Bridging the Week by Gary DeWaal: April 4 - 8, and 11, 2016 (OCR; Spoofing; Me-Too Enforcement Actions; ATS Gone Wild; Leverage Ratio)

Jump to: AML and Bribery    Block Trades and EFRPs    Bridging the Week    Capital and Liquidity    Compliance Weeds    Cybersecurity    EMEA Regulation (sans Capital and Liquidity and UK after March 1, 2019)    My View    Position and Trade Reporting    Registration    Regulation AT    Systems and Controls    Trade Practices (including Disruptive Trading)    Uncleared Swaps   
Email Print
Published Date: April 10, 2016

Two non-US residents settled a civil enforcement action by the Commodity Futures Trading Commission alleging that they engaged in spoofing activity by agreement to pay an aggregate fine of US $2.69 million, while a third individual’s recent criminal conviction for spoofing was not set aside by the relevant court, despite his motion for such relief. Separately, staff of the CFTC once again delayed effective dates for obligatory electronic filings under its new Ownership and Control requirements; clarified definitions of owner and controller; and provided some interim relief on the effective dates of certain other specific requirements of reporting entities. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:

CFTC Again Extends Deadlines for New OCR Compliance; Puts Pressure on FCM Clients Who Will Not Provide Adequate Information Regarding Trading Control

Late last week, staff of the Division of Market Oversight of the Commodity Futures Trading Commission again delayed the roll-out of certain new large trader reporting requirements that initially were adopted during November 2013 and, most recently, scheduled to go into effect later this month. Under these new Ownership and Control Data Reporting Requirements, the CFTC expanded upon its previous large trader reporting regime and required the electronic submission of certain large traders’ and position holders’ data regarding their futures and swaps holdings on updated forms:

Under the revised schedule, new requirements related to the electronic reporting of:

In the interim period, recordkeeping requirements that became effective on August 14, 2014, and legacy non-automated reporting and certain other requirements remain in effect. Entities required to file the relevant forms (Reporting Parties) are also expected to cooperate with CFTC staff to test and implement relevant information technology standards and systems.

As part of its no-action relief and OCR guidance, DMO staff also agreed to extend the time period by which certain other specific OCR requirements would apply. For example, Reporting Parties obligated to file new Form 102A beginning September 29, 2016, will not be required to include certain information regarding trading account controllers (e.g., phone number, name of employer, employer National Futures Association identification, employer legal entity identifier) until August 30, 2018. Staff also increased the reporting trigger for volume threshold accounts under new Form 102B to 250 or more contracts per day from September 29, 2016, until September 28, 2017, and to 100 contracts per day from September 29, 2017, to August 29, 2018. The threshold level would revert to 50 contracts per day beginning August 30, 2018.

DMO staff also clarified who would be considered owners and controllers of reportable accounts under its OCR rules, as well as provided a mechanism for Reporting Parties to identify to the CFTC a client that does not provide it with adequate information to identify a trading account controller on a Form 102A or 102B. From September 29, 2016, to September 28, 2017, DMO staff will not recommend an enforcement action be taken against any Reporting Party that does not properly report a trading account controller provided it specially discloses to the CFTC the non-cooperation of the relevant client; this is typically a problem experienced by reporting future commission merchants and foreign brokers.

(Click here for a brief summary of the CFTC’s initial November 2013 OCR rules in the article, “CFTC Adopts Final Rules for Ownership and Control Reports” in the November 1, 2013 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)


Legal Weeds: The relevant provision of law under which Mr. Coscia was prosecuted prohibits trading activity that “is, is of the character of, or is commonly known to the trade as, 'spoofing' (bidding or offering with the intent to cancel the bid or offer before execution).” It may be clear what is prohibited by this provision, as the court has written, but by its broad sweep, the provision technically makes illegal relatively ordinary trading conduct that no one – not even the Commodity Futures Trading Commission or any exchange – would likely consider nefarious.

For example, when a trader places a stop loss order, he or she does not intend for the order to be executed, because, presumably that would mean the market is trending in a direction opposite his or her expectation. However, he or she will accept a trade execution if the conditions of the stop loss order are realized.

The CFTC, in its May 28, 2013 Antidisruptive Practices Authority guidance (click here to access), seems to acknowledge this dichotomy. According to the CFTC, “a spoofing violation will not occur when the person’s intent when cancelling a bid or offer before execution was to cancel such bid or offer as part of a legitimate, good-faith attempt to consummate a trade. Thus the Commission interprets the statute to mean that a legitimate, good-faith cancellation or modification of orders (e.g., partially filled orders or properly placed stop-loss orders) would not violate [the relevant statutory provision].”

CME Group, in a market advisory addressing disruptive trading (click here to access) also provides a number of other examples where the intent of a trader is not necessarily to have all his or her orders executed at the time of order placement, but the consequence is not deemed impermissible spoofing — e.g., placing a quantity larger than a market participant expects to trade in electronic markets subject to a pro rata matching algorithm and placing orders at various price levels throughout an order book solely to gain queue position, and subsequently cancelling those orders as markets change.

Unfortunately, the statute prohibiting spoofing simply has it wrong. There is nothing automatically problematic about all spoofing as now defined under applicable law. Deception, to some except, is part of smart trading. No trader knowingly reveals all his or her strategy or intent as part of an order placement (consider, for example, exchange-sanctioned iceberg orders). As CME Group wrote in a comment letter to the CFTC about what should be deemed illegal spoofing, it is not the intent to cancel orders before execution that is necessarily problematic, it is “the intent to enter non bona fide orders for the purpose of misleading market participants and exploiting that deception for the spoofing entity’s benefit” (emphasis added; click here to access CME letter to CFTC dated January 3, 2011). Spoofing is simply the big circle in the applicable Venn diagram; what should be prohibited is solely a smaller circle within the larger one – a subset.

The jury hearing Mr. Coscia’s prosecution clearly believed there was sufficient evidence to find the defendant had engaged in spoofing, and the judge overseeing the trial has now ruled twice that Mr. Coscia was on sufficient notice that his specific trading activity constituted spoofing.

However, until the anti-spoofing law is further clarified to reflect what truly is problematic, it will embrace both legitimate and illegitimate activity; potentially scare away bona fide trading and have a deleterious impact on market liquidity; and potentially cause some market participants to run afoul of the law for ordinary order placement activity. This is not right or fair, even if, as the court ruled in Mr. Coscia’s case, traders have “fair notice.”

Compliance Weeds: The risk of executing any non-competitive trade is that, unless it is executed precisely in accordance with exchange rules, it is likely a violation of rules of the Commodity Futures Trading Commission. This is because the CFTC requires all futures transactions to be executed openly and competitively except for trades “executed non-competitively in accordance with written rules of the contract market which have been submitted to and approved by the Commission, specifically providing for the non-competitive execution of such transactions.” (Click here to access the full text of CFTC Rule 1.38.) Unfortunately, not all exchange rules addressing the same non-competitive transactions are identical – even on different markets of the same exchange group (Click here for examples of such different rules in the article, “CME Group Updates Its Pre-Execution Communication Rule to Reflect New Committed Crosses” in the January 31, 2016 edition of Bridging the Week.) Thus care must be taken to ensure that traders are aware of each exchange’s specific requirements and that they are followed faithfully.

My View: It always leaves the Commodity Futures Trading Commission open to second guessing when it brings a “me-too” enforcement action that alleges the same violation addressed in a prior self-regulatory organization’s disciplinary action (particularly when its enforcement action is filed almost two years later as in the instant matter). Unfortunately, the CFTC does not explain its thinking when it files such an action, particularly when there is a settlement. On the one hand, critics can fairly question whether a “me-too” action represents an appropriate expenditure of scarce agency resources. On the other hand, the CFTC can argue that the SRO action levied a sanction that was not sufficient given the severity of the alleged wrongful conduct. In the instant matter, IFUS was only able to ban Mr. Pucciarelli from trading on its markets. The CFTC could have reasonably determined that trading on all markets was a more appropriate penalty for conduct it considered egregious. Who knows – other than CFTC Division of Enforcement staff? At a minimum, the CFTC should ordinarily not file “me-too” actions except where there are particularly egregious circumstances.

My View: The comment period for proposed Regulation Automated Trading by the Commodity Futures Trading Commission has now closed, and staff is in the process of evaluating the many divergent views that were submitted and likely developing one or more final rules, potentially by as soon as year-end. Proposed Regulation AT has many prescriptive requirements (CME Group calculates 87) for persons within its scope, including rules related to utilizing mandatory pre-trade risk filters; the development, testing and monitoring of so-called algorithmic trading systems; the retention and production of source code; and the filing with designated contract markets of annual certified reports. (Click here for a detailed oversight of the requirements of proposed Regulation AT in the article, “CFTC’s Proposed New Algorithmic Trading Rules Augur Potential Increased Obligations and Costs, and a New Registration Requirement” in the November 29, 2015 edition of Between Bridges) However, nothing in the proposed rules would likely have prevented the type of alleged error at issue in the instant matter – plain old human mistake. Somewhat ironic!

And more briefly:

For more information, see:

Basel Committee Consults on Revised Leverage Ratio Framework and Seeks Data to Consider Offsets for Initial Margin:

See also, ISDA Views:

CME Group Member Resolves Disciplinary Action for Automated Trading System Errant Purchases That Purportedly Drove Up Crude Oil Spread Prices:

ESMA Proposes One-Day Margin Period for CCP Client Accounts:

Federal Court Declines to Set Aside Coscia Spoofing Conviction:

FinCEN Proposes to Include Funding Portals in Definition of Broker or Dealer to Apply Bank Secrecy Act Provisions:

IOSCO Issues Overview of Different International Regulators’ Approaches to Cybersecurity:

Peaking Supply Contracts Involving Electricity and Natural Gas Not Swaps Say CFTC in Proposed Guidance:

Rollout of MiFID II One Step Closer to Formal One-Year Delay:

Sample Public Report (Pensions&Investments):

SEC Approves FINRA Rule Mandating Registration of Algo System Designers:

Subject of IFUS Sanction for Alleged Non-Bona Fide EFPs Also Penalized by CFTC for Same Conduct:

Two Non-US Residents Consent to CFTC Settlement for Alleged Spoofing Activity:

US Court Says FSOC Deviated From Its Own Standards in Designating MetLife as Systemically Important and Wrongfully Failed to Consider Costs:

See also Statement of US Department of Treasury:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of April 9, 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.

Recent Commentaries




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.

Social Media:


Katten is a firm of first choice for clients seeking sophisticated, high-value legal services in the United States and abroad.

Our nationally recognized practices include corporate, financial services, litigation, real estate, environmental, commercial finance, insolvency and restructuring, intellectual property, and trusts and estates.

Our approximately 650 attorneys serve public and private companies, including nearly half of the Fortune 100, as well as a number of government and nonprofit organizations and individuals.

We provide full-service legal advice from locations across the United States and in London and Shanghai.


Gary DeWaal
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022-2585


Request Information »

Join Mailing List »