Unexpectedly, the Commodity Futures Trading Commission announced a new initiative to encourage non-registrants to self-report foreign corrupt practices, which it claimed might also constitute violations of laws and rules it administers. Non-registrants who turn themselves in, cooperate with the CFTC and remediate their violations will benefit from a presumption that the CFTC’s Division of Enforcement will ordinarily recommend no fine to the Commission – although it appears likely their situations will be referred to other law enforcement agencies for consideration. Separately, the National Futures Association formally proposed bylaw and rule amendments, as well as a new Interpretive Notice, aimed at making swaps associated persons smarter about swaps markets and applicable regulations. As a result, the following matters are covered in this week’s edition of Bridging the Week:
According to a special Enforcement Advisory, for non-registrants who self-report such violations, fully cooperate with the CFTC, and remediate their violations, the Division of Enforcement will recommended to the Commission a resolution of their wrongdoing “with no civil penalty, absent aggravating circumstances involving the nature of the offender or the seriousness of the offense.”
Mr. McDonald announced the new policy in a speech at the American Bar Association’s National Institute on White Collar Crime. According to the DOE director, acts constituting foreign corrupt practices may also implicate CFTC-administered laws prohibiting fraud, manipulation, false reporting or other offenses. He indicated that the CFTC works closely with the Securities and Exchange Commission and the Department of Justice to ensure that investigations into such matters are “properly coordinated.” Mr. McDonald commented that, to the extent the CFTC brings an enforcement action as part of such coordinated activity, the CFTC will ensure that any fine it requires “appropriately accounts” for any fine by another enforcement body, and if the CFTC insists on disgorgement or restitution, it will give dollar-for-dollar credit for disgorgement or restitution mandated in other related enforcement actions.
It is not clear what prompted Mr. McDonald’s announcement at this time. However, he indicated that the CFTC currently has “open investigations” related to how corrupt practices in any number of forms might impact commodity markets’ prices.
The Foreign Corrupt Practices Act, enacted in 1977 – three years after the authorization of the CFTC in 1974 – makes it illegal for certain persons and entities to make payments to foreign government officials to help obtain or retain business. (Click here for general background on the FCPA in a guide published by the Securities and Exchange Commission and the Department of Justice.)
In November 2016, JPMorgan Chase agreed to settle civil charges brought by the SEC and the Board of Governors of the Federal Reserve System that, between 2006 and 2013, it provided jobs and internships to relatives and friends of Asia-based government officials, including Chinese government officials, to retain or obtain investment banking business. The SEC said this conduct violated the FCPA. (Click here for details in the article“Bank Settles SEC and FRB Charges That It Violated Federal Law by Hiring Relatives and Friends of Asia-Based Government Officials” in the August 23, 2015 edition of Bridging the Week.)
Similarly, in August 2015, The Bank of New York Mellon Corporation agreed to pay sanctions of almost US $15 million to resolve allegations by the SEC that its retention of three interns during 2010 and 2011 constituted violations of the FCPA’s anti-bribery and internal accounting control provisions. The SEC claimed that, in order to maintain and expand business with an unidentified Middle Eastern sovereign wealth fund, BNY agreed to retain three family members of two government officials who were both senior officials affiliated with the sovereign wealth fund. None of the interns, claimed the SEC, met the “rigorous criteria” of the internship program ordinarily administered by BNY. (Click here for more information in the article “Student Internships Result in Bank’s Settlement With SEC Over Alleged FCPA Violations” in the August 23, 2015 edition of Bridging the Week.)
Legal Weeds: In January 2017, the CFTC’s DOE updated a 2007 advisory (click here to access) to clarify the type of cooperation it would consider to recommend reduced charges or sanctions against a company or an individual in connection with an enforcement investigation or action. In general, the Division said it will look “for more than ordinary cooperation or mere compliance with the requirements of law.” In evaluating this, the Division noted three factors it would consider: (1) whether the cooperation resulted in “material assistance” to the Commission’s investigation and enforcement action, including its success, considering the timeliness, nature and quality of the cooperation; (2) whether the cooperation encouraged “high quality” assistance from other persons considering the significance and harm of the relevant type of misconduct and CFTC resources conserved as a result of the help; and (3) the subject’s culpability, and in the case of a company, its culture and other relevant factors. (Click here for more background in the article “Cooperate and Maybe Benefit Says CFTC Division of Enforcement” in the January 29, 2017 edition of Bridging the Week.)
Later in the same year, Mr. McDonald said that potential wrongdoers who voluntarily self-report their violations, fully cooperate in any subsequent CFTC investigation, and fix the cause of their wrongdoing to prevent a reoccurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all. (Click here for background in the article “New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief” in the October 1, 2017 edition of Bridging the Week.) Contemporaneously with his speech, the CFTC’s DOE released a formal Updated Advisory on Self Reporting and Full Cooperation that memorialized and expanded the elements of Mr. McDonald’s presentation (click here to access).
Last year, the CFTC determined not to bring an enforcement action at all against Deutsche Bank after the Commission brought and settled charges against a trader for the bank for purportedly mismarking his swap trading portfolio to disguise trading losses. The CFTC said it determined not to bring an enforcement action against Deutsche Bank in connection with this matter because of its “timely, voluntary self-disclosure” of the incident, full cooperation, and “proactive remediation efforts." (Click here for more in the article ”Ex-Bank Trader Fined US $350,000 and Banned From All CFTC Overseen Markets for Allegedly Concealing Swaps Trading Losses; Bank That Self-Reported, Cooperated and Remediated Receives Letter Closing Investigation” in the November 11, 2018 edition of Bridging the Week.)
The current initiative announced by the CFTC to encourage self-reporting of FCPA-related violations appears to be an extension of the agency’s prior efforts to encourage self-reporting of other violations of applicable law and CFTC rules. I will be curious to see if an enforcement action is announced imminently that sheds light on the unexpected timing of this announcement and initiative.
Under NFA’s proposed new rules, beginning February 1, 2021, all existing and new APs at swaps firm intermediaries or persons designated as APs at swap dealers must satisfy either a “Long Track” or “Short Track” proficiency requirement depending on their job function. The proficiency requirements will test individuals’ swaps market knowledge as well as familiarity with regulatory requirements.
Persons designated as APs in a swap dealer’s sale and trading areas who negotiate, price and/or execute swaps with counterparties and/or are responsible for managing the swap dealer’s swaps-related risks must satisfy Long Track requirements, as must persons designated as APs who supervise such persons. Other persons at swap dealers designated as APs as well as persons designated as APs who are their supervisors, and swap APs and their supervisors at swaps firm intermediaries, may satisfy either the Long or Short Track requirements.
Since there are no registration requirements for persons designated as APs at swap dealers, such entities must maintain records that evidence relevant individuals have timely satisfied requisite proficiency requirements. A person will not be approved as a swap AP of a swaps firm intermediary unless NFA receives evidence he/she has timely taken and passed a proficiency requirement. An individual who has satisfied a swaps proficiency requirement while at one firm is not required to re-satisfy such requirement after he/she joins a new swaps firm intermediary or swap dealer, provided that the start date occurs within two years after the last date of employment at the prior firm and his/her new role doesn't require Long Track proficiency and he/she only has Short Track proficiency.
Individuals acting as APs of swap dealers outside the United States who solely accept or solicit swaps with non-US counterparties or non-US branch offices of US swap dealers do not have to satisfy NFA’s new proficiency requirements.
NFA anticipates posting subject matter topics on its Long and Short Track proficiency requirements as well as relevant frequently asked questions on its website.
Often, the NFA's proposed proficiency requirements do not address persons designated as APs at MSPs; this is because NFA does not currently have any MSP members. However, according to an NFA official, if necessary in the future, the proficiency requirements would be amended to be parallel for persons designated as APs at MSPs as for persons designated as APs at swap dealers.
Compliance Weeds: All CFTC-registered APs and any natural person registered as an FCM, IB, CPO, CTA, floor broker or floor trader are required to receive ethics training on a periodic basis, as needed. Registered entities must have written procedures that describe the frequency and form of training. The frequency and form should be based on the size and type of a firm’s business. One size is not expected to fit all. Topics to be addressed should include an overview of applicable laws and CFTC rules, as well as relevant rules of applicable self-regulatory organizations that oversee the firm; the registrant’s duty to observe just and equitable principles of trade; how to act honestly and fairly with due care in the interest of customers and for the integrity of the market; how to maintain an effective supervisory system and internal controls; how to assess the financial circumstance and investment experience of customers; disclosure of material information to customers; and avoidance and disclosure of conflicts of interests, among other topics. (Click here for additional information in the CFTC’s 2001 Statement of Acceptable Practices With Respect to Ethics Training and here for NFA Compliance Rule 2 -9: Ethics Training Requirements.)
The amended MRAN also adds a new Q/A to clarify that third-party systems accessible to multiple parties that allow for electronic matching or electronic acceptance of bids or offers for EFRPs are prohibited. However, parties may use communication technologies to bilaterally request EFRP quotes from one or more participants and to facilitate privately negotiated EFRPs.
CME Group’s revised MRAN is scheduled to be effective March 19.
Compliance Weeds: All EFRP transactions must involve the bona fide transfer of the cash commodity underlying the exchange contract, or a by-product, related product or an over-the-counter instrument. A liquidation of the related position that occurs simultaneously or close-in-time without the parties incurring market risk will likely cause the EFRP to be deemed a prohibited transitory EFRP.
CME Group will also regard an EFRP as transitory if two EFRPs involving economically equivalent futures positions traded on a CME Group and another exchange result in the related position component being offset between the same parties. Structuring a swap so that it settles through an Exchange for Risk Transaction is not considered to be entering into a transitory EFRP, provided the settlement value (floating price) is subject to material market risk. Immediately offsetting exchange of futures for physical positions involving foreign currency positions are not considered transitory EFRPs if executed in accordance with CME Group rule. Click here to access CME Group Rule 538.K; click here for the currently in place EFRP MRAN Q/A 26.) ICE Futures U.S. has equivalent prohibitions, although it also permits immediately offsetting EFP transactions involving physical delivery obligations by participants in the London Gold Auction administered by the ICE Benchmark Administration. (Click here to access ICE Futures U.S. FAQs – November 20, 2017, Q/A22.
Although EFRPs may be conducted between different trading units within one corporate group or even within one company, they must be for units under independent control and not to transfer positions from one trading operation to another.
In other legal and regulatory matters involving cryptoassets:
Separately, FCT Strategy Trading Limited settled charges brought by the Chicago Mercantile Exchange that, from January 2015 to July 2015, the firm’s traders entered spread futures orders on Globex for Lean Hogs, Feeder Cattle and Live Cattle prior to market opening with the intent to ascertain the depth of the order book and not to enter into bona fide transactions. CME claimed that, as a result of these non bona fide transactions, fluctuations in the publicly displayed Indicative Opening Price occurred. Furthermore, CME alleged that FCT, a nonmember, did not sufficiently train or supervise its traders to prevent the prohibited trading scheme. FCT agreed to a fine of US $75,000 to resolve this matter and performed remedial measures and training following this episode. FCT neither admitted nor denied the charges.
Alan Fraczek also resolved CME charges for entering and cancelling orders for Live Cattle, Lean Hog and Feeder Cattle spread markets on the Globex electronic trading platform during the pre-opening period between May 1, 2017, and December 8, 2017, for non bona fide purposes. CME claimed that these prohibited orders – also purportedly placed to assess depth of market – resulted in fluctuations in the publicly displayed Indicative Opening Price. Mr. Fraczek, who was a nonmember too, was fined US $20,000 and suspended for ten business days from all CME Group trading exchanges.
Element Capital Management LLC settled charges with the Chicago Board of Trade by submitting to a fine of US $15,000 and a disgorgement of US $86,365 for a position limit violation. According to CBOT, at the end of the trading day on August 9, 2018, the firm was 141 contracts over the single and all month limit of 8,000 contracts for 2018 Soybean Oil futures contracts The next trading day, not realizing its mistake, ECM increased its position resulting in a total of 294 contracts over the required limit. CBOT stated that the firm immediately eliminated the overage after realizing its mistake, achieving a profit of $86,365. ECM neither admitted nor denied the charges.
For further information:
Broker-Dealer Fined US $2 Million by FINRA for Purported Five-Year Reg SHO and Supervision Breakdowns
CFTC Chairman Delighted by DLT’s Digital Trinity’s Effect on Markets:
CME Group Warns of Greater Scrutiny for EFRPs With Off-Market Prices:
Consumers Confused by Cryptoassets According to UK FCA Commissioned Research:
Exchange Sues SEC Over Non-Response to Freedom of Information Act Request:
Justice Department Asks CFTC to Hold Off Discovery in Cryptocurrency Purported Fraud Case Pending Resolution of Parallel Criminal Action:
Leader of Alleged Worldwide Cryptocurrency Pyramid Scheme Arrested in Los Angeles:
National Security Agency Gives Away FreeCybersecurity Tools to Help Analyze Malicious Code and Malware:
New CFTC Initiative Encourages Non-Registrants to Self-Report Foreign Corrupt Practices:
NFA Seeks Smarter Swaps APs Through New Training Requirements:
NYMEX and COMEX Permanently Bans 12 Nonmembers From All CME Group Exchanges’ Access for Multiple Trading Offenses and Non-Participation in Disciplinary Processes:
COMEX and NYMEX:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of March 9, 2019. 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. Views of the author may not necessarily reflect views of Katten Muchin or any of its partners or other employees.
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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Bridging the Week by Gary DeWaal: March 4 – 8 and March 11, 2019 (Bribing Is Wrong; Smarter Swaps APs Are Better; Commercially Reasonable Prices for EFRPs Are Best)Jump to: Bitcoin Ecosystem Bridging the Week Cleared Swaps Compliance Weeds Cybersecurity Foreign Corrupt Practices Act Fraud and Anti-Fraud Legal Weeds Policy and Politics Reg SHO Technological Innovations Trade Practices (including Disruptive Trading) Uncleared Swaps