The Korea Exchange, Inc. agreed to pay a fine of US $150,000 to resolve charges that it falsely told the Commodity Futures Trading Commission that it complied with the terms of a CFTC-granted exemptive order, when it knew it did not.
The Korea Exchange, a central counterparty clearinghouse, received the exemptive order in October 2015 authorizing it to clear swaps for US persons without registering as a derivatives clearing organization with the CFTC because it was subject to comparable oversight by the Korean Financial Services Commission, its home regulator, as it would be if registered as a DCO. (Click here to access the KRX Order.) As part of its exemptive order, KRX was required to comply in all material respects with the Principles for Financial Market Infrastructures adopted by the Bank of International Settlements (click here to access), and certify its compliance to the CFTC at least annually.
Among other things, as part of its PFMI obligations, KRX was required to stress test on a daily basis the adequacy of its financial resources and to evaluate and adjust its resources as appropriate in response.
According to the CFTC, from 2016 through early 2018, KRX conducted daily stress tests, but did not evaluate and adjust its resources as required. KRX considered how to fix this problem by October 2017 and changed its policies in on December 18, 2017; it implemented measures to fix its failure in March 2018. Notwithstanding, in February 2018, KRX certified to the CFTC that it observed the PFMIs in “all material respects” and had been complying with all terms in its exemptive order.
This making of a false statement of material facts when KRX knew or reasonably should have known they were false or misleading constituted a violation of applicable law, charged the CFTC. (Click here to access 7 U.S.C. § 9(2).)
KRX settled the CFTC’s enforcement action without admitting or denying any of the Commission’s findings or conclusions. In addition to paying a fine, KRX agreed to retain a third party to evaluate the exchange’s PFMI compliance and to issue an assessment report to the CFTC within six months. The third party will have to conduct a second review of KRX two years after completion of its original report.
Legal Weeds: In September 2018, the CFTC prevailed in an enforcement action against Gregory L. Gramalegui for violating anti-fraud provisions of relevant law and disclosure requirements of CFTC rules in connection with his solicitation of customers for a futures trading system and an advisory service. The federal court in Colorado hearing this matter found that the CFTC proved its allegations and assessed a fine against Mr. Gramalegui of US $1.9 million and ordered disgorgement.
Among its claims, the CFTC charged Mr. Gramalegui with making false statements to it in violation of the same provision of law relied on by the CFTC in its KRX enforcement action. This law was adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.
According to the court, “a statement is actionable under this section when it is either literally untrue or when it fails to include all information necessary to give the recipient a complete and accurate picture of the state of affairs communicated.” Here the court found that the defendant violated this provision of law when he told the CFTC in connection with a deposition that he did not advertise for clients but that clients found him through Google and other search engines; he did not send out marketing emails between September 2014 and 2015; and he played no role in a statement on his website that “most traders have made enough on one trade to pay for the[ir] monthly subscription,” as well as when he did not tell the CFTC that he communicated to customers other than through one identified email account and that he had altered the copy of his website prior to producing it to the CFTC, among other statements and misstatements. Each of these statements was false or misleading, said the court.
Mom always said to tell the truth and not to mislead people. The CFTC has tools to sanction persons for not following mom’s advice – even persons located outside the United States. (Click here to access the court’s full decision.)