision    Systems and Controls   
Published Date: March 29, 2015

Developments impacting high-frequency traders dominated news in financial services last week. The Securities and Exchange Commission proposed amendments to an existing rule that would subject many proprietary trading firms to oversight by the Financial Industry Regulatory Authority for the first time, while both FINRA and the Futures Industry Association issued guidance on best practices for automated trading systems and algorithms. Unrelated, a study by the NY Federal Reserve Bank raised some red flags regarding central clearing. As a result, the following matters are covered in this week’s Bridging the Week:

  • SEC Proposes FINRA Oversee Certain High-Frequency Trading Firms; FINRA and FIA Issue Best Practice Guidance;
  • CFTC Fines Grain Dealer and Merchant US $800,000 for Improperly Reporting Positions (includes My View);
  • MF Global Inc. Trustee Seeks Authorization to Pay Out Additional US $461 Million to General Creditors; Second Lehman Brothers General Creditors Distribution Underway Too;
  • Oppenheimer & Co. Fined US $2.5 Million by FINRA for Failure to Supervise Salesperson Previously Convicted of Broadway Fraud;
  • CME Group and ICE Futures U.S. Each Fine a Trader for Automated Trading System Malfunction (includes Compliance Weeds);
  • Introducing Broker Fined by ICE Futures U.S. for Misreporting and Not Maintaining Required Records for Block Trades (includes Compliance Weeds);
  • NY Fed Report Cautions That Too Few Participants in Central Clearing May Increase Counterparty Risk and Margin Requirements (including My View);
  • CFTC Grants More Permanent CCO Annual Report Filing Deadline Extension;
  • Broker-Dealer Fined US $400,000 by FINRA for Short Sales Ahead of IPO Participations; and more.

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Article Version:

SEC Proposes FINRA Oversee Certain High-Frequency Trading Firms; FINRA and FIA Issue Best Practice Guidance

The Securities and Exchange Commission proposed changes to an existing rule that, if adopted, would require certain proprietary trading firms registered with it as broker-dealers to become members of the Financial Industry Regulatory Authority for the first time. These would include proprietary trading firms that engage in a significant amount of trading on alternative trading systems, such as dark pools.

Registered broker-dealers are not currently required to join FINRA if they are members of a national securities exchange, carry no customer accounts and have annual gross income of US $1,000 or less attributable to securities transactions other than on a national securities exchange of which they are a member. However, income derived from trading through another broker-dealer does not count against the US $1,000 limit. The proposed amendments would eliminate this de minimis exemption.

According to Mary Jo White, Chairperson of the SEC, the original purpose of the relevant rule—Rule 15b9-1—was to enable exchange specialists and floor brokers that principally traded on the floor of an individual exchange “to conduct limited hedging or other off-exchange activities ancillary to their floor-based activities.”

Today, however, claimed Ms. White, many broker-dealers take advantage of the relevant rule whose business is not focused on an exchange floor. According to Ms. White,

[t]rading is now dominated by computer algorithms and active cross-market proprietary trading firms have emerged as significant market participants. These firms represent a significant portion of off-exchange trading, accounting for nearly half of all orders sent to alternative trading systems. The business of these firms is not focused on an exchange floor, and their off-exchange activity is far from ancillary. Yet, they may and do rely on the very same exemption under Rule 15b9-1 for floor brokers.

The proposed amendments do not require proprietary trading firms that are members of national exchanges and who conduct most of their business from such facilities’ floors to join FINRA if their activity on alternative trading systems is solely to hedge the risks of their floor-based activities and they maintain appropriate policies and procedures.

Oversight by FINRA will enhance transparency and regulation of the off-exchange market, claimed the SEC, which is impeded today because FINRA does not have jurisdiction over non-member firms. According to the SEC,

because it does not have jurisdiction over Non-Member Firms, [FINRA] is unable to enforce compliance with the federal securities laws and rules, or apply its own rules, to broker-dealers that conduct a significant amount of off-exchange trading activity, including those that engage in so-called high-frequency trading strategies. As a result, FINRA’s ability to perform comprehensive market surveillance, especially for violations of Commission rules, as well as its ability to understand and reconstruct activity in the off-exchange market generally, is limited … Accordingly, FINRA is unable to monitor the off-exchange market activity of Non-Member Firms, and detect potentially manipulative or other illegal behavior, as efficiently or effectively as it can with FINRA members.

Comments are due on or before 60 days following publication of the proposed amendments in the Federal Register.

Both FINRA and the Futures Industry Association separately published guidance to help enhance effective supervision and control of automated trading systems and algorithms.

Key among FINRA’s recommendations regarding algorithmic trading strategies is that a firm’s “supervisory efforts should be focused on every stage in the process of developing [such] strategies and not be limited to reviewing trading activity by algorithmic strategies only after they have been put into production.”

FIA’s recommendations regarding automated trading systems are more detailed, and include recommendations regarding specific pre-trade controls that should be incorporated into such systems. These include filters or capabilities that address maximum order size, maximum intraday position, market data reasonability, price tolerance, repeated automated execution limits, self-match prevention, kill switches and cancel on disconnect, among other controls.

FIA also makes detailed recommendations regarding the development and testing of algorithmic software, as well as change management and security.

Two weeks ago, FINRA proposed registration of broker-dealer’s algorithmic trading programs’ principal developers and supervisors. (Click here to review a brief article on this development, “FINRA Proposes Registration of Broker-Dealers’ Algorithmic Trading Programs’ Principal Developers and Supervisors” in the March 16 to 20 and 23, 2015 edition of Bridging the Week. Click here to see a more extensive article, “FINRA Seeks Comment on Proposal Requiring Registration of Associated Persons Who Develop Algorithmic Trading Strategies” in the March 28, 2015 Advisory of Katten Muchin Rosenman LLP.)

Briefly:

  • CFTC Fines Grain Dealer and Merchant US $800,000 for Improperly Reporting Positions: Marubeni America Corporation, a grain dealer and merchant, agreed to pay a fine of US $800,000 to the Commodity Futures Trading Commission to resolve charges that it filed 38 inaccurate reports with the CFTC of its cash positions from July 2010 through August 2013. Under applicable CFTC rules, persons holding large futures and options positions in certain agricultural commodities, including wheat, corn, soybeans and soybean meal, among other commodities, must file certain reports (so-called Form 204 reports) with the CFTC setting forth their cash positions when such futures and options positions are hedging transactions. Marubeni, which claimed to be a hedger, filed incorrect reports of its cash positions in these commodities during the relevant time, said the Commission. After filing erroneous reports, Marubeni—a non-registrant with the CFTC—filed correct reports and "cooperated in the [Division of Enforcement’s] investigation," said the CFTC.

My View: Just two weeks ago, the CFTC Division of Enforcement settled an action with ICE Futures U.S. for the exchange’s alleged failure to file accurate and complete reports relating to trading activity, prices and delivery notices on 325 reporting days from October 2012 to at least May 2014. The amount of the settlement was US $3 million, or approximately US $9,231/reporting day. (Click here for details in the article, “ICE Futures Fined US $3 Million by CFTC for Reporting Errors and Untimely Response to Inquiries” in the March 16 to 20 and 23, 2015 edition of Bridging the Week.) Now, one week later, the Division resolves a matter with Marubeni for its 38 inaccurate reports for US $800,000 or approximately US $21,053/incident—where the Division acknowledges the firm’s cooperation. This disparity in treatment may have a legitimate basis, but superficially it seems incongruous. This is why I have argued previously that the CFTC and its Division of Enforcement should update its now outdated, 2007 “Cooperation Factors in Enforcement Division Sanction Recommendations” (click here to access) to, among other things, provide potential respondents more practical guidance in order to negotiate potential settlements. (Click here to review my prior thoughts in the Compliance Weeds section to the article “CFTC Reminisces Over 2014 Enforcement Highlights,” in the November 3 to 7 and 10, 2014 edition of Bridging the Week.)

  • MF Global Inc. Trustee Seeks Authorization to Pay Out Additional US $461 Million to General Creditors; Second Lehman Brothers General Creditors Distribution Underway Too: The trustee for the liquidation of MF Global Inc. is seeking permission from the bankruptcy judge overseeing the firm’s dissolution to make a distribution of US $461 million to unsecured general creditors. If approved, this distribution would result in total distributions to unsecured general creditors of 72 percent of their approved claims. To date, the trustee has distributed 100 percent of approved claims of MF Global’s customers (totaling US $6.7 billion), and 100 percent of approved secured, priority and administrative claims. Separately, the trustee for the liquidation of Lehman Brothers Inc. is in the process of making a second distribution to unsecured creditors of the firm. This distribution—US $2 billion—increases the total distribution to unsecured creditors to $5.9 billion, or 27 percent of their approved claims. Customers of Lehman Brothers in the US had previously received more than US $106 billion—100 percent of their claims. The trustee for both MF Global and Lehman Brothers is James Giddens.
     
  • Oppenheimer & Co. Fined US $2.5 Million by FINRA for Failure to Supervise Salesperson Previously Convicted of Broadway Fraud: The Financial Industry Regulatory Authority fined Oppenheimer & Co. Inc. US $2.5 million for failing to supervise one of its former salespersons, Mark Hotton, who stole money from his clients and churned their accounts from November 2005 to February 2009. During this time, claimed FINRA, Mr. Hotton convinced some of his clients to wire funds from their Oppenheimer and personal bank accounts to entities he owned or controlled. Among other alleged violations, FINRA charged Oppenheimer with (1) not conducting an adequate pre-hire review of Mr. Hotton; (2) not supervising Mr. Hotton adequately when it became aware of civil actions alleging he defrauded business partners out of millions of dollars; (3) not responding to red flags that showed Mr. Hotton was wrongfully wiring customer funds to entities he owned or controlled; and (4) not taking appropriate action after the firm’s analysts detected Mr. Hotton was overtrading some customer accounts. At the time of his hire, Mr. Hotton’s FINRA registration record disclosed 12 reportable events, including two criminal charges, a termination for cause, a New York Stock Exchange investigation, a personal bankruptcy and seven customer complaints. The firm only reviewed the information in the public filing, claimed FINRA, and did not seek any additional information, including court filings, to better understand any unique risks Mr. Hotton’s hiring might cause. In addition to paying a fine, Oppenheimer agreed to remit restitution to customers in excess of US $1.25 million, and to retain a consultant to help the firm develop better policies and procedures related to wire transfers, registration and termination filings, and excessive trading. Mr. Hotton was sentenced to 34 months in prison in October 2014 for defrauding the producers of the Broadway show “Rebecca – The Musical” in a scheme involving fictitious overseas investors. (Click here for details.)
     
  • CME Group and ICE Futures U.S. Each Fine a Trader for Automated Trading System Malfunction: Citadel Securities LLC agreed to pay a fine of US $70,000 to the Chicago Mercantile Exchange because of its entry of an unspecified number of unintentional orders on Globex on June 3, 2013, because of a “software malfunction.” According to CME Group, Citadel’s order entry miscue prompted it to resend to the exchange orders that previously had been filled, causing an unusual short-term increase in trading volume of the E-mini S&P futures market and its prices. Citadel was charged with engaging in “an act which is detrimental to the interest or welfare of the [e]xchange.” Separately, ICE Futures U.S. fined Trevor Gile—trading as Liger Investments Ltd. —US $25,000 for a “software bug” in its automated trading system on November 5, 2013, that resulted in the entry of “numerous” order messages in the LD1 Fixed Price ICE Lot futures markets. The exchange’s business conduct committee deemed that these excessive order messages were “not made in good faith for the purpose of executing bona fide transactions.” IFUS also claimed that Liger failed to identify the software bug prior to deploying the ATS. 

Compliance Weeds: The IFUS settlement is an unexpected application of the exchange’s disruptive trade practice rule that seemingly—on its face—requires an intentional action to be a violation. Under the plain language of IFUS rule 4.02(l)(2), it is prohibited to “[engage] in any … manipulative or disruptive trading practices prohibited by the [Commodity Exchange] Act or by the [Commodity Futures Trading Commission] pursuant to Commission regulation, including, but not limited to … knowingly entering, or causing to be entered, bids or offers, other than in good faith for the purpose of executing bona fide [t]ransactions.” (Click here to access ICE Futures U.S.'s rules.) It is difficult to understand from IFUS’s published disciplinary notice how Liger’s ATS breakdown because of a “software bug” satisfies the intent requirement of this provision. There is another section of the same rule (4.02)(l)(1)(D) that applies a recklessness standard (i.e., the prohibition against practices that constitute the “[r]eckless disregard for the adverse impact of the order or market message”), but it was not used in this disciplinary proceeding.

  • Introducing Broker Fined by ICE Futures U.S. for Misreporting and Not Maintaining Required Records for Block Trades: IVG Energy, Ltd., an introducing broker registered with the Commodity Futures Trading Commission, consented to a fine of US $40,000 for misreporting the execution times “in several instances” of block trades involving the ICE Futures U.S.’s natural gas and power contracts during an unspecified time period. IFUS also claimed that the company failed “to prepare and maintain records associated with such transactions as required by the exchange” although there was no indication what the records might be. In settling this matter, IVG did not admit or deny any rule violations.

Compliance Weeds: Introducing brokers may be surprised to learn that, as is the case under rules of the Commodity Futures Trading Commission, they may also have an obligation to maintain oral records of communication in connection with transactions executed on ICE Futures U.S. even if they are not members. Among the rules that IFUS claimed that IVG violated included its rule 6.07(b) (click here to access ICE Futures U.S.’s rules). This rule requires expressly that all IFUS members and non-member CFTC-registered future commission merchants and IBs “record and maintain all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction involving [e]xchange futures or options [c]ontracts and related [c]ash [c]ommodity or forward transactions, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device, or other digital media.” As under the applicable CFTC rule (1.35(a); click here to access) IFUS’s requirement to record oral communications does not apply to IBs that, during the prior three years, generated less than US $5 million in aggregate gross revenues. CME Group has a similar rule that applies on its face solely to member and member firms (Rule 536H, cross-referencing CFTC rule 1.35(a); click here to access CME rules). 

  • NY Fed Report Cautions That Too Few Participants in Central Clearing May Increase Counterparty Risk and Margin Requirements: A highly quantitative staff report of the Federal Reserve Bank of New York suggests that clearinghouses may not mitigate risks as effectively as bilateral transactions in all circumstances. In particular, says the study, “[w]hen a small number of dealers trade in a relatively large number of asset classes, central clearing … may lead to increased counterparty risk and higher margin needs.” According to the staff study, clearinghouses are most effective in reducing risk when the number of asset classes is small relative to the number of dealers, or if there are a larger number of assets, the number of dealers also increases.

My View: I cannot say that I understand fully the advanced math that supports this staff report. However, the fundamental questioning in this report of the appropriateness of central clearing under all circumstances raises significant red flags. At a minimum, as this study seems to argue, an optimal clearinghouse requires many clearing members to help mutualize risk most effectively. Unfortunately, in fact, the number of clearing members is decreasing, and is likely to decrease further as a result of inconsistent public policy that, on the one hand, promotes central clearing, but on the other hand, penalizes firms that offer central clearing through capital charges.

  • CFTC Grants More Permanent CCO Annual Report Filing Deadline Extension: Staff of the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight granted no-action relief to futures commission merchants, swap dealers and major swap participants to file their annual compliance reports with it by 90, not 60, days following the end of their fiscal year. In addition, for FCMs, the chief compliance officer annual reports do not have to be filed contemporaneously with the filing of the firm’s annual financial report (on Form 1-FR-FCM or through the FOCUS report) as otherwise required by applicable regulation. Staff of the Division had previously granted time-limited relief along the same lines of this new no-action letter for FCMs, SDs and MSPs with fiscal years that ended prior to January 31, 2015. (Click here for details in the article, “In Time for Christmas, CFTC Staff Gives FCMs, SDs and MSPs Gift of Time Extension to File CCO Annual Report; However, Adds Content Requirements As the Price” in the January 2, 2015 edition of Between Bridges.) The relief granted by this new no-action letter remains in effect until the CFTC adopts a new rule amending current regulatory requirements.
     
  • Broker-Dealer Fined US $400,000 by FINRA for Short Sales Ahead of IPO Participations: First New York Securities LLC was fined US $400,000 and required to pay disgorgement of over US $500,000 by the Financial Industry Regulatory Authority for purchasing securities in secondary offerings that it had just a few days prior sold short. Such short selling is typically prohibited for five days prior to such purchases under a regulation of the Securities Exchange Commission (Rule 105 of Regulation M; click here for a related advisory from the SEC). The firm engaged in such prohibited conduct in connection with 14 public offerings from September 2010 through April 2013, said FIRNA. FINRA noted that the firm self-reported six of the violative instances. In settling this matter without admitting or denying any of FINRA’s findings, First New York also agreed not to participate in any secondary or follow-on offerings for six months. In September 2013, the SEC brought and settled cases against 23 firms for similar violations. (Click here for details in the article, “US SEC Charges 23 Firms in Connection with Unlawful Short Sales related to Initial Public Offerings; Simultaneously Issues a Risk Alert” in the September 16 to 20 and 23, 2013 edition of Bridging the Week.)

And even more briefly:

  • HK SFC Clarifies CFTC Part 30.10 Order: In a statement on its website, the Hong Kong Securities and Futures Commission noted that the CFTC Part 30.10 exemptive order granted last week, potentially enables qualifying brokers in Hong Kong to solicit and accept orders and funds directly from US persons on all non-US exchanges authorized by SFC, including the Hong Kong Futures Exchange. The express language of the CFTC order had suggested that qualified HK brokers could only offer US persons services “with respect to transactions on a foreign futures and options exchange located in Hong Kong” under SFC oversight. (Click here for additional information (including a link to the CFTC order) in the article, “CFTC Grants Hong Kong Part 30.10 Status” in the March 16 to 20 and 23, 2015 edition of Bridging the Week.)
     
  • ESMA Seeks Input on Potential Share Classes Under UCITS: The European Securities and Markets Authority is seeking input on the introduction of potential different share classes under the Undertakings for Collective Investment in Transferable Securities (UCITS) directive. Generally, ESMA proposes that share classes of the same UCITS should have the same investment strategy; characteristics of one share class should not impact adversely another share class of the same UCITS—either actually or potentially; and differences among share classes of the same UCITS should be disclosed to investors when they have a choice. Comments should be submitted to ESMA by March 27, 2015. The UCITS directive (originally adopted in 1985 and subsequently amended multiple times) generally permits collective investment offerings authorized by one European jurisdiction to be operated freely throughout Europe.
     
  • ICE Clear Europe Authorized by CFTC for Portfolio Margining for Non-Clearing FCMs: ICE Clear Europe was previously granted authority by the Commodity Futures Trading Commission for itself and its registered futures commission clearing members to hold in so-called customer segregated funds accounts customer positions and funds related to domestic trading on ICE Futures U.S. as well as customer positions and funds related to the trading of foreign futures and options on ICE Futures Europe or ICE Endex, and to permit the portfolio margining of all positions in such accounts. The CFTC extended this authority last week to registered FCMs that are not members of ICE Clear but that carry the relevant ICE products through FCMs that are clearing members of ICE Clear.
     
  • FCA Seeks Views on MiFID II Implementation: The UK Financial Conduct Authority is seeking input on its early views regarding how the Markets in Financial Instruments Directive II might be rolled out in the United Kingdom. Among other matters, FCA is seeking comments on whether it should ban discretionary management firms to accept commissions and other benefits; how to require adviser independence; how to apply MiFID’s II’s remuneration rules for sales staff to non-MiFID firms; and how it should amend its current rules regarding telephone conversations and electronic communications for certain stakeholders. Comments should be submitted through FCA’s website by May 26, 2015. MiFID II and the Markets in Financial Instruments Regulation are comprehensive measures that, once finally implemented, will greatly increase regulation of European financial markets by (1) requiring the trading of certain financial and commodity instruments on regulated venues “whenever appropriate;” (2) increasing obligations on certain algorithmic traders; and (3) obligating speculative traders to limit the size of their net position in commodity derivatives. MiFID II is expected to be effective in Europe as of January 3, 2017.
     
  • SEC Sanctions Trading Firm and 20 Non-Registered Broker-Dealers for New Issue Corporate Bonds’ Allocation Schemes: The Securities and Exchange Commission charged and settled with Global Fixed Income LLC, Charles Kempf, GFI’s chief executive officer, and 20 firms and individuals for an elaborate scheme to help GFI obtain newly issued corporate bonds and re-sell them at a profit. In general, GFI utilized the 20 third-party firms and entities to purchase corporate bonds in over-subscribed initial offerings—causing its own allowance to increase. None of GFI, Kempf or any of the other 20 third parties were registered with the SEC in any capacity. To effectuate this, GFI transferred money to relevant third parties prior to their purchase of new issues on its behalf. GFI subsequently sold the bonds in a few days for a profit, and split the profits with the third parties who had assisted it. In helping GFI this way, the SEC alleged that the firms and entities were acting as broker-dealers without required registration. To settle this matter, GFI and Kempf agreed to pay disgorgement in excess of US $2.4 million, a fine of US $500,000, and each third-party company, a fine of US $50,000, and each third-party individual, a fine of US $5,000. Mr. Kempf agreed not to associate with a registered entity or participate in a penny stock offering for 12 months.
     
  • FCA Publishes 2015/2016 Business Plan Including Key Priorities: The UK Financial Conduct Authority issued its Business Plan for 2015/2016. FCA claimed its three operational objectives are to ensure an “appropriate degree of protection for consumers;” to maintain and enhance the safety of the UK financial system; and to encourage “effective competition” for consumers. FCA anticipates more “thematic supervision work,” which it claims will enable it potentially to identify issues that are common to more than one firm and more than one sector.
     
  • Registered Brokers and Swap Dealers Reminded by CFTC of Obligation to Obtain OCR Information From Customers and Counterparties: The Commodity Futures Trading Commission issued an advisory reminding registered futures commission merchants, clearing members, foreign brokers, swaps dealers and certain reporting markets of their obligation to obtain certain information from their customers on a timely basis to enable them to comply with CFTC ownership and control reporting obligations. Under new rules adopted by the CFTC in 2013 (and modified subsequently through various no-action letters), reporting entities will be required to file comprehensive information with the Commission regarding certain customers with large positions or significant trading activity, electronically, beginning September 15, 2015. (Click here for details regarding these obligations and deadlines in the article, “CFTC Postpones OCR Roll-out; CME Group and ICE Futures U.S. Adopt Conforming Amendments” in the February 9 to 13 and 16, 2015 edition of Bridging the Week; click here for additional details on the CFTC advisory in the article, “CFTC Issues Advisory on Ownership and Control Reporting” in the March 27, 2015 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
     
  • NFA Updates Regulatory Guide to Forex Transactions: The National Futures Association has updated its regulatory guide entitled “Forex Transactions.” Changes reflect amendments to NFA’s financial requirements, an interpretive notice related to the allocation of bunched retail forex orders for multiple accounts, and the prohibition on the use of certain electronic funding means, among other matters.
     
  • CME Group to Require Minimum Fine for Inaccurate or Late Required Reports: CME Group proposes an amendment to one of its rules to require a minimum summary fine of US $1,000 for inaccurate, incomplete or late filing of data or records. The maximum fine per offense may not be greater than US $5,000 for individuals or US $10,000 for firms. Among the reports that will be subject to summary sanctions include those dealing with large traders, open interest and long positions eligible for delivery; block trades; user IDs (Tag 50); automated/manual indicator on Globex trades (Tag 1028); and customer type indicator codes. CME Group may still issue warning letters for first offenses, and refer egregious matters for disciplinary proceedings. The amendment is scheduled to be effective April 7. In a recent CME Group audit trail rule review, the Commodity Futures Trading Commission recommended that no summary fine should be less than US $1,000 (Click here for details regarding this rule review in the article, “CFTC Issues CME Group Report Card: Scores Generally Good But NYMEX and COMEX Directed to Continue to Enhance Spoofing Surveillance” in the November 24 to 28 and December 1, 2014 edition of Bridging the Week.)
     
  • House Hearings on CFTC Reauthorization Continue: The House Committee on Agriculture continued Commodity Futures Trading Commission re-authorization hearings last week. Among other matters, Terrence Duffy, CME Group Chairman, used the occasion of his testimony before the Committee to criticize the failure of European regulators to assess US clearinghouses as subject to equivalent regulation as European clearinghouses. Without such designation, European banks will be subject to increased capital charges for utilizing US clearinghouses such as CME Group. The hold-up in equivalency recognition, claimed Mr. Duffy, lies in a difference in margin standards between the United States and Europe. However, Mr. Duffy said this is particularly unfair in light of the recent recognition by the European Commission of Singapore as having equivalent status when it has the same margin regime as the US.
     
  • CFTC Market Risk Advisory Committee Meets This Week: The Risk Advisory Committee of the Commodity Futures Trading Commission will meet this week on April 2. The two principal topics will be the default management policies of clearinghouses and the industry’s experiences since the beginning of trading on swap execution facilities. The meeting will be held at the CFTC’s offices in Washington, DC.

And finally:

  • In Memoriam: Martin Goldenberg, former Senior Counsel at Newedge USA LLC, now SG Americas Securities, LLC, passed away last week. I had the honor of Marty working for me and occupying the office next to mine for many years. He was a very smart, detailed-oriented attorney and had a very wonderful personality, despite the fact he was a fanatic New York Yankees fan (I am a Mets fan). It’s very sad to lose another great guy!

For more information, see:

Broker-Dealer Fined US $400,000 by FINRA for Short Sales Ahead of IPO Participations:
http://disciplinaryactions.finra.org/Search/ViewDocument/41895

CFTC Fines Grain Dealer and Merchant US $800,000 for Improperly Reporting Positions:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfmarubeniorder032315.pdf

CFTC Grants More Permanent CCO Annual Report Filing Deadline Extension:
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/15-15.pdf

CFTC Market Risk Advisory Committee Meets This Week:
http://www.cftc.gov/About/CFTCCommittees/MarketRiskAdvisoryCommittee/mrac_agenda040215

CME Group and ICE Futures U.S. Each Fine a Trader for Automated Trading System Malfunction:

CME Group:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9526-BC-CITADEL-SECURITIES-LLC.html
IFUS:
http://www.nfa.futures.org/BasicNet/Case.aspx?entityid=0485865&case=2013-159&contrib=ICE

See also, full language of IFUS Disciplinary Notice:
/ckfinder/userfiles/files/ICE%20Futures%20U_S_-%20Trevor%20Gile.pdf

CME Group to Require Minimum Fine for Inaccurate or Late Required Reports:
http://www.cmegroup.com/tools-information/lookups/advisories/market-regulation/files/RA1503-5.pdf

ESMA Seeks Input on Potential Share Classes Under UCITS:
http://www.esma.europa.eu/system/files/2014-1577_dp_on_share_classes_for_publication.pdf

FCA Publishes 2015/2016 Business Plan Including Key Priorities:
http://www.fca.org.uk/static/documents/corporate/business-plan-2015-16.pdf

FCA Seeks Views on MiFID II Implementation:
http://www.fca.org.uk/static/documents/discussion-papers/dp15-03.pdf

HK SFC Clarifies CFTC Part 30.10 Order:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR31

House Hearings on CFTC Reauthorization Continue:
http://agriculture.house.gov/press-release/subcommittee-continues-hearing-series-advance-cftc-reauthorization

ICE Clear Europe Authorized by CFTC for Portfolio Margining for Non-Clearing FCMs:
http://www.cftc.gov/ucm/groups/public/@requestsandactions/documents/ifdocs/iceclreu4dorder3-26-15.pdf

Introducing Broker Fined by ICE Futures U.S. for Misreporting and Not Maintaining Required Records for Block Trades:
http://www.nfa.futures.org/BasicNet/Case.aspx?entityid=0391125&case=2014-081&contrib=ICE

MF Global Inc. Trustee Seeks Authorization to Pay Out Additional US $461 Million to General Creditors; Second Lehman Brothers General Creditors Distribution Underway Too:

Press release:
/ckfinder/userfiles/files/MF%20Global%20Inc%20Gen%20Credit%20Payout%20PR.pdf
Motion:
/ckfinder/userfiles/files/MF%20Global%20Inc%20Trustee%20Motion%20Gen%20Cred%20Payout.pdf

See also, Lehman Brothers Inc. Distribution Information:
/ckfinder/userfiles/files/Lehman%20Brothers%202d%20Distribution.pdf

NFA Updates Regulatory Guide to Forex Transactions:
http://www.nfa.futures.org/NFA-compliance/publication-library/forex-regulatory-guide.pdf

NY Fed Report Cautions That Too Few Participants in Central Clearing May Increase Counterparty Risk and Margin Requirements:
/ckfinder/userfiles/files/NY%20Fed%20Paper%20on%20Central%20Clearing.pdf

Oppenheimer & Co. Fined US $2.5 Million by FINRA for Failure to Supervise Salesperson Previously Convicted of Broadway Fraud:
http://images.magnetmail.net/images/clients/finra/attach/oppenheimer_awc_032615.pdf

Registered Brokers and Swap Dealers Reminded by CFTC of Obligation to Obtain OCR Information From Customers and Counterparties:
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/15-14.pdf

SEC Proposes FINRA Oversee Certain High-Frequency Trading Firms; FINRA and FIA Issue Best Practices Guidance:

FINRA Best Practices Guidance:
http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-09.pdf
FIA Best Practices Guidance:
https://americas.fia.org/articles/fia-issues-guide-development-and-operation-automated-trading-systems
SEC Proposed Rule 15b9-1:
http://www.sec.gov/rules/proposed/2015/34-74581.pdf

SEC Sanctions Trading Firm and 20 Non-Registered Broker-Dealers for New Issue Corporate Bonds’ Allocation Schemes:

Corporate Respondents:
http://www.sec.gov/litigation/admin/2015/34-74586.pdf
David Boyle:
http://www.sec.gov/litigation/admin/2015/34-74585.pdf

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