Bridging the Week by Gary DeWaal: February 1 – 5 and 8, 2016 (Dark Pools; Manipulation; Position Limits; Wash Trades; Purposeful Regulation)

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Published Date: February 07, 2016

Last week, two broker-dealers agreed to pay substantial fines to resolve New York State and Securities and Exchange Commission allegations of wrongdoing by their dark pools. In addition, one futures exchange issued a helpful Frequently Asked Questions regarding its position limits' requirements, while another published a FAQ regarding wash trades. Finally, both the heads of the Commodity Futures Trading Commission and UK Financial Conduct Authority spoke publicly about proposed new rules regarding position limits – but one strongly criticized her continent’s proposed rules as “not necessary.” As a result, the following matters are covered in this week’s edition of Bridging the Week:

(Because of Presidents' Day in the US on February 15, 2016, the next edition of Bridging the Week will be February 16, 2016.)

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Compliance Weeds: Position limit rules are generally equivalent among US exchanges, but are not 100 percent identical. In general, exchange position limits apply to all traders whether members of an exchange or not. On some exchanges (e.g., CME Group and NASDAQ Futures), if a customer breaches a position limit, clearing members will not be deemed in violation of the exchange’s position limits proscriptions for a "reasonable time" (typically one business day) in order to permit a firm to discover and liquidate the violating position. However, on at least one exchange, ICE Futures U.S., clearing members are technically responsible for maintaining “their Customers’ positions within [position limits] on both an intraday and end-of-day basis” (click here to access IFUS Rule 6.13(a)). As a result, it is always important for traders to monitor for position limit compliance both intraday and as of end of day. It is also important for clearing brokers to monitor their customers’ position limit compliance at least as of end of day, and potentially for at least IFUS, intraday too. (Click here to access CME Group Rule 562 and here for CME MRAN RA1518-5R: Position Limits and Accountability Levels (November 19, 2015).) In general, violating an exchange’s position limit could be construed to constitute a violation of speculative position limits' requirements of the Commodity Futures Trading Commission.

Compliance Weeds: All US futures exchanges (in addition to ICE Futures U.S.) as well as the Commodity Futures Trading Commission, prohibit wash sales. Generally, where available, exchange guidance on wash sales is similar. However, unlike on IFUS, where the use of self-trade prevention functionality by algorithmic proprietary traders directly accessing the exchange is mandatory, it is optional on some exchanges (e.g., CME Group and CBOE Futures Exchange). (Click here to access CME MRAN RA1411-5RR: Wash Trades Prohibited (January 2, 2015) and here to access CFE Regulatory Circular RG14-o11: Self-Trade Prevention (March 26, 2014).)

Legal Weeds: In general, no purchase or sale of a commodity for future delivery may occur unless the transaction is conducted on or subject to an exchange appropriately designated by the Commodity Futures Trading Commission. Forward sales of commodities where delivery is contemplated and occurs are generally excluded from this requirement. However, forward sales do not include leveraged or financed sales of physical commodities to retail persons (e.g., not so-called eligible contract participants or eligible commercial entities) where delivery of the physical commodity does not occur within 28 days. (Click here to review the relevant statutory provision, Section 2(c)(2)(D) of the Commodity Exchange Act. Click here for information regarding Jay Grossman, a Florida-based attorney, who was sued and settled an enforcement action brought by the CFTC related to his alleged aiding and abetting of multiple clients in their operation of illegal precious metal schemes for retail clients in the article, "Florida Lawyer Settles CFTC Complaint Charging He Aided and Abetted His Clients’ Unlawful Precious Metals Scheme," in the July 26, 2015 edition of Bridging the Week.)

My View: The UK Treasury recently announced that Andrew Bailey from the Bank of England will soon take over the reigns as head of the Financial Conduct Authority. Although her tenure has been short, Tracey McDermott, current Acting Chief Executive Officer of the FCA, has shown a remarkable frankness and level-headedness for a regulator, and her style will be missed. Recently Ms. McDermott gave a powerful speech about the pendulum of regulation where she strongly suggested that the current amount of oversight has likely shifted too far and might impede innovation. (Click here for more details in the article, “UK FCA’s Acting CEO Says Current Intensity of Regulatory Activity Is Not Sustainable” in the October 25, 2015 edition of Bridging the Week.) She has now openly questioned Europe’s proposed expansive commodity derivatives' position limit scheme that could seriously impede the development of liquidity in some contracts. Ms. McDermott is not an industry defender in regulator’s clothing. She has made it clear she favors tough regulation, and FCA’s soon-to-be-implemented policy to potentially hold senior managers accountable for breaches in their area of responsibility is one of many indicia of that. But she has also made clear that regulating for the sake of regulating is not good public policy. According to Ms. McDermott, regulators need to take a “disciplined approach” in their oversight:

not tough for the sake of being tough
not making rules for the sake of introducing rules
​not activity for the sake of being seen to be active
But interventions and actions which are robust, well thought through and designed to deliver that overarching aim of markets working well.

What a refreshing approach to regulation! Hopefully Ms. McDermott’s thoughtfulness will long outlast her brief tenure as FCA CEO, and her too-short applied sensibility will influence other regulators worldwide for a much longer time!

And more briefly:

For more information, see:

BIS to CCPs: Ensure Sufficient Liquid Resources for Settlements:

CFTC Chairman Offers No Timetable But Says Agency “Working Hard” on Position Limits; FCA Head Says Proposed European Position Limits Unnecessary:


CFTC Charges One Firm and Settles With Another for Illegal Off-Exchange Precious Metals Transactions:

Oakmont Financial:
Worth Group Inc.:

CFTC Opposes Kraft/Mondelez’s Attempt to Have an Appeals Court Determine Certain Legal Issues at This Time:
Kraft CFTC Response Interlocutory Appeal.pdf

Citi Becomes First Bank to Settle LIBOR Class Action Complaint:
Citi Libor Settlement.pdf

EC Proposes Applying Anti-Money Laundering Rules to Virtual Currencies:

EUREX Clearing Granted DCO Registration by CFTC:

FCA Aims to Hold Senior Managers More Accountable for Firm Misconduct Under Their Responsibility:

ICE Futures U.S. Issues Revised Wash Trade FAQ:

NASDAQ Futures Publishes Helpful Position Limit FAQs:

Senate Agriculture Committee Seeks More Information on CFTC Accounting Practices:

Two Broker-Dealers to Pay US $154 Million to the State of NY and the SEC to Resolve Allegations of Wrongdoing by Their Dark Pools:

NYS AG Settlement Announcement:
SEC Orders:
Credit Suisse:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of February 6, 2016. 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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