CFTC Considering Automated Trading Rules
CFTC Chairman Massad recently announced that the CFTC is considering adopting rules that would specifically address automated, or algorithmic, trading. Chairman Massad also indicated that the focus of the rules would be on proprietary traders with direct access to exchanges.
While acknowledging that automated trading has brought many benefits to the marketplace, he also noted that the markets have evolved significantly since the days when most trading occurred on the floors of the exchanges. Chairman Massad further indicated that the time was right to examine whether current rules, designed to ensure integrity and transparency, and prevent manipulation, are up to date in light of changes in the markets. In support thereof, Chairman Massad also noted that automated trading accounts for over 50% of trading on U.S. financial markets as a whole, and 60-80% of trading on U.S. futures markets.
Civil and Criminal Enforcement Matters for Disruptive Trading Practices Increase
The CFTC, the Department of Justice and the Exchanges continue to pursue cases alleging disruptive trade practices on an increasing basis. Recently, the Department of Justice filed its second criminal action based on “spoofing” allegations and asserting violations of the Commodity Exchange Act against Navinder Singh Sarao, a UK resident. In its complaint, the Department of Justice alleges that Sarao’s trading in E-Mini S&P 500 futures contracts contributed to the Flash Crash which occurred on May 6, 2010. Specifically, the Department of Justice alleges that Sarao placed and cancelled large orders without the intent to have them executed and further “layered” his orders to drive prices downward. Sarao is currently fighting extradition to the U.S.
The Sarao matter comes on the heels of the criminal indictment against Michael Coscia, where Coscia of Panther Energy Trading is accused to have programmed algorithms to engage in spoofing. Recently, the District Court Judge denied Coscia’s motion to dismiss the indictment which, among other things, asserted that the anti-spoofing statute, Section 4c(a)(5(C) of the Commodity Exchange Act, was unconstitutionally vague. A jury trial in the Coscia matter is set for October 26, 2015.
If you would like any further information on spoofing-related decisions, please contact us.
House Passes Second CFTC Reauthorization Bill; White House Promises Veto
Congress and the Administration continue to debate legislation that would reauthorize the CFTC, but are yet, no closer than they were in 2014 to passing legislation. Issues that continue to be debated are CFTC funding, swaps end-user relief from the Dodd-Frank Act and CFTC rulemaking procedures.
Last year, the House approved the “Customer Protection and End-User Relief Act,” but the bill was never brought to the Senate floor for a vote. Recently, a second reauthorization bill with a similar name, “The Commodity End-User Relief Act,” introduced to the House by Rep. Michael Conaway (R) of Texas, passed and will now be considered by the Senate. While reauthorizing the CFTC until 2018, the Commodity End-User Relief Act would, among other things, expand relief for swaps end-users from mandated clearing requirements, require CFTC rules subject to the formal rulemaking procedure for cross-border transactions and require written procedures for FCMs’ handling of residual interest. The White House has announced that it would veto the Commodity End-User Relief Act if passed by Congress because in its opinion, the bill undercuts regulation imposed under the Dodd-Frank Act and “undermines the efficient functioning” of the CFTC. The White House also noted that the reauthorization bill offered no solution to the perceived inadequate funding of the CFTC, and proposed that Congress consider imposing user fees to fund the CFTC, which would presumably be paid by CFTC registrants and market participants.
Earlier this year, the House Agricultural Committee held two hearings regarding CFTC reauthorization. In February, Chairman Massad testified before the Committee and focused on developments during the last year. In his testimony, Chairman Massad addressed end-users, the treatment of margin for purposes of banking regulations’ supplemental leverage ratios, position limits, and Cross-Border Guidance issues. In the second hearing in March, the Committee heard testimony from different industry participants including the heads of FCMs, the NFA and end-users.
While Congress continues to consider CFTC reauthorization, it is apparent that any new law will likely provide additional relief to end-users and possibly require clearer rules for cross-border swaps transactions.
Enforcement Actions Against Non-U.S. Persons Increase
Recently, a Singaporean steel company was the respondent in a NYMEX disciplinary action arising from violations of Rule 562 governing position limits. Pursuant to a settlement agreement with the Exchange, the Singaporean steel company agreed to pay a fine of $25,000 and profit disgorgement of $573,900. Although the Singaporean steel company was not a member, under Exchange rules and CFTC rules, the company consented to the jurisdiction of the Exchange and agreed to be bound by all of the Exchange rules simply by executing a transaction on the Exchange.
Over the last few years, we have seen a significant increase in the number of disciplinary actions and investigations brought by U.S. exchanges against Non-U.S. customers.
If you would like additional information on recent enforcement matters against Non-U.S. customers, including a summary of the relevant rules and fines for each matter, please contact us.
CFTC Solicits Public Comments As A Result of Cross-Border Litigation
The CFTC recently requested public comments regarding the costs and benefits associated with swaps rules interpreted by the Cross-Border Guidance associated with swaps activities outside the United States. The CFTC’s request for comments follows a remand by the District Court for the District of Columbia in SIFMA v. CFTC, in which the adoption of the Cross-Border Guidance was challenged by industry participants.
Although the Court upheld the CFTC’s adoption of the Cross Border Guidance, it remanded the matter so that the CFTC could address inadequacies in its cost-benefits analysis associated with 8 of 14 rules interpreted by the Cross-Border Guidance. As a result, in its latest pronouncement, the CFTC clarified that its cost benefits analysis associated with the rules applies to both domestic swaps activities and swaps activities outside the United States.
The CFTC’s request for comments focused on whether there are cross-border costs and benefits associated with the rules that differ from those associated with the rules domestically. The comment period on the CFTC’s request for comments has closed.
CFTC Approves Final Rule Concerning Residual Interest for FCMs
The CFTC has approved a final rule addressing the Residual Interest Deadline (CFTC Rule 1.22), which was viewed generally as a victory for FCMs and its customers. As part of customer protection measures enacted following the collapse of MF Global, CFTC Rule 1.22 requires an FCM to compute the aggregated amount by which any of its customer accounts are undermargined as of the close of each business day and for the FCM to make up the difference from its own funds. Under a phased-in compliance schedule, CFTC Rule 1.22 required the FCM to maintain, or deposit if necessary, a sufficient amount of its own funds in its customer segregated account to offset the difference by the Residual Interest Deadline of 6:00 p.m. (Eastern) the next business day. Absent action by the CFTC, under the phased-in compliance schedule, the 6:00 p.m. deadline would have automatically terminated on December 31, 2018. Thereafter, the Residual Interest Deadline would have moved to earlier in the day as of the time of settlement. In its final rule, the CFTC removed the automatic termination date of December 31, 2018 and instead, the Residual Interest Deadline may only be adjusted upon further action of the CFTC.
During the comment period, critics of the existing rule pointed out that moving the Residual Interest Deadline to earlier than 6:00 p.m. (Eastern) on the settlement date could result in FCMs requiring the pre-funding of margin, which would ultimately increase costs for customers. The Chairman and Commissioners voted unanimously to pass the final rule.