Gary DeWaal and Associates LLC

Yesterday, the CFTC filed and settled charges against ABN AMRO Clearing Chicago LLC for failing to segregate or secure sufficient customer funds on four occasions from March 2009 through August 2011; for failing to meet minimum net capital requirements as of month-end April 2011; and for not being to able to calculate and generate the correct margin required "for a very limited number of certain types of accounts" at some point prior to January 27, 2012, thus not maintaining accurate books and records. For these violations, ABN AMRO was required to pay a penalty of US$ 1 Million and enlist the services of a third party consultant to review and evaluate the Firm's existing internal control policies and procedures and risk management systems.

In addition, ABM AMRO was charged with failure to supervise because, according to the Commission, each of the Firm's violations "...were the result of a lack of adequate policies, procedures and/or controls and, for the most part, were preventable."  The review required by the third party consultant is quite detailed.

This lawsuit evidences the Commission's vehemence post MF Global and Peregrine Financial Group to prosecute cases and seek significant fines and undertakings even where there may be very sporadic and what may have been in the past considered de minimis violations of the CFTC's segregation, secured or net-capital rules.
The following are lessons learned from this action:

1. FCMs need to review their policies and procedures related to the handling of segregated, secured and cleared swaps customer funds as well as to margin.
2. Among other matters, the policies and procedures related to the handling of all categories of customer funds should address permitted movement of funds from these accounts, and the internal processes that should be followed in connection with such movements. In addition to one clerk physically processing such movements, another clerk or supervisor should verify daily, on at least a spot check basis, that movements were made in accordance with applicable policies and procedures;
3. Among other matters, the policies and procedures related to Margin, should address all acceptable forms of margin by customers, as well as the consequences of a customer account being under-margined (ie, accounts in deficit will result in a capital charge equal to the amount of such aggregate deficits).
4. Policies, procedures and processes related to the handling of all categories of customer funds and Margin should be reviewed periodically by the Firm's Internal Audit Department.
5. IAD should also endeavor to ensure that automated systems used to calculate margin do so correctly, and as part of this effort, test different types of accounts to ensure that the automatic calculation is correct.

For more information, see:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfabnamroorder061813.pdf

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 June 20, 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.