Bridging the Week by Gary DeWaal: July 17 to 21 and July 24, 2017 (LOPR; Transitory EFRPs; Injunction Against Cutting Off Services; Convictions for Manipulation Overturned; London Whale)

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Published Date: July 23, 2017

A broker-dealer agreed to pay a fine of US $2.5 million  to the Financial Industry Regulatory Authority and three other self-regulatory organizations for alleged violations of its obligation to report large options positions timely and accurately. In addition, two firms resolved disciplinary actions with CME Group exchanges for purportedly violating prohibitions against engaging in transitory exchange for related position transactions. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Compliance Weeds: Generally, FINRA requires members to report or have reported on their behalf any options position in any account or multiple accounts where the firm or any customer, whether alone or in concert, maintains an aggregate position of 200 or more options contracts (whether long or short) of the put class and the call class on the same side of the market for the same underlying security or index. All positions must be reported to the LOPR System by no later than close of business on the business day following the day the transaction or transactions occurred that necessitated the filing. Where aggregate positions meet the 200-contract threshold, the option position of each individual account must be reported. Accounts must be aggregated when they are under common control or acting in concert. Control is presumed for all parties to a joint account who have authority to act on behalf of the account, all general partners of a partnership account, a person or entity that has a 10 percent or more ownership interest in an entity or shares 10 percent or more of an account’s profits and losses, accounts with common directors or management, or an individual or entity that has authority to execute transactions in an account. (Click here to access the May 2016 guidance by FINRA regarding member firms’ LOPR obligations.)

Compliance Weeds: CME Group exchanges do not permit transitory EFRPs for any purpose. (Click here to access CME Group Rule 538.C.) CME Group says that an EFRP is transitory when the execution of an EFPR is contingent upon the execution of another EFRP or related position transaction between the same parties and the related positions are offset “without the incurrence of market risk that is material in the context of the transaction.” (Click here to access CME Group MRAN RA1707-5 (July 17, 2017).) CME Group will also regard an EFRP as transitory if two EFRPs involving economically equivalent futures positions traded on a CME Group and another exchange result in the related position component being offset between the same parties. Structuring a swap so that it settles through an Exchange for Risk Transaction is not considered to be entering into a transitory EFRP provided the settlement value (floating price) is subject to material market risk. Immediately offsetting exchange of futures for physical positions involving foreign currency positions are also not considered transitory EFRPs if executed in accordance with CME Group rule. (Click here to access CME Group Rule 538.K; see also MRAN Q/A 26.) ICE Futures U.S. has equivalent prohibitions, although it also permits immediately offsetting EFP transactions involving physical delivery obligations by participants in the London Gold Auction administered by the ICE Benchmark Administration. (Click here to access ICE Futures U.S. FAQs – January 30, 2017, Q/A22.)

More briefly:

For further information:

Australian Regulator Consults on Proposed Regulatory Regime Regarding Financial Benchmarks:

Broker-Dealer Agrees to Pay $2.5 Million Fine for Not Complying With FINRA Large Options Position Reporting Requirements:

CBOE Futures Exchange Issues Best Practices for Interfacing with Exchange’s Trading System:

ICE Europe Resolves Disciplinary Actions Against Two Warehouses:

MarkitSERV Temporarily Enjoined From Cutting Off Trade Processing Services to TrueEX, LLC:

OFAC Sanctions List Updated:

Senate Ag Committee Considers Three CFTC Commissioner Nominees This Week:


Two Firms Settle CME Group Exchanges’ Charges That They Entered Into Contingent EFRPs:

Use in US Trial of Testimony Compelled From Two LIBOR Traders in the UK Tanks Their US Conviction for Manipulation; Criminal Charges Dropped Against Two Traders in London Whale-Related Prosecution:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 22, 2017. 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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