Bridging the Week by Gary DeWaal: December 5 to 9 and December 12, 2016 (Position Limits; Aggregation; Owned Entity Exemption; Insider Trader; Manipulation)

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Published Date: December 11, 2016

Last week, the Commodity Futures Trading Commission proposed revised position limit rules and finalized requirements related to the aggregation of positions and accounts to assess compliance with speculative position limits as well as to add a potential exemption to such requirements for entities within a group that trade independently of each other and have procedures and controls to ensure such independence. In addition, the United States Supreme Court found a sufficient basis to uphold the conviction of a tippee accused of trading on inside information he indirectly received from a corporate insider, while a federal court in New York rigorously questioned Commodity Futures Trading Commission attorneys during their closing arguments about the function of markets in a case where the agency had alleged manipulation and attempted manipulation by a trader. As a result, the following matters are covered in this week’s edition of Bridging the Week:


Legal Weeds: The same provisions of the applicable securities law and SEC rule that serve as the basis for a civil action or criminal prosecution for inside trading of securities is the inspiration for a similar provision under law that prohibits employment of a manipulative or deceptive device or contrivance in connection with futures or swaps trading. (Click here to access Commodity Exchange Act Section 6(c)(1), US Code § 9(1), and here to access CFTC Rule 180.1.) The CFTC has previously brought two actions that sound in the securities law concept of inside trading for an employee impermissibly trading based on futures positions of his employer. (Click here for background on both cases in the article, “Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information” in the October 2, 2016 edition of Bridging the Week.)

My View: In the CFTC’s rule review of ICE Futures, it noted that the Market Regulation department of the exchange has the authority to issue warning letters or a summary fine of up to US $10,000 if it determines that a rule violation may have occurred but is viewed to be minor. The CFTC noted that the exchange issued warning letters to 29 respondents based on trade practice investigations during the target period of its review. It raised no issued with such letters. This approach contrasts with the position taken by CFTC staff in a recent rule review of the CBOE Futures Exchange, LLC. There, the CFTC recommended that the exchange should promptly take appropriate disciplinary action when it makes a finding that a violation of a substantive trading rule occurred. This may sound innocuous; however, the recommendation was made in response to the issuance of warning letters by CFE to certain trading permit holders in response to their alleged placement of fictitious orders and trades. According to CFTC staff, “[w]hile a warning letter may be appropriate for certain violations of recordkeeping or audit trail rules, the Division believes that issuing a warning letter for a substantive trading violation is never appropriate.” (Click here for details regarding the rule review and findings in the article, “CFTC Rule Review Instructs CBOE Futures to Cease Issuing Warning Letters for Offenses Other Than Books and Records Offenses” in the September 25, 2016 edition of Bridging the Week.) As I wrote in September, this statement appears contrary to existing CFTC rules, and potentially limits the flexibility of exchange staff to deploy investigative and enforcement resources in the most efficient manner they determine. It’s good if the CFTC is backing off its earlier erroneous view.

Compliance Weeds: Previously, staff of the Commission’s Division of Swap Dealer and Intermediary Oversight published a Staff Advisory reminding swap dealers and major swap participants of their obligations to report certain swap data timely and accurately (click here to access). Staff noted “diverse reporting issues and failure,” with certain types of errors occurring “with some frequency”; readily apparent errors; incomplete reporting; duplicative swap reporting; calculation errors; and reporting delays. Staff recommended utilizing certain measures or processes to enhance reporting quality; data gatekeepers; automated review of reported data; erroneous record checks; and improved changed management practices to help mitigate potential issues. Staff also reminded SDs and MSPs that if they utilize third-party service providers to report swap data, they still remain “responsible” for complying with applicable requirements. As a result, SDs and MSPs should be routinely monitoring the accuracy and timeliness of their data reporting. Staff’s warning at the end of their advisory sounds ominous: “this advisory should not be construed in any way as excusing past violations or limiting the CFTC’s ability to pursue any actions for reporting violations.” In addition to this current matter against Société Générale, the CFTC previously filed and settled charges against other swap dealers, including Deutsche Bank AG. As a result of charges against Deutsche Bank in 2015, the bank agreed to pay a fine of US $2.5 million and to enhance controls around its swaps reporting. (Click here for more information in the article, “Swaps Dealer Agrees to US $2.5 Million Fine to Resolve Charges by CFTC That It Misreported Certain Swap Transactions” in the October 4, 2015 edition of Bridging the Week.) More recently, the bank was sued a second time by the CFTC for alleged recidivist reporting violations; the parties have agreed to resolve that matter too. (Click here for more information in the article, “Swap Dealer Sued in Federal Court by CFTC for Recidivist Reporting Violations; Acknowledges Bank’s Cooperation” in the August 21, 2016 edition of Bridging the Week.)

Compliance Weeds: Recently, the Financial Crimes Enforcement Network of the US Department of Treasury issued an advisory stating that covered financial institutions must file a suspicious activity report following certain cyber-events (click here for details). Mandatorily reportable incidents are those where a financial institution is targeted by a cyber-event where it knows, or has reason to suspect, the event “was intended, in whole or in part, to conduct, facilitate, or affect a transaction or series of transactions” that involves or aggregates or could involve or aggregate to US $5,000 or more in funds or other assets. It would not matter whether the transaction or series of transactions ended up actually occurring. In addition, FinCEN indicated that it encourages but does not require SAR filings when a financial institution sustains “egregious, significant or damaging cyber-events” that may not require mandatory reporting. An example of this would be a barrage of messages aimed at a financial institution (known as a “DDoS attack”) that damages its website and prevents customers from accessing their accounts for a prolonged period of time. Covered financial institutions include banks, broker-dealers, future commission merchants, introducing brokers and mutual funds

And more briefly:

Political Update:

For more information, see:

Broker-Dealer Agrees to Pay US $16.5 Million to Resolve FINRA Charges That It Had Deficient AML Program:

CFTC Adopts Final Rules Related to Aggregation of Positions and Owned Entity Exemption; Re-Proposes Position Limits Rules:

CME Group Enhances Audit Trail for Internally Developed Average Price Systems:

Company Settles With SEC for Transacting in OTC Pre-IPO Security-Based Swaps Contracts With Non-Eligible Contract Participants:

FCA Seeks Comments on Conduct of Business Rules for Firms Offering Contracts for Differences to Retail Clients, Including Rolling Spot FX Products:

ICE Futures Criticized in CFTC Rule Review for Not Completing Investigations in One Year or Less:

International Swap Dealer Settles With CFTC for Alleged Failure to Timely Report Certain OTC Swaps:

Judge Questions CFTC’s Theory of Markets in DRW Alleged Manipulation Case During Closing Arguments:
All quotes from transcript of hearings.

Supreme Court Rules Sharing of Nonpublic Information With Relative Is Sufficient to Find Illegal Insider Trading in Tipper/Tippee Context:

The Potential New CFTC Chair Suggesteth and the Current CFTC Chair Revieweth:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of December 10, 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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