Bridging the Week by Gary DeWaal

Bridging the Week by Gary DeWaal: November 13 – 17 and November 20, 2017 (EFRPs; Attempted Manipulation; Enforcement Priorities; Cryptocurrencies)

Bitcoin Ecosystem    Block Trades and EFRPs    Books and Records    Bridging the Week    Compliance Weeds    Follow-Up    Legal Weeds    Manipulation    Market Structure    My View    Policy and Politics   
Published Date: November 19, 2017

Last week, the Commodity Futures Trading Commission settled an enforcement action against a trading firm and its clearing member affiliate for illegitimate exchange for related position transactions purportedly entered into by the trading firm. Although it appears that the clearing firm solely reported the relevant transactions to the Chicago Mercantile Exchange in its capacity as a clearing member and played no role in the execution of the EFRPs, it was charged by the CFTC as a principal violator as well as with failure to supervise. New law? Separately, the CFTC used its broad authority to prosecute the alleged attempted manipulation of the prices of commodities to bring an enforcement action against a non-US based energy company for activities occurring in Asia that were intended to artificially impact the prices of certain non-US physical positions and over-the-counter US-cleared swaps the firm held. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • Trading Firm and Broker Affiliate Settle CFTC Enforcement Action for Trading Firm’s Alleged EFRP Transactions With Insufficiently Correlated Futures and Physical Legs (includes Compliance Weeds and My View);
  • Non-US Energy Company Agrees to Pay US $4 Million to Resolve CFTC Charges of Attempted Manipulation of Asia-Centric Propane Benchmark Index (includes Legal Weeds);
  • Co-SEC Enforcement Directors Emphasize Individual Accountability in Discussing Their Division’s Priorities;
  • Follow-Up: Second Lawsuit Against Tezos ICO Backers Filed; CME Group Schedules Testing of US Dollar Futures Contract Based on Bitcoin (includes My View); and more.

Because of the US Thanksgiving holiday, there will be no regularly scheduled Bridging the Week on November 27. Bridging the Week will resume normal publication on December 4.

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  • Trading Firm and Broker Affiliate Settle CFTC Enforcement Action for Trading Firm’s Alleged EFRP Transactions With Insufficiently Correlated Futures and Physical Legs: FCStone Merchant Services LLC and INTL FCStone Financial Inc., affiliated companies, agreed to pay a collective fine of US $280,000 to resolve an enforcement action brought by the Commodity Futures Trading Commission related to exchange for related position transactions executed by FCStone Merchant for its own account between December 2013 and March 2014. FCStone Financial, a registered futures commission merchant and clearing member of the Chicago Mercantile Exchange, reported the relevant EFRPs to the CME for processing and was also charged as a principal violator as well as with failure to supervise.

    According to the CFTC, FCStone Merchant executed EFRP transactions with a counterparty on “numerous occasions” involving CME-traded Canadian Dollar futures and physical canola seed. These transactions, said the Commission, were entered into by FCStone Merchant to help a client manage its financial inventory storage costs associated with canola production and currency risk. However, explained the CFTC, because the two components of the purported EFRPs did not have “a reasonable degree of price correlation,” they did not constitute appropriate EFRPs under the applicable CME rule (click here to access CME Group Rule 538.C). As a result, the futures transactions were non-bona fide under applicable law and the relevant CFTC regulation, alleged the Commission. (Click here to access 7 USC §6c(a)(1) and (2) and here to access CFTC Rule 1.38.)

    The CFTC also said that FCStone Financial’s reporting of these transactions based “solely” on its affiliate’s designation of these transactions as EFRPs made it liable as a principal for the non-bona fide futures transactions and, independently, constituted a failure to supervise. According to the CFTC, FCStone Financial “failed to verify that the EFRPs at issue had the necessary corresponding and related cash or OTC derivatives positions required for EFRPs before they were reported to the CME.”

FCStone Merchant and FCStone Financial settled the CFTC’s charges without admitting or denying any of the Commission’s findings or conclusions.

In July 2015, wholly owned subsidiaries of INTL FCStone Inc., including INTL FCStone Markets LLC and INTL Commodities, Inc., were charged by CME Group exchanges with violating EFRP rules, typically by having insufficient or no documentation for the related position component of the EFRP. The firms paid a collective fine of US $160,000 to resolve the CME Group exchanges’ charges. (Click here for details in the article “FCStone Companies and Goldman Sachs Receive Largest Fines in CME Group’s 27 Disciplinary Actions Cascade” in the July 26, 2017 edition of Bridging the Week.)

Compliance Weeds and My View: EFRPs are privately negotiated transactions between two parties. They involve, by each party, the simultaneous purchase or sale of an exchange futures or options contract and the opposite-side-of-the-market sale or purchase of an equivalent quantity of a cash product, by-product, or over-the-counter derivative instrument that has a “reasonable degree” of price correlation to the commodity referenced in the exchange contract. (Click here for background in CME Market Regulation Advisory Notice RA1716-5 (October 18, 2017).) If one party buys the exchange contract and sells the risk position, the other party sells the exchange contract and buys the risk position.

EFRPs are an approved exception to the CFTC’s requirement that all futures and related option transactions must be executed “openly and competitively by open outcry or posting of bids and offers or by other equally competitive methods, in the trading pit or ring or similar place provided by [a] contract market.” However, for EFRPs to be authorized, they must be executed “in accordance with written rules of the contract market that have been submitted to and approved by the Commission” that provide for noncompetitive transactions. (Click here to access CFTC Rule 1.38(a).)

The CFTC alleged that the futures and related positions of FCStone Merchant’s EFRPs were not sufficiently correlated consistent with CME requirements. As a result, the transactions violated the applicable CME rule. The CFTC explained that, because the futures component of the EFRPs were privately negotiated, not competitively executed, and were in violation of CME rule, they did not fit within the Commission's safe harbor. Accordingly, FCStone Merchant was charged by the CFTC with executing noncompetitive transactions in violation of applicable law and the relevant CFTC rule.

FCStone Financial, the clearing member affiliate of FCStone Merchant, was also charged with engaging in non-bona fide futures transactions and failure to supervise as a result of its reporting of its affiliate’s transactions to CME. (Click here to access CFTC Rule 166.3.) Based on the facts set forth in the relevant settlement order, it appears the CFTC’s beef against FCStone Financial was that, by reporting its affiliate’s transactions to the CME as EFRPs in the first place, the firm effectively represented they were bona fide. FCStone Financial made this implicit representation, without independently verifying the legitimacy of FCStone Merchant’s transactions, implied the Commission.

However, neither this view of FCStone Financial’s obligations, nor the consequences of its activities, appears supported by law, let alone ordinary business practice.

The obligations of a CME clearing member in connection with EFRP transactions are limited and clear. A clearing member FCM may have a contractual obligation to report trades for its customer, which if it does, it must perform timely and accurately. A clearing member FCM also has certain confirmation reporting obligations to its customers as well as, potentially, large trader reporting requirements. (Click here for background in CME Market Regulation Advisory Notice RA1716-5 (October 18, 2017), Q/As 20 and 22-24.) 

When a CME clearing member accepts an EFRP for processing, it does so solely as an agent for its customer – even if the customer is an affiliate. Indeed, under applicable CFTC rule, there is no obligation for a clearing member to even view the documentation underlying the EFRP of a customer unless expressly requested by an exchange, the CFTC or other authorized requesting body. The clearing member solely serves a bookkeeper role. According to the relevant CFTC rule:

Upon request of the designated contract market [or] the Commission, … each futures commission merchant, … and member of a designated contract market … shall request from its customers and, upon receipt thereof, provide to the requesting body documentation of cash transactions underlying exchanges of futures...

(Emphasis added; click here to access CFTC Rule 1.35(c)(1).)

Under this rule, if in response to a regulatory request a clearing member asks a customer for underlying EFRP documentation and the customer fails to comply, the clearing member is not liable for the failure of the customer. It is only required to provide to an authorized requesting body documentation it actually receives from a customer.

A prior CME Group guidance governing EFRPs was potentially ambiguous in one part regarding a clearing member’s role in the processing of EFRPs. It said that clearing members should exercise “due diligence” to identify circumstances when a customer’s EFRP transactions might be non-bona fide. However, the MRAN made clear that, despite this ambiguous language, a clearing member would only be liable for an exchange rule violation if the “clearing member ha[d] notice or knowledge of the execution of non-bona fide EFRPs by its customer and [failed] to take appropriate action.” (Click here for details in CME Group MRAN RA-1612-5 (September 20, 2016).)

In any case, a few weeks ago, CME Group amended this MRAN to expressly eliminate the ambiguous language. Now, solely if “a clearing member has actual or constructive notice or knowledge of the execution of non-bona fide EFRPs by its customer and the clearing member fails to take appropriate action” will a clearing member be deemed to have violated the applicable CME EFRP rule. (Click here for background in the article “CME Group Proposes to Eliminate Requirement for Clearing Members to Detect Non-Bona Fide EFRPs; Cautions Traders on Orders During the Globex Pre-Open” in the October 22, 2017 edition of Bridging the Week.)

Only persons actually executing EFRPs appear potentially liable under the law and CFTC rule governing non-competitive transactions; the legal provisions referenced by the CFTC to prosecute FCStone Financial do not address the reporting of such transactions to exchanges. (Click here to access 7 USC §6c(a)(1) and (2) and here to access CFTC Rule 1.38. It appears the Commission may be relying on language referencing the confirmation of a transaction in the statute; but in the context of the statute standing alone as well as read jointly with the applicable CFTC rule, it seems clear that the reference could not apply to reporting to an exchange by a non-principal actor to the relevant transactions.)

Moreover, it is not clear what the CFTC’s basis was to charge FCStone Financial with failure to supervise. An FCM has no apparent obligation to supervise its customer’s EFRP activities – including activity of affiliates – absent affirmative notice of wrongdoing or constructive notice that something untoward is going on. An FCM is not a guarantor of its customers compliance with law.

In September, the CFTC similarly charged Merrill Lynch, Pierce, Fenner & Smith Incorporated, another FCM, with failure to supervise for not diligently overseeing responses to a CME Group Market Regulation investigation related to block trades executed by its affiliate, Bank of America, N.A. According to allegations by the Commission, Merrill’s regulatory breach derived from it not independently assessing information regarding the block trades provided to it by its affiliate that subsequently turned out to be false. (Click here for background in the article “FCM Agrees to Pay US $2.5 Million CFTC Fine for Relying on Affiliate’s Purportedly Misleading Analysis of Block Trades for a CME Group Investigation ” in the September 24, 2017 edition of Bridging the Week.) There was nothing in the CFTC’s settlement order that suggested that Merrill Lynch was on notice of something untoward in connection with its CME production on behalf of its client.

Both this enforcement action involving FCStone Financial and the CFTC’s prior action against Merrill Lynch suggest that the Commission may be expanding its view of the supervisory obligation of FCMs regarding the compliance by their customers of  laws and rules governing the conduct of customers – even without an FCM's actual or constructive knowledge of any violation. This, however, would be an impractical obligation and does not appear supported by language in any existing law or rule.

At a minimum, if this is an evolving Commission view, the CFTC should at least issue formal guidance so that brokers can better understand their new responsibilities going forward. More appropriately, however, if the CFTC seeks to expand the reach of an existing rule, it should do so through a formal rulemaking process with an opportunity for public comment, rather than through enforcement actions.

  • Non-US Energy Company Agrees to Pay US $4 Million to Resolve CFTC Charges of Attempted Manipulation of Asia-Centric Propane Benchmark Index: Statoil ASA, a non-US headquartered international energy company, settled charges brought by the Commodity Futures Trading Commission that, from at least October 2011 through November 2011, it attempted to manipulate Asian propane markets. The purpose of Statoil’s activities, said the Commission, was to benefit the firm’s physical positions in Asia and financial positions, including Statoil’s New York Mercantile Exchange-cleared swaps that settled to an index – the Argus Far East Index – based on propane prices in Asia.

    Statoil agreed to pay a fine of US $4 million to resolve the CFTC’s allegations.

    According to the Commission, prior to its attempted manipulation, Statoil was concerned about significant losses in its gas liquids unit throughout 2011. In response, to avoid losses and meet customer obligations, the firm purportedly determined to increase the level of the FEI Index by purchasing cargoes during the November FEI propane-price settling period. Although the alleged goal was to signal to the marketplace that demand was high to put “upwards pressure” on the FEI Index, the plan “did not materialize as hoped,” said the Commission.

    The Commission charged Statoil with attempted manipulation, holding it liable for the act of its employees who physically placed all relevant trades. At least some of the CFTC’s apparent evidence regarding the intent of Statoil to attempt to manipulate came through records of contemporaneous communications by its employees.

Legal Weeds: Relevant law makes it unlawful to manipulate or attempt to manipulate the price of any commodity in interstate commerce or for future delivery on or subject to the rules of any registered entity, or of any swap. (Click here to access 7 USC §13(a)(2).)

Although the CFTC asserted jurisdiction over Statoil’s purported attempted manipulation outside the US by referencing its potential impact on NYMEX-cleared swaps, the important lesson learned from this matter is that the CFTC has the authority to prosecute alleged manipulative and attempted manipulative conduct involving the price of any commodity in interstate commerce whether it has a potential impact on futures or swaps or not.

The CFTC has similar broad authority under the relatively new provision of law (enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and Commission regulation that prohibits any person from using a manipulative or deceptive device or contrivance in connection with any “contract for sale of any commodity in interstate commerce” – not solely in connection with swaps or a commodity for future delivery on or subject to the rules of any registered entity. (Click here to access CEA Section 6(c)(1), 7 USC §9(1) and here for CFTC Rule 180.1(a).)

Recently, the CFTC relied on this broad authority to file an enforcement action in a federal court in New York City against Gelfman Blueprint, Inc., and Nicholas Gelfman, its chief executive officer and head trader, for purportedly running a Ponzi scheme related to Bitcoin. However, the CFTC’s allegations regarding the defendants’ handling of Bitcoin pertained to Bitcoin alone, not futures or swaps based on Bitcoin. (Click here for background in the article “CFTC Files Charges Alleging Bitcoin Ponzi Scheme Not Involving Derivatives” in the September 24, 2017 edition of Bridging the Week.)

  • Co-SEC Enforcement Directors Emphasize Individual Accountability in Discussing Their Division’s Priorities: The Division of Enforcement of the Securities and Exchange Commission published a report on its 2017 fiscal year accomplishments in which it said that “vigorous enforcement” by the SEC is critical to “combat wrongdoing, compensate harmed investors, and maintain confidence in the integrity and fairness of our markets.”

    Among the five core principals driving these objectives is a focus on individual accountability and keeping pace with technological changes

    According to the Division’s co-directors, Stephanie Avakian and Steven Peikin, one or more individuals have been named in excess of 80 percent of the standalone enforcement actions brought since Jay Clayton became the new SEC Chairman on May 4, 2017. This reflects the Division’s belief that the “vigorous pursuit of individual wrongdoers must be the key feature of any effective program,” said the co-directors.

    Additionally, the Division has created a new Cyber Unit to keep pace of technological changes being used by “wrongdoers to engage in cyber-enabled misconduct.” The Division indicated that the Cyber Unit is focusing on market manipulation involving false information disseminated through electronic and social media; hacking to illicitly obtain nonpublic information and transacting on the information; and violations of law involving distributed ledger technology and initial coin offerings, among other wrongdoing.

    The Division noted that in fiscal year 2017, Division enforcement actions involving investment advisory issues, securities offerings, and issuer reporting/accounting and auditing each comprised 20 percent of its activities. Enforcement actions related to market manipulation, insider trading, and broker-dealers each constituted 10 percent of its activities.

More briefly:

  • Five Financial Industry Organizations Ask SEC to Modernize Record-Retention Rule: Five industry organizations petitioned the Securities and Exchange Commission to adopt a more principles-based and less prescriptive record-retention rule applicable to broker-dealers equivalent to an amended rule recently implemented by the Commodity Futures Trading Commission for all its registrants. The CFTC’s amended rule, approved on May 23, eliminated the CFTC’s prior requirement that (1) electronic records be maintained in their native file format and preserved exclusively in a non-rewritable, non-erasable format (commonly referred to as write once, read many or “WORM”) and (2) records holders use a third-party technical consultant to provide certain representations to the Commission regarding access to a record holder’s required electronic records. Instead, the CFTC’s amended rule solely required that all “regulatory records” be maintained in a way that “ensures the authenticity and reliability of such regulatory record” in accordance with applicable law and CFTC regulations. (Click here for general background on the CFTC’s amended rule in the article “Principles-Based Rules Rule in CFTC Record Keeping Rule Amendment” in the June 4, 2017 edition of Bridging the Week.) The five industry organizations pointed out in their petition that, without SEC relief, dual registered future commission merchants and BDs cannot take advantage of the CFTC relief. The five industry organizations are SIFMA, the Financial Services Institute, ISDA, the Financial Services Roundtable and FIA.
  • SEC Chairman Denies Request to Formally Delay First Phase of CAT Rollout: The Securities and Exchange Commission declined to formally extend the November 15, 2017 date by when national securities exchanges and the Financial Industry Regulatory Authority (the “SROs”) were to begin reporting participant data to a central repository pursuant to plans to roll out a consolidated audit trail known as “CAT.” The SROs requested a formal delay until November 15, 2018, to begin reporting such data because of security concerns, and their failure to hire a qualified chief information security officer by now, among other reasons. In a letter to the SEC delivered late on November 13, the SROs also asked for delays in other elements of the CAT rollout including a requirement to implement a new or enhanced surveillance system by January 15, 2018. However, SEC Chairman Jay Clayton formally rejected the SROs’ request in a statement issued on November 14. Mr. Clayton indicated that, despite the SROs not meeting their November 15 deadline, he instructed staff to work with the SROs “as necessary or appropriate” on issues causing their delay.
  • CFTC Staff Extends Block Trading Relief for SEFs: Staff of the Commodity Futures Trading Commission extended through November 15, 2020, previously granted no-action relief that permits swap execution facilities to facilitate the execution of block trades for swaps that are intended to be cleared on a SEF’s trading system or platform. Without the relief, such block trades must be executed off such facilities (click here to access CFTC Rule 43.2). According to the CFTC, a representative of SEFs had argued that technology does not currently exist that allows a SEF to facilitate a pre-execution credit check for block trades executed off-exchange, as required by CFTC rule (click here to access CFTC Rule 37.702(b)).
  • FINRA Promises Review of Order Routing Payments: The Financial Industry Regulatory Authority indicated that it has commenced an industry-wide sweep to assess how members’ receipt of inducements, including payment for order flow and maker-taker rebates, impact their choice of order routing venues. Among other things, FINRA is asking members how they may reconcile their routing decisions based on inducements with their duty of best execution to customers.
  • NY Financial Regulator Fines International Bank US $135 Million for Attempted Manipulation and Other Offenses in Its FX Trading Business: Credit Suisse AG agreed to remit to the New York State Department of Financial Services US $135 million as part of a consent order related to certain of the bank’s trading practices in foreign exchange for customers from at least 2008 through 2015. DFS alleged that, during this time, the bank inappropriately shared information with other global banks that “may have led” to manipulation of exchange rates and higher costs to Credit Suisse’s customers. DFS also said that, from April 2010 to June 2013, the bank may have tried to front-run customers’ limit and stop loss orders through use of an algorithm designed to trade ahead of customers’ orders. As part of its settlement, Credit Suisse committed to develop and implement a written plan to enhance senior manager’s oversight with NYS and federal laws and regulations related to the bank’s FX trading business.


  • Second Lawsuit Against Tezos ICO Backers Filed; CME Group Schedules Testing of US Dollar Futures Contract Based on Bitcoin: Last week, a second private lawsuit was filed against the promoters of a highly successful initial coin offering earlier this year to support development of the Tezos Blockchain project. The prospective class action lawsuit, filed in a Florida federal court, alleged the unlawful sale of securities and securities fraud, among other offenses. Generally, the allegations paralleled claims made in another purported class action lawsuit against the Tezos ICO promoters filed in October in a California state court. (Click here for background on the first private action in the article “Backers of Tezos Initial Coin Offering Named in Prospective Class Action Litigation” in the November 12, 2017 edition of Bridging the Week.)

In other cryptocurrency developments last week:

  1. CME Group announced that it would begin testing its proposed Bitcoin futures contract on November 20. The daily settlement price of the proposed futures contract will be based on prices derived from trading on four-spot Bitcoin exchanges not affiliated with CME Group (click here for details). 
  2. The European Securities and Markets Authority became the latest in a string of regulators warning about the risks of initial coin offerings. (Click here for background in the article “Singapore Regulator Joins Other Regulators in Warning Initial Coin Offerings May Impact Local Laws” in the October 8, 2017 edition of Bridging the Week.) According to ESMA, ICOs are “highly speculative investments” that may not be regulated. ESMA said that some ICOs may be used for fraudulent or illicit purposes; may involve a “high risk” of losing all invested capital; may not have exit options because investors may not be able to trade their digital tokens or exchange them for other currencies; may have offering documents that are “unaudited, incomplete, unbalanced or even misleading”; and may involve investments in technology that is flawed.
  3. The UK Financial Conduct Authority warned investors about investing in contracts for differences involving cryptocurrencies. Among other things, FCA said that issues regarding the volatility and transparency of cryptocurrency prices, as well as charges and funding costs, make CFDs based on cryptocurrencies more risky. FCA asserted that it regulates CFDs based on cryptocurrencies but “these protections will not compensate you for any losses from trading.”
  4. REcoin Group Foundation, LLC and DRC World Inc. (known as Diamond Reserve Club), and Maksim Zaslavskiy, their sole owner, consented to the entry of a preliminary injunction and asset freeze in response to a Securities Exchange Commission enforcement action alleging that they engaged in a fraudulent initial coin offering from July 2017 through at least September 2017. The enforcement action was filed in September in a federal court in Brooklyn, NY. (Click here for details in the article “SEC Files Lawsuit Against Companies and Backer for Purportedly Fake Initial Coin Offerings” in the October 1, 2017 edition of Bridging the Week.)

My View: As I have written previously, it is hard for me to imagine that blockchain technology, including the use of smart contracts, will not increasingly play a pivotal role in finance as well as other fields. As Commodity Futures Trading Commission Chairman J. Christopher Giancarlo said last week in Singapore, “Shared ledger technology, which holds promise in increasing operational efficiencies, may also help facilitate real-time, standardized, and lower-cost regulatory reporting… And related application of contracts … could result in the potential decrease of execution risk, more efficient use of trade-related margin and collateral, and the incorporation of automated regulatory compliance provisions into the contract code.” (Click here for Mr. Giancarlo’s full speech before the Singapore FinTech Festival.)

Moreover, as long as a blockchain’s protocol is widely distributed and decentralized, its network will likely be dependent on the use of a digital coin of some type to provide incentives to miners or other persons who maintain the system’s integrity. At least some of these digital coins will continue to grow in popularity as a medium of exchange, much as Bitcoin and Ether have already attracted a widespread following.

However, while there have been increasing regulatory pronouncements that cryptocurrencies issued as part of initial coin offerings may be securities subject to local regulations – including by the US Securities and Exchange Commission – less is clear about cryptocurrencies later in their life when they principally serve as a medium of exchange.

The CFTC has declared that such cryptocurrencies are commodities, and asserted its right to impose requirements on any purveyor of such commodities for future delivery and spot cryptocurrencies sold to retail persons where there is financing and actual delivery does not occur within 28 days. Relying on this authority, the CFTC designated LedgerX as a swap execution facility and derivatives clearing organization for fully collateralized digital currency swaps in July 2017. Moreover, the CFTC has said that it has jurisdiction over purveyors of cryptocurrencies who engage in deceptive activities or contrivances in connection with purchases and sales of such commodities, even where there is no futurity or financing involved. (Click here for a general background of CFTC regulation of cryptocurrencies in the article “LedgerX Approved by CFTC as First Derivatives Clearing Organization for Fully Collateralized Swap Contracts Potentially Settling in Bitcoin” in the July 30, 2017 edition of Bridging the Week.)

However, other than the CFTC’s potential oversight, most spot transactions in cryptocurrencies are essentially unregulated. Persons holding cryptocurrencies for others or engaging in a business of exchanging cryptocurrencies for other cryptocurrencies or fiat currencies likely have to register with the Financial Crimes Enforcement Network of the US Department of Treasury, as well as possibly one or more state agencies. There is also a heightened regulatory structure for persons engaged in certain cryptocurrency business activities involving New York or a NY resident under NY's BitLicense scheme, and a model code promoting equivalent oversight may be rolled out to other states in the near future. However, FinCEN's and the states' regulation is mostly focused on promoting sound anti-money laundering practices and customer funds protection, not trading oversight. (Click here for background regarding the Uniform Regulation of Virtual Currency Business Act, FinCEN regulation and NY BitLicense requirements in the article “Model State Law Regarding Virtual Currency Businesses Virtually Finalized” in the August 20, 2017 edition of Bridging the Week.)

As a result, there is no effective functional regulation of cryptocurrency businesses (other than of regulated CFTC entities), including spot exchanges, that helps ensure on an ongoing basis that prices are derived through ordinary market forces and are not manipulated or otherwise artificially distorted. This is among the reasons why the SEC refused earlier this year to approve a proposed rule change by the Bats BZX Exchange, Inc. to list and trade shares of the Winklevoss Bitcoin Trust – whose pricing was to be based on the prices of a spot Bitcoin exchange related to the Trust (click here for details).

The attraction of a decentralized distributed ledger system to some is to exist outside of government control and oversight. However, smart government regulation or proactive self-regulation (with mandatory third-party verifications) could further promote the credibility of a still nascent technology and help ensure that unintended consequences don’t derail what should be highly useful applications in the future. Uncoordinated government regulation, however, should be avoided at all costs.

For further information:

CFTC Staff Extends Block Trading Relief for SEFs:

Co-SEC Enforcement Directors Emphasize Individual Accountability in Discussing Their Division’s Priorities:

FINRA Promises Review of Order Routing Payments:

Five Financial Industry Organizations Ask SEC to Modernize Record-Retention Rule:

Non-US Energy Company Agrees to Pay US $4 Million to Resolve CFTC Charges of Attempted Manipulation of Asia-Centric Propane Benchmark Index:

NY Financial Regulator Fines International Bank US $135 Million for Attempted Manipulation and Other Offenses in Its FX Trading Business:

SEC Chairman Denies Request to Formally Delay First Phase of CAT Rollout:

Second Lawsuit Against Tezos ICO Backers Filed; CME Group Schedules Testing of US Dollar Futures Contract Based on Bitcoin:

Trading Firm and Broker Affiliate Settle CFTC Enforcement Action for Trading Firm’s Alleged EFRP Transactions With Insufficiently Correlated Futures and Physical Legs:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of November 18, 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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