Round-up on CFTC compliance

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

Check back in the future for more posts which will focus on the investigatory and enforcement priorities and interests of different regulatory organizations or initiatives. Namely, on December 28, there will be a round-up on US Federal Trade Commission (FTC) compliance. On January 16, the post will be about EU implementation of the General Data Protection Regulation (GPPR), major privacy ad data protection regulation by the European Parliament and Council of the European Union coming into effect in 2018.

Round-up on compliance of aging and death

Many of the contemporary challenges to the meaning of human life and the responsibility of organizations, individuals, regulators, and even governments to contend with them on a legal or regulatory level come from technology. Indeed, bioethics and design ethics are rich with ethical dilemmas caused by advancements of sophisticated technologies such as artificial intelligence and its many applications. However, there is one philosophical area that is in tension with societal existential constructs and is as old as life itself – aging and death.

The ethical dilemmas stemming from the legal and moral responsibilities humans have to themselves and each other as the end of life approaches are contentious and among the most difficult possible. These dilemmas go to the core of society’s moral ideas about the value of life, the extension of human rights throughout physical or mental incapacity due to age, and the treatment of patients and their bodies through and beyond death.

Legal guardians, funeral homes, hospitals, and other individuals and organizations working in and making profits from business related to aging and dying – encompassing legitimate activities as well as illicit ones – all have various duties to their clients and are subject to societal and legal expectations and norms. However, inspection and enforcement efforts are often uneven and struggle to keep pace with the challenges posed by abusive practices or organizational misconduct. Threats to the rights of individuals and the dignity and proper treatment – or at least clear and honest disclosures – that are expected by patients and their families, must be the focus of future regulatory scrutiny and improvement.

  • Overreaching paternalism in guardianship of senior citizens is a highly disturbing trend which has been enforced by the courts in some jurisdictions. Legal guardians pay themselves from their wards’ estates; in some cases they have hundreds or even thousands of clients and force out family members or friends so that they can exert their control and get paid for it. Of course, this is a necessary system for the care of vulnerable senior citizens who need help administering their affairs. However, it is also ripe for misuse by opportunistic individuals, to the great detriment of the seniors they take on as wards and their loved ones. The financial and social abuses that can occur in these cases are frightening and appalling. Legal guidelines and supervisory scrutiny of these guardians should be standardized across jurisdictions to avoid undue harm to any population and to balance the commercial caretaking aspects of the activity with the rights and dignity of the individuals concerned:  How the elderly lose their rights 
  • Funeral home regulation and inspection is currently a patchwork system at best. Gross abuses and lack of internal controls have been the subject of a number of recent investigatory reports. Employee misconduct or insufficient internal policies and procedures at an operation like a funeral home has obviously devastating potential to cause harm to families of departed individuals at a vulnerable and painful time in their lives. Following the loss of a loved one the thought that the personnel of the funeral home trusted with their body might store the remains improperly or misuse their organs and parts is a concept that is hard to even conceive. However, due to insufficient supervision and inconsistent regulatory and investigative practices, these terrible scenarios play out all too often. A coherent and cohesive regulatory framework with the strength to punish misconduct and enforce expectations of operating standards must be implemented:  Gruesome Discoveries at Funeral Homes Put Spotlight on Spotty Regulations
  • On a related note, the dark reality of the organ trade has been the subject of a number of recent investigatory reports as well. Far from just urban legends about crimes that can take place in far-off lands, body brokers are very real and operating in the United States. While many of them do conduct legitimate business for scientific or medical purposes, others trade illicitly or take advantage of individuals who unknowingly give their body parts upon death or those of their loved ones to be later sold for profit by brokers. Fraud and misrepresentation in this industry violates the dying wishes of individuals or the difficult decisions made by families. The ease with which these illicit transactions are conducted is shocking, with human limbs or organs being bought and sold like spare car parts by some individuals. Like funeral homes, an overarching regulatory system needs to be put in place to monitor and inspect these businesses and implement enforcement actions when necessary:  The Body Trade
  • Turning away from illicit or abusive activities to technological advancements that touch upon aging and death, the reach of artificial intelligence has begun to stretch into this area as well. Robots and robotic devices are no longer the figment of the imagination of a distant future. Many organizations are beginning to utilize them in rudimentary form for a variety of assistant-level activities and are trying to develop the AI technology to use it even more in the future. This extends to patient care as well; hospitals and nursing homes are now exploring using robots to assist nurses in treating patients. Machine learning may eventually be able to automate many aspects of basic care, removing human error and relieving non-robotic nurses to focus on more complex or individually-tailored care. This could be a great efficiency for hospital staffing in the future, but it remains to be seen how non-human interaction in the patient care arena will impact the aging experience. Compassion and humility are often of great mental importance when contending with the forces of aging and illness. A mix of human and robotic care of patients will need to be carefully devised to ensure that these needs are met: Hospitals Utilize Artificial Intelligence to Treat Patients
  • Life extension has been a romantic subject of philosophical and scientific desire for millennia. For as long as people have been alive, they have tried to figure out ways to prolong or prevent dying, sometimes delving deeply into the mysterious and esoteric. Current quests in this area are focused on high-tech solutions. Silicon Valley has turned its most sophisticated efforts toward life extension in seeking to “solve for death.” At the very least, these attempts may derive a technology that greatly impacts aging or pushes human life expectancies far beyond the current normal range. Within a generation this may the force of great societal change that will redefine the needs of aging populations that live for longer and continue the quest to avoid death completely: Seeking eternal life, Silicon Valley is solving for death

As demonstrated by the foregoing stories, improper practices and abuses of power, as well as technological advancements, pose risks to the nature of aging and death as it is currently defined within society. Supervisory frameworks must be developed and strengthened to protect the most vulnerable of individuals and ensure that they and their families are not treated unjustly. Risk assessments and coherent, holistic regulatory guidance should be in place to ensure that these protections are upheld.

Compliance issues with marijuana legalization

Marijuana has a complex legal and regulatory history in the United States. Originally widely deployed in a variety of medical and commercial uses, the regulation and eventual restriction of commonly-accepted preparations of hemp and cannabis began at the turn of 20th century with labelling requirements and a push to include cannabis in the definition of a “poison” for which a prescription would be required. By the 1930s a patchwork of state and national policies in law were in place and the criminalization of marijuana was underway in earnest. For the next 40 years any attempt at decriminalization or reclassification was unsuccessful. In the 1970s and 1980s, however, California began to slowly reduce penalties for possession under state law and work toward legalization for compassionate use in chronically-ill individuals, which became legal in the state in 1996.

Since then, the legalization of marijuana has been a matter of legislative interest in many states. This move toward decriminalization at first was limited to the medical use first legitimized in California state law, either for chronically-ill patients or for those suffering from a variety of illnesses for which marijuana has proven to be a desirable treatment in terms of effectiveness and cost. Advocacy in this area has eventually extended to non-medical use; in 2012, Colorado was the first state to legalize recreational use of marijuana for adults.

As of the writing of this post, medical marijuana is legal (to at least some extent) in 23 states plus the District of Columbia; in 8 states medical and non-medical marijuana is legal to sell and possess. As the below selection will show, momentum for decriminalization and handling of emerging legal markets invokes a wide variety of compliance issues which will need to be addresses for business and consumer protections and obligations.

  • Given that medical marijuana was the initial purpose behind modern legalization and that it continues to be the most widely-accepted rationale for it, it follows quite logically that medical marijuana research would need to be recognized and facilitated by the law as well. Senator Orrin Hatch, a perhaps unexpected ally for legalization, introduced the Marijuana Effective Drug Study Act of 2017 to improve the research approval process and increase the national marijuana quota to provide supply for medical and scientific research into its potential health benefits. Because marijuana is still completely illegal at the federal level, it is subject to the most restrictive classification and therefore getting approval to study it or supply of it to study is very difficult. In order for the full efficacy of marijuana as medical and therapeutic treatment to be understood, these administrative burdens must be overcome: Senator introduces bill to make it easier to do medical marijuana research
  • Due to the fact that, as stated above, marijuana is still totally criminalized at the federal level, and state efforts toward legalization vary widely, regulatory expectations are widespread across a cumbersome patchwork. Businesses hoping to join or exploit the marijuana market in states where it is legalized to some extent will confront a huge regulatory burden of rules, reporting and disclosure obligations, and licensure requirements. It will be crucial for existing or new owners of marijuana-based businesses to consider implementing compliance programs early and thoroughly so that they are not caught unaware by government expectations in their jurisdictions. Otherwise, a culture of operational non-compliance will reign, which could have devastating effect on business success rates amid supervisory enforcement actions for deficiencies: Marijuana Businesses, Particularly In California, Struggle To Navigate A Thicket Of Regulations
  • Public sentiment is certainly trending toward legalization. Sixty-four percent of Americans now say that its use should be made legal, which is the highest level of public support that the pollster Gallup has found in the fifty years it has been recording this measure. Certainly high-profile ballot initiatives in a variety of states and increased media attention have come through to the average American and liberalized views on the matter. How will this impact regulatory outlooks? If the federal government comes around to legalization then some universal standard for controls framework and supervisory requirements may be in the future. If not, states will continue to be left to their own devices to create independent markets and risk controls within them:  Record-High Support for Legalizing Marijuana Use in U.S.
  • As the market for legal weed emerges, powerful people wanting to work within are starting to act like they would in any other industry – looking to garner competitive advantage and turn their companies into giants of the marijuana business. Marijuana is a valuable industry and can be seen as a crop, which means it has an agricultural supply chain like wheat or corn that can be exploited. Utility patents, intellectual property protection for crops, can be used by powerful organizations to corner the market on breeding of new varieties, conducting research, and even producing seeds to be licensed: The Great Pot Monopoly Mystery
  • With governments addressing legalization of marijuana all across the United States, organizations are beginning to weigh in too on what their policies of use by their members and employees may be. One visible example of this is with the National Basketball League (NBA) where both the former commissioner David Stern and the current commissioner Adam Silver have expressed at least awareness that the league policies may eventually have to change. While marijuana is still a prohibited substance in the NBA irrespective of the purpose of use, Silver has said he wants to study it and Stern has opined that he feels players should be allowed to do what is legal in their states with respect to marijuana use:  David Stern calls for NBA changes of marijuana rules

As states continue to move toward decriminalizing or outright legalization for marijuana for a variety of purposes, and other organizations contend with their own policies within that system, mechanisms for regulated markets will begin to emerge, presenting interesting regulatory compliance issues with no clear and easy precedent. Governments and businesses alike will need to contend with both the opportunities and the challenges this will present.

Round-up on compliance issues with blockchain technology

One of the hottest topics of 2017 is blockchain. This advancing technology is seemingly the possible solution to every business problem conceivable. Companies across all industries – as diverse as banking to food production and seemingly everywhere in between – are experimenting with how they might be able to use blockchain to make their reporting and related processes more reliable or efficient. Many are even contemplating how they may take advantage of blockchain to market software applications to other companies, hoping to enter the profitable fintech (financial technology), regtech (regulatory technology), or suptech (supervisory technology) markets.

But what is blockchain? Most famously, it is the core technological component of the well-known cryptocurrencies, such as Bitcoin or Ethereum. Simply put, blockchain is an open list of records (which comprise the “blocks”) which are securely linked together with cryptography. As the blocks are all linked together and independently identified with references to their linked blocks, the data contained therein is extra safe from individual manipulation or alteration. This is a decentralized computing system which is incredibly useful for recordkeeping and records management activities, especially those where security is especially important such as identity management and medical records.

Due to the broad desirability of a secure and adaptable record maintenance technology, blockchain, which was initially developed only less than a decade ago, has been a disruptive influence in many industries already. Across all business areas, companies are looking to blockchain for possible benefits, all relevant to compliance, to their reporting processes.

  • Transparency for pension fund reporting is one major potential use of blockchain. Following the Madoff scandal and other highly-publicized frauds in the investment management industry, there has been more pressure than ever in expectations for investor protection and reporting disclosures. Many pension funds have balked at public and supervisory demands for increased transparency due to the cost concerns for implementing additional reporting mechanisms in balance with very low profit margins. This reaction does not help to enhance trust between investor clients and this fraud-vulnerable industry. Therefore the decentralized, secure nature of blockchain offers appealing opportunities for filling this confidence vacuum. Blockchain-based platforms can get investors access to their own pension information without fears of data manipulation or increased cost burden on firms: How Blockchain is revolutionizing fraud prone industries
  • On a related note, banks and other financial institutions have borne much of the competitive pressure blockchain has created with the advent of cryptocurrencies – but they also stand to benefit from this, if they can make the best of it. Cryptocurrencies such as Bitcoin are a compelling alternative to the centralized, traditional banking system for customers who desire extra security or anonymity. While cryptocurrencies have been traditionally depicted as a safe haven for illegitimate or even illegal payment activities, the mainstream attention on them has created a broader appeal and audience for them. As a response to the interest their customers have shown in cryptocurrencies, banks have started to delve into the potential for the blockchain technology. Some has invested in tech start-up companies concentrating on various blockchain applications while others have delved more deeply into relationships with fintech partners. At this point banks’ proprietary efforts have mostly been restricted to in-house research on potential use of blockchain, but inevitably competitive momentum will start to drive larger institutions toward developing their own projects in this space. These developments are likely to encourage efficiency, inspire leaner and more innovative business models, and serve the regtech and suptech goals of increasing cooperation with regulatory authorities. Ultimately this could help to modernize and improve the persistently staid and legacy-driven banking industry into a bolder and more transparent business model:  How banks and financial institutions are implementing blockchain technology
  • The advertising industry is newly subject to regulatory scrutiny with the upcoming EU privacy directive, the General Data Protection Regulation (GDPR). This law will apply to any organization doing business in, using technology in, or targeting the citizens of, any EU country, so it has a broad global reach. The GDPR will impose new requirements for handling and controlling private data, including protective and disclosure obligations. Therefore blockchain-based solutions, which can be both secure against manipulation or leakage, and distributed with open access so that users making disclosure requests can see the information directly for themselves. This will help to reduce the burden of this reporting as well as improve cost margins rather than coming up with expensive and vulnerable in-house solutions or outsourcing the reporting to third-parties with their own attendant risks: How Blockchains Can Help the Ad Industry Comply With the GDPR
  • Commercial aviation is another industry looking to blockchain systems to help with its risks – this time in cybersecurity management. Airlines and support companies rely a lot on IT systems to do everything from fly and direct aircraft to book and manage passenger travel. These systems are highly imperfect, as system outages and computer crashes that lead to flight cancellations and stranded passengers show in the news each year. They are also vulnerable to cybersecurity risks where intruders could breach personal data, disrupt airline operations, or corrupt and steal client and aircraft information. Storing and protecting this data within vulnerable or old/legacy systems poses many cybersecurity challenges. The concept of tamper-proof blockchain technology is therefore compelling to the aviation industry for these obvious reasons. Blockchain could help to keep operational data safe and protect companies from cyberattacks. More importantly, pressure to adopt it could drive aviation companies to make the difficult yet very important technological updates and improvements to their systems which will serve safety and regulatory concerns alike: How Blockchain, Cloud Can Reinforce Cybersecurity in Commercial Aviation
  • The pharmaceutical industry has long been vexed by inaccurate and unreliable supply chain tracking. It is especially vulnerable to stolen and counterfeit medication entering the supply chain untracked and finding its way to patients, putting their safety at risk. Tracking medicine with blockchain could change all this. A consortium of pharmaceutical companies, including major firms Genentech and Pfizer, are already collaborating together on a tool called the MediLedger Project, which seeks to manage the pharmaceutical supply chain and track medicines within it to ensure that drug deliveries are recorded accurately and transparently. This would take the current complicated and inefficient network of software management in the supply chain to the next level, securing the supply chain with an integrated and decentralized blockchain system. It could also enable sharing of essential information from companies to partners and customers without exposing sensitive business information, a challenge in the industry so far: Big Pharma Turns to Blockchain to Track Meds

There are many potential advantages from a compliance perspective to blockchain, which has the potential to enhance transparency, protect privacy, address various process-driven risks, and strengthen cybersecurity controls, among other benefits. As the technology advances time will tell how broad the applications of blockchain may be across these diverse industries with similar needs for compliance risk management.