Bridging the Weeks by Gary DeWaal: May 23 – June 3 and June 6, 2016 (AML; DLT; Attempted Manipulation; Manipulative Device; Registration; EFRPs; Block Trades; Hedge Exemptions)

Jump to: AML and Bribery    APAC Regulation (sans Capital and Liquidity)    Bitcoin Ecosystem    Block Trades and EFRPs    Bridging the Week    Compliance Weeds    Customer Protection    EMEA Regulation (sans Capital and Liquidity and UK after March 1, 2019)    Exchanges and Clearing Houses    Forum Selection    Insider Trading    Managed Money    Manipulation    Off-Exchange Products (Retail Clients sans Retail Forex)    Omnibus Accounts    Position and Trade Reporting    Position Limits    Registration    Regulation AT    Trade Practices (including Disruptive Trading)    Uncleared Swaps   
Email Print
Published Date: June 05, 2016

During the last two weeks, numerous important regulatory and litigation developments occurred worldwide that impacted financial services firms. In the United States, the Securities and Exchange Commission sanctioned a broker-dealer for anti-money laundering breakdowns, while the Commodity Futures Trading Commission proposed, going forward, to authorize exchanges to grant certain hedge exemptions to speculative position limits (much as they do currently) under its 2013 proposed position limits regulations, and will hold a public roundtable on proposed Regulation Automated Trading this week in Washington, DC. Meanwhile, the European Securities and Markets Authority issued an important think piece on distributed ledger technology; while the principal Hong Kong securities regulator fined a brokerage firm for not being able to ascertain the identities of certain ultimate retail clients of an intermediate broker that was its direct customer. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version:


Compliance Weeds: Applicable law and FinCEN rules require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered future commission merchants and introducing brokers and SEC-registered mutual funds) to file a SAR with FinCEN in response to transactions or patterns of transactions involving at least US $5,000 which a covered entity “knows, suspects, or has reason to suspect” involve funds derived from illegal activity; have no business or apparent lawful purpose; are designed to evade applicable law; or utilize the institution for criminal activity. Previously, the Financial Industry Regulatory Authority also fined Brown Brothers Harriman & Co. US $8 million for failing to file SARs in connection with similar activity involving penny stocks. In that matter, FINRA also fined and suspended the firm’s global anti-money laundering compliance officer for his alleged role in the firm’s alleged misconduct. (Click here for details in the article, “FINRA Says Brown Brothers Harriman Had an Unsatisfactory Anti-Money Laundering Program; Sanctions Firm and Former Global AML Compliance Officer,” in the February 10, 2014 edition of Bridging the Week.) Covered entities should continually monitor transactions they effectuate and ensure they maintain written procedures they follow to identify and evaluate red flags of suspicious activities and file required SARs with FinCEN when appropriate. (Click here for a discussion of another more recent FINRA disciplinary action against a member for alleged widespread AML breakdowns in the article, “Two Related Broker-Dealers To Pay US $17 Million for Widespread AML Compliance Failures; Former AML Compliance Officer Also Sanctioned” in the May 22, 2016 edition of Bridging the Week.)

Helpful to Getting the Business Done: ESMA’s discussion paper is a very succinct primer on DLT and should be reviewed by all finance industry professionals who wish to acquire a basic understanding of the subject. Although ESMA takes no view on a possible need to regulate DLT, it identifies a number of potential legal and regulatory issues. Among other things, ESMA observes that “[t]he capacity of the DLT to fit into the existing regulatory framework may limit its deployment.” ESMA specifically wants feedback on the legality and enforceability of records maintained on the DLT, and how a specific DLT application might be supervised, given its cross-border nature and the differences in privacy, insolvency and other requirements across countries. ESMA’s desire to learn more in commendable, but it should keep in mind CFTC Commissioner J. Christopher Giancarlo’s cautionary advice to all regulators in thinking about DLT, mainly to “do no harm” in order not to impede the development of this new technology. To accomplish this, US and foreign regulators should “coordinate to create a principles-based approach for DLT oversight in order to provide the flexibility, certainty, and harmonization necessary for this technology to flourish,” Mr. Giancarlo stated a few months ago. (Click here for further insight into Mr. Giancarlo’s thinking in the article, “CFTC Commissioner Calls for Regulators to 'Do No Harm' in Development of Distributed Ledger Technology; Other Regulators Weigh in Too” in the April 3, 2016 edition of Bridging the Week.)

Legal Weeds: In connection with the CFTC’s action singularly naming Citibank, NA, in addition to charging the bank with attempted manipulation and making false reports, the CFTC charged Citibank with using or attempting to use a manipulative device in connection with its allegedly problematic conduct that occurred on or after August 15, 2011, in violation of applicable law and CFTC regulation. (Click here to access 7 USC §§ 9(1) and here for CFTC Regulation 180.1(a).) The CFTC continues to use its newly gotten anti-manipulative, deceptive device and contrivance authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to prosecute a wide range of conduct from its first use in the JP Morgan “London Whale” episode to allegations of illegal off-exchange metals transactions, insider trading, claims of more traditional manipulation and attempted manipulation (without endeavoring to show an artificial price) and allegations of spoofing. The CFTC has made clear it sees its new Dodd-Frank authority “as a broad, catch-all provision reaching fraud in all its forms – that is, intentional or reckless conduct that deceives or defrauds market participants” and will use it whenever possible. Market participant beware this new junkyard dog of the CFTC’s enforcement arsenal! (Click here and here to access two prior articles with commentary in Bridging the Week that discuss these provisions – “CFTC Brings First Insider Trading-Type Enforcement Action Based on New Anti-Manipulation Authority” (December 6, 2015) and “Manipulation Is Not Hedging Says CFTC in Federal Court Lawsuit Against Kraft Foods Group and Mondelez Global” (April 5, 2015).)

Compliance Weeds: Although most of the CME Group disciplinary actions involved incidents from 2013 and 2014, some involved conduct that occurred in 2015. Hopefully, by now, it is clear that the CME Group is aggressively prosecuting violations of its EFRP rules. All EFRP transactions must involve the bona fide transfer of the cash commodity underlying the exchange contract, or a by-product, related product or an over-the-counter instrument. A liquidation of the related position that occurs simultaneously or close-in-time without the parties incurring market risk will likely cause the EFRP to be deemed a prohibited transitory EFRP. Although EFRPs may be conducted between different trading units within one corporate group or even within one company, they must be for units under independent control and not to transfer positions from one trading operation to another. (Click here for details in of CME Group’s requirements regarding EFRPs; click here for background on a 2013 Commodity Futures Trading Commission rule review of CME Group that appears to have been the impetus for CME Group’s tougher enforcement practices regarding EFRPs in the article, “Alphabet Soup Under CFTC Scrutiny: CFTC Review of CME Handling of EFRPs (EFPs, EFRs, and EOOs) Suggests Tougher Times for Traders and FCMs; Time to be Proactive” in the April 6, 2013 edition of Between Bridges.”)

My View: Although the proposed amendments to the CFTC’s 2013 position limits regulations and guidance are a big leap in the right direction by permitting exchanges to make assessments regarding purported hedging strategies of entities trading on their facilities, there are potential burdens that hopefully will be alleviated in the final rules. Among other things, it appears that an entity granted a non-enumerated hedge exemption would have to report to the relevant exchange when it established its hedge and its offsetting cash position. Likewise, in connection with anticipatory hedge exemptions granted by an exchange, it appears that a trader similarly would have to file reports that detail its anticipatory hedge position with the CFTC and a copy to the exchange. These may be onerous requirements if too much detail or frequency is mandated. If an exchange-granted hedge exemption is later overturned by the CFTC, a trader would be afforded a “commercially reasonable amount of time” to liquidate its futures position – but the Commission says that ordinarily would be less than one day. This appears to be a very unreasonably short time period. Under the proposed amendments, exchanges would be required to maintain complete books and records of all applications for non-enumerated hedge exemptions. This would include records of all written and oral communications between the exchange and an applicant. It seems a bit of overkill to require exchanges to keep records of oral communications. Again, however, the proposed amendments are a big step forward by mostly restoring the status quo of permitting exchanges to process hedging exemptions to position limits in the first place. Not exactly Back to the Future; more like Future from the Back!

Compliance Weeds: In the United States, block trades are an exception to the Commodity Futures Trading Commission requirement that all futures contracts be executed on a derivatives contract market. Block trades may be executed off the marketplace by eligible contract participants subject to CFTC-approved DCM rules. These rules typically state which DCM products are subject to block trades (and sometimes, during which times); minimum thresholds; and reporting requirements. The rules also typically address the use of nonpublic information regarding block trades. Currently, CME Group prohibits pre-hedging or anticipatory hedging of any portion of a block trade in the same or related product by all parties to an impending block trade. However, parties to a block trade may hedge or offset the risk associated with a block trade following its consummation before the transaction is reported publicly by the exchange. Under IFUS’s proposed interpretation, this strict restriction will only exist for intermediaries that participate in block trades, not principals that deal directly with each other. Third parties on both exchanges will not be able to trade on insider information related to block trades under any circumstance until after a public report of the relevant transaction. It is also important not to assume that IFUS’s and ICE Futures Europe’s requirements on block trades are identical. Among other things, the parties that may participate in block trades and the prohibitions regarding use of impending information regarding block trades may be different between the ICE exchanges located on the opposite sides of the Atlantic Ocean.

And more briefly:

And finally:

For more information, see:

Bitcoin Exchange Sanctioned by CFTC for Not Being Registered:

Broker-Dealer Sanctioned by SEC for Anti-Money Laundering Breakdowns:

Broker-Dealer Charged by FINRA for Failing to Protect Customer Assets; Other Broker-Dealers Sanctioned for Not Complying With Customer Confirmation and Best Execution Requirements:

E*Trade Securities:
UBS Securities:
Wedbush Securities:

CFTC Proposes to Authorize Exchanges to Grant Physical Commodity Users Hedging Exemptions Related to Speculative Position Limits:

CFTC to Hold Public Roundtable Regarding Regulation AT; Five Topics to Be Discussed Including Who Should Be Covered:

CME Group Settles With Non-Members for EFRP and Disruptive Trading Violations:

Joshua Bailer:
City Financial Investment Company:
CSC Commodities:
Deutsche Bank AG London:
Peninsula Petroleum:
Macquarie Bank Limited:
Pointstate Capital:
RAF Fund:
The Scoular Company:
Singapore Carbon Hydrogen Energy:

Dan Roth, NFA Veteran, Current President and CEO, Announces Retirement:

ESMA Clarifies Requirements Regarding Indirect Clients:

ESMA Provides Guidance When Commodity Business Is Ancillary:

ESMA Seeks Comment on Distributed Ledger Technology:

Federal Appeals Court Says Defendant Must Wait Before Challenging SEC Administrative Process:

Final Cross Margin Rule for Uncleared Swaps Issued by CFTC:

FINRA to Implement OATS Requirement to Identify Non-Member Broker-Dealers as of August 1:

Former Bank CEO Sentenced to 18 Months in Prison for Obstructing Fed Examination:

HK SFC Sanctions Broker for Effectuating Transactions for Korean Intermediary Without Ability to Know Ultimate Client Identities:

IFUS and ICE Futures Europe Update Block Trade Guidance:

ICE Europe:

International Bank and Affiliates Settle Two CFTC Enforcement Actions for Alleged Benchmarks Manipulation:

Investment Adviser Settles With SEC for Acting as a Broker-Dealer Without Registration:

NFA to CPOs and CTAs: File Late, Pay a Late Fee:

Retail Forex Transactions Barred by Broker-Dealers as July 31; NFA Proposes Higher Fees for Forex Dealers:


SEC Alleges Plumber Received Great Tips for Great Services Rendered – Albeit Illegal Insider Tips:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of June 4, 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.

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 »