CFTC Releases 2015 Enforcement Summary

Practical Law Legal Update w-000-7486 (Approx. 5 pages)

CFTC Releases 2015 Enforcement Summary

by Practical Law Finance

Spoofing and Manipulation

The CFTC used the anti-spoofing law (7 U.S.C. § 6c(a)(5)) promulgated under Section 747 of the Dodd-Frank Act to bring actions for manipulation and spoofing among market participants (see Legal Update, CFTC Chairman Announces Upcoming Rules, Warns on Enforcement). Spoofing is defined as entering an order with the intent to cancel it before it is consummated in a complete transaction. The CFTC notes that it used this anti-spoofing law to fight manipulation in four separate significant cases in 2015.

For example, the CFTC charged two citizens of the United Arab Emirates, with engaging in unlawful disruptive trading practices in the gold and silver futures markets by spoofing over several months in early 2015.

The CFTC also charged Kraft Foods Group, Inc. and Mondelez Global LLC with manipulation and attempted manipulation of the prices of cash wheat and wheat futures. The complaint also alleged that Kraft and Mondelez held wheat futures in excess of speculative position limits without a valid hedge exemption or a bona fide hedging need, and engaged in numerous noncompetitive trades. These manipulation charges were brought using the CFTC's fraud-based anti-manipulation authority under Section 753 of the Dodd-Frank Act (7 U.S.C. 9), codified as CFTC Regulation 180 (17 CFR 180).

Foreign Exchange, LIBOR, and ISDAFIX Benchmark Rates

The CFTC imposed more than $4.6 billion in penalties in 15 actions against banks and brokers to address foreign exchange (FX), LIBOR, and ISDAFIX benchmark abuses. Specifically, the CFTC:

Issued five orders settling charges against Citibank, HSBC, JPMorgan, RBS, and UBS for attempted manipulation of, and for aiding and abetting other banks' attempts to manipulate, global FX benchmark rates to benefit the positions of certain traders.
Filed and settled two enforcement actions against Barclays for its attempts to:
- manipulate and aid and abet others' attempts to manipulate global FX benchmarks; and
- manipulate and make false reports concerning ISDAFIX (this was the first enforcement action by any governmental authority addressing abuses of ISDAFIX).
Issued an order against Deutsche Bank finding that Deutsche Bank routinely engaged in acts of false reporting and attempted manipulation of LIBOR and, at times, succeeding in manipulating LIBOR to benefit its own cash and derivatives trading positions. The CFTC ordered Deutsche Bank to pay an $800 million civil monetary penalty, the largest fine in the CFTC's history.

Bitcoin-Related Enforcement Actions

The CFTC issued an order settling charges against Coinflip, Inc. and its CEO for offering bitcoin options without registering as a swap exchange under Sections 4c(b) (7 U.S.C. 6c(b)) and 5h(a)(1) (7 U.S.C. 7b-3(a)(1)) of the Commodity Exchange Act (CEA) and CFTC Regulations 32.2 (17 CFR 32.2) and 37.3(a)(1) (17 CFR 37.3(a)(1)). For details, see Legal Update, CFTC: Bitcoin a “Commodity” Subject to Dodd-Frank Swaps Rules.

The CFTC also issued an order against TeraExchange LLC, a provisionally registered swap execution facility (SEF), for failure to enforce its prohibition on “wash” trading (a form of manipulation in which an investor simultaneously sells and buys the same instruments) and prearranged trading on a SEF platform. The platform offered for trading a non-deliverable forward contract based on the relative values of the US dollar and bitcoin. Significantly, this was the first CFTC action charging a registered entity with failure to comply with applicable core principles.

Reporting Violations

In fiscal year 2015, the CFTC brought several actions for reporting violations, including its first actions enforcing:

Large-trader reporting requirements for physical commodity swap positions. In September, the CFTC issued an order against Australia and New Zealand Banking Group Ltd. for failure to comply with its obligation to submit accurate large-trader reports (LTRs) for swap positions it held with respect to certain commodities (see Legal Update, CFTC Fines Bank for Failure to Comply with Large-trader Reporting Requirements).
Real-time public reporting requirements for swap transactions and the reporting of swap data to swap data repositories (SDRs). In September, the CFTC issued an order filing and simultaneously settling charges against Deutsche Bank, a provisionally registered swap dealer (SD), for failing to properly report its swap transactions under Dodd-Frank swap data reporting rules and Parts 43, 44 and 45 of the CFTC’s regulations (see Legal Update, CFTC Fines Deutsche Bank for Dodd-Frank Swap Reporting Violations).

Protection of Customer Funds

The CFTC issued a number of enforcement against futures commission merchants (FCMs) and SDs for failure to properly hold, and for improper investment of, customer funds. For example, the CFTC:

Issued an order requiring Morgan Stanley, a registered FCM and a provisionally registered SD, to pay civil monetary damages for failure to hold sufficient US dollars in segregated accounts in the US to meet all of its US dollar obligations to its cleared swaps customers (see Legal Update, CFTC Fines FCM for Failure to Hold Segregated Cleared Swaps Margin in US Dollars).
Issued an order instituting and simultaneously settling charges against BNP Paribas, a registered FCM, for violating CFTC Regulations 1.25(b)(3)(i)(F) (17 C.F.R. 1.25(b)(3)(i)(F)) and 1.25(b)(3)(ii)(D) (17 C.F.R. 1.25(b)(3)(ii)(D)), which govern concentration limits applicable to the investment of segregated commodity customer funds (see Legal Update, CFTC Fines FCM for Improper Investment of Segregated Customer Funds).

Trade Practice Violations

The CFTC filed a number of enforcement actions on trade practice violations, including actions against:

The Royal Bank of Canada (RBC), which engaged in more than 1,000 illegal “wash” sales, fictitious sales, and noncompetitive transactions over a three year period, using a trading strategy designed by senior RBC personnel, which was motivated in part by tax benefits that it generated for the RBC corporate group.
Olam International, Ltd., which between 2011 and 2013 violated position limits for cocoa futures traded on ICE Futures Exchange, and unlawfully executed noncompetitive exchanges of futures for physical transactions (EFPs) between two of its affiliates. EFPs are noncompetitive transactions that are permitted only if conducted in compliance with exchange rules approved by the CFTC.

Anti-Fraud Enforcement

The CFTC filed 17 enforcement actions against persons who sought to defraud retail customers, pool participants, and others.

Whistleblower Program

The CFTC's whistleblower program continued to grow in 2015, allowing the CFTC to bring cases more quickly and with fewer CFTC resources. In September, the CFTC granted its second whistleblower award since the program was introduced in 2010 under the Dodd-Frank Act (see Legal Update, CFTC Announces Second Whistleblower Award Under Dodd-Frank).

Domestic and International Cooperative Enforcement

In 2015, approximately 90% of the CFTC's major fraud and manipulation cases involved parallel criminal proceedings. The CFTC continues to prioritize cooperative enforcement efforts with federal and state criminal and civil law enforcement authorities, self-regulatory organizations, and international civil and criminal authorities. The CFTC also issued approximately 200 requests for assistance to foreign regulators and received approximately 30 assistance requests from foreign regulators.

CFTC Releases 2015 Enforcement Summary | Practical Law