Round-up on CFTC compliance

This is the first in a series of seven posts about regulatory compliance priorities and enforcement trends.  Today’s post will be about the Commodity Futures Trading Commission (CFTC).  On Thursday December 28, the post will be about the Federal Trade Commission (FTC).  On Thursday January 4, the post will be about the Securities & Exchange Commission (SEC).  On Thursday January 11, the post will be about the Food & Drug Administration (FDA).  On Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

The Commodity Futures Trading Commission (CFTC) is the US regulator charged with supervisory authority over the futures and option markets. Created in 1974 by the Commodities Futures Trading Act, the CFTC is an independent regulatory agency with the purpose to monitor and protect the markets by prohibiting fraudulent activity or other misconduct and to control against risk from these. In the aftermath of the 2008 global financial crisis and the markets reforms which were implemented during the economic recovery, the CFTC has played a more prominent role in the largely unregulated general derivatives (contracts that derive their value from the performance of an underlying entity, such as an asset, index, or interest rate) and specifically, swaps (derivative contracts where two counterparties exchange cash flows of each other’s financial instruments) markets, to encourage transparency and gradually move toward a more stringent supervisory framework.

The CFTC’s principal mission is to ensure the successful and efficient operations of the futures markets, by keeping competition fair and preventing market abuse or other threats to financial integrity and efficacy. As the futures markets and particularly the derivatives and swaps markets are very international, the CFTC collaborates heavily with international partners and oversees a huge variety of diverse financial institutions and service providers, including exchanges, clearing houses, dealers, and commodity pool operators.

The CFTC has often been seen as the smaller, less powerful or prominent cousin agency to the Securities and Exchange Commission (SEC). However, as the CFTC refines its position within the financial regulatory landscape of the global markets and within the US economy, certain issues and emphases have emerged which distinguish the CFTC.

  • Bitcoin: The CFTC made headlines in November 2017 in paving the way for CME Group and Cboe Global Markets Inc to trade bitcoin futures contracts. Investors and markets professionals all over the world have been waiting for the first regulatory verdicts in the US on how cryptocurrencies markets may be handled. The CFTC has answered this boldly, indicating a permissive attitude toward the trading practices coupled with a strict expectation for robust monitoring and reporting to enable oversight of the famously volatile and active bitcoin trading markets. The CFTC had already declared in 2015 that it would treat bitcoin as a commodity, and the ensuing years have shown US financial regulators struggling to agree on what the cryptocurrency is in terms of financial markets and what risks and protections might be applicable for those wishing to invest or speculate in it. The CFTC has chosen to give the futures trading a yellow light, allowing it to go ahead with a cautious eye toward the intense enforcement and investor protection needs that could arise and obtaining assurances from the exchanges that they will proactively cooperate and share the necessary data with the CFTC: Bitcoin Futures Are Coming and Regulators Are Racing to Catch Up
  • Whistleblowers: While far outpaced by the SEC’s much more well-known and publicized whistleblower program, the CFTC’s program was created at the same time as the SEC’s, by the post-financial crisis Dodd-Frank Act in 2010. In 2017, while still modest in comparison to the SEC, the CFTC is having a banner year for payments of whistleblower rewards. These rewards come from sanctions imposed by the CFTC due to validated whistleblower claims against CFTC-covered organizations. This represents a reporting increase by whistleblowers to the CFTC of 70 percent over 2016, indicating that whistleblowers are recognizing the value of the CFTC as an enforcement body. Therefore this uptrend in handling of whistleblower claims could likely continue: Why Wall Street Should Worry About the CFTC Whistleblower Program
  • Deregulation: The overall trend in the US is toward a preference for fewer or more efficient and targeted regulations. This is a clear reversal especially in the financial markets, where in the years after the global financial crisis the momentum was toward more complex and far-reaching regulatory and supervisory oversight on the economy and market participants. This was a reasonable and necessary response to not only the recession but the numerous and varied financial scandals and frauds that were uncovered and damaged the markets and society’s trust in the financial systems. These risks and root causes of misconduct and abuse are still present, so balancing a regulatory posture which prefers a lighter touch against the need for investor protector and facilitation of transparent and equitable markets is a challenge for all regulatory agencies, including the CFTC: CFTC Enforcement Actions Drop Sharply in 2017
  • MiFID II: The revised Markets in Financial Instruments Directive, or MiFID II, is a wide-sweeping set of EU financial regulatory rules coming into effect in January 2018. These new regulations will have huge impact on the way banks and other financial institutions interact with and make money from the markets. While these are European laws, the globality of the markets means that regulators and market participants all over the world are contending with how to handle these new supervisory guidelines. The Futures Industry Association (FIA) has been actively lobbying the CFTC on behalf of its members, including large banks such as Goldman Sachs and Morgan Stanley, to confirm that the new European requirements will not bring expensive new limitations in the US as well: Wall Street Has New MiFID Migraine, Now in Futures Market
    In continuation of this, one important area in which the CFTC has already been deal-making with the EU in anticipation of the approaching MiFID II application is with derivatives trading venues. The European Commission and the CFTC have agreed upon mutual recognition of trading venues so that those in the United States can benefit from an equivalence decision recognizing them as eligible for compliance with MiFID II requirements by virtue of their satisfaction of CFTC requirements: EU and CFTC Implement Mutual Recognition of Derivatives Trading Venues
  • Blockchain: Apart from regulating bitcoin as a commodity, the CFTC hopes to benefit from the technology that underlies cryptocurrencies, blockchain. The CFTC has voluminous amounts of data from the diverse market platofrms and service providers that it supervises and has historically struggled to parse and study these huge troves of data efficiently and meaningfully. The CFTC hopes that the reporting reliability, transparency, and information security offered by the ledger technology blockchain can enable better review and analysis of this data. Traditional procurement requirements have often dogged attempts to implement more advanced or emerging technologies, but one of the priorities of the CFTC and other US government agencies currently is to leverage innovation such as from financial technology (fintech), regulatory technology (regtech), and supervisory technology (suptech): CFTC Looks to Blockchain to Transform How It Monitors Markets

Be sure to check back next week for a round-up on FTC regulatory compliance.

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