Bridging the Week by Gary DeWaal: January 30 to February 3 and February 6, 2017 (Making Regulation Great Again; Fraud-Based Manipulation; AML)

Jump to: AML and Bribery    Automated Trading Systems and Connectivity    Bridging the Week    Cybersecurity    Fraud and Anti-Fraud    Introducing Brokers    Manipulation    My View    Policy and Politics    Supervision    Systems and Controls    Uncleared Swaps   
Email Print
Published Date: February 05, 2017

President Donald Trump began to follow through on his campaign promise to reduce the quantity of all federal regulations and took initial steps to ensure that laws and regulations impacting financial services conform to his so-called “core principles” of effective regulation. Taking these steps appears to be the first salvo in an attack against the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, apparently at the Commodity Futures Trading Commission’s request, CME Group updated one of its rules to mirror the CFTC’s fraud-based manipulation rule. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version


My View: It is healthy every so often to look back and evaluate the effectiveness of previously adopted laws and regulations. President Ronal Reagan ordered such a review promptly after becoming president in 1981, and President Trump has ordered a similar review now. (Click here to access President Reagan’s equivalent executive order.) For the nation as a whole, this review might result in lesser regulation that could result in greater economic growth. For the financial services industry, such a review might result in the rollback of all or some of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act – including the so-called Volcker Rule – which in retrospect, may have constituted a too hasty and too broad response to the 2007-2008 financial crisis. Hopefully, however, the evaluative process does not become too politicized and regulations previously adopted for legitimate reasons are not eliminated wholesale. We, as a nation, cannot ignore, for example, that the financial crisis of 2007-2008 caused real suffering for many Americans. At its core, this crisis was caused by the over-extension of credit to under-qualified persons buying homes and for other purposes, and by the packaging of their debt into more and more exotic financial instruments that were not well understood or adequately overseen. For sure, the imposition of a myriad of new requirements under Dodd-Frank – including many that had nothing to do with the financial crisis (e.g., amendments to the Commodity Exchange Act regarding position limits) – was too severe and some of these provisions should be adjusted. But many requirements – including the obligation to report swaps transactions to impartial trade repositories to provide better transparency and to impose registration and certain conduct requirements on swap dealers – are sensible measures that will help prevent another similar meltdown. Hopefully, the review of regulations generally and financial services laws and regulations in particular (especially Dodd-Frank) ordered by President Trump will engender thoughtful reflection and result in just the right amount of revisions and not overkill.

Compliance Weeds: Although the amendments to the CME Group rule regarding Globex access restrictions seem non-substantive, holistic review of the amended rule is important as the revised provision appears to have expanded somewhat the existing obligations and potential liability of clearing members in connection with customers they guarantee. Among other things, a clearing member must now assist a CME Group investigation into any potential violation of its rules by “requiring any Person to produce documents, to answer questions from the Exchange, and/or to appear in an investigation” (emphasis added). The definition of Person appears to be broad enough to include not only the clearing member’s customer (as the rule currently references), but also its customer’s employees and agents. As before, if a clearing member has “actual or constructive notice” of a violation of an exchange’s rules in connection with a direct access customer and it fails to take “appropriate action” the clearing member “may be found to have committed an act detrimental to the interest or welfare of the Exchange.” (Click here to access the equivalent rule of ICE Futures U.S., Rule 27.04.)

My View: The Commodity Futures Trading Commission recently brought and settled a case grounded on a failure to supervise theory against JP Morgan Securities, a Commission-registered futures commission merchant, claiming that the firm failed to “diligently” supervise its staff when the firm did not remit exchange fee rebates totaling US $7.8 million to relevant customers from 2010 to 2014. The CFTC claimed this was because the firm did not have, during the relevant time, automated systems to reconcile its exchange and clearing fees and utilized solely one employee to perform its fee reconciliation process. (Click here for further details regarding this enforcement action in the article “FCM Agrees to Settle With CFTC Related to Purported Exchange Fees Overcharges” in the January 16, 2017 edition of Bridging the Week.) Unlike FINRA’s charges against Edward Jones that derived from the firm’s alleged misapplication of its own rules and failure to catch its own mistake, the CFTC’s charges against JP Morgan related to the assessment of exchange and clearing fees that the CFTC conceded were “typically complicated because of the myriad applicable rates, surcharges and fee structures.” The CFTC said that JP Morgan’s failure to supervise derived from its purported failure to catch its error through a reconciliation process. This seems like quite a stretch, but in any case, 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 and implement tools to help firms conduct reconciliations more easily and reliably.

Compliance Weeds: In addition to its requirement that all members maintain a written business continuity and disaster recovery plan specific to their operations, the National Futures Association has required all members since March 1, 2016, to have adopted and begun enforcing formal written policies regarding cybersecurity. These policies must be “reasonably designed by members to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” (Click here for further details on NFA’s requirements in the article “NFA Proposes Cybersecurity Guidance” in the September 13, 2015 edition of Bridging the Week.)

And more briefly:

For more information, see:

Another Day, Another CFTC ISDAFIX Fine:

Broker-Dealer Agrees to FINRA Sanction for Miscalculating Rates of Margin Loans to Customers:

CFTC Staff Authorizes Swap Dealers to Comply With EU Uncleared Swaps Margin Rules When Dealing With EU Counterparties in Lieu of US Rules for Interim Period:

CME Group Implements Some New Offenses and Makes Technical Amendments to Globex Access Restrictions Rule:

FCM Resolves CME Clearing House Risk Committee Charge of Failing to Have BCP Procedures:

International Bank Fined Over US $625 Million for AML Violations by UK FCA and New York State:

LME Issues Clarifications Regarding Introducing Broker Arrangements:

Making Regulation Great Again: President Trump Requires Loss of Two Regulations for Every New One and Orders Review of All Financial Services Laws and Rules:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of February 4, 2017. 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 »