This week Gary DeWaal's Bridging the Week reviews a significant NFA action against a Chief Compliance Officer and AML officer that results in his fine and suspension from acting in these capacities. In addition, this week's Bridging the Week reviews:
The week of July 22 to 26, 2013, was light on major regulatory news items relevant to the international financial services industry, but it still had some significant matters.
On July 22, the US Commodity Futures Trading Commission, the UK Financial Conduct Authority, and the Chicago Mercantile Exchange brought enforcement actions and entered in simultaneous settlements for disruptive trading practices by an algorithmic trader. Panther Energy Trading LLC and its manager and sole owner, Michael Coscia, orchestrated these trades that involved commodity futures traded on the CME and ICE Futures Europe.
According to the CFTC, the nature of the disruptive practices – spoofing (or layering, as the FCA calls it) -- occurred from August 8 through October 18, 2011.
All together, Panther and Coscia agreed to payments to these regulators totaling $3.1 Million and disgorgement of trading profits equal to $2.7 Million. The CFTC and CME also imposed trading bans.
According to the CFTC, during the relevant time the two respondents utilized an algorithmic program that repeatedly placed small buy or sell orders in the relevant market, followed by the rapid placement and retraction of large, contrary orders. After the initial small orders were executed, the respondents would reverse the process in order to help ensure profits. The FCA by the way has a very interesting animated representation of these trades on the website.
This was the first occasion for the CFTC to use the new 2010 amendments to the Commodity Exchange Act under Dodd Frank that expressly prohibited spoofing and other types of deleterious market conduct (Keep in mind, just recently the CFTC published its guidance regarding these new provisions).
For more information regarding this matter, check out the summary of these enforcement actions on this website.
During last week, the UK FCA also imposed quite a large fine on the Royal Bank of Scotland and the Royal Bank of Scotland NV because of its failure to report almost 49 Million transactions accurately from November 2007 through February 2013, let alone 800,000 transactions from November 2007 through February 2012, at all. These problems related to 37% of all transactions reportable by RBS during the relevant time.
In addition to the large fine of Pound Sterling 5.6 Million, RBS must incur the cost and hassle of resubmitting all these inaccurate reports.
Under the FCA's regime, investment firms – including futures and securities brokers – are required to make reports of transactions carried out on financial markets. These reports include identifiers of the financial instrument, the firm that undertook the transaction, the counterparty to the transaction, and other characteristics such as buy/sell, price and quantity.
According to FCA the issues that cause RBS' reporting problems were compounded by it s takeover of ABN Amro Bank during 2007. These large fines for reporting violations follow similar large fines against other large investment banks, including Barclays and Credit Suisse.
Last week, he NFA settled matter during the week with the former Chief Compliance Officer and Chief Anti-money laundering officer with a small futures broker and Forex dealing member. Previously the NFA had charged this person and the firm with failure to implement an adequate AML program and failure to supervise firm employees carrying out the firm's AML procedures to ensure they were followed.
According to NFA, James Green, the former CCO and CAML, of FX Direct Dealer LLC, agreed to pay a fine of $75,000 and not serve as a CCO or CAML for one year. In an October 2012 complaint against both entities, which followed a prior complaint in June 2012, NFA alleged a number of incidents involving violations of internal AML procedures, not following up on red flags of suspicious activities or reporting such activities, and inadequate reviewing of new customers.
Although every matter is fact unique, this action and settlement specifically naming a CCO and CAML, as opposed or in addition to other corporate officers, must be somewhat alarming to CCOs in light of their additional new obligations and responsibilities under Dodd Frank.
Also last week, sell side industry participants continued to express serious concern over the CFTC's proposal to require FCMs to top up with their own funds customer segregated accounts to cover for customers who have been called for but who have not yet paid their margin calls – even where there is a 100% expectation that the customers will fully pay their obligations on a timely basis.
The latest objections were before a House Agriculture Subcommittee hearing regarding the CFTC. Notwithstanding that this proposal will likely cause many FCMs to require at least some of their customers to pre-pay margin and thus increase their financial exposure to FCMs – which is precisely what they don't want to do post MF Global and Peregrine Financial -- the CFTC seems likely to stand by its proposal --- at least in some version. According to the CFTC, under their reading of existing law they have no choice but to insist on this new proposal -- despite their long-standing reading (and the common interpretation) of the same law to the contrary for 30+ years!
Finally, in a widely publicized matter, criminal charges were filed on July 25 against four SAC entities related to illegal insider trading. This has matter has been widely publicized in the media. However, one of the categories of charges in the indictment revolved around the alleged failure of the SAC entities to maintain adequate compliance measures designed to detect or prevent insider trading.
Among other matters alleged, were that the SAC entities did not routinely monitor emails for indications of insider trading until 2009, despite the head of compliance recommending such monitoring four years earlier. Moreover, despite various guilty pleas by former SAC portfolio managers and research analysts, SAC's compliance department contemporaneously identified only a single instance of suspected insider trading during the relevant time. Even in that instance, the relevant person was permitted to continue to work at SAC and SAC failed to report the suspected conduct to regulators or law enforcement authorities.
This enforcement action is a reminder of how important reputation and a strong compliance culture is for financial services industry registrant, how long it takes to build and how quickly it can be dissipated. An interesting article on compliance culture can be found in the Culture and Ethics section of this website entitled "Is Gordon Geko Still Walking the Trading Floor."
For more information, see: