Following the high-profile market disruptions caused by the “flash crash” of May 6, 2010, and the “Knightmare” in August 2012, when a coding error in Knight Capital’s trading software resulted in the firm suffering $460 million in losses over the course of 45 minutes, the CFTC sought to determine existing industry practices around automated trading in the futures markets and to evaluate the need for additional regulations. To this end, in 2013, the CFTC published an extensive Concept Release and sought industry feedback on over 120 questions regarding risk controls and system safeguards around automated trading. Market participants applauded the CFTC’s efforts to foster an open discussion on industry best practices, and the industry devoted significant time and resources to drafting thoughtful responses to the Commission’s questions, with over 50 response letters filed.
In a Consent Order entered on August 15, Kraft Foods Group, Inc, and its subsidiary Mondelez Global LLC agreed to pay $16 million to settle the CFTC’s complaint alleging the firms manipulated the December 2011 wheat futures markets. The settlement was thought to have ended the litigation, begun in 2015, however, shortly after the entry of the Consent Order, the firms filed a motion seeking contempt sanctions against the CFTC and Commissioners Berkovitz and Behnam. Kraft’s emergency motion alleges the Commission’s statements, and individual Commissioner statements filed concurrently with the Consent Order violated the terms of the settlement.
The Consent Order contained two unusual aspects. First it contained no factual findings or conclusions of law. Second, it contained a clause limiting the parties’ ability to speak publicly on the litigation.
Under the Consent Agreement, both parties agreed to refrain from making … Read More »
In a recent announcement, the CFTC indicated it would not appeal its district court loss in CFTC v. DRW, stating, “After careful consideration of the issues, as well as discussion with agency staff and Commissioners, Chairman Giancarlo has decided the agency will not appeal the district court’s decision.”
In 2013, the CFTC filed a complaint against principal trading firm DRW Investments, LLC (“DRW”) and its principal, alleging price manipulation of a various interest rate swaps futures contract in 2011, specifically the IDEX Three-Month Interest Rate Swap Future (the “Three-Month Contract”). The CFTC alleged that DRW’s bidding practices in the Three-Month Contract created artificial daily settlement prices. The Commission based this assertion primarily upon the fact that the bids in question were higher than the corresponding rates in the contemporaneous over the counter (“OTC”) swap market. DRW argued its bids were not … Read More »
In an effort to increase awareness and attention by
regulated entities, the CFTC’s divisions of Market Oversight (DMO), Swap Dealer
& Intermediary Oversight (DSIO), and Clearing & Risk (DCR) announced
their 2019 examination priorities. This marks the first time that the agency
has published division
examination priorities, and Chairman Giancarolo commended CFTC
leadership and staff for their work in bringing additional transparency into
the CFTC’s agenda.
Tasked with oversight of trade execution
facilities, DMO focuses its examination priorities on designated contract markets (DCMs) and swap
execution facilities (SEFs). DMO’s Compliance Branch conducts examinations of DCMs
to monitor their compliance with the Commodity Exchange Act and CFTC
regulations. Throughout 2018 the Compliance Branch completed a review of 11
DCM’s self-regulatory operations. Based on this review, and feedback from the
DCM staff, the division identified the following topics for in-depth
examination in 2019:
cryptocurrency surveillance practices; surveillance for disruptive trading (including
DCMs’ rules, surveillance practices, investigations, and disciplinary … Read More »
“The definition of ‘commodity’ is broad. Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.” (In re Coinflip, Inc., CFTC No. 15-29 (Sept. 17, 2015)). This has been the view of the Commodity Futures Trading Commission (CFTC) since at least 2015, and the courts increasingly appear to be affirming the Commission’s assertion of jurisdiction over the virtual currency market.
The U.S. District Court for the District of Massachusetts is the latest court to rule that virtual currencies are commodities, and subject to CFTC jurisdiction. (See CFTC v. My Big Coin Pay, Inc, 1:18-CV-10011-RWZ). In My Big Coin, the district court entered an order holding that the CFTC has the power to prosecute fraud involving virtual currency, even in instances where there is no futures contract over the relevant virtual currency.
A “commodity” as defined in the … Read More »
The National Futures Association (“NFA”) recently proposed an interpretive notice updating disclosure requirements for its members engaged in virtual currency (i.e. cryptocurrency) activities. Self-Regulatory Organizations are increasingly interested in their members’ activities in the emerging virtual currency market, with the NFA’s notice following on the heels of a FINRA Regulatory Notice encouraging its members to self-report their virtual currency activities. (See here for detail on FINRA’s notice).
The apparent catalyst for the NFA’s recent proposal was the launch of bitcoin futures by the CME and CBOE Futures Exchange in December 2017. Concerned that the growth of the market has attracted investors that may not fully appreciate the substantial risk of loss that may rise from trading virtual currencies, and the NFA’s limited regulatory oversight authority, the NFA developed the enhanced disclosure requirements for members.
According to the NFA’s interpretive notice, virtual currencies … Read More »
Spoofing is not going away after all. Last week, the U.S. Court of Appeals for the Seventh Circuit unanimously upheld the first-ever criminal conviction for spoofing. The case, United States v. Coscia, 7th U.S. Circuit Court of Appeals, No. 16-3017, involved a multi-count indictment against futures trader Michael Coscia. The indictment alleged that Coscia engaged in illegal trading by employing computer algorithms that engaged in market activity that violated the anti-spoofing laws created and adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The indictment alleged that Coscia traded in a variety of futures products and made over $1.4 million as a result of his illegal trading.
By way of background, spoofing involves placing bids or offers to sell futures contracts with the intent to cancel the bids or offers before execution. By placing bids … Read More »
The future is now.
On June 29, 2017, the U.S. Senate Committee on Agriculture, Nutrition, and Forestry voted overwhelmingly to confirm the nomination of J. Christopher Giancarlo as Chairman of the U.S. Commodity Futures Trading Commission (“CFTC”), paving the way for his nomination to move forward to consideration on the floor of the U.S. Senate. Within two hours of this announcement, the CFTC announced its first non-prosecution agreements. These agreements and the related “spoofing” cases are discussed in more detail below. These same-day announcements reflect the advancing ambitious agenda outlined by Acting Chairman Giancarlo in his speech entitled “CFTC: A New Direction Forward,” given on March 15, 2017. Acting Chairman Giancarlo has since taken every opportunity to advise the industry of his goals to reduce regulatory burdens, modernize the agency, and maintain the CFTC’s aggressive enforcement efforts. All the while, the … Read More »