CFTC LAW » Compliance

ICE Futures ordered to beef up compliance

Felix Shipkevich — Thu, 04 Feb 2010 00:37:44 +0000

The CFTC’s Division of Market Oversight notified ICE Futures US of the results of a rule enforcement review. The review covered the period from June 1, 2007 through June 1, 2008. The Division assessed ICE Futures’ compliance with core principles relating to audit trail, trade practice surveillance, disciplinary and dispute resolution programs.

The Division found that the Exchange’s Compliance staff, although very experienced, has been reduced since the Division last conducted a comparable review in 2004. In addition, several significant events occurred during the target period that impacted the Compliance Department and required its attention. These events placed a notable strain on staff’s ability to fulfill important self-regulatory obligations in a timely manner. For example, the Exchange was unable to complete a saturation audit trail recordkeeping review during the target period and the Division identified several investigations that were open for excessively long time-periods. The Division recommended that ICE Futures hire additional Compliance staff and monitor the size and workload of the Compliance Department and increase the size of staff as appropriate based on changing circumstances.

The Division also identified some additional areas in which ICE Futures needs to make improvements and recommended that ICE Futures (1) ensure that open outcry saturation recordkeeping reviews are conducted annually; (2) re-examine its trading card compliance program and make adjustments to achieve a higher percentage of compliance, and ensure that the Compliance Department uses its enhanced authority with respect to issuing meaningful summary fines; (3) augment its audit trail compliance program to include a programmatic review of electronic audit and recordkeeping rules; (4) take appropriate measure to complete investigations in a timely manner; and (5) record the date on which completed investigative reports are approved by senior Compliance staff.

Revised Adjusted Net Capital Requirements for FCMs and IBs

Felix Shipkevich — Thu, 31 Dec 2009 07:31:23 +0000

The CFTC is amending its regulations that prescribe minimum adjusted net capital requirements for futures commission merchants (‘‘FCMs’’) and introducing brokers (‘‘IBs’’). The amendments: increase the required minimum dollar amount of adjusted net capital that an IB must maintain from $30,000 to 45,000; increase the required minimum dollar amount of adjusted net capital that an FCM must maintain from $250,000 to $1,000,000; amend the computation of an FCM’s margin-based minimum adjusted net capital requirement to incorporate into the calculation customer and noncustomer positions in over-the-counter derivative instruments that are submitted for clearing by the FCM to derivatives clearing organizations (‘‘DCOs) or other clearing organizations (‘‘cleared OTC derivative positions’’); specify capital deductions for FCM proprietary cleared OTC derivative positions based on the deductions required by the Commission’s regulations for FCM proprietary positions in exchange traded futures contracts and options contracts; and amend the FCM capital computation to increase the applicable percentage of the total margin-based requirement for futures, options and cleared OTC derivative positions in noncustomer accounts to eight percent.

Effective March 31, 2010.

CFTC modifies filing and reporting requirements applicable to FCMs and IBs

Felix Shipkevich — Wed, 30 Dec 2009 07:16:56 +0000

The CFTC is amending certain of its regulations in connection with electronic filing of financial reports and related notices. The amendments broaden the language in the Commission’s regulations applicable to electronic filings of financial reports to clarify that, to the extent a futures commission merchant (‘‘FCM’’) submits a Form 1–FR to the Commission electronically, it may do so using any user authentication procedures established or approved by the Commission. The amendments also permit registrants to electronically submit filings in addition to financial reports, including an election to use a non-calendar fiscal year, requests for extensions of time to file uncertified financial reports and ‘‘early warning’’ notices required under Commission regulations. In connection with the filing of financial reports, the amendments specify, consistent with other requirements and existing practice, that a statement of income and loss is included as a required part of the non-certified 1–FR filings for FCMs and introducing brokers (‘‘IBs’’). The amendments also require more immediate, but less prescriptive, documentation regarding a firm’s capital condition when a firm falls below its required minimum adjusted net capital. Finally, the final regulations include several other minor amendments to correct certain outdated references and to make other clarifications to existing regulations.

Effective Date: January 4, 2010.

NFA guidelines on the use of social networking groups

Felix Shipkevich — Wed, 09 Dec 2009 02:40:46 +0000

On-line Social Networking Groups – Proposed Amendments to NFA’s Compliance Rule 2-29(h) and Adoption of Interpretive Notice

On-line social networking groups have changed the way people make trading decisions. A number of NFA Members sponsor blogs, chat rooms, and forums (also called message or bulletin boards), and some use sites like Facebook or Twitter for business purposes. Associates may also sponsor or participate in these groups. Unfortunately, these on-line communities provide opportunities for posters to spread unsubstantiated rumors and intentional misrepresentations. The form of communication does not change the obligations of Members and Associates who host or participate in these groups, and electronic communications must comply with Compliance Rules 2-9, 2-29, 2-36, and 2-39.

NFA’s interpretive notice entitled NFA Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Site,” (NFA Manual, ¶ 9037) provides guidance on how NFA’s promotional material and supervision rules relate to email and web sites but does not specifically address other types of electronic communications. This notice discusses a Member or Associate’s responsibilities in connection with on-line social networking facilities such as blogs, chat rooms, forums, Facebook, and Twitter.

Obviously, any electronic content that can be viewed by the general public, or even by a more closed community that includes current and potential customers, can be promotional material. For example, blogs dealing with commodity futures or options are promotional material when written by an NFA Member or Associate, and forex blogs are promotional material when written by a Member or Associate subject to the forex rules.

Therefore, content generated by the Member or Associate is subject to the requirements of NFA Compliance Rules 2-29, 2-36, or 2-39. The same is true for futures, options, or forex content written by a Member or Associate and posted on a third party’s site.

The issue becomes more complicated for user-generated comments responding to a Member or Associate’s blog and for Members and Associates who host chat rooms or forums. What is their responsibility for posts from customers or others over whom the Member or Associate has no direct control? When inadequately monitored, social networking sites may contain misleading information, lure customers into trades that they would not normally make, or be used in an attempt to manipulate prices.

If a Member or Associate hosts a blog, a chat room, or a forum where futures or forex are discussed, the Member or Associate is required to supervise the use of that community. This requires, at a minimum, that the Member or Associate regularly monitor the content of the sites it hosts, take down any misleading or otherwise fraudulent posts, and ban users for egregious or repeat violations. Not only are these actions required by NFA’s supervision rules, they are both common sense and common practice. Similar requirements apply to Facebook and other sites that allow others to post to the Member or Associate’s “wall” or other assessable area.

Audio pod-casts and videos on the Internet—whether on the Member or Associate’s Web site or on an independent site such as You-Tube—are similar to radio and television advertisements. If they make specific trading recommendations or refer to profits that have been obtained in the past or can be

NFA proposes amendments to Financial Requirements Section 15 regarding FDM internal financial controls

Felix Shipkevich — Fri, 04 Dec 2009 01:59:19 +0000

Financial Requirements Section 15 currently requires firms to provide NFA with an internal control report prior to acting as an FDM. This report must be prepared by an independent public accountant registered with the Public Company Accounting Oversight Board and must include representations by the accountant that the FDM’s internal financial controls have no material weaknesses. NFA adopted this rule after taking a number of Member Responsibility Actions against FDMs with inadequate internal financial controls.
Additionally, reputable public accounting firms have informed NFA that AICPA auditing standards require accountants to test live transactions before making representations about the adequacy of internal controls, and they cannot do this testing for firms that have not yet begun business. Therefore, the amendments to Section 15 eliminate the specific requirement for an internal control report prior to acting as an FDM and replace it with a more general requirement that the Member must demonstrate that it has adequate internal financial controls. This requirement will continue to put the burden on the Member but will provide more flexibility. Section 15 will continue to authorize NFA to require any FDM to provide an internal control report if NFA believes that the Member’s controls are inadequate:

-If NFA believes that a Member’s internal controls are inadequate at any time, NFA’s Compliance Director may require it to provide to NFA an internal control report that is prepared and certified by an independent public accountant who is registered under Section 102 of the Sarbanes-Oxley Act. -

Federal Regulators Issue Final Model Privacy Notice Form

Felix Shipkevich — Wed, 18 Nov 2009 06:36:32 +0000

Under the Gramm-Leach-Bliley Act (GLB Act), institutions must notify consumers of their information-sharing practices and inform consumers of their right to opt out of certain sharing practices. The model form can be used by financial institutions to comply with these requirements.

CFTC ACTION: EMF Financial Products LLC

Felix Shipkevich — Sat, 14 Nov 2009 06:57:56 +0000

CFTC fined hedge fund EMF Financial Products LLC $4 million for making false statements about its market positions relating to U.S. Treasury note futures. The CFTC said EMF failed to fully disclose to the CBOT its control of up to $11.9 billion of the underlying cheapest-to-deliver security on the September 2005 contract, even as it held a significant large long position in the same contract. The charges stem from an incident in August 2005, when the CFTC says EMF misrepresented its positions regarding the September 2005 U.S. Treasury Note futures contract to the Chicago Board of Trade.

CFTC ACTION: Michael Kourmolis

Felix Shipkevich — Thu, 12 Nov 2009 19:33:56 +0000

The CFTC obtained a consent order against Michael Kourmolis, of Brooklyn, N.Y., permanently prohibiting him from engaging in any activity related to trading any commodity interests, including soliciting funds, registering with the CFTC and trading on behalf of others or himself. Kourmolis fraudulently solicited customers to open accounts to trade foreign currency futures contracts. Kourmolis misleadingly represented in writing that customers would have personal accounts and that their funds were insured by a bank for up to $25 million. Related litigation continues against Thomas Qualls and International Foreign Currency, Inc.

CFTC ACTION: three Canadian defendants charged

Felix Shipkevich — Tue, 10 Nov 2009 04:49:53 +0000

The CFTC announced that a federal court entered default judgment orders against Robin States and his wife Bernadette Bowden, both of Nova Scotia, Canada, and relief defendant Paul States, of British Columbia, Canada, in a CFTC action charging the defendants with fraudulent solicitation and misappropriation in connection with the operation of commodity pool known as Infinity Online Investors Group.
The default orders find that States and Bowden fraudulently solicited approximately Can$ 643,047 from approximately 900 individuals in the United States, Canada and elsewhere to participate in Infinity. According to the orders, Infinity never did any trading. Instead defendants misappropriated the participants’ funds.

New prudential regime for personal investment firms

Felix Shipkevich — Sat, 07 Nov 2009 01:31:21 +0000

Under the new rules, all PIFs will have to hold capital resources worth at least three months of their annual fixed expenditure in realizable assets such as cash. The minimum capital resources threshold for any firm will be set at £20,000. The transition to the new regime has been extended by a year to 31 December, 2013.