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Most of the global news involving financial services during the past week came from the United States and from exchanges regulated by the CFTC. The news involved automated trading, wash sale prevention, and the correct way to conduct exchanges of futures for related positions. The main topics this past week were:
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Automated trading, wash sales prevention and exchanges of futures for related positions dominated the news in financial services during the week of September 9 to 13, 2013.
CFTC Issues Concept Release on Automated Trading; Seeks Answers to 124 Questions
On September 9, 2013, the CFTC issued a concept release on risk controls and system safeguards for automated trading environments that was also discussed at a meeting of the CFTC's Technology Advisory Committee on September 12.
In this Concept Release, the CFTC sets forth its views regarding the principal actors and risks involved with automated trading, and preventative measures taken to date to mitigate such risks. The Commission also provides a comprehensive discussion and poses 124 questions related to further potential mitigation of such risks for which it seeks responses from the industry, including whether any regulatory action is necessary, such as giving the CFTC authority to seek higher civil fines. The CFTC also singles out high frequency trading as a specific type of automated trading and seeks comment whether HFT should receive different regulatory treatment.
(For more on this Concept Release, see an article posted on this website on September 9, 2013, entitled "CFTC Issues Release on Automated Trading; Asks if More Regulation and Higher Fines are Necessary" at http://www.garydewaalandassociates.com/?p=873.)
At the TAC September 12 meeting, industry participants generally applauded the comprehensive and thoughtful nature of the concept release, but cautioned against the proposal or adoption of rules that might be too narrow and single out only a subset of industry actors, when relevant problematic conduct is engaged in by many types of market participants using different types of order entry means and speeds.
Comments to the CFTC's concept release are due by close of business December 11, 2013
ICE Exchanges in US and Europe Require Use of Self Trade Prevention Functionality as of November 1
ICE Futures US and ICE Futures Europe both will require proprietary traders with direct market access to ICE trading engines and who use algorithmic programs to use its Self Trade Prevention Functionality (STPF) as of November 1 to help avoid inadvertent wash sale transactions. Other market participants are encouraged to use this functionality now, although this functionality may become mandatory for other participants at a later date too.
Impacted proprietary traders can utilize ICE's STPF at various levels, including the mandatory authorized trader level, as well as on an inter or intra company basis, or for the same account. STPF permits various alternative conducts to occur when a potential matched trade might occur, including (1) rejecting the new order that would cause a match with a resting order, (2) rejecting the resting order that would cause a match with a new order, or (3) rejecting both the new and resting order if the orders, if executed, would match.
The Chicago Mercantile Exchange currently has an optional Self Match Prevention Functionality (SMPF) too in connection with GLOBEX access. On July 9, 2013, CME submitted to the CFTC a request to approve a Market Regulation Advisory Notice (MRAN) that provides updated guidance related to the CME's prohibition against wash trades as well as information related to its SMPF. The CME had hoped for this Advisory to be approved by the CFTC for issuance by September 9, but this approval is still pending. As part of this process, the CFTC sought public comments on the CME's proposed MRAN through August 14. (For more on this, see an article first posted on this website on June 14, 2013, entitled "Compliance Weeds: CME Proposes New Guidance Regarding Wash Trades Effective September 9, 2013 Pending CFTC Approval" at http://www.garydewaalandassociates.com/compliance-weeds-cme-issues-new-guidance-regarding-wash-trades/.)
CFTC Issues Rule Enforcement Reviews for Three DCMs; EFRPs Singled Out in One (Again)
Last week the CFTC issued rule enforcement reviews of three Designated Contract Markets (DCMs): CBOE Futures Exchange, LLC (CFE), ELX Futures, LP and the Minneapolis Grain Exchange, Inc. The CFTC found that each of the DCMs generally complied with its obligations under relevant core principles, although it issued recommendations for improvements. (For two DCMs, CFE and ELX, the National Futures Association provides certain relevant regulatory services including trade practice and market surveillance, and related investigatory work.)
However, as with its rule enforcement review of the CME issued on August 2, 2013, the CFTC made a number of recommendations regarding NFA's monitoring of Exchange of Futures for Related Position transactions on the ELX that continues to put the industry on notice regarding the CFTC's heightened interest in these transactions.
Specifically, the CFTC recommended that NFA for ELX should (1) include matched EFRP transactions in its random review of all transactions; (2) strategically select more EFRP transactions in connection with its random reviews to detect misconduct; and (3) in addition to its random reviews, ensure it reviews EFRP transactions for every Clearing Privilege Holder at least once every calendar year.
FCMs and trading firms should review their own internal procedures related to their handling of EFRPs in light of these recommendations issued to DCMs.
(For more on this, see an article posted on this website on August 6, 2013, entitled "Alphabet Soup under CFTC Scrutiny: CFTC Review of CME Handling of EFRPs Suggests Tougher Times for Traders and FCMs: Time to be Pro-Active!" at http://www.garydewaalandassociates.com/?p=550.)
CME Seeks to Ban All Transitory EFRPs and Increase Recordkeeping and Other Requirements related to Non-transitory EFRPs
In a related matter, the CME has proposed to prohibit transitory EFRPs in connection with all its products. Currently, transitory EFRPs are permitted in connection with New York Mercantile Exchange energy products, Commodity Exchange and Nymex metals products, and CME foreign exchange products. The CME made its proposal in a filing to the CFTC on September 12 and has asked the CFTC to post its filing, which included proposed amended rules and a revised Frequently Asked Questions related to EFRPs, for notice and public comment.
In addition, the CME is also seeking to amend and/or clarify certain recordkeeping and compliance obligations in connection with non-transitory EFRPs. Among other things, the CME is proposing to require in all circumstances opposing accounts to an EFRP be independently controlled; to codify that futures or options contracts may not be used as the related position component of an EFRP; to permit EFPs to be used in connection with inventory financing of storable energy or metals commodities in addition to storable agricultural commodities; and to clarify that in connection with brokered EFRP transactions, brokers must maintain all records related to their facilitation.
The CME's proposed FAQs also provides additional guidance related to the responsibilities of firms that execute or clear EFRPs on behalf of their customers including guidelines (1) related to recordkeeping requirements, (2) the identification of EFRP transactions on all customer statements; (3) the provision of information related to CME's
EFRP requirements to all customers; and the (4) establishment, documentation and execution of controls that "are reasonably designed to prevent and detect the execution of non-bona fide EFRPs."
For questions or assistance, do not hesitate to contact Gary DeWaal and Associates at (212) 382-4615 or at http://www.garydewaalandassociates.com/request/
For more information, see:
CFTC Concept Release on Automated Trading;
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-22185a.pdf
CFTC Rule Enforcement Review: CBOE Futures:
http://www.cftc.gov/ucm/groups/public/@iodcms/documents/file/rercfe090613.pdf
CFTC Rule Enforcement Review: ELX:
http://www.cftc.gov/ucm/groups/public/@iodcms/documents/file/rerelx090613.pdf
CFTC Rule Enforcement Review: Minneapolis Grain Exchange:
http://www.cftc.gov/ucm/groups/public/@iodcms/documents/file/rermgex090613.pdf
CME: Proposed Amended Rules and FAQ related to EFRPs :
http://www.cmegroup.com/market-regulation/files/13-381.pdf
CME Proposed Market Regulation Advisory Notice regarding Wash Trades:
http://www.cmegroup.com/market-regulation/files/13-272.pdf
ICE Europe (Self Trade Prevention Functionality):
https://www.theice.com/publicdocs/circulars/13127.pdf
https://www.theice.com/publicdocs/futures/IFEU_Self_Trade_Prevention_Policy.pdf
https://www.theice.com/publicdocs/futures/IFEU_Self_Trade_Prevention_FAQ.pdf
ICE US (Self Trade Prevention Functionality):
https://www.theice.com/publicdocs/futures_us/exchange_notices/ExNot091113STPFFinal.pdf
The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of September 16, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
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