United States: 2018 CFTC Year-In-Review

I. INTRODUCTION

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.

II. ENFORCEMENT

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

Read the full alert.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions