Swap Dealers Archives - BR Derivatives Report

This week’s BR Derivatives Report Regulatory Review highlights several regulatory actions issued by the U.S. Commodity Futures Trading Commission (“CFTC”).

1) CFTC Announcement Issued 9/25/2023

CFTC Press Release Number 8783-23

Type of Market Participant Involved

All market participants (registrants and non-registrants) and any interested parties, including financial educators, innovators, and regulators

Summary

The Commodity Futures Trading Commission’s Office of Customer Education and Outreach (“OCEO”) and Office of Technology Innovation (“OTI”) announced Technology and Fraud: Stopping Scams in a Digital World, a virtual event on Wednesday, October 4, at 12:00 p.m. Eastern, as part of World Investor Week (October 2–9).

OCEO is dedicated to helping customers protect themselves from fraud or violations of the Commodity Exchange Act (“CEA”) through the research and development of effective financial education materials and initiatives.

OTI serves as the CFTC’s financial technology innovation hub, driving change and enhancing knowledge through innovation, consulting/collaboration, and education.

Commentary

Announcements like these rarely occur in a regulatory vacuum, and this announcement was no exception. It was followed by no less than 10 separate enforcement actions related to fraud and customer protection issues:

CFTC Charges Four Individuals and a Seychelles Company with Operating a Fraudulent Digital Assets Trading Scheme and Misappropriation

CFTC Charges Eight Entities for Fraudulently Claiming CFTC Registration

CFTC Charges Florida Man and His Company in Connection with a Foreign Currency Fraudulent Solicitation Scheme

CFTC Orders a Colorado Commodity Pool Operator and Its Owner to Pay More Than $475,000 for Fraud Violations

CFTC Charges Unregistered Pool Operator and its Owner with $7.1 Million Fraud

The CFTC and California Department of Financial Protection & Innovation Charge Los Angeles Area Precious Metals Dealer in $21 Million Fraudulent Scheme

Miami Federal Court Enters Preliminary Injunction Order Against Certified Public Accountant in Connection with $58 Million Foreign Currency Fraud and Misappropriation Scheme

CFTC Charges Mosaic Exchange Limited and Sean Michael with a Fraudulent Solicitation and Digital Asset Commodities Trading Scheme

CFTC Charges Florida Man with Forex and Binary Options Fraud and Misappropriation

CFTC Charges Dallas and Los Angeles Area Precious Metals Dealers in Ongoing Fraud Scheme Garnering Over $7 Million from Retirement Accounts

Bottom Line

This week’s flurry of enforcement activity is a good reminder that one of the enumerated statutory purposes of the CEA is to protect all market participants from fraudulent or other abusive sales practices and misuses of customer assets. 7 U.S.C. § 5

Andrew P. Cross —

This week’s BR Derivatives Report Regulatory Review highlights five regulatory actions issued by the U.S. Commodity Futures Trading Commission (“CFTC”).

1) CFTC Enforcement Order Issued 9/20/2023

CFTC Docket No. 23-44

Type of Market Participant Involved

Swap Dealer (“SD”)

Summary

Registered SD failed to:

Implement procedures to ensure that its pre-trade mid-market marks (“PTMMMs”) were accurate (i.e., consistent with the SD’s internal pricing methodologies);
Adequately train and monitor its associated persons regarding PTMMM disclosure requirements; and
Timely provide PTMMMs to counterparties on numerous occasions.

The order imposed a penalty of $650,000 and requires the FCM to remediate the compliance oversight failures.

Commentary

Although many non-SD counterparties do not find the receipt of pre-trade marks to be particularly valuable, SDs are nonetheless obligated to provide counterparties with these marks and supervise the process for doing so.

Bottom Line

SD external business conduct standards (“EBCs”) are a perennial source of enforcement orders—and penalties—for registered SDs. Accordingly, every market participant that may be required in the future to register—or decide to voluntarily register—as a swap dealer would do well to consider the costs of not only EBC compliance oversight but also what seems to be costs of inevitable compliance oversight failures.