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Gary DeWaal's Bridging the Week: December 16 to 20 and 23, 2013 (Comparability Determinations; Double Dipping Leads to Fines, Bribery Controls)

Bridging the Week    Compliance Weeds    My View   
Published Date: December 23, 2013

If March is the month that comes in like a lion and leaves like a lamb, than this December has been the exact opposite. With so little happening the first few weeks of December it seemed lamb-like. However, regulators and litigants seem to have been in a hurry to put everything on the table prior to going on their holidays the last two weeks of this month, and thus December seems to be ending with the roar of a lion. And not unexpectedly, the US Commodity Futures Trading Commission waited until the eve of the very last day to issue important comparability determinations so that non-US swap dealers and major swap participants could figure out the rules of the road going forward.

As a result, all of the following are articles covered on this week's Bridging the Week (which is the last Bridging the Week of 2013), and be sure to check out my reflections on 2013 at the very end of this article:

Video Version:

Article Version:

CFTC Issues Comparability Determinations for Six Jurisdictions on the Eve of Self-Imposed December 21 Deadline

Late Friday afternoon, the US Commodity Futures Trading Commission authorized substituted compliance by non-US swap dealers and major swap participants with certain provisions of six jurisdictions' rules related to swaps dealing, rather than requiring compliance with equivalent provisions of US rules. The CFTC did this by determining that such rules were comparable.

The jurisdictions adjudged to have comparable swaps dealing rules as the US were Australia, Canada, the European Union, Hong Kong, Japan and Switzerland.

For the six jurisdictions, the CFTC found comparability (and thus approved substituted compliance) for a number of so-called "entity level" requirements. These requirements relate to tasks of the chief compliance officer, swap data recordkeeping, risk management program, monitoring of position limits, diligent supervision, business continuity, research conflicts, clearing conflicts, undue influence, availability of information for disclosure, and clearing member risk management (for this last provision, no determination was made for HK and Switzerland). The CFTC also found comparability (and approved substituted compliance) for a few so-called "transaction level" requirements in the EU and Japan.  For the EU, the requirements related to swap confirmations, portfolio reconciliation, portfolio compression, and for the EU and Japan, certain requirements related to daily trading records and swap trading relationships.

Separately, the CFTC's Division of Market Oversight indicated that it would take "no action" again non-US SDs or MSPs located in Australia, Canada, the EU, Japan or Switzerland that were not part of an affiliated group headed by certain US persons for failing to comply with certain US swap data repository reporting requirements. This relief will expire at various times during 2014, depending on the type of counterparty to the relevant swap. In another letter, the Division of Swap Dealer and Intermediary Oversight granted no action until March 3, 2014 for non-US SDs and MSPs from Australia, Canada the EU, Japan, and Switzerland to comply with certain CFTC internal business conduct requirements.

This process of assessing countries' rules for comparability and if comparable, permitting substituted compliance by non-US persons was part of a framework established in the Cross Border Guidance approved by the CFTC on July 12, 2013. (For details of this Guidance, which was published July 26, see:

The comparability determinations were approved 3-1 by the CFTC Commissioners, with Commissioner Scott O'Malia dissenting. According to Commissioner O'Malia,

"I cannot support the Notices [of Comparability Determinations] because they: (1) are based on the legally unsound cross-border guidance; (2) are the result of a flawed substituted compliance process; and (3) fail to provide a clear path moving forward. If the Commission's objective for substituted compliance is to develop a narrow rule-by-rule approach that leaves unanswered major regulatory gaps between our regulatory framework and foreign jurisdictions, then I believe that the Commission has successfully achieved its goal today."

Chairman Gary Gensler, and Commissioners Mark Wetjen (soon to be Acting Chairman) and Bart Chilton had a different view. To them, the comparability determinations demonstrated the effectiveness of international cooperation in implementing the G-20 commitments of September 2009:

"These determinations reflect the Commission's commitment to coordinating our efforts to bring transparency to the swaps market and reduce its risks to the public. The comparability findings for the entity-level requirements are a testament to the comparability of these regulatory systems as we work together in building a strong international regulatory framework."

Previously, three financial markets industry organizations petitioned a US Federal court to set aside the CFTC's Cross Border Guidance and subsequent advisories. The organizations 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 three industry organizations were the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers. (for details regarding this lawsuit, see the related article on "Bridging the Week, December 2-6, 2013:

SEC Charges ConvergEx Subsidiaries and Former Employees with Fraud for Excessive Charges on Customer Transactions

The US Securities and Exchange Commission charged three subsidiaries of ConvergEx Group, LLC and two subsidiaries' ex-employees with fraud related to their acceptance of customers' securities transactions at agreed commissions, and then marking-up or down such transactions without disclosure when they were executed by offshore affiliates on a riskless principal basis. The brokerage companies purposely routed the transactions for execution to offshore affiliates to obtain trading profit on each transaction in addition to the disclosed commissions. In many cases, customers paid double their expected commissions.

The three subsidiaries charged were G-Trade Services, LLC; ConvergEx Global Markets Limited (GCM), and CovergEx Execution Solutions LLC.

One individual charged, Jonathan Samuel Daspin, was the Global Head of Trading for GCM. He was accused of often consulting with the brokers who faced clients to determine how much profit the firm could take without customer detection. The other individual charged, Thomas Lekargeren, was a sales trader for the GCM Division of G-Trade. He is alleged to have participated in a scheme to help conceal the firm's illicit practices to charge higher amounts.

To settle this matter, the ConvergEx firms agreed to pay disgorgement and prejudgment interest in excess of US $87 Million and a penalty of US $20 Million. The individual respondents also agreed to pay disgorgement in excess of US $1 Million and prejudgment interest.

Separately, the US Department of Justice filed criminal charges against a ConvergEx Group subsidiary and the two employees, as well as entered into a deferred prosecution agreement with ConvergEx Group itself. To resolve this matter, ConvergEx has agreed to pay US $43.8 Million in criminal penalties and restitution.

And briefly:

1. In the first, Barclays Capital Inc. settled a CME disciplinary matter for payment of US $10,000 related to its netting of offsetting positions in a physically delivered futures contract (i.e., soybean oil futures) on November 25, 2011, during a period of time (i.e., the delivery month and two days prior) when all such futures contract ordinarily can be offset only through transactions executed in the market place. There is an exception to this requirement for bona fide clerical or operational errors corrected on the same day provided the corrected amount does not exceed 1% of the relevant contract's open interest. However, this exception was not applicable here.
2. In another disciplinary matter, the principal of a trading firm, Kenneth Bell of Bell Trading, agreed not to access CME's electronic trading or clearing platforms or the CME trading floor for 10 days because the automated trading system of Bell Trading malfunctioned for two minutes on August 5, 2011, and entered numerous self-matched trades in the September 20111 Five-year Treasury Note futures contract during that period. The system malfunctioned because of a programming error by a contractor employed by Bell Trading.
3. And finally, in a reminder that the CME expects all elements of its EFRP (exchange of futures for related positions) rules to be followed, an end-user client, West Fraser Mills Ltd. agreed to pay a fine of US $15,000 for entering into the futures leg of an EFR (exchange of futures for risk) transaction on February 3, 2012 involving November 2012 lumber futures, but not a corresponding OTC swap or other OTC instrument. In connection with EFRPs (of which EFRs are a type), the party who is the buyer or seller of the relevant futures contract must have the opposite position (i.e., seller or buyer) of the related position or opposite market exposure (i.e., short or long).

Compliance Weeds: Years ago, each of the above incidents would be dismissed as "costs of doing business." However those days are gone. Although the events are isolated, all compliance incidents, no matter how small, should be evaluated to ensure a firm understands what gave rise to the incident; what events could occur to give rise to a similar incident; and what controls does a firm have or need to develop to minimize the likelihood of a similar incident reoccurring. Sadly, small leaks can lead to big floods.

My View: Some argue that requiring mandatory central clearing has simply transferred and concentrated what previously was diversified risk among many financial services firms to a concentrated risk among a few clearing houses. Moreover, clearinghouses still look principally to clearing members to maintain sufficient resources and liquidity to help out when a fellow clearing member or members default. Not only may the economics of clearing not support this investment in the first instance by clearing members, but it's hard to imagine a scenario where the one or two clearing members with the most exposure default, and the remaining clearing members are sufficiently unaffected to contribute sufficient additional funds to help the CCP perform its functions.

Compliance Weeds: Periodically, and probably no less than once a year, registrants should assess membership and registration applications to ensure that representations regarding businesses are still accurate. If not, determine whether a dialogue needs to be had with the relevant regulator and/or an amendment filed.

My View: I think the Future Industry Association's response to the CFTC's Concept Release on Risk Controls and System Safeguards for Automated Trading must have crossed in the mail with this OFR report. Although OFR identifies some potential issues with ATS, they are not unique to high frequency trading. Also, many of the issues already have been materially addressed, in the case of the securities industry, by rule, or in the case of the futures industry through voluntary best practices adopted by firms, or firms pro-actively instituting protective measure as a result of being increasingly worried by potential blow-ups or enforcement actions. (For more see, see the FIA submission at:

And finally:

My View: Reflections on 2013

This is the final Bridging the Week segment for 2013. Pending an extraordinary industry development, the next installment will be on January 6, 2014.

It has been fun for me personally to develop the concept of Bridging the Week this year which, since introduced during Spring 2013, has evolved from a video-only presentation, to one now that includes video (with captions) as well as written articles. Typically the video version covers fewer matters but includes more commentary, while the written article version covers more stories and all stories in greater detail.

There have been so many developments this year, it's very hard to pick the top ones, or even assess them as good or bad. It's all one's perspective. However, there is little doubt that the financial industry is in the throes of change. Who will change and how, and what will be the regulators' impact on this – that all will be next year's story (although

I already gave my view to John Lothian regarding the probable evolution of the futures commission merchant model; see

Until 2014 and the next Bridging the Week, have a great holiday season and try to spend some quality time with friends and family. And read a few good books too – preferably unrelated to this industry!

For further information, see:

Controls related to Anti-Bribery
DOJ Announcement of ADM Subsidiary Guilty Plea:
FCA matter regarding JLT Specialty Limited:
Canadian Securities Administrators Proposed Rules Related to Mandatory Clearing of OTC Derivatives:
CFTC Actions related to the International Guidance:
DMO Relief related to SDR Reporting:
DSDIO No Action Relief related to Internal Business Conduct Rules:
Notice of Comparability Determination and Related Summary:
Commissioner O'Malia Dissent to Notice of Comparability Determination:
CME Disciplinary actions:
Kenneth Bell:
West Fraser Mills:
CME Proposed Liquidity Rule:
ConvergEx Matters:
SEC v. ConvergEx Brokerages
SEC v. Two Individual Respondents:
DOJ Announcement of ConvergEx Subsidiary and Two Employees Guilty Plea:
ESMA Revised Q&As Regarding Reporting:
FATF Update:
FINRA: Deutsche Bank Securities, Inc.:
FRB Risk Transfer Considerations:
David Nunn Matters:
CFTC action:
CFTC settlement: .
ICE Futures US:
OFR 2014 Annual Report:
In re: Sentinel Management:
Liquidation Trustee Motion:
Available on Request
August 7th Circuit Court of Appeals Decision:
SFC v. HSBC Securities:
Taping Matters:
CFTC No Action for CTA members of SEFs:
CME Proposed Revised Rule:

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 21, 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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