Bridging the Weeks by Gary DeWaal: February 13 to 24 and February 27, 2017 (Variation Margin; EFRPs, Wash Sales; Position Limits; Electronic Trader Tags; Cybersecurity)

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Published Date: February 26, 2017

Staff of the Commodity Futures Trading Commission issued formal no–action relief, some other regulators referenced exercising discretion, while some additional regulators and regulatory organizations discussed forbearance – albeit not general forbearance. However, overall, during the past two weeks, regulators worldwide recognized the difficulty swap dealers are having in complying with the March 1 deadline to implement certain variation margin requirements for uncleared swaps, and indicated or at least implied they would likely not be taking enforcement action against non-compliers, subject to such entities’ good faith efforts to comply with their obligations expeditiously. Separately, US futures exchanges brought a host of disciplinary actions alleging non-bona fide exchange for related position transactions, wash sales, position limits violations and disruptive practices. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:

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Compliance Weeds: There are two important takeaways from these series of exchanges’ regulatory actions. First, position limits are 24/7 (Click here to access ICE Futures US Rule 6.20(b), for example.) Both enforcement actions by ICE Futures U.S. alleging violations of position limits related to purported intraday violations. Trading firms should monitor their position limit compliance not just at the end of each trading day but intraday too. This can be particularly challenging when multiple accounts of different affiliates or even trading desks within a single entity must be aggregated to assess overall positions, but it is important. Second, entering a user-defined spread for the purpose of disadvantaging other market participants can be a violation of general prohibitions against market disruption. (Click here to access CME Group Rule 575D; click here to access the CME Group MRAN regarding disruptive practices, Q/A 22.) In the CBOT disciplinary action against Mr. Pires, the exchange claimed that the respondent entered a user-defined covered option spread with the intent to avoid allocation of futures contracts that should have been tied to the covered options instruments. He did this, said CBOT, in order to obtain more favorable prices for the options instruments than were available in the marketplace. Even though CME Group’s Globex System utilizes reasonability checks aimed to prevent this conduct from occurring, its system is not infallible

Compliance Weeds: Requirements regarding the use of trader identifications and related matters for electronic orders vary from exchange to exchange and the devil is in the details. For example, CME Group rules make explicitly clear that team tags – representing a group of persons who simultaneously administer, operate and monitor an automated trading system – would be expected to change for different shifts. (Click here to access CME Group MRAN regarding Tag 50 ID Requirements Q/A 11.) The new proposed guidelines of ICE Futures U.S. have no similar express requirement regarding team tags and the obligations around shifts. (Click here to access new ICE Futures US proposed FAQ Q/A9.) Also, exchanges impose express responsibilities on clearing members that sponsor persons who directly place electronic orders with exchanges. Among other things, a clearing member:

Clearing member sponsors must be aware of these responsibilities and should implement and maintain policies and procedures reasonably designed to help them comply with their obligations

My View: Whenever I write about exchange requirements regarding electronic orders and direct access persons, I wonder about the value add of proposed Regulation Automated Trading by the Commodity Futures Trading Commission. (Click here for background regarding the CFTC’s supplemental proposal in the article “Proposed Regulation AT Amended by CFTC; Attempts to Reduce Universe of Most Affected to No More Than 120 Persons” in the November 6, 2016 edition of Bridging the Week.) As I have suggested previously, it appears that the CFTC could accomplish most of its objectives by better leveraging existing exchange requirements and plugging what it perceives to be gaps through amendments to core principles for designated contract markets. It is not clear what more prescriptive regulation at the federal level functionally adds, other than substantial costs and ambiguity.

Compliance Weeds: All members of the National Futures Association have been required to implement and enforce written policies regarding cybersecurity since March 1, 2016. These policies must be “reasonably designed 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.” The requirements do not impose one-size-fits-all obligations on members, but instead permit members to adopt procedures relevant to the type, size and complexity of their business. (Click here for details regarding the NFA’s requirements in the article “NFA Proposes Cybersecurity Guidance” in the November 13, 2015 edition of Bridging the Week.)

Compliance Weeds: This enforcement action may have taken place on a continent far far away; however, on this continent noncompetitive trades are prohibited by Commodity Futures Trading Commission rule, unless executed in accordance with exchange rules it has approved. (Click here to access CFTC Rule 1.38.) Exchanges generally have rules permitting the simultaneous placement of opposite orders for different beneficial owners by a party with discretion over both accounts as well as by different parties that my engage in pre-execution communications. (Click here to access CME Group Rules 533 and 539.) These rules can be quite complex, however, and are not one-size-fits-all. Traders should ensure they understand the nuances of these provisions.

Compliance Weeds: When President Ronald Reagan adopted the Russian proverb “trust, but verify” as his own when negotiating with President Mikhail Gorbachev of the Soviet Union in 1986, he could also have been articulating the essential elements of an effective compliance program. As this SEC action against Sidoti & Company evidences, it is not sufficient for a financial services registrant solely to roll out policies and procedures reasonably designed in theory to ensure compliance with applicable laws and rules and trust that they will be followed. The registrant should endeavor to ensure that the policies and procedures are routinely followed, and that they are working as designed. Otherwise they should be amended.

And more briefly:


For more information, see:

Australian Regulator Sanctions Broker for Engaging in Pre-Negotiated Futures Transactions With Client Without Requisite Time Delay:

Broker-Dealer Settles SEC Charges Related to Alleged Compliance and Trading Surveillance Breakdowns:

Canadian Securities Regulators Join the Sandbox Movement:

CFTC Postpones Swap Dealer Compliance Date for OTC Swaps Variation Margin Requirements; Other Regulators Likely to Exercise Forbearance:

Continuing to Make Regulations Great Again: White House Implements More Steps to Reduce Regulatory Burdens:

CPOs Reminded by NFA of CFTC Amended Requirements Regarding Financial Reporting Obligations:

ESMA Raises Concerns to EC Regarding Systematic Internalizers Operating Broker-Crossing Networks:

Futures Traders Resolve SROs’ Disciplinary Actions Related to Alleged Non-Bona Fide EFRPs, Wash Sales, Position Limits Violations and Disruptive Practices:

ICE Futures Issues Guidance Regarding Identification Requirements for Orders Placed Through Its Electronic Trading System:

NFA Proposes Amendment to Filing Deadline for Forex Dealer Member CCO Annual Report:

NYS Requires State-Regulated Financial Services Institutions to Maintain Cybersecurity Program:

SEC Approves FINRA Proposed Mark-Up/Mark-Down Disclosure Requirement on Retail Investors’ Corporate and Agency Bonds’ Confirmations:

SEC Division of Investment Management Issues Guidance Regarding Robo-Advisers:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of February 25, 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.

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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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