Bridging the Weeks by Gary DeWaal: July 25 to August 5 and August 8, 2016 (Exchange Fees; Cross Border Relief; Leaking Confidential Information; OATS; Times They Are A Changin’; Dad)

Jump to: AML and Bribery    Bitcoin Ecosystem    Bridging the Week    Chief Compliance Officers    Commissions and Fees    Compliance Weeds    Customer Protection    Exchanges and Clearing Houses    Follow-Up    Insider Trading    Legal Weeds    Managed Money    Supervision    Systems and Controls    Trade Practices (including Disruptive Trading)    Uncleared Swaps   
Email Print
Published Date: August 07, 2016

The Commodity Futures Trading Commission again fined a futures commission merchant for not timely reconciling exchange fees and paying back customers that were charged too much, despite acknowledging the complexity and manual nature of dealing with exchange fees and discounts. Separately, CFTC staff again delayed the effective date of its own advisory requiring non-US swap dealers that enter into swap transactions with other non-US persons that are arranged, executed or negotiated in the United States to comply with CFTC-mandated transaction-level requirements. Additionally, EUREX continues to roll out its ISA Direct clearing membership for clients, while CME Group still awaits CFTC approval for its equivalent Direct Funding Participant clearing membership. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

Video Version:

Article Version:


My View: This enforcement action is the CFTC’s second enforcement action grounded on the theory that it is allegedly a violation of an FCM’s general obligation to supervise accounts if an FCM fails to accurately reconcile exchange fees and ensure that customers are credited with overpayments on a timely basis. (Click here to access CFTC Regulation 166.3.) In 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $1.2 million to the CFTC related to the CFTC’s allegation that, from at least January 1, 2010, through April 2013, the firm failed to employ “an adequate supervisory system” related to the processing of exchange and clearinghouse fees charged to the firm’s customers. This large fine was assessed despite Merrill apparently self-detecting its own reconciliation issues, endeavoring to correct its problems through the use of two independent consulting firms, and paying out virtually all over-accrued amounts to impacted customers. It turned out that, during the relevant time period, Merrill Lynch paid more than $318 million in exchange fees, and its unexplained over-accruals of $415,318 for customers constituted less than .15 percent of its overall fees paid (Click here for details of this CFTC enforcement action in the article, “CFTC Fines Merrill Lynch $1.2 Million for Not Having an Adequate Supervisory System for Its Exchange and Clearinghouse Fees Reconciliation Process” in the September 1, 2014 edition of Bridging the Week.) Rather than bring enforcement actions against FCMs for managing the best they can with a very broken process, the CFTC should encourage exchanges to institute less complicated fee and discount structures.

My View: Nowhere in the FRB’s release related to Goldman Sachs (click here to access) was any mention of steps it would be taking to lessen the likelihood that its employees would illicitly disseminate confidential information in the future. Nor was there mention of any internal review regarding what breakdowns in oversight and internal controls might have contributed to the unlawful dissemination of confidential supervisory information by Mr. Gross. Since Goldman Sachs was publicly castigated and sanctioned twice by two separate regulators for its role in this matter, hopefully appropriate measures are being taken by the FRB too internally, even if not in the public eye.

Compliance Weeds: A panel of the NYMEX Business Conduct Committee recently found that, from April 18, 2012, through December 10, 2012, Jon Ruggles, a nonmember and former trader for Delta Airlines, traded two accounts of his wife, Ivonne Ruggles, relying on confidential information of his employer in a manner that disadvantaged it. According to NYMEX’s BCC, during the relevant period, Mr. Ruggles accumulated profits in excess of US $3.3 million as a result of his unauthorized trading. (Click here for details regarding this disciplinary action in the article, “Trader Sanctioned Over US $3 Million by CME Group for Trading on Confidential Employer Information; Both He and Wife Barred From Exchange Trading” in the June 19, 2016 edition of Bridging the Week.) The Commodity Futures Trading Commission previously has settled an enforcement action against an individual claiming that his trading opposite his employer’s account constituted impermissible misappropriation of confidential information, and a violation of the relatively new provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the corresponding CFTC rule that prohibit any person from engaging in “any manipulative or deceptive device or contrivance” in connection with futures trading that uses, attempts to use or employs “any manipulative device, scheme or artifice to defraud” or operates “as a fraud or deceit upon any person.” (Click here to access Commodity Exchange Act Section 6(c)(1)), US Code §9(1), and here to access CFTC Rule 180.1. Click here for details on this CFTC action in the article, “CFTC Brings First Insider Trading-Type Enforcement Action Based on New Anti-Manipulation Authority” in the December 6, 2015 edition of Bridging the Week.)

And more briefly:


My View: As Bob Dylan sung, The Times They Are A Changin’ (click here to access a vintage 1964 recording). Eurex already has, and CME Group has proposed, clearing memberships that at least somewhat disintermediate the traditional role of what are known in the United States as future commission merchants. Instead of carriers of client accounts, FCMs would at most become facilitators of client accounts, acting as introducing brokers to clearinghouses. In the United States, CME Group has claimed its proposal will alleviate fellow customer risk for DFP clearing members and reduce certain BASEL bank charges for banks that own FCMs, while EUREX generally emphasizes only the benefits to customers. DFP members’ obligations will be fully guaranteed by another clearing member as proposed by CME Group, while no such general guarantee exists for a clearing agent of an ISA Direct member. Time will tell whether any of these proposals will fulfill their promises. However, they are worth studying, and it is likely beneficial to have a public forum in the United States — perhaps sponsored by the CFTC’s Market Risk Advisory Committee— to discuss the intricacies of CME Group’s DFP proposal and other proposals likely soon to be proposed by other derivatives clearing organizations.

Compliance Weeds: Under FinCEN’s new rules, a covered financial institution must conduct customer due diligence on all new customers’ accounts to:

  1. identify and verify the identity of customers;
  2. identify and verify the identity of beneficial owners of customers that are entities;
  3. understand the nature and purpose of customer relationships; and
  4. ​conduct ongoing monitoring in order to report suspicious transactions and, on a risk basis, maintain and update customer information.

FinCEN believes element (1) is already met by covered financial institutions’ customer identification program (CIP) while elements (3) and (4) are already implicitly required because of existing suspicious activity reporting requirements. It believes that only element (2) is a new requirement.

Generally, covered financial institutions must collect information regarding each of the natural person beneficial owners covered by the rule for a specific customer by:

  1. using the model form provided by FinCEN, which asks for each individual person’s name, date of birth for individuals, real address and identification number, and obligates an individual from the legal entity to certify that the information is true and correct; or
  2. taking other steps to obtain the equivalent information required by the model form with a certification from the legal entity.

A covered financial institution must verify the identity of identified beneficial owners using CIP-type procedures (e.g., receiving documentary or non-documentary evidence), although the covered financial institution need not receive original documents (copies are permissible). However, a covered financial institution is not required to independently verify the fact that an individual is a beneficial owner provided it has no knowledge that would “reasonably call into question” the reliability of provided information.

(Katten Muchin Rosenman LLP has prepared a CLE-eligible webinar with a PowerPoint presentation related to FinCEN’s new requirements. Click here to access.)

And finally:

For more information, see:

Before There Was CME Group’s Direct Funding Participant Clearing Membership Proposal There Was Eurex’s ISA Direct:

Bitcoin Exchange Previously Fined by CFTC Now Hacked:

Broker-Dealer to Pay US $1.2 Million to FINRA for Widespread OATS Violations:

CFTC Proposes Waiving Audited Annual Report Requirement For Certain New Pools:

CFTC Staff Extends Cross-Border Relief for OTC Transactions Arranged in the US:

See also:

CFTC Staff Says Matrix Reporting Okay for FCM and Swap Dealer CCOs Provided Ultimate Authority With Board or Senior Officers:

Court Orders Disbarred Attorney to Pay US $280,000 Fine to CFTC for Role in Illicit Money Passes:

Court Orders Two Web-Based Firms to Pay US $4.6 Million in Sanctions for Binary Options Trading Fraud:

FCM Agrees to Pay US $800,000 Fine to CFTC Because of US $1.1 Million in Erroneous Customer Exchange Fees Charges:

FinCEN Issues FAQs on Customer Due Diligence Requirements for Financial Institutions:

Investment Bank Fined US $36.3 Million by Federal Reserve Bank in Response to Its Own Staff’s Leakage of Nonpublic Information to Ex-Employee:

MAS Issues Guidance on Outsourcing Including Using Cloud Services:

Nonmember Settles CME Group Disciplinary Action for $336,500 in Sanctions and Three-Year Trading Ban for Front-Running Employer Trades:

Three Federal Regulators Announce US $382.4 Million Settlement With Custody Bank for Misleading Clients About FX Mark-Ups:

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

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 »