Gary DeWaal and Associates LLC

A shortened workweek for most in the US and for some in Europe seems to have inspired a slowdown in regulatory developments worldwide impacting the financial services industry. As a result, only the following few matters are covered in this week’s Bridging the Week:

• CFTC Acting Chairman Again Previews That Exempt Foreign DCOs Are Likely Coming Soon;
• IOSCO Rates Countries Implementation of the Principles for Financial Market Infrastructure; US Assessed a Laggard;
• ICE Clear Europe and Its FCM Clearing Members Authorized to Commingle Domestic and Foreign Futures and Options in a Single Segregated Account for Portfolio Margining; NYPC Closes Its Doors;
• Federal Judge Blocks Defendants’ Subpoena for Identity of Confidential Informant in CFTC Manipulation Action; and more.

Also, FINRA has issued a supplement to the standard form of the 2002 Securities Futures Risk Disclosure Statement. 

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CFTC Acting Chairman Again Previews That Exempt Foreign DCOs Are Likely Coming Soon

In a speech last week before an attorney group in Washington, DC, Acting Chairman Mark Wetjen highlighted recent accomplishments of the Commodity Futures Trading Commission in implementing Dodd-Frank, particularly related to rolling-out the Commission’s trading mandate, addressing “market structure issues related to risk controls” and risk controls by futures commission merchants, and adjusting rules to accommodate end users.

In addition, Mr. Wetjen again disclosed that he has instructed the staff of the CFTC to develop “a process for recognizing foreign clearinghouses under authority provided by Congress in Dodd-Frank.” This process presumably would permit such entities to act as derivatives clearing organizations exempt from US registration requirements and to process transactions for at least certain US persons. (For a discussion regarding the authorization of the CFTC to permit exempt DCOs, see the article (and related My View commentary) “CFTC Grants No Action to HK Clearing Entity to Act as DCO Temporarily for US Persons Without Registration” by clicking here.) 

In his presentation, the acting chairman also acknowledged that, despite the CFTC’s relief earlier this year to certain qualified trading venues (QMTF) in Europe to host trading by US persons without registering as a swap execution facility, no QMTF has taken advantage of the relief.  Mr. Wetjen claimed that this development is a function of business considerations and not of regulatory difficulty:

“Some have suggested that the reason there is not a QMTF currently operating pursuant to this effort is because the conditions were not calibrated appropriately. I disagree. The most agile platforms were able to adopt standards to comply with these conditions within the extended time frame provided by the Commission, but either chose not to or pursued a different regulatory course. A better explanation for the lack of uptake is that last year many global financial institutions restructured their operations in a way that made the relief less useful given its timing.”

(For details on this relief, see article “CFTC Grants Conditional Relief for Swaps Trading on Certain Multilateral Trading Facilities Overseen by EU Regulators” by clicking here.  See also the article “CFTC Extends No-Action Relief to Swaps Executed on EU Regulated MTFs” by clicking here.) 

Finally, Mr. Wetjen also indicated that the Commission will soon provide guidance on how FCMs can comply with pre-execution risk control requirements in connection with block trades, and noted that since so-called package transactions (those where at least one leg involves a swap subject to the CFTC trading mandate) have been required since May 16 to trade on a SEF or designated contract market, “…some preliminary data suggests that these efforts may actually be accelerating the move to both regulated and electronic trading.”

And briefly:

• IOSCO Rates Countries Implementation of the Principles for Financial Market Infrastructure; USA Assessed a Laggard: Last week, the Bank for International Settlements (BIS) and the International Organization of Securities Commissioners (IOSCO) said that the 27 participating jurisdictions have made significant process in completing or adopting legislation, regulations and/or policies that will enable them to implement the “Principles for Financial Market Infrastructure that they adopted in April 2012.” These 24 principles relate to structure and organization; credit and liquidity risk management; settlement; default management; general business and operational risk management and access, among other topics; there are also five responsibilities assigned to regulators related to their oversight of FMIs. (FMIs refer to the large central entities that typically settle or clear financial transactions or process payments for brokers and banks. They include clearinghouses, trade repositories, payment systems, central securities depositories (CSDs) and securities settlement systems (SSSs).) Specifically, BIS and IOSCO found high compliance by all 27 jurisdictions related to the responsibilities of regulators, but noted some issues related to the principles, particularly as they relate to CSDs and SSSs. Among the major jurisdictions cited for issues were Canada, China and the US. The US was cited as a laggard mostly because of delays in finalizing certain regulations by the Federal Reserve Bank and the Securities and Exchange Commission.
   
• ICE Clear Europe and Its FCM Clearing Members Authorized to Commingle Domestic and Foreign Futures and Options in a Single Segregated Account for Portfolio Margining; NYPC Closes Its Doors: The CFTC on May 30 authorized ICE Clear Europe Limited and its future commission merchant clearing members to commingle both domestic futures and options traded on ICE Futures US with certain foreign futures and options traded on ICE Futures Europe and ICE Endex in a single segregated futures customer account, along with related customer funds. The combined futures and options may be subject to portfolio margin. In October 2012, the CFTC granted similar relief in connection with energy foreign futures traded on ICE Europe and all futures traded on ICE US. The Commission’s new order expands this relief to cover interest rate, financial and energy foreign futures traded on ICE Endex and ICE Europe too. Both ICE Clear and each FCM clearing member are subject to certain conditions to take advantage of this order. Ironically this new order was granted on the same day the CFTC approved the withdrawal of New York Portfolio Clearing LLC as a designated contract market. NYPC, a joint venture between ICE and Depository Trust & Clearing Corporation, had intended to provide portfolio margin across multiple asset classes including securities and futures.

• Federal Judge Blocks Defendants’ Subpoena for Identity of Confidential Informant in CFTC Manipulation Action: In connection with its enforcement action against various defendants related to an alleged 2007 and 2008 price manipulation of crude oil futures, the CFTC was unable to stop a subpoena by defendants for certain information from a non-party attorney; however it prevented disclosure of the identity of a third party informant and secured the return of certain metadata it accidentally had turned over to the defendants. The defendants in this matter are Parnon Energy Inc., Arcadia Petroleum Ltd, Arcadia Energy (Suisse), Nicholas Wildgoose and James Dyer. In April 2013, the CFTC turned over certain documents to the defendants that indicated that the Commission had “consulted with a confidential informant via the informant’s attorney.” Specifically, it appeared to the defendants that the Commission had provided the informant with defendants’ proprietary trading information, and defendants, in response, tried to learn how the informant “might have used or disseminated their proprietary information.” A US District Court judge hearing this matter in NYC, decided on May 14, 2014, that the informant’s identity was privileged by law and thus not discoverable, but the attorney’s identity was not similarly protected. This was because the CFTC’s document production that had intimated the attorney’s existence was “reckless” as the Commission had turned over “hundreds of thousands of documents” without first reviewing them for privileged information,” said the judge. Since the CFTC’s production of the metadata was inadvertent, the court ordered defendants to return it.

And even more briefly

• NFA Proposes to Increase Budget and Lower Fees: Way too early for Christmas (but no one is complaining), the National Futures Association announced that it proposes to lower the fee it charges FCMs on futures and related options contracts for public customers from US $.02 to US $.01/side. The reduction is subject to CFTC approval. If approved, the lower fees will go into effect October 1. At the same time, the NFA said it is increasing its 2015 budget by 19% (to US $82 million). Among other things, this increase will accommodate the hiring of 30 additional persons related to its new oversight of swap dealers and major swap participants, as well as new staff to monitor a large number of new commodity pool operators.

• CFTC Schedules Roundtable Regarding Position Limits for Physical Commodity Derivatives and Reopens Aggregation Proposal for Public Comment: The CFTC will be holding a roundtable on June 19 to discuss position limits for physical commodity derivatives. Among the topics to be discussed are: the different types of hedges by commercial entities (including anticipatory hedging); spot month limits in physical-delivery and cash-settled contracts; and aggregation of positions based on 50% or more common ownership and identical trading strategies. As previously reported here (see the article "CFTC Announces Measures to Help Certain End Users"), the CFTC will also re-open the comment period for its proposed position limits and aggregation rules from June 12 to July 3.

• CFTC TAC Agenda Set: The CFTC’s Technology Advisory Committee will meet on June 3 in Washington, DC. Topics to be discussed include the alleged advantages of low latency trading firms on derivatives markets; surveillance programs in the 21^st century; and buy side participation on swap execution facilities.

• FINRA Issues 2014 Supplement to 2002 Securities Futures Risk Disclosure Document: The Financial Industry Regulatory Authority has issued an a supplement to the October 2002 Security Futures Risk Disclosure Statement to accommodate changes proposed by OneChicago LLC to list a product with a physical delivery settlement cycle less than three business days. FINRA requires member firms to deliver an amended statement or just the new supplement to each customer having an approved security futures account by not later than the time a confirmation of a transaction is issued to a customer. The last time a supplement was issued by FINRA was August 2010. The FINRA implementation date for its Supplement is June 23, 2014. (NFA apparently has not yet announced adoption of the new supplement; however, it followed FINRA in adopting the last supplement  in 2010.) 
   
• FIA Releases New Customer Funds Q&As: FIA has released Version 3.0 of its Protection of Customer Funds Frequently Asked Questions. This document sets forth important considerations for customers when reflecting upon the protection of their positions and funds at FCMs under US law and rules.

For more information, see:

CFTC Acting Chairman Mark Wetjen's Remarks:
http://www.cftc.gov/PressRoom/SpeechesTestimony/opawetjen-9.

CFTC Schedules Roundtable Regarding Position Limits for Physical Commodity Derivatives:
http://www.cftc.gov/PressRoom/PressReleases/pr6937-14.
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2014-12427a.pdf.

CFTC TAC Agenda Set:
http://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_060314agenda.

Federal Judge Blocks Defendants’ Subpoena for Identity of Confidential Informant in CFTC Manipulation Action:
http://www.nysd.uscourts.gov/cases/show.php?db=special&id=401.

FIA Releases Revised Customer Funds Q&As:
http://www.futuresindustry.org/downloads/PCF_questions.pdf.

FINRA 2014 Supplement to 2002 Securities Futures Risk Disclosure Document:
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p511673.pdf.

See also 2010 Supplement:
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122028.pdf.

ICE Clear Europe and Its FCM Clearing Members Authorized to Commingle Domestic and Foreign Futures and Options in a Single Segregation Account for Portfolio Margining:
http://www.cftc.gov/ucm/groups/public/@requestsandactions/documents/ifdocs/iceclreur4dorder5-30-14.pdf.

IOSCO Rates Countries' Implementation of the Principles for Financial Market Infrastructure; US Assessed a Laggard:
http://www.bis.org/publ/cpss117.pdf.

NFA Fee Reduction:
http://www.nfa.futures.org/news/newsletter2.HTML.

NYPC Withdraws as DCO:
http://www.cftc.gov/ucm/groups/public/@requestsandactions/documents/ifdocs/nypcdcovacationorder.pdf.

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of May 31, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. 

Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained in this article is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

 

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