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The controversial Volker Rule and block trading will occupy the spotlight this upcoming week as the subject of an open meeting of the US Commodity Futures Trading Commission on December 10 (other US regulators will enact the Volcker rule this week too). However, last week the most significant news related to (1) three industry organizations suing the CFTC to set aside its summer guidance related to the application of its Dodd Frank rules to certain overseas participants and transactions, (2) the European Commission's substantial fines issued to six international financial institutions related to their anti-competitive conduct related to rate setting of LIBOR and EURIBOR, and (3) the prison sentence and other sanctions awarded to a former Goldman, Sachs officer related to his rogue trading.
Accordingly, on this week Gary DeWaal's Bridging the Week are covered the following matters:
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Three Industry Organizations File Lawsuit Against the CFTC over Its Cross Border Guidance
Last week three financial markets industry organizations asked a US Federal court to set aside the US Commodity Futures Trading Commission's July 26, 2013 Cross Border Guidance and subsequent advisories related to the handling of participants and transactions involved in the global swaps markets. The plaintiffs alleged that the CFTC endeavored to masquerade what really were "rules" by calling them "guidance" in order to avoid strict legal requirements related to the promulgation of new rules, including, among other matters, adequately evaluating the proposed rules prospective costs and benefits.
The Cross Border Guidance was promulgated by the CFTC as a framework for applying relevant provisions of Title VII of Dodd Frank internationally where the Commission views swap market activity outside the United States as having a "direct and significant connection with activities in, or effect on, commerce of the United States" (for details, see: "CFTC Enacts Interpretive Guidance and Passes Exemptive Order regarding Cross Border Swaps Transactions," http://www.garydewaalandassociates.com/?p=451).
The three industry organizations were the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers. According to the lawsuit,
"Plaintiffs' members support vigilant regulation of the derivatives markets to improve transparency, mitigate systemic risk, and protect against market abuse, and have attempted in good faith to comply with the CFTC's improperly adopted regulations. However, Plaintiffs are compelled to bring this action now to stop what is proving to be an unceasing effort by the Commission to regulate the global swaps markets through unpredictable ‘guidance' documents, advisories, and directives, and to force the CFTC instead to abide by the requirements for rulemaking laid down by Congress."
The laws the plaintiffs allege that that CFTC violated are the Administrative Procedure Act and the Commodity Exchange Act.
Among other arguments in support of its position, the lawsuit contrasts the method by which the US Securities and Exchange Commission has proposed to apply internationally those provisions of Title VII over which it has jurisdiction – mainly through a formal rule proposal subject to notice and comment that included an analysis of costs and benefits – with how the CFTC has applied provisions over which it has jurisdiction – mainly through a purported guidance. In addition, the lawsuit points out numerous occasions where the Commission itself, as well as Chairman Gary Gensler in public speeches, has referred to the Cross Border Guidance as a "rule" despite its release as a "guidance."
The lawsuit also claims that the Cross Border Guidance undermines international cooperation related to the G-20 commitment to augment oversight of the international swaps market, through unilateral extraterritorial regulation by the CFTC "which often duplicate[s] or conflict[s] with foreign regulatory requirements" and detrimentally may harm worldwide markets.
CFTC Commissioner O'Malia Blisters Commission Handling of Swaps Markets' Cross Border Issues
Last week while three industry organizations were in court suiting the CFTC regarding the Cross Border Guidance, CFTC Commissioner Scott O'Malia blistered the Guidance in a speech before the Ninth Annual Futures and Industry Association's Asia Derivatives Conference held in Singapore. In his keynote address, Commissioner O'Malia challenged the authority of the CFTC to issue the Guidance, as well as the some of the perceived dangers it claimed to address:
"Let me be clear – it is time to end this regulatory insanity. The Commission must provide a clear notice of the contours of its regulatory reach. Congress explicitly limited the extraterritorial application of the Commission's jurisdiction to foreign transactions that 'have a direct and significant connection with activities in, or effect on, commerce of the United States.' So far, the Commission has failed to demonstrate any restraint or to validate how our rules comply with this Congressional directive."
Among other matters, Commissioner O'Malia specifically questioned the risk posed by US operations negotiating swap transactions between two non-US counterparties booked outside the US -- a matter that was addressed by the CFTC in a recent guidance (see: "CFTC Issues Advisory Related to the Arrangement of Swaps Involving Non-US Swap Dealers by US Persons," http://www.garydewaalandassociates.com/?p=1406). Says Commissioner O'Malia,
"Now, according to staff, Dodd-Frank applies to all foreign operations in the United States on behalf of non-U.S. persons. I cannot fathom a "direct and significant" connection to a swap transaction between a London bank and a Swiss swap dealer when personnel or an agent of a non-U.S. person happens to negotiate the swap in New York."
European Commission Fines Six Banks €1.71 Billion for Engaging in Anti-competitive Behavior in connection with LIBOR and EURIBOR Indices
The European Commission last week issued fines totally €1.71 Billion against six worldwide financial institutions for engaging in anti-competitive behavior related to rate setting of LIBOR (the London Interbank Offered Rate) and EURIBOR (the Euro Interbank offered rate) benchmark indices.
Unlike previous actions against financial institutions by financial regulators such as the CFTC and UK Financial Conduct Authority, which principally related to the alleged manipulation of such indices (see, for example: "CFTC and FCA Fine Rabobank over LIBOR," http://www.garydewaalandassociates.com/?p=1323), this action relates to the alleged collusion among the named entities, that according to the EC, "….are supposed to be competing with each other."
Three of the institutions – Deutsche Bank, Société Générale and RBS, were fined for anti-competitive conduct related to indices settled in the Euro-currency, while five –RBS, Deutsche Bank, JP Morgan, Citigroup and RP Martin, were sanctioned for anti-competitive conduct involving indices settled in Japanese Yen. Individual firm fines ranged from a high of €725.36 Million for Deutsche Bank to €247,000 to RP Martin.
Two banks, Barclays and UBS, were cited for engaging in anti-competitive behavior, but not sanctioned, as they were given credit for their extensive cooperation. But for this, UBS would have been fined €2.5 Billion, and Barclays €690 Million, says the EC. Other financial institutions received a "leniency" reduction for their cooperation from 5% to 50% of what their fine might otherwise have been.
The EC says that, after the resolution of this matter, it maintains ongoing investigations regarding other anti-competitive behavior in connection with indices denominated in Swiss Francs, as well as other financial products, including credit default swaps, foreign exchange, and other benchmarks, including in the field of oil and biofuels.
Former Goldman, Sachs Trader Sentenced to Nine Months in Prison for Fraudulent Trading Activity involving Futures
Earlier this year, the CFTC filed and settled and enforcement action against Matthew Taylor, a former trader at Goldman, Sachs & Co., related to his December 2007 scheme to enter fictitious trades into the firm's operations systems in order to disguise certain unauthorized futures transactions. As a result of Mr. Taylors's trading, Goldman, Sachs sustained a loss of US $118 Million, and itself agreed to pay a fine to the CFTC of US$ 1.5 Million for failure to supervise Mr. Taylor. Mr. Taylor agreed to pay a fine of US $500,000, among other sanctions (for further details, see: "Ex-Goldman, Sachs Trader Sued by CFTC," http://www.garydewaalandassociates.com/?p=720).
Last week, Mr. Taylor was sentenced to nine months in prison following his plea of guilty during April 2013 in a criminal action filed by the US Attorney's Office in New York related to this same matter. He was also sentenced to three months of supervised release and community service, and required to pay the full amount of Goldman, Sach's trading loss.
The media has reported that the presiding judge, the Hon. William Pauley, in his oral comments at the sentencing hearing, was very critical not only of Mr. Taylor, but of Goldman, Sachs, the CFTC and the prosecutors in the handling of this matter. According to a Reuters article, for example, Judge Pauley said that, generally, this incident was the "paradigm of everything that is wrong with Wall Street and the regulators charged with protecting the public (see: http://www.reuters.com/article/2013/12/06/goldman-trader-sentencing-idUSL2N0JL21220131206). In connection with the regulators specifically, continues the same Reuters article, Pauley commented:
"It cannot be called justice or oversight when it took the government six years to bring a rogue trader to justice, when the trader admitted his conduct on Day 1. At some point, the justice needs to be swift if it's going to mean anything, other than another press release and the ability to say, 'another pelt.'"
And briefly:
For more information, access:
Proposed Canadian Registration Amendments:
http://www.securities-administrators.ca/aboutcsa.aspx?id=1201
Sample province (Ontario): http://www.osc.gov.on.ca/en/SecuritiesLaw_ni_20131205_31-103_proposed-amendments.htm
CME Reminder related to Gifts and Gratuities:
http://www.cmegroup.com/rulebook/files/cme-group-ra1213-5.pdf
FINRA Rule: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=7067&element_id=5665&highlight=gratuities--r7067
EC Fines for Anti-Competitive Behavior:
http://europa.eu/rapid/press-release_IP-13-1208_en.htm
http://europa.eu/rapid/press-release_MEMO-13-1090_en.htm?locale=en
FRB Guidance on Managing Outsourcing Risk:
http://www.federalreserve.gov/bankinforeg/srletters/sr1319a1.pdf
IIROC Gatekeeper and Notice Requirements:
http://www.iiroc.ca/Documents/2013/48b3dda3-ff0b-4a08-8764-122d566f1adb_en.pdf
UMIR: http://www.iiroc.ca/industry/rulebook/Pages/UMIR-Marketplace-Rules.aspx
Sentencing of Matthew Taylor (ex-Goldman, Sachs):
http://www.justice.gov/usao/nys/pressreleases/December13/MatthewTaylorSentencing.php
NFA Rules Amendments and Guidance:
Rule Amendments:
Securities Futures Risk Disclosure:
http://www.nfa.futures.org/news/PDF/CFTC/InterpNotc_CR2-30_b_RiskDisclosureStatement_112113.pdf
Reporting Requirements:
http://www.nfa.futures.org/news/PDF/CFTC/FR_Sec8_InformationRequests_112113.pdf
Floor Trader Firms:
http://www.nfa.futures.org/news/PDF/CFTC/RR201_203_112113.pdf
Affirmation Guidance for Exempt CTAs and CPOs:
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4346
Com. Scott O'Malia FIA Keynote Address:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-31
SIFMA et al. v. CFTC (Press Release and Complaint):
http://www.sifma.org/issues/item.aspx?id=8589946488
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 December 7, 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.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
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Gary DeWaal
Katten Muchin Rosenman
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New York 10022-2585
1 (212) 940-6558
Gary DeWaal's Bridging the Week: December 2 - 6 and 9, 2013 (CFTC Cross Border Guidance, EC and LIBOR/EURIBOR, Goldman, Sachs' Rogue Trader)
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