Bridging the Week by Gary DeWaal: September 12 to 16 and 19, 2016 (De Minimis Threshold; Position Limits; Pre-Execution Communications; Cybersecurity)

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Published Date: September 18, 2016

Last week, the Commodity Futures Trading Commission Chairman Timothy Massad said he would recommend a one-year delay in lowering the de minimis swap dealer threshold from US $8 to $3 billion. In addition, the Hong Kong Securities and Futures Commission reminded futures and options traders that position limits are not just a CFTC requirement when it fined a major international bank the equivalent of US $325,000 for violating its position limits rules. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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My View: The recent study by the CFTC staff provides more than adequate support to permanently cancel the lowering of the de minimis threshold despite its limited data on commodity swaps. No matter what the stated rationale, this seems to be mostly a political decision to defer the resolution of this important matter to after the election of a new US president and the possible appointment of a new CFTC chairperson. However, a one-year delay at this time will prolong unnecessary uncertainty among smaller swaps traders. This may be a punt, but it seems more like a fumble.

Compliance Weeds: Not just the Commodity Futures Trading Commission in the United States, but some foreign regulators, such as the HK Securities and Futures Commission, maintain position limits on certain futures and options contracts that must be adhered to by all persons who trade local markets. (Click here to access SFC’s position limit requirements and aggregation rules. Click here to see also, as an example, the article, “France Rolls Out Reporting and Position Limit Regime for Agricultural Commodity Derivatives Beginning July 1” in the June 14, 2015 edition of Bridging the Week.) Other jurisdictions, including Europe, are scheduled to implement a wide-ranging position limit regime, beginning January 2018. (Click here for details in the article, “ESMA Publishes Final Technical Standards for MiFID II” in the October 4, 2015 edition of Bridging the Week.) It behooves all traders accessing non-US markets to inquire, in advance, if position limits are applicable and if so, to ensure they are aware of the levels, as well as any aggregation rules and basis for exemptions.

Compliance Weeds: Generally, for approved contracts only, CME Group exchanges permit pre-execution communications to facilitate trading subject to strict requirements. Among these requirements are that the party on whose behalf a communication is made previously consented to such communication and that no person involved in pre-trade communications takes advantage of information conveyed except to facilitate the relevant trade. Other than for CBOT EU Wheat futures and options, pre-execution communications are never permitted for CBOT grain and oilseed futures at any time. Moreover, CME Group rules regarding cross trades vary by product and by futures and options. Even the mechanical steps for executing a cross trade following a conversation vary. There are Globex Crosses, Agency Crosses, Committed Crosses, and RFQ and RFC Crosses. (Click here to access the relevant CME Group Market Regulation Advisory Notice regarding Pre-Execution Communications (August 16, 2016).) However, despite the complexity, the consequences of getting it wrong can be severe, resulting in not only potential CME Group sanctions, but possible sanctions by the Commodity Futures Trading Commission too. (Click here to access the article “CFTC Fines FirstRand Bank for Unlawful Pre-Execution Discussions Related to Soybean Futures Trades” in the September 1, 2014 edition of Bridging the Week.) Most simply, all noncompetitive trades are strictly prohibited under CFTC rules, and any violation of a CME Group rule regarding pre-execution communications, could also be deemed a violation of this CFTC requirement. Pre-execution communication rules of other designated contract markets are similar but contain important differences from CME Group requirements (click here to access the “Pre-Execution Communication FAQ” of ICE Futures U.S. (dated August 2016) and here to access guidance with respect to executing cross orders on Nasdaq Futures, Inc.).

And more briefly:

For more information, see:

Australia-Regulated Trading Facility Authorized to Permit US Persons to Trade Swaps Without SEF Registration:

CME Group Sanctions Nonmembers for Impermissible Money Transfers and Pre-Execution Communications:

Standard Chartered Bank:
Zhi Guo Zhang:

Convicted Spoofer Denied Bail Pending Appeal of Adverse Verdict:

FINRA Fines Broker-Dealer US $850,000 for Ignoring Red Flags of Office Manager’s Theft of Client Funds:

International Bank Fined by HK Regulator for Position Limit Breaches in Futures and Options:

Just in Time for Football Season, CFTC Chairman Decides to Punt Swap De Minimis Threshold for One Year:

New CFTC Commissioner Nominations Trudge Forward:

NYS Proposes Express Cybersecurity Requirements for Banks, Insurance Companies and Other NY-Regulated Financial Institutions:

SEC Soon to Seek Public Input on Disruptive Trading Practices:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of September 17, 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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