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Gary DeWaal’s Bridging the Week: February 3 to 7 and February 10, 2014 (Position Limit Violations, CME Expanded Jurisdiction, AML Violations (Again))

Bridging the Week    Compliance Weeds    My View   
Published Date: February 10, 2014

Friday February 14 may be Valentine’s Day, but whether there will be any love this week in the financial services industry may depend on how certain important deadlines and hearings worldwide play out. Among other things, this week will see (1) European financial and non-financial institutions begin reporting their OTC and exchange traded derivatives transactions under EMIR commencing February 12; (2) the first interest rate swaps certified as “Made Available to Trade” (MAT) mandatorily being executed in most instances on or subject to the rules of a SEF or DCM starting on February 15; (3) certain non-US swaps trading platforms being required to qualify by February 15 as SEFs in order to handle for US persons swaps subject to MAT certifications – absent relief from the Commodity Futures Trading Commission; and (4) three distinct public hearings at the CFTC addressing (a) how to handle the execution of multiple legged “package transactions” where one leg involves a swap subject to a MAT certification; (b) certain aspects of the CFTC’s Cross Border Guidance; and (c) issues related to automated trading systems, among other topics.

However, last week there also were many important developments involving the financial services industry, and these are all covered on

Gary DeWaal’s Bridging the Week, including:

Video Version:


Article Version: Acting CFTC Chairman Mark Wetjen Signals a Possibly More Conciliatory Approach to International Regulation

In a speech last week before the US Senate Committee on Banking, Housing & Urban Affairs, Mark Wetjen, Acting Chairman of the US Commodity Futures Trading Commission appeared to signal a more conciliatory approach in addressing the international coordination of swaps regulation. Among other things, with an important deadline related to non-US swaps trading facilities handing certain interest rate swaps subject to the February 15 MAT determination upcoming, Acting Chairman Wetjen suggested that greater reliance on home country supervision of trading venues and clearing houses, as opposed to each country insisting on its own regulation, may promote “efficient and liquid markets.” According to the Acting Chairman in his prepared remarks:

“Harmonizing regulations governing clearinghouses and trading venues, in particular, is critical to sound and efficient market structure. Even if firms are able to navigate the conflicts and complexities of differing regulatory regimes, regulators here and abroad must do what they can to avoid incentivizing corporate structures and inter-affiliate relationships that will only make global financial firms more difficult to understand, manage, and unwind during a period of market distress… A global regime is the best means to avoid balkanization of risk and risk management that may expose the U.S. financial system over time to risks that are unnecessary, needlessly complex, and difficult to predict and contain.”

Acting Chairman Wetjen also implied that there may be additional determinations that foreign jurisdictions' regulation of swaps is “comparable to and as comprehensive” as US regulation. This could open the door to non-US Swap Dealers and Major Swap Participants relying on more of their local, domestic rules to comply with many of their requirements under CFTC rules.

CME Settles Cases Involving Position Limits’, Wash Trades’, and a Potpourri of Other Violations; Asserts Jurisdiction over an Employee of an Affiliate of a Member

The Chicago Mercantile Exchange announced a number of exchange disciplinary actions, two of which are particularly worth noting because of issues related to position limits in related contracts, and the claimed reach of CME jurisdiction.

Compliance Weeds: The Merrill Lynch Commodities matter should remind members that the CME considers that it has jurisdiction over (1) not only its members, but (2) employees of its members, (3) certain of their affiliates, as well as (4) employees of these affiliates too -- no matter where physically located. Indeed, CME Rule 418 expressly provides that any person who trades a CME product expressly consents to the jurisdiction of the CME in connection with its investigatory and disciplinary process -- whether associated with a member or not:

"Any Person initiating or executing a transaction on or subject to the Rules of the Exchange directly or through an intermediary, and any Person for whose benefit such a transaction has been initiated or executed, expressly consents to the jurisdiction of the Exchange and agrees to be bound by and comply with the Rules of the Exchange in relation to such transactions, including, but not limited to, rules requiring cooperation and participation in investigatory and disciplinary processes."

Separately, the Vermillion Asset Management matters, should remind trading firms how important it is today to have the capacity to monitor in real time trading positions on a futures equivalent basis against position limits, particularly in situations where position limits in one contract may be conditioned on adherence to position restrictions in another contract. Even a temporary intra-day position limit violation corrected by the end of day may be prosecuted as a rule violation. Imagine how complicated this will be when swaps, futures and options must be aggregated across affiliated entities and monitored real time on a futures equivalent basis in order to comply with CFTC position limit requirements.

And briefly:

Compliance Weeds: Clearly, as numerous recent AML matters indicate, regulators worldwide, especially FINRA, have made prosecuting AML violations a high priority with costly consequences. If you haven't reviewed my prior Compliance Weeds regarding how better to keep track of "Red Flags," now is the time. Check out ("JP Morgan Criminally Charged and Settles Related to Its Handling of Bernard Madoff Accounts; OCC and FINCEN Civil Charges Also Settled; " see Compliance Weeds at the end of the article).

And even more briefly:

My View: Could this be an early example of Acting Commissioner’s Mark Wetjen’s more conciliatory approach in addressing the international coordination of swaps regulation?

For more information, see:

CFTC DCR Approval OF ASXCF Handling of Certain Proprietary Swaps Trades of US Clearing Members:
CFTC DSIO Notice Related to Reporting of Certain Matters:

CME Disciplinary Actions:

John Forlenza:

Merrill Lynch Commodities (Europe) Limited:

COMEX Violation: NYMEX Violation:

See also: Disciplinary Actions against Guillaume Marchand:

Christopher Moore:

Louis Quaglia:

Vermillion Asset Management: 
March 22, 2013 Violation:
November 26, 2012 Violation:

DFSA Prevails in Enforcement Action against Deutsche Bank:
ESMA Opinion on Complex Products:
FINRA AWC re: Brown Brothers Harriman:
Singapore MAS Consultation Paper on Securities Market Structure and Practices: US SEC Enforcement Action related to “Parking”

Thomas Gonnella
Ryan King

US SEC Proposed Five-Year Strategic Plan:

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 February 8, 2014, 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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