Gary DeWaal's Bridging the Week: September 2 to 6 and 9, 2013

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Published Date : September 09, 2013

Last week, September 2-6, 2013, did not see a lot of material stories worldwide impacting the financial services industry, but a few items warrant review:

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It would be unfair to say that last week, September 2-6, 2013, was the slowest week this year regarding regulatory news impacting financial services' firms worldwide. However when one of the most significant regulatory developments was a press release on the website of the Australian Securities and Investments Commission heralding "Improved Pet Insurance Disclosure," perhaps it wasn't one the most active weeks of regulatory news either (although improved pet insurance disclosure is surely important to pet owners).

That being said, there were a few very important items worth reviewing discussed on this week's Bridging the Week.

First and foremost, with the media reporting that the US Commodity Futures Trading Commission will imminently release its final rules on enhanced customer protection prompted by the collapse of MF Global and Peregrine Financial Group, two international regulators, including the CFTC and the Financial Conduct Authority in the United Kingdom, both announced last week enforcement actions against firms for violating current customer protection rules.

FCA v Aberdeen Asset Managers and Aberdeen Fund Management

In the more significant of these two matters, in the UK, the Financial Conduct Authority brought an enforcement action and settled with Aberdeen Asset Managers and Aberdeen Fund Management, large asset managers, for payment of a fine of GB£7.2 Million (US$11.25 Million) related to their failure to protect client funds as required under law.

According to FCA, from August 31, 2008 through August 31, 2011, the respondents failed to recognize that certain monies it placed with banks on behalf of their clients were governed by UK's client money rules (its so-called CASS regime), and therefore did not obtain appropriate acknowledgments from such banks holding the customer funds regarding the nature of such funds. These customer funds were typically invested in money market deposits.

The Financial Services Authority, the predecessor of the FCA, previously had requested respondents (as well as other industry firms) to confirm that they were fully compliant with all relevant customer protection rules and they did so in 2010.

CFTC v. Macquarie Futures USA, LLC

In the USA, the CFTC brought and simultaneously settled an enforcement action against Macquarie Futures USA LLC for its failure to maintain adequate funds in its so-called Secured Accounts as of close of business for one day. Secured accounts are the type of accounts where funds are held in connection with a US FCM's customers' non-US futures trading.

In this case, Macquarie Futures' failure originated from a Haley's comet once in a lifetime type event related to ICE Clear Europe's conversion of energy swaps to energy futures.

Even though Macquarie Future self-reported and corrected its breach the following day, and even though the firm had sufficient funds set aside for its customers overall in all of its customer funds' protected locations, because approximately $38 Million of the funds were not in the Secured Accounts (but in Segregated Accounts instead – the accounts used for customer funds in connection with US futures trading), the CFTC brought this action. For this matter, Macquarie Futures was required to pay a fine of $150,000 + prejudgment interest.

This action should prompt thinking among registrants regarding what type of enforcement actions the CFTC may take when it sees the material compliance issues they disclose in their 2013 Annual Compliance Reports scheduled to be filed with the Commission in most cases during the first quarter of next year! (Don't forget to review a separate article on this website regarding practical tips for preparing a firm's Annual Compliance Report:

A couple of developments related to the centrally cleared and non-centrally cleared derivatives also made news last week:

Basel Committee on Banking Supervision/IOSCO Final Framework Regarding Margin for Non-Cleared Derivatives

First and foremost, the Basel Committee on Banking Supervision and IOSCO released the final framework for requirements for non-centrally cleared derivatives that should be adopted by international regulators.

According to the Framework, all financial firms and systemically important non-financial firms will have to exchange initial and variation margin appropriate in light of the counterparty risk for each derivatives transaction, and initial margin will have to be exchanged on a gross not net basis. However no initial margin will have to be exchanged in connection with FX forwards and FX swaps transactions. The Framework also proposed restrictions on a receiving firm's re-hypothecation of a counterparty's initial margin deposits.

The agencies recommend that these margin requirements be phased in over time.

ESMA's Advice on Six Countries' Rule Equivalence to EMIR

Second, ESMA last week issued its advice to the European Commission regarding the equivalence of non-EU derivatives rules to EMIR in six jurisdictions: Australia, Hong Kong, Japan, Singapore, Switzerland and the USA. Under EMIR, a non-EU central clearing counterparty (CCP) or trade repository can only offer its services to EU citizens if the EC finds its oversight regulations equivalent to EMIR. If equivalence is found on other rules, in connection with a derivatives trade between a EU-based and non-EU-based entity, the parties may choose to apply the relevant rules of the jurisdiction of the non-EU entity to the transaction.

In general all relevant rules of the USA were judged conditionally equivalent, while all CCP rules of the other countries were assessed conditionally equivalent or equivalent. The jury is out on most of the other jurisdictions' other rules.

HK Proposed Licensing Rules for Derivatives Intermediaries

In connection with one of the discussed jurisdictions, last week regulators in Hong Kong released conclusions emanating from the consultation regarding the scope of activities to be regulated under Hong Kong's OTC derivatives regime. In general there was support for proposals (1) to extend the licensing regime to cover intermediaries that conduct derivatives activities; (2) that there be a transitional period in connection with implementing such regime; and (3) that the Hong Kong Monetary Authority and the Securities and Futures Commission should have effective regulatory authority over systemically important market participants. A bill incorporating these proposals was introduced to the HK Legislative Council during July 2013.

And briefly, last week:

This week the CFTC is expected to release its concept release on automated trading which is scheduled to be discussed at the CFTC's Technology Advisory Committee on September 12.

For questions or assistance, do not hesitate to contact Gary DeWaal and Associates at (212) 382-4615 or at

For more information, see:

ASIC Enhanced Pet Insurance Disclosure Requirement: 
BIS and IOSCO: Margin Requirements for Non-centrally Cleared Derivatives: 
CFTC: No Action Letter for CPOs of Registered Funds with Controlled Foreign Corporations:
CFTC: Order re: Macquarie Futures USA LLC: 
ESMA Advice to the EC on the Equivalence of non-European Derivatives Rules (Press Release only which contains links to individual countries): 
FCA: Final Notice re: Aberdeen Asset Managers Limited and Aberdeen Fund Management Limited: 
FSB Progress Report on G-20 Mandated Financial Reforms:
HKMA and SFC: Consultation Conclusions regarding the OTC Regulatory Regime in HK:
NFA Proposed Rule 2-49:

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 September 9, 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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