Bridging the Week by Gary DeWaal: April 13 to 17 and 20, 2015 (More Funding; Money Pass; Spoofing; Fiduciary Standards; Custody)

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Published Date: April 19, 2015

No single theme dominated news regarding financial service firms and regulation last week. Although many enforcement proceedings were ended worldwide by settlement—including 18 actions brought by the CME Group—a federal judge in Illinois refused to dismiss a spoofing indictment based on facts that previously had been the subject of civil enforcement proceedings brought by the Commodity Futures Trading Commission, the Financial Conduct Authority and the CME Group. Also, the US Department of Labor issued new proposals to extend fiduciary standards to advisers of purchasers of more types of retirement assets. As a result, the following matters are covered in this week’s Bridging the Week:

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CFTC Commissioner Bowen Argues for User Fees During House Subcommittee Hearing; Commissioner Wetjen Calls for Bankruptcy Law Amendments to Permit Individual Segregation of Customer Funds

Commodity Futures Trading Commissioner Sharon Bowen argued for granting authority to the CFTC to impose user fees on certain industry participants, during a CFTC reauthorization hearing held last week before the United States House Committee on Agriculture, Subcommittee on Commodity Exchanges, Energy and Credit.

CFTC Commissioners J. Christopher Giancarlo and Mark Wetjen also spoke before the subcommittee, with Mr. Giancarlo indicating that the CFTC should realign its regulatory agenda prior to requesting additional funding. Among other things, Mr. Wetjen argued for an amendment to bankruptcy laws to provide for individual segregated accounts for customers.

During her testimony, Ms. Bowen was not specific on the type of user fees she would recommend. However, she said, “there are many ways to structure such a fee, including establishing de minimis fees on all trades, fees on certain riskier trades, or annual fees on registrants.”

Ms. Bowen claimed that the Commission required additional resources to “keep pace with our duties.” She said that CFTC current underfunding “has been an obstacle to [the] industry, including end-users.” According to Ms. Bowen,

[w]ith a staff that is stretched so extremely thin, reviews of various applications by derivatives clearing organizations and exchanges can take longer, delaying those organizations’ efforts to improve and enhance trading for market participants. … And with a staff that is stretched so extremely thin, our rulemaking process will move much more slowly. Not only does that invite additional regulatory uncertainty into the markets we regulate, but it also means that we are less able to craft exemptions for end-users or market participants in a timely fashion, even for those entities who have a critical and real need for them.

During his appearance before the subcommittee, Mr. Giancarlo suggested that, before the Commission seeks additional resources, it should reduce “inefficiencies” in the Commission’s oversight. Mr. Giancarlo claimed that it is the CFTC’s own regulatory agenda that contributes to its overwork. According to Mr. Giancarlo,

[f]or example, managing the CFTC’s flawed swaps trading regulatory framework is expensive and time-consuming. Fitting the square peg of the CFTC’s swaps trading rules into the round hole of the established global swaps markets requires the Commission and staff to devote enormous resources to continuously explain, clarify, adjust, exempt and manipulate rules to allow rough swaps market operability. The Commission and staff must constantly add to the plethora of no-action letters, guidance, staff advisories and other written communications that go out to the market and participants. … The CFTC’s current swaps trading regulatory framework requires enormous bureaucratic “make work” to assure industry compliance. … Similarly, the CFTC’s proposed position limits rules are overly burdensome and will require substantial agency resources to implement and sustain. … [They] would partially duplicate—at US taxpayer expense—the management of position limits already being done by DCMs at industry expense. The CFTC should work to reduce these and other examples of inefficiencies before asking for substantial budget increases.

In his testimony, Mr. Wetjen identified a number of issues that the CFTC should rapidly address. These include (1) ensuring that differences are resolved with European regulators to ensure that US clearinghouse regulatory framework is assessed as equivalent to the European framework. Otherwise, European banks will be assessed a higher capital charge for clearing trades through US clearinghouses; (2) clarifying the CFTC’s requirement that block trades involving swap execution facilities must occur away from the SEF. This has caused difficulty for SEFs and futures commission merchants in complying with their pre-execution credit checking obligations; and (3) enhancing transparency regarding clearinghouses with respect to stress tests evaluating how much of a clearinghouse’s own capital should be used and under what circumstances in case of a major clearing member default.

Commissioner Wetjen also suggested that Congress should consider amending bankruptcy laws to permit the CFTC “greater flexibility with respect to the protection of customer funds.” Currently, said Mr. Wetjen, all customer property must be distributed ratably among all customers when there is an overall shortage following an FCM insolvency. There is no ability for the CFTC to design a framework that provides for individual customer funds segregation. According to Mr. Wetjen,

this requirement limits the commission’s flexibility in designing a model for the protection of customer funds that allows for individual segregation. … For customers who believe they can better protect their funds in the OTC marketplace this potential result is unsatisfactory.”

During his appearance, Mr. Wetjen also called upon the subcommittee to monitor developments that appear to be leading to a decrease in the number of FCMs. He indicated the subcommittee should “play a role” to help ensure that different regulatory authorities “do not pursue goals that are may be at cross-purposes with each other”—such as promoting central clearing of derivatives through financial regulation, and raising capital standards for global banks.

My View: I have often previously argued that regulators must be careful not to enact disparate regulations that, together, negate each other and fail to advance desired objectives. As Commissioner Wetjen observes, regulations that encourage central clearing of derivatives cannot be effective if other regulations discourage central clearing through capital surcharges. Likewise, the noble objective to encourage enhanced customer protection by requiring FCMs to use their own capital to fund customer margin deficiencies is frustrated if the same regulations encourage FCMs to require more funds up front from customers, thus increasing clients’ exposure to their brokers. On and on. Preferably in advance, but certainly periodically on an ongoing basis, regulators should step back and review holistically the impact of their regulations to assess whether desired objectives are being met, and, if not (or not as well as possible), revise them.


Compliance Weeds: I have previously articulated the correct requirements in connection with EFRPs and block trades, and discussed requirements to comply with position limits. (Click here to access all prior articles on Bridging the Week related to this subject.) Any violation of an exchange’s rules related to EFRPs, block trades or position limits potentially constitutes a violate of CFTC rules prohibiting non-competitive trades, and speculative position limit violations, respectively.

And even more briefly:

For more information, see:

Alleged Spoofer Fails to Convince Court to Dismiss Indictment:

Block Trades, EFRPs and Position Limits Are Continued Subjects of CME Group’s Enforcement Focus:

Representative actions:

Charles Adam:

E1 Corporation:
Green Plains:
Bisher Khalaf:
Merrill Lynch:
Daniel Shak:

BNY Mellon Fined GBP 126 Million by UK FCA for Failure to Comply With Custody Rules:

CFTC Commissioner Bowen Argues for User Fees During House Subcommittee Hearing; Commissioner Wetjen Calls for Bankruptcy Law Amendments to Permit Individual Segregation of Customer Funds:


CFTC Sues Respondents, Including Lawyer, for Single Stock Futures Pre-Arranged Trading to Pass Money:


Deutsche Bank Branch in Dubai Fined for AML, Client Onboarding and Governance Weaknesses:

FCA Issues Final Guidance on Multilateral Trading Facilities:

MF Global Inc. 100% Unsecured General Creditor Payout Approved by US Bankruptcy Judge:

NY AG Settles With Ernst & Young Over Alleged Financial Statement Fraud Prior to Lehman Collapse:’s-involvement-alleged

PIMCO Joins Chorus Against New Bank Capital Requirements:

US Department of Labor Proposes to Extend Fiduciary Standards to Advisers of Purchasers of More Kinds of Retirement Assets:

Proposed Conflict of Interest Rule:
Proposed Best Interest Contract Exemption:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of April 18, 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.


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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.

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