Valuable Lessons Learned Articles

In a week punctuated by the beginning of trading on Swap Execution Facilities and the simultaneous shut down of the US Commodity Futures Trading Commission, other important developments occurred internationally and in the US relevant to all financial service participants. These matters included:

1. Compliance officers are in the cross hairs once again of the UK FCA and the US SEC: UK Compliance Officer sued by the FCA, while the SEC issued a Frequency Asked Questions regarding the potential liability of legal and compliance officers for business persons under a failure to supervise theory (with Valuable Lessons Learned);
2. ADM Investor Services, Inc. was fined by the CFTC for segregation violations (with Valuable Lessons Learned);
3. CFTC issued FAQs related to commodity options;
4. CFTC issued No-Action relief related to SEFs just prior to closing its doors, including to an Australian (but not European) multilateral trading facility offering swaps to US persons;
5. ESMA finalized alternative investment funds’ reporting requirements;
6. EUREX scheduled implementation of its Excessive System Usage Fee and Order to Trade Ratio to discourage High Frequency Trading; and additional articles too.

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.

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.