Articles in September 2013

Gary DeWaal’s Bridging the Week: September 23 to 27 and 30, 2013

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Bridging the Week, Valuable Lessons Learned | Print

Last week, brokers once again learned through enforcement actions against ICAP Europe that failure to maintain a robust supervisory system over their employees can be costly and embarrassing. However, brokers also learned in a NY court decision involving Amaranth Advisors, that the threshold to hold futures commission merchants liable for their clients’ possible manipulative practices is very very high.

This week swap dealers and other users of swaps will learn whether the decision of the US Commodity Futures Trading Commission to force trading of certain swaps by US persons onto registered Swap Execution Facilities on October 2 promotes transparency and liquidity, engenders anger and confusion, results in a bit of both, or ends up being postponed at least in part. And, who can keep up with all the last minute flurry of guidance and no action letters?

These and other matters covered this week on Bridging the Week are:

1. Yet another trader was sued by the CFTC after allegedly causing large losses to his employer following efforts to disguise trading losses by making false entries into his employer’s internal bookkeeping system;
2. Industry organizations and participants continued to fight against proposed mandatory top up to customer funds’ requirements and a proposed BIS leverage ratio framework that could materially hurt FCMs and their customers;
3. ESMA considers the application of its rules to transactions between non-EU entities; it will make a proposal to the European Commission by November 15;
4. FINRA offered guidance to Broker Dealers regarding suitability while NFA offered guidance to Commodity Pool Operators and Commodity Trading Advisors regarding disclosures;
5. Vision Financial Markets, a US-based FCM, was fined in two separate CFTC actions, one for segregation violations, and one for failure to supervise (in connections with positions limits monitoring);
6. RJ O’Brien, also a US-based FCM, was fined too by the CFTC related to a one day segregation violation; and plenty of other industry developments too.

Gary DeWaal’s Bridging the Week: September 16 to 20 and 23, 2013

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Bridging the Week, Valuable Lessons Learned | Print

During the week of September 16 to 20, 2013, the biggest news was the coordinated enforcement actions by four international regulators against JP Morgan related to its London Whale incident. But what also was big news was that the US Commodity Futures Trading Commission was not among the regulators joining in this coordinated enforcement action — for now. Why?

However, the JP Morgan matter was just the tip of the iceberg in a very hectic week featuring many interesting US litigation developments, new regulatory requirements, regulatory proposals, and an important speech by the CEO of the UK Financial Conduct Authority — all potentially impacting a wide-range of industry participants worldwide. These matters – all covered in this week’s Bridging the Week – include:

1. four regulators sued JP Morgan; why was the CFTC not the fifth;
2. DRW Investments sued the US CFTC to avoid a possible enforcement action;
3. an amended complaint was filed by MF Global Holdings litigation trustee against John Corzine and other principals;
4. the US SEC charged 23 firms (many from the managed money industry) in connection with unlawful short sales related to initial public offerings; simultaneously the SEC issued a Risk Alert;
5. the US CFTC seeks public comment on CME’s proposed new EFRP rules (including banning transitory EFRPs);
6. IBs’, FCMs’, RFEDs’ and certain CTAs’ taping requirement becomes effective December 21;
7. ICE Clear US will require a greater percentage (50%) of clearing member guaranty fund deposit in cash, effective December 31;
8. UK FCA CEO Martin Wheatley gave his view on derivatives’ cross border regulation at last week’s London ISDA conference: why can’t we all just get along (internationally);
9. CTAs’ first quarterly report is due at NFA November 14; and more.

My View: Reflections on the JP Morgan’s Settlements — Human Nature, Internal Controls, and the CFTC’s Broad New Anti-Manipulation Authority

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Culture and Ethics, My View, News Developments, Valuable Lessons Learned | Print

On September 19, 2013, as widely reported in the media, JP Morgan consented to and was assessed fines by four international regulators totaling US $920 Million related to what has been colloquially referred to as the “London Whale” trades during 2012.These trades caused the Bank to suffer losses of US $6.2 Billion.

There is little I can add to the facts of this matter that already are set forth in detail in all the regulatory complaints, especially those of the UK Financial Conduct Authority and US Securities and Exchange Commission; JP Morgan’s own study of this incident issued during January 2013; and the media reports.

However, the reported history of this matter, as well the apparent pendency of an action by the Commodity Futures Trading Commission, makes me think of two things:

1. no matter how good they are, all financial services firms remain vulnerable to individual employees doing bad things. Unless a firm’s culture and infrastructure are sufficiently robust, these bad things can go undetected for a period of time causing big losses and profound regulatory expense (not to mention potential private litigation expenses and a loss of reputation harming business too); and

2. new anti-manipulation authority given to the CFTC in 2010 as part of Dodd Frank is very broad, and the way the Commission has implemented this authority through rule adoption is broader still. Industry participants must carefully consider their proprietary trading activities where intent and proof of an artificial price may no longer be required for a successful CFTC manipulation prosecution.

Financial services firms must continue to address these realities and take appropriate actions.

Gary DeWaal’s Bridging the Week: September 9 to 13 and 16, 2013

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Bridging the Week | Print

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 week on Gary DeWaal’s Bridging the Week are:

1. CFTC issued a concept release on automated trading; seeks views on 124 questions;
2. ICE Exchanges in US and Europe will require use of self trade prevention functionality as of November 1 for proprietary traders with direct market access;
3. CFTC issued rule enforcement reviews for three exchanges; EFRPs singled out in one (again); and
4. CME seeks to ban all transitory EFRPs and increase record keeping and other requirements related to non-transitory EFRPs for traders and brokers.

News Development: CFTC Issues Concept Release on Automated Trading; Asks If More Regulation and Higher Fines Are Necessary

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News Developments | Print

The US Commodity Futures Trading Commission today issued a “Concept Release on Risk Controls and System Safeguards for Automated Trading Environments.” In this Concept Release, the CFTC provides 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 the 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.

Gary DeWaal’s Bridging the Week: September 2 to 6 and 9, 2013

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Bridging the Week | Print

It would be unfair to say that last week, September 2-6, 2013, was the slowest week of the year regarding regulatory news impacting financial services’ firms worldwide. However when one of the most significant regulatory developments was a press release on the website of the Australian Securities & Investments Commission heralding “Improved Pet Insurance Disclosure,” perhaps it wasn’t one the most active weeks of regulatory news either. That being said, there were a few very important items worth reviewing that are covered on this week’s Bridging the Week, including:

1. the UK FCA sued and settled with Aberdeen Asset Managers and Aberdeen Fund Management, large asset managers, for approximately $11.25 Million regarding customer protection rules’ violations;
2. the USA CFTC sued and settled with Macquarie Futures USA, LLC for $150,000 also regarding customer protection rules’ violations;
3. the Basel Committee on Banking Supervision and IOSCO issued their “Final Framework Regarding Margin for Non-Cleared Derivatives;”
4. ESMA issued advice to the European Commission on six countries’ (including the USA’s) rule equivalence to EMIR;
5. the USA CFTC issued No Action relief for financial reporting by certain CPOs trading for Controlled Foreign Corporations,

and more:

There is even a link to the article on pet insurance disclosure too!

Summer Reading You May Have Missed — An Important Article on Systemic Risks by DTCC: But Did They Identify the Top Risks?

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My View | Print

While much of Wall Street, The City and continental Europe were away for summer vacation this past August, Depository Trust and Clearing Corporation published an important thought piece on the most significant systemic risks impacting the financial services industry today and likely tomorrow, entitled “Beyond the Horizon.” This publication deserves the attention of everyone in the financial services business for serious reflection and prompt consideration regarding systemic risks their businesses confront, appropriate mitigation efforts, and opportunities, if any. But did DTCC really identify the top risks?

It’s 10 PM: FCMs, SDs, MSPs — Do You Know the Status of Your Firm’s 2013 Annual Compliance Report Preparation?

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Compliance Weeds | Print

Now that summer is almost over, Chief Compliance Officers of swap dealers, major swap participants, and future commission merchants should be well underway in the process that ultimately will lead to the preparation of their firm’s Annual Compliance Report for the fiscal year ending 2013, and the certification of the report by the CCO or the Chief Executive of their firm.

CCOs that have not begun this process should do so promptly in order to avoid last minute conflicts with other senior officers over what information should be included in their firm’s Annual Compliance Report and how it should be stated. Late preparation could make possible disagreements more contentious because all certifications must be made “under penalty of law,” meaning that the certifying officer has potential administrative, civil and/or criminal liability should it be determined that an Annual Compliance Report was not accurate or complete and that the signatory had reason to know this.

A new article on the website of Gary DeWaal and Associates, “It’s 10 PM: FCMs, SDs, MSPs — Do You Know the Status of Your Firm’s 2013 Annual Compliance Report Preparation?,” provides some practical guidance for all CCOs and firm managers to consider when preparing their firm’s Annual Compliance Report.

Gary DeWaal’s Bridging the Week: August 26-30 and September 3, 2013

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Bridging the Week | Print

As summer unofficially ends in the United States and a new school year is about to begin for students, fittingly, international regulators have issued a few report cards for the last semester on the rollout of some important worldwide regulatory initiatives (regarding BASEL III and the international coordination of OTC derivatives regulation), as well as a few salient life messages: lying is bad (especially to your Chief Compliance Officer)(this in connection with an SEC enforcement action against a former employee of Boulder Investment Advisers), and don’t try to hide your big mistakes (this in connection with a CFTC enforcement action against an ex-Goldman, Sachs trader)!

Moreover, the Financial Stability Board, the high level international coordinator of worldwide national financial authorities, has called for changes and potential changes in the way that financial services’ firms conduct securities lending and repurchase activities. If implemented these ideas could pose yet another material threat to potential revenue by financial services’ industry players.

These developments, as well as:

1. a CFTC enforcement action against the former external auditor for Peregrine Financial Group;
2. a SEC Business Continuity Advisory just for Investment Advisers; and
3. new regulatory developments in China,

are the principal items this week on Gary DeWaal’s Bridging the Week for August 26 to 30 and September 3, 2013.