Bridging the Week by Gary DeWaal: January 5 to 9 and 12, 2015 (FINRA Exams; China Futures Exchanges Opening Up; Disruptive Trading Redux; Charlie Hebdo)

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Published Date: January 11, 2015

The world was fixated last week by the tragic events in France. Notwithstanding, a few important regulatory developments occurred or became public. These included FINRA’s release of its examination priorities for 2015, and China’s chief financial markets regulator – CSRC – proposing rules to accommodate the trading of certain domestic futures contracts by foreign persons through foreign brokers. As a result, the following matters are covered in this week’s Bridging the Week:

Video Version:

Article Version:

FINRA Highlights Member Examinations Focus for 2015

The Financial Industry Regulatory Authority issued its annual letter to broker-dealers setting forth its regulation and examination priorities for the new year.

In general, FINRA indicated that it would concentrate its reviews on “key sales practice, financial and operational and market integrity matters.” However, it also reminded members they must respond timely to FINRA information requests made as part of investigations and examinations. According to FINRA, it has recently experienced an “increasing number of situations” where members have not provided information in a timely fashion:

[t]his is particularly troubling as FINRA discusses large and complex information requests with firms and is flexible with respect to due dates, rolling productions, scope and format—as long as the integrity of the regulatory matter is not compromised. These situations are not acceptable, as timely productions of information (as well as oral information through interviews and on-the-record testimony) are critical to FINRA achieving its investor protection and market integrity mission by identifying and shutting down bad practices and bad actors at the earliest possible time.

Among the specific areas (there are many more) FINRA will look at this year are:

some firms are not monitoring activity in DVP/RVP accounts for suspicious activity, and are not conducting adequate due diligence to ensure that securities being sold are registered [as required under law] or the transaction is subject to an exemption from registration.

FINRA will also be generally assessing the adequacy of firms’ surveillance activities to detect suspicious activity;

This is the tenth year FINRA has published its “Regulatory and Examination Priorities Letter.”

(Click here for further details in the article “FINRA Issues Annual Regulatory and Examination Letter for 2015” in the January 9, 2015 Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP).

CSRC Proposes Interim Measures to Accommodate Access to Approved China Derivatives Markets; SHFE Likely First Beneficiary for Crude Futures Contract

The China Securities Regulatory Commission is soliciting public comment on proposed rules that, if adopted, will permit certain foreign nationals and brokerage firms to trade particularly designated futures contracts listed on China’s futures exchanges.

Under CSRC’s proposed so-called "Interim Measures," overseas customers would be permitted to access approved futures either through Chinese or overseas brokers, or trade directly through exchange facilities, subject to exchange approval. Only local brokers could directly clear approved products for foreign nationals. It appears potentially possible for qualified overseas brokers that establish or control entities in pilot free trade zones in China (one is located in Shanghai) to offer clearing services too, but the Interim Measures are not clear on this point.

CSRC, the relevant exchange, the China Futures Association and the China Futures Margin Monitoring Center would all play roles in monitoring aspects of trading by overseas customers and brokers. (Click here to see an interview I gave to John Lothian News in November 2012 regarding the China Futures Margin Monitoring Center.)

Among other things, qualified overseas customers would have to satisfy eligibility requirements established by CSRC and the relevant exchange. Authorized foreign brokerage firms that access China's futuers exchanges directly would have to be subject to oversight by a regulator with a memorandum of understanding with CSRC governing cooperation. Relevant futures exchanges, domestic futures companies and overseas brokers would have to establish and administer a suitability system in connection with trading by foreign nationals. CSRC contemplates a large trader reporting type regime in connection with futures positions, and would require overseas traders and brokers to submit to regular or random on-site inspections.

CSRC published its guidelines on December 31, 2014, and comments are due by midnight January 31, 2015 in China (keep in mind time differences between China and the US). Media reports have indicated that the crude oil contract trades on the Shanghai Futures Exchange is likely to be the first beneficiary of the new rules (click here for a sample media report).

Currently, only a stock index futures contract listed on the China Financial Futures Exchange is available for hedging purposes to a limited group of foreigners – so-called “qualified foreign institutional investors” – under very limited conditions. In addition, the International Board of the Shanghai Pilot Free Trade Zone was launched by the Shanghai Gold Exchange in September 2014. It trades both spot and forward gold and is accessible to qualified international investors.

Helpful to Getting the Business Done: The potential opening of China’s futures markets to foreign traders and brokers is an important development that should be studied and assessed as a real business opportunity. A good starting point is reviewing and potentially commenting on CSRC’s proposed interim measures. In China, relationships or “guanxi” are exceptionally important, and building relationships with regulators is important for foreigners to conduct business there. Responding in a helpful way to CSRC’s request for feedback can be a valuable first step in establishing a good relationship – provided comments are constructive and educational and not strident or didactic. Moreover, all comments by foreigners should be written in Chinese. Doing business in China requires patience and recognition that there are different ways to conduct business – not all in accordance with American standards and custom.

And briefly:

My View: Given the potential serious consequences of engaging is disruptive trading as a result of enforcement actions brought by national regulators or disciplinary actions brought by exchanges let alone potential criminal prosecutions (click here to see the article “NJ-Based Trader Previously Sanctioned by UK FCA, CFTC and CME Indicted in Chicago for Same Spoofing Offenses,” in the September 29 to October 3 and 6, 2014 edition of Bridging the Week)– it is incumbent for regulatory authorities worldwide to articulate a single standard for prohibited practices that does not inadvertently capture legitimate practices. This appears to be an appropriate project for the International Organization of Securities Commissions.

And even more briefly:

And finally

For more information, see:

Block Trade Rules Updated by CME and CBOT to Reflect CFTC Minimum Size Rules:

CFTC Staff Issues Relief to Swap Dealer From CCO Reporting Line Requirements:

CME Group Corrects Wash Sales Advisory:

CSRC Proposes Interim Measures to Accommodate Access to Approved China Derivatives Markets; SHFE Likely First Beneficiary for Crude Futures Contract:

See translattion of Interim Measures:

Federal Reserve Inspector General Finds Deficiencies in Regulatory Oversight of London Whale Risks – the Complete Report:

FINRA Highlights Member Examinations Focus for 2015:

ICE Futures Europe to Adopt Another Variation of Disruptive Trading Practices Rule:

See sections E2.2(a)(x-xiv):

ISDA Says One-Third of End Users Unsure Whether Uncleared Margin Rules Will Apply; Congress Passes Bill to Help Clarify:

See ISDA Insight: A Survey of Issues and Trends for the Derivatives End-user Community:

See also, H.R. 26: Title III – Business Risk Mitigation and Price Stabilization (68-70):

US Treasury Offers OFAC’s List of Sanctioned and Prohibited Persons in New Format:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of January 10, 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 and/or Gary DeWaal 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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