Author: Felix Shipkevich

CFTC and European Commission Equivalence Decision

US Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo and European Commission (EC) Vice-President Valdis Dombrovskis announced a common approach for the mutual recognition of EU and US derivatives trading venues. The two regulatory bodies have made a joint announcement to ensure that both US and EU swap market counterparts are able to comply with trading obligations mandated by the EU and by the Commodity Exchange Act in their respective trading venues. The EC will adopt an equivalence decision in order to recognize non-EU regulatory frameworks such as CFTC’s Swap Execution Facilities (SEF) and designated contract markets (DCMs). This decision will alleviate the regulatory burden for US and EU companies. As per the European Commission press release,

The European Commission has today determined the United States to be equivalent to the European Market Infrastructure Regulation (EMIR) in terms of the legal, supervisory and enforcement arrangements for non-centrally cleared over-the-counter (OTC) derivatives transactions…It also determines that US rules on obligations on the exchange of collateral (‘margins’) between counterparties are equivalent to EU rules.

Thus, under this approach, both US and EU companies will be able to use any regulated swap trading platform in the US or EU to comply with their trading obligations. These Trading obligations were introduced by the G20 during the aftermath of the financial crisis, assuring transparent venues for trade of certain commonly used derivatives. The European commission lists the mutual benefits of non-EU regulatory framework recognition as:

  • [Allowing] authorities in the EU to rely on supervised entities’ compliance with equivalent rules in a non-EU country

  • [Reducing] or even [eliminating] overlaps in compliance requirements for both EU and foreign market players

  • [Making] certain services, products or activities of non-EU companies acceptable for regulatory purposes in the EU

  • [Allowing] less burdensome prudential regime to apply to EU banks and other financial institutions with exposures in equivalent non-EU countries.

It also determines that US rules on obligations on the exchange of collateral (‘margins’) between counterparties are equivalent to EU rules.

Margin Comparability by the CFTC

In addition to the EU’s equivalence decisions, the CFTC has made margin comparability determinations that will have a significant effect on corss-border swap activity. CFTC commissioners unanimously approved this week that EU entities registered as swap dealers will enjoy the substituted compliance provisions of CFTC margin rules. These margin rules have their boundaries:

  1. They apply only to uncleared swaps and not to bank swap dealers.
  2. They only apply to transactions that are both a swap and an OTC derivative.

The CFTC explains in their press release,

Pursuant to the CFTC’s comparability determination, a swap dealer or major swap participant that is subject to the both the CFTC’s and EU’s margin rules with respect to an uncleared swap may rely on substituted compliance wherever available under the CFTC’s margin rules. Any such swap dealer or major swap participant that complies with the EU’s margin rules would be deemed to be in compliance with the CFTC’s margin rules, but would remain subject to the CFTC’s examination and enforcement authority.

The CFTC’s comparability determination renders moot CFTC Staff Letter No. 17-22, in which the CFTC’s Division of Swap Dealer and Intermediary Oversight provided time-limited no-action relief from compliance with certain provisions of the CFTC’s margin rules for swap dealers that entered into swaps with counterparties that were subject to the EU’s margin rules.

This determination is effective immediately.

Chairman Giancarlo offered a positive outlook on the CFTC press release,

Today marks a significant milestone in cross-border harmonization between the European Commission and the CFTC. These cross-border measures will provide certainty to market participants and also ensure that our global markets are not stifled by fragmentation, inefficiencies, and higher costs. Indeed these measures are critical to maintaining the integrity of our swaps markets.

European Commission Equivalence Determinations

The EC financial regulation laws include provisions that allow it to adopt equivalence decisions through assessment of non-EU rules satisfying the same. The EU will verify that non-EU country rules have legally binding requirements, ensure effective supervision by authorities, and that they achieve the same results as the corresponding EU rules. A formal equivalence decision will then be adopted by the EC once all requirements are met. These equivalence decisions may take the form of an act which may outline whether equivalence is granted in full or partially, for how long, and whether it applies to the entire supervisory framework of a non-EU country or only to some of its authorities. The EU provides a list of equivalence decisions adopted in the area of baking and finance in their website.

These efforts will require close and dedicated efforts by both CFTC staff and EC staff. A joint press release stated such cooperative endeavors, “The CFTC staff and the EC services will work as expeditiously as practicable to ensure that this arrangement is put into place and operating in a coordinated manner, and will continuously monitor the impacts resulting from the implementation to assess whether any further action is appropriate.”

In a press release by the CFTC, Commissioner Brian Quintenz applauds the achievement between the two regulatory bodies, “I commend the staffs of the CFTC and EC for their hard work and dedication.” Chairman Giancarlo also provided statements on their cross-border collaboration, “I look forward to continuing to work with Vice President Dombrovskis and the European Commission staff in a cooperative manner to make further progress in harmonizing our regulatory frameworks.”

The next steps:

  • The CFTC staff will notify the EC of its list of eligible SEFs and DCMs while the EC will notify the CFTC of its list of eligible MiFID II/MiFIR and MAR compliant trading venues.
  • The CFTC staff and the staff of relevant national competent authorities under the coordination of the EC will also work towards concluding cooperation arrangements to ensure the effective exchange of information and coordination of supervisory activities.

Equivalence Agreement Might Be Imminent

Currently, CFTC Chairman J. Christopher Giancarlo is on a 10-day trip in Europe. Derivatives industry attorneys speculate that a European equivalence pact on swap execution rules might come into fruition very soon. If this happens, it would enable swap trading on platforms located in both, the U.S. and Europe. An absence of this agreement would isolate  U.S. and EU swap execution facilities, making trading more expensive as well as hinder the flow of current liquidity. This agreement can happen as early as January 2018.

A trade execution mandate is sought to be administered by the EU. This move might be part of the general EU financial reform that is looking toward restricting particular swap trading on non-European registered trading platforms. Until then, Europeans can use U.S. based swap execution facilities. On the other side, CFTC prohibits U.S. traders from trading swaps on European platforms.

An equivalence agreement seems to likely happen as unlike former CFTC chairmen, Giancarlo’s evident approach to revamp the Dodd-Frank trade-execution rules would put it at par with European regulations. In particular, Giancarlo wants to mandate that trades occur through other than the conventional models, like through an order book. Other models include voice brokering, auctions, and volume match.

Clearing equivalence discourse between the U.S. and EU has been taking as long as five years. It is possible that both sides won’t come to an agreement by January’s deadline. According to CFTC’s Erica Richardson, the 10-day trip is treated as a “relationship-building” period between the two sides. Giancarlo is showing respectable relational gestures. Micah Green, head of Steptoe & Johnson LLP’s cross disciplinary financial services practice in Washington, thinks that the chairman’s approach in domestic policy approach will be similar to the approach he will take with international regulators. Micah Green predicts that the chairman’s approach “will be well received by European regulators.”

CFTC Approves LedgerX to Deal Bitcoin Options

LedgerX Approved to Trade Bitcoin Futures

LedgerX, a trading and clearing platform for Bitcoin, became the first company to be approved by the Commodity Futures Trading Commission (CFTC) to trade Bitcoin futures. This is one of a few of available current events that shows that Bitcoin is on the verge of being overseen by federal agencies that deal with market regulations.

LedgerX was approved by being a derivatives clearing organization (DCO) by CFTC. Previously, they have been given approval as a swap execution facility (SEF). The company is planning to begin Bitcoin options trading services this fall.

It is evident that investors are ambitious to participate in the crypto marketplace that will soon be giving the option to hedge investments to be protected against asset volatility. According to a Morgan Stanley report titled “Blockchain: Unchained?”, the price of Bitcoin will significantly accelerate when the government starts to regulate the markets where Bitcoins are traded.

SEC Hesitant on Bitcoin

Although CFTC, with its cardinal mission to create a fair market, is giving acceptance to crypto market ventures, the Securities Exchange Commission (SEC) is taking an opposing stance. Earlier this year in February, the SEC denied Winklevoss Bitcoin ETF proposal. The SEC’s rationale is that the crypto market is too unregulated. In a 38 page memorandum they stated that “The Commission has … emphasized the importance of surveillance-sharing agreements between the national securities exchange listing and trading the ETP, and significant markets relating to the underlying asset.” The memorandum asserted that ETFs must have rules that prevent market machinations and manipulations. The SEC, with a mission of protecting investors, believes that the lack of regulations in the Bitcoin market creates an environment where it would be tough to effectively enforce rules.

However, some speculate that one federal agency approval can lead to the next federal agency’s approval. It’s a step by step process and regulations will gradually be created and be implemented.

Senate Confirmed Christopher Giancarlo as Chairman of CFTC

Christopher Giancarlo was nominated by the US Commodity Futures Trading Commission (CFTC) as the Chairman of the regulatory agency. Moreover, Brian Quintenz and Rostin Behnam, both of who are Republican nominees, were confirmed as CFTC Commissioners.

However, a third Republican nominee, Dawn Stump, did not receive the same treatment. According to a Senate Democratic aide, the party did not want to confirm three Republican commissioners. There is currently one Democratic commissioner, Sharon Bowen, who is planning to step down.

The US Senate rendered a unanimous vote to confirm Christopher Giancarlo as Chairman of CFTC. This is an unusual sign of bipartisan efforts as for the past months we witnessed a consistency of oppositions along partisan lines.

Christopher Giancarlo was Acting Chairman of CFTC since the beginning of this year. During the confirmation Giancarlo issued the following statement:

“I am humbled by the bipartisan support in the Senate. As I have stated before, during my time as a Commissioner, I have witnessed firsthand the enduring commitment of members of the US Senate to our common purpose of serving the American people and the agricultural producers upon which we all rely. I stand ready to fulfill the CFTC’s mission to foster open, transparent, competitive and financially sound markets, in a way that best fosters broad-based economic growth and American prosperity. I am pleased that the nominations of Russ Benham and Brian Quintenz were also confirmed by the Senate, and I look forward to the swift confirmation of Dawn Stump and getting a full Commission soon. I am also grateful to Commissioner Bowen for her partnership during my tenure as Acting Chairman, and I am proud of the excellent work we’ve accomplished together.”

Please visit CFTC website to find out more about this and the press release.

CFTC Seeking for Federal Resources to Oversee Trading Involved with Blockchain Technology

Washington, D.C. – In a Congressional testimony, the US Commodity Futures Trading Commission (CFTC) intimated an increase of the agency’s budget to oversee trading involved with blockchain technology.

An additional $31 million needed

On June 8, CFTC’s Acting-Chairman, J. Christopher Giancarlo, testified before the Congressional Committee on Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies. The agency suggests an additional $31 million funding is necessary for the CFTC to oversee the functions on blockchain technologies.

This amount will be appropriated accordingly to supervise activities of the blockchain-related market.

FinTech and Blockchain

With the rise of innovation in the financial technology (FinTech) industry, federal financial agencies are in need to revamp their oversight. Earlier this year, President Trump issued an Executive Order that created the American Technology Council. President Trump touted that Government and its agencies should implement efficient information technologies to render more effective oversights and services.

CFTC’s Acting-Chairman Giancarlo testified that a boost in federal funding will aid the agency in implementing FinTech effectually. Giancarlo pointed out that with these new technologies CFTC will become a more effective regulator. Moreover, these technologies will allow the agency to modernize its current regulations.

Later in his testimony, Acting-Chairman Giancarlo mentioned the innovation of “smart” contracts and distributed ledger technology, both of which are in their nascent stages. Their implementations will ostensibly challenge and change conventional methods of our current financial market infrastructure. Hence, Giancarlo finds it important to take an early initiative to prepare CFTC for such modifications.

Other Agencies

There are other federal agencies requesting additional funding to oversee activities in the financial technology industry. The FBI is asking for $21 million and 80 new employees for such purposes. After recent reports of ransomware and other cybercriminal complaints regarding financial-related activities, resources are needed to deter further damage.


Giancarlo’s Testimony:

CFTC Banned David Liew from Trading

Washington, DC – Earlier this June, the U.S. Commodity Futures Trading Commission (CFTC) charged David Liew for illegal practices in the precious metals futures contracts. CFTC banned David Liew from trading, because of preceding events of manipulating the gold and silver markets. As a junior trader, on the precious metals desk, in a large financial institution, Deutche Bank, Liew was engaging in these unlawful acts for at least two years, from 2009 to 2012.

David Liew’s Machinations

Liew mentioned that he conspired to manipulate prices with other unidentified people. One of them Liew referred to as “The Legend.” The scheme involved placing and quickly pulling out small orders, forcing prices to benefit traders who needed to fill client orders. Liew admitted to placing the fraudulent spoof orders with a hope of having the market interest in trading become larger than what it was in reality. Through the spoof orders, Liew’s resting orders were filled. This duplicitous scheme allowed traders to buy metal futures contracts at exaggeratedly low prices and sell them at artificially high prices.

CFTC’s Investigation

CFTC issued an order filing to which David Liew pleaded guilty to connive to fraudulent charges. Liew is agreeing to cooperate as his preceding actions transgressed the Commission Regulations and Commodity Exchange Act (CEA). Moreover, CFTC banned David Liew from trading and obliged him to perpetually never to participate in other similar commodity-interest activities such as seeking registration, or acting as an agent obliged to be registered.

During the Division of Enforcement’s (Division) investigation, Liew was compliant. CFTC recognized Liew’s cooperation in that process, which included rendering of essential assistance to the investigation and cooperating with any other agencies involved in this investigation.

CFTC’s Director of Enforcement, James McDonald, asserted that the enforcement action indicated that the Commission will be more vigilant and be more stringent with “individuals who manipulate and spoof” the markets. He also said, “the Commission will give meaningful cooperation credit to those who acknowledge their own wrongdoing, enter into a Cooperation Agreement and provide substantial assistance to the Division in its investigations and enforcement actions against others who have engaged in illegal conduct.”

CFTC’s Order:

CFTC Extends No-Act SEFs and DCMs from Certain CFTC Regulations for Correction of Errors

Washington, DC — Today, a no-action letter issued by the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight and Division of Clearing and Risk (Divisions) will serve as an extension to the relief granted in CFTC Letter No. 16-58 which will be expiring on June 15, 2017. In addition to the no-action letter providing relief from certain CFTC regulations to allow swap execution facilities (SEFs) and designated contract markets (DCMs) to rectify clerical or operational errors that resulted in a swap being rejected for clearing and consequently becoming void, it also permits SEFs and DCMs to amend clerical or operational errors brought to light after a swap has been cleared.

In order to enable SEFs and DCMs to correct clerical or operational errors that result in a swap being rejected for clearing, the Divisions will recommend that the CFTC to not take any enforcement action against a SEF or DCM for a lack of compliance with  the required methods of execution in CFTC Regulations 37.9(a)(2) and 38.500 as well as the prohibition against pre-arranged trading in CFTC Regulations 37.203 and 38.152 provided that within one hour after a trade has been rejected for clearing, the SEF or DCM corrects all errors by allowing a new, pre-arranged trade with terms and conditions that comply with the terms and conditions of the original trade.

The relief also caters to operational and clerical errors that have only been discovered after the swap has been cleared to be corrected.  The Divisions will not recommend that the CFTC engage in any enforcement action against a SEF or DCM for failure to comply with the required methods of execution in CFTC Regulations 37.9(a)(2) and 38.500 and the prohibition against pre-arranged trading in CFTC Regulations 37.203 and 38.152 if, after a trade has been cleared and an error is discovered, the SEF or DCM permits a pre-arranged trade between the original parties that counteracts the swaps carried on the DCO’s books. To read more, please click here.

CFTC Announces Stronger Anti-Retaliation Protections for Whistleblowers and Enhanced Award Claims Review Process

Washington, DC –  A unanimous vote by the U.S. Commodity Futures Trading Commission (CFTC) to amend Whistleblower Rules has resulted in, among other things, stronger anti-retaliation protections for whistleblowers as well as enhanced processes for reviewing whistleblower claims.

A reinterpretation of the CFTC’s anti-retaliation authority under the Commodity Exchange Act (CEA) concludes that the CFTC or the whistleblower may now seek legal remedies against an employer for retaliation against a whistleblower. Steps taken by an employer that deliberately restricts an employee from direct communication with the CFTC pertaining to a possible violation of the CEA by way of a confidentiality, pre-dispute arbitration or similar agreement are strictly prohibited by the amendment.

In a recent press release, Director of the Division of Enforcement, James McDonald said “The Whistleblower Program is an integral part of the Division’s efforts to identify and prosecute unlawful conduct. The Commission’s approval of these rules today will further strengthen and enhance our efforts to protect customers and promote market integrity.”

While Part 165 of CFTC’s Regulations outlines the agency’s basic framework of the Whistleblower Program the basic framework, the new amendments not only strengthen anti-retaliation protections but will also add efficiency and transparency to the process of determining whistleblower award claims. Furthermore, it will also harmonize the CFTC’s rules with those of the  of the agency’s Whistleblower Program. In addition to strengthening anti-retaliation protections, the new amendments will add the U.S. Securities and Exchange Commission’s whistleblower program.

Additional changes as a result of the amendments include replacing the Whistleblower Award Determination Panel with a Claims Review Staff which will consider and issue Preliminary Determination in the granting and denial of claims. As such, whistleblowers will have an opportunity to view and contest the Preliminary Determination prior to  the CFTC issuing a Final Determination.

Other key changes that have occurred due to the amendments are whistleblower eligibility requirements also make changes to other key areas, such as whistleblower eligibility requirements and authorizing the Whistleblower office to handle a handle facially ineligible award claims that do not pertain to a Notice of Covered Action, a final judgment in a Related Action, or a previously filed Form TCR (Tip, Complaint or Referral).

71 New Names Added to the CFTC’s List of Foreign Entities that Illegally Solicit U.S. Residents to Trade Forex and Binary Options

Washington, DC — In keeping with the U.S Commodity Futures Trading Commission’s (CFTC) attempts to safeguard Americans from fraud, 71 new names have been added to the RED list bringing the total number of companies on this list to over 11o.

The “Registration Deficient, ” now known as the red list which as established in September 2015 and supplemented in April 2016 contains the names of unregistered foreign entities that are believed to be soliciting and accepting funds from U.S. residents at a retail level for, among other things, trading in  foreign currency (forex) and binary options. These companies are required to register with the CFTC but are not registered.

The CFTC asserts that registration does not provide guarantee against mismanagement or fraud by an otherwise unethical firm; however, registration does provide the public with an increased level of security and accountability. Registration limits the CFTC to only examine whether firms are in comply with Commodity Exchange Act, for example whether firms meet minimum financial standards as well as disclosure, reporting, and recordkeeping requirements.

Working in conjunction with the CFTC’s SmartCheckSM campaign, the RED list helps investors identify and protect themselves against illegal conduct. To read more, please click here.

The Royal Bank of Scotland to Pay $85 Million Penalty for Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates by the CFTC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against The Royal Bank of Scotland plc (RBS) for attempted manipulation of the ISDAFIX benchmark which requires RBS to pay an $85 million civil monetary penalty. The CFTC Order revealed that during a five-year period, commencing in January 2007 and expanding through March 2012 (relevant period), RBS, through actions of multiple traders, tried to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a global benchmark reference in a variety of interest rate products. RBS participated in the unlawful conduct in order to gain advantage of certain derivatives positions it held that were priced or valued off of the USD ISDAFIX indicator.

Measures to identify and deter trading potentially aimed at manipulating swap rates will be implemented by the RBS in an effort to strengthen its internal controls and  and to maintain the integrity of interest-rate swap benchmarks.

“People around the world rely on benchmark rates such as ISDAFIX. This is our fourth enforcement action relating to attempts to manipulate the ISDAFIX. These actions, and the CFTC’s previous cases against those who sought to corrupt the LIBOR and foreign exchange benchmark rates, make clear that the Commission takes very seriously its role in ensuring the integrity of any and all benchmarks used in our markets,” Director of the CFTC’s Division of Enforcementsaid Aitan Goelman.

Specifically, the Order found that during the said time frame, RBS, through some of its traders in Stamford, Connecticut, bid, offered, and executed transactions in specific interest rate products which included both swap spreads and U.S. Treasuries, at the critical time of 11:00 a.m. fixing time with the intent to affect the reference rates and spreads captured by a leading interest rates swaps broker (Swaps Broker) in the “print” sent to submitting banks, and thereby to affect the published USD ISDAFIX.

To read more, please click here.