CFTC LAW | Forex, Futures and Derivatives Regulatory News

House Agriculture Committee offers Dodd-Frank amendments

aburke — Fri, 27 Jan 2012 12:45:11 +0000

House Agriculture Committee offers Dodd-Frank amendments

The U.S. House Agriculture Committee has approved six bills that would amend the derivatives sections of the Dodd-Frank Wall Street Wall Street Reform and Consumer Protection Act. Three of the bills have also been passed by the House Financial Services Committee.

Committee Chairman Frank Lucas (R., Okla.) insisted that bills don’t make significant changes to the original law: “They are balanced proposals that ensure the legislation is implemented in the manner Congress intended,” he said.

However, the ranking Democrat, Rep. Collin Peterson of Minnesota, though the Committee should have given regulators the opportunity to finish writing their rules before legislating: “I want to reiterate my view that it is premature to move on legislation until we see the final rules,” Peterson said.

One of the bills gives an exemption from parts of new Dodd-Frank derivatives rules to companies that use derivatives exclusively to hedge business risk. Dodd-Frank already includes such an “end-user” exemption that relieves them of the requirement to send derivatives transactions through clearinghouse. However, some regulators proposed rules requiring end users to post margin under certain conditions.

The bills could be scheduled for a full House vote. However, even if they pass the lower chamber, they are unlikely to be heard by or pass through the Democratic-controlled Senate.

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.

FCMs pass CFTC review

Felix Shipkevich — Thu, 26 Jan 2012 13:35:20 +0000

FCMs pass CFTC review

The CFTC has completed a limited review of registered Futures Commission Merchants (“FCMs”) ordered as a result of the MF Global bankruptcy. The findings, released this week, show that all FCMs with segregated or secured funds were fully in compliance with CFTC regulations. The Commission was checking FCMs holding 4d segregated funds or Part 30 secured amount funds to ensure that customer funds were protected and firms were in compliance with CFTC regulations. Of the 120 registered FCMs, 70 held segregated or secured funds and were subject to review.

According to the CFTC, all 70 firms maintained assets in 4d accounts in excess of the net liquidating equities of its customer, as mandated by the CEA and Commission ruled. In total, the FCMs held $13 billion more than they owed to customers. Furthermore, the FCMs held assets in Part 30 accounts in excess of the required aggregate margin for all customers’ open futures positions. They surpassed their obligations to customers by $7 billion.

In order to assess the state of each firm’s compliance with client funds rules, regulators from the CFTC, CME, and NFA used records and third-party source documents kept at the FCMs. These reviews were not intended to be full audits, and therefore regulators did not confirm balances with depositories or other institutions holding customer funds.

Statistics Provided by the CFTC:

• The FCMs held a total of approximately $166 billion in segregated accounts, which was approximately $13 billion (or 9%) in excess of the $153 billion owed to customers. The FCMs also held approximately $48 billion in Part 30 secured accounts, which was approximately $7 billion (or 17%) in excess of the Part 30 secured amount obligation.

• $137 billion of the total segregated funds of $166 billion (or 82.5%) and $42 billion of the total Part 30 secured funds of $48 billion (or 87.5%) was concentrated in the 14 FCMs reviewed by Commission staff.

• The FCMs posted approximately $74 billion of segregated funds with Commission-designated derivatives clearing organizations. This represents 45% of the total segregated balance of $166 billion.

• The FCMs held approximately $33 billion of the total Part 30 secured funds of $48 billion (or 68%) deposited by customers for trading on foreign futures and options markets at affiliated banks and affiliated foreign brokers. FCMs also invested approximately $3 billion of Part 30 secured funds in internal reverse repurchase transactions and reverse repurchase transactions with affiliated entities.

• The FCMs held approximately $30 billion of Section 4d segregated funds (or 18% of the total segregated funds of $166 billion) with affiliated banks and/or custodian entities. FCMs also invested approximately $12 billion of Section 4d segregated funds in internal reverse repurchase transactions and reverse repurchase transactions with affiliated entities.

MF Global claim deadline: January 31

Elan Mendel — Wed, 25 Jan 2012 14:23:57 +0000

MF Global claim deadline: January 31

MF Global trustee James Giddens has sent a warning to all former clients seeking funds from the collapsed commodities broker to file the claims by January 31. Those who fail to file by this deadline risk not recovered their missing funds or securities.

Those claims filed by 11:59pm on the 31st will be protected to the full extent of the law, and be considered in future distributions of assets. Even those who have already received distributions or account transfers should file claims. Other claims against MF Global, including general estate claims, made be made as late as June 2, 2012.

“It is in the interest of all former customers of MF Global to file a claim, and we strongly encourage them to do so. We understand the claims forms are complex because of regulatory and court requirements, and we recognize that they may be cumbersome to complete. Claimants should fill out the form to the best of their abilities. We serve as the advocates for customers and are committed to helping claimants through the claims process,” said Giddens. He also said that he hoped to better gauge the true extent of the client funds shortfall once all the claims are filed.

Generally, missing securities are protected by the Securities Investor Protection Corporation Insurance found on many brokerage accounts. However, this type of coverage does not apply to commodities accounts like those held at MF Global. Therefore, client returns will be based on the amount of money Giddens and the CFTC are able to track and recover.$4.1 billion has already been released from frozen accounts, but the whereabouts of as much as $1.2 billion is still unknown.

SIFMA/ISDA position limits suit dismissed by appeals court

Felix Shipkevich — Tue, 24 Jan 2012 15:20:16 +0000

SIFMA/ISDA position limits suit dismissed by appeals court

An appeals court in Washington D.C. has thrown out a lawsuit brought by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association challenging the CFTC’s new position limits regulation. The court says that the case must first be heard by a lower court before it can be argued before the appeals court.

“There is no express congressional authorization of direct appellate review applicable to the petition for review in this case,” explained the three-judge panel in a brief order issued late last week. Federal laws provide for appellate review of other agency actions, but cases that directly challenge legislation cannot skip the district courts. SIFMA and ISDA have already filed the case in a district court as well. “Although the statute was unclear, we thought that might be the answer and were prepared for it, and for that reason we filed in both courts,” said Steve Kennedy a spokesman for ISDA. “We now will move forward quickly in the district court.”

The position limits rule, which was approved by a narrow 3-2 vote in October of last year, imposes restrictions on 28 physical commodity futures and swaps and all economically equivalent contracts. The spot-month position limits are set at 25% of deliverable supply, while non-spot-moth position limits are set using a ratio specified by the CFTC. If the rule survives this legal challenge, it will go into effect this year. The lawsuit relies on a loophole in the Dodd-Frank Act first discovered by the U.S. Chamber of Commerce. The Chamber argued that the SEC did not thoroughly weigh the costs of an earlier corporate governance rule, and a D.C. court obligingly struck the rule down.

CFTC fines long-running Ponzi scheme

Felix Shipkevich — Fri, 20 Jan 2012 14:27:52 +0000

CFTC fines long-running Ponzi scheme

The CFTC has secured a federal consent order against Texas resident Larry Benny Groover for defrauding customers and misappropriating client money as part of a foreign exchange (“forex”) Ponzi scheme. Groover has been ordered to pay $2.69 million in restitution and civil monetary penalty. Relief defendant Joanne Groover is also required to disgorge the $44,890 in ill-gotten gains she received as a result of her husband’s misconduct.

According to the court order, from June 18, 2008 to February 2, 2010, Groover fraudulently solicited about $1.4 million. Though the funds were to be used to trade forex, the defendant co-mingled the money with his personal funds. Approximately $647,500 was actually used to trade forex. Groover lost nearly all of that money in poor trades.

He misappropriated the remainder of the funds for personal expenses, on everything from health and medical care, and cable television to groceries, dining, auto repair, gasoline, and insurance, according to the order. Groover also used customer funds to buy software and trade publications, and occasionally to make payments directly to himself and his wife.

BNY reaches partial settlement in federal case

Elan Mendel — Thu, 19 Jan 2012 16:22:59 +0000

BNY reaches partial settlement in federal case

BNY Mellon has reached a partial settlement with the the U.S. Attorney’s office in connection with charges that the custody bank defrauded large institutional customers, including several state pension funds, by overcharging them for foreign exchange (“forex”) transactions.

This settlement addresses only the section of the case aimed at forcing BNY to reveal its methods for deciding forex exchange rates for each customer. The bank has agree to disclose how it formulates exchange rates for customers who buy and sell foreign securities or receive foreign dividends.

According to the initial complaint, federal officials believe that the bank selects rate at the outer margins of the interbank rate and made money on the difference. BNY has also agreed to stop representing to customers that they were getting “best execution” prices. A spokesperson for the bank characterized the settlement negotiations as “constructive” and said that BNY is still “confident that we have provided our clients and their investment managers with the information they need to make informed trading decisions.”

BNY and federal prosecutors did not reached an agreement on the other section of the lawsuit. The Justice Department is seeking hundreds of millions in civil monetary penalties for defrauding customers, and will continue to contest this part of the case.

CFTC settles action against unregistered offshore RFED

Felix Shipkevich — Wed, 18 Jan 2012 17:14:07 +0000

CFTC settles action against unregistered offshore RFED

The CFTC has won a federal consent order against FXOpen Investments Inc., an offshore company, for failing to register with the Commission. The firm is required to pay $140,000 in civil monetary penalty for soliciting the public to make foreign exchange (“forex”) transactions without registering as a Futures Commission Merchant (“FCM”) or Retail Foreign Exchange Dealer (“RFED”) with the CFTC. FXOpen also must close all U.S. customer accounts, return all U.S. customer funds, and cease violating the CEA and CFTC regulations.

According to the order issued by a U.S. District Court Judge in Illinois, between October 18, 2010, and January 26, 2011, FXOpen acted as an RFED or FCM by taking the opposite side of customers’ forex transactions. However, the firm was not registered with the CFTC. FXOpen also solicited or accepted customer orders to place forex trades.

In the United States, RFEDs and FCMs are the only entities permitted to buy forex contracts from or sell forex contracts to individual investors. There are rules and regulations in place to protect investors and the financial system. Even those entities that solicit or accept orders from U.S. investors in connection with forex transactions conducted at an RFED or FCM must be registered.

BNY Mellon settlement deadline nears

Elan Mendel — Tue, 17 Jan 2012 14:50:12 +0000

BNY Mellon settlement deadline nears

Embattled custody bank BNY Mellon is reportedly still in negotiations over the lawsuit filed by federal prosecutors regarding the bank’s foreign exchange (“forex”) rate practices. The lawsuit, filed by Manhattan U.S. Attorney Preet Bharara, aims in part to discover BNY’s methods for disclosing pricing for forex transactions. A judge granted a one-week extension on January 9th, and warned that “parties should not expect another extension from the court.”

Bharara is also seeking millions in damages. The terms of any settlement reached in this case will likely shape later decisions on similar cases pending against BNY and other custody banks across the United States. In total, state and other pension funds are seeking more than $2 billion, allegedly lost by institutional clients due to unfair forex rates. So far, BNY has repeatedly denied any wrongdoing.

BNY had already tried to have the lawsuit filed by New York State dismissed. In a court filing, the bank stated that it was always upfront about the rates applied to preauthorized forex transactions: “A party that knows exactly what it is getting, and at what price, cannot, as a matter of law, have been defrauded.” If the bank made a profit, BNY contended that it “had no duty to disclose it.”

In November, BNY scored a partial victory in Virginia after a circuit court judge threw out two out of three types of claims against the bank. In a statement, BNY Mellon said that “We are pleased that the court dismissed two of the three remaining claims brought by [Virginia] and we are gratified that the judge scheduled a prompt hearing on the one remaining claim.” The remaining claim accuses BNY Mellon of intentionally creating false forex pricing reports in violation of the Fraud Against Taxpayers Act.

Groendyke Ponzi scheme fined $1.4 million

Felix Shipkevich — Fri, 13 Jan 2012 15:48:29 +0000

Groendyke Ponzi scheme fined $1.4 million

The CFTC has obtained a federal consent order against Jeffrey L. Groendyke (and his trade name JG Forex Fund) requiring him to pay $963,141 in restitution and $420,000 in civil monetary penalty for operating an over-the-counter foreign exchange (“forex”) Ponzi scheme. Groendyke is also permanently banned from engaging in any commodity-related activity. The defendant was never registered with the CFTC as a Commodity Pool Operator (“CPO”).

According to the order entered by a U.S. District Court Judge in Michigan, Groendyke fraudulently solicited the public to invest in a forex trading pool. He primarily solicited members of his local church, and represented himself as a successful trader with a profitable trading history. He told prospective investors that the forex pool was a “long term investment” suitable for retirement funds. In this manner, he was able to take $1,009,844 from 42 individuals.

However, of that total, the order finds that the defendant only used $366,950 to actually trade forex. Of that amount, he lost $324,228 through bad trades. Of the remaining money, Groendyke used $46,703 to make Ponzi payments to pool participants in order to perpetuate his scheme. He also misappropriated and lost $5,503 in customer funds trading in his own personal commodity futures account. A further $501,510 was used by third parties who in turn used the funds on activities other than forex trading. Finally, Groendyke spend $131,899 on personal expenses, including computer equipment, rent, groceries, restaurants, hotels, and retail goods. During the scheme, he never revealed to customers that funds were used for anything other than forex trading.

CFTC finalizes three more Dodd-Frank rules

Elan Mendel — Thu, 12 Jan 2012 14:26:38 +0000

CFTC finalizes three more Dodd-Frank rules

In an open meeting on Wednesday, the CFTC approved three final rules, a delegation order, and opened a proposed rule to public comment. The Commission also provided a rough outline for Dodd-Frank implementation in the new year.

The three proposed rules dealt with protection of cleared swaps customer collateral, the registration of swap entities, and business standards for swap entities. The proposed rule contained the CFTC’s version of the Volcker rule, and the delegation order allowed the NFA to register swap entities.

The customer collateral protection rule has been influenced by the MF Global meltdown. Though it allows commodity brokers to pool customer collateral, it forbids them from co-mingling those funds with their own resources. In the event of bankruptcy, clearing-members are only permitted to collect collateral from the defaulting firm, not from individual accounts. However, this provision, clearly aimed at reassuring commodities investors affected by MF Global, is not completely secure. As Commissioner Scott O’Malia was quick to point out, “it benefits cleared swaps customers, and not futures customers (who are bearing the brunt of MF Global). This rulemaking would not have prevented a shortfall in the customer funds of the ranchers and farmers that transact daily in the futures market. Nor would it have expedited the transfer of positions and collateral belonging to such customers in the event of a collapse similar to that of MF Global.”

The CFTC made waves last fall when it declined to issue a proposal for the Volcker Rule last fall with the SEC, FDIC, and OCC. However, the Commission’s proposal does not significantly differ from the earlier drafts issued by the other agencies. The rule is open to comment for 60 days.

Chairman Gensler’s Dodd-Frank timeline divides the year from January to March and April onwards. In the first part of the year, the Commission intends to finalize eleven new rules, including the end-user exemption and commodity options. After April, the CFTC will address eleven more, including the block trade rule, extraterritoriality, and SEFs.