Gary DeWaal's Bridging the Week: August 5 - 9 and 12, 2013

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Published Date : August 12, 2013

This week, Gary DeWaal's Bridging the Week examines interesting and important international developments impacting the financial services industry, including:

Also at least one international regulator is concerned about the lack of gender diversity in senior positions at public corporations!

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There were many interesting and important international developments during the week of August 5-9, 2013, impacting the financial services industry, even if there was no one single knock-out event.

DTCC: Beyond the Horizon

The first matter was not a regulatory matter or even a private litigation at all, but the publication last Wednesday of a very thoughtful article by the Depository Trust and Clearing Corporation entitled "Beyond the Horizon." In it, DTCC discusses a number of systemic risks that increasingly impact the financial services industry one way or another.  The principal ones, according to DTCC, are

Although these are the principal risks highlighted, DTCC discusses many other important risks including interconnectedness risk, liquidity risk, collateral risk and more.
Perhaps DTCC might have missed the biggest risk of all, however – which is the ability (or perhaps, sadly, the inability) of industry participants to generate sufficient revenue to actually pay to safeguard against all these other increasing risks.

That being said, DTCC's report is very thoughtful and deserves to be among the many books and magazines we all intend to read by summer's end! The discussion regarding cyber security is particularly chilling.

Watch for my detailed discussion of DTCC's report in early September to be posted on this website.

UK FCA Goes After A Senior Compliance Officer

Remember the NFA actions against a Chief Compliance Officer of a US futures commission merchant a few weeks ago? Last week the UK Financial Conduct Authority likewise re-publicized the FSA's July 2012 GBP 70,258 fine of a senior UK-based compliance officer, David Thomas Davis of the broker Paul E Schweder Miller & Co. and the revocation of his qualification to serve as an approved person for Compliance and Money Laundering Reporting oversight.

According to the FCA, Mr. Davis failed to act with due care when he ignored certain red flags and permitted a client of Schweder Miller to enter certain trades on the London Stock Exchange during October 2010 that constituted manipulation of the relevant security. FCA claimed that not only did Mr. Davis possess sufficient information prior to approving the trades to question their legitimacy, but afterwards he became aware of additional information that should have prompted him to report to trades as Suspicious Transactions – but he did not.

Again, this matter serves as another reminder to senior compliance officers that the bar is rising worldwide regarding regulators' expectations as to the level of their performance.

ASIC Warns that Good Compliance Systems Are Not Enough

In addition, the Australian Securities and Investment Commission warned that firms will not necessarily receive any credit for investing in fancy compliance monitoring systems with nice bells and whistles when they don't actually do anything with the warnings such systems generate.

In this matter, Instinet Australia was fined AU$ 130,000 for permitting a client to place orders through a co-location automated order processing system that ultimately resulted in a number of wash sales being executed in various securities traded on the Australia Stock Exchange. Instinet's AOP system had a number of standard credit-type filters, but it had no wash trade filter. ASIC said the AOP system should have had a wash trade filter.

Moreover, during the relevant time, Instinet Australia used a well-known industry compliance-monitoring tool developed by the Smarts Group that actually identified the relevant trades as trades for which there was no change in beneficial ownership. However, according to ASIC, Instinet Australia never entered these transactions into its compliance register or acted on them, and never sought to cancel the relevant trades.

This case provides an important message to firms that it is not sufficient solely to invest in good compliance monitoring systems, but it is important to have policies and procedures to process exceptions reported by such systems, not to mention qualified staff to implement such policies and procedures.

SEC Does Not Sue EUREX for a Securities Law Violation

The US Securities and Exchange Commission determined last week not to commence an enforcement action against the EUREX exchange headquartered in Germany when it turned out that its futures contract based on the EURO STOXX Banks Index approved by the US Commodity Futures Trading Commission as a broad-based security index futures contract in 2002, had evolved by August 2010 into a narrow-based security index futures contract requiring approval by the SEC. Needless to say, at the time EUREX did not seek or obtain SEC approval, and did not realize its oversight  until September 2011 after the CFTC adopted new procedures and requested EUREX to certify that it remained in compliance with its broad-based stock futures contracts conditions.

This matter serves as a warning that exchanges, broker dealers and future commission merchants, and swap dealers must consider the characteristic of derivatives based on stock indices to determine whether they are subject to CFTC or SEC oversight – or both. Also, sometimes there can be a few international regulatory complications because of the way US regulators classify financial instruments as futures or securities, while other regulators outside the US distinguish between financial instruments and commodities.


On August 5, the European Securities and Markets Authority, or ESMA, issued revised Questions and Answers related to EMIR. There are a whole bunch of new Q&A's related to central clearing and transaction reporting.

FINRA Fines Oppenheimer and Company

And finally, on August 5, FINRA fined Oppenheimer and Company US $ 1.4 Million related to the sale of unregistered penny stocks, but more significantly, for various anti-money laundering violations.

FINRA claimed that Oppenheimer did not monitor patterns of suspicious activity that constituted red flags of AML violations. Among the red flags ignored, said FINRA, was a stranger appearing at a branch office carrying certificates for penny stocks constituting a large percentage of the float for that issue.
The moral of this matter is that financial services firms should consider developing or buying a system (or even utilizing a spreadsheet) where all quasi-suspicious or problematic conduct can be aggregated in one location and reviewed by customer, type of conduct, or other searchable criteria. However, even with such a system, firms will inevitably miss some red flags even if after the fact such warnings seemed obvious.

OSC Reviews Gender Diversity at Public Companies

One last thing: it is worth reviewing a Consultation being conducted by the Ontario Securities Commission as to disclosures that might be appropriate regarding gender diversity at publicly traded companies. As background, it turns out that in Canada during 2011 only 10.3% of all directors of public companies were women, and 43% of all companies on the S&P/TSX composite index did not have a single female board member and only 15% of senior officer positions were women, with 35.9% of public companies having no women senior officers.

For more information, see:

ASIC – Disciplinary Matter re Instinet Australia Pty Limited:$file/MDP-circular-2013-06.pdf
DTCC -- Beyond the Horizon:
ESMA: EMIR Questions and Answers (August 5 Version):
FCA – Final Notice re David Thomas Davis:
FINRA v. Oppenheimer & Co:
OSC Consultation on Gender Diversity at Public Companies:
SEC Report re EUREX:

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 August 12, 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.


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