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This is a photo of the National Register of Historic Places listing with reference number 7000063

Tuesday, July 23, 2013

SEC FILES FRAUD CHARGES AGAINST CHINA INTELLIGENT LIGHTING AND OTHERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Files Fraud Charges Against China Intelligent Lighting and Electronics, Inc.; NIVS Intellimedia Technology Group, Inc.; and Their Sibling CEOs

The Securities and Exchange Commission today announced that the Commission filed fraud and other related charges against China Intelligent Lighting and Electronics, Inc. (CIL); NIVS IntelliMedia Technology Group, Inc. (NIV); and their respective CEOs, Xuemei Li and, her brother, Tianfu Li. CIL reports that it is a lighting company, and NIV reports that it is a consumer electronic company. Both are located in China.

The Commission alleges that CIL, NIV, and their CEOs engaged in fraudulent schemes to raise and divert offering proceeds, and then attempted to hide the diversions by lying to auditors and making false and materially misleading filings with the Commission. CIL and NIV are U.S. issuers that raised approximately $7.7 million and $21.5 million, respectively, in public registered offerings in the U.S. capital markets in 2010. Thereafter, Xuemei Li, and Tianfu Li diverted those offering proceeds from CIL and NIV contrary to the stated uses of proceeds set forth in the offering documents. Specifically, on June 24, 2010, $7.7 million in offering proceeds was deposited into CIL’s Hong Kong bank account. The next day, Xuemei Li transferred approximately $6.8 million, or almost 90%, to a company that has no disclosed relation to CIL, but continued to tell CIL’s auditor that the funds remained in the account. Similarly, on April 26, 2010, $21.5 million in offering proceeds was deposited in NIV’s Hong Kong bank account. Even though almost all of the money was transferred out of the Hong Kong bank account by May 5, 2010, NIV and Tianfu Li told the company’s auditor that the funds continued to be held in the account.

In addition to lying to auditors to mask the diversions, CIL, NIV, and their respective CEOs also falsified bank and accounting records to reflect inflated cash balances, and filed false and misleading quarterly reports on Forms 10-Q with the SEC that contained inflated cash balances. In addition, the defendants filed registration statements signed by the Lis that misled investors about how the offering proceeds would be used.

In its complaint, the Commission alleges that the Defendants violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5. The Commission further alleges that Xuemei Li and Tianfu Li lied to the auditors and aided and abetted the companies’ violations of the reporting, recordkeeping, and internal controls provisions of the securities laws, including Sections 13(a), 13(b)(2)(A), 13(b)(2) (B), and 13(b)(5) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 13b2-2. The Commission seeks permanent injunctive relief to prevent future violations of the federal securities laws, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, officer and director bars, and any other appropriate relief.

The Commission also announced today the entry of an order instituting administrative proceedings to determine whether the registration of each class of securities of CIL and NIV should be revoked for failure to make required periodic filings with the Commission.

Monday, July 22, 2013

SEC CHARGES CITY OF MIAMI WITH SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged the City of Miami and its former Budget Director with securities fraud in connection with several municipal bond offerings and other disclosures made to the bond investing public. The SEC's action also charges the City with violating a 2003 SEC Cease-and-Desist Order which was entered against the City based on similar misconduct. This case is the SEC's first ever injunctive action against a municipality already under an existing SEC cease-and-desist order.

The SEC alleges in its complaint that beginning in 2008, the City and Michael Boudreaux made materially false and misleading statements and omissions concerning certain interfund transfers in three 2009 bond offerings totaling $153.5 million, as well as in the City's fiscal year 2007 and 2008 Comprehensive Annual Financial Reports ("CAFRs") distributed to broad segments of the investing public, including investors in previously issued City debt. The interfund transfers moved monies from the City's Capital Improvement Fund to its General Fund. Boudreaux orchestrated the transfers in order to mask the increasing deficits in the City's General Fund, its primary operating fund, viewed by investors and bond rating agencies as a key indicator of financial health, at a time when the City was actively marketing bonds to the investing public.

The SEC's complaint, which was filed in the United States District Court for the Southern District of Florida, alleges that the City, through Boudreaux, transferred a total of approximately $37.5 million from its Capital Improvement Fund and a Special Revenue Fund to the General Fund in 2007 and 2008 in order to mask increasing deficits in the General Fund. The SEC also alleges that the City and Boudreaux omitted to disclose to bondholders that the transferred funds included legally restricted dollars which, under City Code, may not be commingled with any other funds or revenues of the City. They also failed to disclose that the funds transferred were allocated to specific capital projects which still needed those funds as of the fiscal year end or, in some instances, already spent that money. The transfers enabled the City to meet or come close to meeting its own requirements relating to General Fund reserve levels. In the wake of the transfers, the City's bond offerings were all rated favorably by credit rating agencies.

After reversing most of the transfers following a report by its Office of Independent Auditor General (OIAG), the City had to declare a state of fiscal urgency once it failed to meet statutorily mandated fund levels in its General Fund, and bond rating agencies downgraded their ratings on the City's debt.

The SEC's complaint charges the City with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. It also charges the City with violating the SEC's 2003 Cease-and-Desist Order. The complaint charges Boudreaux with violations of Section 17(a) of the Securities Act and violations and aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC's complaint seeks injunctive relief and financial penalties against the City and Boudreaux, and an order commanding the City to comply with the SEC's 2003 Order.

Sunday, July 21, 2013

FINANCIAL COMPANY AND OWNER FOUND LIABLE FOR VIOLATIONS OF SECURITIES LAWS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Court Finds Massachusetts-Based Viking Financial Group, Inc. and Its Owner Steven Palladino Liable for Violations of the Securities Laws

The Securities and Exchange Commission announced today that, on July 15, 2013, the federal district court in Massachusetts held that Massachusetts resident Steven Palladino, and his Massachusetts-based company, Viking Financial Group, Inc., committed securities fraud. On April 30, 2013, the Commission filed an emergency enforcement action against the Defendants. In its complaint, the Commission alleged that, since April 2011, Palladino and Viking falsely promised at least 33 investors that their money would be used to conduct the business of Viking - which was to make to short-term, high interest loans to those unable to obtain traditional financing. The Commission also alleged that Palladino misrepresented to investors that the loans made by Viking would be secured by first interest liens on non-primary residence properties and that investors would be paid back their principal, plus monthly interest at rates generally ranging from 7-15%, from payments made by borrowers on the loans. The complaint alleges that, in truth, the Defendants made very few real loans to borrowers, and instead used investors' funds largely to make payments to earlier investors and to pay for the Palladino family's substantial personal expenses, including cash withdrawals and hundreds of thousands of dollars spent on gambling excursions, vacations, luxury vehicles and tuition.

The Commission first filed this emergency action on April 30, 2013, seeking a temporary restraining order, asset freeze, and other emergency relief, which the Court granted. After the parties had an opportunity to brief the issues, on July 15, 2013, the Court held that the Commission had established that the Defendants' conduct violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. The Court further stated that the Commission is entitled to injunctive relief and a temporary order of disgorgement of ill-gotten gains in the amount of at least $3.1 million. The Commission agreed to ascertain whether there are any other possible investors who may have been victims and to submit a final order of disgorgement and a proposed plan of distribution at a later date. The Court also held that imposition of any civil penalties would be determined after a criminal case against the Defendants has been resolved. In the meantime, an order freezing the Defendants' assets remains in place.

Saturday, July 20, 2013

TWO FORMER EXECUTIVES OF ARTHROCARE CORP. CHARGED FOR ROLES IN $400 MILLION SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Wednesday, July 17, 2013
Former CEO and Former CFO of ArthroCare Corp. Charged with Orchestrating $400 Million Securities Fraud Scheme

The former chief executive officer and former chief financial officer of ArthroCare Corp., a publicly traded medical device company based in Austin, Texas, were charged for their alleged leading roles in a $400 million scheme to defraud the company’s shareholders and members of the investing public by falsely inflating ArthroCare’s earnings by tens of millions of dollars, announced Acting Assistant Attorney Mythili Raman of the Department of Justice’s Criminal Division and U.S. Attorney Robert Pitman of the Western District of Texas.

A 17-count indictment was unsealed today in the U.S. District Court for the Western District of Texas against Michael Baker, the former chief executive officer and director of ArthroCare, and Michael Gluk, the former chief financial officer of ArthroCare.  Both defendants surrendered to authorities this morning.

The indictment, which was returned on July 16, 2013, charges Baker and Gluk with one count of conspiracy to commit wire and securities fraud, 11 counts of wire fraud, and two counts of securities fraud; it charges Baker alone with three counts of false statements. The indictment also seeks forfeiture of assets held by Baker and Gluk.

“Truthful corporate earnings reports are critical to the soundness of our financial system,” said Acting Assistant Attorney General Raman.  “Today’s indictment alleges that those at the top of ArthroCare deceived investors and regulators by manipulating the company’s reports to inflate its stock, ultimately causing hundreds of millions in losses in shareholder value.  The Criminal Division will continue to aggressively pursue corporate executives who undermine our financial markets for personal gain.”

According to the indictment, from at least December 2005 through December 2008, Baker, Gluk and other senior executives and employees of ArthroCare allegedly falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors.  According to court documents, Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.  Baker, Gluk and others then allegedly caused ArthroCare to “park” millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.  ArthroCare would then report these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

The indictment alleges that ArthroCare’s distributors agreed to accept shipment of millions of dollars of product in exchange for substantial, upfront cash commissions, extended payment terms and the ability to return product, as well as other special conditions, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

Baker, Gluk and others allegedly used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue.  According to the indictment, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

In addition, Baker, Gluk and others allegedly lied to investors and analysts about ArthroCare's relationships with its distributors, including its largest distributor, DiscoCare.  According to the indictment, Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare's relationship with DiscoCare.

The indictment further alleges that when Baker was deposed by the U.S. Securities and Exchange Commission about the DiscoCare relationship in November 2009, he lied again on multiple occasions.

According to court documents, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.  On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.  The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

If convicted, Baker and Gluk would face a maximum prison sentence of 25 years for the conspiracy charge, 20 years for each count of wire fraud, and 25 years for each securities fraud count. Baker faces five years for each count of false statements.

An indictment is merely a charge, and the defendants are presumed innocent until proven guilty.

This case was investigated by the FBI’s Austin office. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William Chang of the Criminal Division’s Fraud Section.  The Department recognizes the substantial assistance of the U.S. Securities and Exchange Commission.

Friday, July 19, 2013

LATEST CROSS-BORDER WORKING GROUP CASE FOR SEC

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 
SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case

The Securities and Exchange Commission today charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.  The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger.  In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not.  The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy.  After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000.  Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year.  The actual cash balance was just $10 million.

According to the SEC’s complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.  At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund.  Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets.  For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

According to the SEC’s complaint, China MediaExpress’ external auditor resigned in March 2011 due to suspicions about fraudulent bank confirmations and statements.  The company’s audit committee then retained a law firm to conduct an internal investigation.  The law firm hired a Hong-Kong forensic accounting firm to assist in obtaining bank statements from China MediaExpress’ banks to verify the publicly reported cash balances.  The evening before a planned visit to the banks by the accounting firm’s team, Zheng called a senior accountant assigned to the team and told him that he had the authorization letters necessary to obtain China MediaExpress’ bank statements.  He asked the accountant to meet him alone to obtain the authorization letters.  During the meeting, Zheng admitted that there would be discrepancies dating back one to two years between China MediaExpress’ reported and actual cash balances. Zheng offered the accountant approximately $1.5 million to “assist with the investigation.”  The accountant refused the offer.  Approximately one month later, the bank statements were obtained, and they showed substantial discrepancies between publicly reported and actual cash balances.

The SEC’s complaint charges Zheng and China MediaExpress with violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 17(a) of the Securities Act of 1933.  The complaint also charges China MediaExpress with violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and charges Zheng with violating Exchange Act Rules 13b2-2 and 13a-14, and also with aiding and abetting China Media’s violations of Exchange Act Section 13(a).  The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

Thursday, July 18, 2013

U.S.-EUROPE, THE WAY TO APPROACH CROSS-BORDER DERIVATIVES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
July 11, 2013

The European Commission and the CFTC reach a Common Path Forward on Derivatives

Washington, DC – European Commissioner Michel Barnier and United States Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler today announced a Path Forward regarding their joint understandings on a package of measures for how to approach cross-border derivatives.

Commissioner Barnier said that “our discussions have been long and sometimes difficult, but they have always been close, continuous and collaborative talks between partners and friends.”

Chairman Gensler said, “With these joint understandings, together, we’ve taken another significant step in our mutual journey to bring transparency and lower risk to the swaps market worldwide.  I want to thank Commissioner Barnier and all his colleagues for their constructive collaboration throughout this reform process.”

The Path Forward responds to the G20 commitment to lower risk and promote transparency in the over-the-counter (OTC) derivatives markets, which were are at the heart of the financial crisis. The CFTC and the European Commission share a common objective of a steadfast and rigorous implementation of these commitments. Together with the European Securities Market Authority (ESMA), the European Commission (EC) and the United States have made significant progress in their regulatory reforms. Close legislative and regulatory co-ordination and co-operation between the European Commission (EC) and the CFTC has ensured that the rules in place pursue the same objectives and generate the same outcomes.  As a result of the joint collaborative effort, in many places, final rules are essentially identical, even though the regulatory calendars are not always synchronized.

As the market subject to these regulations is international, it is acknowledged that, notwithstanding the high degree of similarity that already exists between the respective requirements, without coordination, subjecting the global market to the simultaneous application of each other’s requirements could lead to conflicts of law, inconsistencies, and legal uncertainty. The CFTC and the EC, with ESMA, have worked closely and collaboratively to implement their rules and regulations to avoid this to the greatest extent possible and consistent with international legal principles. The CFTC and the European Commission share the view that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.

For bilateral uncleared swaps, and because EU and US rules for risk mitigation are essentially identical, the CFTC plans to issue no-action relief for certain transaction-based requirements.  In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.

For the trading-execution requirement, the CFTC plans to permit foreign boards of trade that have received direct access no-action relief to also list swap contracts for trading by direct access to avoid market and liquidity disruption.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  The CFTC staff will issue no-action letters to this effect. In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will in January 2014 assess progress.

The EC, ESMA, and the CFTC will continue to work together on similar approaches to straight-through-processing and harmonized international rules on margins for uncleared swaps and have essentially identical processes with regard to adopting mandatory clearing obligations and regulating intra-group swaps/derivatives trades. They also share common goals of ensuring that the overseas guaranteed subsidiaries and branches of US and EU persons are not allowed to operate outside of important G20 reforms.

Their approaches for reporting to trade repositories are also very similar and the EC, ESMA and the CFTC will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws.  They will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

With respect to central counterparties (CCPs), CFTC rules and EMIR are both based on international minimum standards.  CCP initial margin coverage is the only key material difference and the parties will work together to reduce any regulatory arbitrage opportunities.  They will also endeavour to ensure that CCPs that have not yet been recognised or registered in the US or the EU will be permitted to continue their business operations.

Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief awarded by the CFTC will be reflected in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership. For the future, they have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of their respective rules.

The EU and the US are leading by example and invite others countries to join this approach to make sure that the G20 commitments will be applied in a sensible and rigorous way to cross-border derivatives trades.

Cross-Border Regulation of Swaps/Derivatives
Discussions between the Commodity Futures Trading Commission and the European Union – A Path Forward

July 11, 2013

Our common efforts and joint work

In response to the financial crisis, the G-20 nations agreed on a common goal: to protect the public at large from the financial risks that led to bailouts and economic recession. We agreed to lower risk and promote transparency in a market that is truly global by agreeing to report all over-the-counter derivatives to trade repositories, to centrally clear standardized OTC derivatives and, where appropriate, require trading on transparent and multilateral venues.

The United States (US) and the European Union (EU) share a common objective of an ambitious and rigorous implementation of these G-20 commitments.

The US and the EU have made significant progress in their regulatory reforms.

Close legislative and regulatory co-ordination and co-operation between the European Commission (EC) and the Commodity Futures Trading Commission (CFTC) has ensured that the rules in place pursue the same objectives and generate the same outcomes.

Both regimes will have strict legal requirements in place governing central clearing, trade reporting, and trade execution.  The CFTC is in the process of implementing such regulations and the EC has adopted the regulations giving effect to these requirements.

Pursuant to our respective legislative frameworks and mandates, certain EU rules are stricter in some areas and certain US rules are stricter in others.  The calendar of compliance dates is not always synchronized due to differences in our legislative and rulemaking processes, but that does not change our common goal or our common approach.

As a result of this joint collaborative effort, in many places certain final rules are already essentially identical.

We also fully recognize that the market subject to this regulation is international. The majority of the global swaps and derivatives business is conducted within or between the EU and the US.  A significant amount of transactions take place between counterparties in different jurisdictions (‘cross-border’). The US and the EU both have legitimate interests and concerns about an appropriate regulation of this activity and both could seek legal jurisdiction over the transactions and market participants, and both could subject them to their requirements.

Recognizing the high degree of similarity that already exists between our respective requirements, we seek to address conflicts of law, inconsistencies, and legal uncertainty that may arise from the simultaneous application of EU and US requirements.  Thus, the CFTC, the EC, and the European Securities and Markets Authority (ESMA) have worked closely and collaboratively to fully understand each other's concerns and regulatory approaches.  We have agreed to implement our rules and regulations in a manner that will address conflicts, inconsistencies, and uncertainty to the greatest extent possible and consistent with international legal principles.

As swap market/derivatives participants come into compliance with new regulatory regimes around the globe, a close working relationship between the US and EU with regard to cross-border swaps regulation is mutually beneficial.  By coordinating our efforts, we are providing a model for other regulators and jurisdictions working to implement their G-20 commitments.

To whom we intend to apply our rules

Where a definition has to be given of market participants or infrastructure subject to US or EU jurisdiction, as a matter of principle, it will be construed on a territorial basis, to the extent appropriate.  When foreign entities not affiliated with or guaranteed by US persons are required to register, transaction-level requirements will apply to transactions with US persons and guaranteed affiliates.  For example, EU registered dealers who are neither affiliated with, nor guaranteed by, US persons, would be generally subject only to US transactional rules for their transactions with US persons or US guaranteed affiliates.  Additionally, for market participants that are subject to the requirements of Title VII of the Dodd-Frank Act or EMIR, the CFTC’s Division of Swap Dealer and Intermediary Oversight plans to issue a no-action letter specifying that where a swap/OTC derivative is subject to joint jurisdiction under US and EU risk mitigation rules, compliance under EMIR will achieve compliance with the relevant CFTC rules.

We will not seek to apply our rules (unreasonably) in the other jurisdiction, but will rely on the application and enforcement of the rules by the other jurisdiction.  A possible requirement for certain market participants or infrastructures to register with an authority is acceptable to ensure recourse in the event of a failure to provide satisfactory application or enforcement of rules.

Our regulatory approaches

The EC and the CFTC believe that it is important they should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.

The CFTC seeks to issue final guidance on the cross-border application of its requirements setting out how its rules apply to cross-border swaps activities.  For requirements that are applicable at the entity level, the CFTC has proposed that substituted compliance will be permitted for the requirements applicable in the EU that are comparable to, and as comprehensive as, those applicable in the US.

EU law foresees a system of equivalence. It is based on a broad outcomes-based assessment of the regulatory framework of a third country.  Once equivalence has been determined, infrastructures and firms from that country can access and provide their services across the 28 Member States of the EU under their home jurisdiction rules.  This is expected to be provided for in the relevant forthcoming decisions that the EC can adopt.

Transparency and trading

The CFTC plans to clarify that where a swap is executed on an anonymous and cleared basis on a registered designated contract market (DCM), swap execution facility (SEF), or foreign board of trade (FBOT) the counterparties will be deemed to have met their transaction-level requirements, including the CFTC’s trade-execution requirement.

To date, an FBOT operating pursuant to a direct access no-action relief letter may permit identified members or other participants located in the US to enter trades directly into the trade matching system of the FBOT only with respect to futures and option contracts.  However, an FBOT registered pursuant to Part 48 of the CFTC’s regulations also can list swap contracts for trading by direct access, subject to certain conditions.  In view of the apparent interest on the part of certain FBOTs operating pursuant to the no-action relief in listing swaps for trading by direct access, the CFTC’s Division of Market Oversight plans to amend the no-action letters to permit those FBOTs to list swap contracts, subject to certain conditions.  In the future, registered FBOTs will be permitted to list swap contracts for trading by direct access, subject to the same conditions.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  The CFTC staff will issue no-action letters to this effect. In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will in January 2014 assess progress.

While important EU rules on mandatory trade execution and trading platforms under the Markets in Financial Instruments Directive and Regulation are almost complete, we are working collaboratively to share ideas and ensure harmonization to the maximum extent possible.

We are also working together on similar approaches to straight-through-processing so that market participants and infrastructure in both jurisdictions can benefit from the operational improvements that lower risk to the system.

How we look at risk mitigation rules for uncleared trades

The CFTC and the EU have essentially identical rules in important areas of risk mitigation for the largest counterparty swap market participants. Under the European Market Infrastructure Regulation (EMIR), the EU has adopted risk mitigation rules that are essentially identical to some of the CFTC’s business conduct standards for swap dealers and major swap participants.  In areas such as confirmation, portfolio reconciliation, portfolio compression, valuation, and dispute resolution, our respective regimes are essentially identical.

To achieve that outcome for requirements applicable to transactions, the CFTC’s Division of Swap Dealer and Intermediary Oversight plans to issue a no-action letter specifying that for market participants that are subject to the requirements of Title VII of the Dodd-Frank Act or EMIR, the staff will not recommend any enforcement action against certain covered market participants in cases where those participants comply with the relevant requirements under EMIR, which are deemed to be essentially identical to the requirements imposed by the CFTC.  Where a swap/OTC derivative is subject to joint jurisdiction under US and EU risk mitigation rules, compliance under EMIR will achieve compliance with the relevant CFTC rules.

The EC is conducting, with ESMA, an equivalence assessment of the requirements applicable in the US under the jurisdiction of the CFTC. Where the EC finds the requirements to be equivalent it can allow market participants the choice to comply either with EMIR rules or with the equivalent CFTC rules.

We also are working together with other regulators from around the world to harmonize our rules on margin for uncleared swaps.  In the expectation that those internationally agreed rules will be applied and enforced in a substantially identical manner, this can be reflected in an equivalence decision in the EU, and be the subject of substituted compliance by the CFTC.

Approach to Offshore Guaranteed Affiliates, Branches, and Collective Investment Vehicles

We have a shared goal of ensuring that the overseas guaranteed affiliates and branches of US and EU persons are not allowed to operate outside of important G-20 reforms.

From a CFTC perspective, Dodd-Frank cross-border transaction requirements generally cover swaps between non-US swap dealers and US-persons or guaranteed affiliates of US persons, as well as swaps between two guaranteed affiliates that are not swap dealers. Compliance with transaction requirements for these trades could be satisfied through substituted compliance.  Similarly, foreign branches of US swap dealers may be able to comply with CFTC rules through substituted compliance, as long as the foreign branch is bona fide and the swap is actually entered into by that branch.  Lastly, the definition of US person should include offshore hedge funds and collective investment vehicles that are majority-owned by US persons or that have their principal place of business in the United States.

From an EU perspective, it is equally essential that any unmitigated risks posed in the EU by non-EU entities do not escape regulation. EMIR will cover transactions undertaken between non-EU entities where those transactions pose unmitigated risk that would have a direct, substantial, and foreseeable effect in the EU. It will also cover transactions undertaken by non-EU entities where this is necessary to prevent regulatory evasion. ESMA will publicly consult this month on the types of entities and contracts that should be determined as meeting these criteria. In particular, ESMA will consider whether such unmitigated risks may exist in respect of transactions undertaken by non-EU entities that are guaranteed by EU entities or by EU branches of non EU entities. The EC will then adopt draft Regulatory Technical Standards determining which contracts should be covered by EMIR.

How we approach mandatory clearing

We have essentially identical processes with regard to adopting mandatory clearing obligations.  When the EU adopts its first mandatory clearing determination beginning next year, it is likely to cover the same classes of interest rate swaps and credit default swap indices as the CFTC’s determination.  In terms of which market participants are covered by mandatory clearing, we have broadly similar approaches and have agreed to a ‘stricter-rule-applies’ approach to cross-border transactions where exemptions from mandatory clearing would exist in one jurisdiction but not in the other. This will prevent loopholes and any potential for regulatory arbitrage. With regard to intra-group swaps/derivatives, we have broadly similar approaches with regard to mandatory clearing.

The rules applicable to our DCOs/CCPs

With regard to derivatives clearing organizations (DCOs) and central counterparties (CCPs) that are registered in both the US and the EU, CFTC rules and EMIR are both based on international minimum standards.  We have identified one material difference with regard to our regulatory regimes: initial margin coverage.  We will work together to reduce any prudential concerns or regulatory arbitrage opportunities and to reflect this in our respective decisions on registration and equivalence.

In order to avoid significant market fragmentation and uncertainty around clearing obligations, the EC and the CFTC will endeavour to ensure that those infrastructures will be able to clear swaps/derivatives for their clearing members until registration/recognition has been determined.  The EU can achieve this through the EC’s equivalence decisions and ESMA’s recognition of foreign CCPs, while the CFTC can do this through targeted no-action relief.

Two EU CCPs (LCH.Clearnet Ltd. and ICE Clear Europe) are already registered with the CFTC as DCOs.  Additionally, the CFTC’s Division of Clearing and Risk plans to issue no-action letters to both Eurex Clearing AG and LCH.Clearnet SA  (both of which have pending registration applications with the CFTC) to begin clearing interest rate swaps and/or credit default swap indices for US clearing members.  The CFTC’s Division of Clearing and Risk also has issued no-action letters to two other foreign-based clearing organizations, permitting them and their clearing members to clear, subject to specified conditions, certain swaps that must be cleared by a registered or exempt DCO.  In each case, the time-limited no-action relief expires upon the earlier of December 31, 2013, or the DCO becoming registered with the CFTC.  The CFTC will continue to consider granting no-action relief in similar circumstances where a clearing organization seeks to register as a DCO and has not yet completed the registration process.

Reporting of trades to our trade repositories

For reporting trades to trade repositories, we have determined that our approaches are very similar and we will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws.  We will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

Future collaborative efforts

The EC, ESMA, and the CFTC believe it is important that jurisdictions and regulators should be able to defer to each other where this is justified by the respective quality and enforcement of regulations.

Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief as described herein will be reflected by the CFTC in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership.

For the future, we have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of our respective rules.  We will continue discussions with other international partners with a view to establishing a more generalised system that would allow, on the basis of these countries' implementation of the G-20 commitments, an extension of the treatment the EU and the CFTC will grant to each other.

Brief summary

In response to the financial crisis, the G-20 nations agreed to lower risk and promote transparency in the over-the-counter (OTC) derivatives. The Commodity Futures Trading Commission (CFTC) and the European Commission (EC) share a common objective of a steadfast and rigorous implementation of these commitments.

We have both made significant progress in our regulatory reforms and, as a result of our joint collaborative effort in many places, our final rules are essentially identical. Nonetheless, our regulatory calendars are not always synchronized.

As the market subject to this regulation is international, we acknowledge that,   notwithstanding the high degree of similarity that already exists between our respective requirements, without coordination between us, subjecting this global market to the simultaneous application of our requirements could lead to conflicts of law, inconsistencies, and legal uncertainty. The CFTC and the EC have worked closely and collaboratively to implement our rules and regulations to avoid this to the greatest extent possible and consistent with international legal principles.

Jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulation and enforcement regimes.  The CFTC’s approach allows for compliance with entity-based rules through substituted compliance, as well as for transaction-based rules with guaranteed affiliates.  Further, the CFTC plans to clarify that where a swap is executed on an anonymous and cleared basis on a registered designated contract market, swap execution facility, or foreign board of trade the counterparties will be deemed to have met their transaction-level requirements, including the CFTC’s trade-execution requirement.

For bilateral uncleared swaps, because EU and US rules for risk mitigation are essentially identical, CFTC staff plans to issue no-action relief.  In this regard, the EU’s system of ‘equivalence’ can be applied to allow market participants to determine their own choice of rules.

For the trading-execution requirement, the CFTC plans to permit foreign boards of trade that have received direct access no-action relief to also list swap contracts for trading by direct access to avoid market and liquidity disruption.

As the markets and regulatory regimes continue to evolve, and in order to ensure a level playing field, promote participation in transparent markets, and promote market efficiency, the CFTC will extend appropriate time-limited transitional relief to certain EU-regulated multilateral trading facilities (MTFs), in the event that the CFTC’s trade execution requirement is triggered before March 15, 2014.  Such relief would be available for MTFs that have multilateral trading schemes, a sufficient level of pre- and post-trade price transparency, non-discriminatory access by market participants, and an appropriate level of oversight.  The CFTC staff will issue no-action letters to this effect. In addition, the CFTC will consult with the EC in giving consideration to extending regulatory relief to trading platforms that are subject to requirements that achieve regulatory outcomes that are comparable to those achieved by the requirements for SEFs.  Both parties will in January 2014 assess progress.

We continue to work together on similar approaches to straight-through-processing and harmonized international rules on margins for uncleared swaps and have essentially identical processes with regard to adopting mandatory clearing obligations and regulating intra-group swaps/derivatives trades. We also share common goals of ensuring that the overseas guaranteed affiliates and branches of US and EU persons are not allowed to operate outside of important G-20 reforms.

Our approaches for reporting to trade repositories are very similar and we will continue to work with each other to resolve remaining issues, such as consistent data fields, access to data, and other issues related to privacy, blocking, and secrecy laws.  We will seek to resolve any material issues that may arise in line with the conclusions that may be drawn from discussions in international forums on this subject.

With respect to derivatives clearing organizations (DCOs) and central counterparties (CCPs), CFTC rules and the European Market Infrastructure Regulation are both based on international minimum standards.  CCP initial margin coverage is the only key material difference and we will work together to reduce any regulatory arbitrage opportunities.  We will endeavour to ensure that our DCOs/CCPs that have not yet been recognised or registered will be permitted to continue their business operations.

The EC, the European Securities and Markets Authority, and the CFTC believe it is important that jurisdictions and regulators should be able to defer to each other where this is justified by the respective quality and enforcement of regulations.  Both sides aim to conclude these discussions as soon as possible, at which stage the substance of relevant relief as described herein will be reflected by the CFTC in its guidance relating to substituted compliance, as approved by its principals, while the EU equivalence decisions will have been in place, and where necessary, amended to reflect this partnership.

For the future, we have agreed to continue to work collaboratively and to consider any unforeseen implementation effects that might arise in the application of our respective rules.