Bridging the Week by Gary DeWaal: March 16 to 20 and 23, 2015 (Exchange Fined; Algorithmic Traders; Red Flags; China Access)

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Published Date: March 22, 2015


Spring began last week in the northern hemisphere, inciting optimism that warmer and sunnier days soon lie ahead. Optimism also reigned in the futures industry as a result of the publication of proposed rules by the Shanghai International Energy Exchange that heighten the expectation that non-China-based brokers and traders will soon be permitted to directly trade the exchange’s crude oil futures contract. Meanwhile, ICE Futures U.S. was fined US $3 million by the CFTC for allegedly reporting inaccurate trade, price and other information to the Commission for 325 days, and FINRA proposed a new registration category for algorithmic traders’ top developers and supervisors. As a result, the following matters are covered in this week’s Bridging the Week:

Video Version:

Article Version:

ICE Futures Fined US $3 Million by CFTC for Reporting Errors and Untimely Response to Inquiries

The Commodity Futures Trading Commission fined ICE Futures U.S., Inc. US $3 million last week for filing allegedly inaccurate or incomplete reports related to trading activity, prices and delivery notices from October 2012 to at least May 2014. According to the CFTC, IFUS’s “reporting errors and omissions cumulatively numbered in the thousands” and affected certain data in the exchange’s required reports to the CFTC “for every reporting day” on the 325 reporting days during the relevant time period.

Moreover, claimed the CFTC, during the relevant time period and period of the Division of Enforcement’s investigation into IFUS’s reporting miscues, IFUS “did not respond in a timely and satisfactory manner” to inquiries from Commission staff from various divisions, including enforcement staff, about the data reporting issues. The CFTC acknowledged, however, that ultimately IFUS “did cooperate fully” with the Division of Enforcement’s investigation and fixed the reporting problems.

The CFTC said that IFUS’s reporting errors and omissions arose “primarily” as a result of technology upgrades and data migration projects. The Commission also acknowledged that, although there were problems during the relevant time with reports made by IFUS to the CFTC, there were no problems with data published by IFUS on its website.

Under CFTC rules, a derivatives contract market, like IFUS, is required to submit to the CFTC for each business day certain information in order for the Commission to conduct its routine oversight of markets and participants. According to the Commission, it uses the information provided by DCMs,

to detect and prevent situations that could pose a threat to the markets and to keep the Commission informed of significant market developments. The effectiveness of the Commission's market and financial surveillance programs depends on accurate and timely reporting from DCMs.

The CFTC said it initially notified IFUS of its reporting issues at the beginning of the relevant time period and throughout 2013.

In addition to agreeing to pay the fine to resolve this matter, IFUS consented to the creation and appointment of a new senior position of chief data officer who will be directly responsible for all regulatory reporting. IFUS also agreed to maintain at least three additional quality assurance staff members dedicated to regulatory reporting, and to conduct certain testing to ensure the quality of certain past and future reporting.

IFUS agreed to the settlement of this matter “without admitting or denying the findings and conclusions” in the relevant CFTC order.


Compliance Weeds: Part 30.10 permits futures brokers located outside the United States who are subject to a comparable regulatory framework in the country where they are located to carry accounts for US persons for certain designated non-US futures and options. In the first instance, Part 30.10 eligibility is negotiated with the CFTC and a local non-US regulator or exchange. Afterwards, local non-US brokers apply to the National Futures Association to obtain specific Part 30.10 status. Part 30.10 exemptions are only as broad, however, as their precise terms. Some permit regulated brokers in a jurisdiction to carry accounts for US persons for products on futures exchanges in that jurisdiction as well as certain other designated non-US futures exchanges (e.g., exemptions granted to regulators in the United Kingdom and Australia; click here for the UK Part 30.10 Exemption and here for the Australia Part 30.10 Exemption.). Other exemptions under Part 30.10 are limited solely to specific exchanges in the broker’s jurisdictions (such as the exemption granted to the Taiwan Futures Exchange which only extends to TAIFEX members trading TAIFEX futures products for US persons; click here for details). Even where an exemption is broad-based, however, it may not permit a local broker to carry in an account for a US person all non-US futures and options. For example, the UK Part 30.10 exemption is limited to futures products traded on certain Financial Conduct Authority-recognized investment exchanges, designated investment exchanges and regulated markets only (click here for a current list of these entities). Although the HK Part 30.10 exemption is narrow, it potentially could be used to allow US persons to access futures traded in China through a potential expansion of the Shanghai-HK Stock Connect to futures. (Click here for an overview of the Shanghai-HK Stock Connect.)

My View: Following the collapse of MF Global in October 2011, the CFTC rapidly enacted a number of rules to enhance customer protection. Most quickly, in late 2011, the Commission restricted the investments futures commission merchants could make with customer funds, prohibiting, among other things, purchases of non-US sovereign debt—even though at the time the ability of FCMs to invest in non-US sovereign debt was already prudentially restricted. In part, this action was taken in the belief at the time that MF Global had improperly utilized customer funds to purchase non-US sovereign obligations. However, this appears not to have been the case. As a result, US FCMs are now prohibited from investing customer funds in non-US sovereign debt, even when such investment would more appropriately align the obligations of an FCM currency-wise to its customers. Similarly, a year later, the CFTC enacted the residual interest funding deadline to better ensure that some customers’ funds were not used by an FCM to offset other customers’ undermargined accounts. However, this good-faith effort to protect customers from their FCMs potentially could increase customers’ exposures if FCMs required clients to leave more funds up front to anticipate changing market conditions. Moreover, this measure added to FCMs’ costs. Indeed, a better route may have been for the CFTC to work with Congress to amend the bankruptcy laws to permit individual segregated accounts for customers (as in Europe)—which FCMs could then offer to customers and separately charge for. But this was not the route chosen. It is tough to anticipate unintended consequences; however, effective regulation requires holistic thinking and not just to react and do something for the sake of doing something following a crisis. The CFTC is commended for stepping back somewhat from a 2013 knee-jerk reaction and ameliorating the potential adverse impact of an automatic acceleration of the residual interest deadline.

Compliance Weeds: If not doing so already, brokers should develop a process to collect in a single location all adverse information on every customer from every source (e.g., exchange requests, exceptions from automated or other surveillance, financial issues), and automatically generate exception reports that identify potentially problematic customers and why. Too often red flags are missed because they litter a company’s offices over disparate locations, and are not collated and reviewed in a systematic manner.

And even more briefly:

And finally:

I am speaking at three upcoming conferences: the FIA's "37th Annual Law and Compliance Division Conference on the Regulatiopn of Futures, Derivatives and OTC Products" in Baltimore, Maryland on April 29 - May 1, 2015 (click here for details); the Managed Futures Association's "Compliance 2015" conference in New York City, NY on May 5, 2015 (click here for details); and the America Conference Institute's  National Advance Summit on "Swaps & Derivatives Global Markets Regulation" in New York City, NY on June 29-30, 2015 (click here for details).

For More Information, See:

BIS/IOSCO Delays Rollout of Margin Requirements for Uncleared Swaps:

Full Text:

See also ISDA statement:​

CFTC Grants Hong Kong Part 30.10 Status:

CFTC Maintains FCM Residual Interest Deadline at 6 PM for Now:

CME Group Reiterates Prior Lessons Learned in Current Disciplinary Actions:

Daniel Masters:
Michael Simonian:

ESMA Notes Increased Commonality in Oversight of Automated Trading by EU Regulators:

FCA Bans Former Trader After LIBOR Fraud Conviction:

FINCEN Updates List of Jurisdictions With Deficient AML and Counter-Terrorist Financing Regimes:

FINRA Fines Broker-Dealer for Failing to Act on Red Flags and Prevent Theft by Identity Thief:

FINRA Proposes Registration of Broker-Dealers’ Algorithmic Trading Programs’ Principal Developers and Supervisors:

ICE Futures Fined US $3 Million by CFTC for Reporting Errors and Untimely Response to Inquiries:

Korea Adopts Business Guidelines for Financial Market Infrastructures:

Available at:

NFA Lightly Slaps FCMs for New Customer Protection Rules Breaches:

JP Morgan Clearing Corp:


Shanghai International Energy Exchange Releases Proposed Rules to Govern Overseas Traders:

US and NYS Settle With BNYM Over Alleged FX Price Quality Misrepresentations:

Joint Press Release:

US Stipulation and Settlement Order:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of March 21, 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 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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