Bridging the Week by Gary DeWaal: July 27 - 31 and August 3, 2015 (No Passport; Spoofing; Wash Trades; Position Limits, Bitcoin; Rogue Trading)

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Published Date: August 02, 2015

No unifying theme bridged last week’s most material developments in the financial services industry worldwide. In Europe, ESMA declined to find equivalency in the regulation of alternative investment fund managers and funds in the United States and in the European Union, and thus would not recommend at this time that the European Commission grant passport rights to US managers and funds to access EU professional investors without authorization by each member state where they propose to conduct business. Meanwhile, in the United States, three firms were fined in excess of US $2.6 million by FINRA for OATS trade reporting infractions; while in Hong Kong, a firm was fined approximately US $580,000 for not timely reporting information regarding an apparent rogue trader. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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ESMA Says “No for Now” to Granting Passport Rights to US Fund Managers Under AIFMD:

The European Securities and Markets Authority told the European Commission last week that it was premature to grant passport rights to US alternative investment fund managers (AIFMs) that would enable them to manage or market alternative investment funds (AIFs) in the European Union without authorization by each member state where they proposed to conduct business. This is because ESMA did not find equivalence in overall oversight and potential access rights under the EU and US regulatory schemes.

However, ESMA said that AIFMs and AIFs from Guernsey, Jersey and Switzerland should be permitted to benefit from passport rights because there is equivalence in regulation between those jurisdictions and the European Union.

According to ESMA, if passport rights were granted to relevant US entities at this time, US persons would have easier access to EU professional investors than equivalent EU entities would have to professional investors in the US due to registration requirements under the US framework.

Generally, ESMA found equivalence between the US and EU regulatory oversight of AIFMs and AIFs in most areas, although ESMA found that EU rules on remuneration are significantly more restrictive than in the United States, and that there is no ability under applicable EU rules for a mutual fund to act as its own custodian, as there is in the United States.

In addition to deciding to make no determination regarding US AIFMs and AIFs at this time, ESMA also deferred a decision to grant passport rights to AIFMs and AIFs from Hong Kong and Singapore. ESMA declined to consider at all at this time the equivalence of EU rules and the rules of 16 other jurisdictions, including Australia, Canada and Japan

In general, under relevant EU law – the Alternative Investment Fund Managers Directive – where ESMA finds equivalency in regulation regarding investor protection, market disruption, competition (i.e., equivalence in access) and the monitoring of systemic risk, it should recommend granting a passport. The AIFMD is an EU directive that was implemented in 2013 and regulates entities that manage or market alternative investment funds within the European Union.

(Click here to access additional information on this development in the article “AIFMD Marketing Passport: ESMA Provides European Commission With Advice on Its Possible Extension to Non-EU Jurisdictions” in the July 31, 2015 edition of Corporate & Financial Weekly Digest by Katten Much Rosenman LLP.)

My View: First there was the failure of the European Commission to find that the regulatory oversight of clearinghouses in the United States was equivalent to that in the European Union. This failure, if not resolved, will cause European banks to incur substantial capital charges for clearing on US-based clearinghouses. Now there is the reluctance of ESMA to find that the oversight and potential access of European alternative investment funds managers and funds to US institutional persons is equivalent to that of US AIFMs and AIFs. Soon, ESMA and the European Commission will need to determine whether the oversight of US-based high frequency traders and direct electronic access sponsors to EU markets is equivalent to the requirements for EU-based HFTs and DEAs under the Markets in Financial Instruments Directive II and the Markets in Financial Instruments Regulation. If not, access to EU markets by US-based DEA sponsors and HFTs will potentially require authorization by relevant EU member states. The more complicated it is to conduct international financial transactions, the more likely that fewer of such transactions will be conducted, with concomitant decreases in product liquidity and/or fragmentation of markets. Neither outcome is desirable, and regulators on both sides of the Atlantic should strive to avoid such an outcome.


Compliance Weeds: There are many differences between the regulatory approaches taken by US securities and futures regulators and self-regulators. Another one potentially now involves the definition of spoofing. Whereas futures self-regulators, drawing on applicable law, typically define spoofing in terms of potentially a single transaction (click here to access the 2013 Interpretive Guidance and Policy Statement regarding disruptive trading practices adopted by the Commodity Futures Trading Commission), the BATS Exchange seeks to make it expressly clear in its proposed new interpretation that spoofing or layering involves a “frequent pattern” of transactions. Moreover, while it is unlawful bidding or offering alone that could trigger a spoofing offense under the futures regulatory regime – without regard to whether any order is actually executed – BATS Exchange’s proposed interpretation would require an actual trade execution as part of a series of transactions in order to constitute an offense.

Helpful to Getting the Business Done: I am still personally agnostic when it comes to predicting the future success of Bitcoin. However, it is clear to me that more and more institutions are seeing a great potential in the technology behind the distributed ledgers associated with cryptocurrencies to have a material impact on the processing of financial transactions in the future. Others see an equally great potential in the future use of cryptocurrencies themselves. Review of just a few of the letters submitted to ESMA’s consultation will provide insight into what many see as the possible opportunities.

And more briefly:

For more information, see:

Australian Regulator to Consider Recovering Investigation Expenses Against Respondents:

BATS Exchange Seeks Expedited Authority to Suspend Alleged Spoofers:

Phased Roll-Out of New Position Limits Called for at CFTC EEMAC Public Meeting:

CFE Prepares for OCR Implementation:

CME Group Exchanges Sanction Trader Who Allegedly Engaged in Wash Trades to Manage Tax Obligations:

Dark Pool Operator International Trading Group Announces US $20 Million Reserve for SEC Enforcement Action Settlement:

ESMA Says “No for Now” to Granting Passport Rights to US Fund Managers Under AIFMD:

FCA Finds Continued Weakness in Firms’ Oversight of Benchmark Activities:

FINRA Fines Three Broker-Dealers More Than US $2.6 Million for OATS Reporting Violations:

Goldman Sachs:
KCG Americas:
RBC Capital Markets:

HK SFC Fines Nomura International US $580,000 for Failing to Timely Disclose Activities of Rogue Trader:

Industry Participants Respond to ESMA’s Call for Input on Virtual Currencies and Distributed Ledger Technology and Discuss Potential Applications:

IOSCO Issues Progress Report in the Regulation of Derivative Market Intermediaries:

NFA Conforms Reporting Requirements to CFTC Staff Relief for CTAs Not Directing Trading:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of August 1, 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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