FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Foremost Trading LLC, an Introducing Broker, to Pay $400,000 for Supervision Violations
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Foremost Trading LLC (Foremost), a registered Introducing Broker based in Geneva, Illinois, for failing to supervise diligently the handling of certain trading accounts by its officers, employees, and agents. The CFTC Order requires Foremost to pay a $400,000 civil monetary penalty and cease and desist from violating CFTC regulation 166.3, as charged.
Specifically, the CFTC Order finds that Foremost failed to supervise diligently its officers’, employees’, and agents’ handling of accounts held by clients that were referred to Foremost from three unregistered entities that sold futures trading systems (the Systems Providers). Foremost’s officers, employees, and agents ignored warning signs that the Systems Providers were procuring their clients through fraudulent means and engaging in fraudulent business practices, the Order finds.
Foremost’s personnel received complaints and information from clients about the apparently fraudulent misrepresentations made by the Systems Providers and the unscrupulous business practices in which the Systems Providers were engaged, but failed to fully investigate all these claims or inform clients or prospective clients about these claims, the Order finds. Foremost continued to open accounts for clients referred by the Systems Providers, and additionally, on numerous occasions, Foremost vouched for the Systems Providers’ track records in conversations and correspondence with clients, according to the Order.
CFTC Division of Enforcement staff members responsible for this case are Peter L. Riggs, Thomas L. Simek, Jo Mettenburg, Stephen B. Turley, Jeff Le Riche, Rick Glaser,and Richard Wagner.
Showing posts with label CFTC. Show all posts
Showing posts with label CFTC. Show all posts
Wednesday, September 25, 2013
Friday, September 6, 2013
CFTC CHARGES MAN WITH MAKING ILLEGAL, OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Florida Resident Matthew L. Hall to Pay over $200,000 in Restitution for Illegal, Off-Exchange Precious Metals Transactions
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Matthew L. Hall, individually and doing business as Pacific Exchange Group (PEG), for engaging in illegal, off-exchange precious metals transactions. Hall resides in West Palm Beach, Florida, and PEG is a telemarketing firm with a virtual office in Henderson, Nevada. Neither Hall nor PEG has ever been registered with the CFTC.
The CFTC Order requires Hall to pay $202,577, in restitution to his customers. In addition, the Order imposes permanent registration and trading bans on him.
As explained in the Order, financed transactions in commodities with retail customers, like those engaged in by Hall, must be executed on or subject to the rules of an exchange approved by the CFTC. Since Hall’s transactions were executed off exchange, they were illegal.
Specifically, the CFTC Order finds that from late April 2012 through February 2013, Hall solicited retail customers, generally by telephone or through the PEG website, to invest in financed precious metals transactions, which were executed through Hunter Wise Commodities, LLC (Hunter Wise). Hall, individually and through his employees and agents, represented to prospective customers that 1) the customer could purchase physical commodities, including gold, silver, copper, platinum, or palladium, by paying as little as 20% of the purchase price, 2) customers would receive a loan for the remaining portion of the purchase price on which they would be charged interest, and 3) upon confirmation of the purchase, the physical commodity would be stored at an independent depository in an account in the customer’s name, the Order finds. These representations were based upon representations Hunter Wise made to Hall about Hunter Wise’s operations, according to the Order.
When retail customers placed orders with Hall to enter into retail commodity transactions, Hall simply passed all the details of the purchase, customer payments, and financing on to Hunter Wise, whose existence the Hall did not disclose to retail customers. In return, Hunter Wise paid Hall a portion of the customer commissions and fees, with Hall ultimately receiving commissions and fees totaling $202,577, the Order further finds. Neither Hall nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither Hall nor Hunter Wise actually delivered any precious metals to any customer, according to the Order.
The CFTC sued Hunter Wise in federal court in Florida on December 5, 2012. The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations.
CFTC Orders Florida Resident Matthew L. Hall to Pay over $200,000 in Restitution for Illegal, Off-Exchange Precious Metals Transactions
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Matthew L. Hall, individually and doing business as Pacific Exchange Group (PEG), for engaging in illegal, off-exchange precious metals transactions. Hall resides in West Palm Beach, Florida, and PEG is a telemarketing firm with a virtual office in Henderson, Nevada. Neither Hall nor PEG has ever been registered with the CFTC.
The CFTC Order requires Hall to pay $202,577, in restitution to his customers. In addition, the Order imposes permanent registration and trading bans on him.
As explained in the Order, financed transactions in commodities with retail customers, like those engaged in by Hall, must be executed on or subject to the rules of an exchange approved by the CFTC. Since Hall’s transactions were executed off exchange, they were illegal.
Specifically, the CFTC Order finds that from late April 2012 through February 2013, Hall solicited retail customers, generally by telephone or through the PEG website, to invest in financed precious metals transactions, which were executed through Hunter Wise Commodities, LLC (Hunter Wise). Hall, individually and through his employees and agents, represented to prospective customers that 1) the customer could purchase physical commodities, including gold, silver, copper, platinum, or palladium, by paying as little as 20% of the purchase price, 2) customers would receive a loan for the remaining portion of the purchase price on which they would be charged interest, and 3) upon confirmation of the purchase, the physical commodity would be stored at an independent depository in an account in the customer’s name, the Order finds. These representations were based upon representations Hunter Wise made to Hall about Hunter Wise’s operations, according to the Order.
When retail customers placed orders with Hall to enter into retail commodity transactions, Hall simply passed all the details of the purchase, customer payments, and financing on to Hunter Wise, whose existence the Hall did not disclose to retail customers. In return, Hunter Wise paid Hall a portion of the customer commissions and fees, with Hall ultimately receiving commissions and fees totaling $202,577, the Order further finds. Neither Hall nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither Hall nor Hunter Wise actually delivered any precious metals to any customer, according to the Order.
The CFTC sued Hunter Wise in federal court in Florida on December 5, 2012. The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations.
Wednesday, July 31, 2013
CFTC CHAIRMAN GENSLER TESTIFIES BEFORE SENATE COMMITTEE ON REFORM
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony of Chairman Gary Gensler before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Washington, DC
July 30, 2013
Good morning Chairman Johnson, Ranking Member Crapo and members of the Committee. Thank you for inviting me to today’s hearing. I am pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White.
Today’s hearing comes at an historic moment in the CFTC’s effort to implement the much-needed reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Now, three years since passage of the Dodd-Frank Act, I am pleased to report that we have nearly completed all of the necessary rule writing. Market participants are well along the path of implementing these reforms.
These reforms for the first time shine a light on a marketplace that has been opaque for far too long. These reforms mitigate risk and broaden market access through central clearing of standardized derivatives. These reforms for the first time bring oversight to swap dealers and major swap participants – some of whom were at the center of the bailouts of the financial crisis five years ago. I thank my fellow commissioners and the staff of the Commodity Futures Trading Commission (CFTC) for all of their hard work, dedication and collaboration in bringing oversight to the swaps marketplace.
Introduction
The public and the economy benefit from swap market reforms, just as the public benefitted from the historic reforms in the securities and futures markets since the 1930s. For the first time, we have in place a legal and regulatory foundation for the vast swaps markets that brings transparency and lowers risk for the American public. This new comprehensive regulatory regime includes robust rules of the road to benefit those who trade swaps as well as those who have never even heard of them.
In 2008, we witnessed widespread failure throughout the financial system and financial regulatory system. The lack of important oversight in the swaps market – oversight that we’ve had for decades in the securities and futures markets – allowed for risk to accumulate and be passed on to the public in the form of taxpayer-funded bailouts. Taxpayers sent $182 billion to AIG alone. And AIG was just one part of the larger financial crisis that nearly took down the U.S. and global economies.
Middle class Americans paid the price of the 2008 financial crisis with their jobs, their pensions and their homes. The crisis cost eight million jobs and thousands of businesses, and the swaps market was right at the center. Americans are remarkably resilient, but they do expect us to learn from the lessons of the crisis and to do everything possible to prevent this from happening again. That is why Congress passed the Dodd-Frank Act and why the hard working staff of the CFTC have worked so diligently to implement its reforms.
These rules are complementary pieces of an interconnected foundation on which the swaps market will operate in a transparent, open and competitive manner. Further, just as we have complementary commonsense rules for our roads – traffic lights, stop signs and speed limits, and cops on the streets to enforce all these rules – we need commonsense rules of the road for the swaps markets. In 2008, we had AIG recklessly driving toward failure, and it, along with other failing financial institutions, were so big that they injured millions of bystanders.
Americans would never accept a city or highway system with no rules, no streetlights, no traffic lights and no cops.
And now, with the near-completion of swaps market reforms, the American public no longer will need to accept a dark swaps market lacking commonsense rules of the road.
Credit should be shared for this reform with the SEC. We have worked collaboratively with the SEC, sharing our internal memos, term sheets and draft regulations and seeking advice and counsel every step of the way. In addition to the consultation, Congress tasked the CFTC and SEC with jointly completing a number of critical, foundational rules further defining swap dealers and swaps, among other terms. It is only with this close work and collaboration that reform came to life. We also significantly benefitted from collaboration with other U.S. and international regulators.
We have completed this reform sensitive, as Congress was, that non-financial firms, responsible for 94 percent of private sector jobs in this country, only make up approximately 10 percent of the swaps market. Congress directed that these non-financial end-users have a choice about central clearing, and our rules reflect that. Consistent with Congress’s direction related to clearing, the CFTC has proposed that margin for uncleared swaps does not have to be collected from non-financial end-users. We also have ensured that treasury affiliates of non-financial end-users will have a choice about central clearing. Further, we granted relief for inter-affiliate clearing and reporting as long as outward-facing transactions are cleared and reported.
I now will walk you through the three key areas of completed reforms: transparency, central clearing and oversight of swap dealers and other intermediaries.
Transparency and Access – Lowering Cost and Increasing Liquidity, Efficiency and Competition
A key benefit of swaps reform is providing critical transparency and access to businesses and other end-users that use the swaps market to lock in a price or hedge a risk. Transparency and access – longstanding hallmarks of the futures market, both before and after the trade – lower costs for investors, consumers and businesses.
When light shines on a market, the economy and public benefit. Transparency increases liquidity, efficiency and competition. It is the non-financial part of our economy that provides 94 percent of private sector jobs in the United States and will most benefit from transparency and access to markets. Even amongst financial entities, pension funds, community banks, insurance companies and other non-dealers will significantly benefit as they manage the savings and security of Americans.
Based upon completed reforms, the public and regulators already are benefitting from significant new transparency. Starting late last year, financial regulators have been able to look at swaps transactions that are now being reported to swap data repositories. The phased implementation of these reporting requirements is nearly complete, with just one remaining group of U.S. transactions coming into data repositories August 19. Additional reporting from offshore swap dealers will phase in later this fall.
We now have pricing, transactional, counterparty and valuation information in the data repositories for more than $360 trillion in outstanding swaps. This covers all the different asset classes, including interest rate swaps, credit index swaps, foreign currency swaps, energy swaps, metals swaps and agriculture swaps. We already are benefiting at the CFTC, reviewing this data for purposes of our oversight and surveillance.
Congress knew, though that transparency to the regulators is not enough. Markets work best when the public benefits from seeing the price and volume of transactions after they have been executed. Beginning this past January, the public can now see the prices and volume of transactions on a time delayed basis (and in a way that masks counterparties), similar to a modern-day ticker tape, free of charge and available on the internet. Further, starting today, July 30, a significant portion of the smaller-size transactions will no longer be reported on a time-delayed basis. This fulfills Congress’s mandate that transactions below a block size be publicly reported “as soon as technologically practicable.”
As the Commission recently finalized block rules for swaps, it will shortly turn to consider staff recommendations for a proposal on a futures block rule.
In addition, for the first time, all swaps trading facilities will have to register, completing the task of closing what had come to be known as the “Enron loophole.” We accomplished this through finalizing rules relating to swap execution facilities (SEFs), which are trading facilities for the transaction of swaps. SEFs already have started to register, and some are likely to be operating by August 5. Others will need to register and include the minimum trading functions, such as an order book, by October 2. All market participants shortly will have the ability to compete by making bids and offers to each other through an order book. They also benefit by seeing the prices of such orders prior to making a decision on a transaction.
Thus, market participants, whether they be pension funds, asset managers, community banks or other end users, shortly will be able to go onto a centralized market structure – a designated contract market (DCM) or a SEF – and execute their swaps transactions in a competitive marketplace, while in the past they were primarily only able to do this directly with dealers. This is a critical benefit to our overall economy. When transparency and competition come to a marketplace, costs go down.
Further, standardized swaps (swaps that are subject to the clearing requirement and made available for trading) will be subject to a trade execution requirement likely starting by early next year. A significant portion of interest rate and credit derivative index swaps will be in full view to the marketplace before transactions occur. Trading platforms also can elect to offer other types of swaps for transparent trading. This is a significant shift toward market transparency from the way it used to be.
As Congress made clear in the law, trades will be required to be executed on SEFs or DCMs only when financial institutions transact with financial institutions. Non-financial commercial companies and other end-users will benefit from access to the information on these platforms, but will not be required to use them. Further, companies will be able to continue relying on customized transactions – those not required to be cleared – to meet their particular needs, as well as to enter into large block trades.
Beyond these reforms, new CFTC rules brought additional transparency earlier this year, as customers can now see the valuation of their positions on a daily basis – either as reported by the clearinghouse or by their swap dealers as required by business conduct rules.
With these transparency reforms, the public and regulators now have their first full window into the swaps marketplace. These reforms build upon the democratization of the swaps market that is coming with the clearing of standardized swaps.
Central Clearing – Mitigating Risk and Promoting Access
Transparency is but one critical rule of the road in the swaps markets. It provides the street lamps that light the roads, but we also must ensure that the streets are safe for driving and that drivers have easy access to the highways.
Clearinghouses have operated in the futures markets since the late 19th century to lower risk and improve access for market participants. Clearinghouses reduce the risk that one entity’s failure could spread to the public by standing between the parties and maintaining resources to cover defaults. They value every position daily and require the parties to post adequate margin on a regular basis. Clearing also fosters access for the broad market as it ensures that each participant no longer has to individually worry about its counterparty’s credit characteristics.
The CFTC has implemented the two principal reforms of the Dodd-Frank Act relating to clearing.
First, consistent with the direction of the statute, the Commission in the fall of 2011 adopted a comprehensive set of rules for the risk management of clearinghouses. These final rules provided a strong set of protections for customer money posted to clearinghouses, including for the first time a requirement for gross margining as well as segregation of customer money at the clearinghouse.
These final rules were consistent with international standards as of the time that our rules were published. Subsequently, new international standards have been adopted – the Principles for Financial Market Infrastructures. Though the Commission’s clearinghouse risk management rules cover the vast majority of these new international standards, CFTC staff is working expeditiously to recommend the necessary steps to implement the remaining items that should be incorporated in our rules. Most importantly, Commissioners currently are considering finalizing a rule requiring systemically important clearinghouses to have prefunded default resources sufficient to cover the default of the two clearing members that would cause the greatest loss (after margin) in extreme but plausible circumstances.
Second, the CFTC adopted rules to implement the Dodd-Frank Act’s requirement that standardized swaps be cleared. The Commission approved the first clearing requirement last November, following through on the U.S. commitment at the 2009 G-20 meeting that standardized swaps be cleared by the end of 2012. The Commission has determined that swaps in four interest rate swap classes (U.S. Dollar, Euro, Sterling and Yen) and in two credit index swap classes (CDX and iTraxx) are subject to the clearing requirement. These asset classes account for the vast majority of interest rate and credit default index swaps.
We reached a key milestone in March when the clearing requirement for swap dealers and the largest hedge funds went into effect. Additional financial entities began clearing June 10. Compliance will continue to be phased in throughout this year. Accounts managed by third party investment managers and ERISA pension plans have until September 9. As we phase in compliance with the recently completed cross-border interpretive guidance, collective investment vehicles, including hedge funds, whose principal place of business is in the U.S. but may have incorporated offshore (for instance, in the Cayman Islands) will have to comply with the clearing requirements by October 10. Further, guaranteed affiliates of U.S. persons will have to begin complying with the clearing requirement on October 10 as well. The CFTC also fulfilled Congress’s direction to exempt non-financial end-users from the clearing requirement.
Oversight of Swap Dealers and Other Intermediaries
The third critical piece of swaps market reform is oversight of swap dealers and investment funds operating in the swaps market. To extend the highway metaphor, we require that drivers have licenses and know the rules of the road. Though Congress did not suggest this for all market participants, they were clear that the dealers themselves had to be registered and be brought under new reforms. Furthermore, Congress directed that swaps reforms extend to investment vehicles that invest in swaps.
The foundational joint rules of the CFTC and SEC further defining swap dealers and swaps went into effect last October. By last December, swap dealers began to provisionally register. We now have had 80 swap dealers and two major swap participants provisionally register with the CFTC. This group includes the largest domestic and international financial institutions dealing in swaps, including the 16 institutions commonly referred to as the G16 dealers. We expect additional entities to register as swap dealers as the recently completed cross-border interpretive guidance becomes effective later this year.
Since the beginning of this year, swap dealers have had to report their trades to both regulators and the public. They also have had to comply with various business conduct standards that lower risk and increase market integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also have been required since earlier this year to implement sales practice standards that prohibit fraud, require fair treatment of customers and improve transparency.
Cross-Border Derivatives Reform
Congress was clear that the far-flung operations of U.S. enterprises are to be covered by reform. Recognizing the lessons of the crisis and modern finance, Congress was clear in section 722(d) of the Dodd-Frank Act that swaps reform does apply to activities outside our borders with “a direct and significant connection with activities in, or effect on, commerce of the United States.”
The largest banks and institutions are global in nature, and when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk comes crashing right back to our shores. The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. In fact, the U.S.’s largest banks each have somewhere between 2,000 and 3,000 legal entities. AIG nearly brought down the U.S. economy because it guaranteed the losses of a Mayfair Branch operating under a French bank license in London. Lehman Brothers had 3,300 legal entities, including a London affiliate that was guaranteed here in the U.S., and it had 130,000 outstanding swap transactions. Citigroup had structured investment vehicles that were set up in the Cayman Islands, run out of London, and yet were central to not one, but two bailouts of that institution. Bear Stearns, in 2007 had two sinking hedge funds organized in the Cayman Islands that had to be bailed out by the parent entity. A decade earlier, the same was true for Long-Term Capital Management.
After receiving public input and coordinating with the SEC and other regulators, working with international regulators, we issued guidance and an exemptive order to provide clarity to the market that our new rules apply to cross-border derivative activities. The CFTC interprets the cross-border provisions to cover swaps between non-U.S. swap dealers and guaranteed affiliates of U.S. persons as well as swaps between two guaranteed affiliates. The guidance does recognize and embrace the concept of substituted compliances where there are comparable and comprehensive rules abroad. Further, the interpretive guidance captures offshore hedge funds and collective investment vehicles that have their principal place of business here in the U.S. or that are majority owned by U.S. persons.
We published the proposed guidance for public comment in June of last year and then sought additional comment in December. On July 12, we gave swap dealers organized in each of six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) five additional months to come into compliance with certain swaps reforms as we assess the submissions from those jurisdictions regarding substituted compliance.
Investment Funds
Furthermore, Consistent with Congress’s direction that swaps reforms extend to investment vehicles investing in swaps, the Commission approved final rules 18 months ago that increase transparency to regulators of commodity pool operators (CPOs) and commodity trading advisors (CTAs) acting in the derivatives marketplace – both futures and swaps. The rulemaking also rescinded prior exemptions from CPO registration that had been used by many hedge funds. As a result, CPOs of registered investment companies and hedge funds were required to register by December 31, 2012, and, to date, more than 500 funds and registered investment companies have done so. Pooled investment vehicles, including registered investment companies that trade more than a de minimis amount in commodities or market themselves as commodity funds now will be subject to CFTC oversight. These rules enhance transparency and increase customer protections through amendments to the compliance obligations for CPOs and CTAs. The Commission currently is considering staff recommendations to finalize a rule that seeks to harmonize with the securities laws, to the extent possible, requirements for CPOs of registered investment companies.
Looking Forward on Swaps Market Reform
Now that we have successfully completed the bulk of the rulemaking, and the market is largely implementing those reforms, the CFTC is focusing on three principal areas.
Compliance, Registration, Surveillance and Enforcement
First, with most of the new reforms’ compliance dates behind us, the CFTC is increasingly shifting toward reviewing registration applications of various entities and reviewing those entities and transactions for compliance through the agency’s surveillance, examination and enforcement functions.
The CFTC will continue to work with market participants as they phase in compliance with these completed reforms. The CFTC embraced phasing in compliance to smooth the transition to a new regulatory regime and to ensure that reform is actively implemented. Market participants began phasing in compliance last October. As I have reviewed, much already has been accomplished, but, looking ahead, there are critical compliance dates through the rest of this year and into 2014.
International Harmonization
Second, we are going to continue to work with regulators around the globe to promote reform and harmonize where we can. For example, we are working closely with our international counterparts to ensure that all U.S. persons and their guaranteed affiliates are covered by reform – either the Dodd-Frank Act reforms or through compliance with comparable and comprehensive rules of another jurisdiction.
Earlier this month, we took a significant step when the European Union and we announced a path forward regarding joint understandings for the regulation of cross-border derivatives. This was a significant step forward in harmonizing and giving clarity to the markets, particularly when there might be jurisdictional overlaps with regard to our respective reforms.
The CFTC over the next five months will be reviewing submissions from the six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) to assess their regulatory regimes with regard to possible substituted compliance determinations.
We also are working with foreign regulators on memoranda of understanding to ensure that we will be able to exercise our respective supervisory responsibilities in an efficient, coordinated manner.
Dodd-Frank Rulemakings
Third, we do have a handful of rules to finalize, including capital and margin for swap dealers, the Volcker Rule and position limits.
The CFTC is collaborating closely domestically and internationally on a global approach to margin requirements for uncleared swaps. We have been working along with the Federal Reserve, the other U.S. banking regulators, the SEC and our international counterparts on a final set of standards to be published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). The CFTC’s proposed margin rules exclude non-financial end-users from margin requirements for uncleared swaps. We have been advocating with global regulators for an approach consistent with that of the CFTC. I now anticipate that the final set of international standards, which are nearing completion, will not call for margin for non-systemic, non-financial entities. After the international standards are published, the CFTC will further propose margin rules likely later this year and seek to finalize those rules in the first half of 2014.
Following Congress’ mandate, the CFTC is working with our fellow domestic financial regulators to complete the Volcker Rule. In adopting the Volcker Rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing a rule is achieving these multiple objectives.
In the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps. The agency finalized a rule in October 2011 that addressed Congress’s direction to prevent any single trader from obtaining too large a share of the market to ensure that derivatives markets remain fair and competitive. Last fall, a federal court vacated the rule, and we currently are in the process of appealing that decision. Concurrently, we are working on developing a new proposed rulemaking to address position limits. It is critically important that these position limits be established as Congress required.
Looking Forward on Other Critical Reforms
In addition to the ongoing work on swaps market reform, the CFTC also is pursuing a number of other critical initiatives. I will highlight three such initiatives in this testimony.
Customer Protection
First, the Commission is continuing its work to enhance the protection of customer funds in both the futures and swaps markets.
We have completed amendments to rule 1.25 regarding the investment of customer funds to benefit both futures and swaps customers in December 2011. The CFTC’s gross margining rules for futures and swaps customers, which went into effect last November, require clearinghouses to collect margin on a gross basis. Futures Commission Merchants (FCMs) are no longer able to offset one customer’s collateral against another or to send only the net to the clearinghouse. Swaps customers further benefit from the new so-called “LSOC” (legal segregation with operational comingling) rules, which also became effective last year and ensure funds are protected individually all the way to the clearinghouse.
The Commission also worked closely with market participants on new customer protection rules adopted by the self-regulatory organization (SRO), the NFA. These include requiring FCMs to hold sufficient funds for U.S. foreign futures and options customers trading on foreign contract markets (in Part 30 secured accounts). Starting last year, FCMs must meet their total obligations to customers trading on foreign markets under the net liquidating equity method. In addition, withdrawals of 25 percent or more of excess segregated funds would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC.
Building upon these reforms, in the fall of 2012, the Commission sought public comment on a proposal that would further strengthen the controls around customer funds at FCMs. It would set new regulatory accounting requirements and would raise minimum standards for independent public accountants who audit FCMs. And it would provide regulators with daily direct electronic access to the FCMs’ bank and custodial accounts for customer funds.
The proposal includes a provision on residual interest to ensure that the assets of one customer are not used to cover the positions of another customer. We are considering the many comments we have received on this, consistent with the specific provisions of the Commodity Exchange Act and the overall goal of protecting customers. The Commissioners shortly will receive final staff recommendations on this rule. I think it is critical that we complete these reforms this fall.
Benchmark Interest Rates
Second, the CFTC is continuing its work with domestic and international regulators to ensure the market integrity of benchmark interest rates. Benchmark interest rates, such as the London Interbank Offered Rate (LIBOR) are very important to the American public. LIBOR is the reference rate for 70 percent of the U.S. futures market and more than half of our swaps market. It is the reference rate for more than $300 trillion in derivatives and more than $10 trillion in loans. We need to ensure that these benchmark interest rates have market integrity and that they are based on fact, not fiction.
The interbank unsecured market that the benchmarks are intended to measure, however, essentially no longer exists, particularly for longer tenors.
Furthermore, our enforcement actions against three global banks, along with those of the Financial Conduct Authority, the Justice Department and others, have shown that LIBOR, EURIBOR and similar rates have been readily and pervasively rigged. The CFTC initiated an investigation in 2008 related to LIBOR. Barclays, UBS and RBS paid fines of approximately $2.5 billion for manipulative conduct relating to these rates as a result of multiple agencies’ enforcement and criminal actions.
Given these vulnerabilities and the real risk that they will remain, to ensure market integrity and support financial stability, the Financial Stability Oversight Council recommended in its annual report that U.S. regulators work with foreign regulators, international bodies, and market participants to promptly identify alternative interest rate benchmarks that are anchored in observable transactions and are supported by appropriate governance structures, and to develop a plan to accomplish a transition to new benchmarks while such alternative benchmarks are being identified. The Council further recommended that steps be taken to plan for and promote a smooth and orderly transition to alternative benchmarks, with consideration given to issues of stability and to mitigation of short-term market disruptions.
An IOSCO task force took an important step in bringing reform to benchmark interest rates in announcing new principles earlier this month. Given the known problems with LIBOR, EURIBOR and other significant market benchmarks, I am pleased that the IOSCO Principles require that benchmarks be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest. This report establishes new international standards.
The Financial Stability Board (FSB) is building upon the work of IOSCO by initiating a review of alternatives to existing benchmark interest rates as well as considering any potential transition issues. The FSB has established an Official Sector Steering Group of regulators and central banks and will convene and guide the work of a Market Participants Group.
Direct Market Access
Third, Commission staff currently is developing a concept release for public comment concerning the testing of systems and supervision of market participants with direct electronic market access. These concepts will be designed to address potential risks that high frequency traders and others who have direct market access may cause. Working with other regulators, we hope to hear from the public on this issue soon.
Resources
Traffic laws are only as good and as valuable as the cops assigned to enforce them. While the reforms of the Dodd-Frank Act are essential to promoting transparency and lowering risk in the marketplace, they will not be sufficient to protect the public unless we have the cops on the beat to enforce them. To do so, the CFTC must be adequately funded.
The agency currently is operating on a budget of $195 million after sequestration and has a staff of 685. That is only 8 percent more staff than we had twenty years ago. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market.
Imagine telling the South Dakota Highway Patrol or the Idaho Patrol that, instead of just patrolling the streets of South Dakota or Idaho, they are now responsible for policing a vast portion of the country’s highway system, but they can only hire 8 percent more officers.
That is basically the challenge we now face at the CFTC. Making the challenge even harder is that the new highway system we have been tasked with overseeing is much more complex. Not only do we need resources to have enough cops on the beat, but we need to make sure that our cops have the tools necessary to police the highways and protect the public.
We are not asking for eight times our current funding, but investments in both technology and people are needed for effective oversight of these markets by regulators.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 80 entities having registered as new swap dealers, as well as new swap data repositories, swap execution facilities and clearinghouses, we need people to review registrations and to run examinations to ensure compliance and ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
The U.S. government is facing a strained budget environment, but adequately funding the CFTC is a good investment for the American public. The $182 billion AIG bailout was nearly 600 times more than the CFTC’s budget request of $315 million. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy. Without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets.
Conclusion
Today’s hearing comes as many of the swaps market reforms that this Committee worked to include in the Dodd-Frank Act have already begun to benefit the American public. The CFTC, having completed 59 final rules, orders and guidances, has nearly completed the rule set, and market participants are coming into compliance with these reforms. Clearinghouses have begun clearing the majority of interest rate and credit index derivatives, and the biggest swap dealers have provisionally registered with the CFTC. The public and regulators are benefitting from transparency, as real time and regulatory reporting is already a reality. SEFs will be up and running soon.
Our staff has worked tirelessly to complete this reform that is so important to the American public. We will continue to work with domestic and international regulators on these critical reforms and to ensure compliance.
I am pleased to tell you that the swaps market, which once was an unregulated highway, now has streetlights and traffic laws. The dealers now have to have drivers’ licenses. Though there is still critical work to be done, the swaps marketplace will no longer be dark and will now have safer roads. Still, our traffic laws will not be fully effective without a sufficient number of cops patrolling the highways and back roads.
Thank you again for inviting me today, and I look forward to your questions.
Testimony of Chairman Gary Gensler before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Washington, DC
July 30, 2013
Good morning Chairman Johnson, Ranking Member Crapo and members of the Committee. Thank you for inviting me to today’s hearing. I am pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White.
Today’s hearing comes at an historic moment in the CFTC’s effort to implement the much-needed reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Now, three years since passage of the Dodd-Frank Act, I am pleased to report that we have nearly completed all of the necessary rule writing. Market participants are well along the path of implementing these reforms.
These reforms for the first time shine a light on a marketplace that has been opaque for far too long. These reforms mitigate risk and broaden market access through central clearing of standardized derivatives. These reforms for the first time bring oversight to swap dealers and major swap participants – some of whom were at the center of the bailouts of the financial crisis five years ago. I thank my fellow commissioners and the staff of the Commodity Futures Trading Commission (CFTC) for all of their hard work, dedication and collaboration in bringing oversight to the swaps marketplace.
Introduction
The public and the economy benefit from swap market reforms, just as the public benefitted from the historic reforms in the securities and futures markets since the 1930s. For the first time, we have in place a legal and regulatory foundation for the vast swaps markets that brings transparency and lowers risk for the American public. This new comprehensive regulatory regime includes robust rules of the road to benefit those who trade swaps as well as those who have never even heard of them.
In 2008, we witnessed widespread failure throughout the financial system and financial regulatory system. The lack of important oversight in the swaps market – oversight that we’ve had for decades in the securities and futures markets – allowed for risk to accumulate and be passed on to the public in the form of taxpayer-funded bailouts. Taxpayers sent $182 billion to AIG alone. And AIG was just one part of the larger financial crisis that nearly took down the U.S. and global economies.
Middle class Americans paid the price of the 2008 financial crisis with their jobs, their pensions and their homes. The crisis cost eight million jobs and thousands of businesses, and the swaps market was right at the center. Americans are remarkably resilient, but they do expect us to learn from the lessons of the crisis and to do everything possible to prevent this from happening again. That is why Congress passed the Dodd-Frank Act and why the hard working staff of the CFTC have worked so diligently to implement its reforms.
These rules are complementary pieces of an interconnected foundation on which the swaps market will operate in a transparent, open and competitive manner. Further, just as we have complementary commonsense rules for our roads – traffic lights, stop signs and speed limits, and cops on the streets to enforce all these rules – we need commonsense rules of the road for the swaps markets. In 2008, we had AIG recklessly driving toward failure, and it, along with other failing financial institutions, were so big that they injured millions of bystanders.
Americans would never accept a city or highway system with no rules, no streetlights, no traffic lights and no cops.
And now, with the near-completion of swaps market reforms, the American public no longer will need to accept a dark swaps market lacking commonsense rules of the road.
Credit should be shared for this reform with the SEC. We have worked collaboratively with the SEC, sharing our internal memos, term sheets and draft regulations and seeking advice and counsel every step of the way. In addition to the consultation, Congress tasked the CFTC and SEC with jointly completing a number of critical, foundational rules further defining swap dealers and swaps, among other terms. It is only with this close work and collaboration that reform came to life. We also significantly benefitted from collaboration with other U.S. and international regulators.
We have completed this reform sensitive, as Congress was, that non-financial firms, responsible for 94 percent of private sector jobs in this country, only make up approximately 10 percent of the swaps market. Congress directed that these non-financial end-users have a choice about central clearing, and our rules reflect that. Consistent with Congress’s direction related to clearing, the CFTC has proposed that margin for uncleared swaps does not have to be collected from non-financial end-users. We also have ensured that treasury affiliates of non-financial end-users will have a choice about central clearing. Further, we granted relief for inter-affiliate clearing and reporting as long as outward-facing transactions are cleared and reported.
I now will walk you through the three key areas of completed reforms: transparency, central clearing and oversight of swap dealers and other intermediaries.
Transparency and Access – Lowering Cost and Increasing Liquidity, Efficiency and Competition
A key benefit of swaps reform is providing critical transparency and access to businesses and other end-users that use the swaps market to lock in a price or hedge a risk. Transparency and access – longstanding hallmarks of the futures market, both before and after the trade – lower costs for investors, consumers and businesses.
When light shines on a market, the economy and public benefit. Transparency increases liquidity, efficiency and competition. It is the non-financial part of our economy that provides 94 percent of private sector jobs in the United States and will most benefit from transparency and access to markets. Even amongst financial entities, pension funds, community banks, insurance companies and other non-dealers will significantly benefit as they manage the savings and security of Americans.
Based upon completed reforms, the public and regulators already are benefitting from significant new transparency. Starting late last year, financial regulators have been able to look at swaps transactions that are now being reported to swap data repositories. The phased implementation of these reporting requirements is nearly complete, with just one remaining group of U.S. transactions coming into data repositories August 19. Additional reporting from offshore swap dealers will phase in later this fall.
We now have pricing, transactional, counterparty and valuation information in the data repositories for more than $360 trillion in outstanding swaps. This covers all the different asset classes, including interest rate swaps, credit index swaps, foreign currency swaps, energy swaps, metals swaps and agriculture swaps. We already are benefiting at the CFTC, reviewing this data for purposes of our oversight and surveillance.
Congress knew, though that transparency to the regulators is not enough. Markets work best when the public benefits from seeing the price and volume of transactions after they have been executed. Beginning this past January, the public can now see the prices and volume of transactions on a time delayed basis (and in a way that masks counterparties), similar to a modern-day ticker tape, free of charge and available on the internet. Further, starting today, July 30, a significant portion of the smaller-size transactions will no longer be reported on a time-delayed basis. This fulfills Congress’s mandate that transactions below a block size be publicly reported “as soon as technologically practicable.”
As the Commission recently finalized block rules for swaps, it will shortly turn to consider staff recommendations for a proposal on a futures block rule.
In addition, for the first time, all swaps trading facilities will have to register, completing the task of closing what had come to be known as the “Enron loophole.” We accomplished this through finalizing rules relating to swap execution facilities (SEFs), which are trading facilities for the transaction of swaps. SEFs already have started to register, and some are likely to be operating by August 5. Others will need to register and include the minimum trading functions, such as an order book, by October 2. All market participants shortly will have the ability to compete by making bids and offers to each other through an order book. They also benefit by seeing the prices of such orders prior to making a decision on a transaction.
Thus, market participants, whether they be pension funds, asset managers, community banks or other end users, shortly will be able to go onto a centralized market structure – a designated contract market (DCM) or a SEF – and execute their swaps transactions in a competitive marketplace, while in the past they were primarily only able to do this directly with dealers. This is a critical benefit to our overall economy. When transparency and competition come to a marketplace, costs go down.
Further, standardized swaps (swaps that are subject to the clearing requirement and made available for trading) will be subject to a trade execution requirement likely starting by early next year. A significant portion of interest rate and credit derivative index swaps will be in full view to the marketplace before transactions occur. Trading platforms also can elect to offer other types of swaps for transparent trading. This is a significant shift toward market transparency from the way it used to be.
As Congress made clear in the law, trades will be required to be executed on SEFs or DCMs only when financial institutions transact with financial institutions. Non-financial commercial companies and other end-users will benefit from access to the information on these platforms, but will not be required to use them. Further, companies will be able to continue relying on customized transactions – those not required to be cleared – to meet their particular needs, as well as to enter into large block trades.
Beyond these reforms, new CFTC rules brought additional transparency earlier this year, as customers can now see the valuation of their positions on a daily basis – either as reported by the clearinghouse or by their swap dealers as required by business conduct rules.
With these transparency reforms, the public and regulators now have their first full window into the swaps marketplace. These reforms build upon the democratization of the swaps market that is coming with the clearing of standardized swaps.
Central Clearing – Mitigating Risk and Promoting Access
Transparency is but one critical rule of the road in the swaps markets. It provides the street lamps that light the roads, but we also must ensure that the streets are safe for driving and that drivers have easy access to the highways.
Clearinghouses have operated in the futures markets since the late 19th century to lower risk and improve access for market participants. Clearinghouses reduce the risk that one entity’s failure could spread to the public by standing between the parties and maintaining resources to cover defaults. They value every position daily and require the parties to post adequate margin on a regular basis. Clearing also fosters access for the broad market as it ensures that each participant no longer has to individually worry about its counterparty’s credit characteristics.
The CFTC has implemented the two principal reforms of the Dodd-Frank Act relating to clearing.
First, consistent with the direction of the statute, the Commission in the fall of 2011 adopted a comprehensive set of rules for the risk management of clearinghouses. These final rules provided a strong set of protections for customer money posted to clearinghouses, including for the first time a requirement for gross margining as well as segregation of customer money at the clearinghouse.
These final rules were consistent with international standards as of the time that our rules were published. Subsequently, new international standards have been adopted – the Principles for Financial Market Infrastructures. Though the Commission’s clearinghouse risk management rules cover the vast majority of these new international standards, CFTC staff is working expeditiously to recommend the necessary steps to implement the remaining items that should be incorporated in our rules. Most importantly, Commissioners currently are considering finalizing a rule requiring systemically important clearinghouses to have prefunded default resources sufficient to cover the default of the two clearing members that would cause the greatest loss (after margin) in extreme but plausible circumstances.
Second, the CFTC adopted rules to implement the Dodd-Frank Act’s requirement that standardized swaps be cleared. The Commission approved the first clearing requirement last November, following through on the U.S. commitment at the 2009 G-20 meeting that standardized swaps be cleared by the end of 2012. The Commission has determined that swaps in four interest rate swap classes (U.S. Dollar, Euro, Sterling and Yen) and in two credit index swap classes (CDX and iTraxx) are subject to the clearing requirement. These asset classes account for the vast majority of interest rate and credit default index swaps.
We reached a key milestone in March when the clearing requirement for swap dealers and the largest hedge funds went into effect. Additional financial entities began clearing June 10. Compliance will continue to be phased in throughout this year. Accounts managed by third party investment managers and ERISA pension plans have until September 9. As we phase in compliance with the recently completed cross-border interpretive guidance, collective investment vehicles, including hedge funds, whose principal place of business is in the U.S. but may have incorporated offshore (for instance, in the Cayman Islands) will have to comply with the clearing requirements by October 10. Further, guaranteed affiliates of U.S. persons will have to begin complying with the clearing requirement on October 10 as well. The CFTC also fulfilled Congress’s direction to exempt non-financial end-users from the clearing requirement.
Oversight of Swap Dealers and Other Intermediaries
The third critical piece of swaps market reform is oversight of swap dealers and investment funds operating in the swaps market. To extend the highway metaphor, we require that drivers have licenses and know the rules of the road. Though Congress did not suggest this for all market participants, they were clear that the dealers themselves had to be registered and be brought under new reforms. Furthermore, Congress directed that swaps reforms extend to investment vehicles that invest in swaps.
The foundational joint rules of the CFTC and SEC further defining swap dealers and swaps went into effect last October. By last December, swap dealers began to provisionally register. We now have had 80 swap dealers and two major swap participants provisionally register with the CFTC. This group includes the largest domestic and international financial institutions dealing in swaps, including the 16 institutions commonly referred to as the G16 dealers. We expect additional entities to register as swap dealers as the recently completed cross-border interpretive guidance becomes effective later this year.
Since the beginning of this year, swap dealers have had to report their trades to both regulators and the public. They also have had to comply with various business conduct standards that lower risk and increase market integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also have been required since earlier this year to implement sales practice standards that prohibit fraud, require fair treatment of customers and improve transparency.
Cross-Border Derivatives Reform
Congress was clear that the far-flung operations of U.S. enterprises are to be covered by reform. Recognizing the lessons of the crisis and modern finance, Congress was clear in section 722(d) of the Dodd-Frank Act that swaps reform does apply to activities outside our borders with “a direct and significant connection with activities in, or effect on, commerce of the United States.”
The largest banks and institutions are global in nature, and when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk comes crashing right back to our shores. The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. In fact, the U.S.’s largest banks each have somewhere between 2,000 and 3,000 legal entities. AIG nearly brought down the U.S. economy because it guaranteed the losses of a Mayfair Branch operating under a French bank license in London. Lehman Brothers had 3,300 legal entities, including a London affiliate that was guaranteed here in the U.S., and it had 130,000 outstanding swap transactions. Citigroup had structured investment vehicles that were set up in the Cayman Islands, run out of London, and yet were central to not one, but two bailouts of that institution. Bear Stearns, in 2007 had two sinking hedge funds organized in the Cayman Islands that had to be bailed out by the parent entity. A decade earlier, the same was true for Long-Term Capital Management.
After receiving public input and coordinating with the SEC and other regulators, working with international regulators, we issued guidance and an exemptive order to provide clarity to the market that our new rules apply to cross-border derivative activities. The CFTC interprets the cross-border provisions to cover swaps between non-U.S. swap dealers and guaranteed affiliates of U.S. persons as well as swaps between two guaranteed affiliates. The guidance does recognize and embrace the concept of substituted compliances where there are comparable and comprehensive rules abroad. Further, the interpretive guidance captures offshore hedge funds and collective investment vehicles that have their principal place of business here in the U.S. or that are majority owned by U.S. persons.
We published the proposed guidance for public comment in June of last year and then sought additional comment in December. On July 12, we gave swap dealers organized in each of six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) five additional months to come into compliance with certain swaps reforms as we assess the submissions from those jurisdictions regarding substituted compliance.
Investment Funds
Furthermore, Consistent with Congress’s direction that swaps reforms extend to investment vehicles investing in swaps, the Commission approved final rules 18 months ago that increase transparency to regulators of commodity pool operators (CPOs) and commodity trading advisors (CTAs) acting in the derivatives marketplace – both futures and swaps. The rulemaking also rescinded prior exemptions from CPO registration that had been used by many hedge funds. As a result, CPOs of registered investment companies and hedge funds were required to register by December 31, 2012, and, to date, more than 500 funds and registered investment companies have done so. Pooled investment vehicles, including registered investment companies that trade more than a de minimis amount in commodities or market themselves as commodity funds now will be subject to CFTC oversight. These rules enhance transparency and increase customer protections through amendments to the compliance obligations for CPOs and CTAs. The Commission currently is considering staff recommendations to finalize a rule that seeks to harmonize with the securities laws, to the extent possible, requirements for CPOs of registered investment companies.
Looking Forward on Swaps Market Reform
Now that we have successfully completed the bulk of the rulemaking, and the market is largely implementing those reforms, the CFTC is focusing on three principal areas.
Compliance, Registration, Surveillance and Enforcement
First, with most of the new reforms’ compliance dates behind us, the CFTC is increasingly shifting toward reviewing registration applications of various entities and reviewing those entities and transactions for compliance through the agency’s surveillance, examination and enforcement functions.
The CFTC will continue to work with market participants as they phase in compliance with these completed reforms. The CFTC embraced phasing in compliance to smooth the transition to a new regulatory regime and to ensure that reform is actively implemented. Market participants began phasing in compliance last October. As I have reviewed, much already has been accomplished, but, looking ahead, there are critical compliance dates through the rest of this year and into 2014.
International Harmonization
Second, we are going to continue to work with regulators around the globe to promote reform and harmonize where we can. For example, we are working closely with our international counterparts to ensure that all U.S. persons and their guaranteed affiliates are covered by reform – either the Dodd-Frank Act reforms or through compliance with comparable and comprehensive rules of another jurisdiction.
Earlier this month, we took a significant step when the European Union and we announced a path forward regarding joint understandings for the regulation of cross-border derivatives. This was a significant step forward in harmonizing and giving clarity to the markets, particularly when there might be jurisdictional overlaps with regard to our respective reforms.
The CFTC over the next five months will be reviewing submissions from the six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan and Switzerland) to assess their regulatory regimes with regard to possible substituted compliance determinations.
We also are working with foreign regulators on memoranda of understanding to ensure that we will be able to exercise our respective supervisory responsibilities in an efficient, coordinated manner.
Dodd-Frank Rulemakings
Third, we do have a handful of rules to finalize, including capital and margin for swap dealers, the Volcker Rule and position limits.
The CFTC is collaborating closely domestically and internationally on a global approach to margin requirements for uncleared swaps. We have been working along with the Federal Reserve, the other U.S. banking regulators, the SEC and our international counterparts on a final set of standards to be published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). The CFTC’s proposed margin rules exclude non-financial end-users from margin requirements for uncleared swaps. We have been advocating with global regulators for an approach consistent with that of the CFTC. I now anticipate that the final set of international standards, which are nearing completion, will not call for margin for non-systemic, non-financial entities. After the international standards are published, the CFTC will further propose margin rules likely later this year and seek to finalize those rules in the first half of 2014.
Following Congress’ mandate, the CFTC is working with our fellow domestic financial regulators to complete the Volcker Rule. In adopting the Volcker Rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing a rule is achieving these multiple objectives.
In the Dodd-Frank Act, Congress directed the Commission to impose limits on speculative positions in physical commodity futures and options contracts and economically equivalent swaps. The agency finalized a rule in October 2011 that addressed Congress’s direction to prevent any single trader from obtaining too large a share of the market to ensure that derivatives markets remain fair and competitive. Last fall, a federal court vacated the rule, and we currently are in the process of appealing that decision. Concurrently, we are working on developing a new proposed rulemaking to address position limits. It is critically important that these position limits be established as Congress required.
Looking Forward on Other Critical Reforms
In addition to the ongoing work on swaps market reform, the CFTC also is pursuing a number of other critical initiatives. I will highlight three such initiatives in this testimony.
Customer Protection
First, the Commission is continuing its work to enhance the protection of customer funds in both the futures and swaps markets.
We have completed amendments to rule 1.25 regarding the investment of customer funds to benefit both futures and swaps customers in December 2011. The CFTC’s gross margining rules for futures and swaps customers, which went into effect last November, require clearinghouses to collect margin on a gross basis. Futures Commission Merchants (FCMs) are no longer able to offset one customer’s collateral against another or to send only the net to the clearinghouse. Swaps customers further benefit from the new so-called “LSOC” (legal segregation with operational comingling) rules, which also became effective last year and ensure funds are protected individually all the way to the clearinghouse.
The Commission also worked closely with market participants on new customer protection rules adopted by the self-regulatory organization (SRO), the NFA. These include requiring FCMs to hold sufficient funds for U.S. foreign futures and options customers trading on foreign contract markets (in Part 30 secured accounts). Starting last year, FCMs must meet their total obligations to customers trading on foreign markets under the net liquidating equity method. In addition, withdrawals of 25 percent or more of excess segregated funds would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC.
Building upon these reforms, in the fall of 2012, the Commission sought public comment on a proposal that would further strengthen the controls around customer funds at FCMs. It would set new regulatory accounting requirements and would raise minimum standards for independent public accountants who audit FCMs. And it would provide regulators with daily direct electronic access to the FCMs’ bank and custodial accounts for customer funds.
The proposal includes a provision on residual interest to ensure that the assets of one customer are not used to cover the positions of another customer. We are considering the many comments we have received on this, consistent with the specific provisions of the Commodity Exchange Act and the overall goal of protecting customers. The Commissioners shortly will receive final staff recommendations on this rule. I think it is critical that we complete these reforms this fall.
Benchmark Interest Rates
Second, the CFTC is continuing its work with domestic and international regulators to ensure the market integrity of benchmark interest rates. Benchmark interest rates, such as the London Interbank Offered Rate (LIBOR) are very important to the American public. LIBOR is the reference rate for 70 percent of the U.S. futures market and more than half of our swaps market. It is the reference rate for more than $300 trillion in derivatives and more than $10 trillion in loans. We need to ensure that these benchmark interest rates have market integrity and that they are based on fact, not fiction.
The interbank unsecured market that the benchmarks are intended to measure, however, essentially no longer exists, particularly for longer tenors.
Furthermore, our enforcement actions against three global banks, along with those of the Financial Conduct Authority, the Justice Department and others, have shown that LIBOR, EURIBOR and similar rates have been readily and pervasively rigged. The CFTC initiated an investigation in 2008 related to LIBOR. Barclays, UBS and RBS paid fines of approximately $2.5 billion for manipulative conduct relating to these rates as a result of multiple agencies’ enforcement and criminal actions.
Given these vulnerabilities and the real risk that they will remain, to ensure market integrity and support financial stability, the Financial Stability Oversight Council recommended in its annual report that U.S. regulators work with foreign regulators, international bodies, and market participants to promptly identify alternative interest rate benchmarks that are anchored in observable transactions and are supported by appropriate governance structures, and to develop a plan to accomplish a transition to new benchmarks while such alternative benchmarks are being identified. The Council further recommended that steps be taken to plan for and promote a smooth and orderly transition to alternative benchmarks, with consideration given to issues of stability and to mitigation of short-term market disruptions.
An IOSCO task force took an important step in bringing reform to benchmark interest rates in announcing new principles earlier this month. Given the known problems with LIBOR, EURIBOR and other significant market benchmarks, I am pleased that the IOSCO Principles require that benchmarks be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest. This report establishes new international standards.
The Financial Stability Board (FSB) is building upon the work of IOSCO by initiating a review of alternatives to existing benchmark interest rates as well as considering any potential transition issues. The FSB has established an Official Sector Steering Group of regulators and central banks and will convene and guide the work of a Market Participants Group.
Direct Market Access
Third, Commission staff currently is developing a concept release for public comment concerning the testing of systems and supervision of market participants with direct electronic market access. These concepts will be designed to address potential risks that high frequency traders and others who have direct market access may cause. Working with other regulators, we hope to hear from the public on this issue soon.
Resources
Traffic laws are only as good and as valuable as the cops assigned to enforce them. While the reforms of the Dodd-Frank Act are essential to promoting transparency and lowering risk in the marketplace, they will not be sufficient to protect the public unless we have the cops on the beat to enforce them. To do so, the CFTC must be adequately funded.
The agency currently is operating on a budget of $195 million after sequestration and has a staff of 685. That is only 8 percent more staff than we had twenty years ago. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market.
Imagine telling the South Dakota Highway Patrol or the Idaho Patrol that, instead of just patrolling the streets of South Dakota or Idaho, they are now responsible for policing a vast portion of the country’s highway system, but they can only hire 8 percent more officers.
That is basically the challenge we now face at the CFTC. Making the challenge even harder is that the new highway system we have been tasked with overseeing is much more complex. Not only do we need resources to have enough cops on the beat, but we need to make sure that our cops have the tools necessary to police the highways and protect the public.
We are not asking for eight times our current funding, but investments in both technology and people are needed for effective oversight of these markets by regulators.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 80 entities having registered as new swap dealers, as well as new swap data repositories, swap execution facilities and clearinghouses, we need people to review registrations and to run examinations to ensure compliance and ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
The U.S. government is facing a strained budget environment, but adequately funding the CFTC is a good investment for the American public. The $182 billion AIG bailout was nearly 600 times more than the CFTC’s budget request of $315 million. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy. Without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets.
Conclusion
Today’s hearing comes as many of the swaps market reforms that this Committee worked to include in the Dodd-Frank Act have already begun to benefit the American public. The CFTC, having completed 59 final rules, orders and guidances, has nearly completed the rule set, and market participants are coming into compliance with these reforms. Clearinghouses have begun clearing the majority of interest rate and credit index derivatives, and the biggest swap dealers have provisionally registered with the CFTC. The public and regulators are benefitting from transparency, as real time and regulatory reporting is already a reality. SEFs will be up and running soon.
Our staff has worked tirelessly to complete this reform that is so important to the American public. We will continue to work with domestic and international regulators on these critical reforms and to ensure compliance.
I am pleased to tell you that the swaps market, which once was an unregulated highway, now has streetlights and traffic laws. The dealers now have to have drivers’ licenses. Though there is still critical work to be done, the swaps marketplace will no longer be dark and will now have safer roads. Still, our traffic laws will not be fully effective without a sufficient number of cops patrolling the highways and back roads.
Thank you again for inviting me today, and I look forward to your questions.
Sunday, June 30, 2013
CFTC CHARGES MF GLOBAL INC., WITH UNLAWFUL MISUSE OF CUSTOMER FUNDS
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Charges MF Global Inc., MF Global Holdings Ltd., Former CEO Jon S. Corzine, and Former Employee Edith O’Brien for MF Global’s Unlawful Misuse of Nearly One Billion Dollars of Customer Funds and Related Violations
Settlement of charges against MF Global, subject to court approval, directs payment of all funds still owed to commodity customers and imposes a $100 million penalty against the company
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today filed an enforcement action in the United States District Court for the Southern District of New York against MF Global Inc. (MF Global), a registered futures commission merchant (FCM), MF Global Holdings Ltd. (Holdings), former Chief Executive Officer of MF Global and Holdings Jon S. Corzine, and former Assistant Treasurer of MF Global Edith O’Brien based on, among other violations, MF Global’s unlawful use of customer funds that harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.
MF Global has agreed to settle all charges against it on terms set forth in a proposed order that is subject to court approval and includes 100% restitution of the approximately $1 billion lost by all commodity customers when the firm failed on October 31, 2011. Commissioner Jill Sommers stated, "I am pleased that the MF Global Trustee has agreed to settle the charges against the company. There is nothing more important than doing everything possible to make full restitution to all commodity customers. I am also proud of the members of the Division of Enforcement team, who have worked so hard on this case to bring us to where we are today."
According to the Complaint, Corzine, a former U.S. Senator and New Jersey Governor with more than twenty years of Wall Street experience, joined MF Global as CEO in March 2010 with a plan to transform the firm from a futures broker into a major investment bank. Corzine’s strategy called for making increasingly risky and larger investments of the firm’s money. In the summer and fall of 2011, as MF Global’s need for cash was rising and its sources of cash were diminishing, Corzine knew that the firm was relying more and more on proprietary funds that it held alongside customer funds in FCM customer accounts. During this time, Corzine did not enhance MF Global’s deficient systems and controls sufficiently to ensure that the firm’s increasing reliance on FCM cash did not result in unlawful uses of customer money. Ultimately, these failures contributed to the massive customer losses.
As alleged, during October 2011, MF Global was on the brink of failure and in desperate need of cash to survive. As Holdings’ Treasurer told Holdings’ CFO at that time, in one of many recorded phone calls obtained by the CFTC, the firm was "skating on the edge," without "much ice left." Corzine was warned about the firm’s liquidity stresses, and he knew that the firm violated its own policy that had been designed to protect customer funds. Holdings’ Treasurer recommended to Holdings’ CFO in a recorded call, "we have to tell Jon that enough is enough. We need to take the keys away from him."
In the last week of October 2011, with virtually no other sources of immediate cash to turn to, the firm repeatedly and unlawfully used customer funds for firm needs, ultimately leaving it nearly $1 billion short of customer funds. In that last week, Corzine is alleged to have been aware of the firm’s true low cash balance, even as he directed the firm to continue paying large obligations without inquiring how the firm could come up with the money to do so. Corzine is charged for the firm’s violations as an MF Global "control person" who, among other things, did not act in good faith and is also charged with violating his legal obligations to diligently supervise.
David Meister, the CFTC’s Enforcement Director, said, "Turning a profit is not the only job of the person at the top of a CFTC-regulated firm. Particularly in times of crisis, the person in control, like the CEO here, must do what’s necessary to prevent unlawful uses of customer money, so that customers’ money is still there if and when the music stops. The allegations in our Complaint serve as a stark reminder that we will enforce the law against responsible individuals at all levels of a firm to ensure that customer funds are properly safeguarded every minute of every day."
O’Brien, MF Global’s Assistant Treasurer, is charged with aiding and abetting the firm’s misuse of customer funds. According to the Complaint, she directed, approved, and/or caused improper transfers of hundreds of millions of dollars from customer accounts to help meet the firm’s needs during the final days of October 2011, while knowing that MF Global did not have sufficient proprietary funds available in those customer accounts for those transfers. The Complaint alleges that O’Brien remarked in a recorded telephone conversation that it "could be game over" from a regulatory perspective if funds were not returned to customer accounts on Friday, October 28, 2011, MF Global’s final business day.
With respect to the company defendants, in addition to the misuse of customer funds described above, the Complaint charges that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts; (ii) filed false reports with the CFTC that failed to show the deficits in the customer accounts; and (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation; and that Holdings controlled the operations of MF Global and is therefore liable as a principal for MF Global’s violations of the Commodity Exchange Act and CFTC regulations.
If approved by the United States District Court and the United States Bankruptcy Court, the proposed settlement of all charges against MF Global will require 100% restitution of all remaining commodity customer claims. The proposed order also includes the imposition of a $100 million penalty, which can be paid to the extent MF Global has not fully exhausted all available funds and assets paying customers and then other creditors entitled to priority under bankruptcy law.
The CFTC also seeks full restitution and penalties against Holdings, Corzine, and O’Brien, in addition to trading and registration bans and injunctions against Corzine and O’Brien.
The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.
CFTC Division of Enforcement staff members responsible for this case are Candice Aloisi, Elizabeth Brennan, Patryk Chudy, Christopher Giglio, Sheila Marhamati, David W. Oakland, Joseph Rosenberg, Michael Berlowitz, Karin Roth, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, Stephen J. Obie, and Vincent McGonagle. Jeremy Christianson from the CFTC’s Office of Data and Technology also assisted in this matter, along with staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight and Division of Clearing and Risk.
CFTC Charges MF Global Inc., MF Global Holdings Ltd., Former CEO Jon S. Corzine, and Former Employee Edith O’Brien for MF Global’s Unlawful Misuse of Nearly One Billion Dollars of Customer Funds and Related Violations
Settlement of charges against MF Global, subject to court approval, directs payment of all funds still owed to commodity customers and imposes a $100 million penalty against the company
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today filed an enforcement action in the United States District Court for the Southern District of New York against MF Global Inc. (MF Global), a registered futures commission merchant (FCM), MF Global Holdings Ltd. (Holdings), former Chief Executive Officer of MF Global and Holdings Jon S. Corzine, and former Assistant Treasurer of MF Global Edith O’Brien based on, among other violations, MF Global’s unlawful use of customer funds that harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale.
MF Global has agreed to settle all charges against it on terms set forth in a proposed order that is subject to court approval and includes 100% restitution of the approximately $1 billion lost by all commodity customers when the firm failed on October 31, 2011. Commissioner Jill Sommers stated, "I am pleased that the MF Global Trustee has agreed to settle the charges against the company. There is nothing more important than doing everything possible to make full restitution to all commodity customers. I am also proud of the members of the Division of Enforcement team, who have worked so hard on this case to bring us to where we are today."
According to the Complaint, Corzine, a former U.S. Senator and New Jersey Governor with more than twenty years of Wall Street experience, joined MF Global as CEO in March 2010 with a plan to transform the firm from a futures broker into a major investment bank. Corzine’s strategy called for making increasingly risky and larger investments of the firm’s money. In the summer and fall of 2011, as MF Global’s need for cash was rising and its sources of cash were diminishing, Corzine knew that the firm was relying more and more on proprietary funds that it held alongside customer funds in FCM customer accounts. During this time, Corzine did not enhance MF Global’s deficient systems and controls sufficiently to ensure that the firm’s increasing reliance on FCM cash did not result in unlawful uses of customer money. Ultimately, these failures contributed to the massive customer losses.
As alleged, during October 2011, MF Global was on the brink of failure and in desperate need of cash to survive. As Holdings’ Treasurer told Holdings’ CFO at that time, in one of many recorded phone calls obtained by the CFTC, the firm was "skating on the edge," without "much ice left." Corzine was warned about the firm’s liquidity stresses, and he knew that the firm violated its own policy that had been designed to protect customer funds. Holdings’ Treasurer recommended to Holdings’ CFO in a recorded call, "we have to tell Jon that enough is enough. We need to take the keys away from him."
In the last week of October 2011, with virtually no other sources of immediate cash to turn to, the firm repeatedly and unlawfully used customer funds for firm needs, ultimately leaving it nearly $1 billion short of customer funds. In that last week, Corzine is alleged to have been aware of the firm’s true low cash balance, even as he directed the firm to continue paying large obligations without inquiring how the firm could come up with the money to do so. Corzine is charged for the firm’s violations as an MF Global "control person" who, among other things, did not act in good faith and is also charged with violating his legal obligations to diligently supervise.
David Meister, the CFTC’s Enforcement Director, said, "Turning a profit is not the only job of the person at the top of a CFTC-regulated firm. Particularly in times of crisis, the person in control, like the CEO here, must do what’s necessary to prevent unlawful uses of customer money, so that customers’ money is still there if and when the music stops. The allegations in our Complaint serve as a stark reminder that we will enforce the law against responsible individuals at all levels of a firm to ensure that customer funds are properly safeguarded every minute of every day."
O’Brien, MF Global’s Assistant Treasurer, is charged with aiding and abetting the firm’s misuse of customer funds. According to the Complaint, she directed, approved, and/or caused improper transfers of hundreds of millions of dollars from customer accounts to help meet the firm’s needs during the final days of October 2011, while knowing that MF Global did not have sufficient proprietary funds available in those customer accounts for those transfers. The Complaint alleges that O’Brien remarked in a recorded telephone conversation that it "could be game over" from a regulatory perspective if funds were not returned to customer accounts on Friday, October 28, 2011, MF Global’s final business day.
With respect to the company defendants, in addition to the misuse of customer funds described above, the Complaint charges that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts; (ii) filed false reports with the CFTC that failed to show the deficits in the customer accounts; and (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation; and that Holdings controlled the operations of MF Global and is therefore liable as a principal for MF Global’s violations of the Commodity Exchange Act and CFTC regulations.
If approved by the United States District Court and the United States Bankruptcy Court, the proposed settlement of all charges against MF Global will require 100% restitution of all remaining commodity customer claims. The proposed order also includes the imposition of a $100 million penalty, which can be paid to the extent MF Global has not fully exhausted all available funds and assets paying customers and then other creditors entitled to priority under bankruptcy law.
The CFTC also seeks full restitution and penalties against Holdings, Corzine, and O’Brien, in addition to trading and registration bans and injunctions against Corzine and O’Brien.
The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.
CFTC Division of Enforcement staff members responsible for this case are Candice Aloisi, Elizabeth Brennan, Patryk Chudy, Christopher Giglio, Sheila Marhamati, David W. Oakland, Joseph Rosenberg, Michael Berlowitz, Karin Roth, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, Stephen J. Obie, and Vincent McGonagle. Jeremy Christianson from the CFTC’s Office of Data and Technology also assisted in this matter, along with staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight and Division of Clearing and Risk.
Wednesday, June 26, 2013
CFTC CHAIRMAN GENSLER TESTIMONY BEFORE SENATE APPROPRIATIONS SUBCOMMITTEE
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony of Chairman Gary Gensler Before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government, Washington, DC
June 25, 2013
Good afternoon Chairman Udall, Ranking Member Johanns and members of the Subcommittee. Thank you for inviting me to today’s hearing on the President’s request for the Commodity Futures Trading Commission’s (CFTC) fiscal year (FY) 2014 budget. I’m pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White.
This hearing is occurring at an historic time in the markets because under Congress’ direction, the CFTC now oversees not only futures markets that we have overseen for decades, but also the swaps market. The SEC oversees the security-based swaps market. The CFTC has completed 90 percent of the swap market reform rules required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The public is benefiting from seeing the price and volume of each swap transaction. This information is available free of charge on a website, like a modern-day tickertape. For the first time, standardized swaps will have to be traded on transparent trading platforms. The public also is benefiting from the risk reduction and greater access to the market that comes from centralized clearing. And for the first time, the public is benefiting from the oversight of swap dealers. So far, 78 have registered and must adhere to sales practice and business conduct standards to help lower risk to the overall economy.
The marketplace is increasingly shifting to implementation of these common-sense rules of the road. Now it is all the more clear: the CFTC is not the right size for its new and expanded mission Congress has directed it to perform.
The CFTC’s current funding is $195 million after sequestration. We recognize that the federal government is operating under a sequester and that budgets for agencies across government require additional scrutiny. Our mission, however, has expanded dramatically. We now oversee the nearly $300 trillion swaps market. It is critical that we be resourced to promote transparency in these markets and to help protect the economy and taxpayers from risks posed by these markets. Thus, the President’ FY 2014 budget requests an appropriation of $315 million and 1,015 FTEs. The overall funding levels requested approximate the plan set forth in the President’s 2013 Budget ($308 million and 1,015 FTE), but also take into account industry progress in implementing financial reform. Although the 1,015 FTE requested in this budget are at the same level as for FY 2013, adjustments were made across our mission activities to reflect the transition from Dodd-Frank rulemaking to swaps market oversight in 2014. Primarily, the Commission shifted its requested resource allocation to support and maintain direct examinations – a critical component of customer protection. Market events have highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.
The President’s budget request for the Commission strikes a balance between important investments in technology and human capital, both of which are essential to carrying out the agency’s mandate. This approximately 50 percent increase in appropriated funding includes a 62 percent increase in IT services, but only a 44 percent increase in staff.
The CFTC is dedicated to using taxpayer dollars efficiently – nearly a fourth of the overall budget request, $73 million, is for outside IT services. When the CFTC’s dedicated IT staff is included, the request is $94.8 million for IT, or nearly a third of the overall budget. But it still takes human beings to watch for market manipulation and abuses that affect hedgers, farmers, ranchers, producers and commercial companies, as well as the public buying gas at the pump.
The CFTC is operating under a strategic plan for FY 2011-2015. This plan raises the bar on the agency’s performance measures to more accurately evaluate our progress. But the agency’s performance is affected by the challenges of limited resources. For the second year in a row, there are many goals that were not met, as are detailed in the agency’s Annual Performance Report (APR). The agency will include findings from the APR in this year’s revision of the strategic plan and consider the results as the agency reevaluates the allocation of resources.
Appropriations statutes for the CFTC for FY 2012 granted authority to transfer funds between purposes. This authority will expire on September 30, 2013. We used the authority in both FY 2012 and FY 2013 to avoid furloughs or reductions-in-force that otherwise would have been necessary. In the event that FY 2014 funding is provided through a continuing resolution for any period of time on and after October 1, 2013, the lapse in the transfer authority will very likely lead to a need to take personnel actions that seriously undermine the agency’s ability to perform its mission.
In my remaining testimony, I will review the five areas that make up over 90 percent of our requested budgeted staff increase: registrations, examinations, surveillance and data, enforcement, and economics and legal analysis.
Registration and Product Reviews
A significant task before us in FY 2014 will be the continuation of registration of entities, as well as reviews of new products for both the clearing mandate and the trading mandate.
We want to consider registration applications in a thoughtful and timely manner, be efficient in reviewing submissions, and be responsive to market participant inquiries – but this will require sufficient funding. For FY 2014, the President’s request supports $38.9 million and 147 FTEs for these two mission areas, an increase of $22.6 million and 92 FTEs.
The estimated 200 clearinghouses, trading platforms, swap data repositories, swap dealers and major swap participants that are recently registered or may seek CFTC registration within the next year is a dramatic increase over any registration effort the agency has overseen in the past.
The Commission needs staff to facilitate the registration of the following:
Clearinghouses – Entities that lower risk to the public by guaranteeing the obligations of both parties in a transaction. We are working with four entities seeking to register as DCOs and have inquiries from others. These entities would join the 13 we currently oversee.
Designated contract markets (DCMs) – U.S. trading platforms that list futures and options and likely will start listing swaps. The CFTC currently oversees 16 DCMs, and by 2014, staff expects another three to four to seek registration.
Foreign boards of trade (FBOTs) – Regulated trading platforms in other countries that are generally equivalent to DCMs. Since the FBOT rule became effective, 20 FBOTs have filed applications with the CFTC. By 2014, staff expects an additional couple of FBOTs to seek registration with the CFTC.
Swap data repositories (SDRs) – Recordkeeping facilities created by Dodd-Frank to bring transparency to the swaps market. Three are provisionally registered with the CFTC, and by 2014, one additional SDR may seek registration.
Swap dealers and major swap participants – Under the Dodd-Frank Act, the CFTC is working to comprehensively regulate swap dealers and major swap participants to lower their risk to the economy. As the result of completed CFTC rules, 78 swap dealers and two major swap participants are now provisionally registered. This group includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. Commission staff currently estimates that over time, 25-50 additional swap dealers may request registration with the National Futures Association (NFA). We’ll be overseeing their registration and related questions.
Swap execution facilities (SEFs) – The new trading platform for swaps. Commission staff estimates that 15-20 entities may request to become SEFs.
The Commission approved the first clearing requirement last November. As of June 10, most financial entities were required to bring certain credit default and interest rate swaps into central clearing. Accounts managed by third party investment managers and ERISA pension plans have until September 9 to begin clearing. The Commission continues in the resource intensive review for determinations of other swaps that will be subject to the clearing mandate.
Full funding for the agency means that we will be best prepared to review the dramatic increase in requested registrations and to review swaps for the clearing mandate. A partial increase in funding means market participants will see a backlog in registrations, responses to their inquiries, and product review because we won’t have personnel sufficient to review their submissions in a timely and complete manner. Flat funding means market participants will wait even longer. There will be significant backlogs for participants seeking to register with the CFTC, as well as for the review of swaps for mandatory clearing.
Examinations
Another critical mission for FY 2014 will be more regular and more in-depth examinations of the major market participants the CFTC oversees. Examinations are the CFTC’s tool to check for compliance with laws that protect the public and to ensure the protection of customer funds. The President’s request would provide $44.3 million and 185 FTEs for examinations, an increase of $25.6 million and 104 FTEs. The CFTC would more than double our current allocation for this mission because the number of entities we examine is expected to more than double.
This is an area where the agency has fallen short of our goals in performance reviews. The CFTC directly reviews clearinghouses and trading platforms and will review SDRs. But while the agency reviews them directly, we don’t have the resources to have full-time staff onsite, unlike other regulatory agencies that do have on-the-ground staff at the significant firms they oversee. The CFTC also doesn’t do annual reviews. Clearinghouses, for instance, currently are examined on a three-year cycle. For intermediaries such as futures commission merchants (FCMs) and swap dealers, the CFTC relies on what are known as self-regulatory organizations (SROs) to be the primary examiners. Given our lack of resources, we’re only able to double check the SROs’ work on a limited number of FCMs each year, and the agency can spend little time onsite at the firms. Our budget also doesn’t allow us to review commodity pool operators or commodity trading advisors.
On top of the current lack of staff for examinations, our responsibilities in 2014 will expand to include reviews of many new market participants. For instance, there are currently 106 FCMs, 78 swap dealers and two major swap participants have provisionally registered, and more are expected to do so as the year progresses. More frequent and in-depth examinations are necessary to assure the public that firms have adequate capital, as well as systems and procedures in place to protect customer money. Reviews are critical to ensuring the financial soundness of clearinghouses, and ensuring transparency and competition in the trading markets.
Fully funding the increase for examinations means the Commission can move toward annual reviews of all significant clearinghouses and trading platforms and adequate reviews of FCMs and swap dealers. A partial increase for examinations means cutting back our monitoring plans for new market participants and more in-depth risk reviews. Flat funding means we will continue lacking the ability to assure the public that the CFTC’s registrants are financially sound and in compliance with regulatory protections.
Surveillance and Data
Effective market surveillance is dependent on the CFTC’s ability to acquire and analyze extremely large volumes of data to identify trends and events that warrant further investigation. For FY 2014, the President’s request would support $61.7 million and 174 FTEs for surveillance, data acquisition, and analytics, an increase of $18.3 million and 53 FTEs. Of the $61.7 million request, 55 percent would be directed toward IT.
The Dodd-Frank swaps market transparency rules mean a major increase in the amount of incoming data for the CFTC to aggregate and analyze. The agency is taking on the challenge of establishing connections with SDRs and aggregating the newly available swaps data with futures market data. This requires high performance hardware and software and the development of analytical alerts. But it also requires the corresponding personnel to manage this technology effectively for surveillance and enforcement.
As the CFTC also receives ownership and control information for trading accounts, the agency will have data to better detect intraday position limit violations and analyze high frequency trading.
A full increase for surveillance means the CFTC will have the ability to analyze futures and swaps data to protect market participants and the public. A partial increase would limit the agency’s investments in analysis-based surveillance tools. And flat funding will limit our capacity to effectively utilize and aggregate the new data we now are receiving.
Enforcement
The CFTC’s enforcement arm protects market participants and other members of the public from fraud, manipulation, and other abusive practices in the futures and swaps markets. Our efforts range from pursuing Ponzi schemers who defraud individuals across the country out of life savings; to abuses that threaten customer funds; to false reporting of prices; to schemes to manipulate prices, including of goods, such as oil, gas and agricultural products. The Commission has opened more than 800 investigations in the past two fiscal years. The President’s FY 2014 request would provide $57.7 million and 213 FTEs for enforcement, an increase of $18.1 million and 51 FTEs.
In 2002, we had 154 people devoted to enforcement, and that number is nearly flat with our current staff of 156. This staff has been called upon to enforce laws and rules that are new to our arsenal. The Dodd-Frank mandate closed a significant gap in the agency’s enforcement authorities by extending the enforcement reach to swaps and prohibiting the reckless use of manipulative or deceptive schemes. In addition, the CFTC will be overseeing a host of new market participants.
A full increase for enforcement means more investigations and cases that the agency can pursue to protect the public. A less than full increase means that the CFTC will be faced with difficult choices. We could maintain the current volume and types of cases, but we would have to shift resources from futures cases to swaps cases or not cover all of the swaps market. Flat funding means not only that the Commission’s enforcement volume likely would shrink, but parts of the markets would be left with little enforcement oversight.
The Commission’s engagement in targeted enforcement efforts in the public interest include its historic actions regarding the rigging of benchmark rates, such as the London Interbank Offered Rate (LIBOR), a reference rate for much of the U.S. futures and swaps markets. Barclays, UBS and RBS were fined approximately $2.5 billion for manipulative conduct by the CFTC, the UK Financial Services Authority (FSA) and the Justice Department. At each bank, the misconduct spanned many years, took place in offices in several cities around the globe, included numerous people, and involved multiple benchmark rates and currencies. In each case, there was evidence of collusion. In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely. Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputation. While the cases led to $2 billion in fines flowing to the U.S. Treasury, this is about ensuring for financial market integrity.
Economics and Legal Analysis
For FY 2014, the President’s budget would support $24.6 million and 97 FTEs to invest in robust economic analysis teams and Commission-wide legal analysis, a decrease of $3.6 million and 20 FTEs from our estimate under the pre-sequester continuing resolution. The CFTC’s economists support all of the Commission’s divisions, including surveillance and complex enforcement cases. They have served on Dodd-Frank rule teams to carefully consider the costs and benefits of each rule.
The decision to make downward adjustments in the resources requested for this critical mission activity was not an easy one. However, given the increasing number of intermediaries the CFTC now oversees, examination teams need to be bolstered.
In 2014, the CFTC’s economists will be integral in developing tools to analyze automated surveillance data and continuing to evaluate new products for clearing.
Flat funding means a strained ability to analyze the market and detect problems that could be negative for the economy. Flat funding also means the Commission’s legal analysis team will be cut back even further to support front-line examinations, adding to the delays in responding to market participants and processing applications and straining the team’s ability to support enforcement efforts.
Conclusion
The CFTC’s hardworking team is just 9 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market. Effective market implementation of swaps reforms by the CFTC requires additional resources. We are not asking for eight times the funding or staff. Investments in both technology and people, however, are needed for effective oversight of these markets.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 80 entities having registered as new swap dealers and major swap participants, we need people to answer their questions and work with the NFA on the necessary oversight to ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
This is an incredibly strained budget environment. But without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy.
Thank you again for inviting me today, and I look forward to your questions.
Testimony of Chairman Gary Gensler Before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government, Washington, DC
June 25, 2013
Good afternoon Chairman Udall, Ranking Member Johanns and members of the Subcommittee. Thank you for inviting me to today’s hearing on the President’s request for the Commodity Futures Trading Commission’s (CFTC) fiscal year (FY) 2014 budget. I’m pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White.
This hearing is occurring at an historic time in the markets because under Congress’ direction, the CFTC now oversees not only futures markets that we have overseen for decades, but also the swaps market. The SEC oversees the security-based swaps market. The CFTC has completed 90 percent of the swap market reform rules required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The public is benefiting from seeing the price and volume of each swap transaction. This information is available free of charge on a website, like a modern-day tickertape. For the first time, standardized swaps will have to be traded on transparent trading platforms. The public also is benefiting from the risk reduction and greater access to the market that comes from centralized clearing. And for the first time, the public is benefiting from the oversight of swap dealers. So far, 78 have registered and must adhere to sales practice and business conduct standards to help lower risk to the overall economy.
The marketplace is increasingly shifting to implementation of these common-sense rules of the road. Now it is all the more clear: the CFTC is not the right size for its new and expanded mission Congress has directed it to perform.
The CFTC’s current funding is $195 million after sequestration. We recognize that the federal government is operating under a sequester and that budgets for agencies across government require additional scrutiny. Our mission, however, has expanded dramatically. We now oversee the nearly $300 trillion swaps market. It is critical that we be resourced to promote transparency in these markets and to help protect the economy and taxpayers from risks posed by these markets. Thus, the President’ FY 2014 budget requests an appropriation of $315 million and 1,015 FTEs. The overall funding levels requested approximate the plan set forth in the President’s 2013 Budget ($308 million and 1,015 FTE), but also take into account industry progress in implementing financial reform. Although the 1,015 FTE requested in this budget are at the same level as for FY 2013, adjustments were made across our mission activities to reflect the transition from Dodd-Frank rulemaking to swaps market oversight in 2014. Primarily, the Commission shifted its requested resource allocation to support and maintain direct examinations – a critical component of customer protection. Market events have highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.
The President’s budget request for the Commission strikes a balance between important investments in technology and human capital, both of which are essential to carrying out the agency’s mandate. This approximately 50 percent increase in appropriated funding includes a 62 percent increase in IT services, but only a 44 percent increase in staff.
The CFTC is dedicated to using taxpayer dollars efficiently – nearly a fourth of the overall budget request, $73 million, is for outside IT services. When the CFTC’s dedicated IT staff is included, the request is $94.8 million for IT, or nearly a third of the overall budget. But it still takes human beings to watch for market manipulation and abuses that affect hedgers, farmers, ranchers, producers and commercial companies, as well as the public buying gas at the pump.
The CFTC is operating under a strategic plan for FY 2011-2015. This plan raises the bar on the agency’s performance measures to more accurately evaluate our progress. But the agency’s performance is affected by the challenges of limited resources. For the second year in a row, there are many goals that were not met, as are detailed in the agency’s Annual Performance Report (APR). The agency will include findings from the APR in this year’s revision of the strategic plan and consider the results as the agency reevaluates the allocation of resources.
Appropriations statutes for the CFTC for FY 2012 granted authority to transfer funds between purposes. This authority will expire on September 30, 2013. We used the authority in both FY 2012 and FY 2013 to avoid furloughs or reductions-in-force that otherwise would have been necessary. In the event that FY 2014 funding is provided through a continuing resolution for any period of time on and after October 1, 2013, the lapse in the transfer authority will very likely lead to a need to take personnel actions that seriously undermine the agency’s ability to perform its mission.
In my remaining testimony, I will review the five areas that make up over 90 percent of our requested budgeted staff increase: registrations, examinations, surveillance and data, enforcement, and economics and legal analysis.
Registration and Product Reviews
A significant task before us in FY 2014 will be the continuation of registration of entities, as well as reviews of new products for both the clearing mandate and the trading mandate.
We want to consider registration applications in a thoughtful and timely manner, be efficient in reviewing submissions, and be responsive to market participant inquiries – but this will require sufficient funding. For FY 2014, the President’s request supports $38.9 million and 147 FTEs for these two mission areas, an increase of $22.6 million and 92 FTEs.
The estimated 200 clearinghouses, trading platforms, swap data repositories, swap dealers and major swap participants that are recently registered or may seek CFTC registration within the next year is a dramatic increase over any registration effort the agency has overseen in the past.
The Commission needs staff to facilitate the registration of the following:
Designated contract markets (DCMs) – U.S. trading platforms that list futures and options and likely will start listing swaps. The CFTC currently oversees 16 DCMs, and by 2014, staff expects another three to four to seek registration.
Foreign boards of trade (FBOTs) – Regulated trading platforms in other countries that are generally equivalent to DCMs. Since the FBOT rule became effective, 20 FBOTs have filed applications with the CFTC. By 2014, staff expects an additional couple of FBOTs to seek registration with the CFTC.
Swap data repositories (SDRs) – Recordkeeping facilities created by Dodd-Frank to bring transparency to the swaps market. Three are provisionally registered with the CFTC, and by 2014, one additional SDR may seek registration.
Swap dealers and major swap participants – Under the Dodd-Frank Act, the CFTC is working to comprehensively regulate swap dealers and major swap participants to lower their risk to the economy. As the result of completed CFTC rules, 78 swap dealers and two major swap participants are now provisionally registered. This group includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. Commission staff currently estimates that over time, 25-50 additional swap dealers may request registration with the National Futures Association (NFA). We’ll be overseeing their registration and related questions.
Swap execution facilities (SEFs) – The new trading platform for swaps. Commission staff estimates that 15-20 entities may request to become SEFs.
The Commission approved the first clearing requirement last November. As of June 10, most financial entities were required to bring certain credit default and interest rate swaps into central clearing. Accounts managed by third party investment managers and ERISA pension plans have until September 9 to begin clearing. The Commission continues in the resource intensive review for determinations of other swaps that will be subject to the clearing mandate.
Full funding for the agency means that we will be best prepared to review the dramatic increase in requested registrations and to review swaps for the clearing mandate. A partial increase in funding means market participants will see a backlog in registrations, responses to their inquiries, and product review because we won’t have personnel sufficient to review their submissions in a timely and complete manner. Flat funding means market participants will wait even longer. There will be significant backlogs for participants seeking to register with the CFTC, as well as for the review of swaps for mandatory clearing.
Examinations
Another critical mission for FY 2014 will be more regular and more in-depth examinations of the major market participants the CFTC oversees. Examinations are the CFTC’s tool to check for compliance with laws that protect the public and to ensure the protection of customer funds. The President’s request would provide $44.3 million and 185 FTEs for examinations, an increase of $25.6 million and 104 FTEs. The CFTC would more than double our current allocation for this mission because the number of entities we examine is expected to more than double.
This is an area where the agency has fallen short of our goals in performance reviews. The CFTC directly reviews clearinghouses and trading platforms and will review SDRs. But while the agency reviews them directly, we don’t have the resources to have full-time staff onsite, unlike other regulatory agencies that do have on-the-ground staff at the significant firms they oversee. The CFTC also doesn’t do annual reviews. Clearinghouses, for instance, currently are examined on a three-year cycle. For intermediaries such as futures commission merchants (FCMs) and swap dealers, the CFTC relies on what are known as self-regulatory organizations (SROs) to be the primary examiners. Given our lack of resources, we’re only able to double check the SROs’ work on a limited number of FCMs each year, and the agency can spend little time onsite at the firms. Our budget also doesn’t allow us to review commodity pool operators or commodity trading advisors.
On top of the current lack of staff for examinations, our responsibilities in 2014 will expand to include reviews of many new market participants. For instance, there are currently 106 FCMs, 78 swap dealers and two major swap participants have provisionally registered, and more are expected to do so as the year progresses. More frequent and in-depth examinations are necessary to assure the public that firms have adequate capital, as well as systems and procedures in place to protect customer money. Reviews are critical to ensuring the financial soundness of clearinghouses, and ensuring transparency and competition in the trading markets.
Fully funding the increase for examinations means the Commission can move toward annual reviews of all significant clearinghouses and trading platforms and adequate reviews of FCMs and swap dealers. A partial increase for examinations means cutting back our monitoring plans for new market participants and more in-depth risk reviews. Flat funding means we will continue lacking the ability to assure the public that the CFTC’s registrants are financially sound and in compliance with regulatory protections.
Surveillance and Data
Effective market surveillance is dependent on the CFTC’s ability to acquire and analyze extremely large volumes of data to identify trends and events that warrant further investigation. For FY 2014, the President’s request would support $61.7 million and 174 FTEs for surveillance, data acquisition, and analytics, an increase of $18.3 million and 53 FTEs. Of the $61.7 million request, 55 percent would be directed toward IT.
The Dodd-Frank swaps market transparency rules mean a major increase in the amount of incoming data for the CFTC to aggregate and analyze. The agency is taking on the challenge of establishing connections with SDRs and aggregating the newly available swaps data with futures market data. This requires high performance hardware and software and the development of analytical alerts. But it also requires the corresponding personnel to manage this technology effectively for surveillance and enforcement.
As the CFTC also receives ownership and control information for trading accounts, the agency will have data to better detect intraday position limit violations and analyze high frequency trading.
A full increase for surveillance means the CFTC will have the ability to analyze futures and swaps data to protect market participants and the public. A partial increase would limit the agency’s investments in analysis-based surveillance tools. And flat funding will limit our capacity to effectively utilize and aggregate the new data we now are receiving.
Enforcement
The CFTC’s enforcement arm protects market participants and other members of the public from fraud, manipulation, and other abusive practices in the futures and swaps markets. Our efforts range from pursuing Ponzi schemers who defraud individuals across the country out of life savings; to abuses that threaten customer funds; to false reporting of prices; to schemes to manipulate prices, including of goods, such as oil, gas and agricultural products. The Commission has opened more than 800 investigations in the past two fiscal years. The President’s FY 2014 request would provide $57.7 million and 213 FTEs for enforcement, an increase of $18.1 million and 51 FTEs.
In 2002, we had 154 people devoted to enforcement, and that number is nearly flat with our current staff of 156. This staff has been called upon to enforce laws and rules that are new to our arsenal. The Dodd-Frank mandate closed a significant gap in the agency’s enforcement authorities by extending the enforcement reach to swaps and prohibiting the reckless use of manipulative or deceptive schemes. In addition, the CFTC will be overseeing a host of new market participants.
A full increase for enforcement means more investigations and cases that the agency can pursue to protect the public. A less than full increase means that the CFTC will be faced with difficult choices. We could maintain the current volume and types of cases, but we would have to shift resources from futures cases to swaps cases or not cover all of the swaps market. Flat funding means not only that the Commission’s enforcement volume likely would shrink, but parts of the markets would be left with little enforcement oversight.
The Commission’s engagement in targeted enforcement efforts in the public interest include its historic actions regarding the rigging of benchmark rates, such as the London Interbank Offered Rate (LIBOR), a reference rate for much of the U.S. futures and swaps markets. Barclays, UBS and RBS were fined approximately $2.5 billion for manipulative conduct by the CFTC, the UK Financial Services Authority (FSA) and the Justice Department. At each bank, the misconduct spanned many years, took place in offices in several cities around the globe, included numerous people, and involved multiple benchmark rates and currencies. In each case, there was evidence of collusion. In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely. Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputation. While the cases led to $2 billion in fines flowing to the U.S. Treasury, this is about ensuring for financial market integrity.
Economics and Legal Analysis
For FY 2014, the President’s budget would support $24.6 million and 97 FTEs to invest in robust economic analysis teams and Commission-wide legal analysis, a decrease of $3.6 million and 20 FTEs from our estimate under the pre-sequester continuing resolution. The CFTC’s economists support all of the Commission’s divisions, including surveillance and complex enforcement cases. They have served on Dodd-Frank rule teams to carefully consider the costs and benefits of each rule.
The decision to make downward adjustments in the resources requested for this critical mission activity was not an easy one. However, given the increasing number of intermediaries the CFTC now oversees, examination teams need to be bolstered.
In 2014, the CFTC’s economists will be integral in developing tools to analyze automated surveillance data and continuing to evaluate new products for clearing.
Flat funding means a strained ability to analyze the market and detect problems that could be negative for the economy. Flat funding also means the Commission’s legal analysis team will be cut back even further to support front-line examinations, adding to the delays in responding to market participants and processing applications and straining the team’s ability to support enforcement efforts.
Conclusion
The CFTC’s hardworking team is just 9 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market. Effective market implementation of swaps reforms by the CFTC requires additional resources. We are not asking for eight times the funding or staff. Investments in both technology and people, however, are needed for effective oversight of these markets.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 80 entities having registered as new swap dealers and major swap participants, we need people to answer their questions and work with the NFA on the necessary oversight to ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
This is an incredibly strained budget environment. But without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy.
Thank you again for inviting me today, and I look forward to your questions.
Tuesday, June 25, 2013
COMMODITY POOL OPERATOR ORDERED TO PAY MILLIONS
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
June 20, 2013
Federal Court in North Carolina Orders Toby D. Hunter, Prestige Capital Advisors, and D2W Capital Management to Pay over $11.7 Million for Fraud and other Violations in Commodity Pool and Managed Foreign Currency (Forex) Schemes
Washington, DC -The U.S. Commodity Futures Trading Commission (CFTC) announced that it obtained federal court orders requiring Defendants Toby D. Hunter, Prestige Capital Advisors, LLC (Prestige), and D2W Capital Management, LLC (D2W), all of Charlotte, North Carolina, together to pay more than $4.3 million in restitution to defrauded pool and managed account clients and imposing civil monetary penalties of approximately $7.5 million. The court’s grant of default judgment against Prestige and D2W and a Consent Order of Permanent Injunction against Hunter stems from a CFTC enforcement action filed September 6, 2011, charging Defendants with fraudulent solicitation, misappropriation, and regulation violations (see CFTC Press Release 6110-11). The Orders also impose permanent trading and registration bans against the Defendants and prohibit them from violating the anti-fraud and other provisions of the Commodity Exchange Act (CEA) and CFTC Regulations, as charged.
The Honorable Max O. Cogburn, Jr. of the U.S. District Court for the Western District of North Carolina entered an Order of Default Judgment and Permanent Injunction against Defendants Prestige and D2W on January 25, 2013, imposing civil monetary penalties of approximately $6.9 million on Prestige and $280,000 on D2W. The court entered a subsequent Order on February 22, 2013, requiring Prestige to pay restitution of over $4.1 million and D2W to pay restitution of $85,250.
The court found that Prestige fraudulently solicited and accepted more than $4.7 million from multiple pool participants for investment in one or more commodity pools that traded among other things, commodities and futures contracts. The court specifically found that in soliciting pool participants, Prestige posted false trading returns on a website called BarclayHedge, where fund managers could post unverified historical returns for prospective clients to view, sent false trading results to at least one Prestige pool participant, and issued false account statements. Furthermore, according to the Orders, approximately $2.3 million of pool participant funds was misappropriated by Prestige, and D2W, a managed forex account service, sent false account statements to at least one client.
Subsequently, on June 13, 2013, Judge Cogburn entered a consent Order of Permanent Injunction settling charges stemming from the same violations of the CEA and CFTC Regulations against Hunter. The Order requires Hunter to pay approximately $85,000 in restitution to D2W’s clients, $40,000 in restitution to Prestige pool participants, and also imposes a $280,000 civil monetary penalty.
Hunter was indicted by the U.S. Attorney’s Office for the Western District of North Carolina (Charlotte office) for criminal activity related to the Prestige matter.
The CFTC thanks the British Columbia Securities Commission and the U.K. Financial Conduct Authority for their assistance.
CFTC Division of Enforcement staff members responsible for this case are Eugenia Vroustouris, Daniel Jordan, Michael Loconte, Erica Bodin, Rick Glaser, and Richard Wagner.
June 20, 2013
Federal Court in North Carolina Orders Toby D. Hunter, Prestige Capital Advisors, and D2W Capital Management to Pay over $11.7 Million for Fraud and other Violations in Commodity Pool and Managed Foreign Currency (Forex) Schemes
Washington, DC -The U.S. Commodity Futures Trading Commission (CFTC) announced that it obtained federal court orders requiring Defendants Toby D. Hunter, Prestige Capital Advisors, LLC (Prestige), and D2W Capital Management, LLC (D2W), all of Charlotte, North Carolina, together to pay more than $4.3 million in restitution to defrauded pool and managed account clients and imposing civil monetary penalties of approximately $7.5 million. The court’s grant of default judgment against Prestige and D2W and a Consent Order of Permanent Injunction against Hunter stems from a CFTC enforcement action filed September 6, 2011, charging Defendants with fraudulent solicitation, misappropriation, and regulation violations (see CFTC Press Release 6110-11). The Orders also impose permanent trading and registration bans against the Defendants and prohibit them from violating the anti-fraud and other provisions of the Commodity Exchange Act (CEA) and CFTC Regulations, as charged.
The Honorable Max O. Cogburn, Jr. of the U.S. District Court for the Western District of North Carolina entered an Order of Default Judgment and Permanent Injunction against Defendants Prestige and D2W on January 25, 2013, imposing civil monetary penalties of approximately $6.9 million on Prestige and $280,000 on D2W. The court entered a subsequent Order on February 22, 2013, requiring Prestige to pay restitution of over $4.1 million and D2W to pay restitution of $85,250.
The court found that Prestige fraudulently solicited and accepted more than $4.7 million from multiple pool participants for investment in one or more commodity pools that traded among other things, commodities and futures contracts. The court specifically found that in soliciting pool participants, Prestige posted false trading returns on a website called BarclayHedge, where fund managers could post unverified historical returns for prospective clients to view, sent false trading results to at least one Prestige pool participant, and issued false account statements. Furthermore, according to the Orders, approximately $2.3 million of pool participant funds was misappropriated by Prestige, and D2W, a managed forex account service, sent false account statements to at least one client.
Subsequently, on June 13, 2013, Judge Cogburn entered a consent Order of Permanent Injunction settling charges stemming from the same violations of the CEA and CFTC Regulations against Hunter. The Order requires Hunter to pay approximately $85,000 in restitution to D2W’s clients, $40,000 in restitution to Prestige pool participants, and also imposes a $280,000 civil monetary penalty.
Hunter was indicted by the U.S. Attorney’s Office for the Western District of North Carolina (Charlotte office) for criminal activity related to the Prestige matter.
The CFTC thanks the British Columbia Securities Commission and the U.K. Financial Conduct Authority for their assistance.
CFTC Division of Enforcement staff members responsible for this case are Eugenia Vroustouris, Daniel Jordan, Michael Loconte, Erica Bodin, Rick Glaser, and Richard Wagner.
Tuesday, June 11, 2013
PROMOTING LEGAL ENTITY IDENTIFIERS AND THE CFTC
FROM: THE COMMODITY FUTURES TRADING COMMISSION
CFTC Provides For Mutual Acceptance of Approved Legal Entity Identifiers
Washington, DC — The Commodity Futures Trading Commission (CFTC) has issued an Amended Order expanding, through mutual acceptance by international regulators, the list of Legal Entity Identifiers (LEIs) that can be used by registered entities and swap counterparties in complying with CFTC’s swap data reporting regulations. The Amended Order revises CFTC’s order of July 23, 2012, which directed all registered entities and swap counterparties required by CFTC rules to use LEIs in swap recordkeeping and swap data reporting to use LEIs—currently known as CFTC Interim Compliant Identifiers (CICIs)—provided by DTCC-SWIFT, the utility designated by the CFTC as the provider of LEIs until establishment of the global LEI system.
As a member of the international LEI Regulatory Oversight Committee (ROC), the CFTC is participating in the ongoing establishment of the global LEI system. WM Datenservice, a European utility sponsored by a ROC member, which like DTCC-SWIFT may become a Local Operating Unit (LOU) of the global system, has now begun issuing LEIs—currently called General Entity Identifiers (GEIs)—that, like the CICI, are anticipated to become LEIs in the global system. Other utilities sponsored by ROC members may follow. In addition, derivatives data reporting is scheduled to begin in the European Union in September 2013.
In these circumstances, cooperation between regulators is needed to ensure that a single legal entity is identified by only one LEI. To this end, the Chairs of the ROC recently asked the CFTC and the European Securities Markets Authority (ESMA) to take the action necessary to provide for mutual acceptance, for use in data reporting under their rules, of the LEIs now issued by either DTCC-SWIFT or WM Datenservice, and for mutual acceptance of other LEIs later approved by the ROC as globally acceptable.
CFTC’s Amended Order provides for the mutual acceptance requested by the Chairs of the ROC, effective as soon as the conditions essential to mutual acceptance are fulfilled. First, under the Amended Order, as soon as ESMA informs CFTC that CICIs are accepted for data reporting under ESMA’s reporting rules, registered entities and swap counterparties will be able to use either a CICI or a GEI in swap data reporting under CFTC rules. Second, LEIs issued by another utility sponsored by a ROC member will become usable under CFTC rules as soon as CFTC receives the necessary assurance that such LEIs comply with applicable international standards and that authorities accepting such LEIs for data reporting will also accept CICIs. Finally, once the ROC adopts standards for global acceptability of pre-LOUs and the LEIs they issue, and has approved pre-LOUs and pre-LEIs including DTCC-SWIFT and CICIs as globally acceptable, registered entities and swap counterparties subject to CFTC rules will be able to use either CICIs or other identifiers (including GEIs) approved by the ROC as globally acceptable.
CFTC Provides For Mutual Acceptance of Approved Legal Entity Identifiers
Washington, DC — The Commodity Futures Trading Commission (CFTC) has issued an Amended Order expanding, through mutual acceptance by international regulators, the list of Legal Entity Identifiers (LEIs) that can be used by registered entities and swap counterparties in complying with CFTC’s swap data reporting regulations. The Amended Order revises CFTC’s order of July 23, 2012, which directed all registered entities and swap counterparties required by CFTC rules to use LEIs in swap recordkeeping and swap data reporting to use LEIs—currently known as CFTC Interim Compliant Identifiers (CICIs)—provided by DTCC-SWIFT, the utility designated by the CFTC as the provider of LEIs until establishment of the global LEI system.
As a member of the international LEI Regulatory Oversight Committee (ROC), the CFTC is participating in the ongoing establishment of the global LEI system. WM Datenservice, a European utility sponsored by a ROC member, which like DTCC-SWIFT may become a Local Operating Unit (LOU) of the global system, has now begun issuing LEIs—currently called General Entity Identifiers (GEIs)—that, like the CICI, are anticipated to become LEIs in the global system. Other utilities sponsored by ROC members may follow. In addition, derivatives data reporting is scheduled to begin in the European Union in September 2013.
In these circumstances, cooperation between regulators is needed to ensure that a single legal entity is identified by only one LEI. To this end, the Chairs of the ROC recently asked the CFTC and the European Securities Markets Authority (ESMA) to take the action necessary to provide for mutual acceptance, for use in data reporting under their rules, of the LEIs now issued by either DTCC-SWIFT or WM Datenservice, and for mutual acceptance of other LEIs later approved by the ROC as globally acceptable.
CFTC’s Amended Order provides for the mutual acceptance requested by the Chairs of the ROC, effective as soon as the conditions essential to mutual acceptance are fulfilled. First, under the Amended Order, as soon as ESMA informs CFTC that CICIs are accepted for data reporting under ESMA’s reporting rules, registered entities and swap counterparties will be able to use either a CICI or a GEI in swap data reporting under CFTC rules. Second, LEIs issued by another utility sponsored by a ROC member will become usable under CFTC rules as soon as CFTC receives the necessary assurance that such LEIs comply with applicable international standards and that authorities accepting such LEIs for data reporting will also accept CICIs. Finally, once the ROC adopts standards for global acceptability of pre-LOUs and the LEIs they issue, and has approved pre-LOUs and pre-LEIs including DTCC-SWIFT and CICIs as globally acceptable, registered entities and swap counterparties subject to CFTC rules will be able to use either CICIs or other identifiers (including GEIs) approved by the ROC as globally acceptable.
Monday, May 6, 2013
CFTC CHAIRMAN GENSLER'S STATEMENT TO TECHNOLOGY ADVISORY COMITTEE
FROM: COMMODITY FUTURES TRADING COMMISSION
Statement of Chairman Gary Gensler before the Technology Advisory Committee
April 30, 2013
I thank you, Scott, for your leadership in bringing this committee together. It’s been a great effort of yours. You’ve done an excellent job throughout the years, and today’s meeting couldn’t come at a more timely moment.
I want to thank the Technology Advisory Committee as well. Now, why is it such a timely moment?
For two reasons – one, we’ve had a very real change since your earlier meetings. We’ve had a paradigm shift. The swaps market is moving into implementation of Dodd-Frank reform. This means we have real-time reporting. We have 76 swap dealers registered. We have clearing that’s being phased in between March and September of this year. And we have reporting to the swap data repositories already underway.
But secondly, as Scott said and has been reported in the press, we live in a time that technology is constantly changing. This is generally a good thing. Innovation in our society is a good thing – whether it’s in the markets, in health care, in day-to-day life. All one has to do is look in the kitchen to see how wonderful technology is, and how much easier things are today than 40 years ago.
There is a paradigm shift in the swaps market as it has become more transparent and we have central clearing, but there also is a continual shift – one might say paradigm shift as well – with technology.
We need to adapt and adjust our rules to make sure that the market ultimately benefits from transparency and that there is oversight of these markets.
Regarding the panels we’ll see on data, there has been a full commitment since 2009 from the G-20, the 20 leading nations and jurisdictions around the globe, to gather data into trade repositories so that regulators, central bankers, and finance ministers can get a sense of this important market, the $600 trillion swaps marketplace.
Here in the US and in a number of countries we now have data repositories registered and reporting that information. I think it’s natural that we have some growing pains. I’m glad that we’re going to have two panels discussing this topic today.
I think it’s clear what the regulators and the finance ministers around the globe were saying. They wanted an accessible place to go to sort and search data. Congress put into the statute that it be directly, electronically accessible to the regulators. That means it’s not a report or a summary, but a regulator can go in and see trade by trade. We need to be able to aggregate it by counterparty, by reference rate, by trade date and use modern technology to do that.
We’re not there yet. This is natural growing pains. But I think today’s process will help, and maybe a guidebook will help as well.
We’re also going to hear further about customer protection. We have put out rules, working with the self-regulatory organizations, like CME and the NFA, about direct electronic access to bank accounts and custodial statements. I look forward to hearing from you all today on how that’s working so far. Our rules haven’t been finalized, but you’ve started, with the self-regulatory organizations, to do that. Post the events of last year, particularly at Peregrine, this is a critical issue.
I’m glad that Scott has put a panel on with regard to last week’s events. As technology changes, our financial system and the rules in place need to be resilient. As sure as there were bad actors putting out false information 100 years ago into the marketplace -- all we need to do is read about the late 19th century and the stories about false information and runs in the markets of that era -- it’s sure that 100 years from now people will try to put out false information into markets. They will use new technology, things that will make Twitter and Facebook look old style.
But I think as regulators we need to be resilient as well, and to continue to update what we do to promote transparency and protect the markets -- and make sure that false information is not put out in the markets. That’s one of the things that we’re doing with regard to LIBOR and Euribor.
I think we do need to finalize a concept release that we’ve been working on for many moons here at the CFTC. My hope is that we could put out a concept release that I’ve referred to as testing and supervision, which is about risk controls and system safeguards for automatic trading environments. Last week’s events remind me once again. I’ve been chatting with fellow commissioners. I think we will do that in the next month to two months, put it out and get the benefit of public comment.
Also, I think we need to finalize something that sounds like it’s in the weeds, but it’s called ownership and control reporting. We proposed it, and it’s now in front of my fellow commissioners. I think the staff has done an excellent job – so that we can know the actual owners and controllers of futures accounts in a similar way to what’s in the swap data repositories for swaps.
As a final note, we do need more resources here at the CFTC. If we don’t have the technology resources to keep up, then all the data in data repositories, all that’s being done out there in the marketplace, it’s going to be hard for us to be nimble.
I thank you, and I thank Scott for putting this together.
Note: this transcript was edited slightly for clarity.
Statement of Chairman Gary Gensler before the Technology Advisory Committee
April 30, 2013
I thank you, Scott, for your leadership in bringing this committee together. It’s been a great effort of yours. You’ve done an excellent job throughout the years, and today’s meeting couldn’t come at a more timely moment.
I want to thank the Technology Advisory Committee as well. Now, why is it such a timely moment?
For two reasons – one, we’ve had a very real change since your earlier meetings. We’ve had a paradigm shift. The swaps market is moving into implementation of Dodd-Frank reform. This means we have real-time reporting. We have 76 swap dealers registered. We have clearing that’s being phased in between March and September of this year. And we have reporting to the swap data repositories already underway.
But secondly, as Scott said and has been reported in the press, we live in a time that technology is constantly changing. This is generally a good thing. Innovation in our society is a good thing – whether it’s in the markets, in health care, in day-to-day life. All one has to do is look in the kitchen to see how wonderful technology is, and how much easier things are today than 40 years ago.
There is a paradigm shift in the swaps market as it has become more transparent and we have central clearing, but there also is a continual shift – one might say paradigm shift as well – with technology.
We need to adapt and adjust our rules to make sure that the market ultimately benefits from transparency and that there is oversight of these markets.
Regarding the panels we’ll see on data, there has been a full commitment since 2009 from the G-20, the 20 leading nations and jurisdictions around the globe, to gather data into trade repositories so that regulators, central bankers, and finance ministers can get a sense of this important market, the $600 trillion swaps marketplace.
Here in the US and in a number of countries we now have data repositories registered and reporting that information. I think it’s natural that we have some growing pains. I’m glad that we’re going to have two panels discussing this topic today.
I think it’s clear what the regulators and the finance ministers around the globe were saying. They wanted an accessible place to go to sort and search data. Congress put into the statute that it be directly, electronically accessible to the regulators. That means it’s not a report or a summary, but a regulator can go in and see trade by trade. We need to be able to aggregate it by counterparty, by reference rate, by trade date and use modern technology to do that.
We’re not there yet. This is natural growing pains. But I think today’s process will help, and maybe a guidebook will help as well.
We’re also going to hear further about customer protection. We have put out rules, working with the self-regulatory organizations, like CME and the NFA, about direct electronic access to bank accounts and custodial statements. I look forward to hearing from you all today on how that’s working so far. Our rules haven’t been finalized, but you’ve started, with the self-regulatory organizations, to do that. Post the events of last year, particularly at Peregrine, this is a critical issue.
I’m glad that Scott has put a panel on with regard to last week’s events. As technology changes, our financial system and the rules in place need to be resilient. As sure as there were bad actors putting out false information 100 years ago into the marketplace -- all we need to do is read about the late 19th century and the stories about false information and runs in the markets of that era -- it’s sure that 100 years from now people will try to put out false information into markets. They will use new technology, things that will make Twitter and Facebook look old style.
But I think as regulators we need to be resilient as well, and to continue to update what we do to promote transparency and protect the markets -- and make sure that false information is not put out in the markets. That’s one of the things that we’re doing with regard to LIBOR and Euribor.
I think we do need to finalize a concept release that we’ve been working on for many moons here at the CFTC. My hope is that we could put out a concept release that I’ve referred to as testing and supervision, which is about risk controls and system safeguards for automatic trading environments. Last week’s events remind me once again. I’ve been chatting with fellow commissioners. I think we will do that in the next month to two months, put it out and get the benefit of public comment.
Also, I think we need to finalize something that sounds like it’s in the weeds, but it’s called ownership and control reporting. We proposed it, and it’s now in front of my fellow commissioners. I think the staff has done an excellent job – so that we can know the actual owners and controllers of futures accounts in a similar way to what’s in the swap data repositories for swaps.
As a final note, we do need more resources here at the CFTC. If we don’t have the technology resources to keep up, then all the data in data repositories, all that’s being done out there in the marketplace, it’s going to be hard for us to be nimble.
I thank you, and I thank Scott for putting this together.
Note: this transcript was edited slightly for clarity.
Friday, May 3, 2013
CFTC COMMISSIONER BART CHILTON'S STATEMENT ON REGULATING "CHETAH" TRADERS
"Meltdown Moments"
Statement of Commissioner Bart Chilton at the CFTC Technology Advisory Committee
April 30, 2013
Good morning. I want to thank you all for being here, particularly those of you who have been working so hard on this committee, especially Commissioner O’Malia.
Maybe it’s my imagination, but it seems like there’s some new glitch—some new meltdown moment in markets—for us to talk about every time we get together. This time we need only go back a week to just last Tuesday and the Hack Attack. This Hack Attack shows that despite the benefits of electronic trading and social media, putting the two ingredients together can make for a very sorry soup. As many times as these glitches recur, we need not blindly accept that the whiz bang machinery will always work as well as it should. On the contrary, we should open our eyes to the fact that technology has placed us, at times, in a perilous position with regard to financial markets.
It’s worrisome that markets could move so fast based on a hoax. It’s likely that high frequency traders made money on the way down and the way up but there undoubtedly were folks who got caught, lost money and then couldn’t get back in.
This only serves to underscore the importance of better regulation of cheetah traders. While I don’t believe we should be out to make these cats extinct, we need the regulatory tools to keep them in their cages when they go feral.
I want to be brief because I want your take on these topics, so I’ll stop there. Thanks again.
Statement of Commissioner Bart Chilton at the CFTC Technology Advisory Committee
April 30, 2013
Good morning. I want to thank you all for being here, particularly those of you who have been working so hard on this committee, especially Commissioner O’Malia.
Maybe it’s my imagination, but it seems like there’s some new glitch—some new meltdown moment in markets—for us to talk about every time we get together. This time we need only go back a week to just last Tuesday and the Hack Attack. This Hack Attack shows that despite the benefits of electronic trading and social media, putting the two ingredients together can make for a very sorry soup. As many times as these glitches recur, we need not blindly accept that the whiz bang machinery will always work as well as it should. On the contrary, we should open our eyes to the fact that technology has placed us, at times, in a perilous position with regard to financial markets.
It’s worrisome that markets could move so fast based on a hoax. It’s likely that high frequency traders made money on the way down and the way up but there undoubtedly were folks who got caught, lost money and then couldn’t get back in.
This only serves to underscore the importance of better regulation of cheetah traders. While I don’t believe we should be out to make these cats extinct, we need the regulatory tools to keep them in their cages when they go feral.
I want to be brief because I want your take on these topics, so I’ll stop there. Thanks again.
Monday, October 29, 2012
A NEARLY $2 MILLION FINE SETTLES CHARGES OF OPTIONS FRAUDN AND UNAUTHORIZED TRADING
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Illinois Resident Joshua T.J. Russo to Pay More than $1.8 Million in Restitution and Penalties for Futures and Options Fraud and Unauthorized Trading
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges against Joshua T.J. Russo of Chicago, Ill., for fraudulently soliciting at least one customer to participate in a fictitious commodity futures and options pool, engaging in unauthorized trading, and issuing false account statements.
The CFTC order requires Russo to pay restitution of $960,000, a $645,000 civil monetary penalty, and disgorgement of $215,000. The order permanently prohibits Russo from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC. The order also permanently prohibits Russo from further violations of the Commodity Exchange Act and CFTC regulations, as charged.
The CFTC order finds that, from around March 2007 through April 2011, Russo, as a registered Associated Person of an independent Introducing Broker (IB), fraudulently solicited at least one of the IB’s customers by telling the customer that he would be a general partner in a fictitious pool called Peak Performance Fund, LP (PPF). According to the order, Russo issued false statements to the PPF customer in the form of purported PPF audited financial statements and in the form of weekly spreadsheets that Russo represented were summaries of the customer’s account values. In fact, however, the statements grossly overinflated the value of the customer’s accounts, the order finds.
In addition, the order finds that Russo provided at least five other customers with similar spreadsheets that grossly inflated the value of the customers’ accounts. Russo also engaged in a significant amount of unauthorized trading in these customers’ accounts, and in the accounts of three other customers, the order finds. Russo engaged in speculative trading for at least one customer, contrary to the hedging strategy that Russo represented he would utilize, according to the order.
According to the order, Russo’s eight customers deposited at least $3 million into trading accounts to trade commodity futures and options in managed and self-directed accounts. Russo, through his false statements to the eight customers, concealed his unauthorized trading and overall trading losses of approximately $1.7 million, the order finds.
On October 25, 2012, Russo was charged with a single count of commodities fraud in a related criminal action (USA v. Russo, 1: 12-cr-00836). His arraignment is currently scheduled for November 1, 2012.
The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the National Futures Association.
CFTC Division of Enforcement staff members responsible for this case are Katherine S. Driscoll, Michael Solinsky, Michelle Bougas, Kassra Goudarzi, Melanie Bates, Gretchen L. Lowe, and Vincent A. McGonagle
CFTC Orders Illinois Resident Joshua T.J. Russo to Pay More than $1.8 Million in Restitution and Penalties for Futures and Options Fraud and Unauthorized Trading
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges against Joshua T.J. Russo of Chicago, Ill., for fraudulently soliciting at least one customer to participate in a fictitious commodity futures and options pool, engaging in unauthorized trading, and issuing false account statements.
The CFTC order requires Russo to pay restitution of $960,000, a $645,000 civil monetary penalty, and disgorgement of $215,000. The order permanently prohibits Russo from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC. The order also permanently prohibits Russo from further violations of the Commodity Exchange Act and CFTC regulations, as charged.
The CFTC order finds that, from around March 2007 through April 2011, Russo, as a registered Associated Person of an independent Introducing Broker (IB), fraudulently solicited at least one of the IB’s customers by telling the customer that he would be a general partner in a fictitious pool called Peak Performance Fund, LP (PPF). According to the order, Russo issued false statements to the PPF customer in the form of purported PPF audited financial statements and in the form of weekly spreadsheets that Russo represented were summaries of the customer’s account values. In fact, however, the statements grossly overinflated the value of the customer’s accounts, the order finds.
In addition, the order finds that Russo provided at least five other customers with similar spreadsheets that grossly inflated the value of the customers’ accounts. Russo also engaged in a significant amount of unauthorized trading in these customers’ accounts, and in the accounts of three other customers, the order finds. Russo engaged in speculative trading for at least one customer, contrary to the hedging strategy that Russo represented he would utilize, according to the order.
According to the order, Russo’s eight customers deposited at least $3 million into trading accounts to trade commodity futures and options in managed and self-directed accounts. Russo, through his false statements to the eight customers, concealed his unauthorized trading and overall trading losses of approximately $1.7 million, the order finds.
On October 25, 2012, Russo was charged with a single count of commodities fraud in a related criminal action (USA v. Russo, 1: 12-cr-00836). His arraignment is currently scheduled for November 1, 2012.
The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the National Futures Association.
CFTC Division of Enforcement staff members responsible for this case are Katherine S. Driscoll, Michael Solinsky, Michelle Bougas, Kassra Goudarzi, Melanie Bates, Gretchen L. Lowe, and Vincent A. McGonagle
Wednesday, March 28, 2012
CHURNING ACCOUNTS GETS FUTURES TRADER'S REGISTRATION REVOKED
The following excerpt is from the CFTC website:
March 21, 2012
CFTC Revokes Registrations of Richard Allan Finger, Jr. and his Company, Black Diamond Futures, LLC Based on Criminal Action
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a Notice of Intent to Revoke the Registrations (Notice) of Richard Allan Finger, Jr. (Finger), a resident of Washington State, and Black Diamond Futures, LLC (Black Diamond), a Washington State limited liability company. The CFTC simultaneously issued an Opinion and Order (Order) settling the action and revoking Black Diamond’s registration with the CFTC as a Commodity Trading Advisor (CTA) and Finger’s registration as its sole Associated Person (AP).
The Notice alleged that, pursuant to the Commodity Exchange Act (CEA), Finger was subject to a statutory disqualification of his registration based upon his plea of guilty to one count of wire fraud, in violation of 18 U.S.C. § 1343 in the criminal action, United States v. Finger, Crim. Case No. 11-mj-424 (W.D. Wash.). The Notice further alleged that Black Diamond was subject to a statutory disqualification pursuant to the CEA because Finger was the sole principal of Black Diamond and Finger’s registration is subject to revocation.
The Notice alleged that in the criminal action, Finger admitted to certain facts, including that:
From late 2009 to August 2011, Finger was a registered securities representative in Washington State;
In approximately February 2011, Finger started his own broker-dealer, Black Diamond Securities LLC;
In order to induce his existing investors to transfer their accounts to his new company, Finger fraudulently inflated the values of their accounts in statements he made to them;
Thereafter, Finger churned the securities accounts of at least 10 of his investors, despite telling them that he would use a conservative investment strategy. For example, with respect to one investor, Finger’s churning reduced the value of the investor’s account from approximately $1 million to less than $225,000 within two months; and
In order to conceal his churning, Finger emailed false account statements to his investors.
The CFTC’s Order accepting the offer of settlement in the statutory disqualification proceeding finds that Finger and Black Diamond are subject to statutory disqualification from registration with the CFTC pursuant to Sections 8a(2)(D)(iii) and (iv) and 8a(2)(H) of the CEA, respectively, and revokes their registrations.
CFTC Division of Enforcement staff responsible for this case are Glenn Chernigoff, Alison Wilson, Gretchen L. Lowe, and Vincent A. McGonagle.
Tuesday, January 31, 2012
CFTC SETTLES FRAUD CHARGES WITH CENTURION GLOBAL CAPITAL MANAGEMENT LLC.
The following excerpt is from the CFTC website:
January 23, 2012
“Washington, DC - The Commodity Futures Trading Commission (CFTC) today announced that it filed and simultaneously settled charges against Timothy Michael Murphy of Redding, Conn., and his New York-based company, Centurion Global Capital Management LLC (CGCM), for fraudulently soliciting at least 40 customers to participate in a commodity pool.
The CFTC’s order requires Murphy and CGCM jointly and severally to pay both a $140,000 civil monetary penalty and restitution of $220,000. The order also permanently prohibits CGCM and prohibits Murphy for a five-year period from trading on a CFTC-registered entity and from registering or seeking exemption from CFTC registration.
The order finds that between about May 2009 and January 2010, CGCM, through Murphy, used a promotional sheet to solicit participants for their commodity pool, Centurion Multi-Strategy LP, that Murphy knew contained false and/or misleading information regarding the trading performance history of one of the two Commodity Trading Advisors that were to trade the pool’s futures accounts. Murphy sent and/or caused this fraudulent promotional sheet to be sent by email and other means to at least 40 pool participants, the order finds. From about September 2009 through July 2010, Murphy received approximately $220,000 from CGCM from the fees and commissions generated by the Centurion pool, according to the order. The Centurion pool was liquidated in or about July 2010, and the remaining funds were returned to pool participants, the order further finds.
The CFTC thanks the National Futures Association (NFA) and the Swiss Financial Market Supervisory Authority (FINMA) for their assistance.
CFTC Division of Enforcement staff members responsible for this case are Joseph Rosenberg, Mark A. Picard, Sheila Marhamati, Philip Rix, Steven I. Ringer, Lenel Hickson, Stephen J. Obie, and Vincent A. McGonagle.”
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