Michael Coscia, the first trader convicted of spoofing under new provisions of law, now awaits sentencing following a request for a tough sentence by the US Attorney’s Office in Chicago and for leniency by Mr. Coscia’s counsel. Meanwhile, a broker-dealer agreed to pay US $6 million to resolve charges by the Financial Industry Regulatory Authority related to alleged filing of “thousands” of deficient blue sheets over a seven-year period, while the Securities and Exchange Commission proposed that investment advisers adopt formal business continuity and transition plans to guard against material disruptions. In addition, the House Committee on Agriculture will hold a hearing this week on the Commodity Futures Trading Commission’s proposed Regulation Automated Trading. As a result, the following matters are covered in this week’s edition of Bridging the Weeks:
- Government Seeks Maximum Sentence in Coscia Criminal Action;
- SEC Proposes Investment Advisers Adopt Formal Business Continuity and Transition Plans (includes My View);
- Broker-Dealer Settles FINRA Blue Sheets Violation Allegation by Payment of US $6 Million Fine (includes Compliance Weeds);
- International Bank Consents to US $560,000 Sanction by CFTC for Not Accurately Reporting Large Trader Reports for Swaps Positions in Physical Commodities (includes two Compliance Weeds);
- NYS Department of Financial Services Issues Transaction Monitoring and Filtering Requirements for State-Regulated Banks and Other Financial Institutions;
- BIS and IOSCO Provide Guidance on Cybersecurity Measures That Should Be Adopted by Financial Market Infrastructures (includes Compliance Weeds):
- IFUS Files and Resolves Disciplinary Action Alleging Disruptive Trading; and more.
- Government Seeks Maximum Sentence in Coscia Criminal Action: The United States Attorney’s Office in Chicago requested last week that the judge presiding over the criminal trial of Michel Coscia impose the maximum sentence recommended by applicable guidelines against Mr. Coscia of between 70 and 87 months in prison while Mr. Coscia’s counsel argued for a lesser term of between no more than 4 to 10 months imprisonment. (Last November, Mr. Coscia was convicted of six counts of commodities fraud and six counts of spoofing in connection with his trading activities on CME Group exchanges and ICE Futures Europe from August through October 2011 following a seven-day trial and approximately one hour of jury deliberation. (Click here for details regarding this conviction in the article, “Jury Convicts Michael Coscia of Commodities Fraud and Spoofing” in the November 8, 2015 edition of Bridging the Week.)) In making this recommendation, the government dismissed arguments made on behalf of Mr. Coscia, that he should be sentenced to a shorter term. Mr. Coscia’s counsel had argued that a lesser sentence was warranted because at the time of his purported breaches the text of the relevant law prohibiting spoofing did not provide any “reasonable guidance for identifying—or avoiding—prohibited conduct;” the nature of his trading was not unusual compared to other traders; and he already has sustained significant punishment for his offenses, through substantial fines, disgorgement of profits and a one-year trading suspension on any CME Group exchange. The government urged the presiding judge to reject Mr. Coscia’s arguments, noting that “[t]his Court now has the opportunity to send a message, loud and clear, that our financial markets operate on principles of honesty and transparency, and do not allow a select few traders to profit in the trading markets through illegal bait and switch schemes at the expense of other traders.”
- SEC Proposes Investment Advisers Adopt Formal Business Continuity and Transition Plans: At the end of June, the Securities and Exchange Commission proposed a new rule requiring investment advisers to adopt and put in place written business continuity and transition plans designed to deal with a “significant disruption” in such entities’ operations. These plans would not be one-size-fits-all, but rather be risk-based depending on the IA’s operations. Under the SEC’s proposed rule, business continuity and transition plans would address the maintenance of “critical operations and systems, and the protection, backup and recovery of data, including client records;” back-up physical locations; communications with clients, employees, regulators and service providers; evaluation of critical third-party service providers; and a transition plan that contemplates the termination of the IA’s business “designed to safeguard, transfer and/or distribute client assets during transition.” According to the SEC, “[p]roper planning and preparation for possible distress and other significant disruptions in an adviser’s operations is essential so that, if an entity has to exit the market, it can do so in an orderly manner, with minimal or no impact on its clients.” Comments on the SEC’s proposal will be accepted through September 6. At the same time the SEC issued its proposed new rule for IAs, the SEC’s Division of Investment Management issued business continuity planning guidance for registered investment companies.
My View: On first blush, the Securities and Exchange Commission’s proposed rule requiring investment advisers to adopt business continuity and transition plans appears reasonably drafted without imposing overly prescriptive requirements. It establishes the elements of what the SEC perceives to be acceptable programs but permits specific measures to be tailored to reflect each firm’s actual business. The rule also requires an investment adviser to review the adequacy of its existing business continuity and transition plan no less than annually. This all seems quite reasonable.
- Broker-Dealer Settles FINRA Blue Sheets Violation Allegation by Payment of US $6 Million Fine: Deutsche Bank Securities Inc. agreed to pay a fine of US $6 million to resolve charges brought by the Financial Industry Regulatory Authority that it filed “thousands” of deficient blue sheets with it and the Securities and Exchange Commission from 2008 through 2015. (Blue sheets refer to trade data submitted by certain regulated entities, including broker-dealers, to the SEC and FINRA in an automated form in response to requests by the regulatory bodies in connection with their investigations, typically of equity market activity.) According to FINRA, during the relevant time, DBSI experienced “multiple problems” that sometimes caused incorrect information to be included on blue sheets; omitted required transactions; duplicated some transactions; and did not include order execution times. FINRA said these errors were attributable to “significant failures” within the firm’s blue sheet system, “including programming errors in system logic and [the firm’s] failure to implement enhancements in response to new regulatory reporting requirements.” To resolve this matter, DBSI also agreed to retain an independent consultant to help it review and make recommendations regarding its policies, procedures and systems dealing with blue sheets.
Compliance Weeds: Macquarie Capital (USA) Inc. also recently agreed to pay a substantial fine (US $2.95 million) to FINRA to resolve charges that, between 2012 and 2015, it produced to the SEC and it a substantial number of blue sheets that were inaccurate and did not have an adequate audit system to ensure the reliability of its blue sheet submissions. FINRA alleged that Macquarie’s errors included reversing buy/sell codes on allocations of certain customer trades; miscalculating the net amount of allocations on certain customer trades; and failing to provide any or complete customer information on certain transactions. (Click here for details of FINRA’s prior action in the article, “Broker-Dealer Agrees to FINRA Sanction of US $2.95 Million for Alleged Blue Sheet Failures” in the June 2, 2016 edition of Bridging the Week.) If reporting firms have not done so already, it may be advisable sooner not later (and periodically afterwards) to review both the logic of any system designed to produce blue sheets, as well as the sources (and integrity) of the data received by the system. Sample output should also be reviewed carefully to ensure it matches regulatory requirements and tests should be conducted comparing expected with actual output. Indeed, this type of periodic testing should be considered for all systems that generate regulatory reporting.
- International Bank Consents to US $560,000 Sanction by CFTC for Not Accurately Reporting Large Trader Reports for Swaps Positions in Physical Commodities: Barclays Bank plc agreed to pay a fine of US $560,000 to settle charges brought by the Commodity Futures Trading Commission saying that, from March 1, 2013, through October 29, 2014, it failed to submit accurate large trader reports of physical commodity swap positions as required by applicable law and CFTC regulations. (In general, under applicable law and CFTC regulations, swap dealers and other reporting entities are required to file with the Commission on a daily basis reports of swap positions involving certain physical commodities in excess of certain minimum levels in particular formats.) The CFTC claimed that, during the relevant time, Barclays submitted LTRs to it that included “inaccurate position information caused by missing or inaccurate prices in crude oil, natural gas, gasoline, heating oil, and agricultural products.” The CFTC said that some of the incorrect information came from third-party vendors. Moreover, noted the CFTC, in some instances, Barclays’ own systems detected the potential problems, but did not remedy the errors before submitting LTRs to the CFTC. In resolving this matter with Barclays, the CFTC acknowledged that, during the relevant period, the firm communicated with staff regarding its issues and fixed them “as necessary to comply with its LTR reporting requirements.”
Compliance Weeds 1: Previously, the CFTC filed charges against the Australia and New Zealand Banking Group Ltd. for also violating regulatory requirements related to the reporting of large swap positions involving physical commodities. The CFTC alleged that, from at least March 1, 2013, to November 20, 2014, ANZ failed on certain days to submit any reports of its large positions, while at other times it “routinely” submitted required reports that included errors. ANZ settled the CFTC’s charges by agreeing to pay a fine of US $150,000 (Click here for background regarding this matter and a discussion of LTR requirements generally in the article, “Australian-Based Swap Dealer Sanctioned by CFTC in First Case for Violations of Large Trader Reporting Requirements for Physical Commodity Swap Positions” in the September 20, 2015 edition of Bridging the Week.) The CFTC considers accurate LTRs critical for its oversight of markets and market activity and appears to prioritizing enforcement actions involving allegedly deficient LTRs.
Compliance Weeds 2: Certain large trader reporting requirements that were adopted by the Commodity Futures Trading Commission during November 2013 and subsequently postponed will soon be mandatory. Specifically, it will soon be required to electronically submit certain large traders’ and position holders’ data regarding their futures and swaps holdings on updated forms as follows:
- new Form 102A to identify holders of large positions;
- new Form 102B to identify traders that exceed a stated volume of transactions (50 contracts/day on a notional value basis; “volume threshold accounts”) during a single trading day (regardless of end-of-day positions);
- new Form 102S to identify holders of certain swaps positions;
- new Form 40/40S to collect information from reporting traders; and
- new Form 71 to collect information on omnibus volume threshold accounts.
Under the CFTC’s latest revised schedule, new requirements related to the electronic reporting of:
- Forms 102A, 102B (for Designated Contract Market volume trading threshold accounts) and 102S go into effect on September 29, 2016;
- Forms 40, 40S and new Form 71 go into effect on November 18, 2016; and
- Form 102B (for Swap Execution Facility volume threshold trading accounts) goes into effect on August 30, 2018.
- NYS Department of Financial Services Issues Transaction Monitoring and Filtering Requirements for State-Regulated Banks and Other Financial Institutions: The New York State Department of Financial Services issued final rules that require banks and certain other financial institutions it regulates to maintain an ongoing transaction monitoring and filtering program that is “reasonably designed” to detect possible Bank Secrecy Act violations and other anti-money laundering violations, and to prevent transactions with sanctioned persons and entities (e.g., as identified by the Office of Financial Assets Control of the US Department of Treasury). Under the DFS’s final rules, the monitoring program may be manual or automated but must be based on a risk assessment of the institution and must be periodically updated to reflect changes in applicable laws and regulatory warnings. The program must, as applicable, identify all relevant data sources and validate “the integrity, accuracy and quality of data to ensure that accurate and complete data flows through the Transaction Monitoring and Filtering Program.” Each regulated entity is required to adopt and submit to the DFS by April 15 annually a board resolution or a senior officer’s compliance finding that the firm has a transaction monitoring and filtering program that complies with the DFS’s requirements. The new requirements are effective January 1, 2017, with the first annual board resolutions or compliance finding required to be submitted to the DFS by April 15, 2018.
- BIS and IOSCO Provide Guidance on Cybersecurity Measures That Should Be Adopted by Financial Market Infrastructures: The Bank for International Settlements and the International Organization of Securities Commissions issued guidance to financial market intermediaries to enhance their cybersecurity. (FMIs include systemically important payment systems, central securities depositories, securities settlement systems, central counterparties or clearinghouses, and trade repositories.) In general, BIS and IOSCO recommended five central risk management categories and three overarching components that should be addressed in all FMIs’ cybersecurity programs. These include: governance; identification of critical business functions; protection; detection of potential cyber incidents; response and recovery, as well as rigorous testing; situational awareness; and learning and evolving. According to BIS and IOSCO, “[s]trong situational awareness can significantly enhance an FMI’s ability to understand and pre-empt cyber events, and to effectively detect, respond to and recover from cyber attacks that are not prevented.” Similarly, it is important that any cybersecurity program adopted by an FMI evolve with the “dynamic nature of cyber risks,” said BIS and IOSCO.
Compliance Weeds: BIS’s and IOSCO’s issuance of its guidance to FMIs provides a timely reminder to members of the National Futures Association that they were required by March 1 to have adopted and begun enforcing formal written policies regarding cybersecurity. These policies must be “reasonably designed by members to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” (Click here for further details on NFA’s requirements in the article, “NFA Proposes Cybersecurity Guidance” in the September 13, 2015 edition of Bridging the Week.)
- IFUS Files and Resolves Disciplinary Action Alleging Disruptive Trading: ICE Futures U.S. filed and settled charges against Cashcot Industries Pte. Ltd. and 1 Jain, a trader employed by Cashcot, for engaging in layering and spoofing-type conduct in the Cotton No. 2 futures market on January 23, 2014. According to IFUS, on that day, Mr. Jain entered multiple 500-lot March 2014 cotton futures orders on one side of the market at the same time he entered small lot orders on the other side of the market. He did this, claimed IFUS, to create the appearance of market pressure and to “mislead market participants into trading opposite the small orders.” Mr. Jain cancelled or amended the large orders after his small orders were executed. In addition, charged IFUS, on July 28, 2014, Mr. Jain entered an order in March 2015 cotton futures to offset an opposite order by a counterparty who he knew, through pre-execution communications, would be hedging a swap position by also placing an order in the same cotton futures. To resolve this matter, Cashcot agreed to pay a fine of US $80,000 and Cashcot and Mr. Jain agreed to a six-month denial of all IFUS trading privileges.
And more briefly:
- House Committee on Agriculture to Hold Hearing on CFTC Proposed Regulation AT This Week: The House Committee on Agriculture will be holding a hearing on July 13 to examine Regulation Automated Trading proposed by the Commodity Futures Trading Commission in November 2015. These new rules, if adopted, would potentially impose many new obligations on certain CFTC registrants that use algorithmic trading systems to trade futures, options or swaps on designated contract markets. (Click here for details in the article, "CFTC’s Proposed New Algorithmic Trading Rules Augur Potential Increased Obligations and Costs, and a New Registration Requirement” in the November 29, 2015 edition of Between Bridges.) There is no published agenda at this time for the hearing.
- Three UK Traders Convicted for LIBOR Offenses Sentenced to Prison Terms from 2.9 to 6.5 Years: Three former employees of Barclays Bank plc—all US nationals—were convicted last week by a UK jury in connection with their alleged role in the manipulation of the US Dollar LIBOR benchmark from June 2005 through September 2007. The three individuals were Jonathan James Mathew, Jay Vijay Merchant and Alex Julian Pabon. Following this conviction, the presiding judge in the matter sentenced Mr. Merchant to a prison sentence of six and one-half years, Mr. Mathews, to four years and Mr. Pabon to two years and nine months. In sentencing the three defendants, the presiding judge said their behavior demonstrated “an absence of integrity.” Another ex-Barclays’ trader, Peter Johnson, was also sentenced for the same offenses on July 7 to four years in prison; he had pleaded guilty to the offenses in October 2014.
- EC Formally Recognizes US Derivatives Clearing Organizations as Subject to Equivalent Regulation: The European Commission formally recognized 15 US derivatives clearinghouses (CCPs) overseen by the Commodity Futures Trading Commission as subject to equivalent regulation as EU-regulated markets. This will permit European banks and their affiliates to carry positions at such clearinghouses without take onerous capital charges. However, this recognition does not extend to US clearinghouses or other central counterparties regulated by the Securities and Exchange Commission. The EC recently extended the deadline for CCPs to be recognized as so-called “Qualifying CCPs” (in order to avoid harsh capital treatments) to December 15.
- Trader and Company Agree to Pay a US $250,000 Fine to Resolve CFTC Allegations They Engaged in Fictitious Transactions in Illiquid Single Stock Futures: Mathew Marcus and his company, Tech Power Inc., agreed to settle charges brought by the Commodity Futures Trading Commission in connection with an alleged scheme that utilized pre-arranged, noncompetitive matched trades involving single stock futures traded on One Chicago. This scheme was used, said the CFTC, to impermissibly transfer US $390,000 from an account in the name of a law firm to Tech Power. The respondents agreed to pay a fine of US $250,000 to resolve this matter. (Click here for details regarding the CFTC’s initial complaint in the article, “CFTC Sues Respondents, Including Lawyer, for Single Stock Futures Pre-Arranged Trading to Pass Money” in the April 18, 2015 edition of Bridging the Week.)
- ICE Futures Europe Revises Block Trade, EFRP and Other Policies to Conform to Market Abuse Regulation: ICE Futures Europe has revised its guidances related to block trades, exchange for related position transactions and ICE Brent Index Conflicts of Interest to reflect implementation of the Market Abuse Regulation in the European Union on July 3. In general, MAR includes prohibitions for insider dealing and market manipulation and provisions to prevent and detect violations.
- New FINRA Rule Governing Accounts Opened by Associated Persons at Broker-Dealer Other Than Employer Approved by SEC: The Securities and Exchange Commission has approved a new rule of the Financial Industry Regulatory Authority that prescribes requirements related to securities accounts established by associated persons at broker-dealers other than with their employer. In general, the new rule requires advance written consent to maintain such accounts, and obligates the non-employer, upon request, to provide account statements or transactional data regarding such accounts to the associated person’s employer. The objective of the new rules, which consolidate various prior rules, is to facilitate oversight of such accounts by associated persons’ employers.
Compliance Weeds: Regulations of the Commodity Futures Trading Commission have equivalent requirements as FINRA regarding accounts of "affiliated persons" of futures commission merchants and introducing brokers (Click here to access CFTC Rule 155.3 and 155.4). In general, an affiliated person of such registrants need to obtain the written authorization of his or her employer to maintain an account with a third-party FCM. Moreover the the third-party FCM must afterwards on a "regular basis" send copies of all account statements related to such an account and "all written records prepared upon receipt of orders for such account." FCMs receiving such orders must prepare immediately upon receipt of an order for such account a written record of such order, including the account identification and order number that includes the date and time to the nearest minute when the order is received. Under relevant rules, "affiliated persons" of FCMs and IBs is broadly defined to include any general partner, director, owner of more than ten percent, registered associated person or employee, any relative or spouse, or any relative of a spouse, who share the same home as the person directly affiliated with the relevant registrant.
Corrected from an earlier version saying I wished the National Futures Association should consider, like FINRA, adopting a similar rule to govern futures accounts opened at futures commission merchants other that a registrant’s own employer.
- FRB Extends Volcker Rule Funds Divestiture Requirements Until July 21, 2017: The Board of Governors of the Federal Reserve System extended to July 21, 2017, the date by which banking entities must divest their ownership in certain legacy investment funds and end relationships with funds that are prohibited under the s0-called “Volcker Rule” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In general, the Volcker Rule prohibits insured depository institutions and affiliated companies from engaging in proprietary trading and from acquiring or maintaining an ownership interest in or having certain relationships with a hedge fund or private equity fund, subject to some express exclusions.
- CFTC Staff Reminds FCMs and IBs to Report Suspicious Activities Timely and All Registrants to Comply With OFAC Sanctions Programs: The Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight issued an advisory to remind futures commission merchants and introducing brokers of their ongoing obligation to report suspicious activities, as required by the Financial Crimes Enforcement Network, and for all registrants to comply with economic sanction programs administered by the Office of Foreign Assets Control. (Both FinCEN and OFAC are part of the US Department of Treasury.)
Compliance Weeds: FinCEN recently expanded its existing anti-money laundering and customer identification program requirements for FCMs, IBs and other covered financial institutions by finalizing rules requiring them to identify the material beneficial owners of their legal entity customers based on tests of equity ownership and control. Such entities are currently required to know the identity of each of their legal entity customers, but not necessarily their beneficial owners. (Click here for more details in the article, “FinCEN Finalizes Rules Requiring Banks, Broker-Dealers, FCMs, Mutual Funds and IBs to Help Verify Beneficial Owners of Certain Accounts” in the May 8, 2016 edition of Bridging the Week.)
- CFTC’s Division of Market Oversight Highlights Compliance Department Resources Concern in CBOE Futures Rule Enforcement Review: The Commodity Futures Trading Commission issued a rule review of the CBOE Futures Exchange, Inc. for the period March 1, 2014, to February 28, 2015, that concluded that the exchange generally complied with its obligation to monitor and ensure compliance with its own rules and to protect market participants. Notwithstanding, the CFTC found three deficiencies which it said required corrective action: the exchange must ensure it has sufficient compliance department resources to complete investigations in a timely manner; it must complete all investigations in one year or less; and it must more effectively discuss with the National Futures Association, its third-party regulatory service provider, all ongoing investigations and matters of regulatory concern.
For more information, see:
BIS and IOSCO Provide Guidance on Cybersecurity Measures That Should Be Adopted by Financial Market Infrastructures:
Broker-Dealer Settles FINRA Blue Sheets Violation Allegation by Payment of US $6 Million Fine:
CFTC’s Division of Market Oversight Highlights Compliance Department Resources Concern in CBOE Futures Rule Enforcement Review:
CFTC Staff Reminds FCMs and IBs to Report Suspicious Activities Timely and All Registrants to Comply With OFAC Sanctions Programs:
EC Formally Recognizes US Derivatives Clearing Organizations as Subject to Equivalent Regulation:
FRB Extends Volcker Rule Funds Divestiture Requirements Until July 21, 2017:
Government Seeks Maximum Sentence in Coscia Criminal Action:
House Committee on Agriculture to Hold Hearing on CFTC Proposed Regulation AT This Week:
ICE Futures Europe Revises Block Trade, EFRP and Other Policies to Conform to Market Abuse Regulation:
Conflicts of Interest:
IFUS Files and Resolves Disciplinary Action Alleging Disruptive Trading:
International Bank Consents to US $560,000 Sanction by CFTC for Not Accurately Reporting Large Trader Reports for Swaps Positions in Physical Commodities:
New FINRA Rule Governing Accounts Opened by Associated Persons at Broker-Dealer Other Than Employer Approved by SEC:
NYS Department of Financial Services Issues Transaction Monitoring and Filtering Requirements for State-Regulated Banks and Other Financial Institutions:
SEC Proposes Investment Advisers Adopt Formal Business Continuity and Transition Plans:
Three UK Traders Convicted for LIBOR Offenses Sentenced to Prison Terms from 2.9 to 6.5 Years:
Trader and Company Agree to Pay a US $250,000 Fine to Resolve CFTC Allegations They Engaged in Fictitious Transactions in Illiquid Single Stock Futures:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 9, 2016. 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 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.
© 2021 Katten Muchin Rosenman and Gary DeWaal. All Rights Reserved.