CFTC Announces Staff Roundtable Discussion on Non-intermediation

Regulatory News

April 27, 2022

Washington, D.C. — Staff of the Commodity Futures Trading Commission will hold a public roundtable on May 25, 2022, from 9:30 a.m. to 4:00 p.m., to discuss issues related to intermediation in derivatives trading and clearing. 

With limited exceptions, derivatives trading today is conducted through regulated intermediaries who perform many important functions, including providing customers with access to exchanges and clearinghouses, processing transactions, ensuring compliance with federal regulations, and guaranteeing performance of the derivatives contract to the clearinghouse. Recently, however, a number of registered entities have discussed with CFTC staff proposals to offer “non-intermediated” or direct trading and clearing of margined products to retail customers.

The goal of the roundtable is to gather information and receive expert input from a wide variety of stakeholder groups regarding the impact non-intermediation could have in the context of CFTC-registered derivatives clearing organizations (DCOs) and what it means for derivatives trading and clearing more generally. The roundtable will include participants from DCOs, futures commission merchants (FCM), FCM customers, end-users, academics, proprietary traders, public interest groups, and others.

The roundtable will be held in the Conference Center at CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street NW, Washington, D.C. for participants only. In accordance with the agency’s implementation of COVID-19 related precautions, the general public will have access to the roundtable by webcast on the CFTC’s website or may also listen by telephone.

Viewing/Listening Instructions:

To access the live meeting feed, use the dial-in numbers below or stream at www.cftc.gov. A live feed can also be streamed through the CFTC’s YouTube channel. Call-in participants should be prepared to provide their first name, last name, and affiliation, if applicable. Materials presented at the meeting, if any, will be made available online.

Source: Commodity Futures Trading Commission

CFTC: Portfolio Manager Found Liable for Making False or Misleading Statements

Regulatory and Legal News

April 19, 2022

Washington, D.C. — The Commodity Futures Trading Commission today announced that on April 15, a jury in the U.S. District Court in the Western District of Wisconsin issued a verdict finding Edward S. Walczak liable for engaging in conduct that operated as a fraud or deceit upon investors, potential investors, or investment advisors, in violation of Section 4o(1)(B) of the Commodity Exchange Act (CEA).

The verdict was obtained after a 5-day trial that was the culmination of an action brought by the CFTC against Walczak on January 27, 2020, that alleged he misrepresented how he managed risk in the Catalyst Hedged Futures Strategy Fund. [See CFTC Press Release No. 8901-20] The jury found Walczak not liable for violations of CEA Sections 4o(1)(A) and 6(c)(1) and CFTC Regulation 180.1. Further proceedings will follow regarding sanctions.

“True and accurate disclosures are critical to investor protection,” said Acting Director of Enforcement Vincent McGonagle. “As we said at the outset of this case, the CFTC is committed to holding accountable individuals that misstate the risks of investing in their products.”

For the trial, the CFTC’s case was consolidated with a Securities and Exchange Commission (SEC) action against Walczak relating to the same conduct. The CFTC thanks the SEC and its staff for their hard work and cooperation through the consolidated trial. 

The Division of Enforcement staff members responsible for this action are Sam Wasserman, Peter Janowski, Meredith Borner, David Acevedo, Michael Cazakoff, John Buffington, Shantel Ogbuagu, Shelley Evans, and former staff member, Candice Aloisi. The trial team was also assisted by trial technician Dawn Miller.

Source: Commodity Futures Trading Commission

CFTC Charges Tennessee Trader and Two Entities with Engaging in Cross-Market and Single-Market Spoofing and Manipulative Schemes

Regulatory and Legal News

April 14, 2022

Washington, D.C. — The Commodity Futures Trading Commission today filed a civil enforcement action in the U.S. District Court for the Northern District of Illinois against David SkudderGlobal Ag LLC, and Nesvick Trading Group LLC for spoofing—bidding or offering with the intent to cancel the bid or offer before execution—and for the use of manipulative schemes. The schemes involved both soybean futures contracts and options on soybean futures contracts traded on the Chicago Board of Trade. Some of their misconduct involved cross-market spoofingi.e., spoofing in one market to benefit a position in another market, where the price of the two markets is correlated. Skudder is a founder, principal, and registered associated person of Global, a registered commodity trading advisor. Skudder is also a registered associated person of Nesvick, a registered introducing broker.       

The CFTC seeks, among other things, monetary penalties, restitution, disgorgement, registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA) and CFTC regulations.

“Through this action, the CFTC shows it continues to vigorously detect and prosecute spoofing and manipulation, including when actors attempt to obscure their misconduct by using different markets or financial products,” said CFTC Acting Director of Enforcement Vincent McGonagle. 

Case Background

The complaint alleges that from approximately September 2014 through March 2019 Skudder carried out his schemes by placing hundreds of large orders for soybean futures that he intended to cancel before execution (spoof orders) while placing orders on the opposite side in the soybean futures market, or cross-market in the options on soybeans futures market (genuine orders), that would benefit from market participants’ reactions to his spoof orders. By placing the spoof orders, Skudder allegedly deceived other traders about supply and demand, misleading market participants about the likely direction of the commodity’s price, which made Skudder’s genuine orders appear more attractive to market participants and allowed Skudder to execute his genuine orders in larger quantities and at better prices than he otherwise would have, absent the spoof orders.

This case is brought in connection with the CFTC Division of Enforcement’s Spoofing Task Force, and the staff members responsible are Nicholas Sloey, Clemon Ashley, Brandon Wozniak, Allison Sizemore, Jeff Le Riche, Jordon Grimm, Christopher Reed, and Charles Marvine.

Source: Commodity Futures Trading Commission

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CFTC Charges Wisconsin Woman and Her Companies with Fraud and Misappropriation

Enforcement and Legal Action

April 13, 2022

Washington, D.C. — The Commodity Futures Trading Commission today filed a civil enforcement action in the U.S. District Court for the Eastern District of Wisconsin against Kay Yang of Mequon, Wisconsin, and her companies, AK Equity Group LLC and Xapphire LLC. The complaint charges Yang, AK Equity, and Xapphire with fraud and misappropriation related to an off-exchange foreign currency (forex) trading scheme in which they solicited funds totaling at least $15.7 million from at least 67 investors. Yang’s husband, Chao Yang, is named as a relief defendant for receiving investor funds to which he was not entitled. 

Case Background

According to the complaint, from approximately April 2017 through March 2020, the defendants solicited and pooled millions of dollars of investors’ funds in bank and trading accounts for the purported purpose of trading forex.

The complaint alleges, among other things, the defendants falsely represented to existing and potential pool participants that they successfully managed hundreds of millions of dollars in a variety of investment vehicles; consistently achieved positive monthly returns; would allocate 100% of pool participants’ funds to forex trading; and would adhere to a trading strategy that included low leverage ratios and moderate trading frequencies. These were false claims and the defendants routinely suffered trading losses using high leverage and high frequency trading strategies. The defendants also failed to disclose they misappropriated significant amounts of pool participants’ funds to pay for Kay Yang’s personal expenses. For example, Yang spent over $700,000 at casinos and on gambling-related purchases, more than $439,000 on travel and luxury hotels, and at least $248,000 on cars and car-related expenses. Furthermore, Yang made net transfers of approximately $200,000 to bank accounts in her name, at least $1.4 million to bank accounts in her husband’s name  and more than $1 million to joint bank accounts she shared with her husband.         

In continuing its litigation, the CFTC seeks full restitution to defrauded pool participants, disgorgement of any ill-gotten gains, a civil monetary penalty, permanent registration and trading bans, and a permanent injunction against future violations of the Commodity Exchange Act, as charged.  

Related Civil Actions

In a separate, parallel matter, the Securities and Exchange Commission (SEC) today filed a civil complaint against Yang in connection with this scheme. 

On July 13, 2020, the State of Wisconsin Department of Financial Institutions, Division of Securities (WDFI), issued a Final Order by Consent to Cease and Desist, Revoking Exemptions, and Imposing Disgorgement, Restitution, and Civil Penalties on Yang in connection with her operation of AK Equity and Xapphire.

Source: Commodity Futures Trading Commission

CFTC Awards Approximately $10 Million to a Whistleblower

March 18, 2022

Washington, D.C. — The Commodity Futures Trading Commission today announced an approximately $10 million award to a whistleblower who voluntarily provided original information that led the CFTC to open an investigation. The whistleblower gave useful information at the earliest stages of the investigation and later provided supplemental information. 

“This award demonstrates the continued success of the CFTC’s Whistleblower Program,” said Acting Director of Enforcement Vincent McGonagle. “The CFTC is committed to rewarding whistleblowers who identify misconduct in our markets.”

“The CFTC has granted a number of multimillion-dollar whistleblower awards to date,” added Whistleblower Office Director Christopher Ehrman. “These large awards are putting market participants on notice that whistleblowers continue to provide significant information to the Commission.”

About the CFTC’s Whistleblower Program

The CFTC’s Whistleblower Program was created under Section 748 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Since issuing its first award in 2014, the CFTC has granted whistleblower awards amounting to approximately $330 million. Those awards are associated with enforcement actions that have resulted in monetary sanctions totaling more than $3 billion. The CFTC issues awards related not only to the agency’s enforcement actions, but also in connection with actions brought by other domestic or foreign regulators if certain conditions are met.

The Commodity Exchange Act (CEA) provides confidentiality protections for whistleblowers. Regardless of whether the CFTC grants an award, the CFTC will not disclose any information that could reasonably be expected to reveal a whistleblower’s identity, except in limited circumstances. Consistent with this confidentiality protection, the CFTC will not disclose the name of the enforcement action in which the whistleblower provided information or the exact dollar amount of the award granted.

Whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected. All whistleblower awards are paid from the CFTC Customer Protection Fund, which was established by Congress, and is financed entirely through monetary sanctions paid to the CFTC by violators of the CEA. No money is taken or withheld from injured customers to fund the program.

Source: Commodity Futures Trading Commission

CFTC chairman lays out priorities for managing commodity market and cryptocurrency risks during bursts in market activity…

Today, Commodity Futures Trading Commission chair Rostin Behnam delivered remarks at the FIA Boca 2022 International Futures Industry Conference where he described the CFTC’s priorities for managing commodities markets through what he describes as bursts in market activity.  These bursts, in some part due to technology-driven innovation in the markets, reflect the influence of monetary policy and global interconnectedness on markets.  Mr Behnam argued that market innovation emerges when there is a backdrop of regulatory reassurance.

Regulatory reassurance means the management of the risks that emerge from the bursts of transformative change in the markets.  Mr Behnam sees these risks being managed in one of two general ways.  Either the bursts themselves will have to be managed or the markets will have to get comfortable with the fallout from these risks.

Mr Behnam appears to prefer a middle-of-the-road approach by noting that policy priorities rest with core markets by achieving regulatory certainty and creating fail safe market mechanisms.

Two major policy tools stood out during Mr Behnam’s remarks.  First was an update on proposed rule making that addresses risk governance for derivatives clearing organizations.  DCOs arrange or provide on a multilateral basis for the settlement or netting of obligations.

Second, Mr Behnam wants Congress to pass legislation that gives the CFTC authority to develop a regulatory framework for the cash digital asset commodity market.  Mr Behnam noted his support of President Joe Biden’s executive order calling for coordination by financial regulatory bodies to create a framework for ensuring consumer and investor protection in the cryptocurrency market.

What is missing from Mr Behnam’s consumer/investor protection narrative is the portion that discusses government securing its legal tender turf.  While the government’s position as source of the nation’s circulating currency is not under immediate threat, the federal government’s concern has often been dressed in the rhetoric of financial stability or economic growth.  I believe market makers in the cryptocurrency trade are already mindful of this but earlier predictions about increased scrutiny are taking fruit.

Alton Drew

16.03.2022     

CFTC Orders London-Based Swap Dealer to Pay $3.25 Million for Swap-Data Reporting, Conflicts of Interest, Mid-Market Mark, and Supervision Failures

March 15, 2022

Washington, D.C. — The Commodity Futures Trading Commission today simultaneously filed and settled charges against ED&F Man Capital Markets, Ltd. (ED&F Man), a London-based provisionally registered swap dealer, for failing to comply with certain swap dealer requirements to report accurate swaps data to a swaps data repository (SDR), failing to disclose a conflict of interest to swaps counterparties, failing to disclose mid-market marks to counterparties, and for related supervision failures.

The order imposes a $3,250,000 civil monetary penalty on ED&F Man and orders it to cease and desist from further violations of the Commodity Exchange Act and CFTC regulations, as charged.

“The CFTC will not hesitate to bring cases against swap dealers that violate substantive customer protection regulations and fail to have adequate supervisory controls in place,” said CFTC Acting Director of Enforcement Vincent McGonagle. “Swap dealer registrants must ensure they make complete and accurate disclosures to counterparties and accurately report swap valuation data to SDRs, and they must also diligently perform their supervisory duties.”

Case Background

Specifically, the order finds that between February 2014 and July 2021, ED&F Man failed to report certain swaps data to an SDR accurately for hundreds of thousands of swaps. The order also finds that, from February 2014 through January 2018, ED&F Man failed to disclose to its U.S. swaps counterparties that proprietary traders, trading on behalf of an affiliate, had access to counterparties’ trade information. Further, from February 2014 to April 2021, ED&F Man failed to disclose mid-market marks to some of its counterparties as required for numerous metals and FX swaps. The order also finds that ED&F Man failed to maintain an adequate supervisory system and to perform its supervisory obligations diligently with respect to swaps data reporting, conflict of interest disclosures, and providing mid-market marks. 

The CFTC thanks and acknowledges the assistance of the National Futures Association with this matter.

The Division of Enforcement staff members responsible for this case are Kevin Samuel, Glenn Chernigoff, Erica Bodin, Kathleen Banar, and Rick Glaser. Pamela Geraghty from the Market Participants Division assisted with this matter.

Source: Commodity Futures Trading Commission

CFTC chairman Rostin Behman announces additional members to his leadership team

January 25, 2022

Washington, D.C. — Commodity Futures Trading Commission Chairman Rostin Behnam today announced the following leadership appointments as he begins his chairmanship. The personnel announced today will lead divisions, offices and other teams within the CFTC to execute the responsibilities in the CFTC governing statute and other issues facing the agency. Today’s announcement follows Chairman Behnam announcing his executive office staff and naming Tanisha Cole Edmonds as the CFTC’s first Chief Diversity Officer. Chairman Behnam plans to make additional staff and policy announcements very soon.

“These individuals have decades of experience with the Commodity Exchange Act and our governing regulations, bringing unmatched expertise to their roles,” said Chairman Behnam. “I am grateful to each for their service, and I am confident that they will strive every day to fulfill the agency’s mission and ensure our markets work for all.”

Amanda Olear, Market Participants Division Director

Amanda Olear has been appointed the Director of the Market Participants Division. In her role, she is responsible for the oversight of swap dealers, futures commission merchants, introducing brokers, commodity pool operators, commodity trading advisors, and their associated persons, and she has been working in an acting capacity for this past year. Previously, she served as Deputy Director for Registration and Compliance since 2018. Ms. Olear joined the CFTC in 2007 from Council, Baradel, Kosmerl & Nolan, P.A. in Annapolis, Maryland, where she focused on business entity formation and complex commercial litigation. Prior to that, Ms. Olear served as a law clerk to the Honorable Lynne A. Battaglia on the Maryland Court of Appeals. Coming from a long line of family farmers, she holds a JD, with honors, from the University of Maryland Francis King Carey School of Law and a BA, summa cum laude, from McDaniel College.

Rob Schwartz, General Counsel

Rob Schwartz has been named General Counsel of the Commodity Futures Trading Commission. In his role, Mr. Schwartz will lead the Legal Division and serve as chief legal advisor to the Commission. A 10-year veteran of the CFTC, Mr. Schwartz has been the agency’s Acting General Counsel since January 2021. Since joining the CFTC in 2011, Mr. Schwartz has served primarily as the CFTC’s chief litigator, in the position of Deputy General Counsel for Litigation, Enforcement and Adjudication. He has successfully represented the CFTC in numerous critically significant cases, including several lawsuits challenging the agency’s implementation of the Dodd-Frank Act, many appeals in enforcement actions, and bankruptcies of registered entities. Mr. Schwartz joined the CFTC from private practice where he represented businesses and individuals in enforcement actions and investigations by the Securities and Exchange Commission, the Public Company Accounting Oversight Board and other government agencies, as well as in private civil actions at all levels of the federal judicial system covering a broad range of business issues. Prior to that, Mr. Schwartz served as a law clerk to the Honorable Amalya L. Kearse of the U.S. Court of Appeals for the Second Circuit. Mr. Schwartz holds a JD, magna cum laude, from New York University School of Law and a BA in Political Science from Tufts University.

Clark Hutchison, Clearing and Risk Division Director

Clark Hutchison will continue his role as the Director of the Division of Clearing and Risk (DCR), which he has led since July 2019. In his role, Mr. Hutchison manages a team of 90 employees at the CFTC’s Washington, D.C., New York and Chicago offices that are responsible for the agency’s supervision of derivatives clearinghouses and their members, including oversight of clearing processes through risk assessment and surveillance. Prior to joining the CFTC, Mr. Hutchison spent more than three decades in top positions in large global financial institutions, where he specialized in clearing and risk management. In addition to his private sector experience, Mr. Hutchison has served as a special advisor to the board of directors of the Futures Industry Association, as a member of the Chicago Mercantile Exchange’s Risk Committee, and as a member of the board of directors of NASDAQ Futures, Inc. Mr. Hutchison received a BA from Haverford College.

Tamara Roust, Data Division Director and Chief Data Officer

Dr. Tamara Roust will continue as the Director of the Division of Data and Chief Data Officer, a role she has had since October 2020. In her role, she is responsible for overseeing the agency’s enterprise data strategy and data governance approaches, including cloud migration, automation and artificial intelligence efforts and compliance with the Federal Data Strategy. Prior to rejoining the CFTC, Dr. Roust served as Chief Data Officer for the State of Illinois where she developed the state’s enterprise data strategy and was a part of the state’s COVID-19 taskforce. As part of that effort, she developed automated solutions for transferring data from 1970s era IBM DB2 systems to cloud-native systems for contact tracing, so that hundreds of local health departments could connect to data stored within the state’s systems. From 2011-2016, Dr. Roust served as a Risk Analyst in the CFTC’s Division of Clearing and Risk (DCR), and from 2016-2019, as an Associate Director within DCR’s Examinations Branch, where she revised 39.18 and 39.36 regulations to improve information security at Derivatives Clearing Organizations (DCOs). She also has nearly a decade of experience in the financial services industry, holds several industry credentials, and worked as a senior engineer for NASA’s Jet Propulsion Laboratory. Dr. Roust holds several graduate degrees including a PhD in Management Information Systems from Claremont Graduate University and a BA in Mathematics and Computer Science from the University of California, Los Angeles. Most recently, she earned a certificate in Machine Learning from Stanford.

Suyash G. Paliwal, International Affairs Office Director

Suyash G. Paliwal will continue as Director of the Office of International Affairs (OIA) at the Commodity Futures Trading Commission. In his role, Mr. Paliwal advises the CFTC Chairman on cross-border issues and leads the CFTC’s international regulatory initiatives. OIA represents the Commission in international fora such as the International Organization of Securities Commissions (IOSCO), IOSCO’s joint work with the Committee on Payments and Market Infrastructures (CPMI), and the Financial Action Task Force (FATF), and advises the Chairman on matters relating to the Financial Stability Board (FSB) and IOSCO’s Financial Stability Engagement Group (FSEG). Prior to joining the CFTC, Mr. Paliwal served at the Federal Reserve Board, where he advised on FSB matters, represented the central bank in the International Association of Insurance Supervisors and bilateral forums, developed international and domestic policy for the supervision of systemically important financial institutions and certain financial conglomerates (insurance savings and loan holding companies), and oversaw the supervision of large financial institutions. He led a team of supervisors in Europe and Asia to develop international standards on governance and risk management, advised Federal Reserve Board leadership on strategic international engagement and market developments, and was lead author of a proposed capital rule. Prior to his government service, Mr. Paliwal worked in private practice at White & Case and Allen & Overy, where he advised clients on complex international legal issues and derivatives regulations. Before entering law school, he worked in the financial services industry at Ernst & Young and Verisk Analytics, Inc. He holds a JD from Columbia Law School (2010), an MBA, University of Pennsylvania and a BS, University of Pennsylvania.

Source: Commodities Futures Trading Commission