Bridging the Week by Gary DeWaal: March 9 to 13 and 16, 2015 (Skin in the Game; Alleged Spoofing; International Guidance; Another Compliance Officer Sanctioned)

Jump to: AML and Bribery    Bridging the Week    Chief Compliance Officers    Exchanges and Clearing Houses    My View    Registration    Trade Practices (including Disruptive Trading)   
Email Print
Published Date: March 15, 2015

The 40th annual FIA Boca Raton International Futures Industry Conference ended last Friday, but many of the topics discussed during the event will resonate for months. These include the profitability of futures commission merchants; capital; clearinghouse risk and what is the appropriate amount of clearinghouse capital that should be made available to the default waterfall; and new initiatives involving back-office outsourcing, Bitcoin and China. Meanwhile, another lawsuit involving spoofing was filed—but this time not by a regulator and not against a specifically named defendant! As a result, the following matters (including my reflections on the Boca conference and the state of the exchange-traded derivatives industry) are covered in this week’s Bridging the Week:

Video Version:

Article Version:

CFTC Chairman Suggests European-CFTC Agreement on Clearinghouse Equivalency May Come Soon; Skin in the Game Debate Needs More Study

In an address before the 40th annual FIA Boca Raton International Futures Industry Conference, Timothy Massad, Chairman of the Commodity Futures Trading Commission, suggested that long-standing issues that have so far resulted in European regulators not recognizing US clearinghouses as subject to equivalent oversight as under European law may be close to resolution.

Without such a determination, European banks utilizing US clearinghouses will potentially be subject to a penalty capital charge beginning June 15, 2015. (Click here for background in the article, “European Banks Receive a Stay From Taking Capital Hits for Exposure to US Clearinghouses,” in the December 8 to 12 and 15, 2014 edition of Bridging the Week.)

In his presentation, Chairman Massad also provided some insight into how the Commission views the debate about the appropriate level of clearinghouse “skin in the game,” without revealing the likely outcome of the CFTC’s deliberations. (Skin in the game refers to the amount of resources a clearinghouse will contribute to the default waterfall from its own capital, as opposed to its members’ resources).

Chairman Massad distinguished between a bank’s need for capital and a clearinghouse’s. Banks, he said, require capital “to offset losses that may arise frequently.” Clearinghouses, however, require capital to cover a very “unusual event” where “there has been a default of a clearing member, and the resources of the of the defaulter held by the clearinghouse—both initial margin and default fund contribution—are not enough to cover the loss.”

The chairman suggested that a determination of an appropriate level of clearinghouse skin in the game should be viewed in the context of what is an appropriate “alignment of incentives between the clearinghouse and its clearing members.” This is particularly relevant, he said, where the equity of clearinghouses is typically now held by outside investors, not members.

Moreover, said the chairman, it is important to consider issues regarding skin in the game in the context of clearinghouse governance. According to Chairman Massad,

whose interests should be taken into account when a clearinghouse designs its recovery plan and when a clearinghouse faces a default? If the waterfall of resources is not sufficient to cover a default, then how does the clearinghouse decide what happens next, and who should participate in or have input into that decision? How do we ensure there is adequate time for that decision-making process to take place?

Although he did not provide insight regarding his thoughts on the possible answers to these questions, the chairman noted that these and other aspects of clearinghouse recovery plans in case of a extraordinary default by a member will be discussed during a roundtable this week at the CFTC.

(Click here for further background on the skin in the game debate, to view the article, “CME Group Adds Its View to ‘Skin in the Game’ Debate” in the January 19 to 23 and 26, 2015 edition of Bridging the Week) and here to view the article, “…While a Clearinghouse—LCH.Clearnet—Weighs in on Clearinghouse Issues Too” in the December 1 to 5 and 8, 2014 edition of Bridging the Week.)

My View: Issues around clearinghouse recovery generally and the appropriate level of skin in the game were among the many important topics addressed during formal sessions and bar-side conversations at the FIA Boca conference. Another major topic often discussed was the decreasing profitability of futures commission merchants because of, among other reasons, increasing capital requirements and regulatory costs. Outsourcing of FCM back-office functions, issues around automated trading, Bitcoin and opportunities involving China were also addressed. Frankly, other than the discussions regarding Bitcoin, most of the conversations were repetitive of those from last year, although the arguments were better refined after a year of rehearsal. Unfortunately, legislators, regulators and industry participants have failed for many years to look at financial services holistically, and instead have endeavored to address discrete issues within silos, with an eye towards the past rather than the future. This is why, to me, legislators and regulators have enacted laws and rules to promote central clearing, on the one hand, but at the same time have enacted capital rules and other regulations that discourage banks (and other brokers) from facilitating central clearing, on the other hand. Futures commission merchants too have bemoaned the low interest rate environment as hurting profitability, forgetting that they are brokers not banks, while at the same time taking too few actions to increase differentiation from their competitors and to enhance customer service. As a result, they are left to compete solely by offering too low rates. The paradigms of yesterday will not work going forward, and unless legislators, regulators and business leaders recognize this, we are likely to be discussing the same topics next year at Boca too—although the break from the Northeast and Midwest winters will always be appreciated!


My View: Among international regulators, FCA may be the most aggressive in sanctioning senior compliance officers. However, in prior cases, the compliance officer arguably crossed the line in either affirmatively furthering the bad actions of his/her firm, or misleading FCA (click here for background in the article “FCA Sanctions Bank of Beirut, Former Compliance Officer and Former Internal Auditor for Providing Misleading Information Regarding AML Systems and Controls Remediation” in the March 2 to 6 and 9 edition of Bridging the Week). In this matter, FCA acknowledges that the compliance officer improved the firm’s procedures, but said the improvements were not enough. The sanctioning of a compliance officer regarding the alleged inadequacy of a firm’s procedures absent some affirmative misconduct appears dangerously to transform compliance officers from advisors to a firm, to potential guarantors of the firm’s compliance with all applicable laws and regulations. This is too great a burden and fails to distinguish the difference between an advisor and a supervisor—even accepting that compliance officers have proactive obligations and cannot just give advice and then turn aside and ignore unlawful actions when they know (or reasonably should have known) they are being committed.

And even more briefly:

For more information, see:

CFTC Chairman Suggests European-CFTC Agreement on Clearinghouse Equivalency May Come Soon; Skin in the Game Debate Needs More Study:

CFTC Formally Responds to Court Judgment on International Guidance; Calls for Public Comments:

CFTC Announces Next Meeting of Risk Advisory Committee and Reschedules Public Roundtable on Clearinghouse Recovery:

Clearinghouse Recovery:
Risk Advisory:

ESMA Issues Revised Technical Standards Regarding Clearing Obligation for Interest Rate Swaps:

FCA Provides Guidance On Use of Social Media:

FCA Sanctions Compliance Officer for Registrant’s Inadequate Systems and Controls:

Five Federal and NYS Regulators Penalize Commerzbank for AML Violations (representative actions):

Federal Reserve:
New York State Department of Financial Services:

HTG Capital Files Lawsuit to Identify Alleged Spoofer:

IOSCO Announces Review of Clearinghouse Stress Testing:

UBS Fined US $500,000 by FINRA for Not Reporting Salespersons’ Tax Liens and Judgments:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of March 14, 2015. 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.

Recent Commentaries




Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

Social Media:


Katten is a firm of first choice for clients seeking sophisticated, high-value legal services in the United States and abroad.

Our nationally recognized practices include corporate, financial services, litigation, real estate, environmental, commercial finance, insolvency and restructuring, intellectual property, and trusts and estates.

Our approximately 650 attorneys serve public and private companies, including nearly half of the Fortune 100, as well as a number of government and nonprofit organizations and individuals.

We provide full-service legal advice from locations across the United States and in London and Shanghai.


Gary DeWaal
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022-2585


Request Information »

Join Mailing List »