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News

RELEASE Number

7831-18

https://www.cftc.gov/PressRoom/PressReleases/7831-18

October 18, 2018

Federal Court Orders Trading Firm and CEO to Pay More than $2.5 Million for Fraudulent Bitcoin Ponzi Scheme

Washington, DC – A New York federal court has ordered New York corporation Gelfman Blueprint, Inc. (GBI) and its Chief Executive Officer Nicholas Gelfman of Brooklyn, New York, to pay in total over $2.5 million in civil monetary penalties and restitution in what was the first anti-fraud enforcement action involving Bitcoin filed by the Commodity Futures Trading Commission (CFTC) (see CFTC Complaint and Press Release 7614-17).

CFTC Director of Enforcement Comments

James McDonald, the CFTC’s Director of Enforcement, commented: “This case marks yet another victory for the Commission in the virtual currency enforcement arena.  As this string of cases shows, the CFTC is determined to identify bad actors in these virtual currency markets and hold them accountable.  I’m grateful to the members of Enforcement’s Virtual Currency Task Force for their tireless work on these matters.”

Together, the Order for Final Judgment by Default (Default Order), and the Consent Order for Final Judgment (Consent Order) (collectively, the Orders), entered respectively on October 2, 2018 and October 16, 2018, by Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York, resolve the charges of the CFTC Complaint against GBI and Gelfman filed on September 21, 2017.

The Orders find that from approximately 2014 through approximately January 2016, Defendants Gelfman and GBI, by and through its officers and agents and employees, operated a Bitcoin Ponzi scheme in which they fraudulently solicited more than $600,000 from at least 80 customers.  As stated in the Orders, the customers’ funds supposedly were for placement in a pooled commodity fund that purportedly employed a high-frequency, algorithmic trading strategy executed by Defendants’ computer trading program called “Jigsaw.”  In fact, as the Orders indicate, the strategy was fake, the purported performance reports were false, and—as in all Ponzi schemes—payouts of supposed profits to GBI Customers in actuality consisted of other customers’ misappropriated funds. Also, the Consent Order finds that Gelfman was liable as a controlling person for GBI’s violations, and the Default Order finds that GBI was liable as a principal for the violations of Gelfman and its other officers, agents, and employees.

The Orders find that, to conceal Defendants’ trading losses and misappropriation, Defendants made and provided false performance reports to pool participants, including statements that created the appearance of positive Bitcoin trading gains, when in truth Defendants’ Jigsaw trading account records reveal only infrequent and unprofitable trading.  The Orders also find that Gelfman, in order to conceal the scheme’s trading losses and misappropriation, staged a fake computer “hack” that supposedly caused the loss of nearly all customer funds.

In addition to requiring GBI and Gelfman, respectively, to pay $554,734.48 and $492,064.53 in restitution to customers and $1,854,000 and $177,501 in civil monetary penalties, the Orders impose permanent trading and registration bans on GBI and Gelfman and permanently enjoin them from further violations of the Commodity Exchange Act and CFTC Regulations, as charged.

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets.  The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC appreciates the cooperation and assistance of the New York County District Attorney’s Office and the Finland Financial Supervision Authority.

This case was brought in connection with the Division of Enforcement’s Virtual Currency Task Force, and the CFTC Division of Enforcement staff members responsible for this case are Gates S. Hurand, Christopher Giglio, K. Brent Tomer, Lenel Hickson, Jr., and Manal M. Sultan.

*  *  *  *  *  *

CFTC’s Customer Fraud Advisory on Virtual Currencies and Bitcoin 

For more virtual currency resources, visit the CFTC’s dedicated virtual currency web page,www.cftc.gov/bitcoin, which includes several customer advisories informing the public of possible risks associated with investing or speculating in virtual currencies or recently launched Bitcoin futures and options.  The CFTC also has issued several customer protection Fraud Advisories that provide the warning signs of fraud.  These include, for example, the Commodity Pool Fraud Advisory, which warns customers about a type of fraud that involves individuals and firms, often unregistered, offering investments in commodity pools.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

 

RELEASE Number

7830-18

October 18, 2018

CFTC Staff Issues Updated Report Assessing Agricultural Block Trades

https://www.cftc.gov/PressRoom/PressReleases/7830-18

Washington, DC — The Commodity Futures Trading Commission’s (CFTC) Market Intelligence Branch (MIB) today issued a report entitled Updated Report: Agricultural Block Trade Analysis  (October 2018), that updates findings from a July 2018 report that analyzed agricultural block trading in the grains, oilseeds, and livestock markets at the CME.

This new report includes data for the time period of January 8, 2018, when CME launched block trading to the full suite of agricultural futures and options products, through September 2018. Access the original report at Agricultural Block Trades(July 2018).

  • Block trades in the agricultural markets are a very small portion of the overall volume, but are somewhat more significant on specific dates and for certain contract months.
  • Block trades are primarily occurring in nearby months.
  • Market makers appear to be offsetting much of the block volume into the central limit order book.
  • The prices of all block trades reviewed appear to be priced within the CME rule for “fair and reasonable” prices.

MIB staff will continue to engage the industry as block trading develops.  This report is part of a series of MIB reports.  MIB is a unit of the CFTC’s Division of Market Oversight.  Part of MIB’s role is to analyze and communicate current and emerging market issues to CFTC leadership and the public and assist the CFTC in making informed policy.

[New report at the link above and under Related Links]

 

SPEECHES & TESTIMONY

Remarks of Chairman J. Christopher Giancarlo at FIA Expo Chicago, Illinois

https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo58

“A Week in the Life of the CFTC”

October 17, 2018

Introduction

Thank you.  I especially want to thank the organizing committee, Walt Lukken, and the rest of the speakers.  Thank you for the invitation to speak here.  This expo is advertised as the “hub” of the derivatives and swaps universe.  Indeed, it is, and I am pleased to have this time with you.

Recent Developments at the CFTC

It may have been a quiet week in Lake Wobegon, but the first week in October was a rather busy time at the CFTC.  I would like to tell you about a week in the life of the agency.

On Wednesday and Thursday, October 3-4, the CFTC hosted its first ever financial technology conference, FinTech Forward.  LabCFTC and the CFTC’s Office of Customer Education and Outreach (OCEO) worked together to bring innovators, regulators, market participants, thought-leaders, and the general public together to examine the wide range of FinTech developments impacting markets, including crypto assets, machine learning, cloud technologies, regtech, and other emerging financial technologies.

The collaboration underscores the Commission’s multi-pronged approach to keeping pace with a rapidly changing market and ensuring market integrity.  In its first year, LabCFTC has actively and effectively executed on its mission of facilitating market-enhancing innovation and helping to inform policy, and the Office of Customer Education and Outreach continues to pursue opportunities to educate customers in our markets across all asset classes.

In fact, LabCFTC is here in Chicago at FIA Expo holding office hours with financial technology innovators.  Next week, the Lab will conduct lab hours in Austin, Texas. Sign-ups are underway.

FinTech Forward 2018 focused on key tech-driven developments in the financial markets.  Conference participants considered the impact of new technologies on markets and customers, and what regulators must do to remain forward-looking, mitigate risks, educate customers and market participants, and identify emerging opportunities, risks, and challenges.  It was a fine event that we hope to reprise next year.

Perhaps an even more significant event was the meeting of the Technology Advisory Committee on Friday, October 5.  That is because the TAC Committee met in front of a full Commission.  The last time that happened was on April 30, 2013 – five and a half years ago.  In fact, that was the last time any advisory committee took place before a full CFTC Commission.  Thus, it was very satisfying to have our new and full Commission together ten days ago.

You know, there is logic to having a five-member Commission.  And, it is right that all CFTC Commissionerships be filled, as they are now.  In fact, we may well have on board the most experienced and knowledgeable group of Commissioners in the history of the CFTC.  You will hear from most of us here at Expo.  I thank Senator Roberts, Senator Stabenow, and the Senate Ag Committee for their work in the current Congress to confirm all five members of this Commission.

One of the capabilities of a full Commission is to sponsor and activate all of the CFTC’s advisory Committees.  I thank Commissioner Stump for agreeing to sponsor the Global Markets Advisory Committee.  In that role, Dawn is representing the CFTC this week at the IOSCO meeting in Madrid.  It has been too long since the last meeting of GMAC, but it is now in good hands and will soon be off to a good restart.

I also thank Commissioner Berkovitz for taking over sponsorship of the Energy and Environmental Markets Committee.  Dan is busy finalizing the EEMAC membership for an upcoming meeting.  We look forward to that.

I will be taking on sponsorship of the Agriculture Advisory Committee and will be reaching out soon to members.  The Ag Advisory Committee met last year in Kansas City under Commissioner Behnam’s interim sponsorship, for which we are grateful.  I look forward to sponsoring another Ag Advisory Committee meeting in Kansas in conjunction with the CFTC’s 2nd Ag Commodity Futures Conference in early April 2019.

I also want to thank Commissioner Behnam for standing up the Market Risk Advisory Committee with energy and determination.

The MRAC’s formation of a sub-committee to address emerging issues related to the movement away from LIBOR to SOFR was just unanimously approved by the Commission.  The MRAC’s work in this area will complement and further the work of the Alternative Reference Rate Committee.  Commissioner Behnam has taken a thoughtful approach to this important task.[i]  I support this coordinating effort and the fine work that will surely result.

That brings me back to the TAC Committee meeting.  I thank Commissioner Quintenz, Daniel Gorfine, and all the distinguished TAC members for preparing a thorough and diverse program.

I want to briefly comment on one topic raised at the TAC Committee.  That is the report of the TAC’s Automated and Modern Trading Markets Subcommittee and its discussion around an IOSCO Consultation Report on “Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading.”[ii]  I query to what extent the recommendations contained in the IOSCO report may address some of the concerns underlying the CFTC’s 2016 proposed Regulation AT.[iii]

As you know, Regulation AT was an initiative of my predecessor, Chairman Massad.  My position was and continues to be that, while there were some good things in the proposal, there were other things that were unacceptable and perhaps unconstitutional, including that proprietary source code used in trading algorithms be accessible without a subpoena at any time to the CFTC and the Justice Department.

At heart, Reg AT is a registration scheme that would put hundreds if not thousands of automated traders under CFTC oversight, a role for which our agency has inadequate resources and capabilities.  While I share genuine concerns about the inevitability of some future market disruption exacerbated by automated trading algorithms, there is nothing in Reg AT’s proposed imposition of burdensome fees and registration requirements that will prevent such an event.  The blunt act of registering automated traders does not begin to address the complex public policy considerations that arise from the digital revolution in modern markets.  Worse is that it would give a false sense of security that the CFTC had regulatorily foreclosed such market disruption, which is impossible.  That is why I voted against Reg AT.  I do not intend to advance it in its current iteration.

Nevertheless, I remain quite open to thoughtful consideration by my fellow Commissioners, market participants, and the public about whether there are elements in Reg AT that could serve as the basis for a new and more effective rule.  Our new Market Intelligence Branch and Office of Chief Economist can help with market analysis.  In February, the UK FCA and the Prudential Regulatory Authority published papers outlining their respective regulatory governance and compliance expectations in respect of algorithmic trading.  These are worth careful study.  The IOSCO recommendations discussed by the TAC Subcommittee also appear helpful.  I commend the TAC Committee for its work to review the impact of automated trading on markets.  I look forward to well-informed and balanced policy recommendations that the Commission can consider for appropriate action.

Record Setting Enforcement

Let me now pivot to another issue that was addressed the same first week in October: enforcement.  We reported on the agency’s enforcement efforts for the fiscal year that ran from October 2017 through September 2018 – the first fiscal year under my administration.

In short, it was one of the most vigorous periods of enforcement activity in the history of the agency.  We reported:

  • More enforcement actions than ever;
  • More penalties resulting from those actions than five out of eight years of the prior administration;
  • More large cases than ever before;
  • More cases for manipulative conduct and spoofing;
  • More whistleblower awards than in the entire history of the program;
  • More partnering, including with federal and state law enforcement, other market and prudential regulators and self-regulatory organizations; and
  • More accountability, with 70% of cases involving charges against individuals from the front office to the C-Suite.

Why such an emphasis on enforcement?

Because it is the duty of government generally and the particular mission of the CFTC to enforce market regulation and prosecute bad actors.  We fulfill that mission so that America’s financial markets are places for good people to fulfill their dreams and grow the economy.

During an administration pledged to broad-based prosperity, the CFTC’s robust enforcement program is important to the health and safety of U.S. financial markets.  When conducted in a disciplined fashion, assertive regulatory enforcement is fully compatible with vibrant economic growth.

Before I entered government service, I spent a decade and a half working on Wall Street.  My commitment to robust regulatory enforcement derives from that experience.  I have enormous respect for the good men and women of America’s financial service industry who conduct themselves each and every day with integrity and honesty.  They are the ones who are betrayed by the very few who engage in wrongful behavior.  They are the ones who count on the CFTC to police U.S. commodity and financial markets that remain the envy of the world.

A New Approach to Cross-Border Regulation

Let me comment on one other event from the first week in October.  That was the release of a White Paper on cross-border regulation.[iv]  As you may know, the White Paper provides thoughts on how the CFTC should revise its current ad-hoc cross-border regime into a holistic risk-based framework that furthers the cause of swaps market reform.  I want to focus the balance of my remarks this morning on one of the foundational elements of the White Paper: regulatory deference.

In September, I embarked on an extensive trip to Europe and Asia where I gave a preview of the White Paper through a series of speeches laying out my ideas for improving the CFTC’s cross-border application of swaps regulation.  The speeches contained both a mea culpa and an apologia.  The mea culpa acknowledged that in the past the CFTC has been accused of an over-expansive assertion of jurisdiction in applying Title VII of the Dodd-Frank Act outside the United States.  That expansive assertion is responsible, at least in part, for fragmenting global markets into a complex series of ever more shallow pools of trading liquidity.

At the same time, the apologia recognized the fact that the CFTC’s cross-border overreach may have been understandable back in 2013, when no other G20 jurisdiction had yet to fully implement the G20 swaps reforms.  To ostensibly protect U.S. markets, the CFTC sought to impose U.S. law abroad regardless of whether activity had a “direct and significant” impact on the United States.

However, all of this is water under the bridge.  Times have changed.  Markets have changed.  A new approach to cross-border regulation is necessary.

The White Paper does not purport to address every cross-border issue, but to lay out a high-level framework for approaching the matter.  It seeks to offer enough detail to give readers a good sense of direction, yet acknowledges that details and substance must be worked out through the rulemaking process.  The purpose of the White Paper, therefore, is to serve as a concept release to generate more focused discussion of these important issues.

Since returning from Europe and Asia, I have begun discussing the recommendations contained in the White Paper with many market participants and fellow regulators both domestically and abroad.  Further, I have directed the staff to begin the rulemaking process with the aim to publish certain proposed and final regulations through the APA process with appropriate public notice and comment in the first half of next year.

So, what do we mean by “deference?”  It is a word that is frequently thrown about in regulatory circles.  Yet, it is a mistake to dismiss it as a slogan.  It is a regulatory approach that can be applied to concrete regulatory challenges – regulation of swaps trading venues, regulation of central clearinghouses (CCPs), and regulation of swap dealers.  It is the basis for any realistic chance to preserve functioning global markets.

During my travels in Europe and Asia, I called for policymakers and regulators to join me in adopting a deferential approach to the cross-border application of swaps reform regulation.  I said we have a rare and precious opportunity to trust one another; an opportunity to put into place contemporaneously laws, rules, and regulations that enshrine regulatory and supervisory deference in how we treat third-country firms and transactions.  This approach can help to end the imposition of unnecessarily duplicative, overlapping, and costly burdensome regulatory requirements and thereby alleviate the market fragmentation that plagues the swaps markets today.

The majority of regulators with whom I spoke welcomed the return to deference.  It was discussed favorably at last week’s G-20 meeting in Bali.  Many are expressing enthusiasm for regulatory coordination and want to seize the opportunity to put in place relevant laws, standards, and policies that reflect a path of deference.

I am committed to establishing a CFTC cross-border framework that is risk-based and offers deference to comparable non-U.S. regulations.  It is my sincere hope that the regulators of the world’s largest swaps markets will choose to join me on this path forward.  I believe this is the right path whether or not any other jurisdiction moves toward this approach.

2017 Proposed Amendments to EMIR

As many of you know, the current EU legislative proposals on third-country CCP supervision appear to be headed in the opposite direction of what I am proposing. It is a flashback to the CFTC’s 2013 guidance.  The proposed amendments to EMIR will expand the regulatory and supervisory authority of ESMA over both EU and third-country CCPs (including ongoing surveillance and on-site inspections), and to provide the European Central Bank (ECB) and other EU central banks with new oversight authority over both EU and third-country CCPs.

Under ESMA’s new authority, the proposal would designate each recognized third-country CCP as either Tier 1 or Tier 2 depending on how systemically important the CCP’s clearing activities are to the European markets.  Tier 1 CCPs would be considered “non-systemic” and would be subject to essentially the current existing equivalence determination and recognition regime.  Tier 2 CCPs would be considered “systemic” and would be subject to additional EU regulatory and supervisory requirements (i.e., must be fully consistent with all provisions of EMIR).

And of course, as you know, a number of EMIR requirements will dramatically increase the costs to clear at U.S. CCPs that are operating in the EU and are inconsistent with U.S. law.  This is because EMIR is applied to all of the clearing operations of the non-EU CCP – even clearing activity that happens outside of the EU –irrespective of the domestic law that the non-EU CCP is subject to in its home jurisdiction.  This is very different than the CFTC approach.

In my talks with European authorities, I have asked them to reconsider such an expansive approach.  I have repeatedly given the example of letters of credit as one matter of contention.  Under the CFTC DCO regime, letters of credit are accepted for initial margin for futures contracts.  This type of financing has been used for generations in American agriculture.  However, letters of credit are not a permitted form of initial margin payment under EMIR.  Prohibiting the use of letters of credit would cause American FCMs to have to post tens of billions of Dollars in additional clearinghouse margin.  It would be devastating to the FCM industry and to American agriculture.[v]

There are other substantive differences that are equally problematic.  For example, EMIR would dictate matters of board composition and corporate governance for U.S. clearinghouses, including those designated as SIDCOs, overriding existing legal obligations under U.S. securities and state corporations law.  Such overseas interference with sovereign U.S. federal and state law is unprecedented and wholly unacceptable.

The proposed amendments to EMIR, when understood alongside comments from some European officials, raise serious doubts about the European commitment to a policy of deference.  In contrast to the CFTC’s approach to the regulation and supervision of cross-border CCPs to limit CFTC oversight to primarily U.S. business activity, the EU’s approach is to apply EU law to a third-country CCP’s entire clearing business, even business activity of long-standing commercial practice, comprehensively regulated under established U.S. law.

Make no mistake: the CFTC cannot and will not allow its regulated markets and market participants to become subject to conflicting or overly burdensome regulation from abroad.  No sovereign regulator would agree to it, let alone a regulator overseeing the world’s largest derivatives markets.  The CFTC will not allow U.S. market participants to be put in the completely untenable position of having to choose between violating domestic laws and regulations or violating foreign laws and regulations.  It is completely irresponsible for European regulators to seek to put U.S. market participants in this position.

If a satisfactory resolution of this situation cannot be found, the CFTC will have no choice but to consider a range of readily available steps to protect U.S. markets and market participants.  Be assured that the CFTC has a range of options, short of further legislative action, that it can execute unilaterally in response to an extraterritorial overreach by a non-U.S. authority.  They include revisiting the CFTC’s Part 30 regime to withdraw existing exemptions in particular overseas jurisdictions.  They also include delaying or withholding CFTC staff relief for non-U.S. entities from such jurisdictions.  Other effective options are available in conjunction with fellow U.S. regulatory agencies.

These are blunt and strong tools.  We are fully aware of the devastating impact they would have on market access and trading liquidity provision on national markets in which they would be applied.  None of these options represent a course of action that I wish to pursue.

I much prefer the approach of regulatory deference that I have spent the past six weeks traveling the globe to promote.  In fact, I am ready to jump on even more planes, trains, and automobiles bound for any European capitol to work out a sensible approach.  I do not want to reach a point where we give up on deference and start restricting market access and critical provision of trading liquidity on both sides of the Atlantic.

So, let me end on a positive note.  I am cheered by the warm reception my White Paper has received in so many international quarters.  Most people understand what it was intended to do.  I hold my hand out to colleagues in Europe and across the globe.  I am hopeful that we can work together to reduce global market fragmentation and build upon regulatory deference as the basis for well-ordered and robust world markets that support global economic growth and prosperity.  We must.  There is no other sensible choice.

Conclusion

So, in conclusion, it has indeed been a busy week at the CFTC – a full and engaged Commission, a FinTech conference, a new look at automated trading in today’s digital markets, addressing the move away from LIBOR, record regulatory enforcement, and new thinking on the crucial role of regulatory deference in the cross-border implementation of swaps reform, just to name a few topics.

Some say there is a lot of noise coming out of Washington of late.  It is an election season after all.  Whatever the season, the CFTC is busy, has its head down, and is getting on with the job it has to do – the CFTC, where the enforcement is strong, the Commissioners are good looking, and the staff are all well above average.

Thank you.

[i] See Remarks of CFTC Commissioner Rostin Behnam at the Bipartisan Policy Center, Reference Rate Reform: Impact on the Economy and Consumers (Oct. 11, 2018), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam9.

[ii] See IOSCO, Consultation Report, Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading (Mar. 2018), available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD594.pdf.

[iii] See Regulation Automated Trading, 81 FR 85334 (Nov. 25, 2016), available at: https://www.govinfo.gov/content/pkg/FR-2016-11-25/pdf/2016-27250.pdf.

[iv] See CFTC Chairman J. Christopher Giancarlo, Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation (Oct. 1, 2018), available at: https://www.cftc.gov/sites/default/files/2018-10/Whitepaper_CBSR100118_0.pdf.

[v] The CFTC has requested from European authorities a way to reconcile this particular conflict of laws without adequate satisfaction.

 

SPEECHES & TESTIMONY

Remarks of Commissioner Brian Quintenz at the 38th Annual GITEX Technology Week Conference

https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz16?utm_source=govdelivery

October 16, 2018

Good morning.  Thank you very much Matteo for that kind introduction.  Before I begin, let me quickly say that the views I express today are my own and do not represent the views of the Commission.  For those of you not familiar with the Commission’s mission, the CFTC is responsible for regulating the derivatives markets in the United States.  As such, we have oversight authority over the futures and swaps market, including derivatives on commodity cryptocurrencies.

This is the first GITEX Technology Week Conference that I have had the pleasure of attending and I am delighted to be here with you today.  I would especially like to thank the Dubai World Trade Centre for being such a generous and gracious host. This is a spectacular event and it is a fascinating conference.

While this is my first time at GITEX, it is not my first time in Dubai.  I had the pleasure of visiting here for the first time in March earlier this year at the invitation of Saeb Eigner, the Chairman of the Dubai Financial Services Authority (DFSA).  I first met Saeb in Washington, D.C. on a visit he made there almost a year ago exactly.  Our conversation turned quickly from financial regulation to shared interests of art and fishing, and I am lucky to now consider him a friend.  When he extended an invitation to meet him here, I readily accepted.

During that trip, I had the pleasure of meeting a number of senior leaders and government officials, including His Excellency Mohammad Al Gergawi, Minister of Cabinet Affairs and the Future of the United Arab Emirates, and His Excellency Essa Kazim, Governor of Dubai International Financial Centre.  As the world looks forward to Expo 2020, let me say that Dubai will be the perfect host for such a wonderful event.  It will give the world a chance to celebrate all that you have accomplished as well as look forward to all that you have yet to achieve.

One of the highlights of my trip last March had nothing to do with financial regulation; rather, it involved Saeb showing me around the enormous Art Dubai exposition.  Saeb is an expert in Middle Eastern art, having written a famous book on the topic, and it was a joy to learn from him as we viewed brilliant works byChaouki Choukini, Kourosh Shishegaran, Ben Bella, and Khaled Zaki.  There was one exhibit that I remember distinctly, however, but mostly for the discussion it elicited.  An artist group called teamLab[1] created a digital art piece presented through a video screen that evoked a living, moving water pond.  Art by Algorithm, Saeb and I thought.  Or was it?  Could an algorithm actually be considered art? How easily could it be copied and reproduced, with or without the artists’ permission?  What is it exactly that a purchaser owns – a computer program?  As I looked at the piece, it was unquestionably artistic, but was it artwork?

I began reflecting on other art I had seen which contained distinct algorithmic components.  A chandelier titled “Volume” by artist Leo Villareal displayed in the Renwick Gallery across from the White House in Washington, D.C. uses an algorithm to control its 23,000 different LED lights.  According to an article describing the exhibit, “[i]t requires hours using his custom software to tune it, adjust it, and refine the light patterns to create the right brightness and tempo—part conductor, part programmer.”[2]  During my tour of Bloomberg’s new London headquarters last year, one point of interest was a water feature installation by Spanish artist Cristina Iglesias, titled “Forgotten Streams,” with different water speeds and volumes controlled by an algorithm for various effects.

We are living during a period of large-scale technological advancement and adoption.  These developments are challenging our current beliefs, as well as our current constructs.  Just as my discussion with Saeb reflected the potential transition of artwork from the physical to the algorithmic, so too are discussions in financial markets and regulatory spheres reflecting a transition from the intermediated to the distributed, dis-intermediated environment of the internet-based blockchain world.  How can our regulatory apparatus, built to register and oversee intermediaries, adequately police our markets and set standards for a disintermediated market?

A particular area of interest to me is how regulators apply existing legal paradigms to novel technologies not contemplated when those laws were adopted.  In the past, the CFTC has supervised the derivatives markets through the registration of market intermediaries.  For example, much of the CFTC’s regulatory structure for promoting market integrity and protecting customers revolves around the regulation of exchanges, swap dealers, futures commission merchants, clearinghouses, and fund managers.  However, this supervisory framework is not applicable in the disintermediated world of blockchain, which raises several complex legal and policy issues.  In the context of decentralized blockchains, like ethereum, on top of which multiple applications can run autonomously via smart contracts, it requires identifying who is responsible for ensuring that activity on the blockchain complies with the law.

Blockchain Smart Contracts

Before we go on, let’s review the key players essential to powering smart contracts on the blockchain.

First, there is the group of “core developers,” who write the foundational open-source software underlying the public blockchain.  Typically, these “core developers” do not play an active role in managing the blockchain.  However, they do tend to retain some responsibility for its ongoing operability.[3]  For example, in the past, core developers of some chains have developed software updates to address bugs in the code or put forth solutions to address events, such as hackings, that may threaten the viability of the chain.[4]

Second, you have users – for example, individuals who own cryptocurrency, like bitcoin or ether, and use the blockchain to transact.

Next, in order to validate those transactions, “miners” bundle groups of transactions into blocks and solve a complex mathematical problem to arrive at a unique solution – a process called “hashing.”  If a majority of the nodes on the chain confirm the miner’s solution, then the block is validated and added to the chain.

Some blockchain networks, like ethereum, allow smart contracts to be integrated into the chain.  In brief, a smart contract is a computer code containing all terms of the contract and is self-enforcing – meaning the software can execute the terms of the contract without additional input from the parties.[5]  Once the smart contract is formed on the ethereum network, it operates without further intervention.  Some software developers have written code that allows users to create specific types of smart contracts that can be deployed on the blockchain.  Once users download this application, they can easily find others using that same protocol willing to transact.

To recap, there are many actors essential to the functioning of the blockchain ecosystem:  the core developers of the blockchain software, the developers of smart contract applications, miners that validate transactions, and users, who transact and execute smart contracts on the chain.

Smart contracts are easily customized and are almost limitless in their applicability.  For example, a protocol could create smart contracts for flight insurance.  If you were worried about a flight being late, you could check how much it would cost to buy insurance, and if you thought the price was reasonable, you could purchase the contract with cryptocurrency.  Then, if your flight was late, the contract, by consulting public flight records, would automatically compensate you for the delay.  Smart contracts could also be used to facilitate the sharing economy by enabling users to rent houses, cars, and other property.

Other protocols could create smart contracts that more closely resemble traditional financial products.  For example, individuals who believe they have developed predictive data about future financial events, like a stock’s performance, could offer their data for purchase via smart contracts.  Depending upon the facts and circumstances, this activity could present regulatory issues.  It could look like providing investment advice, or, given the anonymity of the predictions, could be used nefariously to facilitate insider trading.

Other protocols could allow individuals to create their own smart contracts predicting future events more broadly.  Essentially, these contracts would allow individuals to bet on the outcome of future events, like sporting events or elections, using digital currency.  If your prediction is right, the contract automatically pays you the winnings.  Again, depending on the facts and circumstances, this could look like what the CFTC calls a “prediction market,” where individuals use so-called “event contracts,” binary options, or other derivative contracts to bet on the occurrence or outcome of future events.  In the past, the CFTC has generally prohibited prediction markets as contrary to the public interest, only permitting them in limited circumstances when it has found that they operate on a small-scale, non-profit basis, and serve academic purposes.[6]

As we just noted, there are innumerable types of smart contracts on the blockchain, many of which operate entirely outside of the CFTC’s jurisdiction.  But, what steps should the CFTC take if it learns of a smart contract protocol that may implicate its regulations?

Applying Old Law to New Products

In my view, with respect to any smart contract protocol, the first step in the analysis is defining the basic nature of the contract.  Is it a contract for sale or a rental agreement?  Or, does it have the essential characteristics of a swap, future or option?  If so, is the product accessible by U.S. persons?  If the contract is a product within the CFTC’s jurisdiction, then regardless of whether it is executed via a written ISDA confirmation or software code, it is subject to CFTC regulation.

If the smart contract is within the CFTC’s jurisdiction, then the next question becomes, is the method by which it is being transacted on the blockchain compliant with CFTC regulations?  If the contract is a swap, is it being offered to retail participants?  Is it a product that must be traded on an exchange?  Does the protocol itself perform exchange-like functions by facilitating trading, thereby potentially implicating registration requirements?  These are all open questions that the CFTC must consider and resolve as smart contracts proliferate and perhaps become a common feature of our financial markets.

Now, let’s assume the CFTC has answered all of these questions for a particular smart contract it is examining.  Let’s say the hypothetical product at issue is within our jurisdiction, but is not being executed in a manner compliant with CFTC rules. Who should be held responsible for this activity?  How should the CFTC enforce its regulations against a software code, rather than a registered intermediary or an exchange?  The answers to these questions are still being contemplated, but I have a few thoughts of my own that I would like to share and on which I would welcome feedback and discussion.

Let’s apply the general analytical framework I’ve described above to our earlier example of the “prediction market.”  In this hypothetical, after performing a facts and circumstances analysis, the CFTC has determined that the smart contracts executed on the blockchain are binary options, which are within the CFTC’s jurisdiction.  Binary options are a type of option whose payoff is either a fixed amount or zero.  For example, there could be a binary option that pays $100 if the price of gold is above $1,200 per ounce on a specified date and zero otherwise.

Moreover, the contracts in our scenario likely qualify as event contracts that are based upon the occurrence or non-occurrence of an event (as opposed to a price of a commodity).  Event contracts have a unique spot in CFTC jurisprudence because of the public policy concerns they raise.  For example, event contracts based upon war, terrorism, assassination, or other similar incidents may be contrary to the public interest – in which case, the CFTC can prohibit an exchange from offering the contract.[7]  Because of these concerns, as noted above, the CFTC has historically only authorized off-exchange trading in event contracts in limited circumstances, on specific types of events, for academic purposes, and with strict limits on the amounts retail customers can invest.[8]  Therefore, the particular fact pattern described above – event contracts, executed in a potentially for-profit manner, between retail customers, on any conceivable event, for any sum of money – raises multiple CFTC regulatory concerns.

But who should be held accountable for this activity?

Enforcement on the Blockchain

One could look to the core developers of the underlying blockchain code.  Without this foundational code, the smart contracts could never be executed.  However, these core developers had no involvement in the development of the smart contract code.  They invented a code upon which any number of applications can run and, in my view, it seems unreasonable to hold them accountable for every subsequent application that uses their underlying technology, without further evidence of knowledge or intent.  They may not even be aware that this particular type of smart contract has been deployed.

Similarly, miners and general users of the blockchain are not in a position to know and assess the legality of each particular application on the blockchain.  The anonymous, decentralized nature of the chain makes it difficult or even impossible for miners and users to monitor the activity of other miners and users.

That leaves us with the developers of the smart contract code that underlies these event contracts, as well as the individual users who then use that code to create and wager on their own event contracts.  The developers of the code could claim that they merely created the protocol and therefore have no control over whether and how users choose to use it once it is part of the public domain.  They would place the liability on the individual users, who are the actual creators and counterparties of the event contracts.

In my view, this analysis misses the mark.  Instead, I think the appropriate question is whether these code developers could reasonably foresee, at the time they created the code, that it would likely be used by U.S. persons in a manner violative of CFTC regulations.  In this particular hypothetical, the code was specifically designed to enable the precise type of activity regulated by the CFTC, and no effort was made to preclude its availability to U.S. persons.  Under these facts, I think a strong case could be made that the code developers aided and abetted violations of CFTC regulations.[9]  As such, the CFTC could prosecute those individuals for wrongdoing.

Think of someone asking you to borrow the keys to your car because they want to rob a bank.  If you let them borrow your car, it would be reasonable for the government to hold you partially responsible for the ensuing criminal activity. However, it would be unreasonable for the government to prosecute the car manufacturer.

Enforcing CFTC regulations against those individuals does not immediately stop the activity from occurring, because individual users could continue to use the software to execute their own event contracts.  What does the CFTC do then?  The CFTC could attempt to raise awareness by U.S. participants that the activity is illegal.  In addition, it could attempt to prosecute individual users of the contracts to discourage future participation.  Ultimately, however, going after users may be an unsatisfactory, ineffective course of action.  From a practical perspective, the blockchain is an anonymized, global network.  It seems likely that determined users will be able to gain access.

The variability of international regulations also raises issues.  For instance, although the CFTC heavily regulates trading in event contracts, other jurisdictions view them differently.  In the United Kingdom, for example, event contracts are not viewed as financial instruments, but rather as a permitted form of wagering regulated by the Gambling Commission.  And, although the United States permits binary options based on commodity prices, the European Union bans that very same type of product.[10]  How then does the CFTC enforce its regulations on U.S. activity when the marketplace for that activity has become seamless, anonymized, and global?  I do not have all the answers today, but I expect it may be an issue that the CFTC faces in the future, as public blockchains create international markets in which everyone wants to participate.

Engagement Instead of Enforcement

Yet, this outcome may be avoidable.  Developers of smart contract code could also engage with CFTC staff to see if there is way the code’s product can comply with CFTC regulations.  CFTC staff is open to engaging with innovators to understand new technological infrastructures and applications and to work to ensure these activities are undertaken in a manner compliant with the law.  In some cases, it may be that new products require the Commission to rethink its existing regulations or provide regulatory relief – both courses of action that I think would be appropriate depending upon the technology in question.

It is for precisely this reason that CFTC Chairman Giancarlo created the LabCFTC group at the Commission.  One of LabCFTC’s primary goals is to interface with the FinTech community and other regulators to deepen the agency’s understanding of technological innovations and provide guidance to innovators about how CFTC regulations may be implicated by their work.  In its first year of existence, LabCFTC has already held 200 meetings with innovators, FinTech start-ups, and well-established financial players to engage on their views and innovations.

I would much rather pursue engagement than enforcement – but in the absence of engagement, enforcement is our only option.

Code as Law

This discussion leads me to my final point today.  I have heard some say that “the code is law,” meaning that if the software code permits it, an action is allowed.  I disagree with this fundamental premise.  Case law, statutes, and regulations are the law.  They apply to the code, just as they apply to other activities, contracts, or agreements.

But what about when the law’s applicability has yet to be tested?  For example, in the case of a 51% attack, where one bad actor, or a coordinated group of bad actors, amass more than 51% of a blockchain’s computing power, so that they can insert their own false values and transactions into the system to steal cryptocurrency from other users.  Or, take the example of The DAO, where users exploited a bug uncovered in the code and stole 3.6 million ether.  In that instance, the perpetrator(s) argued strenuously that the action was not theft, but rather the rightful gains he or she earned by detecting and exploiting an error in the code.[11]

Technically, all the users on the blockchain are aware of the possible risks posed by a 51% attack or a bug in the code.  By participating on the chain, are they knowingly assuming the risk of these incidents occurring?  Or, is there an implicit agreement among participants on the blockchain that they will not take actions to undermine the operability and integrity of the blockchain?  It is certainly possible that the software code does not represent the entirety of the participants’ agreement and must be interpreted in connection with traditional contract law concepts like good faith and fair dealing.

In addition, derivative or investment contracts are still subject to regulations, with the CFTC responsible for promoting the market integrity of the derivatives markets.  In other words, a contract can’t say anything that it wants.

A recent market integrity issue in the credit default swap space provides an interesting example.  The issue raised the possibility of a “manufactured default” – a scenario where a company would technically default on an obligation in a way that would benefit an outside party’s CDS holdings in exchange for favorable financing by that party to the company.  While potentially valid under the terms of the written CDS contracts, such activity, especially if it were to become commonplace, would threaten the integrity of the CDS market.  While I am strongly opposed to inserting the agency into private contract disputes, where market integrity is clearly threatened through widely adopted contract loopholes – such as arranged default scenarios or 51% attacks on a blockchain – I believe the CFTC could consider investigating such conduct for fraud or manipulation.

Conclusion

Smart contract applications on blockchain networks hold great promise.  They have the potential to open up new markets and create efficiencies in existing ones.  At the same time, they also raise novel issues of accountability that users and policy makers alike must consider.

In the course of my reading to prepare for this speech, I came across a quote from acclaimed American scientist, Carl Sagan, who stated, “[w]e live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.”  Unfortunately, I think his observation has only grown truer with time.  I am hopeful, however, that it does not apply to the U.S. Commodity Futures Trading Commission.

Our rapidly evolving technological landscape poses challenges for all of us.  As such, I think it is incumbent upon regulators to continually educate ourselves on new technological developments, so that we can accurately evaluate their benefits and risks and develop appropriate policy responses.

Thank you for having me at this magnificent event.  It is truly a pleasure to be with you.

[1]     See https://www.teamlab.art/w/ for more information about teamLab.

[2]     Alex Palmer, Leo Villareal’s 23,000 Points of Light Illuminate the Renwick Gallery, Smithsonian.com, Nov. 16, 2015, https://www.smithsonianmag.com/smithsonian-institution/most-majestic-energy-saving-sculpture-ever-seen-180957105/.

[3]    Dirk A. Zetzsche, Ross P. Buckley, and Douglas W. Arner, The Distributed Liability of Distributed Ledgers:  Legal Risks of Blockchain, Univ. of New S. Wales Law Research Series 19 (Jan. 1, 2017) (describing how a small group of core developers have password access to the Bitcoin code).

[4]     For example, when a hacker exploited a bug in The Dao, a smart contract that runs on ether, to steal ether, the Ethereum Foundation stepped in to develop a proposed update to the underlying ethereum software, ultimately leading to a hard fork that unwound the theft and returned the stolen ether to the original owners.  See David Siegal, Understanding The DAO Attack, CoinDesk (June 25, 2016), https://www.coindesk.com/understanding-dao-hack-journalists/.

[5]    Nick Szabo first defined the term “smart contract” in 1994.  He described a smart contract as, “[A] computerized transaction protocol that executes the terms of a contract. The general objectives …are to satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. Related economic goals include lowering fraud loss, arbitration and enforcement costs, and other transaction costs.”   Ryan Surujnath, Off The Chain! A Guide to Blockchain Derivatives Markets and the Implications on Systemic Risk, 22 Fordham J. Corp. & Fin. L. 257, 270 (2017).

[6]     Pursuant to CEA Section 5c(c)(5)(C)(i), the CFTC may determine an event contract is contrary to the public interest because it involves activity that is unlawful under any Federal or State law; terrorism; assassination; war; gaming; or other similar activity that the Commission determines is contrary to the public interest.  If the Commission makes this determination about a contract, the contract cannot be listed on an exchange.

To date, the CFTC has provided no-action relief to two academic institutions, allowing them to operate small scale, not-for-profit prediction markets for academic purposes.   See No-Action Letter 14-130 (Oct. 29, 2014) (allowing Victory University of Wellington to operate a not-for-profit market for the trading of event contracts), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/14-130.pdf; No-Action Letter 93-66 (June 18, 1993) (allowing the University of Iowa to operate a non-profit electronic market for trading event contracts concerning political elections and economic indicators), https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/93-66.pdf.  In contrast, the CFTC issued an order prohibiting Nadex from offering political event contracts for profit on its exchange.  See Order Prohibiting the Listing or Trading of Political Event Contracts (April 2, 2012), https://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/nadexorder040212.pdf.

[7]     CEA Section 5c(c)(5)(C)(i).

[8]     In contrast, binary options based on a change in the price or rate of a commodity are typically limited to futures exchanges.  Further, the CFTC generally prohibits registered entities from listing or clearing any contracts that involve or reference terrorism, assassination, war, gaming, or an activity that is unlawful under any state or federal law.  17 C.F.R. § 40.11(a).

[9]     CEA Section 13(a).

[10]    ESMA Agrees to Prohibit Binary Options and Restrict CFDs to Protect Retail Investors (March 27, 2018), https://www.esma.europa.eu/press-news/esma-news/esma-agrees-prohibit-binary-options-and-restrict-cfds-protect-retail-investors.

[11]    Lester Coleman, DAO Ether Hacker Warns Against Hard Fork, CNN (June 18, 2016), https://www.ccn.com/dao-ether-hacker-warns-hard-fork/.

 

SPEECHES & TESTIMONY

Keynote Remarks of CFTC Commissioner Rostin Behnam at the Federal Reserve Bank of Chicago’s Fifth Annual Conference on CCP Risk Management, Chicago, Illinois 

https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam10?utm_source=govdelivery

A Decade After The Financial Crisis: Remaining Challenges and New Approaches for the Next Ten Years and Beyond

October 16, 2018

Introduction

Thank you for the kind introduction President Evans; it is a pleasure to be here with all of you today, and an honor to kick off day two of this great conference.  I wish to thank the Federal Reserve Bank of Chicago, particularly Bob Cox and Robert Steigerwald, for the invitation to speak with you and for organizing this event.  Before I begin my remarks, please allow me to remind you that the views I express today are my own and do not represent the views of the Commodity Futures Trading Commission (the CFTC or Commission) or my fellow Commissioners.

Since the 2008 financial crisis, new language has entered the financial regulatory and governance lexicon, or at least taken on new importance.  One word that has taken on new significance, and is acutely important to both the CFTC and the Federal Reserve, is resiliency.  I always think of this conference, and more specifically this city as the perfect locale to talk about resilience – not only because of the expertise regarding central counterparties (CCPs) risk management represented in the room, but also because Chicagoans know a thing or two about resilience.  Cubs fans endured 108 years of losing between World Series titles.  Along the way, they saw a baseball go through Leon Durham’s legs, and another ball go into Steve Bartman’s glove.  Yet the team and its fans persevered, demonstrating steadfast resilience in their quest for what was then an elusive title.

The theme for this year’s conference, Examining Regulatory Initiatives, is quite timely considering a decade has passed since the financial crisis and eight years since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)[1].  During the past ten years, domestic and international regulators have focused on identifying systemic risks in their financial markets, and designing and implementing policies to execute the G-20 financial regulatory reforms,[2] which address those risks.  The G-20 reforms have strengthened the resilience of large financial institutions, including CCPs, and substantial progress has been made in many jurisdictions toward mitigating systemic risk.

Here in the United States we have achieved substantial implementation of the core reforms agreed upon by the G-20.  As a result, many regulators and market participants are now turning to post-implementation evaluation of the effects of the G-20 reforms.[3]  Therefore, this is an opportune time to engage in a constructive dialogue regarding whether the Dodd-Frank Act reforms are achieving their intended outcomes, and to identify any material unintended consequences.  Returning to the Cubs for a moment, like the team’s President, Theo Epstein, and Manager, Joe Maddon, this is a perfect time to think about new approaches to solving old problems.

Listening Tour and CFTC Market Risk Advisory Committee

I recently completed my first year as a Commissioner.  Slightly less than one year ago, and shortly after I started my term, I announced a listening tour, focused on visiting the full scope of CFTC market participants and stakeholders in order to get a better sense of what was working and what was not working with our regulations.[4]  Like CFTC registrants and market participants, the listening tour has been vast in geographic scope, but most importantly provided me with an opportunity to fully digest and analyze the full spectrum of issues, concerns, and comments of CFTC stakeholders, including CCPs, futures commission merchants (FCMs), end users, and service providers.

In addition to the listening tour, I heard the concerns of market participants through the nominations process for CFTC’s Market Risk Advisory Committee (MRAC), which I sponsor.[5]  In the federal register release seeking nominations for membership on the MRAC, I requested suggestions for topics for the MRAC’s consideration and over 75 topics were submitted; 17 of which focused on clearing and clearinghouse risk issues.[6]  With that said, I would like to share with you today some of the topics that were mentioned during the listening tour and included in the MRAC submissions as challenges for CCPs and swaps market participants since the G-20 reforms and the passage of the Dodd-Frank Act: (i) FCM concentration and access to clearing services; (ii) cross-border issues; (iii) CCP governance and risk; and finally (iv) some parting words regarding developments in financial technology.

FCM Concentration and Access to Clearing Services

Throughout the year, a number of market participants have expressed concerns to me regarding FCM concentration and its effects on access to clearing.  This important issue is certainly not new, but the years long trend continues to head in the wrong direction because of a number of factors.[7]  The statistics paint a very concerning picture.  For futures, the number of FCMs has declined from 100 CFTC-registered entities in 2002 to 54 as of August 2018, with the top five and ten FCMs holding 54% and 73% of total client margin, respectively.[8]  For swaps, the client clearing landscape is concentrated further to less than 20 FCMs.  Only 17 FCMs are holding client margin for swaps clearing with the top five and ten FCMs holding 77% and 98%, respectively.[9]  Further, the Consultation Report prepared by the Financial Stability Board’s Derivatives Assessment Team (DAT) on incentives to centrally clear OTC derivatives appears to be consistent with these findings.  The DAT Consultation Report, which seeks to assess whether reforms to capital, margin, and clearing adequately incentivize central clearing of OTC derivatives, highlights that the provision of client clearing services is concentrated in a small number of banks.  Specifically, “five firms, all bank-affiliated, account for over 80% of total client margin for cleared OTC derivatives in the United States, the United Kingdom and Japan.”[10]

Many large bank-owned FCMs have exited the swaps clearing business citing as one reason the global introduction of the Basel Committee on Bank Supervision’s Basel III leverage ratio and the Supplementary Leverage Ratio (SLR) in the United States.[11]  The SLR, a bank-based capital charge designed, in part, to reduce risk posed by on-balance-sheet lending activities, has been applied to centrally cleared derivatives.  The adoption of swaps clearing moved segregated client initial margin off the balance sheets of clearing member FCMs and into CCPs.  However, the SLR treats customer margin as an on balance sheet asset.

The global implementation of the central clearing mandate has produced a significant demand for clearing services and a substantial increase in overall clearing volumes in the swaps market, and yet there have been FCM consolidations and market exits, which have resulted in a substantial reduction in clearing capacity.  Given that central clearing is a key component of the G-20’s effort to improve derivatives markets, policymakers, both bank and market regulators, must take the necessary steps to ensure that client clearing remains a commercially viable business.  However, according to the DAT Consultation Report, 89% of client clearing service providers surveyed said that the leverage ratio, in particular, was negatively impacting their ability to provide client clearing services.[12]

Given the G20 reform mandate, I have concerns about the systemic risk implications of the current FCM concentration levels, the effect of the SLR on bank-owned FCMs, as well as the portability of a failing clearing member’s book of business to other clearing members in times of stress.  During stressed market conditions, when firms are more conservative with capital allocations, there may not be clearing members willing to acquire a failed clearing member’s book of business in a default.  The inability of clearing members to accept the porting of this book may ultimately result in liquidations of client positions.[13]  Mass liquidations would negatively impact the clients being liquidated and exacerbate volatility at a vulnerable moment.  As a few market participants, including end-users suggest, increased volatility “…could lead to additional client defaults perpetuating the cycle of stress and reducing market participants’ ability to withstand such stressful events.  The negative impact to systemic financial stability of such a situation would be significant.”[14] Clients both large and small are likely evaluating the costs and risks associated with establishing and maintaining business relationships with FCMs.

This is the moment in my prepared remarks where I would like to pause, and emphasize that I support strong bank capital requirements, including the SLR.  The regulatory and market participant community must never forget the extraordinary actions taken in September, 2008, and shortly thereafter, which included massive capital injections into the world’s largest banking institutions because of a liquidity crisis.  Capital is not merely a cost or set aside, lying dormant; it is a critical source of funding, provided by a bank’s owners, which supports many traditional banking activities.  I believe it is a commonly shared view that the strong capital position of U.S. banks, on the heels of strong reform initiatives passed in 2010, has led to the leading position of these banks relative to their global counterparts.  However, as I have stated this morning, within the context of centrally cleared derivatives, the SLR is contributing to higher FCM concentration levels and reduced access to clearing.  This misalignment must be addressed to resolve the large systemic risk concern.[15]

Of note, the European Union has proposed to amend its capital rules to exclude cash collateral on centrally cleared derivatives transactions held at CCPs from the leverage ratio.[16] Additionally, in the House of Representatives, the Financial Services Committee reported out bipartisan legislation this past August that would amend relevant U.S. law to exclude initial client margin from leverage exposure calculations.[17]  Finally, in April 2016, the Basel Committee on Banking Supervision issued a consultative document in which comments were requested on the impact of the Basel III leverage ratio on clearing member business models, including the impact on the cost of clearing members’ provision of clearing services to clients.[18]  Despite most solutions being focused on balance sheet treatment of initial margin, I welcome a broader conversation to discuss any regulatory or market based solutions that may address this concentration and access issue, while preserving key reforms.[19]

Additionally, in the event of a default, as I noted earlier, porting defaulting clearing member positions, specifically within the context of absorbing both the positions and related capital charges, remains a concern that could have systemic implications.  During stressed market conditions, clearing members are likely to be constrained by capital requirements, and therefore may be unwilling or unable to acquire the portfolio absent temporary relief from the SLR.[20]

Now is the time to devise solutions to these critically important challenges.  As we move into the next decade past the crisis, a study of the health of the FCM model for client clearing is vital to ensure continued compliance with post-crisis reforms, reduction of systemic risk, and that current regulations do not have unintended consequences that may undermine the same reforms meant to address old problems.

European Commission Proposal regarding Supervision of Third-Country CCPs

Now I would like to turn to a few important cross-border issues.  The European Commission’s proposed legislation to amend the European Market Infrastructure Regulation (EMIR) and create a new European Framework for the regulation and supervision of CCPs[21] has been a source of concern for the CFTC and for our U.S. CCPs that do business in the EU.  The regulation would, in effect, make EU authorities primary supervisors of U.S. CCPs classified as systemically risky by the EU, and would apply EU law to all aspects of their business (U.S. business included).  U.S. CCPs recognized by the EU would be subject to overlapping regulation and duplicative supervision without due deference to existing CFTC regulation and supervision of those U.S. CCPs – due deference that was agreed upon in the 2016 CFTC and European Commission equivalence agreement (the Equivalence Agreement).[22]

Deference is the cornerstone of the CFTC’s cross-border approach, and an essential regulatory tool that not only alleviates practical domestic budgetary constraints; but, also respects the strength of deserving foreign counterparts, and encourages the fundamentals of working together towards a cohesive cross-border regulatory framework that supports strong, robust, and transparent regulations.  If a home country authority implements a comprehensive regulatory and supervisory framework that is comparable to our regulations and laws, then that home country authority should maintain primary oversight over its domestic entities to which other foreign regulators should defer.  A solid, outcomes-based comparability assessment of the consistency of the home regulator’s relevant regulations and supervisory programs is the foundation of such deference.

The Equivalence Agreement is a testament to the successful cross-border regulation of CCPs, and a milestone agreement that represents the strong, bilateral relationship between the U.S. and European Union.  Our global markets are more efficient because of this agreement; there are less regulatory and supervisory burdens for our clearinghouses and less market fragmentation.

I would like to highlight one challenge the current proposal before the European Council presents to cross-border harmony.  Under the CFTC’s swaps framework, customer collateral provided for swaps is required to be segregated from a FCM’s own property pursuant to the legally segregated and operationally commingled segregation model (known as LSOC).  This is in contrast to EMIR, which requires that individual segregation be offered to clients for swaps.  U.S. CCPs recognized by the EU would not be able to offer individual segregation to their U.S. clients because individual segregation is inconsistent with the U.S. Bankruptcy Code.  Consequently, this nuanced difference in regulation has direct and detrimental effects, among other things, on a recognized U.S. CCP’s ability to comply with U.S. law.

I do not have a crystal ball to predict outcomes, and fully recognize the overwhelming challenge of resolving the multitude of issues the European Union and the United Kingdom are faced with today; but, I maintain that the European Commission should honor its commitment to the Equivalence Agreement and treat U.S. CCPs in accordance with it.

Cross-Border Rethink

I would like to spend a few minutes to share my general thoughts on Chairman Giancarlo’s latest white paper, “Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation”.[23]  As you know, the Chairman’s white paper expresses the views and ambitions of the Chairman only and neither binds any other Commissioner nor the Commission on the path forward.  I agree that the Commission should address any problems resulting from its current approach to the oversight of cross-border swaps activities, and that it should do so both internally as a Commission in accordance with statutory procedures, and externally with appropriate consideration of and deference towards our fellow global regulators.  Moreover, I support the Chairman’s stated objectives of (1) recognizing the distinction between swaps reforms intended to mitigate systemic risk and reforms designed to address particular market and trading practices; (2) increasing CFTC cooperation with global regulators to reduce duplicative regulation and redundant supervision; (3) reducing the operational burdens and complexity of overlapping regulations where appropriate; and (4) reducing market fragmentation and fostering deeper liquidity pools.[24]

As the Chairman himself acknowledges, the white paper is not quite a concept release and its proposals have not yet been presented to the full Commission for input, consideration, or consensus.[25]  It remains unclear as to how the Commission will approach the rulemaking process within our existing set of regulations.  Certain aspects of the proposal represent departures from existing policy with respect to swaps clearing and may even conflict with our governing statute or prior Commission interpretations.

One popular proposal that raises policy questions is the extension of the derivatives clearing organization (DCO) exemption to U.S. customer clearing because it would not afford U.S. persons transacting overseas certain protections under the U.S. Bankruptcy Code.  U.S. persons clearing swaps at an exempt DCO through non-U.S. clearing members that are not registered with the CFTC would not be customers under the U.S. Bankruptcy Code, and conversely, the local jurisdiction’s bankruptcy laws would apply.  This is particularly concerning since the CFTC’s regulatory framework is based, in part, on customer protection and these U.S. persons would lose that protection.  This is but one example that I look forward to engaging with the Chairman and my fellow commissioners on, and more importantly hearing your thoughts on in the weeks and months ahead.

CCP Governance and Risk Management

CCP governance is a topic of increasing emphasis among domestic and international regulators, particularly the potential conflict of interest between shareholders and clearing members arising from the CCP’s mutualization of risk.  Conflicts between CCPs and clearing members have focused on risk management or risk-related issues generally.  Many clearing members have expressed concerns that their interests may not be adequately represented in governance structures that focus on shareholders, considering the clearing members, through mutualized default funds, are the bearers of a vast majority of the CCP’s tail risk.  As you know, there is an ongoing debate about the appropriate amount of CCP capital in the default waterfall.

Separately, there is a discussion percolating about the interests being served by the “hat” worn by clearing member employees who sit on the risk management committee.  Specifically, how do clearing member employees manage conflicts between their incentives and duties regarding (1) prioritizing the safety and soundness of the clearinghouse, (2) any duty owed to the shareholders of the clearinghouse, and (3) advancing the interests of their firm?  There is considerable potential for value from including clearing member employees as expert members of risk management committees.  However, in order for this value to be realized, any conflict or tension must be addressed and resolved.

Mostly through my sponsorship of the MRAC, I have heard that further review and discussion of CCP governance structures, particularly with respect to the risk committee, is necessary.  Therefore, I will be convening the MRAC for a meeting on December 4th to discuss these issues.  I believe the recent clearing default at NASDAQ is further evidence that governance and risk management issues must be continually discussed, debated, and refined as necessary.  There is no shortage of hypotheticals.  There is no shortage of unique market factors.  There is no shortage of unexpected events that will drive markets into scenarios not foreseen and potentially plausible.  We all must remain diligent, patient, and open to continuous discussions to prevent defaults and market crises in the future.  Clearing will not eliminate losses.  But, the collective regulatory and market participant community must do everything to reduce them.

Use of FinTech by the Clearing Industry

I would like to close by spending a few minutes discussing the potential use cases for blockchain technology or distributed ledger technology (“DLT”) for clearing and settlement, and share some thoughts on how I have been thinking about new technologies being applied to the financial services sector.  During the listening tour, I met with technologists of both established and newer applications.  I also met with think tanks, academics, and practitioners.  The goal of these meetings was to get an understanding of these technologies and the associated risks.  The utilization of DLT for post-trade clearing and settlement has the potential to bring powerful efficiencies and increased resiliency, as well as disruptor even transform our industry.  Specifically, DLT can be used for position keeping, global collateral management,[26] settlement, and reporting.  However, the use of DLT by the clearing industry is still in its infancy.[27]  As a regulator, I know that this will not be for long.  Although the FSB has concluded that there are currently no compelling financial stability risks from emerging FinTech innovations,[28] I think about how regulation should respond to the challenges brought by DLT for clearing and settlement, or just FinTech generally.

Regulators must approach FinTech with an open mind, despite there being great regulatory uncertainty regarding how FinTech fits into existing rules and regulations.  However, CFTC registrants planning to use DLT or other technologies should be prepared to analyze how existing rules and regulations could apply.  As a regulator, I will be looking closely to ensure that our core principles are observed and that the vital interests we protect are safeguarded.

Conclusion

I hope I have given you more insight into my views on the challenges facing the clearing industry and regulation of the derivatives markets and how I view some of the hurdles we are all facing. We are all on course to solve the issues before us, and we should not be deterred from moving forward.  Most significantly I would like to end by thanking the Federal Reserve.  Although the CFTC and the Fed have worked closely for many decades, the relationship has taken on a new dynamic since the passage of the Dodd-Frank Act.  In the one short year I have been a Commissioner, I have seen the relationship grow stronger, and I hope that relationship will continue to grow stronger in the years ahead.  I firmly believe a strong relationship will benefit regulators, the market, and the American public through safe and transparent markets.   Thank you for having me today.

[1] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 § 712(d), 124 Stat. 1376, 1644 (2010).

[2] In response to the Financial Crisis, the G-20 Leaders at the Pittsburgh Summit in 2009 commenced a comprehensive reform of over-the-counter (“OTC”) derivatives markets with the goals of mitigating systemic risk, improving transparency in the derivatives markets, and protecting against market abuse.  The G-20 Leaders made five commitments to reform OTC derivatives markets.  Specifically,

  • standardized OTC derivatives should be centrally cleared;
  • non-centrally cleared derivatives should be subject to higher capital requirements;
  • non-centrally cleared derivatives should be subject to minimum standards for margin requirements;
  • OTC derivatives should be reported to trade repositories; and
  • standardized OTC derivatives should be traded on exchanges or electronic trading platforms, where appropriate.

Financial Stability Board, Review of OTC derivatives market reforms:  Effectiveness and Broader Effects of the Reforms, June 2017, available at http://www.fsb.org/wp-content/uploads/P290617-1.pdf ; see the Pittsburgh Summit Leaders’ statement, paragraph 13 of body, http://www.fsb.org/wp-content/uploads/g20_leaders_declaration_pittsburgh_2009.pdf.

[3] See Financial Stability Board, Evaluation of the Effects of the Financial Regulatory Reforms on Infrastructure Finance, July 2018, available at http://www.fsb.org/wp-content/uploads/P180718.pdf; Financial Stability Board, Incentives to Clear Over-The-Counter (OTC) Derivatives, August 2018, available at http://www.fsb.org/wp-content/uploads/P070818.pdf (hereinafter, “DAT Consultation Report”).

[4] Rostin Behnam, Remarks of CFTC Commissioner Rostin Behnam at the Georgetown Center for Financial Markets and Policy, Washington, D.C. (Nov. 14, 2017),https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam1.

[5] https://www.cftc.gov/About/CFTCCommittees/MarketRiskAdvisoryCommittee/index.htm.

[6] https://www.cftc.gov/LawRegulation/FederalRegister/finalrules/2018-05271.html.

[7] https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf

[8] See Financial Data for FCMs, Aug. 31, 2018, available athttps://www.cftc.gov/MarketReports/financialfcmdata/index.htm.

[9] Id.

[10] DAT Consultation Report at 3.

[11] See Joe Rennison and Laura Noonan, Deutsche Bank walks away from US swaps clearing, Financial Times, Feb. 9, 2017, available at https://www.ft.com/content/2392bc42-ee47-11e6-930f-061b01e23655;  Joe Rennison, Nomura Exits Swaps Clearing for US and European Customers, Financial Times, May 12, 2015, available at https://www.ft.com/content/e1883676-f896-11e4-be00-00144feab7de;  Silla Brush, State Street Exiting Swaps Clearing Business, Citing New Rules,Bloomberg, Dec. 4, 2014, available at https://www.bloomberg.com/news/articles/2014-12-04/state-street-exiting-swaps-clearing-business-citing-new-rules;  Philip Stafford, RBS to Wind Down Part of Swaps Clearing Unit, Financial Times, May 18, 2014, available athttps://www.ft.com/content/4d906d92-dea4-11e3-9640-00144feabdc0;  Rick Baert, BNY Mellon closes U.S. derivatives clearing business, Pension & Investments, Dec. 10, 2013, available athttp://www.pionline.com/article/20131210/ONLINE/131219993/bny-mellon-closes-us-derivatives-clearing-business.

[12] DAT Consultation Report at 63.

[13] Joanna Wright, US Clearing Banks Still Push for Leverage Ratio IM Offset, Risk.net, Feb. 26, 2018, available at https://www.risk.net/regulation/basel-committee/5426961/us-clearing-banks-still-push-for-leverage-ratio-im-offset.

[14] Letter from the Commodity Markets Council and Managed Funds Association to the Basel Committee on Banking Supervision, Nov. 2, 2015.  https://www.managedfunds.org/wp-content/uploads/2015/11/CMC-MFA-Leverage-Ratio-Letter-End-User-Impact-Final.pdf.

[15] Prior to Dodd-Frank, from 2002 through 2011, an average of 14 firms entered the FCM marketplace annually.  Since Dodd-Frank, the average has been four, with only one last year and none so far this year.

[16] Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012, COM (2016) 850 final (Nov. 23, 2016); Wright, supra note 8.

[17] H.R. 4659, 115th Cong. (2017), https://www.congress.gov/115/bills/hr4659/BILLS-115hr4659rh.pdf.

[18] Bank for International Settlements, Revisions to the Basel III Leverage Ratio Framework, April 2016, available at https://www.bis.org/bcbs/publ/d365.pdf.

[19] In April, 2018, the Federal Reserve Board and the Office of the Comptroller of the Currency proposed a rule to tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms.  However, the proposal did not include amendments regarding off-sets for centrally cleared derivatives. https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180411a.htm

[20] Separately, temporary relief from Know Your Customer and Anti-Money Laundering requirements could facilitate smoother onboarding of a defaulting clearing member’s book.

[21] Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorization of CCPs and requirements for the recognition of third-country CCPs, COM (2017) 331 final (June 13, 2017); see also Commission proposes more robust supervision of central counterparties (CCPs) (June 13, 2017), available athttp://europa.eu/rapid/press-release_IP-17-1568_en.htm.

[22] Comparability Determination for the European Union:  Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 F.R. 15260 (March 2016),https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.

[23] J. Christopher Giancarlo, Commissioner, U.S. Commodity Futures Trading Commission, Cross-Border Swaps Regulation Version 2.0:  A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation(2018), https://www.cftc.gov/sites/default/files/2018-10/Whitepaper_CBSR100118_0.pdf.

[24] J. Christopher Giancarlo, Cross-Border Swaps Regulation Version 2.0; A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation, Oct. 1, 2018, at ii-iii.

[25]See CFTC, Chairman Giancarlo Releases Cross-Border White Paper, Oct. 1, 2018,https://www.cftc.gov/PressRoom/PressReleases/7817-18;  Robert Mackenzie Smith, Q & A: CFTC’s Giancarlo on the race to overhaul cross-border rules, Risk.net, Oct. 4, 2018, available athttps://www.risk.net/regulation/6002076/qa-cftcs-giancarlo-on-the-race-to-overhaul-cross-border-rules.

[26] See, e.g., Mattia Calzetta, Blockchain, clearing & settlement:  Everything there is to know,Mogul News, Oct. 3, 2018, available at https://mogul.news/blockchain-clearing-settlement/?utm_source=tmm&utm_medium=article&utm_campaign=blockchain-clearing&utm_content=21(noting that “CITI and CME Clearing have implemented a real-time distributed ledger platform, which allows banks to view the collateral in its ledgers in real-time, send cash or securities with one click to a Clearing House, and receive an immediate acknowledgment.”)

[27] David Mills et al, Distributed Ledger Technology in Payments, Clearing and Settlement, 6(2/3) J. of Fin. Mkt. Infrastructures, 207, 208 (2017).

[28] Financial Stability Board, Financial Stability Implications from FinTech, June 27, 2017, available at http://www.fsb.org/wp-content/uploads/R270617.pdf.

 

RELEASE Number

7828-18

https://www.cftc.gov/PressRoom/PressReleases/7828-18

October 15, 2018

Federal Court in New York Orders Kevin Antonovich to Pay $554,375 Judgment for Commodity Pool Fraud

Washington, DC – The Commodity Futures Trading Commission (CFTC) announced that Judge I. Leo Glasser of the U.S. District Court for the Eastern District of New York issued a Consent Order on October 3, 2018, against Kevin Scott Antonovich, a resident of Cherry Grove, New York, requiring him to pay $554,375 in restitution and a civil monetary penalty for violations of the Commodity Exchange Act and CFTC Regulations.  The Order also imposes permanent trading and registration bans on Antonovich, among other injunctive relief.

The Court’s Order stems from a CFTC Enforcement Complaint filed on April 23, 2018, that charged Antonovich with misappropriation of customer funds, fraudulent solicitation in connection with investments in a commodity pool, and with registration violations (see CFTC Complaint and Press Release 7716-18).

The Order finds that from September 29, 2015, through at least August 17, 2016, Antonovich fraudulently solicited and received hundreds of thousands of dollars from more than 150 pool participants in connection with pooled investments in off-exchange binary options.  The Order further finds that Antonovich misappropriated more than $100,000 of pool participant funds for business expenses and his personal use, made false and misleading representations to pool participants, and fabricated documents purporting to show funds available for return to pool participants.

The Order also finds that Antonovich told pool participants that his trading for the pool would occur on a CFTC-registered exchange when, in fact, all trading occurred on offshore platforms and that Antonovich issued numerous updates to pool participants falsely claiming that his trading for the pool was profitable.  In addition, the Order finds that when pool participants sought payouts from the pool, Antonovich falsely claimed that funds were available to be paid out and fabricated trading account and bank documents to give pool participants the false impression that funds were available to satisfy not only return of principal funds, but also payment of purported profits.

The CFTC Division of Enforcement staff members responsible for this action are James Garcia, Kevin Samuel, Alison B. Wilson, and Rick Glaser.

*   *   *   *   *   *

CFTC’s Commodity Pool Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Commodity Pool Fraud Advisory, which warns customers about a type of fraud that involves individuals and firms, often unregistered, offering investments in commodity pools.

Also, before investing or trading with a firm, check the firm’s registration status and disciplinary history, if registered, with the National Futures Association. A company’s registration status can be found at: www.nfa.futures.org/basicnet.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Consent Order: Kevin Scott Antonovich

 

RELEASE Number

7827-18

https://www.cftc.gov/PressRoom/PressReleases/7827-18

October 12, 2018

In CFTC Action, Former Trader Kamaldeep Gandhi Admits to Engaging in Spoofing and Manipulative Schemes at Proprietary Trading Firms

CFTC Order Recognizes Gandhi’s Entry into a Cooperation Agreement with the Division of Enforcement

Washington, DC — The Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Kamaldeep Gandhi, in which Gandhi admits to engaging in manipulative and deceptive schemes, along with other individuals, which involved thousands of acts of spoofing (bidding or offering with the intent to cancel the bid or offer before execution) with respect to a variety of futures products traded on the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and the Commodity Exchange, Inc.  The Order finds that Gandhi engaged in this unlawful activity while placing orders for, and trading futures contracts through, accounts owned by his former employers, two proprietary trading firms named as Firm A and Firm B in the Order.

The Order recognizes Gandhi’s entry into a formal cooperation agreement with the CFTC’s Division of Enforcement (Division).  The Order requires Gandhi to cease and desist from violating the Commodity Exchange Act’s prohibition on spoofing and the use of manipulative and deceptive schemes.  The Order also permanently bans Gandhi from trading and other activities in CFTC-regulated markets.  In the Order, the CFTC reserves its determination as to monetary sanctions against Gandhi, pursuant to the cooperation agreement and Gandhi’s agreement to continue to cooperate with the Division.

CFTC’s Director of Enforcement Comments

James McDonald, the Director of Enforcement, commented:  “Today’s enforcement action shows that the CFTC will continue to aggressively pursue individuals who spoof in our markets.  This action also serves as an example of the range of tools we can bring to bear in rooting out this misconduct.  This includes the fact that, in certain cases under the Division’s enhanced cooperation program, the Commission may elect to postpone the evaluation and assessment of monetary sanctions until cooperation is substantially complete.”

The Order finds that from at least September 2012 through March 2014 at Firm A and from at least May 2014 through October 2014 at Firm B, Gandhi, both individually and in coordination with others, placed thousands of orders to buy or sell futures contracts with the intent to cancel those orders prior to execution.  In doing so, the Order finds that Gandhi intentionally sent false signals of increased supply or demand designed to trick market participants into executing against the orders he wanted filled.

Criminal Action

In a separate action, the Department of Justice, Fraud Section, today announced criminal charges against Gandhi.

The CFTC’s Enforcement Division acknowledges and thanks the staff of the Market Regulation Department of the CME Group, the U.S. Department of Justice, Fraud Section, and the Federal Bureau of Investigation for their assistance.

This case is brought in connection with the CFTC Division of Enforcement’s Spoofing Task Force, and the staff members responsible are Rachel Hayes, Rebecca Jelinek, Allison Sizemore, Stephen Turley, Peter Riggs, Chris Reed, and Charles Marvine.

 

RELEASE Number

7826-18

https://www.cftc.gov/PressRoom/PressReleases/7826-18

October 11, 2018

Federal Court in Chicago Enters $14 Million Judgment against Options Trader for Fraudulent Options Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge John Robert Blakey of the U.S. District Court for the Northern District of Illinois entered a Consent Order for Permanent Injunction (Consent Order), which resolves charges against Defendant Thomas C. Lindstrom, of Winnetka, Illinois, for engaging in fraud in connection with his trading of options on 10-year U.S. Treasury note futures (T-Note Options).

The October 4, 2018 Consent Order stems from a CFTC Enforcement Complaint filed on September 29, 2016, against Lindstrom, a long-time trader of T-Note Options offered on the Chicago Board of Trade (CBOT) (see CFTC Complaint and Press Release 7460-16).  The Consent Order finds that in 2014, Lindstrom engaged in trading activity which had the effect of falsely inflating the value and profitability of his options position, and misrepresented to his employer the quantity of options and the risk associated with his position.  As a result, the Consent Order finds, Lindstrom’s employer, Rock Capital Markets, LLC (Rock Capital) paid Lindstrom $285,000 in draws to which he was not entitled.  Rock Capital lost $13,981,478 as a result of Lindstrom’s misconduct, and ceased operating after 23 years in business.

The Consent Order requires Lindstrom to pay $13,981,478 in restitution, along with an $855,000 civil monetary penalty.  The Consent Order imposes permanent trading and registration bans on Lindstrom, among other injunctive relief.

Lindstrom’s Fraudulent Scheme

The Consent Order finds that Lindstrom exploited a pricing convention set by exchange rule then in effect, whereby deep out-of-the-money options settled each day at the standard minimum tick value of $15.625 prior to expiration.  According to the Consent Order, Lindstrom purchased thousands of these options, which created the appearance of millions of dollars of profits in Lindstrom’s account.  Lindstrom used the appearance of profits to request and receive draws from Rock Capital.  Lindstrom also sent his employer screenshots of his trading account that omitted the thousands of deep out-of-the-money options that he actually held.

According to the Consent Order, from one contract expiration to the next, as the options expired worthless and his account’s phony profits were wiped out, Lindstrom purchased more and more out-of-the-money options to cover the realized losses his account had incurred and create the appearance of more phony profits in his account.  Ultimately, Lindstrom accumulated a position of more than 950,000 deep out-of-the-money T-Note Options.  When Lindstrom’s true position and losses were uncovered, his account had a net liquidation value that was inflated by more than $15 million.

On September 29, 2016, Lindstrom was indicted on criminal charges arising from the same fraudulent conduct that was the subject of the CFTC’s enforcement Complaint.  See United States v. Lindstrom, Case No. 16-cr-631 (N.D. Ill.).  On January 23, 2018, Lindstrom pled guilty to one count of wire fraud and he is scheduled to be sentenced later this year.

The CFTC’s Enforcement Division thanks the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Northern District of Illinois for their cooperation.  CFTC Division of Enforcement staff members responsible for this action are Michael D. Frisch, Jeffrey Gomberg, Joy McCormack, Robert Howell, Scott R. Williamson, and Rosemary Hollinger.

RELATED LINKS

Consent Order: Thomas C. Lindstrom

 

SPEECHES & TESTIMONY

Remarks of CFTC Commissioner Rostin Behnam at the Bipartisan Policy Center, Reference Rate Reform: Impact on the Economy and Consumers

https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam9?utm_source=govdelivery

October 11, 2018 

Introduction

Thank you for the kind introduction. I want to thank the International Swaps and Derivatives Association (ISDA), and the Bipartisan Policy Center for hosting this important event and giving me an opportunity to participate and share my views.  As long as I have worked in Washington, I have relied on BPC’s consensus driven, bipartisan solutions, which in many respects can themselves be considered benchmarks, for policymakers. Before I begin my remarks, please allow me to remind you that the views I express today are my own and do not represent the views of the Commodity Futures Trading Commission (the CFTC or Commission) or my fellow Commissioners.

This morning’s discussion has highlighted that reference rates, despite being little known outside of discrete financial circles, are a crucial component of the global economic ecosystem, woven into countless products that touch the lives of nearly every American consumer.  From the terms of the most basic home mortgage, to student loan agreements, auto financing contracts, and credit card purchases, reference rates are pervasive throughout our real economy. Given the everyday consumer use of these financial products, the past findings of benchmark fraud and manipulation have real word impacts on consumers. Reference rate reform requires an all hands on deck approach to ensure American consumers do not feel the weight of misaligned or manipulated reference rates.  To me, reference rate reform can be summed up in one word:  “trust.”

In the coming years, market participants, regulators, and end-users must leverage all available resources to find consensus driven solutions that will restore transparency, credibility, and above all else accuracy – in a word, trust – to ensure reference rates properly reflect fair and equitable borrowing costs.  With this in mind, I cannot think of a better venue to trust than BPC to host today’s discussion.

The CFTC has been working diligently as a member of the Official Sector Steering Group, the coordinating body set up by the Financial Stability Board in 2013 to drive the reform effort.[1]  To that end, I want to recognize the tremendous work of the Alternative Reference Rates Committee (AARC), and also the work done by the Federal Reserve, U.S. Treasury Department, the UK’s Financial Conduct Authority, the Bank of England, the European Central Bank, and other key stakeholders across the globe.[2]

The timeline of events since the financial crisis is a powerful story of recognition and reform as well as collaboration and innovation in the benchmark space.  Given the Financial Conduct Authority’s decision to no longer compel banks to submit to LIBOR at the end of 2021, we only have a few years to reach consensus and lay the foundations for the next generation reference rates.[3]

CFTC’s Role: Past, Present & Future

Since allegations of benchmark manipulation first surfaced nearly a decade ago, the CFTC has been at the forefront of the global effort to eliminate fraud and manipulation within the rate setting process.  Since June 2012, the CFTC has levied sanctions of more than $3.3 billion for LIBOR-related misconduct. These important enforcement actions, initiated by prior CFTC leadership and continued under current leadership, have not only addressed the bad actions of numerous individuals, but also a failure of financial institutions to police employees.

Personally, I have recently provided a forum for additional discussion of LIBOR through the CFTC’s Market Risk Advisory Committee (MRAC), which I sponsor.

At the CFTC, each Commissioner sponsors an Advisory Committee to provide input and make recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. The MRAC advises the Commission on matters relating to evolving market structures and the movement of risk across clearinghouses, exchanges, intermediaries, market makers and end users.  The Committee examines systemic issues that threaten the stability of derivatives and other financial markets, and makes recommendations to the Commission on how to improve market structure and mitigate risk.  MRAC members include representatives from clearinghouses, exchanges, intermediaries, academia, and end-users.

In July, I convened the MRAC to focus on benchmark reform in an effort to unpack the myriad impending issues specifically related to the derivatives market.[4]  As a starting point, members of the ARRC and key market participants first discussed the role of interest rate benchmarks in the economy, the impetus for LIBOR reform, and the current status of global reform initiatives.  The discussion focused on the efforts of the Financial Stability Board (FSB) and the ARRC, as well as public and private sector coordination efforts in other jurisdictions.  A second panel of speakers addressed the development of the Secured Overnight Financing Rate (SOFR), and SOFR derivatives, and efforts to improve LIBOR.

A final panel discussed the effect of LIBOR reform on the derivatives markets.  The discussion focused on LIBOR reform’s impact on legacy derivatives contracts, the development of fallback language, and key risk management and governance considerations for market participants.  End user and dealer representatives discussed the risks their firms and clients face with respect to LIBOR Reform and how they or their clients are preparing to mitigate those risks.

Just last week, the Commission approved my effort to establish the Interest Rate Benchmark Reform Subcommittee to provide reports and recommendations to the MRAC regarding ongoing efforts to transition U.S. dollar derivatives and related contracts to SOFR, and the impact of such transition on the derivatives markets.[5]

I am excited to lead this important next step by convening market experts from all disciplines to assist the MRAC, and ultimately the Commission, to find regulatory solutions within the jurisdiction of the CFTC that will ensure a smooth transition to an alternative risk-free reference rate.  Topics and issues this subcommittee may consider include the treatment, under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act,[6] of existing derivatives contracts that are amended to include new fallback provisions or otherwise reference RFRs such as SOFR and new derivatives contracts that reference RFRs. The subcommittee also may consider the impact of the transition on liquidity in derivatives and related markets.  I am currently seeking nominations for membership on the subcommittee to ensure that it benefits from the expertise of a diverse and skilled body of individuals.

My goal is to use the subcommittee to complement the work of the AARC by shedding more light on the potential challenges heading toward 2021, identifying the risks for financial markets and individual American consumers, and above all else providing solutions within the derivatives space. My expectation is that the subcommittee’s work – and that of the Commission itself – will recognize the critical importance of benchmarks while demanding integrity and reliability.

There are a number of clear-cut outstanding issues related to the treatment of legacy derivatives that can benefit from in depth discussions within the MRAC, including margin requirements, mandatory clearing, trade execution, and reporting.  Further, it is critical that the CFTC, through the MRAC, establish a robust record in order to resolve and defend any regulatory changes that potentially lie ahead.

Closing

In the past decade, American consumers have overcome significant economic challenges as a result of the financial crisis.  On the heels of the crisis, as consumers struggled with these challenges, benchmark fraud and manipulation further eroded trust between consumers and the financial industry.  I am determined to work, within the context of reference rate reform, to help rebuild trust by shedding light on the importance of reference rates to consumers, and facilitating an inclusive, bipartisan conversation to resolve issues related to derivatives markets.  In that light, I am certain the CFTC and more specifically the Market Risk Advisory Committee can play an important supporting role of all the work that has been done dating back more than five years, but also in the few years ahead.

[1] http://www.fsb.org/what-we-do/policy-development/additional-policy-areas/reforming-financial-benchmarks/

[2] https://www.newyorkfed.org/arrc/index.html

[3] https://www.fca.org.uk/news/speeches/the-future-of-libor

[4] https://www.youtube.com/watch?v=3hOHOZQgwPA&feature=youtu.be

[5] https://www.cftc.gov/PressRoom/PressReleases/7819-18

[6] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 § 712(d), 124 Stat. 1376, 1644 (2010).

 

Technical Notice

FINRA-Bloomberg Indices to be Discontinued

http://www.finra.org/industry/trace/finra-bloomberg-indices-be-discontinued

OCTOBER 10, 2018

Beginning Thursday, November 1, 2018, FINRA will discontinue processing the FINRA-Bloomberg Active U.S. Corporate Bond Indices.

The following FINRA TRACE Corporate and Agency (CA) API files will continue to have historical data available for download for the February 4, 2011 through October 31, 2018 period:

  • Indices (Investment Grade, High Yield)
  • 10 Most Active Index Bonds (Investment Grade, High Yield)
  • Leading and Lagging Movers (Investment Grade, High Yield)
  • Index Components (Investment Grade, High Yield)

Please note that any API queries for these files using a date on or after November 1, 2018 will result in a blank file.

Similarly, historical data will remain available for the February 4, 2011 through October 31, 2018 period on the Indices screen for firms with access to TRACE CA on TRAQS. No indices data after November 1, 2018 will be available for display.

Firms using or republishing the indices should make any necessary arrangements. All other TRACE aggregated data will continue to be available.

Questions regarding this notice should be directed to FINRA Product Management or call (866) 899-2107.

 

SPEECHES & TESTIMONY

Statement of CFTC Chairman J. Christopher Giancarlo on Proposed Amendments to Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors

https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement100918?utm_source=govdelivery

October 9, 2018

In response to the Request for Information issued as part of Project KISS, the Commission received a number of letters from members of the asset management industry suggesting areas of potential rulemaking that, in their view, would make the Commission’s regulations more efficient and less burdensome.  I believe that today’s notice of proposed rulemaking furthers both of those interests.

This proposal would incorporate relief from registration and compliance obligations for commodity pool operators (CPOs) and commodity trading advisors (CTAs) consistent with relief currently provided by staff letters and advisories.  By integrating this relief now into the Commission’s regulations, the Commission is eliminating the need to search for a staff advisory that is over 20 years old and is providing legal certainty to entities currently relying upon the staff relief.  This will make regulatory obligations clearer and thereby facilitate compliance.

Specifically, today’s notice of proposed rulemaking would reduce burdens for CPOs that operate pools in multiple jurisdictions by permitting them to register with respect to the pools that solicit or accept U.S. domiciled participants.  It would maintain an exemption with respect to those offshore activities whose only nexus to the U.S. is that the CPO also manages some U.S. derived assets.  It would also shore up our consumer protection provisions by prohibiting statutorily disqualified persons from operating exempt pools and soliciting and accepting funds, thereby giving such pool participants more confidence in their pool’s operator.  It would ensure that the Commission’s regulations treat similarly situated entities in a commensurate manner by excluding the investment advisers of business development companies under terms identical to those under which the investment advisers of registered investment companies are already excluded.  It would also eliminate the burden of filing data collection forms for persons with no meaningful, reportable information.  Finally, it would provide appropriate relief to the operators and advisors of asset management vehicles whose clients are limited to a single family, consistent with the terms of a comparable regulation adopted by the SEC, furthering our efforts at harmonizing with our fellow regulators in how we treat market participants in this space.

In short, this proposal appropriately tailors regulation and codifies decades-old no action relief in line with the goals of the CFTC’s Project KISS. I expect this proposal to be the first in a series of staff recommendations to streamline and simplify regulation of commodity pool operators and commodity trading advisors.

 

RELEASE Number

7825-18

https://www.cftc.gov/PressRoom/PressReleases/7825-18

October 9, 2018

CFTC Proposes to Streamline Regulations for Commodity Pool Operators and Commodity Trading Advisors

Washington, DC — The Commodity Futures Trading Commission (CFTC) unanimously approved proposed rules as a part of CFTC’s KISS Initiative to simplify regulations for commodity pool operators (CPOs) and commodity trading advisors (CTAs).

“I’m pleased my fellow Commissioners supported today’s proposal, which I hope is the first of a series of long overdue simplifications to Part 4 regulations,” said CFTC Chairman J. Christopher Giancarlo. “These proposed amendments are common sense changes that cut the regulatory mandates on CPOs and CTAs, while simultaneously promoting consumer confidence in the market.  We look forward to working with the public to ensure these rules are adopted and implemented in an effective and transparent method.”

The proposed rules would simplify the regulatory obligations for CPOs and CTAs by codifying long-standing staff advisories and no-action letter relief in the Part 4 regulations.  These rules would enhance consumer protection, as well as boost confidence in the commodity markets, by banning individuals who are legally disqualified to operate investment pools from doing so.  Additionally, the CFTC proposes streamlining registration requirements for CPOs that operate in multiple jurisdictions. The proposal is consistent with the CFTC’s Project KISS initiative, which requested public input on simplifying and modernizing the agency’s regulations to make them less burdensome and costly, while maintaining their regulatory benefits.

Also, under the proposal, investment advisers of business development companies would be treated under the same terms as investment advisers for registered investment companies. The proposed changes would also help advance the CFTC’s ongoing effort to harmonize rules with comparable regulators by channeling Securities and Exchange Commission (SEC) regulations in providing registration relief to CPOs and CTAs whose clients are limited to a single family, and in aligning Part 4 regulations with amendments adopted by the SEC pursuant to the JOBS Act of 2012.

These proposals advance the CFTC’s goal of providing appropriately tailored regulation to a dynamic and innovative industry.

 

News Release

For Release: 

http://www.finra.org/newsroom/2018/cfa-institute-and-finra-foundation-study-debunks-common-myths-about-millennials-and

Thursday, October 4, 2018

Contact(s): 

Angelita Plemmer Williams
FINRA Investor Education Foundation
(202) 728-8988

 J.D. McCartney
CFA Institute
(212) 418 6889

CFA Institute and FINRA Foundation Study Debunks Common Myths about Millennials and Investing

New research finds millennials lack confidence making investment decisions, cite lack of investment knowledge as barrier to investing, and show limited interest in robo-advisors

NEW YORK – Conventional wisdom paints a picture of millennials as aggressive, knowledgeable, and confident when it comes to investing, but a new research study sponsored by CFA Institute and the FINRA Investor Education Foundation debunks common assumptions about millennial investors. The research, titled “Uncertain Futures: 7 Myths About Millennials and Investing,” explores the attitudes and behaviors of millennials when it comes to finances and investing.

According to the research, the majority of millennials lack confidence in financial decision-making and show little interest in robo-advisors. Despite coming of age in a digital world, they prefer to work face to face with a financial professional. The study measures the attitudes of millennials with no investment accounts, those with only retirement accounts, and those with taxable investment accounts. The research also compares millennials with taxable accounts to Gen Xers and Baby Boomers with taxable accounts, to determine how the investing behavior of these three generations differs. In addition, the study examines the pathways that millennials follow to investing, and why some have no investment accounts.

Millennial Myth vs. Reality

“This study dismisses many of the assumptions that are commonly held about millennials and why many of them are not investing,” said FINRA Foundation President Gerri Walsh. “These findings help us better understand the needs and wants of millennials to further enhance investor education efforts that will engage millennials in the financial markets.”

The survey debunks the following myths about millennials and their investing behavior:

Myth 1: Millennials have lofty financial goals.

  • Reality: Contrary to conventional wisdom, millennial investors and non-investors expect to retire at the standard age of 65. Non-investing millennials have very modest financial goals and are focused on surviving month-to-month. In contrast, the financial goals of millennials with taxable accounts mirror those of Gen Xers and baby boomers, such as “saving enough to retire when I want and live comfortably.”

Myth 2: Income and debt are the key barriers to investing.

  • Reality: While income and debt are important, 39% of millennials without taxable investment accounts state that not having enough knowledge about investing is also an important barrier.

Myth 3: Millennials are overconfident in general, so they are probably overconfident about investing.

  • Reality: Far from being overconfident, only 21% of non-investing millennials and millennials with only retirement accounts are very or extremely confident about making investment decisions. This figure increases to 47% for millennials with taxable accounts.

Myth 4:  Millennials are skeptical of the financial services industry and by extension, financial professionals.

  • Reality: Millennials acknowledge and respect the expertise that financial professionals can provide. Nearly three quarters (72%) of millennials working with a financial professional are very or extremely satisfied with their financial professional. Only 15% of millennials not working with a financial professional cite lack of trust as a reason.

Myth 5: Millennials overestimate the investable assets needed to work with financial professionals.

  • Reality: In fact, millennials underestimate the investable assets needed to work with a typical financial professional. Twenty percent of millennials believe there is no minimum amount needed to work with a financial professional. About six in 10 believe a financial professional would work with them if they had $10,000 or less to invest. Millennials also lack guideposts for pricing financial advice. Forty-two percent of millennials do not know what financial professionals charge for their services. When asked to estimate, they guess high: 77% believe financial professionals charge 5% or more of assets under management.

Myth 6: Millennials gravitate toward electronic communication and robo-advisors.

  • Reality: Despite their affinity for technology, 58% of millennials prefer to work face to face with a financial professional, on par with Baby Boomers (60%) and Gen Xers (58%). Only 16% of millennials show strong interest in using robo-advisors.

Myth 7: Millennials are all the same and have similar investing attitudes and behaviors.

  • Reality: This is not a homogenous group. For example, urban millennials are 50% more likely than rural millennials to own taxable investment accounts. Thirty-three percent of male millennials are extremely or very confident in their financial decision-making, compared to only 23% of female millennials. Twenty-eight percent of white millennials have taxable accounts compared with 20% of African-American millennials.

Other important survey findings include:

  • The workplace is a major on-ramp for the road to investing; millennials without access to an employer-sponsored retirement plan may be getting left behind.
  • Innovations in investment products and services currently hold limited appeal for millennials.
  • When it comes to working with a financial professional, 58% of millennials say they prefer to work face to face, which underscores the importance of human interaction and communication.
  • Compared to prior generations, millennials who do invest more often start when they are young — before age 21.
  • The study highlights the importance of parents and family members in the decision making process. Forty-six percent of millennials with investment accounts cited parents and family as key factors in their decision to start investing.

“Millennials are expected to inherit more than $40 trillion in the coming decades,” said Bjorn Forfang, deputy CEO of CFA Institute. “By providing insights into investment preferences and concerns, this research can help financial professionals engage and better serve the needs of the next generation of investors. Investment professionals who take time to demonstrate that client interests are paramount can expect to earn the trust of millennial clients.”

More information about the study—including the survey instrument, data and additional details about the methodology—can be found at www.finrafoundation.org or www.cfainstitute.org.

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion of ethical behavior in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economies grow. There are more than 161,000 CFA charterholders worldwide in 163 countries and regions. CFA Institute has eight offices worldwide and there are 151 local member societies. For more information, visit www.cfainstitute.org or follow us on Twitter at @CFAInstitute and on Facebook.com/CFAInstitute.

About FINRA Foundation

The FINRA Investor Education Foundation supports innovative research and educational projects that give underserved Americans the knowledge, skills and tools to make sound financial decisions throughout life. For more information about FINRA Foundation initiatives, visit www.finrafoundation.org.

 

No 401(k)? No Problem. 5 Ways to Save for Retirement.

OCTOBER 4, 2018

http://www.finra.org/investors/highlights/no-401k-no-problem-5-ways-save-retirement

KAITLYN KIERNAN

Saving for retirement can be daunting, so it’s no surprise that employer-sponsored retirement plans can be a key stepping-stone into the world of investing—and through your investments, to a healthy retirement nest egg.

“While employer-sponsored retirement plans are fantastic tools to help people save for retirement, there are plenty of options for those who don’t have access to one.”

While that’s great for those with access to an employer-sponsored plan, such as a 401(k), 403(b) or 457 plan, those without access to plan at work may find themselves struggling to figure out where to begin saving for their futures.

And that’s particularly true for millennials. About 77 percent of non-investing millennials are employed full-time, but don’t have access to an employer-sponsored plan, or are not employed full-time, according to a recent study by the FINRA Investor Education Foundation and the CFA Institute. That compares to just 22 percent of millennials currently investing with retirement-only accounts.

The thing is, the lack of access to an employer-sponsored plan or to full-time employment doesn’t mean you can’t save for retirement. In fact, saving for the future can be one of the best ways to use your money, no matter your current employment status.

“While employer-sponsored retirement plans are fantastic tools to help people save for retirement, there are plenty of options for those who don’t have access to one,” said Gerri Walsh, President of the FINRA Foundation.

Here’s a look at your options:

Traditional or Roth IRA

Regardless of where you work, you can save through individual retirement accounts, or IRAs, which allow you to make tax-advantaged contributions to save for retirement. You can set up an IRA through a financial services company, such as a bank, brokerage firm or insurance company. IRA account holders can choose how to invest their retirement funds (mutual funds, exchange-traded funds, stocks, bonds and more). The two primary types of IRAs are the traditional IRA and the Roth IRA.

In a traditional IRA, if you aren’t eligible for a retirement plan at work, you can fully deduct your IRA contributions (up to $5,500 in 2018, or $6,500 if you are 50 or older) from your taxable income. The earnings on the investments in a traditional IRA account also grow tax-deferred. That means you’ll only face taxes on earnings when you withdraw money from your traditional IRA account in retirement.

Related: What Does It Mean to Be Pre-Tax or Tax-Advantaged?

While contributions to a Roth IRA are not deductible from your taxable income, money in Roth IRA accounts grows tax-free. That means you generally don’t pay taxes when you withdraw the money in retirement. This makes a Roth IRA a good choice for those who think they will be in the same or a higher tax bracket when they retire. Those with incomes exceeding a certain threshold are not allowed to contribute to Roth IRAs.

For more details on phase-out limits and restrictions around withdrawals and contributions, check out What You Need to Know About IRAs.

Solo 401(k)

Self-employed? Then a Solo 401(k) might be for you. Solo 401(k)s allow individuals to contribute to 401(k) plans in two capacities: as the employee and as the employer. That allows most individuals to make higher contributions than they could through other self-employed retirement plans. And, like other employer-sponsored 401(k) plans, you can choose to make it either a Roth plan or a traditional plan.

There are a couple of drawbacks to solo 401(k)s. For example, setting them up takes a little longer than it does with other plans. While other self-employed retirement plans can be opened with just an online application, solo 401(k)s usually require a few extra steps.

There’s also a bit of deadline pressure. To contribute for a given year, you must open the plan during that calendar year, though contributions to the plan can be made as late as your tax return due date in the following year. For instance, if you want to make a 2018 contribution to a solo 401(k), you must establish your plan by Dec. 31, 2018, but you can continue to contribute until April 15, 2019 (or Oct. 15 if you are filing for an extension.)

SEP IRAs and SIMPLE IRAs

For the self-employed, you have two other IRA options. SEP IRAs (Simplified Employee Pension IRAs) and SIMPLE IRAs (Savings Incentive Match Plan for Employers) follow the same rules as traditional IRAs but feature higher contribution limits.

For SEP IRAs, you can contribute up to 25 percent of your net earnings from self-employment or $53,000 — whichever is lower. For SIMPLE IRAs, as with solo 401(k)s, you can contribute both as an employee and an employer. However, the contribution limits are lower than those of solo 401(k)s.

Unlike solo 401(k)s, SEP IRAs and SIMPLE IRAs do not feature Roth plans, but one advantage is that they generally take less time to establish and, as the latter plan’s name suggests, they are indeed simpler. In addition, SEP IRAs feature later deadlines than solo 401(k)s—you can wait until your tax return due date in 2019 to open (and contribute to) a SEP IRA plan that counts toward the 2018 tax year.

For SIMPLE IRAs, the deadline for establishing a plan is Oct. 1 of the calendar year for which you wish to contribute. Employee contributions can be made up until Jan. 30, of the following year, while employer contributions can be made until the tax return due date of the following year.

If you are ready to start saving for retirement, but don’t have an employer-sponsored plan to help you on your way, consider these alternatives, and you will be one step closer to achieving your financial goals.

“What is most important is that people choose the appropriate plan that is available to them and make a commitment to investing toward their future,” the FINRA Foundation’s Walsh said.

Subscribe to FINRA’s The Alert Investor newsletter for more information about saving and investing.

 

RELEASE Number

7824-18

https://www.cftc.gov/PressRoom/PressReleases/7824-18

October 4, 2018

CFTC and ASIC Sign FinTech Cooperation Arrangement

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) and the Australian Securities and Investments Commission (ASIC) today signed an arrangement to cooperate and support innovation through each other’s financial technology (FinTech) initiatives – CFTC’s LabCFTC and ASIC’s Innovation Hub.

“The signing of this arrangement with ASIC advances our mutual interest in facilitating technological innovation and development to enhance our respective markets,” said CFTC Chairman J. Christopher Giancarlo.  “This arrangement will encourage the development of emerging financial and compliance technologies and continue to enhance global awareness of the critical role of regulators in 21st century digital markets.  I am pleased to announce the signing of this arrangement on the occasion of the CFTC’s first FinTech conference, FinTech Forward 2018: Innovation, Regulation and Education.”

ASIC Chair James Shipton said, “We are delighted to partner with our colleagues at the CFTC to help encourage FinTech and RegTech innovation in both Australia and the United States.  Technological changes are continuing to reshape financial services, markets and the regulatory landscape.  Today’s arrangement assists innovative businesses to grow across borders and allows for greater information sharing and cooperation by the two regulators.”

The Cooperation Arrangement on Financial Technology Innovation (FinTech Arrangement) focuses on information-sharing regarding FinTech market trends and developments. It also facilitates referrals of FinTech companies interested in entering the others’ market, and sharing information and insight derived from each authority’s relevant sandbox, proofs of concept, or innovation competitions.

The FinTech Arrangement follows the launch of the Innovation Hub in March 2015 and LabCFTC in May 2017. Among other activities, these initiatives were set up to help businesses with innovative ideas to navigate the regulatory landscape and engage with the regulator. To date, the Innovation Hub has supported over 300 businesses and authorised over 60 FinTech businesses. LabCFTC has engaged with over 200 entities and organizations since its launch last year and published a request for public input on potential innovation competitions.

The FinTech Arrangement supports both authorities’ efforts to facilitate market-enhancing FinTech innovation and ensures international cooperation on emerging regulatory best practices.

Background

ASIC’s Innovation Hub

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015 ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub assists entrepreneurs to understand how regulation might impact them. The Hub also helps ASIC to monitor and understand fintech developments. ASIC closely collaborates with other regulators to understand developments, and to provide entrepreneurs the opportunity to expand their target markets into other jurisdictions. More information can be found atwww.asic.gov.au/for-business/your-business/innovation-hub/.

CFTC’s LabCFTC

Launched in May 2017, LabCFTC is an initiative aimed at facilitating market-enhancing FinTech innovation, informing policy, and ensuring that we have the regulatory and technological tools and understanding to keep pace with changing markets. It is the agency’s focal point to engage with FinTech innovation and promote fair competition by making the CFTC more accessible to FinTech innovators. LabCFTC is an information source for Commissioners and staff on market-enhancing innovation that may influence policy development.  More information can be found at www.cftc.gov/LabCFTC.

 

RELEASE Number

7823-18

https://www.cftc.gov/PressRoom/PressReleases/7823-18

October 3, 2018

CFTC’s Technology Advisory Committee Announces Agenda for its October 5 Public Meeting

Washington, DC — The Commodity Futures Trading Commission (CFTC) today announced the agenda for the upcoming Technology Advisory Committee (TAC) public meeting on Friday, October 5, 2018 at CFTC’s headquarters in Washington, DC. [For attending, viewing, and listening instructions, see CFTC Press Release 7798-18].

CFTC Commissioner Brian Quintenz is the sponsor of the TAC, and Daniel Gorfine, Director of LabCFTC, is the Designated Federal Officer.

At this meeting, the TAC will hear presentations from the Automated and Modern Trading Markets, Distributed Ledger Technology and Market Infrastructure, and Virtual Currencies TAC subcommittees, and discuss how RegTech is opening up the possibility of machine readable and executable regulatory rulebooks (i.e., Robo Rulebooks), as well as the potential role for regulators to facilitate RegTech.

The meeting is open to the public with seating on a first-come, first-served basis. Members of the public may also watch a live webcast or listen to the meeting via conference call using a domestic toll-free telephone or international toll or toll-free number to connect to a live, listen-only audio feed. Persons requiring special accommodations to attend the meeting because of a disability should notify Daniel Gorfine at (202) 418-5625.

[See Agenda under Related Links]

 

RELEASE Number

7822-18

https://www.cftc.gov/PressRoom/PressReleases/7822-18

October 3, 2018

CFTC Charges Owner of Precious Metals Firm with Defrauding More than 130 Customers in Precious Metals Scheme

Washington, DC – The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Western District of Washington charging Defendant Aaron Michael Scott of Portland, Oregon, with fraud and misappropriation in connection with contracts of sale of precious metals, specifically gold and silver.  Scott conducted his scheme through now-dissolved Washington-based company BMC Worldwide, Inc. (d/b/a Blue Moon Coins) (Blue Moon).

CFTC Director of Enforcement Comments

CFTC Director of Enforcement James McDonald, stated: “As alleged here, the Defendant defrauded more than 130 customers in a widespread scheme in which the Defendant solicited and accepted customer money, purportedly in exchange for precious metals, when in reality the Defendant simply lined his own pockets.  This case shows the CFTC will work tirelessly to protect customers involved in these markets and to hold wrongdoers accountable.  We thank the U.S. Attorney for the Western District of Washington and her Office for their assistance in this case.”

The CFTC Complaint alleges that from at least October 2013 through April 2014, Scott and Blue Moon defrauded more than 130 customers, throughout the United States and elsewhere, who purchased precious metals from Blue Moon.  Scott and Blue Moon are alleged to have lied to their customers and misappropriated their funds, resulting in customer losses of more than $1.3 million.

As alleged, Scott and Blue Moon falsely claimed, among other things, that Blue Moon had precious metals in stock to fulfill customer orders or that Blue Moon would fulfill customer orders by purchasing precious metals from a supplier.  According to the Complaint, Blue Moon did not maintain an inventory of precious metals sufficient to fulfill customer orders and, in many cases, Scott and Blue Moon made no effort to procure precious metals to fulfill customer orders.  Instead, as alleged, Scott and Blue Moon simply misappropriated the vast majority of customer funds for their own use.  Scott and Blue Moon allegedly used customer funds to pay Blue Moon’s operating expenses, invest in other businesses, pay unrelated debts, and refund other disgruntled customers or fulfill other customer orders in the nature of a Ponzi scheme.  Scott and Blue Moon also attempted to prolong and hide their scheme by lying to customers about reasons their orders had not been fulfilled, the Complaint alleges.

In its continuing litigation against Scott, the CFTC seeks full restitution to defrauded customers, disgorgement of ill-gotten gains, permanent registration and trading bans, a civil monetary penalty, and a permanent injunction against future violations of federal commodities laws, as charged.

Related Criminal Indictment

On September 27, 2018, a federal grand jury indicted Scott on eleven counts of wire fraud and five counts of mail fraud in the U.S. District Court for the Western District of Washington.  An initial appearance has been scheduled for October 4, 2018.

CFTC Division of Enforcement staff members responsible for this case are Peter Riggs, James Humphrey, Stephen Turley, Joyce Brandt, Christopher Reed, and Charles Marvine.

*   *   *   *

CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

Also, before investing or trading with a firm, check the firm’s registration status and disciplinary history, if registered, with the National Futures Association. A company’s registration status can be found at: www.nfa.futures.org/basicnet.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Complaint: Aaron Michael Scott

 

RELEASE Number

7821-18

https://www.cftc.gov/PressRoom/PressReleases/7821-18

October 3, 2018

CFTC Wins Trial against Fraudster in Futures Markets

Court Orders Defendant to Pay More than $1.9 Million for Fraudulent Solicitation of Customers, False Statements to the CFTC, and for Violating a Prior CFTC Order against Him

Washington, DC — A Colorado federal court entered final judgment ordering Defendant Gregory L. Gramalegui of Vail, Colorado, d/b/a Emini Trading School, (Defendant or Gramalegui) to pay more than $1.9 million in civil monetary penalties and disgorgement in connection with a federal enforcement action brought by the Commodity Futures Trading Commission (CFTC) alleging fraudulent solicitation of customers in connection with the offering of a futures trading system and an advisory service, making false statements to the CFTC, and violations of a prior CFTC order against the Defendant.

CFTC Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commented:  “The CFTC’s case and this court’s decision make clear that recidivists will be caught and punished and that lying to the CFTC is a grave offense meriting a serious penalty.  This case also shows, yet again, the CFTC’s readiness to prove its case at trial.”

Summary of Opinion

In a 73-page opinion entered on September 26, 2018, following a two-day bench trial, Judge Robert E. Blackburn of the U.S. District Court for the District of Colorado found that Gramalegui engaged in a years-long scheme to fraudulently market and sell a futures trading system that did not work and an advisory service that did not deliver as promised and, in doing so, Gramalegui failed to provide required advertising disclosures to clients and prospective clients.  In addition, the Court found that Gramalegui’s unlawful activity violated a prior CFTC Order entered against him in 2001 based on his marketing of a previous deceptive trading system and advisory service (see CFTC Press Release 4544-01).  Finally, in the first litigated decision under this provision of the Commodity Exchange Act (CEA), the Court found that during the CFTC’s investigation of this matter, Gramalegui repeatedly made false statements to the CFTC.  The enforcement action was initiated by the CFTC on October 19, 2015 (see CFTC Complaint and Press Release 7268-15).

The Court ordered the Defendant to pay a $1,442,070.51 civil monetary penalty and to disgorge $480,690.17 in ill-gotten gains. The Court also imposed permanent trading and registration bans on Defendant and permanently enjoined him from further violations of the CEA and CFTC Regulations, as charged.

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets.  The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC staff members responsible for this case are Laura Brookover (formerly of the CFTC), Ilana Waxman, Raagnee Beri, Daniel Jordan, Michelle Bougas, Erica Bodin, Jeremy Christianson, Michael Loconte, and Rick Glaser.

* * * * * * * * * *

CFTC’s Fraud Advisories

The CFTC has also issued several customer protection Fraud Advisories that provide the warning signs of fraud, including Commodity Trading Systems Sold on the Internet.

Also, before investing or trading with a firm, check the firm’s registration status and disciplinary history, if registered, with the National Futures Association. A company’s registration status can be found at: www.nfa.futures.org/basicnet.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Gregory L. Gramalegui: Findings of Fact, Conclusions of Law, and Orders

 

RELEASE Number

7821-18

https://www.cftc.gov/PressRoom/PressReleases/7821-18

October 3, 2018

CFTC Wins Trial against Fraudster in Futures Markets

Court Orders Defendant to Pay More than $1.9 Million for Fraudulent Solicitation of Customers, False Statements to the CFTC, and for Violating a Prior CFTC Order against Him

Washington, DC — A Colorado federal court entered final judgment ordering Defendant Gregory L. Gramalegui of Vail, Colorado, d/b/a Emini Trading School, (Defendant or Gramalegui) to pay more than $1.9 million in civil monetary penalties and disgorgement in connection with a federal enforcement action brought by the Commodity Futures Trading Commission (CFTC) alleging fraudulent solicitation of customers in connection with the offering of a futures trading system and an advisory service, making false statements to the CFTC, and violations of a prior CFTC order against the Defendant.

CFTC Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commented:  “The CFTC’s case and this court’s decision make clear that recidivists will be caught and punished and that lying to the CFTC is a grave offense meriting a serious penalty.  This case also shows, yet again, the CFTC’s readiness to prove its case at trial.”

Summary of Opinion

In a 73-page opinion entered on September 26, 2018, following a two-day bench trial, Judge Robert E. Blackburn of the U.S. District Court for the District of Colorado found that Gramalegui engaged in a years-long scheme to fraudulently market and sell a futures trading system that did not work and an advisory service that did not deliver as promised and, in doing so, Gramalegui failed to provide required advertising disclosures to clients and prospective clients.  In addition, the Court found that Gramalegui’s unlawful activity violated a prior CFTC Order entered against him in 2001 based on his marketing of a previous deceptive trading system and advisory service (see CFTC Press Release 4544-01).  Finally, in the first litigated decision under this provision of the Commodity Exchange Act (CEA), the Court found that during the CFTC’s investigation of this matter, Gramalegui repeatedly made false statements to the CFTC.  The enforcement action was initiated by the CFTC on October 19, 2015 (see CFTC Complaint and Press Release 7268-15).

The Court ordered the Defendant to pay a $1,442,070.51 civil monetary penalty and to disgorge $480,690.17 in ill-gotten gains. The Court also imposed permanent trading and registration bans on Defendant and permanently enjoined him from further violations of the CEA and CFTC Regulations, as charged.

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets.  The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC staff members responsible for this case are Laura Brookover (formerly of the CFTC), Ilana Waxman, Raagnee Beri, Daniel Jordan, Michelle Bougas, Erica Bodin, Jeremy Christianson, Michael Loconte, and Rick Glaser.

* * * * * * * * * *

CFTC’s Fraud Advisories

The CFTC has also issued several customer protection Fraud Advisories that provide the warning signs of fraud, including Commodity Trading Systems Sold on the Internet.

Also, before investing or trading with a firm, check the firm’s registration status and disciplinary history, if registered, with the National Futures Association. A company’s registration status can be found at: www.nfa.futures.org/basicnet.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Gregory L. Gramalegui: Findings of Fact, Conclusions of Law, and Orders

 

RELEASE Number

7821-18

https://www.cftc.gov/PressRoom/PressReleases/7821-18

October 3, 2018

CFTC Wins Trial against Fraudster in Futures Markets

Court Orders Defendant to Pay More than $1.9 Million for Fraudulent Solicitation of Customers, False Statements to the CFTC, and for Violating a Prior CFTC Order against Him

Washington, DC — A Colorado federal court entered final judgment ordering Defendant Gregory L. Gramalegui of Vail, Colorado, d/b/a Emini Trading School, (Defendant or Gramalegui) to pay more than $1.9 million in civil monetary penalties and disgorgement in connection with a federal enforcement action brought by the Commodity Futures Trading Commission (CFTC) alleging fraudulent solicitation of customers in connection with the offering of a futures trading system and an advisory service, making false statements to the CFTC, and violations of a prior CFTC order against the Defendant.

CFTC Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commented:  “The CFTC’s case and this court’s decision make clear that recidivists will be caught and punished and that lying to the CFTC is a grave offense meriting a serious penalty.  This case also shows, yet again, the CFTC’s readiness to prove its case at trial.”

Summary of Opinion

In a 73-page opinion entered on September 26, 2018, following a two-day bench trial, Judge Robert E. Blackburn of the U.S. District Court for the District of Colorado found that Gramalegui engaged in a years-long scheme to fraudulently market and sell a futures trading system that did not work and an advisory service that did not deliver as promised and, in doing so, Gramalegui failed to provide required advertising disclosures to clients and prospective clients.  In addition, the Court found that Gramalegui’s unlawful activity violated a prior CFTC Order entered against him in 2001 based on his marketing of a previous deceptive trading system and advisory service (see CFTC Press Release 4544-01).  Finally, in the first litigated decision under this provision of the Commodity Exchange Act (CEA), the Court found that during the CFTC’s investigation of this matter, Gramalegui repeatedly made false statements to the CFTC.  The enforcement action was initiated by the CFTC on October 19, 2015 (see CFTC Complaint and Press Release 7268-15).

The Court ordered the Defendant to pay a $1,442,070.51 civil monetary penalty and to disgorge $480,690.17 in ill-gotten gains. The Court also imposed permanent trading and registration bans on Defendant and permanently enjoined him from further violations of the CEA and CFTC Regulations, as charged.

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets.  The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC staff members responsible for this case are Laura Brookover (formerly of the CFTC), Ilana Waxman, Raagnee Beri, Daniel Jordan, Michelle Bougas, Erica Bodin, Jeremy Christianson, Michael Loconte, and Rick Glaser.

* * * * * * * * * *

CFTC’s Fraud Advisories

The CFTC has also issued several customer protection Fraud Advisories that provide the warning signs of fraud, including Commodity Trading Systems Sold on the Internet.

Also, before investing or trading with a firm, check the firm’s registration status and disciplinary history, if registered, with the National Futures Association. A company’s registration status can be found at: www.nfa.futures.org/basicnet.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Gregory L. Gramalegui: Findings of Fact, Conclusions of Law, and Orders

 

RELEASE Number

7820-18

https://www.cftc.gov/PressRoom/PressReleases/7820-18

October 3, 2018

Federal Court Finds that Virtual Currencies Are Commodities

Court Denies Defendants’ Motion to Dismiss in Commodity Fraud Case Involving the Virtual Currency My Big Coin

Washington, DC — On September 26, 2018, Senior Judge Rya W. Zobel of the U.S. District Court for the District of Massachusetts, entered an order holding that the Commodity Futures Trading Commission (CFTC) has the power to prosecute fraud involving virtual currency and denying the defendants’ motion to dismiss the CFTC’s amended complaint.

CFTC Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commenting on the ruling, stated:  “This is an important ruling that confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets.  This ruling, like the one in McDonnell from Judge Weinstein in the Eastern District of New York, recognizes the broad definition of commodity under the CEA, and also that the CFTC has the power to prosecute fraud with respect to commodities including virtual currencies.  We will continue to police these markets in close coordination with our sister agencies.”

Summary of Order

Agreeing with the CFTC’s arguments, the Court held that the CFTC had sufficiently alleged that the particular virtual currency at issue, My Big Coin (MBC), was a commodity under the Commodity Exchange Act (CEA) because the CFTC alleged that MBC “is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin).”  According to the Court, the term “commodity” “includes a host of specifically enumerated agricultural products as well as ‘all other goods and articles . . . and all services rights and interests . . . in which contracts for future delivery are presently or in the future dealt in.”  The Court specifically agreed with the CFTC that “Congress’ approach to defining ‘commodity’ signals an intent that courts focus on categories—not specific items.”  The Court found that ‘[t]his broad approach also accords with Congress’s goal of ‘strengthening the federal regulation of the . . . commodity futures trading industry,’ . . . since an expansive definition of ‘commodity’ reasonably assures that the CEA’s regulatory scheme and enforcement provisions will comprehensively protect and police the markets.”

The Court also rejected Defendant’s argument that the CFTC’s anti-fraud authority over MBC extended only to fraudulent market manipulation, holding that the “broad language in the statute” “explicitly prohibit[s] fraud even in the absence of market manipulation.”

These holdings are consistent with the decisions obtained by the CFTC earlier this year in the case of CFTC v. McDonnell in the Eastern District of New York (see CFTC Release 7702-18, March 6, 2018; CFTC Release 7774-18, August 24, 2018).

The order arises from a CFTC federal court enforcement action charging defendants Randall Crater; Mark Gillespie; John Roche; Michael Kruger; My Big Coin Pay, Inc.; and My Big Coin, Inc.; and relief defendants Kimberly Renee Benge; Kimberly Renee Benge d/b/a Greyshore Advertisement a/k/a Greyshore Advertiset; Barbara Crater Meeks; Erica Crater; Greyshore, LLC; and Greyshore Technology, LLC with commodity fraud and misappropriation related to the solicitation of customers for the virtual currency MBC.

The CFTC’s amended complaint alleges that since at least January 2014, the defendants operated a fraudulent virtual currency scheme in which they solicited customers to purchase a fully-functioning virtual currency, MBC, by repeatedly making false and misleading claims about its value, usage, trade status, and financial backing.  As alleged in the amended complaint, Defendants lied that MBC could be bought, sold, donated, used to make purchases, and was actively trading.  To give the illusion that MBC was a safe bet, Defendants also lied that MBC was backed by millions of dollars in gold, and would be used to stabilize the economies of twenty-two countries, as alleged in the amended complaint.  The amended complaint also alleges that Defendants misappropriated customer funds by conning people into giving them more than $6 million for what Defendants represented was a fully-functioning virtual currency.  Defendants allegedly used these misappropriated funds to purchase a home, antiques, fine art, jewelry, luxury goods, furniture, interior decorating and other home improvement services, travel, and entertainment.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, rescission, disgorgement of ill-gotten gains, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement and CFTC Virtual Currency Task Force staff responsible for this case are Traci Rodriguez, Jonah McCarthy, Patricia Gomersall Hillary Van Tassel, Dan Ullman, John Einstman, and Paul Hayeck.

* * * * * * * * * *

CFTC’s Customer Advisory on the Risks of Virtual Currency Trading

The CFTC has issued a Customer Advisory on the Risks of Virtual Currency Trading to inform the public of possible risks associated with investing or speculating in virtual currencies or recently launched Bitcoin futures and options.  The CFTC has also issued several other customer protection Fraud Advisories that provide the warning signs of fraud.

Also, before investing or trading with a firm, check the firm’s registration status and disciplinary history, if registered, with the National Futures Association. A company’s registration status can be found at: www.nfa.futures.org/basicnet.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

RELATED LINKS

Memorandum of Decision: My Big Coin Pay, Inc. et al.

 

RELEASE Number

7819-18

https://www.cftc.gov/PressRoom/PressReleases/7819-18

October 3, 2018

CFTC Commissioner Behnam Announces the Establishment of New Subcommittee of the Market Risk Advisory Committee and Seeks Nominations for Membership

Washington, DC — Commodity Futures Trading Commission (CFTC or Commission) Commissioner Rostin Behnam announced today that the Commission has voted to establish the Interest Rate Benchmark Reform Subcommittee (Subcommittee) under the CFTC’s Market Risk Advisory Committee (MRAC).  Commissioner Behnam, sponsor of the MRAC, is seeking nominations for membership on the Subcommittee through a formal request in the Federal Register.  The deadline for submissions is October 16, 2018.

“Following the July 12, 2018, MRAC meeting, which examined global benchmark reform efforts, I am excited to lead this important next step by convening market experts from all disciplines to assist the MRAC, and ultimately the Commission, to find regulatory solutions, within the jurisdiction of the CFTC that will ensure a smooth transition to an alternative risk-free reference rate,” said Commissioner Behnam.

Commissioner Behnam established the Subcommittee to provide reports and recommendations to the MRAC regarding ongoing efforts to transition U.S. dollar derivatives and related contracts to a risk-free reference rate (RFR) — the Secured Overnight Financing Rate (SOFR) — and the impact of such transition on the derivatives markets.  Topics and issues this Subcommittee may consider include, but are not limited to, the following:

  • The treatment, under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, of existing derivatives contracts that are amended to include new fallback provisions or otherwise reference RFRs such as SOFR and new derivatives contracts that reference RFRs; and
  • Impact on liquidity in derivatives and related markets during the transition.

In the Federal Register Notice published on October 2, 2018, Commissioner Behnam invites members of the public to nominate individuals, not currently serving on the MRAC, for membership on the Subcommittee.  Self-nominations are also acceptable.  Please see the Federal Register Notice for instructions on nomination submissions.

 

Information Notice – 10/02/18

Administrative Changes to the Continuing Education Regulatory Element Programs

https://www.finra.org/industry/information-notice-100218

Effective Date: December 8, 2018

Summary

Effective December 8, 2018, the content from the S106 and S901 Regulatory Element Continuing Education (CE) Programs will become part of the S101 Regulatory Element CE Program. The S106 and S901 CE Programs will be retired as stand-alone programs. Individuals who previously completed these programs instead will be required to complete the S101 CE Program. The S101 CE Program will include new personalized modules for each of the following representative categories: Investment Company and Variable Contracts Products, Investment Banking, and Research.

Questions regarding this Notice should be directed to:

Monica Schumacher, Associate Director, Continuing Education (CE), at (212) 858-4018;

or

David Scrams, Senior Director, Testing & Measurement, CE, at (240) 386-5950.

View Full Notice (PDF 78.07 KB)

 

SPEECHES & TESTIMONY

https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo56?utm_source=govdelivery

Remarks of Chairman J. Christopher Giancarlo at Economic Club of Minnesota, Minneapolis, Minnesota

“Regulatory Enforcement & Healthy Markets: Perfect Together!”

October 2, 2018

Introduction

Good afternoon.  Thank you for the leadership of the Economic Club and for the invitation to speak here.  It is an honor.  The Economic Club, in conjunction with the great economics department at the University of Minnesota, has made Minneapolis a center of economic thought.  Through economists like Walter Heller, and titanic figures like Bill Frenzel and Mark Olson, Americans listen carefully to the voices that come out of Minneapolis.  You provide an important platform for sharing ideas and informing the community.  I would particularly like to thank Chairman Mark Kennedy, President Stephen Sanger, and Executive Director Kristin Robbins for making this possible.  I also want to recognize my friend, Neel Kashkari.

Today I would like to talk about enforcement of regulations in financial and commodities markets.  At the CFTC, regulatory enforcement is a priority and a bipartisan one.  As I have made clear many times, there will be no pause, no let up, and no relaxation in the CFTC’s efforts to enforce the law and punish wrongdoing.[1]  We must keep the markets safe and fair for consumers.  I am grateful for the commitment of my fellow Commissioners who bring a high degree of intelligence and range of perspectives to bear on enforcement matters.  They ask the right questions and seek the right answers to find the right balance in the cause of rule enforcement.

At the CFTC, our mission is to foster open, transparent, competitive, and financially sound markets.  We also want our markets to be deep, liquid and vibrant attracting the world’s capital essential to the current resumption of strong economic growth.

Today, I want to talk about why a vigorous enforcement program is essential to fulfilling that mission and why a strong—and disciplined—enforcement program is compatible with strong economic growth and American prosperity.  Indeed, those who have studied the issue have concluded that strong enforcement is necessary for strong markets.[2]

The connection between enforcement and economic growth makes sense.  For the economy to grow, businesses and individuals need to know they’re competing on a level playing field.  They know—and we know—that’s essential for them to thrive. Unlawful activity puts honest businesses at a disadvantage.  It impedes free and fair competition.  It dampens economic growth.  And it undermines our democratic values, public accountability, and the rule of law.  That’s why we’re committed to ensuring all companies and individuals in our markets play by the rules.

I want to talk today about some of the developments in our enforcement program, and some of the ways we’ve worked to grow the program over the past year.  I was confirmed as Chairman in August 2017.  And our Fiscal Year—which ran from October 2017 through September 2018—just ended.  So in offering these thoughts I’ll focus principally on the activities of the Fiscal Year that just closed.

Overview

I’ll start with an overview.  Now, I want to make clear that a strong enforcement program is about more than just numbers.  You can’t get a complete picture of an enforcement program through quantitative metrics alone.  You also don’t want Federal agencies to be motivated to hit certain headline numbers when enforcing the law.  That is not sound public policy.

But some have asserted that regulatory agencies under this administration have gone soft on regulatory enforcement.  Those critics have primarily used numbers to make their case.[3]  So, I’ll spend a few minutes talking about the quantitative measures of the past year—my first year since Senate confirmation—to show that, even on its own terms, this criticism is unfounded.  In fact, by any measure, enforcement during this past year has been among the most vigorous in the history of the CFTC.

So, let’s do the numbers:[4]

More enforcement actions.  During the last Fiscal Year, the CFTC filed 83 enforcement actions.  That’s among the highest number of actions in the Commission’s history, and an approximately 25% increase from each of the last three years of the prior administration.  A 25% increase.

More penalties.  Not surprisingly, the penalties resulting from those cases also reflect our commitment to combatting wrongdoing in our markets.  The total amount of civil monetary penalties imposed by the Agency during the last Fiscal Year was approximately $900 million.  That total is higher than five of the eight years from 2009 to 2016.  And of those $900 million, we collected about $800 million—or just under 90 percent.  That would have ranked second highest during that same eight year period from 2009 to 2016.  The second highest.

More large-scale matters.  When it comes to numbers, total penalty amounts can serve as imprecise measures of success, because a small number of filings with relatively high penalties can account for a large percentage of the overall amount. So, could it be that this year’s enforcement program has been driven by a single (or just a few) large cases?  In a word, no:  This year’s enforcement effort reflects the broadest range of significant actions in the history of the Commission.  During the last Fiscal Year, we brought more large-scale matters, against those whose actions threaten the basic integrity of the market, than in any previous year in Commission history.  From 2009 to 2016, the CFTC imposed monetary judgments of more than $10 million in an average of three cases per year.  This past year, we imposed such monetary judgments in ten cases.[5]  That’s more than three times the previous average.

Similarly, we have brought more manipulative conduct and spoofing cases than ever before.  From 2009 to 2016, the Commission, on average, brought five such cases per year.  This year, we filed more than 25—more than five times the previous annual average.  More than five times the previous average.

More Accountability.  But how do you know who we’re charging?  Are we going after the small fish while letting the big ones off the hook?  Not a chance.  We filed more charges against financial institutions than in all but one of the 8 years from 2009 to 2016.  We have prioritized individual accountability, with approximately 70% of our cases involving charges against individuals.  And these include significant numbers of individuals at financial institutions, as well as individual traders at proprietary trading firms and managed funds.  We’ve brought these cases without fear or favor.  We’ve given no one a pass.

More partnering with criminal law enforcement.  We’ve also filed far more actions in parallel with our criminal law enforcement partners than in any previous year.  We filed 14 such parallel actions this Fiscal Year—more than any other year from 2009 to 2016.  This means that wrongdoers in our markets now face the prospect not just of substantial fines, but also, in appropriate cases, the threat of criminal prosecution.

More whistleblower awards.  On top of all this, we’ve developed our whistleblower program in unprecedented ways.  We strengthened the protections we provide to whistleblowers that come forward.  We granted more whistleblower awards this past Fiscal Year than in the entire history of the program.  And we issued the largest whistleblower awards in the history of the Agency.  All of this has been designed to ensure more whistleblowers come forward to tell the Agency about any misconduct occurring in our markets.  It seems to be working, as we’ve received more whistleblower tips and complaints this past year than in any previous year.

Record Numbers.  So, those are the numbers.  By any measure, they are impressive.  They demonstrate that the CFTC remains undaunted and effective in pursuit of its enforcement mission.

But as I’ve said, numbers tell only a small part of the story.  In our view, a robust enforcement program should cover the waterfront.  It should detect the most pernicious and harmful wrongdoing.  It should make clear that nobody—no matter how big or well connected—is above the law.  It should charge not only the entities responsible for wrongdoing, but also the individuals who carried out the illegal action.  And when criminal prosecution and the prospect of imprisonment are warranted, an effective enforcement program should work alongside its criminal law partners to ensure that justice is achieved.  Those are some of the principles we have strived to achieve as part of our enforcement program, and what I’ll turn to now.

Manipulative Conduct Cases

Just a moment ago, I highlighted cases involving manipulative conduct or disruptive trade practices like spoofing as particularly noteworthy.  Why is that the case?

One primary function of our markets is to facilitate the price discovery process. And one of our principal responsibilities as regulator of these markets is to ensure that the price discovery process is sound.  That means identifying, investigating, and aggressively prosecuting those who seek to interfere with this price discovery process.  Our experience and market intelligence teaches that manipulative trading practices undermine price discovery, drive liquidity from the markets, and put honest brokers at a disadvantage.

These cases are complex, and they are difficult.  They require to us stay one step ahead of the most sophisticated wrongdoers in our markets.  As one court put it, “[t]he methods and techniques of manipulation are limited only by the ingenuity of man.”[6]  That is why I have directed CFTC Staff to redouble our efforts to meet the challenges posed by those who might use their ingenuity to undermine the integrity of our markets.  And they have delivered.

That’s reflected not just in the numbers—not just in the fact that we filed five times more cases involving this type of misconduct than the previous annual average. It’s also reflected in the cases themselves.

We continued to file significant cases involving benchmark manipulation.[7]  We filed cases involving traditional forms of manipulative conduct like efforts to corner the market.[8]  We charged new forms of manipulative conduct—like those that abuse technology or seek to manipulate the structure of the electronic order book.[9]  And we’ve charged particularly complex and novel patterns of manipulation—including those that cross-markets, cross-exchanges, and even cross international borders.[10]

We’ve done all this, it bears mentioning, without missing a beat in other areas of our program.  At the same time we’ve focused on the integrity of the price discovery process, we’ve also continued our commitment to protect customers and root out retail fraud in our markets.  More than thirty of our cases this Fiscal Year involve retail fraud.  That is in line with the annual average in the past decade at the Agency.  These filings range from fraud in the markets for retail forex, precious metals, and virtual currencies among others.  Some of these cases—including a series of recent binary options fraud filings—set new precedents within the CFTC for how to aggressively identify and prosecute this type of retail fraud.[11]  And we have not been shy to take these cases to trial, winning significant trial victories in this area over the past year—including a precedent setting victory in a trial involving Bitcoin fraud.[12]

Coordination with Criminal Authorities and Other Regulators

Coordination with Criminal Authorities

I have given some metrics for the significant ramp up in CFTC coordination with our law enforcement partners and self-regulatory organizations.  In particular, we’ve increased our efforts to work with the Department of Justice (DOJ), as reflected by the significantly increased number of parallel filings this past Fiscal Year.

As I’ve made clear, a robust combination of criminal and regulatory enforcement in our markets is not only appropriate,[13] but also critical to deterring violators, punishing misconduct, and preserving market integrity and protecting customers. As part of our goal to deter wrongdoers, we recognize there is no greater deterrent than the prospect of criminal prosecution—and the reality of time in jail.

Perhaps the most notable reflection of our commitment on this score was the announcement of the parallel actions involving spoofing and manipulative conduct we filed together with the Department of Justice in January 2018.  A senior member of the Justice Department stated that these filings constituted “the largest futures market criminal enforcement action in Department history.”[14]  The largest.

These filings were equally significant for the CFTC.  We filed cases charging three financial institutions and six individuals with spoofing and manipulative conduct.[15]  One of the resolutions with a financial institution marked the largest civil monetary penalty ever imposed by the Commission for spoofing-related misconduct.[16]  The largest.

But the Commission has taken a number of other actions in parallel with our criminal counterparts as well.  These included cases ranging from retail fraud[17] to virtual currency fraud,[18] to cases where the defendant sought to obstruct our investigation,[19] to name a few.

We are grateful to the Department of Justice for their continued coordination in these matters.  And we expect this to be an area of continued growth for our enforcement program.

Coordination with Other Regulators and Self-Regulatory Organizations

Beyond our coordination with DOJ, we’ve also focused on increasing coordination with other government agencies and self-regulatory organizations.  We can most effectively protect our markets when working closely with these regulatory partners.  That’s particularly true as our markets evolve and become more interconnected.  Bad actors don’t conform their misconduct to the technical boundaries of different regulatory jurisdictions.  So regulators must work together to ensure the entire scope of the misconduct is identified, investigated, and prosecuted—particularly when the wrongdoing stretches across different regulatory jurisdictions.

We’ve done that this past Fiscal Year.  Our increased coordination with the SEC is particularly noteworthy.  To give you one example, in a series of cases filed in Federal District Court in Florida last week, we took action, in parallel with the SEC, in charging a massive national and international binary options fraud ring, where the alleged fraud spanned across both CFTC and SEC jurisdictions and harmed approximately 75,000 victims.[20]

To offer another example:  Together with parallel actions of the SEC, DOJ, and the Federal Bureau of Investigation (FBI), we filed an action against a trading platform and its CEO for unlawfully offering products margined in Bitcoin without the required anti-money laundering protections in place.  We brought the action charging the portion of the activity involving derivatives, the SEC charged the portion relating to equities, and DOJ and the FBI secured an order seizing the platform’s website and shutting it down.[21]

I want to thank SEC Chairman Clayton and the SEC’s enforcement team for their continued commitment to working together to police and protect our respective markets.

We’ve also coordinated our enforcement activities with self-regulatory organizations like the NFA and the exchanges.  In a series of cases involving on-exchange trading misconduct, we brought actions in parallel with exchanges like the CME and NADEX. [22]  We’ve done the same with the National Futures Association (NFA): we’ve filed a number of actions in parallel with the NFA,[23] but we’ve also called upon NFA to collect restitution, assist in identifying victims, and serve as a post-judgment monitor.[24]

All of this reflects the view that as regulators, we are better together than we are on our own.  This point—that we’re better together—is uncontroversial.  But it’s a lot easier to say than it is to achieve.  It requires a daily commitment from all involved to work together, to accommodate one another, and—from time to time—to give each other the benefit of the doubt.  I have made it clear this is what I expect our Staff to do.  Leaders of the other agencies and organizations have made it clear that’s what they expect as well.  And it’s what the American people expect.  I am grateful to the Staff of the CFTC and of our sister agencies and organizations for following through on this commitment.

Individual Accountability

Another priority for our enforcement program has been to enhance individual accountability.  It’s becoming widely recognized across the enforcement community that one of the most effective ways to combat corporate misconduct is by seeking accountability from individuals who committed the wrongful acts.  Individual accountability ensures that the person committing the illegal act is held responsible and punished; it deters others, fearful of facing individual punishment, from breaking the law in the future; it incentivizes companies to develop cultures of compliance and to report to regulators when they find bad actors in their entity; and it promotes the public’s confidence that we are achieving justice.

This past year, we made great strides in achieving this goal of individual accountability.  During the last Fiscal Year, approximately 70% of the Commission’s actions involved charges against one or more individuals.  These charges—particularly when coupled with our increased coordination with the criminal authorities—should send a significant deterrent message to those in our markets who might otherwise be tempted to engage in wrongdoing.

Part of our effort to increase individual accountability has involved the continued development of our cooperation and self-reporting program.[25]  This cooperation program was started by my predecessor, Chairman Massad.  It had my support then and I embrace it today.  This program—which grants substantial benefits to those who come forward, take responsibility for their own wrongdoing, and assist in the Commission’s investigations—has allowed us to bring cases and charge individuals that we would not otherwise have been able to charge.

The end goal here extends well beyond the number of cases filed.  We intend for our enhanced emphasis on individual accountability, cooperation, and self-reporting to have a far broader social impact.  That is, to foster a culture of compliance in our markets.  I can imagine a CEO standing in front of the company’s new hires on their first day on the job.  I can imagine the CEO telling the new staff about the various trainings to come as part of the onboarding process—compliance, ethics, human resources and the like.  And I imagine—this is our goal with the cooperation and self-reporting program—the CEO telling the new staff that, notwithstanding these various internal company regimes, if they break the law, their problems won’t stop with the compliance, ethics, or human resources department.  Their problems will come from the CFTC, DOJ, and the FBI. Because the CEO is committed to identifying any misconduct, and reporting it out to the relevant authorities.  That sort of commitment is what we’re seeking to foster.[26]  And that sort of commitment, we believe, is what creates the culture of compliance we want in all of our market participants.

This is the point, ladies and gentlemen.  The purpose of regulatory enforcement is a reasoned and disciplined one: to foster a culture of compliance in US financial markets. A culture of ethical behavior that underpins open, competitive, and vibrant market activity essential to strong economic growth and American prosperity.

Whistleblower Office

Finally, we have emphasized the integral role our Whistleblower Program plays in our enforcement effort and for the Agency more broadly.  Demonstrating our commitment to protecting whistleblowers, the Commission finalized Rules prohibiting employers from retaliating against whistleblowers and from taking steps to impede would-be whistleblowers from coming forward.[27]

A goal in strengthening the whistleblower protections was, of course, to ensure that whistleblowers would not be penalized for their decisions to come forward to report wrongdoing.  But the programmatic goal was broader:  To offer whistleblowers additional incentives to report wrongdoing to the Commission, thus increasing both the quantity and quality of information available to us about misconduct in our markets.

In the same vein, the Commission also highlighted the incentives for whistleblowers to come forward through the awards it issued this past year. Coming into this Fiscal Year, the Commission had issued a total of four whistleblower awards.  This past year, the Commission issued five such awards—more than the cumulative total previously issued.  The five awards from last Fiscal Year total more than $75 million.  This includes the CFTC’s largest ever award of approximately $30 million.

Our goal to incentivize more whistleblowers to come forward appears to be working.  Whistleblowers submitted more tips and complaints to the CFTC than in any previous year.  I expect this area to continue to grow as well.

Conclusion

Before I entered government service, I spent a decade and a half working on Wall Street.  My commitment to robust regulatory enforcement derives from that experience.  I have enormous respect for the good men and women of America’s financial service industry who conduct themselves each and every day with integrity and honesty.  They are the ones who are betrayed by the very few who engage in wrongful behavior.

It is the duty of government generally and the particular mission of the CFTC to fairly enforce market regulation and prosecute bad actors.  We must fulfill that mission so that America’s financial markets are places for good people to fulfill their dreams, grow the economy and increase prosperity.

I have been critical of past policy choices that seemed blind to adverse implications for economic growth and vitality.  As someone who serves during an administration pledged to broad based prosperity, I believe the CFTC’s commitment to robust enforcement plays an important role in the health and safety of US financial markets.  I am certain that, when conducted in a disciplined fashion, active enforcement is compatible with vibrant economic growth.

In my home state of New Jersey, we have a slogan: New Jersey & you – perfect together.  As the Chairman of the CFTC, I have a similar saying: “Regulatory enforcement & healthy markets: perfect together!”

I began by talking about some of the great voices out of Minnesota.  One of them was Walter Heller, a giant in the field and head of the Council of Economic Advisors under Presidents Kennedy and Johnson.  He put the Economics Department on the map at University of Minnesota and was well known to many of the founders of the Economics Club.  Perhaps the most famous remark by Dr. Heller was that in economics we should focus on the “practicalities.”  Principle may guide us, but we must not forget the practicalities.

I believe enforcement is a way that principles are practicalities.  By enforcing our principles we make the practicalities of commerce work in ways that benefit all Americans.

Thank you.

[1] See J. Christopher Giancarlo, Remarks of Acting Chairman J. Christopher Giancarlo Before the 42nd Annual International Futures Industry Conference (Mar. 15, 2017), http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20#P17_3230.

[2] See John C. Coffee, Jr., Law and the Market: The Impact of Enforcement, 156 U. Pa. L. Rev. 229, 242-46 (2007) (explaining that vigorous enforcement in U.S. markets contributes to higher valuations and reduced cost of capital).

[3] See, “Wall Street Impunity: On the Ten-Year Anniversary of the 2008 Financial Crisis, the Trump Administration Is Prepared to Go Soft on Big Banks,” Public Citizen, Sept. 6, 2018, at: https://www.citizen.org/sites/default/files/wall_street_crash_enforcement_v13.pdf

[4] The CFTC will publish final fiscal year enforcement statistics in fourth quarter 2018.

[5] In re Cargill, Inc., CFTC No. 18-03 (Nov. 6, 2017); In re Deutsche Bank AG, CFTC No. 18-06 (Jan. 29, 2018); In re UBS AG, CFTC No. 18-07 (Jan. 29, 2018); In re Deutsche Bank Securities Inc., CFTC No. 18-09 (Feb. 1, 2018); In re Société Générale S. A., CFTC No. 18-14 (June 4, 2018); In re JPMorgan Chase Bank, N.A., CFTC No. 18-15 (June 18, 2018); In re BNP Paribas Securities Corp., CFTC No. 18-19 (Aug. 29, 2018); In re ICAP Capital Markets LLC, CFTC No. 18-33 (Sept. 18, 2018); In re Bank of America, N.A., CFTC No. 18-34 (Sept. 19, 2018); In re Kooima & Kaemingk Commodities, Inc., CFTC No. 18-39 (Sept. 26, 2018).

[6] Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971).

[7] In re Deutsche Bank Securities Inc., CFTC No. 18-09 (Feb. 1, 2018); In re Société Générale S. A., CFTC No. 18-14 (June 4, 2018); In re JPMorgan Chase Bank, N.A., CFTC No. 18-15 (June 18, 2018); In re BNP Paribas Securities Corp., CFTC No. 18-19 (Aug. 29, 2018); In re ICAP Capital Markets LLC, CFTC No. 18-33 (Sept. 18, 2018); In re Bank of America, N.A., CFTC No. 18-34 (Sept. 19, 2018).

[8] E.g., In re Statoil ASA, CFTC No. 18-04 (Nov. 14, 2017).

[9] E.g., CFTC v. Thakkar, No. 18-CV-00619 (N.D. Ill. filed Jan. 28, 2018); In re Geneva Trading USA, LLC., CFTC No. 18-37 (Sept. 20, 2018).

[10] E.g., In re Victory Asset, Inc., CFTC No. 18-36 (Sept. 19, 2018); In re Ramsey, CFTC No. 18-49 (Sept. 27, 2018).

[11] CFTC v. Atkinson, No. 18-CV-23992 (S.D. Fl. filed Sept. 27, 2018); CFTC v. Montano, 18-CV-1607 (M.D. Fl. filed Sept. 27, 2018); In re Berry, CFTC No. 18-42 (Sept. 27, 2018); In re Pollen, CFTC No. 18-43 (Sept. 27, 2018); In re Barrett, CFTC No. 18-44 (Sept. 27, 2018); In re Brookshire, CFTC No. 18-45 (Sept. 27, 2018); In re Schranz, CFTC No. 18-46 (Sept. 27, 2018); In re Giacca, CFTC No. 18-47 (Sept. 27, 2018); In re Stephenson, CFTC No. 18-48 (Sept. 27, 2018).

[12] See CFTC v. McDonnell, No. 18-CV-361, 2018 WL 4090784 (E.D.N.Y. Aug. 28, 2018); see also CFTC v. Gramalegui, No. 15-CV-02313, 2018 WL 4610953 (D. Colo. Sept. 26, 2018).

[13] Section 9(a)(5) of the Commodities Exchange Act, 7 U.S.C. § 13(a)(5) (2012) (explaining that violations of the federal commodities laws and regulations can constitute a criminal violation if done “willfully”).

[14] John P. Cronan, Acting Assistant Attorney General John P. Cronan Announces Futures Markets Spoofing Takedown (Jan. 29, 2018).

[15] See James M. McDonald, Statement in Connection with Manipulation and Spoofing Filings (Jan. 29, 2018) (announcing filings of eight actions—charging six individuals and four companies—with manipulative and spoofing misconduct, which included the announcement of the largest penalty ever imposed by the CFTC for spoofing-related misconduct).

[16] In re Deutsche Bank AG, Inc., CFTC No. 18-06 (Jan. 29, 2018).

[17] CFTC v. Carter, No. 18-CV-00242 (N.D. Ill. filed Jan. 12, 2018).

[18] CFTC v. Kantor, No. 18-CV-02247 (E.D.N.Y. filed Apr. 17, 2018).

[19] CFTC v. Landgarten, No. 18-CV-03824 (E.D.N.Y. filed July 2, 2018).

[20] CFTC v. Atkinson, No. 18-CV-23992 (S.D. Fl. filed Sept. 27, 2018); CFTC v. Montano, 18-CV-1607 (M.D. Fl. filed Sept. 27, 2018); In re Berry, CFTC No. 18-42 (Sept. 27, 2018); In re Pollen, CFTC No. 18-43 (Sept. 27, 2018); In re Barrett, CFTC No. 18-44 (Sept. 27, 2018); In re Brookshire, CFTC No. 18-45 (Sept. 27, 2018); In re Schranz, CFTC No. 18-46 (Sept. 27, 2018); In re Giacca, CFTC No. 18-47 (Sept. 27, 2018); In re Stephenson, CFTC No. 18-48 (Sept. 27, 2018).

[21] CFTC v. 1Pool Ltd., No. 18-CV-02243 (D.D.C. filed Sept. 27, 2018); see also Federal Bureau of Investigation, Information on 1Broker.com Seizure (Sept. 27, 2018), at: https://www.fbi.gov/investigate/cyber/information-on-1broker-com-seizure (detailing seizure of 1Broker.com trading platform).

[22] E.g., In re Arab Global Commodities DMCC, CFTC No. 18-01 (Oct. 10, 2017); In re Lansing Trade Group, LLC, CFTC No. 18-16 (July 12, 2018); In re Singhal, CFTC No. 18-11 (Apr. 9, 2018); In re Geneva Trading USA, LLC., No. 18-37 (Sept. 20, 2018); In re Kooima & Kaemingk Commodities, Inc., CFTC No. 18-39 (Sept. 26, 2018); In re Ramsey, CFTC No. 18-49 (Sept. 27, 2018).

[23] In re X-Change Financial Access LLC, CFTC No. 18-13 (May 29, 2018); CFTC v. R.J. O’Brien & Associates LLC, CFTC No. 18-17 (July 30, 2018); In re Global Asset Advisors, CFTC No. 18-30 (Sept. 14, 2018).

[24] E.g., In re Kooima & Kaemingk Commodities, Inc., CFTC No. 18-39 (Sept. 26, 2018).

[25] See James M. McDonald, Perspectives on Enforcement (Sept. 25, 2017), at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opamcdonald092517; see also  Mark A. Cohen, Theories of Punishment and Empirical Trends in Corporate Criminal Sanctions, 17 Managerial & Decision Econ. 299, 406-08 (1996) (finding that company cooperation increased likelihood of individual convictions).

[26] See, e.g., Jennifer Arlen and Reinier Kraakman, Controlling Corporate Misconduct:  An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. Rev. 687, 689-94 (1997) (explaining that, to optimize deterrence, enforcement regimes should induce firms to take effective steps to monitor and detect misconduct, report any violations detected, and fully cooperate with authorities to bring individual wrongdoers to justice).

[27] See 17 C.F.R. §§ 165.19-20 (2017). The amendments to the rules also enhance the award claims review process and clarify when a whistleblower may receive an award in both the Commission’s action and in a related action.  See 17 C.F.R. §§ 165.7 (f) – (l), 165.11(a) (2017).

 

RELEASE Number

7818-18

https://www.cftc.gov/PressRoom/PressReleases/7818-18

October 1, 2018

CFTC Orders the Bank of Nova Scotia to Pay $800,000 Penalty for Spoofing in the Precious Metals Futures Markets

Bank’s Penalty Was Substantially Reduced in Recognition of Its Self-Reporting, Cooperation, and Remediation

Washington, DC — The Commodity Futures Trading Commission (CFTC) issued an Order filing and settling charges against the Bank of Nova Scotia (BNS) for engaging in multiple acts of spoofing in gold and silver futures contracts traded on the Chicago Mercantile Exchange (CME).  The Order finds that BNS engaged in this activity by and through traders on its precious metals trading desk (Traders) from at least June 2013 through June 2016.  The Order requires BNS to pay an $800,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act’s prohibition against spoofing.  BNS was notified of the misconduct by its Futures Commission Merchant, and when BNS became aware of the misconduct, BNS reported it to the CFTC.

CFTC Director of Enforcement Comments

James McDonald, CFTC Director of Enforcement, commented: “This case is another great example of the significant benefits of self-reporting and cooperation.  We expect market participants to take proactive steps to prevent this sort of misconduct before it starts.  But, as this case shows, there is a strong incentive for market participants to quickly and voluntarily report wrongdoing when it is discovered and cooperate with our investigation, as the Bank of Nova Scotia did here.  In recognition of its self-reporting and cooperation, the Commission imposed a substantially-reduced penalty.”

The Order finds that the Traders placed orders to buy or sell precious metals futures contracts with the intent to cancel the orders before execution.  According to the Order, the spoofing strategy involved a trader placing a small order on one side of the market at or near the best price (the Genuine Order), then placing a large bid or offer on the opposite side of the market away from the best price (the Spoof Order).   The Order finds that the Spoof Orders created the impression of greater buying or selling interest than would have otherwise existed without the Spoof Orders, and the Spoof Orders were placed in order to induce other market participants to fill the smaller resting Genuine Orders.

In addition to the $800,000 penalty, the Order requires BNS to take specified steps to maintain and implement training programs and systems and controls to detect and deter spoofing.  The Order also makes findings about the nature and significance of BNS’s early self-reporting, cooperation, and remediation.

The CFTC thanks and acknowledges the assistance of the CME Group, Inc.

This case is brought in connection with the CFTC Division of Enforcement’s Spoofing Task Force, and the staff members responsible are Greta Gao, Jonah McCarthy, Jennifer Blakley, Dmitriy Vilenskiy, A. Daniel Ullman II, Christine Ryall, and Paul G. Hayeck.

 

News Release

For Release: 

http://www.finra.org/newsroom/2018/finra-announces-plan-consolidate-examination-and-risk-monitoring-programs

Monday, October 1, 2018

Contact(s): 

Jessica McCormick (212) 858-5145
Ray Pellecchia (212) 858-4387

FINRA Announces Plan to Consolidate Examination and Risk Monitoring Programs

WASHINGTON – FINRA announced today that it plans to consolidate its Examination and Risk Monitoring Programs, integrating three separate programs into a single, unified program to drive more effective oversight and greater consistency, eliminate duplication and create a single point of accountability for the examination of firms. The effort is a result of FINRA360, the organization’s ongoing comprehensive self-evaluation and improvement initiative.

FINRA regulates more than 3,700 firms and 630,000 individual brokers, and regularly examines every firm for compliance with FINRA’s rules and those of the SEC and the MSRB. Those examination responsibilities are currently divided among three different programs responsible for business conduct, financial and trading compliance. The consolidation will bring those programs under a single framework designed to better direct and align examination resources to the risk profile and complexity of member firms. Among other benefits, FINRA expects the new structure to increase the efficiency and effectiveness of the program.

Planning for the consolidation is already underway, overseen by Bari Havlik, who joined FINRA in April as Executive Vice President of Member Supervision. She will be supported by a steering committee of senior executives.

“Our Examination and Risk Monitoring program is central to our efforts to protect investors and guard the integrity of markets.  After careful consideration and extensive feedback from internal and external stakeholders, we are moving toward a program structure that is based on the firms we oversee. By directing our expertise and resources in a more tailored way, we will become more effective at examining for compliance,” said FINRA President and CEO Robert W. Cook. “Bari brings valuable perspective to her role at the helm of this transformation and, under her leadership, we have begun to create and implement a roadmap that thoughtfully and methodically builds towards the new structure.”

Havlik said, “Implementing a unified program structure will help make us a more agile and risk-focused regulator while focusing on enhanced training and career opportunities for our staff.  We are evolving the program in a way that addresses specific feedback that we’ve received as part of FINRA360. This will be a significant undertaking that will continue through 2019, but our work is well underway. I look forward to keeping our stakeholders updated as we progress.”

Exams executed pursuant to FINRA’s Regulatory Service Agreements (RSAs) with exchange clients will be performed by a separate, specialized unit housed in FINRA’s Market Regulation department to ensure consistency across RSA exams, provide dedicated resources to RSA-specific rules and trading, and promote economies of scale for RSA client work. This group will work in close coordination with the consolidated FINRA Examination and Risk Monitoring team.

ABOUT FINRA

FINRA is not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

 

RELEASE Number

7817-18

https://www.cftc.gov/PressRoom/PressReleases/7817-18?utm_source=govdelivery

October 1, 2018

Chairman Giancarlo Releases Cross-Border White Paper

Washington, DC – Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo released a white paper titled “Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation.” Based on the principles set forth in this white paper, Chairman Giancarlo intends to direct the CFTC staff to put forth new rule proposals to address a range of cross-border issues in swaps reform.

“I have been a constant supporter of the swaps market reforms passed by the U.S. Congress in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the commitments made by the G20 leaders in Pittsburgh in 2009,” said Giancarlo. “Those are clearing standardized swaps through central counterparties, reporting swaps to trade repositories, and trading standardized swaps on regulated trading platforms. However, I have long said that I hold reservations about the CFTC’s current approach to applying its swaps rules to cross-border activities.”

This paper identifies a number of adverse consequences of the CFTC’s cross-border approach, including the following:

  • It is expressed in “guidance” rather than formal regulation subject to the Administrative Procedure Act.
  • It is over-expansive, unduly complex, and operationally impractical, increasing transaction costs and reducing economic growth and opportunity.
  • It relies on a substituted compliance regime that encourages a somewhat arbitrary, rule-by-rule comparison of CFTC and non-U.S. rules under which a transaction or entity may be subject to a patchwork of CFTC and non-U.S. regulations.
  • It shows insufficient deference to non-U.S. regulators that have adopted comparable G20 swaps reforms and is inconsistent with the CFTC’s longstanding approach of showing comity to competent non-U.S. regulators in the regulation of futures.

The white paper recommends improvements to the CFTC’s cross-border approach that are supportive of the G20 swaps reforms and aligned to Congressional intent, and that better balance systemic risk mitigation with healthy swaps market activity in support of broad-based economic growth. Among other things, the Chairman recommends the following changes to the CFTC’s cross-border approach:

  • Non-U.S. CCPs– Expand the use of the CFTC’s exemptive authority for non-U.S. CCPs that are subject to comparable regulation in their home country and do not pose substantial risk to the U.S. financial system, permitting them to provide clearing services to U.S. customers indirectly through non-U.S. clearing members that are not registered with the CFTC.
  • Non-U.S. Trading Venues– End the current bifurcation of the global swaps markets into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues in regulatory jurisdictions that have adopted comparable G20 swaps reforms from having to register with the CFTC as swap execution facilities, thereby permitting such jurisdictions to each function as a unified marketplace, under one set of comparable trading rules and under one competent regulator.
  • Non-U.S. Swap Dealers– Require registration of non-U.S. swap dealers whose swap dealing activity poses a “direct and significant” risk to the U.S. financial system; take into account situations where the risk to the U.S. financial system is otherwise addressed, such as swap transactions with registered swap dealers that are conducted outside the United States; and show appropriate deference to non-U.S. regulatory regimes that have comparable requirements for entities engaged in swap dealing activity.
  • Clearing and Trade Execution Requirements– Adopt an approach that permits non-U.S. persons to rely on substituted compliance with respect to the swap clearing and trade execution requirements in Comparable Jurisdictions, and that applies those requirements in Non-Comparable Jurisdictions if they have a “direct and significant” effect on the United States.
  • ANE Transactions– Take a territorial approach to U.S. swaps trading activity, including trades that are “arranged, negotiated, or executed” within the United States by personnel or agents of such non-U.S. persons. Nonincidental swaps trading activity in the United States should be subject to U.S. swaps trading rules.  Such an approach addresses the current fragmentation of U.S. swaps markets, with some activity subject to CFTC rules and some activity not subject to CFTC rules.  This approach is consistent with the principle – one unified marketplace, under one set of comparable trading rules and under one competent regulator.

These proposals will be presented to the full Commission for thoughtful input and bipartisan consideration and adoption.  The resulting rulemakings would replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed by the CFTC in 2016, as well as address certain positions taken in CFTC staff advisories and no-action letters.

 

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