This is a photo of the National Register of Historic Places listing with reference number 7000063
Saturday, September 28, 2013
ADDRESS BY CFTC COMMISSIONER O'MALIA AT GLOBAL FORUM FOR DERIVATIVES MARKETS
FROM: COMMODITY FUTURES TRADING COMMISSION
Regulatory Harmonization, Not Imperialism: A Workable Cross-Border Framework
Keynote Address By Commissioner Scott D. O’Malia, The Global Forum for Derivatives Markets (34th Annual Burgenstock Conference), Geneva, Switzerland
September 26, 2013
Thank you very much for the kind introduction and for inviting me to speak here today.
These certainly are fascinating times in the world of derivatives, and it’s good to see so many people gathered here to discuss and debate the numerous pressing issues facing the industry today.
I would like to thank all of the regulators that took part in yesterday’s discussions regarding the status of the global regulatory framework. Yesterday’s meeting builds on last week’s IOSCO board meeting, which I attended and participated in. I have benefitted from both bilateral and multilateral discussions. Both the message and the goals are of my fellow regulators are clear. We must harmonize our rules to prevent regulatory arbitrage from undermining our comprehensive financial reforms.
Speaking of financial reforms, as you may have noticed, the Commission has been nothing if not busy the past three years. It has been working at a feverish – and sometimes too hurried – pace to implement the Dodd-Frank legislation. To date, the Commission has issued 61 final rules, orders and guidance documents. We have also issued over 100 exemptions and no-action letters – some for an indefinite time – from the very rules we just passed.
Today, I would like to focus on three topics. First, the cross-border regulatory framework. Second, the landscape for swap execution facilities (“SEFs”). And third, upcoming Commission rules on customer protection and position limits.
Cross-Border Framework: Regulatory Harmonization, Not Imperialism
Let me start with my first topic: cross-border issues. Right now we are at a critical juncture in global regulators’ efforts to establish a cross-border regulatory framework for derivatives. Before I get to my thoughts on what must be done in order to ensure an effective, efficient and workable framework, let’s review what has already taken place.
The Commission finalized its cross-border guidance on July 12.1 I had many serious concerns about the document that prevented me from supporting its approval. Let me briefly share a few of these concerns. First, the guidance failed to justify its overbroad extraterritorial reach under the statute’s “direct and significant” standard. This standard was in fact meant to be a limitation on the Commission’s authority, not an invitation to bring the world under the Commission’s jurisdiction.
Second, in staking out such an overbroad position, the guidance failed to give sufficient consideration to principles of international comity.
Third, the Commission should have issued the document as a rulemaking, not as an “interpretive guidance.” That may sound like a trivial distinction, but it is not.
A Commission interpretative guidance document does not have the force of law, in contrast to a Commission rule. Yet this guidance imposes obligations that have a practical binding effect, and market participants cannot afford to ignore these obligations for fear of enforcement or other penalizing action.
The issuance of interpretative guidance instead of a rulemaking had other negative consequences. It allowed the Commission to avoid a proper cost-benefit analysis. In addition, it allowed the Commission to avoid the requirements of the Administrative Procedure Act (“APA”), which was enacted by Congress to ensure fair notice, public participation, and reasoned decision-making and accountability in connection with agency action.
Fourth, and most relevant for our discussion here today, the Commission got the process and order of things all wrong. In finalizing the guidance, it made a preemptive unilateral move that only made more difficult the task of reaching a harmonized global framework with its fellow regulators – imperialist regulation, in other words. What the Commission should have done is the opposite: settle on a framework with international regulators, and then finalize its policy.
Substituted Compliance: Sunlight Is the Best Disinfectant
As the saying goes, “sunlight is the best disinfectant.” And I believe that holds true for the Commission’s substituted compliance process. It was and remains my hope that the previous policy overreach that occurred through the expansive cross-border guidance can be mitigated through a transparent, structured, and consistent process for the Commission’s substituted compliance determinations, a crucial element of the harmonization effort.
As part of such a process, I have emphasized the importance of offering the opportunity for other regulatory bodies to engage directly with the full Commission. This would allow us to better understand how our rules and theirs will work and to minimize the likelihood of regulatory retaliation and inconsistent, duplicative, or conflicting rules.
I have been doing my best to facilitate interaction and dialogue between the Commission and fellow regulators. As I mentioned, last week I attended IOSCO’s annual conference in Luxembourg. There, I participated in the board’s sessions and had productive discussions with regulators from the jurisdictions that have applied, or are planning to apply, for substituted compliance.
Nevertheless, thus far the process for substituted compliance determinations has not been transparent enough. By way of analogy, it suffers from many of the same shortcomings as the concerns with the development of an index developed by a price reporting agency. Both are opaque and one never knows exactly how the methodology is applied.
It’s time to take the process out of the dark, and explain to the rest of the Commission and the applicants how these evaluations will be conducted.
Supervisory MOUs: The Flexible Complement to Substituted Compliance
Besides substituted compliance determinations, there is another important element to the cross-border regulatory framework: supervisory memoranda of understanding (“MOUs”) between the Commission and fellow regulators. These MOUs, if done right, can be a key part of the global harmonization effort.
The reason for this is that the substituted compliance regime cannot, by itself, solve the cross-border puzzle. What substituted compliance will do is to provide a clear understanding of similarities and differences between jurisdictions. What it won’t do – especially because the determinations are to be made by the end of this year, and the rulemaking process is ongoing and fluid in a number of places – is provide the necessary flexibility to fill in any gaps. The MOUs provide this flexibility.
Because the MOUs are so complementary to substituted compliance, the Commission should be able to review them alongside the respective substituted compliance determinations and vote on them at the same time.
Dictating to the rest of the world a one-size-fits-all regulatory standard will not yield long-term regulatory cooperation. While it is important that regulators identify where there are differences in our regulatory regimes, we must also have a mutually agreed upon solution for resolving our differences through bilateral supervisory agreements.
SEFs: To Foster the Landscape, the Commission Must Be Flexible
Now, I would like to move to my second topic: SEFs. We are less than 10 days away from SEFs going live on October 2. As of today, Commission staff has temporarily registered 15 SEFs and has to review four more applications before October 2.
I am very optimistic about the potential SEF platforms and the innovative trading opportunities they can provide. Not only will markets benefit from increased standardization and improved liquidity, but I will be interested to see how the swap/futures trading relationship evolves as a result of these platforms.
On September 12, I chaired a Technology Advisory Committee (“TAC”) meeting where the Commission had an opportunity to hear concerns from different market participants, including SEFs, dealers, and clearing members, regarding the implementation of various regulatory requirements.
Given the concerns raised by market participants, it would make sense to delay the October 2 compliance date, especially because this date is an arbitrary date and is not tied to any legal requirements. Market participants would benefit from getting a time-limited extension to allow for a smooth transition to these new execution venues. If the Commission wants to foster a robust, competitive landscape for SEFs, it must be flexible enough to adjust the compliance date based on market and technology realities, and not stick with an unworkable date simply to adhere to an individual agenda.
A number of TAC panelists raised concerns about various onboarding issues. It was clear from the discussions that market participants need more time to review SEF rule books and participant agreements for consistency and legal compliance. Frankly, I don’t blame them for being extra careful, given the fact that Commission staff publicly announced that it is not going to review SEF applications for substantive compliance.
Another troublesome issue that was brought up during the TAC meeting involves notorious Footnote 88 in the SEF final rules.
The rules require existing multiple-to-multiple swap trading venues to register as SEFs, even if they only offer products that are not yet subject to the trade execution mandate. This has resulted in venues offering products like non-deliverable forwards and foreign exchange options to rush to get registration applications completed on time.
However, Footnote 88 allows other platforms, such as single dealer platforms, to continue trading swaps not subject to the trade execution mandate and without having to register with the Commission.
Another issue that causes a lot of anxiety among SEFs is the requirement to report permitted transactions (i.e. transactions that are not subject to the trade execution mandate) to a swap data repository (“SDR”).
Based on the proposed rules, SEFs did not anticipate that the Commission would require these transactions to be executed on a SEF. Thus, SEFs do not have sufficient time to build the technology infrastructure for the reporting of these transactions.
Many of these permitted transactions are not electronically executed and are, by nature, less standardized than required transactions. Thus, from a technology perspective, SEFs are concerned that the trade reporting mechanisms will simply not be in place by October 2.
Our track record on utilizing and analyzing data has not been good and the Commission struggles to effectively understand and organize SDR data. The last thing we can afford is to implement an untested and unprepared reporting system based on an arbitrary date.
Market participants are also concerned about Commission staff’s sudden announcement via an email message that SEFs are required to provide for pre-execution credit checks.
Without certainty of clearing at the point of execution, counterparties are exposed to the potentially significant costs of a trade failure. Some type of pre-trade credit-checking is necessary to ensure that clearing members will extend sufficient credit. This is a policy that I support.
However, since neither the SEF proposed rule nor the final rule addressed this requirement, market participants are scrambling to understand the requirement and the pros and cons of various technology models that could be utilized to set these credit limits.
First, the Commission must be clear about its expectations regarding guarantee arrangements and what the market should do if a trade is broken because of credit issues. Second, if these expectations require additional technology investments, I believe that the Commission needs to give industry more time to build the necessary technology infrastructure as well as to iron out various workflow issues.
Last but not least, the Commission is facing serious problems regarding its treatment of EU-regulated multilateral trading facilities (“MTFs”). In the Barnier-Gensler “Path Forward” document,2 the Commission assured European regulators that it will extend appropriate time-limited transitional relief to certain EU-regulated MTFs, in the event that the Commission’s trade execution requirement is triggered before March 15, 2014.
However, the flexibility embodied in this agreement appears to be in direct contradiction to the SEF final rules that expressly require all platforms meeting a SEF definition to register by October 2, or cease operation. I don’t think the current registration requirement on October 2 is consistent with either the spirit or the letter of the “Path Forward” document. It is unclear to me what the impact on liquidity will be if as a result of this problem, all U.S. persons are required to trade exclusively on U.S. SEF platforms or else to be forced to revert to bilateral trading.
Upcoming Rules: Customer Protection and Position Limits
My third and final topic is to share some of my thoughts on two important rules currently being considered by the Commission.
One is a final rule on enhanced customer protection measures. In the wake of the major failures of MF Global and Peregrine Financial, the Commission and the industry are looking carefully at ways to make enhancements to customer protection.
One improvement already in place is an electronic customer funds confirmation network that will confirm the customer balances held at FCMs and custodian banks. This initiative, funded entirely by the industry, was first contemplated at an emergency TAC meeting I convened in July 2012 to discuss customer protection. Its operation today will ensure that customer funds can’t be used for unauthorized purposes.
Currently before the Commission is a draft final rule to make various reforms to accounting standards, reporting requirements and a controversial new provision requiring FCMs to maintain enough residual interest in their segregated customer accounts in an amount that would ensure that at no point does one customer’s funds margin or extend credit to another customer.
Residual Interest: A Change of Interpretation
This proposal has been met with great concern across the entire industry, in large part because the proposal is at odds with the Commission’s long-held interpretations spanning the past 50 years. Historically the Commission has allowed FCMs to meet their residual interest requirement by maintaining additional funds in an amount equal to the net margin deficit the FCM predicted for its segregated account. This calculation was required to be made once a day, not in real time.3
With the Commission’s reinterpretation, FCMs would be required to change their practices to hold enough residual interest to make up for the margin deficiency of all customers at all times on a gross basis. This means that a firm would be required to calculate the potential margin deficit for each customer throughout the trading day and set aside an amount equal to that estimated deficit so that no customer’s margin excess is used to margin the position of another customer.
If the Commission maintains its original standard of compliance “at all times,” we will have an enormous increase in the capital required to participate in these markets. According to a review conducted by FIA, this new residual interest rule will require clearing members on U.S. futures exchanges, and most likely their customers, to put up an additional $100 billion in order to meet the requirement.4
I have heard from a large number of agricultural interests – farmers, ranchers and many smaller FCMs who serve these customers – that believe this provision will raise their costs significantly. Commercial firms who would be most impacted by this policy change have indicated they aren’t able to shift funds like large commercial banks and need flexibility to make their margin payments to the FCM.
If, on the other hand, the Commission moves away from the “at all times” standard, we would have to articulate how a margin calculation done at any other time interval satisfies the supposed statutory requirements of requiring margin “at all times.”
Weak Cost-Benefit Analysis
I think we must also look at this residual interest issue in the context of the cost-benefit analysis. As you know, I have frequently cited the Commission’s cost-benefit analysis as a source of weakness when the agency justifies the imposition of a new regulatory requirement on the industry. Unfortunately I think the same criticism can be made here.
The Commission’s proposal does acknowledge that it is very likely that FCMs will pass along the additional cost of compliance to their customers. However, it makes no effort to quantify the cost borne by those customers, or to link that cost directly to the actual risk those customers introduce into the derivatives markets.
I appreciate the fact the rule change is intended to increase protection for customer funds. But, when the rules propose reforms that significantly increase the cost to a point that it becomes uneconomic to hedge, it is hard to argue that we are protecting customers.
This is why I believe it is so important the Commission quantify the cost versus the benefits. We also need to take a clear look at what actual protection this change will provide based on past practice. I believe through improved surveillance and the use of technology to monitor customer flows, we can make improvements to current practice and still provide the flexibility to commercial firms to make timely margin payments, without imposing unreasonable costs.
Position Limits
The Commission is also considering a new proposed rule on position limits. As a preliminary matter, I question the unsavory maneuver of proposing a new rule while simultaneously continuing to argue in the courts that the original, vacated rule was valid. Putting that aside, I will focus mainly on a few key areas as I consider the new proposal.
First, statutory justification: the Commission must do the necessary homework it failed to do in the vacated rule in order to justify establishing any limits. Second, bona fide hedging: the Commission must articulate a definition of hedging that reflects the realities of how commercial firms use the derivatives markets to manage risk, in order for these activities to be exempted from any limits. And third, aggregation of positions: the Commission’s aggregation policy must be reasonable in principle, and it must be workable in practice given complicating factors such as complex corporate structures and relationships as well as laws that prohibit information-sharing.
Conclusion
I would like to conclude today by returning to my first topic: the cross-border framework. Today’s derivatives markets are undoubtedly global and highly interconnected. Just as we must accept this reality, we must also accept that the Commission is not the global regulatory authority. It simply cannot be, not least because of resource limitations – but more than that, it should not want to be.
The only workable and effective way to regulate these markets is for regulators to work together and establish a harmonized framework that avoids overreach, duplication, inconsistency, and conflict. To achieve this, the Commission must implement a transparent process for substituted compliance. This process must include active engagement with fellow regulators. And the Commission must complement this substituted compliance regime with a set of flexible MOUs. If it does these things, the Commission can rightly take credit for choosing the path of regulatory harmonization over the path of regulatory imperialism.
Thank you very much for your time.
1 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.
2 http://www.cftc.gov/PressRoom/PressReleases/pr6640-13.
3 See 17 CFR §1.32, which calls for an FCM to compute at the close of each business day the total amount of futures customer funds on deposit in segregated accounts, the amount of futures customer funds required under the Commodity Exchange Act and Commission regulations to be on deposit, and the amount of the FCM’s residual interest in customer funds.
4 See FIA comment letter dated February 15, 2013, available at http://www.futuresindustry.org/downloads/Enhanced_Customer_Protection_021513.pdf.
Regulatory Harmonization, Not Imperialism: A Workable Cross-Border Framework
Keynote Address By Commissioner Scott D. O’Malia, The Global Forum for Derivatives Markets (34th Annual Burgenstock Conference), Geneva, Switzerland
September 26, 2013
Thank you very much for the kind introduction and for inviting me to speak here today.
These certainly are fascinating times in the world of derivatives, and it’s good to see so many people gathered here to discuss and debate the numerous pressing issues facing the industry today.
I would like to thank all of the regulators that took part in yesterday’s discussions regarding the status of the global regulatory framework. Yesterday’s meeting builds on last week’s IOSCO board meeting, which I attended and participated in. I have benefitted from both bilateral and multilateral discussions. Both the message and the goals are of my fellow regulators are clear. We must harmonize our rules to prevent regulatory arbitrage from undermining our comprehensive financial reforms.
Speaking of financial reforms, as you may have noticed, the Commission has been nothing if not busy the past three years. It has been working at a feverish – and sometimes too hurried – pace to implement the Dodd-Frank legislation. To date, the Commission has issued 61 final rules, orders and guidance documents. We have also issued over 100 exemptions and no-action letters – some for an indefinite time – from the very rules we just passed.
Today, I would like to focus on three topics. First, the cross-border regulatory framework. Second, the landscape for swap execution facilities (“SEFs”). And third, upcoming Commission rules on customer protection and position limits.
Cross-Border Framework: Regulatory Harmonization, Not Imperialism
Let me start with my first topic: cross-border issues. Right now we are at a critical juncture in global regulators’ efforts to establish a cross-border regulatory framework for derivatives. Before I get to my thoughts on what must be done in order to ensure an effective, efficient and workable framework, let’s review what has already taken place.
The Commission finalized its cross-border guidance on July 12.1 I had many serious concerns about the document that prevented me from supporting its approval. Let me briefly share a few of these concerns. First, the guidance failed to justify its overbroad extraterritorial reach under the statute’s “direct and significant” standard. This standard was in fact meant to be a limitation on the Commission’s authority, not an invitation to bring the world under the Commission’s jurisdiction.
Second, in staking out such an overbroad position, the guidance failed to give sufficient consideration to principles of international comity.
Third, the Commission should have issued the document as a rulemaking, not as an “interpretive guidance.” That may sound like a trivial distinction, but it is not.
A Commission interpretative guidance document does not have the force of law, in contrast to a Commission rule. Yet this guidance imposes obligations that have a practical binding effect, and market participants cannot afford to ignore these obligations for fear of enforcement or other penalizing action.
The issuance of interpretative guidance instead of a rulemaking had other negative consequences. It allowed the Commission to avoid a proper cost-benefit analysis. In addition, it allowed the Commission to avoid the requirements of the Administrative Procedure Act (“APA”), which was enacted by Congress to ensure fair notice, public participation, and reasoned decision-making and accountability in connection with agency action.
Fourth, and most relevant for our discussion here today, the Commission got the process and order of things all wrong. In finalizing the guidance, it made a preemptive unilateral move that only made more difficult the task of reaching a harmonized global framework with its fellow regulators – imperialist regulation, in other words. What the Commission should have done is the opposite: settle on a framework with international regulators, and then finalize its policy.
Substituted Compliance: Sunlight Is the Best Disinfectant
As the saying goes, “sunlight is the best disinfectant.” And I believe that holds true for the Commission’s substituted compliance process. It was and remains my hope that the previous policy overreach that occurred through the expansive cross-border guidance can be mitigated through a transparent, structured, and consistent process for the Commission’s substituted compliance determinations, a crucial element of the harmonization effort.
As part of such a process, I have emphasized the importance of offering the opportunity for other regulatory bodies to engage directly with the full Commission. This would allow us to better understand how our rules and theirs will work and to minimize the likelihood of regulatory retaliation and inconsistent, duplicative, or conflicting rules.
I have been doing my best to facilitate interaction and dialogue between the Commission and fellow regulators. As I mentioned, last week I attended IOSCO’s annual conference in Luxembourg. There, I participated in the board’s sessions and had productive discussions with regulators from the jurisdictions that have applied, or are planning to apply, for substituted compliance.
Nevertheless, thus far the process for substituted compliance determinations has not been transparent enough. By way of analogy, it suffers from many of the same shortcomings as the concerns with the development of an index developed by a price reporting agency. Both are opaque and one never knows exactly how the methodology is applied.
It’s time to take the process out of the dark, and explain to the rest of the Commission and the applicants how these evaluations will be conducted.
Supervisory MOUs: The Flexible Complement to Substituted Compliance
Besides substituted compliance determinations, there is another important element to the cross-border regulatory framework: supervisory memoranda of understanding (“MOUs”) between the Commission and fellow regulators. These MOUs, if done right, can be a key part of the global harmonization effort.
The reason for this is that the substituted compliance regime cannot, by itself, solve the cross-border puzzle. What substituted compliance will do is to provide a clear understanding of similarities and differences between jurisdictions. What it won’t do – especially because the determinations are to be made by the end of this year, and the rulemaking process is ongoing and fluid in a number of places – is provide the necessary flexibility to fill in any gaps. The MOUs provide this flexibility.
Because the MOUs are so complementary to substituted compliance, the Commission should be able to review them alongside the respective substituted compliance determinations and vote on them at the same time.
Dictating to the rest of the world a one-size-fits-all regulatory standard will not yield long-term regulatory cooperation. While it is important that regulators identify where there are differences in our regulatory regimes, we must also have a mutually agreed upon solution for resolving our differences through bilateral supervisory agreements.
SEFs: To Foster the Landscape, the Commission Must Be Flexible
Now, I would like to move to my second topic: SEFs. We are less than 10 days away from SEFs going live on October 2. As of today, Commission staff has temporarily registered 15 SEFs and has to review four more applications before October 2.
I am very optimistic about the potential SEF platforms and the innovative trading opportunities they can provide. Not only will markets benefit from increased standardization and improved liquidity, but I will be interested to see how the swap/futures trading relationship evolves as a result of these platforms.
On September 12, I chaired a Technology Advisory Committee (“TAC”) meeting where the Commission had an opportunity to hear concerns from different market participants, including SEFs, dealers, and clearing members, regarding the implementation of various regulatory requirements.
Given the concerns raised by market participants, it would make sense to delay the October 2 compliance date, especially because this date is an arbitrary date and is not tied to any legal requirements. Market participants would benefit from getting a time-limited extension to allow for a smooth transition to these new execution venues. If the Commission wants to foster a robust, competitive landscape for SEFs, it must be flexible enough to adjust the compliance date based on market and technology realities, and not stick with an unworkable date simply to adhere to an individual agenda.
A number of TAC panelists raised concerns about various onboarding issues. It was clear from the discussions that market participants need more time to review SEF rule books and participant agreements for consistency and legal compliance. Frankly, I don’t blame them for being extra careful, given the fact that Commission staff publicly announced that it is not going to review SEF applications for substantive compliance.
Another troublesome issue that was brought up during the TAC meeting involves notorious Footnote 88 in the SEF final rules.
The rules require existing multiple-to-multiple swap trading venues to register as SEFs, even if they only offer products that are not yet subject to the trade execution mandate. This has resulted in venues offering products like non-deliverable forwards and foreign exchange options to rush to get registration applications completed on time.
However, Footnote 88 allows other platforms, such as single dealer platforms, to continue trading swaps not subject to the trade execution mandate and without having to register with the Commission.
Another issue that causes a lot of anxiety among SEFs is the requirement to report permitted transactions (i.e. transactions that are not subject to the trade execution mandate) to a swap data repository (“SDR”).
Based on the proposed rules, SEFs did not anticipate that the Commission would require these transactions to be executed on a SEF. Thus, SEFs do not have sufficient time to build the technology infrastructure for the reporting of these transactions.
Many of these permitted transactions are not electronically executed and are, by nature, less standardized than required transactions. Thus, from a technology perspective, SEFs are concerned that the trade reporting mechanisms will simply not be in place by October 2.
Our track record on utilizing and analyzing data has not been good and the Commission struggles to effectively understand and organize SDR data. The last thing we can afford is to implement an untested and unprepared reporting system based on an arbitrary date.
Market participants are also concerned about Commission staff’s sudden announcement via an email message that SEFs are required to provide for pre-execution credit checks.
Without certainty of clearing at the point of execution, counterparties are exposed to the potentially significant costs of a trade failure. Some type of pre-trade credit-checking is necessary to ensure that clearing members will extend sufficient credit. This is a policy that I support.
However, since neither the SEF proposed rule nor the final rule addressed this requirement, market participants are scrambling to understand the requirement and the pros and cons of various technology models that could be utilized to set these credit limits.
First, the Commission must be clear about its expectations regarding guarantee arrangements and what the market should do if a trade is broken because of credit issues. Second, if these expectations require additional technology investments, I believe that the Commission needs to give industry more time to build the necessary technology infrastructure as well as to iron out various workflow issues.
Last but not least, the Commission is facing serious problems regarding its treatment of EU-regulated multilateral trading facilities (“MTFs”). In the Barnier-Gensler “Path Forward” document,2 the Commission assured European regulators that it will extend appropriate time-limited transitional relief to certain EU-regulated MTFs, in the event that the Commission’s trade execution requirement is triggered before March 15, 2014.
However, the flexibility embodied in this agreement appears to be in direct contradiction to the SEF final rules that expressly require all platforms meeting a SEF definition to register by October 2, or cease operation. I don’t think the current registration requirement on October 2 is consistent with either the spirit or the letter of the “Path Forward” document. It is unclear to me what the impact on liquidity will be if as a result of this problem, all U.S. persons are required to trade exclusively on U.S. SEF platforms or else to be forced to revert to bilateral trading.
Upcoming Rules: Customer Protection and Position Limits
My third and final topic is to share some of my thoughts on two important rules currently being considered by the Commission.
One is a final rule on enhanced customer protection measures. In the wake of the major failures of MF Global and Peregrine Financial, the Commission and the industry are looking carefully at ways to make enhancements to customer protection.
One improvement already in place is an electronic customer funds confirmation network that will confirm the customer balances held at FCMs and custodian banks. This initiative, funded entirely by the industry, was first contemplated at an emergency TAC meeting I convened in July 2012 to discuss customer protection. Its operation today will ensure that customer funds can’t be used for unauthorized purposes.
Currently before the Commission is a draft final rule to make various reforms to accounting standards, reporting requirements and a controversial new provision requiring FCMs to maintain enough residual interest in their segregated customer accounts in an amount that would ensure that at no point does one customer’s funds margin or extend credit to another customer.
Residual Interest: A Change of Interpretation
This proposal has been met with great concern across the entire industry, in large part because the proposal is at odds with the Commission’s long-held interpretations spanning the past 50 years. Historically the Commission has allowed FCMs to meet their residual interest requirement by maintaining additional funds in an amount equal to the net margin deficit the FCM predicted for its segregated account. This calculation was required to be made once a day, not in real time.3
With the Commission’s reinterpretation, FCMs would be required to change their practices to hold enough residual interest to make up for the margin deficiency of all customers at all times on a gross basis. This means that a firm would be required to calculate the potential margin deficit for each customer throughout the trading day and set aside an amount equal to that estimated deficit so that no customer’s margin excess is used to margin the position of another customer.
If the Commission maintains its original standard of compliance “at all times,” we will have an enormous increase in the capital required to participate in these markets. According to a review conducted by FIA, this new residual interest rule will require clearing members on U.S. futures exchanges, and most likely their customers, to put up an additional $100 billion in order to meet the requirement.4
I have heard from a large number of agricultural interests – farmers, ranchers and many smaller FCMs who serve these customers – that believe this provision will raise their costs significantly. Commercial firms who would be most impacted by this policy change have indicated they aren’t able to shift funds like large commercial banks and need flexibility to make their margin payments to the FCM.
If, on the other hand, the Commission moves away from the “at all times” standard, we would have to articulate how a margin calculation done at any other time interval satisfies the supposed statutory requirements of requiring margin “at all times.”
Weak Cost-Benefit Analysis
I think we must also look at this residual interest issue in the context of the cost-benefit analysis. As you know, I have frequently cited the Commission’s cost-benefit analysis as a source of weakness when the agency justifies the imposition of a new regulatory requirement on the industry. Unfortunately I think the same criticism can be made here.
The Commission’s proposal does acknowledge that it is very likely that FCMs will pass along the additional cost of compliance to their customers. However, it makes no effort to quantify the cost borne by those customers, or to link that cost directly to the actual risk those customers introduce into the derivatives markets.
I appreciate the fact the rule change is intended to increase protection for customer funds. But, when the rules propose reforms that significantly increase the cost to a point that it becomes uneconomic to hedge, it is hard to argue that we are protecting customers.
This is why I believe it is so important the Commission quantify the cost versus the benefits. We also need to take a clear look at what actual protection this change will provide based on past practice. I believe through improved surveillance and the use of technology to monitor customer flows, we can make improvements to current practice and still provide the flexibility to commercial firms to make timely margin payments, without imposing unreasonable costs.
Position Limits
The Commission is also considering a new proposed rule on position limits. As a preliminary matter, I question the unsavory maneuver of proposing a new rule while simultaneously continuing to argue in the courts that the original, vacated rule was valid. Putting that aside, I will focus mainly on a few key areas as I consider the new proposal.
First, statutory justification: the Commission must do the necessary homework it failed to do in the vacated rule in order to justify establishing any limits. Second, bona fide hedging: the Commission must articulate a definition of hedging that reflects the realities of how commercial firms use the derivatives markets to manage risk, in order for these activities to be exempted from any limits. And third, aggregation of positions: the Commission’s aggregation policy must be reasonable in principle, and it must be workable in practice given complicating factors such as complex corporate structures and relationships as well as laws that prohibit information-sharing.
Conclusion
I would like to conclude today by returning to my first topic: the cross-border framework. Today’s derivatives markets are undoubtedly global and highly interconnected. Just as we must accept this reality, we must also accept that the Commission is not the global regulatory authority. It simply cannot be, not least because of resource limitations – but more than that, it should not want to be.
The only workable and effective way to regulate these markets is for regulators to work together and establish a harmonized framework that avoids overreach, duplication, inconsistency, and conflict. To achieve this, the Commission must implement a transparent process for substituted compliance. This process must include active engagement with fellow regulators. And the Commission must complement this substituted compliance regime with a set of flexible MOUs. If it does these things, the Commission can rightly take credit for choosing the path of regulatory harmonization over the path of regulatory imperialism.
Thank you very much for your time.
1 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-17958a.pdf.
2 http://www.cftc.gov/PressRoom/PressReleases/pr6640-13.
3 See 17 CFR §1.32, which calls for an FCM to compute at the close of each business day the total amount of futures customer funds on deposit in segregated accounts, the amount of futures customer funds required under the Commodity Exchange Act and Commission regulations to be on deposit, and the amount of the FCM’s residual interest in customer funds.
4 See FIA comment letter dated February 15, 2013, available at http://www.futuresindustry.org/downloads/Enhanced_Customer_Protection_021513.pdf.
CFTC ORDERS NEWBRIDGE METALS TO PAY RESTITUTION FOR ILLEGAL PRECIOU METALS TRANSACTIONS
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Florida Company Newbridge Metals, LLC to Pay over $1.5 Million in Restitution for Illegal, Off-Exchange Precious Metals Transactions
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Newbridge Metals, LLC, based in Boca Raton, Florida, for engaging in illegal off-exchange precious metals transactions.
The CFTC Order requires Newbridge to pay restitution of $1,517,930.66 to its customers. In addition, the Order imposes permanent registration and trading bans against Newbridge and requires the firm to cease and desist from violating Section 4(a) of the Commodity Exchange Act, as charged.
As explained in the Order, financed transactions in commodities with retail customers, like those engaged in by Newbridge, must be executed on, or subject to, the rules of an exchange approved by the CFTC. The CFTC Order finds that, from February 2012 through February 2013, Newbridge solicited retail customers to buy and sell precious metals on a financed basis.
According to the Order, Newbridge telemarketers typically represented that a customer could purchase a desired quantity of precious metals with a 25% deposit, and that the customer could borrow the remaining 75%. The customer would then pay Newbridge a finance charge on the loan, a service charge, and a maximum commission of 15%.
If a customer agreed to the transaction, the customer sent the deposit, finance charge, and commission to Newbridge. Newbridge confirmed the transaction and ultimately transferred the funds to Hunter Wise Commodities, LLC (Hunter Wise), the Order finds. Hunter Wise subsequently remitted to Newbridge a portion of the customer commissions and fees, with Newbridge ultimately receiving $1,517,930.66 in commissions and fees for the retail financed precious metals transactions executed through Hunter Wise, the Order states.
However, according to the Order, neither Newbridge nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither company actually delivered any precious metals to any customer. Because Newbridge’s transactions were executed off exchange, they were illegal.
The CFTC sued Newbridge’s clearing firm, Hunter Wise, in federal court in Florida on December 5, 2012. The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations (see CFTC Press Release 6447-12). On February 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets (see CFTC Press Release 6522-13).
CFTC Orders Florida Company Newbridge Metals, LLC to Pay over $1.5 Million in Restitution for Illegal, Off-Exchange Precious Metals Transactions
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Newbridge Metals, LLC, based in Boca Raton, Florida, for engaging in illegal off-exchange precious metals transactions.
The CFTC Order requires Newbridge to pay restitution of $1,517,930.66 to its customers. In addition, the Order imposes permanent registration and trading bans against Newbridge and requires the firm to cease and desist from violating Section 4(a) of the Commodity Exchange Act, as charged.
As explained in the Order, financed transactions in commodities with retail customers, like those engaged in by Newbridge, must be executed on, or subject to, the rules of an exchange approved by the CFTC. The CFTC Order finds that, from February 2012 through February 2013, Newbridge solicited retail customers to buy and sell precious metals on a financed basis.
According to the Order, Newbridge telemarketers typically represented that a customer could purchase a desired quantity of precious metals with a 25% deposit, and that the customer could borrow the remaining 75%. The customer would then pay Newbridge a finance charge on the loan, a service charge, and a maximum commission of 15%.
If a customer agreed to the transaction, the customer sent the deposit, finance charge, and commission to Newbridge. Newbridge confirmed the transaction and ultimately transferred the funds to Hunter Wise Commodities, LLC (Hunter Wise), the Order finds. Hunter Wise subsequently remitted to Newbridge a portion of the customer commissions and fees, with Newbridge ultimately receiving $1,517,930.66 in commissions and fees for the retail financed precious metals transactions executed through Hunter Wise, the Order states.
However, according to the Order, neither Newbridge nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither company actually delivered any precious metals to any customer. Because Newbridge’s transactions were executed off exchange, they were illegal.
The CFTC sued Newbridge’s clearing firm, Hunter Wise, in federal court in Florida on December 5, 2012. The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations (see CFTC Press Release 6447-12). On February 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets (see CFTC Press Release 6522-13).
Friday, September 27, 2013
ATLANTA-AREA DEFENDANTS CHARGED BY SEC WITH SECURITIES FRAUD
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Atlanta-Area Defendants with Securities Fraud
On September 23, 2013, the Securities and Exchange Commission filed an action in federal court in the Northern District of Georgia, charging Stephen L. Kirkland (Kirkland), a Marietta, Georgia resident, and his company The Kirkland Organization, Inc. (TKO), a Georgia corporation, with violations of the federal securities laws for making false and misleading statements to investors in the United States and in Great Britain. The Commission’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against the defendants.
The Commission’s complaint alleges that between late 2008 and late 2010, Kirkland and TKO repeatedly made false and misleading statements to investors and potential investors including but not limited to: (a) if they invested with the defendants through a managed account at Westover Energy Trading Partners, LLC (Westover), there would be no risk of losing their principal; (b) they would earn 2% to 3% per month; (c) a specified New York real estate developer/owner was a manager of Westover; and (d) the New York real estate developer/owner’s substantial wealth would be used to indemnify investors against loss. Investors in the United States and Great Britain have invested at least $800,000 with the defendants based upon those false representations.
The complaint alleges that Kirkland and TKO violated the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. It further alleges that while acting as investment advisors, the Defendants violated Sections 206 (1) and Section 206 (2) of the Investment Advisers Act of 1940 (“Advisers Act”), the antifraud provisions of the Advisers Act. With respect to Kirkland, the complaint also alleges that he, while acting as a control person, induced violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
SEC Charges Atlanta-Area Defendants with Securities Fraud
On September 23, 2013, the Securities and Exchange Commission filed an action in federal court in the Northern District of Georgia, charging Stephen L. Kirkland (Kirkland), a Marietta, Georgia resident, and his company The Kirkland Organization, Inc. (TKO), a Georgia corporation, with violations of the federal securities laws for making false and misleading statements to investors in the United States and in Great Britain. The Commission’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against the defendants.
The Commission’s complaint alleges that between late 2008 and late 2010, Kirkland and TKO repeatedly made false and misleading statements to investors and potential investors including but not limited to: (a) if they invested with the defendants through a managed account at Westover Energy Trading Partners, LLC (Westover), there would be no risk of losing their principal; (b) they would earn 2% to 3% per month; (c) a specified New York real estate developer/owner was a manager of Westover; and (d) the New York real estate developer/owner’s substantial wealth would be used to indemnify investors against loss. Investors in the United States and Great Britain have invested at least $800,000 with the defendants based upon those false representations.
The complaint alleges that Kirkland and TKO violated the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. It further alleges that while acting as investment advisors, the Defendants violated Sections 206 (1) and Section 206 (2) of the Investment Advisers Act of 1940 (“Advisers Act”), the antifraud provisions of the Advisers Act. With respect to Kirkland, the complaint also alleges that he, while acting as a control person, induced violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Thursday, September 26, 2013
SEC CHARGES OWNERS OF TWO COMPANIES WITH DEFRAUDING INVESTORS IN OIL AND GAS OFFERINGS
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged the owner of two Florida-based companies with defrauding investors in five oil and gas offerings by misrepresenting such key facts as the amount of available reserves, the use of investor funds, and his past success in the oil and gas industry.
The SEC alleges that Ronald Walblay of Delray Beach, Fla., perpetrated the fraud through RyHolland Fielder Inc., which has managed a number of oil and gas limited partnerships, and his former brokerage firm Energy Securities Inc., which sold the partnerships’ interests – none of which were registered with the SEC as required under the federal securities laws. Walblay raised at least $12 million from more than 195 U.S. and foreign investors by falsely touting in sales brochures that RyHolland Fielder offered millions of barrels of oil and natural gas reserves. Walblay also falsely touted in offering materials that investors could receive potential returns of up to 2,270 percent. Meanwhile, not a single investor had ever profited from any of the partnerships, and Walblay used a greater percentage of investor funds than was disclosed to pay salaries and marketing expenses for investor conferences.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the unregistered securities offerings by Walblay and his firms were in Basin Oil L.P., Basin Oil HV L.P., Great Plains Oil L.P., Permian Basin Oil L.P., and Texas Permian Oil LLLP. They solicited investors from approximately January 2009 to November 2012.
The SEC alleges that in some offerings Walblay falsely portrayed to investors that RyHolland Fielder offered billions of cubic feet of natural gas reserves in place. Walblay, Energy Securities, and RyHolland lacked any basis to make this statement to investors because no such reserves existed.
The SEC further alleges that the offering materials for the limited partnerships misled investors about the use of proceeds. For example, contrary to the statements made in documents distributed to investors, money raised from investors in the Permian Basin Oil L.P. offering were partly used to pay expenses incurred in the prior oil and gas offerings.
According to the SEC’s complaint, Walblay exaggerated his past success in the industry. For instance, he told investors that a prior offering he conducted in 1991 featured a well that produced more than 100,000 barrels of oil in less than 45 days. There was no basis to make this statement.
The SEC’s complaint charges Energy Securities, RyHolland, and Walblay with violating Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint also charges Walblay with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5. The SEC seeks financial penalties, disgorgement of ill-gotten gains with prejudgment interest, and permanent injunctions.
The Securities and Exchange Commission today charged the owner of two Florida-based companies with defrauding investors in five oil and gas offerings by misrepresenting such key facts as the amount of available reserves, the use of investor funds, and his past success in the oil and gas industry.
The SEC alleges that Ronald Walblay of Delray Beach, Fla., perpetrated the fraud through RyHolland Fielder Inc., which has managed a number of oil and gas limited partnerships, and his former brokerage firm Energy Securities Inc., which sold the partnerships’ interests – none of which were registered with the SEC as required under the federal securities laws. Walblay raised at least $12 million from more than 195 U.S. and foreign investors by falsely touting in sales brochures that RyHolland Fielder offered millions of barrels of oil and natural gas reserves. Walblay also falsely touted in offering materials that investors could receive potential returns of up to 2,270 percent. Meanwhile, not a single investor had ever profited from any of the partnerships, and Walblay used a greater percentage of investor funds than was disclosed to pay salaries and marketing expenses for investor conferences.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, the unregistered securities offerings by Walblay and his firms were in Basin Oil L.P., Basin Oil HV L.P., Great Plains Oil L.P., Permian Basin Oil L.P., and Texas Permian Oil LLLP. They solicited investors from approximately January 2009 to November 2012.
The SEC alleges that in some offerings Walblay falsely portrayed to investors that RyHolland Fielder offered billions of cubic feet of natural gas reserves in place. Walblay, Energy Securities, and RyHolland lacked any basis to make this statement to investors because no such reserves existed.
The SEC further alleges that the offering materials for the limited partnerships misled investors about the use of proceeds. For example, contrary to the statements made in documents distributed to investors, money raised from investors in the Permian Basin Oil L.P. offering were partly used to pay expenses incurred in the prior oil and gas offerings.
According to the SEC’s complaint, Walblay exaggerated his past success in the industry. For instance, he told investors that a prior offering he conducted in 1991 featured a well that produced more than 100,000 barrels of oil in less than 45 days. There was no basis to make this statement.
The SEC’s complaint charges Energy Securities, RyHolland, and Walblay with violating Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint also charges Walblay with aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5. The SEC seeks financial penalties, disgorgement of ill-gotten gains with prejudgment interest, and permanent injunctions.
CFTC CLOSES SILVER CONTRACT MARKET MANIPULATION CASE
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Closes Investigation Concerning the Silver Markets
Washington, DC – The Commodity Futures Trading Commission (CFTC or Commission) Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.
In September 2008 the CFTC confirmed that its Division of Enforcement was investigating complaints of misconduct in the silver market (see CFTC Release 5562-08, October 2, 2008). At that time the Commission had received complaints regarding silver prices. These complaints were focused on whether the silver futures contracts traded on the Commodity Exchange, Inc. (COMEX) were being manipulated.1 For example, the complaints pointed to differences between prices in the silver futures contracts and prices in other silver products, including retail silver products. The complainants generally asserted that because the prices for retail silver products, such as coins and bullion, had increased, the price of silver futures contracts should have also experienced an increase. By reference to publicly available information concerning large traders with short open positions in the silver futures contracts, the complaints also alleged that the large shorts in the silver market were responsible for lower futures prices. The Division of Enforcement conducted an exhaustive investigation of these and other complaints and focused on identifying and evaluating whether there was any trading activity in violation of the Commodity Exchange Act and Commission regulations including the anti-manipulation provisions.
The Division of Enforcement’s investigation utilized more than seven thousand enforcement staff hours. The staff reviewed and analyzed position and transaction data, including physical, swaps, options, and futures trading data, and other documents and information, and interviewed witnesses. The Division’s investigation included an evaluation of silver market fundamentals and trading within and between cash, futures and over the counter markets. The investigation was also undertaken with assistance by the Commission’s Division of Market Oversight, the Commission’s Office of Chief Economist, and outside experts.
Separately, the Division of Market Oversight continued surveillance of the silver market contemporaneously to the Division of Enforcement’s investigation. The Division of Market Oversight’s market surveillance function encompasses a robust monitoring of traders’ positions and transactions at the ownership and account levels to identify potential violations of the Commodity Exchange Act and Commission regulations including, but not limited to, price manipulation, disruptive trading and trade practice violations. For example, after an episode of sharp price moves in any commodity, staff utilizes numerous visualization and analytical tools on data submitted daily to the Commission to discover indications of potential manipulation and other violations. Where questions remain, Division of Market Oversight staff regularly utilize the Commission authority such as the Special Call under Regulation § 18.05 to obtain additional detailed information from traders.
The Division of Enforcement takes complaints it receives seriously. The Division will not hesitate to use its authority, including new manipulation authority in the Dodd-Frank Act, to bring market manipulation charges as supported by the evidence.
If you have information about a violation of the Commodity Exchange Act or Commission regulations, you may either file a tip or complaint under our whistleblower program, or report such violations or other suspicious activities or transactions to our Division of Enforcement. The CFTC will pay awards to eligible whistleblowers who voluntarily provide us with original information about violations of the Commodity Exchange Act that lead us to bring an enforcement action that results in more than $1 million in monetary sanctions.
1 The CME Group now includes the New York Mercantile Exchange (NYMEX) as well as the Commodity Exchange, Inc. (COMEX). Market participants generally still refer to the silver futures contracts offered by the CME Group as “COMEX silver futures.”
CFTC Closes Investigation Concerning the Silver Markets
Washington, DC – The Commodity Futures Trading Commission (CFTC or Commission) Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.
In September 2008 the CFTC confirmed that its Division of Enforcement was investigating complaints of misconduct in the silver market (see CFTC Release 5562-08, October 2, 2008). At that time the Commission had received complaints regarding silver prices. These complaints were focused on whether the silver futures contracts traded on the Commodity Exchange, Inc. (COMEX) were being manipulated.1 For example, the complaints pointed to differences between prices in the silver futures contracts and prices in other silver products, including retail silver products. The complainants generally asserted that because the prices for retail silver products, such as coins and bullion, had increased, the price of silver futures contracts should have also experienced an increase. By reference to publicly available information concerning large traders with short open positions in the silver futures contracts, the complaints also alleged that the large shorts in the silver market were responsible for lower futures prices. The Division of Enforcement conducted an exhaustive investigation of these and other complaints and focused on identifying and evaluating whether there was any trading activity in violation of the Commodity Exchange Act and Commission regulations including the anti-manipulation provisions.
The Division of Enforcement’s investigation utilized more than seven thousand enforcement staff hours. The staff reviewed and analyzed position and transaction data, including physical, swaps, options, and futures trading data, and other documents and information, and interviewed witnesses. The Division’s investigation included an evaluation of silver market fundamentals and trading within and between cash, futures and over the counter markets. The investigation was also undertaken with assistance by the Commission’s Division of Market Oversight, the Commission’s Office of Chief Economist, and outside experts.
Separately, the Division of Market Oversight continued surveillance of the silver market contemporaneously to the Division of Enforcement’s investigation. The Division of Market Oversight’s market surveillance function encompasses a robust monitoring of traders’ positions and transactions at the ownership and account levels to identify potential violations of the Commodity Exchange Act and Commission regulations including, but not limited to, price manipulation, disruptive trading and trade practice violations. For example, after an episode of sharp price moves in any commodity, staff utilizes numerous visualization and analytical tools on data submitted daily to the Commission to discover indications of potential manipulation and other violations. Where questions remain, Division of Market Oversight staff regularly utilize the Commission authority such as the Special Call under Regulation § 18.05 to obtain additional detailed information from traders.
The Division of Enforcement takes complaints it receives seriously. The Division will not hesitate to use its authority, including new manipulation authority in the Dodd-Frank Act, to bring market manipulation charges as supported by the evidence.
If you have information about a violation of the Commodity Exchange Act or Commission regulations, you may either file a tip or complaint under our whistleblower program, or report such violations or other suspicious activities or transactions to our Division of Enforcement. The CFTC will pay awards to eligible whistleblowers who voluntarily provide us with original information about violations of the Commodity Exchange Act that lead us to bring an enforcement action that results in more than $1 million in monetary sanctions.
1 The CME Group now includes the New York Mercantile Exchange (NYMEX) as well as the Commodity Exchange, Inc. (COMEX). Market participants generally still refer to the silver futures contracts offered by the CME Group as “COMEX silver futures.”
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