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  • CFTC Approves First Digital Currency Derivatives Exchange

    FinTech

    On July 24, the Commodity Futures Trading Commission (CFTC) announced its approval, by unanimous vote, of the first digital currency derivatives exchange under the Commodity Exchange Act. The CFTC issued a letter and order granting the registration, allowing the company to provide clearing services for fully-collateralized digital currency swaps, but noted that the authorization to provide clearing services for fully-collateralized digital currency swaps did not constitute or imply a CFTC endorsement of the use of digital currency generally, or bitcoin specifically. Based on the company’s representations related to having collateral already on deposit to cover the maximum possible loss, the CFTC exempted the company from certain regulations calling for, among other things, monthly stress-testing and specific daily reporting requirements. The company initially plans to clear bitcoin options.

    Fintech CFTC Digital Commerce Bitcoin Securities Commodity Exchange Act

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  • Regulators Coordinate Review of Volcker Rule Application to Foreign Funds

    Securities

    On July 21, five U.S. financial regulators announced that they would not take action against foreign banks for qualifying foreign excluded funds, subject to certain conditions, under the Volcker Rule for a period of one year as they review the treatment of these types of funds under current implementing regulations. The regulators, which include the Federal Reserve Board, FDIC, OCC, SEC, and Commodity Futures Trading Commission, issued a joint statement to address concerns raised as to whether certain foreign excluded funds may fall within the definition of “banking entity” under the Bank Holding Company Act and therefore be subject to the Volcker Rule.

    “A number of foreign banking entities, foreign government officials, and other market participants have expressed concern about the possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for certain foreign funds,” according to the joint statement. The regulators noted that the review will allow time to consider the appropriate course of action to address these concerns, including whether congressional action may be necessary.

    In addition, the regulators stressed that the joint statement “does not otherwise modify the rules implementing section 619 [of the Dodd-Frank Act] and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities.”

    Securities Prudential Regulators Compliance Bank Compliance Banking Volcker Rule Federal Reserve FDIC OCC SEC CFTC

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  • SEC Chairman Outlines Regulatory Agenda

    Securities

    On July 12, SEC Chairman Jay Clayton spoke at the nonpartisan Economic Club of New York about the principles behind his regulatory agenda. In addition to outlining the SEC’s three-part mission on investor protection, market order and efficiency, and capital formation, Clayton stressed the need for cooperation with domestic and foreign regulators to ensure effective, sound regulatory approaches. Noting the SEC’s coordination with the Commodity Futures Trading Commission (CFTC) on issues concerning cybersecurity and swap markets specifically, Clayton highlighted plans to continue to work with the CFTC, under the guidance of Title VII of the Dodd-Frank Act, to “reduce unnecessary complexity as well as costs to both regulators and market participants.” The SEC also plans to continue to encourage strong enforcement and examination programs.

    Securities SEC Regulator Enforcement Enforcement CFTC

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  • Enforcement Actions Announced by CFTC for Fraud, Registration Violations in Florida

    Courts

    On July 11, the CFTC announced that the U.S. District Court for the Middle District of Florida entered an order for final judgment by default against two individuals and their company for fraudulently soliciting investors in a commodity pool, misappropriating pool participants’ funds, and committing futures fraud, among other things. According to the CFTC complaint filed on January 26 of 2017, the defendants fraudulently marketed their company to prospective participants, materially misrepresented their past trading success using fabricated high rates of return, provided account statements to investors showing fictitious increases in value, and failed to disclose defendant’s previous permanent injunction on trading.

    In addition to imposing a permanent injunction on trading and registration, the Court ordered defendants to pay civil monetary penalties of almost $1.85 million as well as restitution of $459,613. An appointed monitor will oversee the defendants’ payment of restitution. The Court also required one of the defendants to affirmatively disclose his violations in any future marketing materials, presentations, speeches or websites. The required disclosure names his violations, the amount of restitution and civil penalties he must pay, along with the case numbers of his CFTC actions.

    Both of the defendants recently pleaded guilty to related criminal charges. One defendant was sentenced to one year and one day in prison in connection with her guilty plea to one count of obstruction of justice, and the other defendant is awaiting sentencing in connection with his guilty plea to one count of wire fraud.

    Courts Federal Issues CFTC Securities Enforcement Fraud Litigation

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  • CFTC Enters into First-Ever Non-Prosecution Deals in Spoofing Investigation

    Securities

    On June 29, the Commodity Futures Trading Commission (CFTC) entered into non-prosecution agreements with three futures traders who admitted to engaging in “spoofing” in the U.S. Treasury futures market between 2011 and 2012 (see non-prosecution agreements here, here, and here). Spoofing involves placing bids or offers with the intent to cancel before execution. Here, the traders placed a small bid or offer on one side of the market and a large bid or offer on the opposite side of the market to be cancelled almost immediately (often in less than one second). The traders used the strategy to get smaller orders filled (and filled more quickly) at favorable prices.

    This is the first time the CFTC has used non-prosecution agreements, which the Director of Enforcement called “a powerful tool to reward extraordinary cooperation in the right cases, while providing individual and organizations strong incentives to promptly accept responsibility for their wrong doing and cooperate with the Division’s investigation.” In announcing the agreements, the CFTC lauded the traders’ “timely and substantial cooperation,” noting that their efforts provided assistance in connection with a $25 million settlement with the multinational bank they worked for earlier this year.

    Securities Litigation Federal Issues CFTC Broker-Dealer Enforcement

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  • CFTC Announces Initiative for Fintechs

    Securities

    On May 17, the U.S. Commodity Futures Trading Commission (CFTC) announced an initiative called “LabCFTC” designed to engage innovators in the financial technology industry and “promot[e] responsible [fintech] innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees.” Located in New York, LabCFTC will address the regulatory challenges of increasingly automated trading and foster a regulatory environment more receptive to emerging fintech companies. The initiative will consist of two major components:

    • GuidePoint will offer opportunities for fintech companies to engage with the CFTC on how to implement innovative technology into existing regulatory framework and navigate the regulatory process.
    • CFTC 2.0 will initiate the adoption of emerging technologies in order to improve the CFTC's effectiveness and efficiency.

    In prepared remarks issued before the New York FinTech Innovation Lab, CFTC Acting Chairman J. Christopher Giancarlo stated that LabCFTC is “[t]wenty-first century regulation for 21st century digital markets and will help the CFTC cultivate a regulatory culture of forward thinking . . . , become more accessible to emerging technology innovators . . . , discover ways to harness and benefit from [fintech] innovation . . ., and become more responsive to our rapidly changing markets.”

    Securities Fintech Agency Rule-Making & Guidance CFTC

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  • CFTC Extends Public Comment Period for Regulation Automated Trading (Reg AT) to May 1

    Federal Issues

    On January 23, the CFTC extended the comment period for the supplemental proposal for Regulation Automated Trading (Regulation AT) from January 24 to May 1. Acting CFTC Chairman Chris Giancarlo recently announced his intention to “allow more time for public comments on the proposal” in light of “the complexity of the supplemental notice and the well-reasoned requests from interested parties.”  Initially proposed in November 2015, the CFTC released a revised version of the rule in November 2016 in response to concerns expressed by trading firms over, among other things, the requirement that they make their source code available to the agency without a subpoena. All comments will be posted on the CFTC’s website.

    Federal Issues Digital Commerce CFTC Fintech

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  • GOP Senators Introduce Bill to Create Five-member Board of Directors at CFPB

    Federal Issues

    Last week, Sens. Deb Fischer (R-Neb.), Ron Johnson (R-Wis.) and John Barrasso (R-Wyo.) introduced a bill (S. 105) that would amend the Consumer Financial Protection Act of 2010 to replace the CFPB’s current single director with a bipartisan, five-member board. The proposed leadership structure would be similar to that of other financial regulators, including the FDIC, SEC and CFTC.

    Federal Issues FDIC Consumer Finance CFPB SEC CFTC

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  • Financial Stability Oversight Council will hold its first post-election meetings on November 16

    Federal Issues

    On November 16, Treasury Secretary Jack Lew will preside over a meeting of the Financial Stability Oversight Council (FSOC). The agenda will include both an open and an executive session. The preliminary agenda for the open session includes an update on the work of the Alternative Reference Rates Committee, an update on the council's review of the asset management industry and revisions to the council's regulations under the Freedom of Information Act. The preliminary agenda for the executive session includes a presentation on stress tests of central counterparties conducted by the CFTC, a discussion of confidential data related to the Council’s review of asset management products and activities, and an update on the annual re-evaluation of the designation of a non-bank financial company.

    Open session Council meetings are made available to the public via live webcast and also can be viewed after they occur here. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards. Meeting minutes for past Council meetings are available here. Readouts for past Council meetings are available here.

    Federal Issues Consumer Finance Nonbank Supervision CFTC FSOC Treasury Department

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  • CFTC Commissioner Urges Regulators to “Do No Harm” as Blockchain Technology Develops

    FinTech

    On March 29, CFTC Commissioner J. Christopher Giancarlo delivered remarks before the Depository Trust and Clearing Corporation 2016 Blockchain Symposium. According to Giancarlo, blockchain technology — also known as distributed ledger technology — has the ability to “revolutionize the world of finance” by potentially linking networks of legal recordkeeping in a similar fashion to how the “Internet connects data and information.” Giancarlo spent much of his remarks heralding the technology’s potential, opining that blockchain technology may (i) “be able to provide regulators with visibility into the trading portfolios of swaps counterparties that they lacked during the financial crisis and that Dodd-Frank mandated”; (ii) “make possible new ‘smart’ securities and derivatives that can value themselves in real time”; and (iii) “help market participants manage the enormous operational, transactional and capital complexity brought about by the legion of disparate mandates, regulations and capital requirements promulgated globally in the wake of the 2008 financial crisis.” In light of the potential benefits of blockchain technology, the speed at which it is developing, and the vast interest it has garnered within the financial industry, Giancarlo advocated that regulators take a uniformed, encouraging, and principle-based approach toward their regulation of the industry, likening it to the “do no harm” framework implemented during the comparatively relaxed regulatory framework at the onset of the Internet. This approach will foster innovation, according to Giancarlo : “[o]nce again, the private sector must lead and regulators must avoid impeding innovation and investment and provide a predictable, consistent and straightforward legal environment. Protracted regulatory uncertainty or an uncoordinated regulatory approach must be avoided, as should rigid application of existing rules designed for a bygone technological era.”

    CFTC

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