United States: 2018 CFTC Year-In-Review


For the Commodity Futures Trading Commission (CFTC or Commission), 2018 was characterized by (1) an active enforcement program emphasizing cooperation and self-reporting, (2) increasing cross-border tension over supervision of central counterparties (CCPs), (3) publication of a far-reaching proposed rule to restructure the framework governing swap execution facilities (SEFs), (4) evolving Commission oversight of virtual currencies, and (5) publication by Chairman J. Christopher Giancarlo of his vision for market structure reform and cross-border harmonization. We discuss these five areas of Commission action in 2018 and what may be ahead in 2019.


The CFTC filed 83 enforcement actions in Fiscal Year 2018 (ended in September), obtaining $947 million in civil monetary penalties, restitution and disgorgement.1 These numbers are a significant increase over the prior fiscal year—more than double the dollar amount and nearly double the number of actions. The dollar amount of fines in Fiscal Year 2018 approximates the amount collected in 2016 but is well short of the $3.27 billion in monetary fines collected in 2014 and the $3.14 billion collected in 2015, when the Commission obtained record-setting fines relating to the manipulation of benchmark interest rates and other high-profile misconduct following the financial crisis. The CFTC has also announced a settlement or judgment in an additional 14 actions from the end of Fiscal Year 2018 through the end of the calendar year.

A. Cooperation and Self-Reporting

In 2018, the CFTC continued to encourage cooperation and self-reporting to the Division of Enforcement (the Division). There were clear steps toward the implementation of Director James McDonald's public statements from 2017. We discussed last year the Division's use of nonprosecution agreements with cooperating parties.2

On November 8, 2018, the Division issued its first public declination letter, indicating it was closing its investigation of Deutsche Bank AG, citing the bank's voluntary self-disclosure in the investigation of an individual managing director, its full cooperation in the matter and its proactive efforts to strengthen its swaps valuation process.3 The CFTC settled charges brought against an individual related to the investigation for fraudulently mismarking swap valuations.4 The declination letter adds another tool to the Division's potential resolutions for a cooperating party.

The Division stated in its letter that the misconduct was identified through Deutsche Bank AG's internal compliance, after which the bank commenced its own investigation and promptly reported its findings to the Division. Also, Deutsche Bank AG, among other things, provided updates of the investigation to the Division and responded completely and expeditiously to the Division's requests.

Director McDonald discussed the success of the cooperation and self-reporting program in a speech in November.5 The Director noted that through the end of the fiscal year, three orders had been issued that involved self-reporting, with each receiving a significantly reduced civil monetary penalty.6 Further, the Division recently accepted a bifurcated settlement, in which liability was set in the order but the amount of the penalty, if any, was to be determined after cooperation had been completed.7 Director McDonald stated that he expects this type of settlement to increase and that it is more similar to the criminal system, where sentencing is separate from the guilty plea.

Reliance on the cooperation and self-reporting program can be seen as a way for the CFTC to maintain an active and effective enforcement regime with fewer staff resources. Look for the CFTC and the Division to continue to leverage the self-reporting program in the coming year in response to the Commission's budget constraints.

B. Enhanced Coordination

Another means of stretching constrained staff resources is through better internal coordination and increased cooperation with other authorities. In discussing year-end enforcement metrics, both Chairman Giancarlo and Director McDonald stressed the increased level of coordinated enforcement between the CFTC, law enforcement and other regulatory organizations, both domestic and foreign.8 The increased focus on coordinated actions and on parallel enforcement and criminal actions is clear with respect to the spoofing cases (discussed below) that have been brought this year.

Coordination is not just with other agencies and regulators, but also across offices. Four new task forces were created during the year: Spoofing and Manipulative Trading, Virtual Currency, Insider Trading and Protection of Confidential Information, and Bank Secrecy Act.9

C. Notable Spoofing Enforcement Cases

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) made it unlawful for any person to engage in "spoofing"—broadly defined as "bidding or offering with the intent to cancel the bid or offer before execution."10 Over the past several years, the Division has aggressively enforced its antispoofing authority, and this past year was no different.

In January 2018, Director McDonald announced the Division's new Spoofing Task Force, "which is a coordinated effort across the Division—with members from our offices in Chicago, Kansas City, New York, and Washington, DC—to root out spoofing from our markets."11 He noted that, over the past year, the CFTC has developed new, sophisticated data analysis tools to identify spoofing and other unlawful trading activity.12

That same month, the CFTC filed eight antispoofing actions, including settlements by three banks (Deutsche Bank,13 HSBC14 and UBS15), and five complaints against six individuals and one company.16 The three settled bank actions were all seven-figure settlements, and Deutsche Bank was the largest spoofing-related settlement; however, in announcing the settlements, Director McDonald noted that "the fines would have been substantially higher but for each bank's substantial cooperation, and for UBS, its additional self-reporting of the conduct."17

Of particular note is that spoofing has also fostered greater coordination between the CFTC and law enforcement. On the same day that the CFTC announced the above enforcement actions, the Department of Justice announced that it had charged eight individuals with deceptive trading practices, including seven for spoofing.18 Some of these traders have chosen to plead guilty; one trader agreed to cooperate with the CFTC in further enforcement investigations as well.19

D. Setbacks to the Enforcement Program

1. Manipulation

The Division also experienced setbacks during 2018. As we previously discussed,20 a court again rejected a market manipulation charge when the trading was motivated by good faith economic analysis and reflected bona fide interest in transacting on the terms submitted to the market, or where the trading did not create an "artificial" price. The court succinctly noted that "[i]t is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented the product."21 The facts regarding the actual trading activity were largely undisputed. However, the court held that the CFTC failed to prove that the trading created an artificial price or intended to manipulate the market. Rather, while the trader had the ability to influence, sought to influence and did influence the price of the particular contract, there was no evidence that the resulting price was artificial or did "not reflect the basic forces of supply and demand."22 The court found that the particular contract had been undervalued and that other market participants had come to agree with the trader's valuation theory. Ultimately, the court found that there was no intent to create an artificial price, that there was bona fide interest to fill every order submitted and that the orders were consistent with the trader's valuation model.

Following Wilson, manipulation cases remain difficult to sustain under current law if the case relies solely on market data and without affirmative evidence of manipulative intent; this is in contrast to recent trends in spoofing cases. We do note that the lack of intent was particularly difficult to prove in Wilson because the market generally accepted the particular valuation method; if the valuation method were to have been viewed skeptically, intent may have been easier to prove.

2. Criminal Spoofing

As we discussed above, the CFTC has enjoyed several successes in prosecuting spoofing and the Department of Justice has brought successful parallel criminal actions, including a victory in United States v. Coscia. However, the case of Andre Flotron identified the limits to criminal prosecution.23 Flotron was alleged to have engaged in a manipulative and deceptive scheme and spoofing in the precious metals futures markets on a registered entity. However, by the time of trial, only a single count survived—conspiracy to commit commodity fraud by means of spoofing. The direct spoofing charges had been dismissed due to lack of venue in Connecticut. Ultimately, Flotron was acquitted of the remaining conspiracy charge.

Although Flotron avoided a criminal conviction, an executed consent order was filed with the court on December 20, 2018, to resolve the outstanding civil enforcement action.24 Under the order, Flotron would be subject to a one-year trading ban and a $100,000 civil monetary penalty.

E. Other Notable Enforcement Cases

The CFTC also continued to resolve matters regarding benchmark manipulation. In particular, several enforcement actions for attempted manipulation of the US Dollar International Swaps and Derivatives Association Fix (ISDAFIX) benchmark (a leading global benchmark referenced in a range of interest rate products) were resolved.25

F. Continuation of Retail Enforcement Regime

The CFTC also brought many actions to protect retail investors, including an emphasis on virtual currencies.26 Chairman Giancarlo emphasized this "commitment to protect customers and root out retail fraud in our markets."27 Nearly half of the actions from last year were primarily based on retail fraud, a failure to register or illegal off-exchange contracts.28 According to the Chairman, the total number of retail-based actions is consistent with the enforcement regime of the past decade.29

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1 Staff of Commodity Futures Trading Commission, Annual Report on the Division of Enforcements (2018) available at https://www.cftc.gov/sites/default/files/2018-11/ENFAnnualReport111418_0.pdf (Annual Enforcement Report).

2 For a more detailed discussion regarding the first nonprosecution agreements, see Paul M. Architzel, Anjan Sahni, Matthew Beville and Daniel J. Martin, 2017 CFTC Year-in-Review (Feb. 6, 2018) available at https://www.wilmerhale.com/en/insights/client-alerts/2018-02-06-2017-cftc-year-in-review-and-a-look-forward.

3 Letter from James M. McDonald, Director, Division of Enforcement, Commodity Futures Trading Commission, to Andrew Stemmer, Deutsche Bank AG (Nov. 8, 2018) (Declination Letter).

4 See In re Jacob Bourne, CFTC Docket No. 18-51 (Sept. 28, 2018).

5 James M. McDonald, Director, Division of Enforcement, Commodity Futures Trading Commission, Speech Regarding Enforcement Trends at the CFTC, NYU School of Law: Program on Corporate Compliance and Enforcement (Nov. 14, 2018) (McDonald Summary Speech).

6 See In re The Bank of Nova Scotia, CFTC Docket No. 18-50 (Sept. 28, 2018) (imposing a civil monetary penalty of $800,000); In re UBS AG, CFTC Docket No. 18-07 (Jan. 29, 2018) (imposing a civil monetary penalty of $15 million); In re The Bank of Tokyo-Mitsubishi UFJ, Ltd., CFTC Docket No. 17-21 (Aug. 7, 2017).

7 In re Gandhi, CFTC Docket No. 19-01 (Oct. 11, 2018).

8 See J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission, Remarks at Economic Club of Minnesota (Oct. 2, 2018) (Giancarlo Enforcement Speech) and McDonald Summary Speech.

9 Annual Enforcement Report at 5-6.

10 Section 747 of the Dodd-Frank Act codified at Commodity Exchange Act Section 4c(a)(5).

11 James M. McDonald, Director, Division of Enforcement, Commodity Futures Trading Commission, Statement (Jan. 29, 2018) available at http://www.cftc.gov/PressRoom/SpeechesTestimony/mcdonaldstatement012918 (McDonald Spoofing Speech).

12 Id.

13 In re Deutsche Bank AG and Deutsche Bank Securities Inc., CFTC Docket 18-06 (Jan. 29, 2018) (imposing a civil monetary penalty of $30 million, the largest for spoofing-related conduct).

14 In re HSBC Securities (USA) Inc., CFTC Docket 18-08 (Jan. 29, 2018) (imposing a civil monetary penalty of $1.6 million).

15 In re UBS AG, CFTC Docket No. 18-07 (Jan. 29, 2018) (imposing a civil monetary penalty of $15 million; this case is one of those cited for a reduction due to self-reporting).

16 CFTC Files Eight Anti-Spoofing Enforcement Actions against Three Banks (Deutsche Bank, HSBC & UBS) & Six Individuals, CFTC Release No. 7681-18 (Jan. 29, 2018) available at https://www.cftc.gov/PressRoom/PressReleases/pr7681-18.

17 McDonald Spoofing Speech.

18 Department of Justice, Eight Individuals Charged with Deceptive Trading Practices Executed on US Commodities Markets (Jan. 29, 2018) available at https://www.justice.gov/opa/pr/eight-individuals-charged-deceptive-trading-practices-executed-us-commodities-markets.

19 See generally https://www.justice.gov/opa/pr/two-traders-plead-guilty-60-million-commodities-fraud-and-spoofing-conspiracy.

20 Paul M. Architzel and Matthew Beville, Court Again Rejects a CFTC Manipulation Claim (Dec. 18, 2018) available at https://www.wilmerhale.com/en/insights/client-alerts/20181218-court-again-rejects-a-cftc-manipulation-claim.

21 Memorandum and Order, CFTC v. Wilson & DRW Investments, No. 13-cv-7884, 26 (S.D.N.Y. Nov. 30, 2018) (Wilson).

22 Wilson at 15–16.

23 Order, United States v. Flotron, No. 3:17-cr-00220 (D. Conn. Feb. 19, 2018).

24 Joint Motion to Reopen Case and Enter Final Judgment and Consent Order, CFTC v. Flotron, No. 3:18-cv-00158 (D. Conn. Dec. 20, 2018).

25 See Deutsche Bank Securities Inc., CFTC Docket No. 18-09 (Feb. 1, 2018) (imposing a civil monetary penalty of $70 million); see also JPMorgan Chase Bank, N.A., CFTC Docket No. 18-15 (June 18, 2018) (imposing a civil monetary penalty of $65 million); BNP Paribas Securities Corp., CFTC Docket No. 18-19 (Aug. 29, 2018) (imposing a civil monetary penalty of $90 million); ICAP Capital Markets LLC, CFTC Docket No. 18-33 (Sept. 18, 2018) (imposing a civil monetary penalty of $50 million); Bank of America, N.A., CFTC Docket No. 18-34 (Sept. 19, 2018) (imposing a civil monetary penalty of $30 million).

26 Virtual currencies are discussed in greater detail below.

27 Giancarlo Enforcement Speech.

28 See Annual Enforcement Report (noting that 41 of 83 cases were primarily for retail fraud, a failure to register or illegal off-exchange contracts).

29 Giancarlo Enforcement Speech. See also J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission, Remarks of Chairman J. Christopher Giancarlo at FIA Expo Chicago, Illinois (Oct. 10, 2018) available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo58.

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