On October 20, 2016, the US District Court for the Southern District of New York issued an opinion and order appointing an independent monitor to oversee the remediation of issues experienced by Deutsche Bank AG’s (DB) in its swap data reporting systems. In appointing an independent monitor, the court rejected candidates proposed by DB and the CFTC.

On September 30, 2105, the CFTC and DB entered into a settlement (CFTC order) regarding technical issues experienced by DB in reporting its swap data to a swap data repository (SDR) as required by CFTC Regulations Parts 43 and 45 (see Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules). The CFTC order covered DB’s failure to accurately report swap cancellations in all assets classes and to investigate and correct errors from January 2013 through July 2015.

The CFTC order stipulated that DB would cease reporting violations and required that DB implement changes to improve both the accuracy and effectiveness of its SDR reporting and data management. The CFTC found that DB’s reporting problems were, in part, due to the failure of DB to implement and maintain adequate business continuity and disaster recovery plans and other supervisory systems, as required by Part 23 of CFTC Regulations (17 C.F.R. §§ 23.602 and 23.603).

However, issues continued with DB’s swap data reporting systems. On April 16, 2016, DB's swap data reporting system experienced further technical issues that prevented users from submitting swap data in multiple asset classes. The outage lasted for five days, and subsequent fixes created both new reporting issues and also revealed earlier reporting problems that violated a prior CFTC order (see Legal Update CFTC Files Complaint Against Deutsche Bank Alleging Swap Data Reporting Violations).

In an action to address the latest swap data reporting system outage, the CFTC petitioned the court for relief for DB's violation of the prior CFTC order. The CFTC’s petition included a request for appointment of an independent monitor to assess and oversee DB's compliance with the CFTC orders and regulations. The CFTC and DB submitted a joint motion for appointment of the monitor, with final approval subject of the court's decision.

On September 30, 2016, the CFTC submitted three DB monitor candidates to the court for its consideration. Only one candidate, Chatham Financial, was considered “best suited” by the CFTC and DB to operate as a monitor. During a hearing on October 6, 2016, the court surmised that the remaining two candidates were submitted merely to comply with the earlier order that three candidates be proposed. Neither of the two candidates had been vetted by DB or the CFTC.

As the court explained in its order directing the CFTC to submit candidates for independent monitor, while the court affords the CFTC deference in its selection of an independent monitor, the duty of the court “extends beyond that of a ‘rubber stamp.’” Further, the court noted that it has broad powers in appointing an independent monitor and may tailor the appointment to the special needs of the individual case.

Here, the court exercised that power by declining to appoint any of the CFTC’s proposed independent monitors, instead appointing Paul S. Atkins of Patomak Global Partners. Under the terms of the opinion and order, the independent monitor will provide the court with recommendations concerning: