CFTC LAW | Forex, Futures and Derivatives Regulatory News » CFTC

Hong Kong SFC and MA sidestep G-20 deadline

Elan Mendel — Tue, 18 Oct 2011 14:22:57 +0000

Hong Kong SFC and MA sidestep G-20 deadline

Hong Kong’s twin financial regulators, the Securities and Futures Commission (“SFC”) and the Monetary Authority (“MA”) , have refused to commit to finalizing over-the-counter derivatives reform by the G-20 deadline at the end of next year. In a joint consultation regarding the OTC market, the regulators announced that they might wait for other countries to finish their G-20 reforms before finalizing their own.

“The HKMA and SFC are working towards meeting the G20 implementation deadline of end-2012,” explained the regulators in a press conference yesterday. ”However, much depends on external factors, including the progress of reform initiatives in other major markets, due completion of the legislative process, and the readiness of relevant market infrastructure and participants.”

This wait-and-see attitude contravenes a recent statement by the Financial Stability Board (“FSB”), an international working group focused on financial regulation. The FSB encouraged all nations to write regulation to the best of their abilities, rather than wait for the US and the EU to complete their reforms. The 2012 deadline set by the G-20 already is in danger, as countries look at the slow pace of Dodd-Frank implementation (in the United States) and EMIR/MiFID reform (in Europe) and delay their own revisions.

However, SFC executive Ashley Alder notes that “Hong Kong cannot drive the reform initiatives but will continue to coordinate with overseas jurisdictions to address some of the key aspects of the reform, the cross-border nature of the OTC derivatives market necessitates international standards.” Regulators and politicians from across the globe have made similar statements, calling for harmonization at the expense of rapid reform in order to avoid significant regulatory arbitrage.

The SFC-MA consultation, which runs through the end of November, will discuss a number of reforms, including central clearing, exchange trading, data capture, and record-keeping requirements.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

In Brief: Position Limits Finalization

aburke — Wed, 12 Oct 2011 15:18:17 +0000

In Brief: Position Limits Finalization

The CFTC has officially released the agenda for its October 18th meeting. As the press has speculated, the Commission will be considering position limits, as well as DCOs and a possible amendment to the swap regulation effective date.

The CFTC has delayed two open meetings prior to this, most likely because of problems with the position limits rule-making process (read more).

In remarks before the Futures Industry Association, Gary Gensler also turned heads by suggesting the Commission would extend the exemptive relief granted to market participants in July in order to avoid confusion within the industry.

Volcker Rule in limbo at CFTC (UPDATED)

Felix Shipkevich — Mon, 10 Oct 2011 18:36:18 +0000

Volcker Rule in limbo at CFTC (UPDATED)

UPDATE: According to Deputy Treasury Secretary Neal Wolin, the CFTC will most likely adopt Volcker Rule requirements matching those already proposed by other regulators. Says Wolin: “The CFTC will do its piece of this when it does, but I would expect there would be a consistent approach across the major elements of Volcker Rule implementation. Four regulators have spoken with the same voice. I expect the central coordination of the substance of this rule will continue to be the case.”

–

The CFTC will be taking a “wait-and-see” approach to the Volcker Rule, defying with the swift adoption of the Dodd-Frank provision by other agencies. Though the CFTC will not have a major role in implementing the rule, the Commission’s hesitation may open the provision to legal challenges.

The Volcker Rule is the piece of the Dodd-Frank Wall Street Reform and Consumer Protection Act which prevents banks from trading securities, derivatives, and other financial instruments for their own profit. It also prohibits banks from investing in hedge or private equity funds. The Volcker Rule is considered Dodd-Frank’s answer to the Glass–Steagall Act, and was included in the Act as a way to limit the overlap between commercial and investment banking.

The FDIC and SEC are already scheduled to vote on the rule this week, but the CFTC is stepping back to watch the proceedings. “[CFTC Chairman Gary Gensler] said we might, if it’s the will of the commission, put forward … a virtually identical proposal with the other regulators, or we could go it alone,” said Commissioner Scott O’Malia. “He’s not committing either way.”

Unlike other financial regulators, the CFTC will only have a small role in implementing the Volcker Rule. One decision the Commission will have to make is how to define hedge and private equity funds. The CFTC can either agree to the definition already drafted by the SEC, or work with the agency to create a new rule.

Unregistered CPO accused of commodity fraud

Elan Mendel — Fri, 30 Sep 2011 21:21:55 +0000

Unregistered CPO accused of commodity fraud

The CFTC has charged Oscar Hernandez and his companies Midway Trading Company and Conquest Investment Group with operating a commodity pool Ponzi scheme. The defendants did business as unregistered Commodity Pool Operators (“CPO”) and allegedly misappropriated $3 million from participants’ funds.

According to the CFTC, between 2006 and 2009, Hernandez told friends and acquaintances that he had developed a successful futures day-trading program, and that his investments in commodities and overseas stock markets were returning 180 percent annually, risk-free. He failed to ever disclose the risks associated with commodity futures trading, and exaggerated the potential for profit. In this manner, he was able to solicit more than $3 million from various individuals.

Allegedly, when the CPOs placed the participants’ funds in commodity futures trading accounts, they lost $1.3 million. The defendants also misappropriated another $1.8 million for personal use, to make car, mortgage, and credit card payments. To perpetuate the scheme, funds were also misappropriated to make Ponzi payments to participants expecting profits.

The enforcement action is a joint effort between the CFTC, the U.S. Attorney’s Office, and the FBI. The USAO has filed criminal charges against Hernandez as well. The CFTC is seeking restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, civil monetary penalties, and permanent injunctions against further violations of federal commodities laws from the CPOs.

Dodd-Frank position limits delayed again

aburke — Wed, 28 Sep 2011 14:25:36 +0000

Dodd-Frank position limits delayed again

The CFTC has postponed another meeting, pushing back a final vote on position limits until October 18th. The Commission was scheduled to meet on September 22nd, and then again on October 4th, to finalize a Dodd-Frank rule-making, but in recent weeks signs of internal strife have leaked into the public eye.

Creating position limits has always been one of more contentious tasks given to the CFTC by the Dodd-Frank Act. When a draft of the rule was proposed in January, the CFTC was flooded with thousands of comments. However, the process took a dramatic turn two weeks ago, when two anonymous CFTC staff members sent anonymous “whistle-blower” complaints to the agency’s Inspector General. Both complaints contend that the rulemaking team is stocked with inexperienced staff members, allowing the team leader to gut the rule of any meaningful provisions.

Furthermore, one of the whistle-blowers alleges that the rule currently relies on a type of OTC data that the CFTC is not authorized to collect by the large swaps trader reporting requirement passed earlier this year. This delay suggests that the Commission is taking the time to review the rule, and perhaps to correct the data collection mismatch.

Democrats join Dodd-Frank position limits policy-making

aburke — Tue, 27 Sep 2011 20:41:19 +0000

Democrats join Dodd-Frank position limits policy-making

Last week, Democrats in the House and Senate introduced matching bills entitled “Anti-Excessive Speculation Act of 2011.” H.R. 3006 and S. 1598 seek to override the position limits rule currently being drafted by the CFTC. Senator Bill Nelson of Florida and Representative Peter Welch of Vermont are spearheading the effort to “bring down the price of oil to bring down the price of gas” by taking “some of the gamblers out of the oil markets.”

The Speculation Act would cap position limits at 5 percent of deliverable supply in the spot month and 5 percent of open interest in the out-months, though it still exempts legitimate hedging transactions. These apply to over-the-counter and on-exchange trades. The bill creates an aggregate speculative position limit for energy contracts, to be applied to speculators as a class of traders. It also codifies a duty to ensure commodity markets “accurately reflect the fundamental supply and demand for commodities” as a fundamental principle of the Commodities Exchange Act.

Altogether, the Speculation Act is much more aggressive than its CFTC counterpart. The Dodd-Frank Act authorized the CFTC to write position limits for the commodity futures market as a way to curb speculation. However, since the bill was passed last year, progress has been frustratingly slow for many advocates of market reform, and the final draft is shaping up to be gentler on market participants than first thought. According to the latest reports, position limits will hover around 25%, and aggregation policies and class limits will be relaxed.

More generally, the position limits debate has been riven with partisan bickering. According to two anonymous whistle-blower complaints, the rule revision process has been poorly managed. “Gutting out the intent of the position limits as required by Dodd-Frank, wasting taxpayer monies, steamrolling over other staff, proposing a rule that cannot be implemented, is wasteful,” said one. At its heart, the controversy is linked to fundamentally different views about the commodity futures market. In one camp are those who insist that the trading of futures contracts encourages speculation and drives up prices for consumers. Conversely, there are those who believe that the unfettered trade of futures contracts counteracts retail price volatility and stabilizes prices. Both point to a host of conflicting studies to support their respective positions.

After the spike in energy prices in 2008, some politicians began to call for increased regulation in the commodity markets, and position limits were included in the Dodd-Frank Act. This year’s rise in energy and food prices brought speculation back to national attention, and Democrats in particular have been eager to impose tough position limits as soon as possible. Across the aisle, many Republicans have derided the CFTC’s position limits proposal (and Dodd-Frank in general) as anti-job and economically unaffordable.

The Speculation Act, at this time endorsed only by a handful of Democratic lawmakers, is unlikely to gain traction. It is in many ways the inverse of several Republican measures to repeal parts of Dodd-Frank earlier this year. Rather, the bill was probably introduced in an attempt to influence the CFTC, as well as a way to grandstand for disgruntled voters at home.

photo credit: VinothChandar

Accountant fined for inadequate FCM audit

Felix Shipkevich — Mon, 26 Sep 2011 14:31:22 +0000

Accountant fined for inadequate FCM audit

The CFTC has filed and settled charges against public accounting firm McGladrey & Pullen, LLP, and firm partner David Shane. When McGladrey and Shane performed an audit on registered Futures Commission Merchant (“FCM”) One World Capital Group, LLC, they failed to report the many misstatements and inadequacies in One World’s financials and procedures. The firm has been ordered to pay $900,000 in civil monetary penalties and restitution to the FCM’s defrauded customers, and Shane will pay a separate penalty personally.

In 2006, McGladrey issued an opinion that One World’s financial statements were free from material misstatements, and stated that it did not find any material inadequacies in the firm’s internal controls. According to the CFTC order, the FCM had both misstatements in its financial records and significant problems in its internal controls. Additionally, the order finds that McGladrey did not conduct its audit in compliance with generally accepted auditing standards (GAAS).

One World’s financial statements contained a number of inaccuracies. For example, the 2006 Statement of Financial Condition asserts that the FCM’s liabilities payable were over $6.9 million, in in fact that figure was closer to $15 million for just forex customers alone. More generally, One World’s financial statements did not reflect that the firm served as a counter party to its forex customers in over 90% if its business.

Furthermore, McGladrey did not report the many failings of One World’s internal controls and accounting system. The FCM did not keep a customer ledger, and the system did not properly identify the number of forex customers or the amount of customer liabilities. These inadequacies led to the misstatements made during the 2006 audit.

In 2007, the CFTC sued One World, and the FCM shut down in 2007. The CFTC enforcement director is adamant that auditors be held accountable for their work: “Auditors of Commission registrants perform a critical gatekeeper role in protecting the financial integrity of the futures markets and the investing public. Auditors must understand the business operations of their clients, and conduct financial audits in accordance with GAAS. As demonstrated by today’s action, the Commission will not hesitate to impose significant sanctions on auditing firms and hold individuals personally responsible when they fail to adhere to their professional obligations as regrettably happened here.”

As part of its settlement, McGladrey must hire an independent consultant to review and improve its auditing program and develop a mandatory continuing professional education program which focuses on FCMs that conduct forex business.

CFTC relaxes provisions of position limits rule

Felix Shipkevich — Thu, 22 Sep 2011 14:51:10 +0000

CFTC relaxes provisions of position limits rule

The final draft of the CFTC’s position limits rule contains key changes relaxing some provisions most hated by large institutions, according to a report by Reuters. However, the Commission has not yielded ground on sections snagging massive passives, nor will the changes convince all institutions not to move their trading activity overseas.

The two most significant changes appear in the areas of aggregation policy and class limits. In the first draft of the proposed rule, the CFTC initially proposed aggregating positions for entities with common owners, without considering if they share trading strategies or control. Now, Reuters says that the CFTC will not force commonly-owned entities to aggregate, provided that all accounts are independently controlled, and that there are thick firewalls set up between trading desks. “To the extent that such accounts and programs are traded independently and for different purposes, such trading may enhance market liquidity for bona fide hedgers and promote efficient price discovery,” said the CFTC. This exemption however, will not be extended to index funds.

The second major alteration affects class limits. At first the CFTC said it would use class limits, applying the limits to exchange-traded futures, related over-the-counter swaps, and across both of those classes combined. Now, class limits have been relaxed. Traders exceeding a particular limit would be allowed to use opposing positions that fall underneath the swaps position to reduce their net position. However, it is likely that the provision will be revised in the future: “While class limits can be an effective tool to address undue market power in a particular segment of the derivatives market, the commission has determined that such limits should not be imposed without additional data and analysis.”

The rule is scheduled for a vote on October 4th, and may be changed further before it comes before the Commissioners. Position limits have always been a politically decisive issue at the CFTC, and this tendency was only exacerbated by the sharp rise in food and oil prices this year, which many politicians have blamed on speculation. Furthermore, the rule attracted scrutiny again last week when two frustrated CFTC staff members filed complaints with the Commission’s Inspector General. The anonymous letters and emails alleged that the rule-making process was rife with intrigue and that the final rule was unworkable.

CFTC grants temporary relief from Large Swaps Trader Reporting

Elan Mendel — Mon, 19 Sep 2011 15:10:45 +0000

CFTC grants temporary relief from Large Swaps Trader Reporting

The CFTC’s Division of Market Oversight has issued a letter extending relief from two sections of the “Large Swaps Trader Reporting for Physical Commodities” rule. The relief is temporary and conditional, and parties are welcome to become fully compliant with reporting requirements before relief expires.

The Division is offering relief from sections 20.3 and 20.4 of the large trader reporting rule. 20.3 requires daily reports from clearing organizations, and 20.4 requires daily reports from clearing members and swap dealers. Based on discussions with market participants and industry organizations, the Division believes that it is necessary to extend temporary relief from these rules in order to continue addressing compliance and implementation issues.

Therefore, clearing organizations and clearing members are exempted from 20.3 and 20.4 until November 21, 2011 for cleared swaps, and January 20, 2012 for uncleared swaps. However, this relief is only offered on the condition that clearing organizations and clearing members provide open interest data for positions at the end of each month, beginning September 30, 2011. This data must be submitted no later than February 20, 2012.

All other provisions of the large swaps trader reporting requirement come into effect on September 20, 2011, including the special call provision of 20.5(b) and the books and record requirement in 20.6.

CTA charged with solicitation fraud, misrepresentation

Felix Shipkevich — Fri, 16 Sep 2011 15:54:51 +0000

CTA charged with solicitation fraud, misrepresentation

The CFTC has brought charges against Commodity Trading Advisor (“CTA”) Paron Capital Management and the firm’s principal James D. Crombie for alleged false statements made to the NFA during an audit and for fraudulent solicitation.

According to the CFTC brief, between August 2010 and March 2011 the defendants used various promotional materials, including a PowerPoint Presentation called the “Flip-Book”, a monthly newsletter, and a Due Diligence Questionnaire to solicit clients to invest with the CTA. These materials significantly misrepresented Crombie’s trading expertise and performance history. Crombie and Paron falsified Crombie’s trading history and the firm’s total assets, among other things.

In March 2011, the NFA received anonymous complaints accusing the defendants of using fictitious performance data and alerting the Association to past lawsuits against Crombie when he worked for another trading firm. Accordingly, the NFA commenced an investigation. When shown the promotional materials in use at Paron, auditors requested evidence verifying the historical returns cited by Crombie. Allegedly, Crombie provided the NFA with false statements, which the NFA discovered when they asked the entities in question to provide copies of the same statements. Crombie also denied the existence of any lawsuits against him, another false statement.

The NFA brought a Member Responsibility Action (MRA) and an Associated Responsibility Action (ARA) against Crombie and the CTA. However, the charges were settled out of court, and Crombie neither confirmed nor denied the allegations. The CFTC is seeking return of ill-gotten gains, restitution to defrauded customers, civil monetary penalties, and trading and registration bans. No figure is placed on how much money the defendants actually fraudulently solicited.

Read our ongoing coverage of the Crombie/Paron case.
photo credit: redjar