Commentaries

Bridging the Week by Gary DeWaal: July 14 to 18 and 21, 2014 (Mutual Non-Recognition; Wash Sales; Unregistered CPOs; IBs)

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Published Date : July 20, 2014

No single theme predominated globally this week among the many disparate matters raised by international regulators and through litigation. However, one regulator raised concerns about the potential deleterious impact on global liquidity if international regulators do not better coordinate their implementation of the G20 mandates that followed the 2008 financial crisis, while two self-regulatory organizations’ disciplinary actions remind brokerage firms that surveillance of account activity is an important part of effective supervision.

As a result, the following matters are covered in this week’s Bridging the Week:

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Article Version:

CFTC Commissioner O’Malia Urges International Financial Regulators to Cooperate More to Avoid Fracturing Liquidity

Last week, Scott O’Malia, a commissioner of the Commodity Futures Trading Commission, implored financial regulators worldwide not to impair markets that are healthy and well-functioning in their roll-out of regulations meant to implement the commitment of G20 leaders made in Pittsburgh, Pennsylvania, in September 2009 to reform OTC derivatives markets.

Speaking before a group of lawyers at the Federal Reserve Bank of NY, Mr. O’Malia expressed his concern regarding “continuing reports of market fragmentation and fracturing of liquidity between US and non-US markets as a result of diverging regulatory approaches to implementation of the G20 principles.”

Mr. O’Malia suggested that the CFTC play a role in promoting competitive markets by (1) re-examining its rules that may have negatively impacted markets; (2) working with international regulators to harmonize swap data reporting, exchange trading and central counterparty clearing; and (3) making appropriate investments in technology.

Regarding central clearing, Mr. O’Malia observed that if the European Commission does not find that the US regulatory regime is equivalent to that under European law by December 15, 2014, US clearing houses (CCPs) will not qualify for favorable capital treatments by EU banking institutions. According to Mr. O’Malia,

“[I]f this happens, it would be cost-prohibitive for EU banks to clear through third country CCPs. US CCPs will be unable to maintain direct clearing member relationships with EU firms and would be ineligible to clear contracts subject to the EU clearing mandate next year. This outcome would be detrimental to both US and European interests because it will lead to market fragmentation and contraction of liquidity, as well as market disruption and dislocation due to the international nature of the swaps market.”

Mr. O’Malia said he was encouraged by the July 11 US-EU Financial Markets Regulatory Dialogue Joint Statement (for details, click here) that reaffirmed regulators’ commitment to work together to implement OTC derivatives reform, and expressed his hope that the EC and CFTC will “turn these aspirational words into action.”

During his presentation, Mr. O’Malia also expressed his support for a bill that recently passed the House of Representatives (for details, click here) "that not only reauthorizes the CFTC, but also provides important market structure and Commission reforms.” Among these reforms, said Mr. O’Malia, are providing additional customer protections for customers and their funds; making it clear that end-users who use swaps to hedge and mitigate risk are not considered financial entities; and requiring the CFTC to conduct an appropriate quantitative and qualitative cost-benefit analysis in connection with rulemakings.

My View: It seems that both EU regulators and the CFTC are aware of the importance of finding the other’s CCP regulatory scheme equivalent. However, it is unclear what the hold-up is in actually making such a finding. However, this is just one in a host of contentious transatlantic issues that awaits resolution by Timothy Massad, the new CFTC chairman, working with his European counterparts. Hopefully these matters will be resolved soon, before, as Mr. O’Malia pointed out, severe damage is done to global liquidity.

And briefly:

Compliance Weeds: This decision suggests that, at least under some circumstances, NFA expects FCMs and other members to look beyond the four corners of exemptions from registration proffered by their clients (even if filed with NFA) to assess whether such exemptions are legitimate. Members should consider including in their ongoing surveillance a review of clients with exemptions from registration (that otherwise would be expected to be registered with the CFTC and to be a member of NFA) to assess whether a client’s activities are consistent with its claimed exemption. If a filing with NFA is necessary to crystalize such exemption, the FCM should review evidence of such filing as part of this review, although this review alone is not enough.

And even more briefly:

For more information, see:

Australia Proposes to Mandate Central Clearing of OTC AUD Interest Rate Derivatives:
http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2014/Central%20clearing%20of%20OTC%20AUD/Key%20Documents/PDF/Proposals-Paper-20140707.ashx

CFTC Commissioner O’Malia Urges International Regulators to Cooperate More to Avoid Fracturing Liquidity:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-40

Citigroup Agrees to Pay US $7 Billion to Resolve Federal and State Claims Regarding Mortgage Securities:
http://www.justice.gov/usao/nye/pr/July14/2014Jul14/Citi%20-%20Settlement%20Agreement%20SIGNED.pdf

See also: Statement of Facts:
http://www.justice.gov/usao/nye/pr/July14/2014Jul14/Citi%20-%20SOF%20FINAL.pdf

ESMA Seeks Views on Market Abuse Regulation:
http://www.esma.europa.eu/system/files/esma_2014-809_consultation_paper_on_mar_draft_technical_standards.pdf

Financial Stability Board Begins Assessment of FX Benchmarks:
http://www.financialstabilityboard.org/press/pr_140715.htm

HKMA and SFC Seek Views on Mandatory Reporting and Related Record Keeping for OTC Derivatives:
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=14CP6

Judge Rules Against Futures Broker Regarding Wash Sales in Wheat Manipulation Action:
/ckfinder/userfiles/files/CFTC%20v_%20Moncada.pdf

See also: CFTC Complaint Against Eric Moncada:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfmoncadacomplaint120412.pdf

Retail Forex Dealer and FCM Fined by NFA for Doing Business With an Unregistered CPO:
http://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=3970
http://www.nfa.futures.org/basicnet/CaseDocument.aspx?seqnum=3971

SEC Charges Ernst & Young With Violating Auditor Independence Rules for Engaging in Lobbying Activities:
http://www.sec.gov/litigation/admin/2014/34-72602.pdf

Monetary Authority of Singapore Consults on FX Derivatives Reporting:
http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/CP%20FX%20reporting.pdf

US Treasury Secretary Urges Financial Sector to Increase Efforts Against Cyber Threats:
http://www.treasury.gov/press-center/press-releases/Pages/jl2570.aspx

See also:

SIFMA Comment on Treasury Secretary Lew Speech:
http://www.sifma.org/newsroom/2014/sifma_statement_on_cybersecurity_remarks_by_secretary_lew/
Other responses:
http://www.sifma.org/newsroom/2014/financial_industry__cybersecurity_is_a_top_priority_for_protecting_customers/

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 19, 2014. 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 and/or Gary DeWaal 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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