Developments concerning digital tokens highlighted news in financial services this week. For the first time, a derivatives clearing organization – LedgerX – was licensed by the Commodity Futures Trading Commission to clear fully collateralized swaps contracts that could settle in digital currencies including Bitcoin. Separately, the Securities and Exchange Commission ruled that digital tokens issued to raise funds for projects might be securities under US law. Finally, BTC-e, a digital currency exchange, and Alexander Vinnik, who purportedly directed its operations and finances, were indicted for allegedly operating an unlicensed money services business and engaging in money laundering. Additionally, the CFTC brought a me-too enforcement action against a defendant for alleged spoofing trading activity more than two years after two CME Group exchanges resolved disciplinary actions for the same conduct – is this the most meaningful and cost-effective way of prosecuting purported wrongful behavior? As a result, the following matters are covered in this week’s edition of Bridging the Week:
Legal Weeds: The CFTC has broad jurisdiction over commodities and, in particular, derivatives based on commodities. Under applicable law, commodities are defined to include all “goods and articles” (except onions and motion picture box office receipts) and “all services, rights and interests” on which contracts for future delivery might be based. (Click here to access the definition of an eligible contract participant at 7 U.S.C. § 1a(9).) In response, the Commission formally proclaimed its authority over derivatives based on virtual currencies in December 2014 when then Chairman Timothy Massad testified before the US Senate Committee on Agriculture, Nutrition and Forestry. There, Mr. Massad said, “Derivative contracts based on a virtual currency represent one area within our responsibility.” (Click here to access a copy of Mr. Massad’s testimony.) Previously, in September 2014, TeraExchange self-certified a US dollar-settled Bitcoin swap contract for trading on its SEF and the CFTC did not object. In September 2015, the Commission brought and settled charges against Coinflip, Inc. and its chief executive office for purportedly operating a trading facility for Bitcoin options without being registered as a SEF or a designated contract market. (Click here for details in the article “CFTC Says Virtual Currencies Are a 'Commodity' Under Federal Law, Files Charges Against Coinflip for Operating an Unregistered Bitcoin Options Trading Platform” in the September 20, 2015 edition of Bridging the Week.) More recently, in June 2016, the CFTC brought and settled charges against BFXNA Inc., doing business as Bitfinex, for allegedly engaging in prohibited, off-exchange commodity transactions with retail clients and failing to register as a futures commission merchant, as required. (Click here for details in the article “Bitcoin Exchange Sanctioned by CFTC for Not Being Registered” in the June 5, 2016 edition of Bridging the Week.)
My View: The CFTC’s enforcement action in this matter appears unwise particularly in light of the agency’s precarious financial circumstances and limited resources. Unless self-regulatory organizations have insufficient jurisdiction to address trading-based infractions on their facilities that span other exchanges or involve extraordinary wrongdoing, it’s not clear what the marginal benefit is of the CFTC bringing a me-too enforcement action. Here, where Mr. Posen was subject to hefty CME Group exchanges’ sanctions for alleged spoofing-type conduct, an additional CFTC action appears unwarranted. If the CFTC is dissatisfied with the way an SRO handles infractions, the more appropriate forum to address this is through periodic rule reviews. (Click here for background on the CFTC’s FY 2018 budget request and current financial circumstances in the article “Commissioner Bowen Votes to Process CFTC 2018 Budget Proposed by Acting Chairman Despite Disapproval” in the June 4, 2017 edition of Bridging the Week.) The CFTC’s enforcement action a few weeks ago in light of a disciplinary action this week by the CME against Rosenthal Collins Capital Markets LLC raises similar concerns. (Click here for background on this matter in the article “Trader Settles COMEX Disciplinary Actions for Failure to Supervise for Employee’s Alleged Spoofing Activity” in this week’s edition of Bridging the Week.)
Compliance Weeds: Last year, CME Group exchanges brought and settled disciplinary actions against Geneva Trading USA, LLC and two of its employees – Krzysztof Marzec and Robert Kimmons – for engaging in alleged spoofing-type activities on the New York Mercantile Exchange, Inc. and the Commodity Exchange, Inc. from March 2013 through July 2013. To resolve the matter, Geneva Trading agreed to disgorge aggregated COMEX and NYMEX trading profits of US $91,241. For the actions of its two traders, Geneva Trading was charged by the CME Group exchanges with violating just and equitable principles of trades and related violations, but solely on a strict liability basis. The firm was not charged with failure to supervise, and it was not assessed a fine. The disciplinary actions against Focus and General Trading and Geneva Trading suggest that, although a firm may be held strictly liable for the allegedly wrongful acts of its employees under CME Group rules, where the firm has and enforces robust policies and procedures governing the conduct, CME Group might consider it appropriate solely to require the firm to return any profits attributable to employees’ improper conduct. In such instances, the firm should not necessarily be charged with failure to supervise and subject to a fine or other sanctions. This would be the case despite the employees not following such policies and procedures! If a firm does not have or does not enforce robust policies, however, a fine should not be unexpected. (Click here for background on the disciplinary action against Geneva Trading in the article “CME Group Settles With Trading Firm for Spoofing-Type Offenses, Holding It Strictly Liable for Acts of Agents; Orders Disgorgement of Profits” in the October 9, 2016 edition of Bridging the Week.)
Compliance Weeds: Reg MAR generally requires brokers and dealers with access (or providing access) to trade securities directly on an exchange or alternative trading system to have procedures and processes and controls that limit their financial exposure as a result of such access, and ensure compliance with all applicable regulatory requirements. In April 2014, the Securities and Exchange Commission’s Division of Trading and Markets issued helpful answers to frequently asked questions related to Regulation MAR (click here to access). In its Q&As, the SEC provides a concise summary of the relevant regulation as well as answers to 19 questions regarding it. The SEC and FINRA have applied Reg MAR broadly. In 2015, for example, the Securities and Exchange Commission settled an enforcement action against Latour Trading LLC, a proprietary trading firm, for allegedly violating Reg MAR and other SEC rules in connection with a breakdown in its electronic trading infrastructure that resulted in approximately 12.6 million orders for over 4.6 billion shares being sent to stock exchanges that did not comply with requirements of the SEC aimed to help ensure competition among US securities markets and fair prices – “Regulation NMS” (National Market System). The SEC claimed that Latour violated Reg MAR because it did not “appropriately” control market access so as not to jeopardize its “own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system.” The SEC said that Latour violated Reg MAR because the developer who changed software, purportedly causing the trading infrastructure breakdown, was not under Latour’s exclusive control. Latour settled this matter by payment of a fine of more than US $8 million. (Click here for background on this matter in the article “Proprietary Trading Firm Agrees to Pay More Than US $8 Million to SEC to Resolve Market Access Charges Emanating From Faulty Software” in the October 4, 2015 edition of Bridging the Week.)
For further information:
Bitcoin Exchange and Operator Charged with Money Laundering:
Broker-Dealer Settles FINRA Charges That It Failed to File Suspicious Activity Reports in Response to Red Flags:
CFTC Settles With Alleged Spoofer Two Years After CME Group Exchanges First Resolved Disciplinary Actions for Same Conduct:
FCA Makes No Promises to Firms That Missed the July 3 Deadline for Requesting MiFID II Permissions:
Four Broker-Dealers Agree to Pay Aggregate Fine of US $4.75 Million to FINRA and Various Exchanges for Allegedly Violating SEC Market Access Rule:
LedgerX Approved by CFTC as First Derivatives Clearing Organization for Fully Collateralized Swap Contracts Potentially Settling in Bitcoin:
LIBOR to End in 2021:
NFA Ends Swap Dealer Filing Requirement, Substitutes Attestation Process:
SEC Declines to Prosecute Issuer of Digital Tokens That Violated US Securities Laws:
SEC Grants Two Whistleblower Awards Totaling US $4.2 Million; One to Government Agency Employee:
Trader Settles COMEX Disciplinary Actions for Failure to Supervise Employee’s Purported Spoofing Activity:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 29, 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.
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.
May 03, 2020
April 12, 2020
March 29, 2020
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.
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022-2585
Bridging the Week by Gary DeWaal: July 24 to 28 and July 31, 2017 (Bitcoin Derivatives Clearinghouse; Digital Tokens for Fund-Raising; Bitcoin Alleged Criminal Activity; Spoofing; Reg MAR)Jump to: AML and Bribery Bitcoin Ecosystem Bridging the Week Compliance Weeds Exchanges and Clearing Houses Legal Weeds My View Registration Regulation MAR Supervision Uncleared Swaps Whistleblowing