CFTC | Global Investment Law Watch

United States: CFTC Reaches Settlement with Oil and Natural Gas Advisor for Failure to Register as a SEF

Sep 29 2022

By: Cheryl L. Isaac and Spencer D. Warkentin

On September 26, 2022, amidst a flurry of other enforcement actions, the Commodity Futures Trading Commission (“CFTC”) announced the settlement of its administrative action against Asset Risk Management, LLC (“ARM”) in the amount of $200,000. The CFTC found that ARM operated an unregistered swap execution facility (“SEF”) for a period of 5 years, from September 2017 to the present.

Under the Commodity Exchange Act and CFTC regulations, any entity that operates a “trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform” must register as a SEF or designated contract market (“DCM”). In this case, ARM facilitated, negotiated and executed swaps between and among about 70 clients and 20 to 30 swap counterparties. In doing so, ARM (i) obtained requests for swap pricing from clients; (ii) transmitted those requests to multiple swap counterparties; (iii) where authorized, approved or rejected counterparty pricing (leading to swap execution); and (iv) subsequently confirmed swap executions with the client.

Even though ARM did not have a traditional exchange platform, the CFTC determined that ARM’s business could indeed be classified as a “multiple-to-multiple” trading system designed to facilitate the execution of swaps. Interestingly, the ARM Order focused on the ability of multiple participants to execute or trade swaps, regardless of whether the platform actually allows multiple participants to simultaneously request, make, or accept bids and offers. The CFTC noted that certain “one-to-many” platforms may be considered as multiple-to-multiple trading systems, such as a request-for-quote (“RFQ”) system, where a single requestor initiates a one-to-many RFQ to multiple participants. The CFTC distinguished this type of platform from a liquidity provider, in which one sponsoring entity is the counterparty to all swaps executed through the platform. Under those circumstances, the platform would not be required to register as a SEF or DCM.

The ARM Order serves as a reminder to derivatives market participants that it is necessary to examine the particular facts and circumstances of any given trading system in order to determine whether a “multiple-to-multiple” platform exists, and whether registration as a SEF or DCM is required.

United States: CFTC Proposes New Rules for Derivatives Clearing Organizations

Aug 23 2022

By: Cheryl L. Isaac and Matthew F. Phillips

On July 27, 2022, the Commodity Futures Trading Commission (“CFTC”) proposed a series of amendments to the Commodity Exchange Act (the “Exchange Act”) designed to enhance its governance standards for Derivatives Clearing Organizations (“DCOs”).

United States: CFTC Extends Position Limits Aggregation Relief

Aug 23 2022

By: Cheryl L. Isaac and Michael G. Lee

On August 10, 2022, the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (DMO) issued a no-action letter (NAL), CFTC Staff Letter No. 22-09 (NAL 22-09), temporarily extending relief regarding certain position aggregation requirements until the earlier of either August 12, 2025 or the effective date of any relevant rulemaking. This relief was first provided in CFTC Staff Letter No. 17-37 (NAL 17-37) on August 10, 2017, and subsequently extended in CFTC Staff Letter No. 19-19 (NAL 19-19) on July 31, 2019. The extended relief provided by NAL 19-19 was set to expire on August 12, 2022, two days before the issuance of NAL 22-09. The DMO stated that it would use the newly extended time to assess the impact of the relief, including whether it hinders the CFTC staff’s ability to conduct market surveillance, particularly in light of so many new contract markets and market participants becoming subject to the Position Limits for Derivatives Final Rule. The CFTC will also consider a rulemaking process to codify the relief set forth in NAL 22-09.

United States: CFTC Sues Crypto Exchange Gemini Trust Co.

Jun 09 2022

By: Clifford C. Histed, Cheryl L. Isaac, and Christine Mikhael

On 2 June 2022, the Commodity Futures Trading Commission (CFTC) filed a complaint against crypto exchange Gemini Trust Company, LLC (Gemini) in the U.S. District Court for the Southern District of New York for allegedly making false or misleading statements of material facts to the CFTC related to the bitcoin futures contract that Gemini launched on its exchange in 2017. If successful in this litigation, the CFTC would impose a derivatives trading and registration ban on Gemini and its employees, in addition to civil monetary penalties and profit disgorgement.

According to the CFTC’s complaint, Gemini intended to self-certify its bitcoin futures contract, and it engaged with CFTC staff between July and December 2017 in connection with the self-certification. The bitcoin futures contract was to be cash-settled by reference to the underlying bitcoin price, determined by the daily bitcoin auction that took place on the Gemini Exchange. In its complaint, the CFTC alleges that the Gemini bitcoin futures contract and related spot auction were readily susceptible to manipulation.

Specifically, the CFTC alleges that:

Gemini represented to the CFTC that Gemini required all transactions to be fully “prefunded”, despite the fact that Gemini was lending digital assets to traders on an unsecured basis at low rates;
Gemini made false or misleading statements relating to self-trading and did not effectively prohibit self-trading from occurring in the Gemini bitcoin auctions (with about 70% of the total auction trading volume resulted from one market participant trading with itself in December 2016);
Gemini entered into bespoke fee arrangements with certain market makers that were not available to all Gemini market participants and were not disclosed to the public; and
Gemini provided false or misleading statements to the CFTC regarding trading volume and liquidity on the Gemini Exchange.

The CFTC emphasized in its complaint that the bitcoin futures contract was particularly significant because it was to be among the first digital asset futures contracts listed on a U.S. derivatives exchange. This action makes clear regulators’ intense focus of crypto assets, and the stakes are high: If the CFTC is successful, Gemini and its employees and agents would effectively be banned from U.S. derivatives markets, in addition to being subject to civil monetary penalties and profit disgorgement. CFTC Chairman Rostin Behnam has previously warned that the agency’s recent crypto-related enforcement actions were just the “tip of the iceberg,” and the Gemini lawsuit is evidence that there are more enforcement actions to come.

United States: All Square: Amended CFTC “Block Trade” Definition Officially Effective

May 31 2022

By: Cheryl L. Isaac and Michael G. Lee

On 25 May 2022, the U.S. Commodity Futures Trading Commission’s (CFTC) block trade no-action relief, provided in CFTC No-Action Letter (NAL) 20-35, expired. As of that day, all swap execution facilities (SEFs) are required to comply with the amended definition of “block trade” provided under CFTC Regulation 43.2.

“Block trades” are large, privately negotiated (either directly or through a broker) swap transactions that meet certain quantity thresholds. Block trades must qualify for execution apart from the SEF’s order book or trading platform in accordance with the relevant SEF’s rules, pursuant to CFTC Regulations.

Tag: CFTC