Gary DeWaal and Associates LLC


Gary DeWaal's Bridging the Week: July 15-19 and 22, 2013

Bridging the Week   
Published Date: July 22, 2013

This week's video "Bridging the Week" reviews last week's:

Video Version:

Article Version:

IOSCO and Benchmarks

For starters, this past week IOSCO published its framework of principles for benchmarks used in financial markets – such as the controversial LIBOR and ISDAFIX.
Although the principles make clear that it is best that a benchmark should be based on prices, indices or values that have been formed by the competitive forces of supply and demand and anchored by observable transactions, it makes clear that benchmarks do not need to be based solely or even predominantly by actual transactions.

UK Financial Conduct Authority (formerly the FSA) and Customer Protection

The UK Financial Conduct Authority also last week published a consultation paper in connection with a review of its client assets regime for the investment business. This is potentially relevant not only to UK customers and financial services firms, but also auditors and third party providers in the UK and globally.

FCA's stated goal in seeking comments is to improve the speed of returning clients assets following insolvencies of investment firms, not to mention achieving a greater return of client assets and decreasing the market impact of such insolvencies. A big proposed change for the UK is permitting insolvency practitioners to distribute client money based on a firm's records, not as agreed with clients – this should take months off distribution times.

Responses to the FCA generally are due by October 11, except for those pertaining to indirect client clearing, which are due by August 12.

Commissioner O'Malia Dissent to the Cross Border Guidance

Last week Commissioner's O'Malia Dissent related to the CFTC Guidance and Policy Statement and related Exemptive Order was finally and fully published.

No new ground was covered in his dissent, but Commissioner O'Malia again argues that the Proposed Guidance fails to set forth its statutory basis, crosses the line between interpretive guidance and rule making and does not sufficiently consider international law and comity. Among other things, he argues that the Guidance does not make clear how the Transaction Level requirements satisfy the direct and significant standards that is the basis for the CFTC's authority, and raises concern about the Commission's failure to follow the protocols of the Administrative Procedure Act.

FERC v. Barclays

Also, this past week the Federal Energy Regulatory Commission required Barclays Bank to show cause why it should not be fined $435 Million and ordered it to pay back $34.9 Million in profit and interest for allegedly manipulating California's electricity market through its trading from November 2006 through December 2008. Certain individual employees of Barclays are also facing penalties, in one case, of up to $15 Million for their role in this matter. According to media reports, Barclays will contest its FERC fine.

According other media reports, FERC is considering a similar action against JP Morgan regarding a related matter.

FINRA: High Frequency Trading Review and Recent Disciplinary Actions

FINRA this past week announced an examination of high frequency trading firms related to their development and use of trading algorithms and controls surrounding trading technology. A summary of the information requested by the Trading Examinations Unit was posted on FINRA's web site. The nature of the questions should remind proprietary trading groups of the importance of testing their algorithms before they go live, and maintaining monitoring tools to immediately detect and shut down such systems when there are material problems.

This questionnaire should also remind brokers granting sponsored access to such firms also to ensure that their clients have adequately tested and monitor automated systems on an ongoing basis, in addition to complying with their own regulatory obligations under SEC Rule 15c3-5.

FINRA also announced in its July 2013 Disciplinary Action Bulletin that it had fined three firms a total of $900,000 for failing to establish and maintain adequate AML programs, and one firm $9 Million for 35 significant email failures from 2007-2013 and for making misstatements to FINRA. Among the email failures included failure to keep and review Bloomberg email messages, and failure to maintain access to certain emails during a transition to a different email system when 80 million email messages became corrupted.

The action against each firm points to the importance for firms continually to review and update their AML programs – specifically to ensure that red flags are being acted upon promptly, and to review and test their email systems to ensure that all types of electronic communications that firms think they are saving are in fact being saved and are retrievable in the expected form.

Check out a May 13 Valuable Lessons Learned feature on this website involving five ING entities for some tips on email reviews.

SEC v. Steven Cohen

Also in the securities world, on Friday the Securities and Exchange Commission announced the filing of a administrative action against Steven Cohen for his failure to supervise two persons during 2008 at the hedge fund bearing his initials, SAC, related to their alleged misuse of inside information. According to the SEC, Cohen did not act appropriately to prevent insider trading when he received highly suspicious information that "should have caused any reasonable hedge fund manager in Cohen's position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct."

CME Wash Trading Guidance

The CFTC is now seeking public comment on the proposed CME Wash Trade Guidance by August 14.  See a summary of this Guidance on this website.

CFTC Reauthorization

Also, last week the Senate conducted a hearing on the CFTC re-authorization. Nothing unexpected came out of this. There was testimony on how the CFTC's residual interest proposal would be bad for the industry and customers, and why a transaction tax would be bad for market liquidity. In addition, there was a discussion on why the bankruptcy code should be amended to provide more protection to customers in case on an FCM bankruptcy, and in particular, eliminating pro rata distribution in case of swaps so some customers can get back 100% of their funds.

Comparison of EMIR and Title VII of Dodd Frank

Finally, as the CFTC now begins to consider whether at least six jurisdictions have comparable and comprehensive swaps rules as the USA, Deloitte has published a very help comparison of Title VII and EMIR requirements regarding 15 categories of swaps regulation. Deloitte's  bottom line: the requirements are very comparable applying an outcomes based test. This document can be accessed through this website.

For more information, see:

IOSCO and benchmarks: 
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf
UK FCA and customer assets protection: 
http://www.fca.org.uk/your-fca/documents/consultation-papers/cp13-5
Commissioner O'Malia's dissent: 
http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213
FERC v. Barclays: 
https://www.ferc.gov/eventcalendar/Files/20130716170107-IN08-8-000.pdf
FINRA matters: high frequency trading and July disciplinary actions: http://www.finra.org/industry/regulation/guidance/targetedexaminationletters/p298161
http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryactions/p300016.pdf
SEC v. Cohen: 
http://www.sec.gov/litigation/admin/2013/ia-3634.pdf
CFTC Re-authorization hearings: 
http://www.ag.senate.gov/hearings/2013cftcreauthorization
Title VII and EMIR Comparability: 
http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/Industries/Financial%20Services/uk-fs-cftc-eu.pdf

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of July 22, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.


© 2019 Gary DeWaal and Associates LLC | 1 (212) 382-4615 | 1180 Avenue of the Americas, Suite 809, New York, NY 10036