The LGBT Bar: 2017 Lavender Law Conference
Finance Law Institute: Derivatives Panel
CLE Course MaterialsPresented by Greg Todd, Peter Malyshev, David Lucking and Darek De Freece
August 4, 2017
“Bitfinex: Could Greater Regulation Have Prevented Its Hack?” David Lucking and Conor O’Hanlon (Aug. 15, 2016)
Page 3
“CFTC Staff Advisory Clarifying Chief Compliance Officer Reporting Line Requirements,” David Lucking and Deborah North (July 27, 2016)
Page 9
“Derivatives and Pension Funds: Key Collateralisation Deadline Approaching,” Emma Dwyer, Maria Stimson, Däna Burstow, Neil Bowden, Jane Higgins, Helen Powell and Emma Lancelott (Feb. 15, 2017)
Page 11
“EMIR Under the Knife: EC Proposal to Amend Key Derivatives Regulation,” Emma Dwyer, Richard Tredgett, Tom Roberts, Franz Ranero, Damian Carolan, Nick Bradbury, Nicole Rhodes and Emma Lancelott (May 9, 2017)
Page 15
“U.S. CFTC Enforcement: Key Compliance Takeaways from 2016,” Jennifer Achilles, Jill Ottenberg, Peter Malyshev and Michael Selig (January 2017)
Page 30
“U.S. CFTC Enforcement Considerations for 2017,” Peter Malyshev, Jennifer Achilles, Jill Ottenberg and Michael Selig (February 2017)
Page 39
“NFA Update for Commodity Pool Operators and Commodity Trading Advisors,” Nicolle Snyder Bagnell and Lucas Liben (February 2017)
Page 45
“An Overview of the CFTC’s Modernized Recordkeeping Requirements,” Peter Malyshev, Kari Larsen and Michael Selig (June 2017)
Page 48
Panelist Profiles Page 51
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15 Aug 2016
Bitfinex: could greater regulation have prevented its hack?Introduction
"In response to these constructive discussions with the CFTC’s Division of Enforcement, BFXNA has made significant changes to the way in which U.S. customers engage in financed trading on Bitfinex."
– Bitfinex Announcement, June 2, 2016[1]
In their engagement to date with the emerging cryptocurrency sector, the United States Commodity Futures Trading Commission (the CFTC), and many other regulatory bodies, have broadly adopted a "wait and see" approach to adapting their regulatory frameworks, seeking where necessary to apply existing regulations to this nascent space in as coherent a manner as possible. This approach has so far been largely successful, with enforcement actions by regulators taken against dangerous Ponzi schemes and unlicensed exchanges.[2] However, this approach has come under scrutiny, as just two months prior to the August 2, 2016 hack of Bitfinex the CFTC had issued an order, following the conclusion of an investigation into the Hong Kong-based cryptocurrency exchange.
Background
Bitfinex is a cryptocurrency trading platform that permits the exchange of cryptocurrencies including bitcoin, litecoin and ether. It also provides a margin trading and lending service for users. Through its margin trading and lending service, users are able to lend funds as margin to other traders to enable them to open leveraged positions. Bitfinex permitted a maximum leverage of 3.33 to 1.[4] On August 2, 2016 Bitfinex's security was compromised, leading to a theft of 119, 756 bitcoin, worth approximately USD$72 million on August 2.[5] The exact details of how the hacker managed to effect the heist is unclear, although there is speculation that the attack may have been a combination of Bitfinex's private keys being compromised, as well as unauthorized access to the API instructing BitGo to counter sign the transactions.[6] On August 7, 2016 Bitfinex announced that losses arising from the August 2 hack will be socialized, with
,[3]
,[7]
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users accounts being haircut by approximately 36%. In return, users have been issued a new 'BFX' token, which represent a debt claim (or potential redemption of iFinex Inc. stock) at some point in the future.[8] This represents the first ever issuance of a digital token in place of a company's debt obligation.[9] How this novel insolvency solution will be received by users, regulators, and insolvency officials remains to be seen.
Bitfinex protected its customer funds through a customer segregated wallet system in partnership with BitGo.[10] Prior to August 2015, Bitfinex used an omnibus settlement wallet to store funds, with funds being held in a hot/cold wallet system. A hot/cold wallet system allowed Bitfinex to operate an active online wallet to settle trades (the 'hot' wallet), and separately store a majority of its bitcoins offline (the 'cold' wallet). In August 2015 and January 2016 Bitfinex changed its processes to ensure that each customer's funds were held in their own segregated customer wallet. Bitfinex explained the benefits of this approach in an FAQ following the adoption of the system:
"The use of this model, where each customer has a separate set of keys and wallets, allows for a much greater level of granularity at which multi-institutional security can be provided. Whilst in the past BitGo would have to treat a pooled wallet as a single unit, per-customer policies can now be enforced. Further, since we now enforce multi-institutional second factor authentication (Bitfinex will be the first factor and BitGo the second factor), attackers are required to compromise both institutions before getting funds."[11]
Under this system, BitGo maintained control of one of the private keys, Bitfinex maintained control of another, and the third private key was held by Bitfinex in cold storage "for the off-chance that BitGo was unavailable and BitGo needed to authorize a transaction".[12] Each customer therefore had a BitGo wallet in which their bitcoin is stored, with the keys held by both Bitfinex and BitGo. In the case of U.S. customers subject to a lien (i.e. the lien of a Bitfinex margin financing provider), the third key was held by the customer themselves.[13] Bitfinex did have withdrawal limits in place to protect against attacks draining wallets, but the attacker circumvented these limits.[14]
The CFTC's Bitfinex Order
The CFTC is the regulatory body with the power to regulate commodities in the United States. Following the passage of the Dodd-Frank Act, it is tasked with oversight of leveraged, margined or financed retail commodity transactions. The CFTC has previously asserted its jurisdiction over bitcoin by determining that it is a commodity.[15] Pursuant to this power, the CFTC began investigating Bitfinex in 2015, and ultimately issued an order on June 2, 2016.
The United States Commodity Exchange Act (CEA) provides that any agreement, contract or transaction in any commodity entered into with or offered to a retail customer on a leveraged or margined basis, or financed by an offeror, the counterparty, or a person acting in concert with an offeror or counterparty on a similar basis is to be regulated by the CFTC and subject to the CEA
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as if it were a contract of sale of a commodity for future delivery.[16] There is however an exception to this, which provides that if the agreement, contract or transaction result in actual delivery within 28 days, it will not be regulated as if it were a transaction of a commodity for future delivery.[17] Such transactions ordinarily have numerous requirements, including that they be traded on a recognized board of trade subject to the CFTC's jurisdiction. Therefore it is of immense importance to cryptocurrency platforms that traded bitcoins are considered to be effectively delivered.
As a result, the CFTC's question became what constituted 'delivery' of a bitcoin. Did Bitfinex 'deliver' bitcoins to their users effectively within the period in question? Ultimately, the CFTC decided that Bitfinex had not done so because Bitfinex retained the private keys to customers' wallets. This distinction has been the subject of much debate, and a recent submission has been made to the CFTC seeking clarification and guidance.[18] In particular, concern has been expressed at the equation of possession of a private key with delivery/control of a wallet's contents, and also how such private key analysis should be considered in respect of multi-signature wallets.
Conclusion
Although the CFTC's Bitfinex Order did not affirmatively compel Bitfinex to alter its custodial structure to the existing structure, it is clear that Bitfinex cooperated and constructively engaged with the CFTC from September 2015 onwards, and made "significant changes to the way in which U.S. customers engage[d]" with the Bitfinex platform. This change involved moving from a hot/cold proprietary wallet system to the existing BitGo multi-signature system.
Although the exact vulnerability of the August 2 hack is currently unclear, reports from Bitfinex indicate that it was a sophisticated and technical exploitation.[19] Given the lack of current information, it is therefore difficult to state with certainty whether the changes Bitfinex made following the CFTC's investigation played a role in this hack. Some have speculated that the hosting of a greater number of segregated, but online, customer funds in wallets may have facilitated the hacker's ability to steal such a large amount (under the old system, the majority of customers' bitcoins would have been held in cold storage).
Such a theory remains speculation (it is worth noting that Bitfinex's withdrawal limits were compromised too), although it is certainly concerning that Bitfinex's vulnerability was exposed so soon after a direct regulatory investigation. Some questions are likely to be asked of the regulatory investigation. Could the CFTC have interpreted 'delivery' more strictly (e.g. requiring total key control to pass to the customer), compelling Bitfinex to register with the CFTC and therefore become subject to stricter regulatory oversight? Are existing CFTC rules sufficient to address this type of event?[20] Should the CEA itself be amended to be more responsive to the unique characteristics of cryptocurrency exchanges, including a greater facilitation of 'cold storage' methods?
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In any event, the scale of the hack suggests that there was a failure of security, automation and oversight and calls are already being made for the implementation of greater technological security, including the adoption of vault-style custodial systems.[21] The hack is also being heralded as an important reminder in the use of effective cold wallet storage.[22] These responses underscore that exchanges will ultimately become more secure through technological, rather than legal, solutions.
Regardless of the exact nature of the vulnerability, it is likely that the August 2 hack may prompt renewed regulatory interest in Bitfinex and other similar exchanges. It may spur the CFTC to revisit its interpretation of 'delivery' for cryptocurrency exchanges and other service providers using multi-signature wallets. It may also encourage a more universal interest from regulators, coming as it does on the heels of the DAO debacle and Ether replay attacks. Such interest may be unwelcome in a nascent industry that has generally disfavored regulatory oversight, but it is likely to arrive nonetheless.
Authors: David Lucking, Conor O'Hanlon of Allen & Overy LLP
[1] Bitfinex Announcement, June 2, 2016: 'Bitfinex and CFTC reach settlement' (archived). Available at: https://webcache.googleusercontent.com/search?q=cache:OtjuVlKsLvsJ:https://www.bitfinex.com/posts/108+&cd=5&hl=en&ct=clnk&gl=us
[2] SEC Press Release, December 1, 2015: 'SEC Charges Bitcoin Mining Companies'. Available at: https://www.sec.gov/news/pressrelease/2015-271.html;
[3] CFTC Press Release, September 24, 2015: 'CFTC Settles with TeraExchange LLC, a Swap Execution Facility, for Failing to Enforce Prohibitions on Wash Trading and Prearranged Trading in Bitcoin Swap'. Available at: http://www.cftc.gov/PressRoom/PressReleases/pr7240-15
[4] United States of America Before the Commodity Futures Trading Commission In the Matter of BFXNA Inc. d/b/a BITFINEX, Respondent. Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions. CFTC Docket No. 16-19, June 2, 2016 (the CFTC Bitfinex Order), p. 3. Available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf
[5] Comments of 'zanetackett' on Reddit, 'Bitfinex down due to bitcoin security breach', August 2, 2016 (the Reddit Thread). Available at: https://www.reddit.com/r/BitcoinMarkets/comments/4vtv1m/bitfinex_down_due_to_bitcoin_security_breach/d61oetn?context=3
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[6] The Reddit Thread. Available at: https://www.reddit.com/r/Bitcoin/comments/4vwcek/bitfinex_hacker_used_bitfinex_and_bitgo_keys/;
[7] Emin Gün Sirer, 'How the Bitfinex Heist could have been avoided', August 3, 2016, HackingDistributed.com. Available at: http://hackingdistributed.com/2016/08/03/how-bitfinex-heist-could-have-been-avoided/
[8] iFinex Inc. is the parent company of Bitfinex, based in the British Virgin Islands. 'Questions Abound as Bitfinex Issues Digital Assets to Customers', Coindesk.com, August 8, 2016. Available at: http://www.coindesk.com/bitfinex-disperses-unique-token-to-compensate-for-60m-theft/
[9] Bitfinex Update, August 5, 2016. Available at: https://www.bitfinex.com/
[10] @BitGo, Twitter update, August 3, 2016 at 12:54am. Available at: https://twitter.com/bitgo/status/760624908334346240
[11] Bitfinex website 'support' section (archived). Available at: http://webcache.googleusercontent.com/search?q=cache:https://www.bitfinex.com/support#section-bitgo
[12] Bitfinex website 'support' section (archived). Available at: http://webcache.googleusercontent.com/search?q=cache:https://www.bitfinex.com/support#section-bitgo
[13] Bitfinex website 'how it works' section (archived). Available at: https://webcache.googleusercontent.com/search?q=cache:ucJNmfT5EW0J:https://www.bitfinex.com/howitworks+&cd=1&hl=en&ct=clnk&gl=us
[14] The Reddit Thread. Available at: https://www.reddit.com/r/Bitcoin/comments/4vupa6/p2shinfo_shows_movement_out_of_multisig_wallets/d61tgy3?context=3
[15] United States of America Before the Commodity Futures Trading Commission In the Matter of Coinflip Inc., d/b/a Derivabit, and Francisco Riordan, Respondents. Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions. CFTC Docket No. 15-29, September 17, 2015. Available at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf
[16] Section 2(c)(2)(D) of the CEA. Available at: https://www.law.cornell.edu/uscode/text/7/2
[17] Section 2(c)(2)(D)(ii)(III)(aa) of the CEA. Available at: https://www.law.cornell.edu/uscode/text/7/2
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[18] Jerry Brito, 'A law firm just filed a petition with the CFTC asking for a "comprehensive rulemaking" on Bitcoin', July 19, 2016, Coincenter.com. Available at: http://coincenter.org/link/a-law-firm-just-filed-a-petition-with-the-cftc-asking-for-a-comprehensive-rulemaking-on-bitcoin
[19] The Reddit Thread. Available at: https://www.reddit.com/r/Bitcoin/comments/4vupa6/p2shinfo_shows_movement_out_of_multisig_wallets/d61o5tr?context=3
[20] See CFTC System Safeguards Testing Requirements, December 23, 2015. Available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister121615a.pdf
[21] Emin Gün Sirer, 'How the Bitfinex Heist could have been avoided'.
[22] @aantonop, Twitter update, August 3, 2016 at 3:36pm. Available at: https://twitter.com/aantonop/status/760846832138194946?ref_src=twsrc%5Etfw
Contact information
David Lucking +1 212 756 1157 Partner, New York [email protected]
Conor O'Hanlon +1 212 610 6423 Associate, New York [email protected]
This ePublication is for general guidance only and does not constitute definitive advice.
© Allen & Overy 2017
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27 Jul 2016
CFTC Staff Advisory Clarifying Chief Compliance Officer Reporting Line Requirements
CFTC Staff Advisory No. 16-62 (the Guidance Letter) is intended to clarify the required
elements of CFTC Rule 3.3's chief compliance officer (CCO) reporting line requirements and
provide guidance on additional supervisory relationships that a CCOs may have with senior
management other than the board or senior officer. Certain provisionally registered swap
dealers, futures commission merchants, and major swap participants (collectively, Registrants)
have indicated that, given that swap dealing only constitutes a small portion of their activities,
their boards and senior officers may not provide detailed direction regarding compliance-related
matters on a day-to-day basis even though they stay informed of the condition of the various
business lines of the Registrants. As a result, certain Registrants have designated members of
senior management to support the CCO on compliance matters in the ordinary course.
CFTC Rule 3.3 implements the requirement of section 4s(k)(2)(A) of the Commodity Exchange
Act (CEA) that the CCO "report directly" to the board by requiring either the board or the senior
officer to: (i) appoint the CCO; (ii) approve the CCO's compensation; (iii) meet with the CCO at
least annually and at the CCO's election; and (iv) make any removal decisions regarding the
CCO. The Guidance Letter notes that in addition to the requirements of CFTC Rule 3.3,
Registrants may include supervisory lines for addressing compliance matters in the normal
course if doing so is consistent with the CEA and CFTC Rule 3.3. Registrants may create
additional supervisory reporting lines so that senior management who have more direct, relevant
experience may assist the CCO address day-to-day compliance issues. However, these
additional reporting lines may not be used in lieu of the requirements of CFTC Rule 3.3, which
must be satisfied regardless of whether such additional supervisory reporting lines are
established.
Finally, if additional supervisory relationships are established, Registrants must be careful to
structure them such that the independence of the CCO is maintained. To ensure the CCO's
independence, Registrants should consider all relevant facts and circumstances, including: (i)
whether the reporting line requirements of CFTC Rule 3.3 are satisfied and whether the CCO
has unfettered access to the board or senior officer to address compliance issues; (ii) whether
any additional supervisor is sufficiently senior so as to provide a level of independence from the
risk-taking aspects of the swaps or FCM business that could otherwise create conflicts of interest
when considering compliance matters; and (iii) whether any additional supervisory management
is appropriate (for example, it would be inappropriate if an additional supervisor is a member of
the Registrant's legal department because this could compromise attorney-client privilege, the
work-product doctrine, or similar protections) and knowledgeable of the Registrant's regulated
activities and compliance requirements.9
Thus, Registrants may, for example, establish, in addition to but not in lieu of the reporting line
requirements of CFTC Rule 3.3, supervisory relationships whereby the CCO reports to a global
chief of compliance officer who reports into the parent of the Registrant.
Contact information
David Lucking +1 212 756 1157
Partner, New York [email protected]
Deborah North +1 212 610 6408
Partner, New York [email protected]
This ePublication is for general guidance only and does not constitute definitive advice.
© Allen & Overy 2017
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15 Feb 2017
Derivatives and pension funds:key collateralisation deadlineapproaching
Speed read
For pension funds which enter into uncleared overthecounter (OTC) derivative contracts,urgent action is required to ensure that appropriate arrangements are in place to avoiddisruption to new contracts from 1 March 2017. On this date, new variation margin rules willapply to a broader range of financial counterparties and nonfinancial counterparties. Moreonerous, initial margin requirements could also apply to pension funds, but this would be froma later date, if at all.
CONTENTS
Variation margin rules apply from 1 March 2017 | Initial margin rules may alsoapply | How do the VM and IM rules interact with the EMIR clearingrequirement? | What action is required?
Variation margin rules apply from 1 March 2017From 1 March 2017, in a 'big bang' change to market practice, all parties classed as financialcounterparties (this includes pension funds) under the European Market InfrastructureRegulation (EMIR), as well as certain nonfinancial counterparties (to the extent theiroutstanding OTC derivatives positions exceed certain gross notional values calculated on agroup basis), will fall within scope of the obligation to collect collateral, known as variationmargin (VM), in relation to uncleared trades when they transact with another inscopecounterparty. The rules will also apply to crossborder transactions (ie transactions between inscope EU entities and nonEU entities) to the extent that a nonEU counterparty would be
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subject to the rules were it established in the EU (with the rules applying to the nonEUcounterparty indirectly). In addition, the rules can apply to transactions entered into betweentwo nonEU entities in certain limited circumstances. We note that there are no specificexemptions that apply to pension funds in a VM context.
The new VM rules are part of G20 commitments to reduce certain risks relating to derivatives.The rules mark a move away from current practice (existing derivatives collateralarrangements are not subject to regulatory requirements and parties can structure these asthey see fit) to an obligation to exchange twoway collateral on a daily basis, with the terms ofsuch exchange being prescribed by regulation. As such, certain minimum requirements mustbe included in collateral documentation and existing practices must be reviewed and, ifnecessary, revised (for example, the regulation prescribes minimum transfer amounts, types ofeligible collateral, collateral quality and haircuts).
The new rules only apply to uncleared OTC derivatives that are "entered into" after 1 March2017. Trades entered into before that date will not be subject to the new rules unless they arenovated or amended in a material way. Whether an amendment will bring a trade in scope isnot straightforward and more detailed analysis will be required.
In order to determine whether the VM requirements will apply to a counterparty pairing, it is,therefore, important that each counterparty is aware of its classification for EMIR purposes aswell as that of its counterparty.
Initial margin rules may also applyIn addition to new VM rules, EMIR also introduces new rules relating to initial margin (IM). IM iseffectively an additional buffer to cover potential future exposures over a tenday period. Theintroduction of IM (not traditionally an important part of collateralisation in the OTC derivativesmarket) as a mandatory and substantial element of OTC derivatives collateralisation willinvolve significant market changes. This is primarily because IM is calculated on a gross basisand collateral must also be segregated to protect against the default or insolvency of thecollateral taker and to ensure that it is freely transferable to the collateral provider on thedefault of the collateral taker. There is, however, an EUR8 billion threshold before the IMrequirements will apply (calculated on a group basis based on the aggregate average notionalamount (AANA) of noncentrally cleared derivatives entered into), which means that IM willonly be relevant for the most systemically important counterparties.
IM requirements are being phased in between February 2017, and then from September2017, and then each consecutive September until September 2020 depending on the AANA,with the AANA applicable in February 2017 being EUR3,000 billion, the AANA applicable inSeptember 2017 being EUR2,250 billion, the AANA applicable in September 2018 beingEUR1,500 billion, the AANA applicable in September 2019 being EUR750 billion and the AANAapplicable in September 2020 being EUR8 billion.
For many pension funds, there is likely to be a substantial gap between the application of theVM and IM requirements, and for funds for which the AANA is less than EUR8 billion, the IMrequirements will not apply at all.
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How do the VM and IM rules interact with theEMIR clearing requirement?VM and IM requirements only apply to OTC derivatives transactions which are not subject tothe mandatory clearing requirement under EMIR. Although a discussion of the clearingobligation is outside the scope of this briefing, we note that pension funds still benefit from anexemption to mandatory clearing – in fact, a delegated regulation extending the existingtransitional exemption to 16 August 2018 has been adopted by the European Commission.However, to the extent that a pension fund enters into a noncentrally cleared OTC derivativecontract that is subject to the VM or IM requirement, the pension fund must be prepared tocollateralise that transaction.
What action is required?To the extent this process has not already begun, you will need to collect data and notifycounterparties of the fund's EMIR classification and its AANA. You may already have beenasked for this information by existing counterparties as they seek to work out which contractsneed to be collateralised pursuant to the EU rules, and how (that is, VM only, or VM and IM).
You will also need to be ready – from a legal, operational and documentation perspective – tocomply with the VM requirements by 1 March 2017 and (if applicable) the IM requirements at alater date.
ISDA has produced various tools and documentation to assist with compliance. There are anumber of different approaches that can be taken to amending documentation, and pensionfunds should consider which route is most appropriate and feasible in their specificcircumstances.
This briefing scratches the surface of a very complex regime. In addition, we note that thereare also other new margin regimes which are being phased in in other G20 jurisdictions andwhich may equally apply to your counterparty pairing. To discuss the issues and details further,please contact your usual Allen & Overy adviser.
Contact informationEmma Dwyer +44 203 0883754Partner, DSF [email protected]
Maria Stimpson +44 203 0883665Partner, Pensions [email protected]
Däna Burstow +44 203 0883644Partner, Pensions [email protected]
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Neil Bowden +44 203 0883431Partner, Pensions [email protected]
Jane Higgins +44 203 0883161Partner, Pensions [email protected]
Helen Powell +44 203 0884827PSL Counsel, Pensions [email protected]
Emma Lancelott +44 203 0882982Senior PSL, DSF [email protected]
This ePublication is for general guidance only and does not constitute definitive advice.
© Allen & Overy 2017
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___________________________________________________________________________________________________________ © Allen & Overy LLP 2017
EMIR under the knife: EC
proposal to amend key derivatives
regulation 9 May 2017
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EMIR under the knife: EC proposal to amend key derivatives regulation | 9 May 2017 ___________________________________________________________________________________________________________________________
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_________________________________________________________________________________________________________ © Allen & Overy LLP 2017
Speed read Over four years after the European Market Infrastructure Regulation (EMIR) entered into force, the
existing framework is under review and the European Commission (EC) has proposed changes
intended to “simplify the rules and make them more proportionate”. We consider how derivatives
markets may be impacted by the proposals and highlight some initial observations. In particular, this
briefing highlights the proposed changes to counterparty classification as aspects of the proposals are
likely to prove problematic if pursued.
Background to EMIR review EMIR introduces a number of key obligations for counterparties to derivatives contracts, namely: (i) mandatory clearing through authorised or recognised central counterparties (CCPs) of certain OTC
derivatives contracts (the Clearing Obligation); (ii) risk mitigation (including margin) requirements for
OTC derivatives contracts not subject to clearing (the Risk Mitigation Requirements); and (iii)
mandatory reporting of all derivatives contracts to a registered or recognised trade repository (the Reporting Obligation). Certain requirements for CCPs and trade repositories (TRs) are also
introduced.
In order to ensure its consistent and effective application, Article 85 of EMIR requires that the EC
review and, if appropriate, submit proposals to amend EMIR. The review of EMIR was included in the
2016 EC Regulatory Fitness and Performance Programme (REFIT) and, following publication of its
report in November 20161 (the EC Report), the EC published a proposal to amend EMIR on 4 May
2017 (the EMIR Review).
At this stage of EMIR implementation, the EC believes that only certain targeted amendments are
required. As the Clearing Obligation and Risk Mitigation Requirements relating to margin have only
recently been (and in some cases are still in the process of being) phased-in, the EC has not reviewed
these requirements in detail at this stage, sensibly preferring instead to wait until they have become
fully operational. We note, in particular, that there are no proposed changes to the substance of the
margin requirements for non-centrally cleared OTC derivatives transactions.
The EMIR Review relates to proposed changes only and, therefore, it is likely that further amendments
will be made prior to finalisation. We note that once the EMIR Review is complete, further changes
may still be made to the EMIR framework as it is also proposed that EMIR is again reviewed within
three years of application.
1 The report can be accessed here: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX%3A52016DC0857.
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EMIR under the knife: EC proposal to amend key derivatives regulation | 9 May 2017 ___________________________________________________________________________________________________________________________
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_________________________________________________________________________________________________________ © Allen & Overy LLP 2017
Proposed changes: counterparty scope Some of the proposed changes which may have the greatest impact on individual counterparties
relate to the classification of counterparties under EMIR. We discuss the key changes below and the
implications of the proposed changes on particular counterparty types in further detail at the end of
this briefing.
Significance of counterparty classification under EMIR
Counterparty classification is important under EMIR as it determines the requirements and the level of
the requirements that will apply to each counterparty pair.
Pursuant to EMIR, counterparties can be classified as: (i) financial counterparties (FCs); (ii) non-
financial counterparties (NFCs); or (iii) third country entities (TCEs). There are also certain limited
exemptions from EMIR which include certain central banks, development banks and government
owned and backed public entities. The category of NFC is further split into: (i) non-financial counterparties above the “clearing threshold” (NFC+s); and (ii) non-financial counterparties below the
“clearing threshold” (NFC-s).
FCs are subject to the Clearing Obligation, more onerous (including margin) Risk Mitigation
Requirements and the Reporting Obligation. The difference between NFC+s and NFC-s is crucial
because NFC+s are broadly subject to the same requirements as FCs albeit within different time
periods for certain obligations. By contrast, NFC-s are not subject to the Clearing Obligation and the
Risk Mitigation Requirements relating to daily valuation and margin.
Proposed changes to counterparty classification
The EMIR Review proposes certain changes to the parameters of counterparty classification as
outlined below. Based on this, it seems that the classification of existing entities would change. It is
not currently clear from the EMIR Review that this will impact future transactions only. This will need to
be clarified as the EMIR Review progresses through the EU political negotiation process as, to the
extent that the changes are pursued and apply in respect of existing transactions, significant
difficulties from a compliance and legal certainty perspective would arise.
Method of calculation of the “clearing threshold” to be amended – The EMIR Review
proposes that OTC derivative positions be calculated annually by reference to the “aggregate
month-end average position for the months March, April and May” as opposed to “the rolling
average position over 30 working days” which will reduce the operational burden for
counterparties. The effect of amendments to this calculation may push certain NFC
counterparties above or below the existing “clearing threshold” which will impact the
requirements and level of requirements applicable.
Introduction of a category of “small financial counterparties” (SFCs) by way of
introduction of a “clearing threshold” for FCs – The new “clearing threshold” for FCs is to
be the same as the new “clearing threshold” for NFCs (set out immediately above). The
rationale is that FCs should not be required to clear transactions when this is not economically
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feasible due to low volumes of trading activity and there is no significant systemic risk concern.
Like NFCs, FCs must calculate the “clearing threshold” on a group basis and, in the case of
FCs, by reference to “other entities within the group to which the FC belongs”. FCs will no
longer be required to clear transactions to the extent they subsequently drop below the
“clearing threshold”.
Broader definition of “FC” to additionally include: (i) alternative investment funds as
defined in Article 4(1)(a) of the AIFMD2 (AIFs); (ii) central securities depositaries
authorised in accordance with Regulation (EU) 909/2014 (CSDs); and (iii) securitisation
special purposes entities as defined in Article 4(1)(66) of the CRR3 (SSPEs) – The
apparent rationale is that certain entities currently classified as NFCs should, due to the nature
of their activities, be classified as FCs (for example, investment funds under national
frameworks) although it is not clear that all implications of the proposed changes have been
focused on. For securitisations, this would mean that traditional securitisation vehicles
captured by the SSPE definition would be classified as FCs and, as a result, be subject to the
Clearing Obligation or (more likely) to the more onerous (including margin) Risk Mitigation
Requirements. The application of such requirements to securitisation vehicles, and of the
margin obligations in particular, is highly problematic given the nature of such entities and is
arguably unnecessary given that counterparties to securitisation swaps will already typically
have the benefit of the security provided by the vehicle and have a senior ranking entitlement
to payment. Separately and for completeness, we note that certain counterparties may
additionally find themselves brought within the definition of FC as a result of changes made by
the implementation of MiFID II4 and MiFIR5 in January 2018.
Key proposed differences in the treatment of FCs and NFCs are:
Hedging exemption – Despite existing difficulties with monitoring and inconsistent application
of the hedging exemption, the existing hedging exemption continues in its current form. The
EMIR Review makes no proposal for amendment in this regard. NFCs may continue to benefit
from a hedging exemption when calculating whether the “clearing threshold” has been
exceeded. Based on the proposals, FCs will not benefit from a hedging exemption
notwithstanding that the “clearing threshold” concept will apply to determine the application of
the Clearing Obligation (but not the Risk Mitigation Requirements) as described below.
OTC derivatives transactions which must be cleared when “clearing threshold”
exceeded – In respect of FCs (and as per the current position under EMIR for NFCs), if the
“clearing threshold” is exceeded in respect of one asset class, all asset classes must
subsequently be cleared. In respect of NFCs, only the asset class or asset classes in respect
of which the “clearing threshold” has been exceeded must be cleared. In each case,
2 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives
2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010: http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX%3A32011L0061. 3 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and
investment firms and amending Regulation (EU) No 648/2012: http://eur-lex.europa.eu/legal-content/en/TXT/?uri=celex%3A32013R0575. 4 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0065. 5 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending
Regulation (EU) No 648/2012: http://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32014R0600.
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transactions must only be cleared to the extent the Clearing Obligation exists for the relevant
asset class and transactions must be cleared within four months of becoming subject to the
Clearing Obligation. Whereas NFCs have four months to prepare for clearing once they
exceed the “clearing threshold”, we note that there continues to be no similar transitional
period before compliance is required with the Risk Mitigation Requirements relating to margin.
This is problematic as margin documentation and processes take time to put in place.
Group test – Both FCs and NFCs must calculate the “clearing threshold” on a group basis. In
the case of FCs, the group test is calculated by reference to all other entities within the group
to which the FC belongs whereas only “non-financial entities” in the group must be assessed in
the case of NFCs. The introduction of a “clearing threshold” for FCs extends the use of the
group test under EMIR. We note that difficulties have arisen in the context of the interpretation
of the group test to date. Applying the definition is not always straightforward and the extension
of the test may exacerbate these difficulties.
Proposed changes: clearing obligation and
central counterparties Whilst there are no substantive changes proposed in respect of the operation of the Clearing
Obligation itself, the EMIR Review proposes certain changes which impact clearing:
Introduction of a category of “small financial counterparties” (SFCs), a broader
definition of FC and changes to boundary of NFC+/NFC- distinction – As discussed
above, proposed amendments to the classification of counterparties under EMIR will impact
which counterparties are subject to the Clearing Obligation. There have been concerns that
smaller FCs were struggling to access client clearing and these proposed changes may
provide welcome relief to certain of those affected counterparties. Indeed, the EC has already
recently postponed the deadline for compliance with the Clearing Obligation for certain small
FCs and certain AIFs that are NFC+s (known as “Category 3 counterparties”) to 21 June
2019.6 However, the changes may pose difficulties for those counterparties who now find
themselves (perhaps unexpectedly) in the FC or NFC+ categories.
Removal of the “frontloading” obligation – Under EMIR, certain OTC derivatives
transactions subject to the Clearing Obligation entered into between certain FCs (those
categorised as Category 1 or 2 for the purposes of the Clearing Obligation) before the relevant
clearing start date must be cleared in addition to those transactions entered into after the
relevant clearing start date. This (much criticised) retrospective clearing obligation is referred to
as “frontloading”. The EMIR Review proposes to remove the concept of frontloading entirely: a
move which will be welcomed by market participants (although will not assist in respect of
those transactions already “frontloaded”).
6 Commission Delegated Regulation (EU) 2017/751 of 16 March 2017 amending Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU)
2016/1178 as regards the deadline for compliance with clearing obligations for certain counterparties dealing with OTC derivatives (published in the
Official Journal of the European Union on 29 April 2017): http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32017R0751.
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Introduction of the ability to suspend the clearing obligation in certain circumstances –
There have been concerns that, absent a formal amendment via regulatory technical standards (RTS) which is time consuming, there was no existing mechanism to suspend the Clearing
Obligation to react quickly to dramatic changes in market conditions or when the market
situation required it to avoid market disruption. As such, a new power is proposed to be
introduced whereby the EC may temporarily suspend the Clearing Obligation for a particular
transaction or counterparty type in specified circumstances and for a limited period. Market
participants will be keen to ensure that the EMIR Review allows the suspension to be activated
at appropriate times. This measure is intended to complement a similar measure under the
EC’s proposed regulation on CCP recovery and resolution (published in November 2016)7
which is intended to introduce a mechanism for the suspension of the Clearing Obligation in a
resolution scenario.
Further extension of transitional exemption for pension schemes by three years – It is
recognised that posting cash collateral in the form of variation margin to CCPs in accordance
with market practice is not compatible with the investment objectives of pension schemes and,
consequently, the interests of policy holders which necessitate the holding of non-cash assets.
As such, pension schemes currently benefit from a temporary exemption from the Clearing
Obligation until 16 August 2018. No viable technical solution has emerged to date allowing
pension schemes to post non-cash collateral in the form of variation margin to CCPs and the
EC concurs with industry that more time is required to develop solutions. Consequently,
pension schemes are likely to welcome this further transitional relief.
Introduction of principle to provide clearing services on fair, reasonable and non-
discriminatory commercial terms (FRAND) – A new FRAND principle is to be introduced
whereby clearing members and clients providing clearing services must ensure they do so on
fair, reasonable and non-discriminatory commercial terms. The aim of this proposal is to assist
with access to clearing and is justified by reference to the public interest in making clearing
work. The EC will be empowered to produce RTS to further specify what FRAND means.
Clearing members will want to monitor this development carefully to ensure that compliance is
not problematic as it may impact the terms on which they can do business.
Clarification that assets covering positions recorded in client segregated accounts do
not form part of the insolvency estate of CCP or clearing member – The EMIR Review
proposes to include this provision to provide comfort that the CCP default management
procedures and porting will function effectively in the event of a default of a CCP or clearing
member. Whilst legal certainty is to be welcomed, the interaction of this provision with local
insolvency laws remains to be seen.
CCP transparency of initial margin levels – There have been concerns that CCPs were not
sufficiently transparent in respect of the calculation of margin to be posted to CCPs in respect
of cleared transactions and that better information sharing by CCPs was required. As such, the
EMIR Review proposes that CCPs be required to provide clearing members with tools to
simulate their initial margin requirements.
7 Proposal for a Regulation of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties and
amending Regulations (EU) No 1095/2010, (EU) No 648/2012, and (EU) 2015/2365 (published on 28 November 2016): http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX%3A52016PC0856.
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As there have been numerous concerns relating to access to clearing for certain clients of clearing
members, a number of the proposed measures are intended to assist with access to clearing for
certain clients of clearing members as well as indirect clients. The EC notes that its CRDV package of
proposals (published in November 20168) are also in train and intend to make changes to the leverage
ratio to allow institutions to reduce the exposure measure by the initial margin received from clients for
cleared derivatives. The intention is that this change will also improve access to clearing by reducing
the current associated (and burdensome) regulatory capital requirements.
Proposed changes: risk mitigation
requirements Key points to note in respect of the Risk Mitigation Requirements are:
There are no proposed substantive changes to the Risk Mitigation Requirements
themselves (including the substance of the margin requirements for non-centrally
cleared OTC derivatives transactions) – The key impact in respect of the Risk Mitigation
Requirements relates to the proposed movement in counterparty classification as this will
impact the type and level of Risk Mitigation Requirements that may apply. For example, if a
counterparty changes from an NFC- to an NFC+ or a FC, it will be subject to more onerous
operational Risk Mitigation Requirements (such as a requirement to reconcile portfolios on a
more frequent basis) as well as becoming subject to the daily valuation and margin Risk
Mitigation Requirements. This could significantly impact the pricing and feasibility of entering
into certain transactions and may impact structuring.
Introduction of supervisory procedures to ensure initial and ongoing validation of risk
management procedures – Stakeholders had raised concerns, amongst other things, that the
absence of a clear mandate for initial margin models to be endorsed by supervisory authorities
introduced uncertainty in respect of whether initial margin calculations could be considered
fully in compliance with EMIR. The EMIR Review aims to provide certainty for market
participants in respect of whether their risk management procedures are adequate and
anticipates that detail on supervisory procedures will be included in (yet to be developed) RTS.
It remains to be seen whether this will produce the anticipated clarity or whether it will raise
other issues for derivatives market participants.
Proposed changes: reporting obligation and
trade repositories There have been calls for streamlining of the current requirements as a result of concerns relating to
the disproportionate costs and operational burden of the Reporting Obligation for certain
counterparties (particularly in respect of the burden of reporting on those counterparties with limited
8 The CRDV proposals can be accessed here: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:0850:FIN.
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resources). The EC agreed that the Reporting Obligation could be simplified without significantly
impacting the systemic risk benefit. As such, a number of proposed changes in respect of the
Reporting Obligation have been made and it is also anticipated that further detail on reporting will
follow by way of RTS:
Increased responsibility and liability for FCs reporting OTC derivatives transactions
with NFC- counterparties – The EMIR Review envisages that FCs take responsibility and
liability for reporting on behalf of their NFC- counterparties with the aim of reducing the
reporting burden for NFC-s without compromising data quality. The EC comments that this is a
similar approach to that taken under the SFTR9 but it is worth noting that the two requirements
are not the same. The SFTR provides an exception to the rule that both counterparties must
report where a FC transacts with an NFC which on its balance sheet does not exceed the limits
of at least two of the three criteria defined in Article 3(3) of the Accounting Directive.10 It
remains possible to delegate reporting.
Introduction of single-sided reporting for exchange-traded derivatives (ETDs) – The
EMIR Review establishes that CCPs are responsible and liable for reporting both legs of an
ETD which is a welcome simplification for ETD reporting (which includes significant volumes)
without adversely affecting the transparency of the ETD market. It remains possible to delegate
reporting.
Responsibility and liability of reporting for UCITS and AIFs – The EMIR Review
establishes that a management company that manages a UCITS is responsible and liable for
reporting on behalf of the UCITS and that the manager is responsible and liable for reporting
on behalf of an AIF. It remains possible to delegate reporting.
“Backloading” to be removed – The EC has proposed the removal of “backloading” (ie the
obligation to report certain historical derivatives transactions existing or entered into on or after
16 August 2012 but no longer outstanding on the 12 February 2014 reporting start date) with
the aim of reducing the costs and burdens on counterparties where there would be relatively
little benefit in terms of data. The removal of the backloading obligation will provide welcome
operational relief in respect of an obligation that did not appear to add any significant regulatory
benefit.
Exemption for intragroup transactions with NFCs from the Reporting Obligation – The
purpose of this proposed exemption is to reduce costs and burdens for those counterparties
disproportionately affected (ie those groups which carry out internal hedging) where there
would be relatively little benefit in terms of data or ability to monitor systemic risk.
There are also a number of changes which impact TRs. For example, proposed changes relating to
the harmonisation of reporting rules and procedures of TRs to ensure data quality, amendments to the
registration of TRs to allow for a simplified application for the extension of registration of TRs already
9 Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and
of reuse and amending Regulation (EU) No 648/2012: http://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32015R2365. 10 Namely: (i) balance sheet total: EUR 20,000,000; (ii) net turnover: EUR 40,000,000; or (iii) average number of employees during the financial year: 250.
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registered under the SFTR, a proposal to increase the upper limit for fines for TRs to incentivise TRs
to maintain good data quality and amendments to the requirements for data availability in TRs.
Potential impact on OTC derivatives market
participants A number of the proposals (such as the removal of frontloading and backloading) were expected in
line with the EC Report and reflect welcome changes to the existing EMIR regime.
However, if EMIR is amended in accordance with the proposals, OTC derivatives market participants
will need to re-evaluate their classification under EMIR and related consequences.
The proposed changes are problematic for certain entity types and, in particular, those “new FCs” which may not have previously anticipated being subject to the Clearing Obligation or Risk Mitigation Requirements relating to daily valuation and margin. Moreover, for certain new FCs (including relevant securitisation vehicles), compliance with such requirements is likely to prove very difficult in practice. From a securitisation perspective, relevant vehicles are highly unlikely to have access to eligible collateral for posting and will be restricted by the terms of the transaction documents in their activities. In this regard, we note that the EC has separately introduced legislation under the Capital Markets Union to revive the securitisation markets, and the proposal to classify SSPEs as FCs appears to be out of step with the EC’s work on this front given the challenges the proposal would present with respect to the ability of securitisation vehicles to hedge common interest rate and currency risk.
More generally, whilst one would expect any re-classification of counterparties to apply in respect of future transactions only, as noted above it is not entirely clear how the proposed amendments are intended to apply in the context of existing counterparties and transactions.
The proposals will now be considered by the European Parliament and Council and require their approval prior to being adopted. The final position under the EMIR Review will not be known for some time and further changes are likely to be made through the political negotiation process.
We have set out some initial thoughts in the table below in respect of the potential impact of the
current proposals, although there will likely be additional points to flag as the proposals develop. We
note that there are numerous other issues that will impact derivatives markets participants which are
not specifically discussed in this briefing. As the EU process continues, we expect that these advocacy
points will be raised and discussed in further detail.
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Entity type Required Scoping Actions
Impact: Clearing Obligation
Impact: Risk Mitigation Requirements (capital, daily valuation and margin only)
Impact: Risk Mitigation Requirements (other than capital, daily valuation and margin)
Impact: Reporting Obligation
Entities currently classified as FCs
FCs to ascertain whether they are above or below the “clearing threshold” (ie whether they are now classified as an SFC) calculated on a group basis by reference to “other entities within the group to which the FC belongs”.
Hedging exemption may not be used when calculating the “clearing threshold”.
“Clearing threshold”
Only FCs above the “clearing threshold” subject to the Clearing Obligation.
All OTC derivatives transactions subject to the Clearing Obligation must be cleared.
SFCs not subject to the Clearing Obligation thereby exempting those SFCs with limited trading volumes from compliance.
No frontloading obligation for any FCs.
Pension scheme exemption further
No changes. All FCs (including SFCs) will be required to comply with the capital, daily valuation and margin Risk Mitigation Requirements as per the current framework.
No changes. All FCs (including SFCs) will be required to comply with the Risk Mitigation Requirements as per the current framework.
FCs must take responsibility and liability for reporting on behalf of their NFC- counterparties.
Management company that manages a UCITS is responsible and liable for reporting on behalf of the UCITS.
Manager is responsible and liable for reporting on behalf of an AIF.
Intragroup transactions with NFCs are exempt from the Reporting Obligation.
No backloading.
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Entity type Required Scoping Actions
Impact: Clearing Obligation
Impact: Risk Mitigation Requirements (capital, daily valuation and margin only)
Impact: Risk Mitigation Requirements (other than capital, daily valuation and margin)
Impact: Reporting Obligation
calculated annually by reference to “aggregate month-end average position for the months March, April and May”.
extended. Delegation of reporting remains possible.
AIFs, CSDs and SSPEs (New FCs)
As above. As above.
If NFC entities are now classified as FCs and have been relying on the hedging exemption or group test to push them below the “clearing threshold”, they may be in a position where certain trades now need to be cleared. The position of existing arrangements is not entirely clear.
As above.
All FCs will be required to comply with the capital, daily valuation and margin Risk Mitigation Requirements. If entities have been relying on the hedging exemption to avoid being an NFC+ and thus subject to the daily valuation and margin requirements, this will mean they can no longer do so as the
As above.
More onerous operational risk mitigation requirements apply to FCs.
As above.
We note that, in practice, many New FCs are likely to delegate the Reporting Obligation. Delegation of the Reporting Obligation remains possible and, therefore, impact as regards reporting may be minimal for many New FCs.
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Entity type Required Scoping Actions
Impact: Clearing Obligation
Impact: Risk Mitigation Requirements (capital, daily valuation and margin only)
Impact: Risk Mitigation Requirements (other than capital, daily valuation and margin)
Impact: Reporting Obligation
In the context of SSPEs, as derivatives must be subject to the Clearing Obligation, it may be that there is no relevant Clearing Obligation given the usual conditional nature of the notional and non-standard terms of many securitisation swaps for hedging purposes.
hedging exemption is not relevant in this context in respect of FCs.
Entities currently classified as NFC+ (which are not New FCs)
NFC+s could potentially move down to NFC- if the change to the calculation of the “clearing threshold” (ie to be calculated annually by reference to
NFC+s will remain subject to the Clearing Obligation as per the current framework except that only OTC derivatives transactions in an asset class where the “clearing
No changes. NFC+s will be subject to the daily valuation and margin requirements as per the current framework.
No changes. NFC+s will be subject to the Risk Mitigation Requirements as per the current framework.
Intragroup transactions with NFCs are exempt from the Reporting Obligation.
No backloading.
Delegation of reporting remains
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Entity type Required Scoping Actions
Impact: Clearing Obligation
Impact: Risk Mitigation Requirements (capital, daily valuation and margin only)
Impact: Risk Mitigation Requirements (other than capital, daily valuation and margin)
Impact: Reporting Obligation
“aggregate month-end average position for the months March, April and May”) means the NFC status changes.
Hedging exemption may continue to be used when calculating the “clearing threshold”.
threshold” has been exceeded and which are subject to the Clearing Obligation must be cleared.
possible.
Entities currently classified as NFC- (which are not New FCs)
NFC-s could potentially move up to NFC+ if the change to the calculation of the “clearing threshold” (ie to be calculated annually by reference to “aggregate
No changes. NFC-s will not be subject to the Clearing Obligation as per the current framework.
The Clearing Obligation will apply if the change to the calculation of the “clearing threshold”
No changes. NFC-s will not be subject to the capital, daily valuation and margin requirements as per the current framework.
The daily valuation and margin requirements will
No changes. NFC-s will be subject to the Risk Mitigation Requirements as per the current framework.
More onerous operational risk mitigation requirements will
NFC-s are no longer responsible or liable for reporting transactions entered into with FC counterparties.
Intragroup transactions with NFCs are exempt from the Reporting
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Entity type Required Scoping Actions
Impact: Clearing Obligation
Impact: Risk Mitigation Requirements (capital, daily valuation and margin only)
Impact: Risk Mitigation Requirements (other than capital, daily valuation and margin)
Impact: Reporting Obligation
month-end average position for the months March, April and May”) means the NFC status changes.
Hedging exemption may continue to be used when calculating the “clearing threshold”.
means the NFC status changes.
apply if the change to the calculation of the “clearing threshold” means the NFC status changes.
apply if the change to the calculation of the “clearing threshold” means the NFC status changes.
Obligation.
No backloading.
Delegation of reporting remains possible.
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Contacts
Emma Dwyer | Partner
Tel +44 20 3088 3754
Mob +44 7767 674 269
Richard Tredgett | Partner
Tel +44 20 3088 2467
Mob +44 7766 137 679
Tom Roberts | Partner
Tel +44 20 3088 3518
Mob +44 7920 597 003
Franz Ranero | Partner
Tel +44 20 3088 2424
Mob +44 7810 378 394
Damian Carolan | Partner
Tel +44 20 3088 2495
Mob +44 7500 841 530
Nick Bradbury | Partner
Tel +44 20 3088 3279
Mob +44 7971 249 680
Nicole Rhodes | PSL Counsel
Tel +44 20 3088 4408
Mob +44 7584 888 703
Emma Lancelott | Senior PSL
Tel +44 20 3088 2982
Mob +44 7795 601 570
This ePublication is for general guidance only and does not constitute definitive advice.
© Allen & Overy 2017
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If you have questions or would like additional information on the material covered in this Briefing, please contact one of the authors:
Jennifer L. AchillesPartner, New York+1 212 521 [email protected]
Jill OttenbergAssociate, Washington, D.C.+1 202 414 [email protected]
Peter Y. MalyshevPartner, Washington, D.C.+1 202 414 [email protected]
Michael SeligAssociate, Washington, D.C.+1 202 414 [email protected]
…or the Reed Smith lawyer with whom you regularly work.
Client Briefing
Energy & Natural Resources
U.S. CFTC Enforcement: Key Compliance Takeaways from 2016
At a Glance:
In 2016, the U.S. Commodity Futures Trading Commission brought several significant enforcement actions involving computerized robo-advisors, recordkeeping and reporting requirements, insider trading, spoofing, market manipulation, and employee liability. Many of these cases included novel theories and new interpretations of existing laws and regulations. This client briefing looks back on the Commission’s 2016 enforcement agenda, and highlights key compliance takeaways for market participants going into the new year. In light of these trends, it is important that market participants review their compliance programs and understand the facts and circumstances that the Commission may consider in assessing penalties.
Introduction:
In fiscal year 2016, the U.S. Commodity Futures Trading Commission (“CFTC”) issued more than $1.2 billion in fines for violations of the Commodity Exchange Act, as amended (“CEA”), and CFTC regulations.1 Although this is slightly less than the total fines issued over the last fiscal year, the CFTC’s Division of Enforcement brought several unique cases this year, opening the door to a vast terrain of diverse enforcement territory in 2017. Even though these cases stem from traditional CFTC enforcement authority, many include novel theories or new interpretations of the law, involving computerized robo-advisors, suitability, employee liability, insider trading, and violations of new reporting requirements. Additionally, the National Futures Association (“NFA”) collected roughly $700,000 in fines in fiscal year 2016 for violations of its regulatory requirements. This client
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briefing looks back on the enforcement agenda of the CFTC and highlights key compliance takeaways from 2016. A Reed Smith analysis of enforcement actions brought by the UK Financial Conduct Authority in 2016 is available here.
I. Misappropriation of Insider Information
Until December 2015, commodities traders were unlikely to risk an enforcement action from the CFTC when trading commodities based on material nonpublic information.2 But that changed with the CFTC’s investigation of Arya Motazedi for trading in personal accounts using information obtained from his employer. Motazedi was ordered to pay a $100,000 fine and restitution to his employer, and he received a permanent ban from the industry.3 In September 2016, the Division of Enforcement brought its second enforcement action for insider trading, this time against Jon Ruggles, who similarly breached a duty of confidence to his employer by trading in a personal account in his wife’s name using information about the energy markets obtained in the course and scope of his employment.4 The CFTC ordered Ruggles to pay a $3.5 million civil monetary penalty and $1.75 million in disgorgement.
Material nonpublic information obtained from an employer is the property of the employer, who has the right to exclusive use of that information. Employees have a relationship of trust and confidence with their employer and therefore owe a duty to their employer to act in its best interests, keep such information confidential, and not misappropriate such information – in other words, a violation of the CFTC’s insider trading rules is similar to a violation of the SEC’s insider trading prohibition based on a misappropriation theory. Companies that trade commodities should implement an insider trading risk management policy that restricts and/or monitors employees’ personal commodities trading to prevent the unauthorized use of nonpublic company information. Additionally, they should consider implementing a cybersecurity program to guard against the theft of proprietary information.
On December 6, 2016, the Supreme Court, in a unanimous opinion, provided long-awaited additional guidance with respect to insider trading cases in its ruling in Salman v. United States.5 Adhering to its 1983 decision in Dirks v. SEC6, the court held that a tippee is liable for trading on inside information when the tipper “personally will benefit directly, or indirectly, from his disclosure.” The Supreme Court in Salman agreed with the Ninth Circuit’s interpretation of Dirks, holding that the tipper “personally benefitted from making a gift of confidential information to a trading relative.” In such a situation, the Court found a tipper benefits personally because his gift of trading information to a relative or friend is equivalent to if he traded on the information himself and gifted the proceeds. This ruling will likely serve to increase federal insider trading prosecutions (including those brought by the CFTC), specifically where the insider has not received a tangible monetary or
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pecuniary benefit as a quid pro quo for sharing inside information with a friend or relative.
II. Reporting Violations
The CFTC continues to prioritize the enforcement of reporting violations. In fiscal year 2016, the CFTC issued more than double the number of enforcement orders for reporting violations than in the previous fiscal year.7 A number of these violations involved new reporting requirements under Dodd-Frank.
First, the CFTC is increasingly bringing enforcement actions for violating the large trader reporting requirements for physical commodity swap positions. Following its first two such enforcement actions in 2015, this year the Division of Enforcement fined two large banks $560,000 and $400,000, respectively, for violating the Swaps Large Trader Reporting Rule.8
Second, the Division of Enforcement brought a novel enforcement action against a non-U.S. swap dealer for multiple swap reporting violations, related supervision failures, and violation of a prior CFTC order issued also in connection with reporting violations.9 This swap dealer’s swap data reporting system experienced a systems outage that interfered with its swap data reporting for five days. According to the CFTC, it investigated the matter and discovered a pattern of reporting problems that began prior to the systems outage involving the integrity of certain data fields, including erroneous reporting of legal entity identifiers (“LEI”). The CFTC argued that the reporting problems resulted from this entity’s failure to implement an adequate Business Continuity and Disaster Recovery Plan, and other supervisory systems.
Third, the Division of Enforcement issued a $450,000 fine against another non-U.S. swap dealer in December 2016 for allegedly failing to timely or properly report certain non-deliverable forwards, FX swaps, and FX forwards to a swap data repository (“SDR”).10 In that case, the swap dealer maintained that a software update to its FX trading platform caused the platform to incorrectly code this swap dealer as the reporting counterparty for certain transactions. As a result, neither the swap dealer nor its counterparty reported the swaps. This entity subsequently reported a number of the transactions several months later. The Division of Enforcement acknowledged this swap dealer’s remedial efforts. Although the CFTC continues to work out technical issues involving the reporting of swap data to SDRs, it is critical that parties to swaps ensure that all required data is reported. When engaging in both domestic and cross-border transactions, it is important that the parties to the swap determine which party has the reporting obligations and report the swap data in the proper form and manner.
Finally, market participants must be cognizant of reporting requirements associated with their positions in futures and options. This year, the Division of
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Enforcement fined several U.S. and non-U.S. commodity traders more than $1.5 million for failing to submit accurate monthly Form 204 Reports regarding the composition of their fixed-price cash commodity purchases and sales. Similarly, the CFTC fined two other non-U.S. commodity traders more than $630,000 for failing to file Form 304 Reports regarding cotton call purchases and sales.12
III. Recordkeeping
The Division of Enforcement sanctioned a handful of market participants in 2016 for failing to maintain books and records in the proper form and manner pursuant to the CEA and the CFTC’s regulations. In September, the CFTC fined a non-U.S. bank $500,000 for failing to create, maintain, and promptly produce required confirmations for Exchange for Related Position transactions.13 That same month, the CFTC filed a complaint against another entity for, among other things, failing to keep and produce for inspection the trading instructions it electronically received for customers who subscribed to third-party trading systems.14
Market participants must generate and keep records in accordance with the CEA and the CFTC’s regulations, and should respond promptly to CFTC requests for the production of such records. Recordkeeping systems should routinely be tested to ensure that records are being generated and stored in the correct format. Furthermore, in the event information previously provided is no longer accurate, the filer must file an amended report in order to keep reportable information current and accurate.
IV. Futures Commission Merchant Risk Management
This year marked the first time the CFTC brought an enforcement action involving Rules 1.11 (Risk Management Program for FCMs) and 1.73 (Clearing FCM Risk Management). The agency imposed a $1.5 million fine jointly against a U.S. futures commission merchant (“FCM”); its CEO; and its former CCO for alleged supervision and risk management failures, and for making inaccurate statements to the CFTC.15 According to the CFTC, the FCM did not promptly or thoroughly investigate the customer’s trading after being notified that the customer was engaging in manipulative trading practices. The CFTC also found that, although the FCM had written risk management policies and procedures pursuant to CFTC Rule 1.11, it failed to follow them, including those pertaining to customer pre-trade limits. The CFTC found the CCO to be responsible for the company’s failure to follow the policies.
V. Commodity Trading Advisor Fraud
The CFTC broadly construes the concept of commodity-trading advising to now encompass computerized robo-advisor trading software platforms. In 2016, the agency brought several enforcement actions against companies offering computerized trading software that assists traders in their decision-making. The
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CFTC filed a complaint against a company operating an online trading platform (and its owner), alleging the fraudulent solicitation of customers to use software that guided customers in their commodity trading decisions by instructing them when to buy or sell, what products to buy or sell, and at what price.16 The CFTC also filed a complaint against another company and its owners for fraudulently marketing a commodity futures trading software platform.17 The complaint alleges that the defendants failed to comply with the CFTC’s requirements pertaining to Commodity Trading Advisors (“CTAs”), and made material misrepresentations when marketing the software.
Firms that offer automated trading software or in any form provide advice in connection with commodity trading should consider registering as CTAs, and must follow the CFTC’s regulations for such registrants, including the requirement to distribute a hypothetical disclaimer to potential customers. Similar authorities exist for introducing brokers under the CFTC’s and NFA’s regulations, and the CFTC has been increasingly taking a broad look at activities that may qualify as introductory brokerage services in connection with trading in commodity interests.
VI. Protection of Customer Funds
The protection of customer funds held by commodity pools and FCMs remains a critical objective of the CFTC. This past year, the agency brought numerous cases against market participants for failing to segregate or protect customer funds pursuant to the CFTC’s regulations. In December, the CFTC obtained a $21.8 million default judgment against two investment funds and their owner for fraudulently soliciting pool participants and misappropriating their funds.18 In another case, a federal court in North Carolina ordered an investment fund and its owner to pay more than $15 million in fines for misappropriating and comingling commodity pool participants’ funds.19
VII. Disruptive Trading Practices
The CFTC continues to test the waters regarding its new anti-disruptive trading practices authority in a handful of high-profile enforcement matters. In 2016, the CFTC resolved three federal district court lawsuits involving “spoofing,” a practice whereby a trader places large orders without an intention to fill them for the purpose of moving prices in a favorable direction to the trader. These enforcement actions provide valuable guidance on the outer boundaries of permissible behavior.
In October 2015, the agency filed a civil complaint in federal district court charging a proprietary trading firm and its owner with spoofing and employing a manipulative and deceptive device while trading crude oil and natural gas futures on four different exchanges.20 The Division of Enforcement alleged that the scheme “created the appearance of false market depth that [the company
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and its owner] exploited to benefit their own interests, while harming other market participants.” On December 21, 2016, the individual defendant, without admitting or denying wrongdoing, agreed to pay $2.5 million to settle the claims. He also consented to having his trading monitored by an independent party for three years.
In April 2016, the CFTC issued a Consent Order imposing a permanent injunction against two individual traders, prohibiting them from engaging in spoofing in violation of the CEA. The Order arose out of a CFTC complaint filed in May 2015, alleging that defendants engaged in unlawful spoofing in the gold and silver futures markets by placing bids and offers on the Commodity Exchange, with the intent to cancel them before execution. The Consent Order requires the defendants to pay $1.38 million and $1.31 million civil monetary penalties.
In November 2016, a federal district court in Chicago entered a Consent Order against a London trader, ordering him to pay a whopping $25,743,174.52 in civil monetary penalties and $12,871,587.26 in disgorgement.22 The settlement arises out of an enforcement action against the trader and his company, charging them with unlawfully manipulating, attempting to manipulate, spoofing, and using a manipulative device with regard to the E-mini S&P 500 near month futures contract. In the Consent Order, the defendant admits to the CFTC’s allegations that he placed tens of thousands of bids and offers that he intended to cancel before execution.
VIII. Market Manipulation
The CFTC brought several enforcement actions for manipulation and attempted manipulation in 2016. The scope of the CFTC’s anti-manipulation authority continues to be tested in federal court. Notably, on October 4, 2016, a federal court in Manhattan ruled that the CFTC must show that a trader intended to create an “artificial” price in order to prove attempted market manipulation.23 The Division of Enforcement sued an investment firm and its chief executive in November 2013, charging the defendants with “banging the close” (i.e., illegally placing buy or sell orders toward the end of the trading day in an effort to impact the daily closing price and gain a benefit in a related market). The defendants argued that the trading was an attempt to correct mispricing in an interest rate contract, and that the trading “moved market prices towards, rather than away from, their intrinsic values.” The judge’s ruling in this case increases the CFTC’s burden and may help future defendants facing similar charges.
The CFTC also fined two large banks a total of $545 million for attempted manipulation and false reporting relating to interest rate benchmarks. On May 25, 2016, the agency settled charges with one of the banks for attempted manipulation and false reporting in connection with LIBOR, TIBOR, and ISDAFIX benchmarks.24 With respect to LIBOR and TIBOR, the CFTC charged the bank
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with false reporting to benefit derivatives trading positions priced based on the two benchmarks. The agency also alleged that traders attempted to manipulate the benchmarks by contacting other panel banks to adjust their submissions to benefit the bank’s trading positions. With respect to ISDAFIX, the CFTC alleged that the bank “submitted a rate or spread higher or lower than the reference rates and spreads disseminated to the panel banks on certain days that the bank had a derivatives position settling or resettling against the USD ISDAFIX benchmark. . . .” The CFTC fined the bank $425 million for the alleged violations.
On December 21, 2016, in its third enforcement action relating to the ISDAFIX interest rate benchmark, the Division of Enforcement settled charges against a large investment bank in connection with the alleged attempt of the bank’s New York traders to manipulate the benchmark and make false reports.25 The CFTC alleged that the bank heavily traded swaps at 11:00 a.m. when the broker sent a snapshot to the panel banks charged with submitting rate quotes. The CFTC maintained that the bank intentionally pushed the benchmark higher or lower to benefit the positions of its interest rate products trading group. The bank agreed to pay a $120 million civil monetary penalty and implement remedial steps to improve its internal controls.
IX. Conclusion
The CFTC’s enforcement agenda in 2016 highlights a number of significant topics and trends that market participants should note, as follows:
First, the CFTC has demonstrated a new concern about insider trading and the misappropriation of material nonpublic information, issuing significant penalties in its second such enforcement action this year.
Second, the CFTC brought its first enforcement action involving risk management for FCMs and their CCOs. Market participants must be cognizant that the CFTC is actively enforcing failure to investigate and failure to follow written procedures, even where such procedures are in compliance with the CFTC’s rules. It is essential that FCMS have clear written risk management policies and procedures in place, and that CCOs ensure all personnel follow these policies.
Third, reporting remains low-hanging fruit for enforcement. In addition to Series ’04 and Large Trading Reporting violations, the CFTC has begun to bring actions pursuant to new Dodd-Frank reporting requirements. As such, reporting parties should determine their reporting obligations prior to engaging in futures or swaps transactions, and ensure that all reports are timely, complete, and accurate. As highlighted in a significant enforcement matter last year, reporting parties should take care to ensure the accuracy of LEIs in their reports to SDRs, including in the cross-border context where privacy laws and other considerations may come into play. Care should be taken to ensure that each LEI is not lapsed, retired, or cancelled. LEI renewals may be enforced in the future.
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Fourth, with respect to the CFTC’s treatment of new technology, vendors that develop and market commodity trading software should be aware that commodity trading software platforms may be treated by the CFTC as commodity trading advisors.
Fifth, the CFTC continues to investigate market participants for engaging in spoofing. Automated trading systems should not be designed to enter orders without the intent to execute them, and must be carefully monitored.
Finally, the Southern District of New York made it much more difficult for the CFTC to prosecute market manipulation, mandating that the agency show a defendant’s intent to create an artificial price. The question remains whether other jurisdictions will follow suit.
Given the CFTC’s aggressive pursuit of a wide variety of enforcement violations in 2016, clients should be sure to contact Reed Smith as soon as possible if they discover a compliance shortcoming within their company, receive a subpoena or inquiry from the CFTC, or learn of allegations that may lead to an investigation.
See CFTC Releases Annual Enforcement Results for Fiscal Year 2016, Nov. 21, 2016, available at http://www.cftc.gov/PressRoom/PressReleases/pr7488-16.
The CEA included provisions applicable to government employees, as well as exchange employees trading on material non-public information. Under the Dodd-Frank Act of 2010, the CFTC promulgated section 180.1, which contains provisions similar to SEC’s 10-b(5) authority, provided, however, it still clarifies that a commodity trader does not have an affirmative duty to disclose material non-public information that has been legitimately obtained.
1. See CFTC Releases Annual Enforcement Results for Fiscal Year 2016, Nov. 21, 2016, available at http://www.cftc.gov/PressRoom/PressReleases/pr7488-16.
2. The CEA included provisions applicable to government employees, as well as exchange employees trading on material non-public information. Under the Dodd-Frank Act of 2010, the CFTC promulgated section 180.1, which contains provisions similar to SEC’s 10-b(5) authority, provided, however, it still clarifies that a commodity trader does not have an affirmative duty to disclose material non-public information that has been legitimately obtained.
3. See In the Matter of Arya Motazedi, Comm. Fut. L. Rep. (CCH) ¶33,599, (Dec. 2, 2015).
4. See In the Matter of Jon P. Ruggles, Comm. Fut. L. Rep. (CCH) ¶33,872, (Sep. 29, 2016).
5. No. 15-628 (U.S. Dec. 6, 2016)
6. Dirks v. SEC, 463 U.S. 646 (1983)
7. In fiscal year 2016, the CFTC issued nine enforcement orders for reporting violations, compared with four the previous fiscal year.
8. See In the Matter of Barclays Bank PLC, Comm. Fut. L. Rep. (CCH) ¶33,791, (Jul. 6, 2016); In the Matter of Wells Fargo Bank, N.A., Comm. Fut. L. Rep. (CCH), ¶33,869, (Sep. 27, 2016).
9. In the Matter of Deutsche Bank AG, Comm. Fut. L. Rep. (CCH) ¶33,452, (Apr. 23, 2015)
10. In the Matter of Société Générale SA, CFTC Docket No. 17-01 (Dec. 7, 2016).
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This Briefing is presented for informational purposes only
and is not intended to constitute legal advice.
© Reed Smith LLP 2017. All rights reserved. For
additional information, visit http://www.reedsmith.com/legal/
ABU DHABI · ATHENS · BEIJING · CENTURY CITY · CHICAGO · DUBAI · FRANKFURT · HONG KONG · HOUSTON · KAZAKHSTANLONDON · LOS ANGELES · MUNICH · NEW YORK · PARIS · PHILADELPHIA · PITTSBURGH · PRINCETON
RICHMOND · SAN FRANCISCO · SHANGHAI · SILICON VALLEY · SINGAPORE · TYSONS · WASHINGTON, D.C. · WILMINGTON
Client Briefing 17-013 January 2017
11. See In the Matter of CHS, Inc., Comm. Fut. L. Rep. (CCH) ¶33,681, (Mar. 9, 2016); In the Matter of Golden Agri International Pte Ltd., Comm. Fut. L. Rep. (CCH) ¶33,794, (Jul. 11, 2016); In the Matter of Alfred C. Toepfer International, Inc., Comm. Fut. L. Rep. (CCH) ¶33,563, (Sept. 30, 2015).
12. See In the Matter of Agrocorp International Pte Ltd., Comm. Fut. L. Rep. (CCH) ¶33,804, (Jul. 11, 2016); In the Matter of Libero Commodities, SA, Comm. Fut. L. Rep. (CCH) ¶33,464, (May 11, 2015).
13. See In the Matter of Barclays Bank PLC, Comm. Fut. L. Rep. (CCH) ¶33,864, (Sept. 22, 2016).
14. See CFTC v. eFloorTrade, LLC and John A. Moore, Docket No. 16-cv-7544 (S.D.N.Y. 2016).
15. See In The Matter of Advantage Futures, LLC, Comm. Fut. L. Rep. (CCH) ¶33,862, (Sept. 21, 2016).
16. See CFTC v. Jody Dupont and Open Range Trading LLC, Civil Action No 8:16-cv-03258-TMC (D.S.C. 2016).
17. See CFTC v. United Business Servicing LLC, et al., Case No. 2:16-cv-07358 (C.D. Cal. 2016).
18. See CFTC v. Alvin Guy Wilkerson, et al., Civil Action No. 1:16-cv-6734 (N.D. Ill. 2016).
19. See CFTC v. James A. Shepherd, et al., Case No. 3:13-cv-00370 (W.D.N.C. 2013).
20. See CFTC v. Oystacher, Civil Action No. 1:15-cv-09196, (N.D. Ill. 2015).
21. See CFTC v. Heet Khara and Nasim Salim, Case No. 1:15-cv-03497 (S.D.N.Y. 2015).
22. See CFTC v. Nav Sarao Futures Limited PLC, et al., Case No. 1:15-cv-3398 (N.D. Ill. 2015).
23. See CFTC v. Donald R. Wilson, et al., Civil Action No. 13-cv-7884 (S.D.N.Y. 2013).
24. See In The Matter of Citibank N.A., CFTC Docket No. 16-16 (May 25, 2016); In the Matter of Citibank, N.A., et al., CFTC Docket No. 16-17(May 25, 2016).
25. See In The Matter of The Goldman Sachs Group, et al., CFTC Docket No. 17-03 (Dec. 21, 2016)
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If you have questions or would like additional information on the material covered in this Briefing, please contact one of the authors:
Peter Y. MalyshevPartner, Washington, D.C.+1 202 414 [email protected]
Jennifer L. AchillesPartner, New York+1 212 521 [email protected]
Jill OttenbergAssociate, Washington, D.C.+1 202 414 [email protected]
Michael SeligAssociate, Washington, D.C.+1 202 414 [email protected]
…or the Reed Smith lawyer with whom you regularly work.
Client Briefing
Energy & Natural Resources
U.S. CFTC Enforcement Considerations for 2017
At a Glance:
Change is in the air and the political landscape may significantly affect the U.S. Commodity Futures Trading Commission’s enforcement agenda. Last month, Commissioner J. Christopher Giancarlo rose to the position of Acting Chairman and announced a number of staffing changes at the Commission, including a new Acting Director of the Division of Enforcement. Meanwhile, the U.S. Congress is considering legislation that could pare back a number of Dodd-Frank Act reforms to the Commodity Exchange Act. In this client alert, we review recent enforcement trends in light of the new political agenda and highlight important developments at the CFTC, including its potential enforcement priorities for 2017.
Shortly after President Donald J. Trump was inaugurated on January 20, 2017, Commissioner J. Christopher Giancarlo ascended to the position of Acting Chairman of the U.S. Commodity Futures Trading Commission (“CFTC”). In less than a week, Giancarlo announced a number of staffing changes, including the appointment of Vincent McGonagle as Acting Director for the Division of Enforcement. Meanwhile, the Commodity End-User Relief Act, which would reauthorize the CFTC through 2021 with a budget of $250 million a year and pare back some of the Dodd-Frank Act reforms to the Commodity Exchange Act (“CEA”), passed in the House of Representatives and similar legislation will now be considered in the Senate. Furthermore, President Trump’s transition team continues to work on broad policy guidelines for the reform of U.S. financial markets.1
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In short, change is in the air and the political landscape may significantly affect the CFTC’s enforcement agenda. Market participants should expect:
1) Enforcement of Current Laws and Regulations. The CFTC must and will continue enforcing the CEA and the regulations that are currently in effect;
2) Greater Cooperation with the SROs. The National Futures Association (“NFA”) and commodities exchanges will continue enforcing the law that is in effect and, given budgetary constraints, the CFTC will push more on-the-ground enforcement responsibility and authority to these self-regulatory organizations (“SROs”);
3) Focus on Money. Because the CFTC is assessed by its effectiveness as a regulator and by how much money it brings into the U.S. Treasury, the CFTC will continue prosecuting and imposing sanctions for violations of the CEA and its rules; and
4) Use of Existing Law. There has been a significant body of law developed in the past 7 years following the passage of the Dodd-Frank Act that the CFTC can readily deploy in its prosecution of questionable market behavior. Strengthened by the Securities and Exchange Commission (“SEC”) precedents in similar actions such as insider trading, the CFTC’s Division of Enforcement has effective tools to build new enforcement actions.
Given that it is unlikely that the CTFTC will ease up on enforcement actions in 2017, market participants should be aware of the following new guidelines and developments.
I. The Division of Enforcement Updated its 2007 Enforcement Advisory
Like other regulatory agencies, the CFTC acknowledges companies’ and individuals’ cooperation with its investigations when determining appropriate penalties for misconduct. The day before Acting Chairman Giancarlo assumed his new role, the Division of Enforcement issued updated advisories on how companies should behave during CFTC investigations to receive maximum cooperation credit (the “Cooperation Advisories”).2 The Cooperation Advisories, which update a previous 2007 advisory,3 offer helpful guidance and best practices to companies under investigation.
The Cooperation Advisories specify that the CFTC considers the following factors in determining the appropriate monetary penalties and other sanctions: (1) the value of a company’s cooperation to the CFTC’s investigation(s) and enforcement actions; (2) the value of a company’s cooperation to the CFTC’s broader law enforcement interests; and (3) the balancing of the level of a company’s culpability and history of prior misconduct with the acceptance of responsibility, mitigation and remediation.
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The Cooperation Advisories also explicitly indicate which actions by a company or individual may offset the credit that could be achieved through other cooperative actions. These include conduct that “impedes the Division’s investigation or inappropriately consumes government resources.” The CFTC indicates that such activities include, but are not limited to: (1) failing to respond to Division requests in a timely manner; 2) misrepresenting or minimizing the extent of the company’s misconduct; (3) failing to preserve relevant information; and (4) inappropriately advising employees not to cooperate fully with the investigation.
Market participants should review the Cooperation Advisories and implement compliance programs that facilitate cooperation. In addition, market participants should advise their employees that if they become aware of an issue that may prompt an investigation, they should contact the company’s compliance department. Additionally, if employees are contacted by the CFTC in connection with an investigation, they are not obligated to discuss any matters with the staff of the CFTC, the NFA or the SRO without a lawyer present.
Market participants should also note that the CFTC’s whistleblower program is increasingly becoming more active. The CFTC announced its third and fourth whistleblower awards last year for $10 million and $50,000, respectively.
II. The CFTC Adjusted its Civil Monetary Penalties
On January 24, 2017, the CFTC issued new civil monetary penalties, adjusted for inflation, pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990.4 Notably, the rule adjusts the current maximum civil monetary penalty for market manipulation and attempted manipulation from the greater of $1,098,190 or triple the monetary gain, to the greater of $1,116,156 or triple the monetary gain. The rule also adjusts the maximum civil monetary penalty for non-manipulation violations from the greater of $167,728 or triple the financial gain, to $170,472 or triple the financial gain. Market participants should note that although the price of many commodities is not keeping pace with inflation, the CFTC’s civil monetary penalties are adjusted each year and the increase is not inconsequential. All future civil monetary penalty assessments will be based on these inflation-adjusted amounts.
III. A Significant Enforcement Action Offers a Cautionary Tale Regarding Effective Compliance Programs
On January 19, 2017, the CFTC fined a swap dealer $25 million for spoofing (i.e., entering orders with the intent to cancel them) and failure to supervise.5 Following the enactment of Dodd-Frank and implementation of related regulations, the swap dealer circulated a compliance alert to its traders that included the amended statutory language prohibiting spoofing but provided no additional training or guidance on the subject. Moreover, the swap dealer did not put any systems or controls in place to detect spoofing by its traders or analyze their trading activity to detect spoofing. Five traders subsequently engaged in spoofing by entering
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orders they intended to cancel before execution. One trader observed others place spoof orders and began to do so himself. He incurred a loss and had to answer to his supervisor, who told him not to do it again but never reported the incident to compliance.
In addition to issuing a $25 million civil monetary penalty, the CFTC ordered the swap dealer to (1) provide annual training addressing the CEA’s legal requirements with regard to spoofing to its employees who trade on designated contract markets; and (2) maintain systems and controls reasonably designed to detect spoofing activity by its traders.
This case is an example of why market participants must take compliance seriously and ensure that they adequately supervise and train their traders and employees. Simply informing them about regulatory or legal changes is usually not adequate given the complexities of the provisions. As a new year begins, market participants should verify that their compliance materials are up-to-date and that their personnel have adequate training.
IV. The CFTC is Likely to Continue to Pursue Recordkeeping and Reporting Violations
As mentioned in our previous Client Alert regarding CFTC enforcement in 2016, the CFTC continues to pursue a larger swath of recordkeeping and reporting cases each year and this trend is likely to continue. Recordkeeping and reporting violations are low-hanging fruit for enforcement and, given the CFTC’s projected budget of $250 million6, the Division of Enforcement is likely to bring more of these actions in 2017.
In January alone, the Division of Enforcement has already brought three such actions. On January 17, the CFTC fined an investment and trading company $150,000 for failing to file Form 304 Cotton-On Call Reports on 53 occasions and filing late reports on 2 occasions.7 This action is consistent with the others Series ’04 reporting violations cases brought by the CFTC over the past few years. These actions are likely to continue, especially if the CFTC’s positionlimits rulemaking is finalized. Such rulemaking would expand the scope of the Form 204 and 304, and create new Forms 504, 604, and 704.
On January 26, the CFTC fined a dually -registered introducing broker (“IB”) and futures commission merchant (“FCM”) $280,000 for failing to retain required records and failing to supervise.8 The IB/FCM did not preserve and maintain audit trail logs for its customers and failed to implement policies and procedures to ensure retention of those records for roughly five years. The CFTC ordered the IB/FCM to update its policies and procedures on recordkeeping and provide appropriate training to its officers and employees regarding the CFTC’s recordkeeping requirements.
Finally, on January 11, the CFTC fined a dually -registered FCM and swap dealer (“SD”) $900,000 after its officers, employees, and agents overcharged customers
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for trading and clearing exchange-traded products.9 Although the CFTC did not pursue a recordkeeping violation, the failuretosupervise charge related to the FCM/SD’s systems for receiving and reconciling invoices from exchanges. As a result of its failure to implement adequate systems, the FCM/SD overcharged customers in the aggregate amount of roughly $7.8 million.
V. Recent CFTC Rule Enforcement Reviews May Prompt More Enforcement Actions
The CFTC’s Division of Market Oversight recently performed a rule enforcement review (“RER”) of ICE Futures U.S.10 The RER recommended, among other things, that the exchange expand the scope of all of its trade practices investigations “as appropriate” to scrutinize for patterns of abuse. It also recommended that ICE Futures U.S. conduct trade practice reviews for all trade dates and maintain documentation sufficient to demonstrate that it conducted the reviews. Similarly, in an RER of the New York Mercantile Exchange and the Commodities Exchange, the CFTC recommended that the exchanges implement a formal review process to verify that market participants’ positionlimits exemptions are legitimate.11 Given budgetary constraints and a concern with the enforcement of exchange rules, the CFTC is likely to continue to pressure exchanges to scrutinize trading practices and bring enforcement actions when appropriate. The NFA, which collected $700,000 in fines, expelled 22 members, and suspended 11 members in 2016, may follow suit.
Conclusion
With all of the political appointments and personnel changes at the CFTC, the big question is whether the CFTC will continue to aggressively pursue market participants for violations of the CEA and related regulations. We believe it will.
In his former role as a Commissioner of the CFTC, Acting Chairman Giancarlo did reveal his vision for enforcement. However, enforcement generally tends to remain consistent from administration to administration. Although some of the CFTC’s regulations may change under the Trump Administration, the Division of Enforcement is likely to keep busy. The new Acting Director of Enforcement Vincent McGonagle served in the Division of Enforcement in the past and the departure of former Director of Enforcement Aitan Goelman is unlikely to affect its operations.
Congress is considering versions of the Commodity End-User Relief Act and Financial CHOICE Act that would reform the CEA, but these bills would have little effect on the CFTC’s enforcement agenda. The core provisions enforced by the CFTC, including reporting, recordkeeping, market manipulation, and disruptive trading practices would largely be unaffected by the reforms.
Accordingly, market participants should remain cognizant of the enforcement trends and compliance lessons as the new make-up of the CFTC continues to take shape.
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r e e d s m i t h . c o m
This Briefing is presented for informational purposes only
and is not intended to constitute legal advice.
© Reed Smith LLP 2017. All rights reserved. For
additional information, visit http://www.reedsmith.com/legal/
ABU DHABI · ATHENS · BEIJING · CENTURY CITY · CHICAGO · DUBAI · FRANKFURT · HONG KONG · HOUSTON · KAZAKHSTANLONDON · LOS ANGELES · MUNICH · NEW YORK · PARIS · PHILADELPHIA · PITTSBURGH · PRINCETON
RICHMOND · SAN FRANCISCO · SHANGHAI · SILICON VALLEY · SINGAPORE · TYSONS · WASHINGTON, D.C. · WILMINGTON
Client Briefing 17-046 February 2017
1 See H.R. 238, 115th Cong. (2017); S. 2917, 114th Cong. (2016); H.R. 5983, 114th Cong. (2016).2 The Cooperation Advisory for Corporations is available here, and the Cooperation Advisory for
Individual is available here.3 The 2007 Advisory on Cooperation Factors in Enforcement Division Sanction Recommendations is
available here.4 Annual Adjustment of Civil Monetary Penalties for Inflation—2017, 82 Fed. Reg. 7,643 (Jan. 23, 2017).5 See In the Matter of Citigroup Global Markets Inc., CFTC Docket No. 17-06 (Jan. 19, 2017).6 The $250 million budget is the same as the 2016 enacted level, and $80 million below the President’s
Budget for fiscal year 2017 (prepared for the Committee on Appropriations, February 2016).7 See In The Matter of CNCGC Hong Kong Ltd., CFTC Docket No: 17-05 (Jan. 17, 2017).8 See In The Matter of E*TRADE Securities LLC and E*TRADE Clearing LLC, CFTC Docket No. 17-07
(Jan. 26, 2017).9 See In The Matter of J.P. Morgan Securities LLC, CFTC Docket No. 17-04 (Jan. 11, 2017).10 See ICE Futures U.S. Trade Practice Rule Enforcement Review11 See NYMEX and COMEX Market Surveillance Rule Enforcement Review
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r e e d s m i t h . c o m Client Alert 17-050 February 2017
If you have questions or would like additional information on the material covered in this Alert, please contact one of the authors:
Nicolle R. Snyder Bagnell Partner, Pittsburgh +1 412 288 7112 [email protected]
Lucas Liben Associate, Pittsburgh +1 412 288 4041 [email protected]
…or the Reed Smith lawyer with whom you regularly work.
Client Alert
Energy & Natural Resources
NFA Update for Commodity Pool Operators and Commodity Trading Advisors
At a Glance…
On January 11, 2017, the National Futures Association issued a notice to its members regarding commodity pool operators and commodity trading advisors claiming an exemption or exclusion from registration pursuant to certain Commodity Futures Trading Commission regulations. The notice reminds NFA members that CPOs and CTAs claiming certain exemptions from CFTC and NFA registration must affirm their notice of exemption with the NFA by March 1, 2017. We detail the major take-aways from the notice, and other notable updates for CPOs and CTAs in this client alert.
As a new calendar year begins, commodity trading advisors (“CTA”) and commodity pool operators (“CPO”) must review and tend to their continuing regulatory obligations with the National Futures Association (“NFA”). In 2016, the NFA brought several enforcement actions against CPOs and CTAs for failing to comply with NFA rules, including its reporting requirements. Accordingly, it is important that all CPOs and CTAs currently claiming an exemption or exclusion from U.S. Commodity Futures Trading Commission (“CFTC”) and NFA registration pursuant to certain CFTC regulations, affirm their exemption by March 1, 2017. Market participants should note that the recent executive order signed into law by President Trump aimed at rolling back the Dodd-Frank Act does not impact their regulatory obligations. The executive order merely directs the CFTC and other agencies to review their regulations in light of the principles in the order. Accordingly, market participants should comply with the laws and regulations as they currently exist, and consider the NFA’s Annual Notice detailed below.
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r e e d s m i t h . c o m Client Alert 17-050 February 2017
Annual Notice of Exemption Filing for CPOs/CTAs
On January 11, 2017, the NFA issued a notice to its members regarding CPOs and CTAs claiming an exemption or exclusion from registration pursuant to certain CFTC regulations.1 The notice reminds NFA members that CPOs and CTAs claiming certain exemptions from CFTC and NFA registration must affirm their notice of exemption with the NFA by March 1, 2017.
The Commodity Exchange Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, (“CEA”), and the CFTC’s regulations require CPOs and CTAs to register with the CFTC and the NFA, unless an exemption or exclusion applies. CPOs and CTAs that claim an exemption or exclusion from registration under CFTC regulations 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5), or 4.14(a)(8) must file annual notices of exemption with the NFA within 60 days following the calendar year end. Reed Smith discussed this obligation in detail in a previous Client Alert available here.
NFA asks its members to “take reasonable steps” to determine that the CPOs and CTAs with which they deal are not in violation of the NFA’s rules regarding exempt status. The NFA expects its members to perform reasonable diligence in reviewing the CPO/CTA that previously claimed an exemption from registration on the NFA’s BASIC system, or using the NFA’s exemptions spreadsheet to determine that the CPO/CTA has affirmed its exemption(s) in the past.
NFA members may easily perform due diligence on CPOs and CTAs using the NFA’s website.2 If they determine that a CPO or CTA does not have an active exemption, the NFA requires them to cease transacting customer business with the CPO/CTA.
Enforcement Actions against CPOs/CTAs
In 2016, the NFA brought five enforcement actions against CPOs and CTAs for failing to comply with its rules. These cases involved reporting and filing violations, making inaccurate and/or misleading statements to the NFA, failing to cooperate fully and promptly with an NFA examination, and misappropriating customer funds. In one case, the NFA fined a CPO/CTA $60,000 for failing to timely file three quarterly reports, eight annual pool financial statements, and three CTA PR reports.3 It is important that CPOs and CTAs carefully review their reporting requirements, and timely file all necessary reports with the NFA and verify that the reports are accurate. The NFA revoked several CPOs and CTAs memberships last year for submitting false or misleading information in NFA filings and reports.4
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r e e d s m i t h . c o m
This Alert is presented for informational purposes only
and is not intended to constitute legal advice.
© Reed Smith LLP 2017. All rights reserved. For
additional information, visit http://www.reedsmith.com/legal/
ABU DHABI · ATHENS · BEIJING · CENTURY CITY · CHICAGO · DUBAI · FRANKFURT · HONG KONG · HOUSTON · KAZAKHSTANLONDON · LOS ANGELES · MUNICH · NEW YORK · PARIS · PHILADELPHIA · PITTSBURGH · PRINCETON
RICHMOND · SAN FRANCISCO · SHANGHAI · SILICON VALLEY · SINGAPORE · TYSONS · WASHINGTON, D.C. · WILMINGTON
Client Alert 17-050 February 2017
1. See Notice I-17-02 (Jan. 11, 2017), available at https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4781.
2. NFA members may perform diligence on their counterparties using the NFA’s BASIC system, available at http://www.nfa.futures.org/basicnet/.
3. See In the Matter of The Cambridge Strategy Asset Management Limited, NFA Case No. 16-BCC-013 (Nov. 2, 2016).
4. See In the Matter of TGI Capital Management Limited, NFA Case No. 15-BCC-032 (Feb. 24, 2016); In the Matter of Tina Mozhayski, D/B/A RF Intl, NFA Case No. 15-BCC-004 (Mar. 24, 2016).
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r e e d s m i t h . c o m Client Alert 17-150 June 2017
Alert
Energy & Natural Resources
If you have questions or would like additional information on the material covered in this Alert, please contact the author:
Peter Y. Malyshev Partner, Washington, D.C. +1 202 414 9185 [email protected]
Kari S. Larsen Counsel, New York +1 212 549 4258 [email protected]
Michael Selig Associate, Washington, D.C. +1 202 414 9287 [email protected]
…or the Reed Smith lawyer with whom you regularly work.
An Overview of the CFTC’s Modernized Recordkeeping RequirementsAt a Glance…
On May 23, 2017, the U.S. Commodity Futures Trading Commission unanimously approved a revamped CFTC Rule 1.31, which specifies the form and manner that records must be kept by commodities market participants, and a slight modification to CFTC Rule 23.203, which pertains to swaps record retention. This modernized edition of Rule 1.31 aims to simplify and streamline the CFTC’s recordkeeping procedures and goes into effect on August 28, 2017. Because Rule 1.31 specifies the form and manner for keeping all CFTC-required records, the effects of this rulemaking will be significant.
Modernizing the Commodity Futures Trading Commission’s (“CFTC”) regulations for the “Digital Age” and replacing overly prescriptive rules with clear principles are two stated aims of Acting Chairman J. Christopher Giancarlo. On May 23, 2017, the Acting Chairman made progress on both of these fronts with the unanimous approval of a revamped CFTC Rule 1.31 (“Amended Rule 1.31”), which specifies the form and manner that records must be kept by commodities market participants, and a slight modification to CFTC Rule 23.203, which pertains to swaps record retention.1 This modernized edition of Rule 1.31 does not impose any new obligations on persons currently in compliance with the CFTC’s recordkeeping requirements, but it aims to simplify and streamline their recordkeeping procedures when it goes into effect August 28, 2017, which will be greatly welcomed by industry. Because Rule 1.31 specifies the form and manner for keeping all CFTC-required records, the effects of this rulemaking will be significant.
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r e e d s m i t h . c o m Client Alert 17-150 June 2017
I. The Form of Books and Records
CFTC Rule 1.31, which currently includes archaic terms such as “micrographic media,” and directs market participants to retain electronic records on floppy disks and microfiche, has long been due for an update. Accordingly, the CFTC has amended the Rule to make it “technologically neutral” and therefore more likely to stand the test of time. Amended Rule 1.31 defines the body of books and records required to be kept by the Commodity Exchange Act (“CEA”) and the CFTC’s regulations as “regulatory records,” a subset of which are defined as “electronic regulatory records.” Market participants must retain all data necessary to access, search, or display electronic books and records, and all data produced and stored electronically describing how and when such books and records were created, formatted, or modified (i.e., metadata). The CFTC decided not to include a specific definition of metadata, stating that including specifics would be contrary to the goal of technology neutrality, and found instead that requiring the description of how and when such books and records were created, formatted, or modified would be sufficient to support its statutory inspection and investigative purposes. Persons need only maintain such data about a regulatory record after the record is created. The term “electronic regulatory records” refers to all such records that are not created and maintained on paper.
II. The Manner of Creating and Maintaining Books and Records
Amended Rule 1.31 specifies that regulatory records must be created and retained in a form and manner that ensures authenticity and reliability in accordance with the CEA and CFTC’s regulations. Market participants must keep an inventory of their electronic records, and establish systems and controls to ensure the authenticity and reliability of such records, which must include systems that maintain the security, signature, and data necessary to ensure that the records are authentic. Moreover, they must be able to produce such records in the event of an emergency or systems outage. However, these are not new requirements, but rather helpful guidance for market participants maintaining electronic books and records.
As originally proposed, Amended Rule 1.31 would have required market participants to establish, maintain, and implement written policies and procedures reasonably designed to ensure compliance with its recordkeeping obligations under Rule 1.31. However, the finalized version of Amended Rule 1.31 does away with this requirement, in response to commenters’ concerns that such a requirement is inconsistent with a principles-based approach to regulating recordkeeping.
The CFTC approved a modification to CFTC Rule 23.203(b), which specifies the retention time period for electronic pre-execution communications in relation to a swap. The modification reduces the time period from the life of the swap plus five years, to five years from the date of creation of the regulatory record.
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r e e d s m i t h . c o m
This Alert is presented for informational purposes only
and is not intended to constitute legal advice.
© Reed Smith LLP 2017. All rights reserved. For
additional information, visit http://www.reedsmith.com/legal/
ABU DHABI · ATHENS · BEIJING · CENTURY CITY · CHICAGO · DUBAI · FRANKFURT · HONG KONG · HOUSTON · KAZAKHSTANLONDON · LOS ANGELES · MUNICH · NEW YORK · PARIS · PHILADELPHIA · PITTSBURGH · PRINCETON
RICHMOND · SAN FRANCISCO · SHANGHAI · SILICON VALLEY · SINGAPORE · TYSONS · WASHINGTON, D.C. · WILMINGTON
Client Alert 17-150 June 2017
III. Inspection of Books and Records
Amended Rule 1.31 restates and clarifies the CFTC’s and Department of Justice’s (“DOJ”) right to inspect books and records required to be kept and maintained in accordance with Rule 1.31. The requirement that market participants produce records to the CFTC and DOJ upon request remains unchanged, but Amended Rule 1.31 clarifies that electronic records must be produced promptly in a reasonable form and medium.
Additionally, Amended Rule 1.31 removes the requirement that recordkeepers engage a third-party technical consultant, and that the technical consultant file certain representations with the CFTC regarding access to the recordkeeper’s electronic regulatory records.
1. The rulemaking is available here.
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The LGBT Bar 2017 Lavender Law Conference – Finance Law Institute
Derivatives Panel Speaker Profiles
Darek DeFreece
Darek is managing director and chief administrative officer (CAO) for the foreign exchange and international treasury management line of business within Wells Fargo’s International Group. As a member of the senior management team, Darek is responsible for the day-to-day supervision of the business and serves as the primary interface between the business and its various support partners, including compliance, legal, human resources, corporate properties, and operations. In addition, Darek is responsible for coordinating the strategic direction of the business and leading projects related to its growth and development.
In addition to serving as the division’s CAO, Darek also has direct responsibility for the foreign banknote business throughout the Wells Fargo footprint. With a dedicated team of sales specialists and customer support, Wells Fargo is a leading provider of physical foreign currency to Wells Fargo consumers and to other United States financial institutions.
Before his current role, Darek was Wells Fargo’s primary foreign exchange counsel for more than 10 years and managed a team of attorneys that provided legal support to other International lines of business including Global Banking, Global Financial Services, and Global Payment Services. Before joining Wells Fargo, Darek worked for international money management firms and in private practice, with a focus on over-the-counter derivatives and investment management.
David Lucking
David is a partner at Allen & Overy who specializes in derivatives and structured finance transactions, as well as the regulatory framework that underpins the derivatives market. David advises financial institutions on a wide range of derivatives products and asset classes (including credit, rates, FX, longevity) in both funded and unfunded form. He has drafted a number of market standard document templates for the International Swaps and Derivatives Association, Inc. (ISDA) and other derivatives industry bodies, including documentation for confirming trades referencing the iTraxx and CDX indices and David is the U.S. adviser to ISDA’s Credit Derivatives Determinations Committee which determines Credit Events and other matters for the credit derivatives market as a whole. David has advised on various aspects of the transition of the over-the-counter derivatives market to regulated trading platforms and central clearing houses, as well the registration of a number of swap dealers under the Dodd-Frank Act. In addition, he advises on the implications of the Volcker Rule on their derivatives trading business, as well as their structured finance activities.
Peter Malyshev
Peter is a partner in Reed Smith’s Energy & Natural Resources Group based in Washington, D.C. Peter focuses his practice on regulatory, compliance and transactional matters relating to commodities, derivatives and securities products regulated by the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC).
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- 2 -
Gregory Todd
Greg is an attorney with Bank of America Merrill Lynch’s Legal Department in New York with responsibility for global regulatory reform coverage in addition to his role supporting global rates and currencies sales and trading activity. Greg currently leads the Legal Department’s implementation efforts for global derivatives regulatory reform as well as heads legal coverage of BofAML’s global currencies and Americas interest rates derivatives businesses.
Greg joined the bank in 2005 to cover structured products and credit derivatives businesses in the Americas. He assumed responsibility for regulatory reform coverage in 2010, Americas interest rates derivatives coverage in 2012 and global currencies coverage in 2015. He was promoted to managing director in 2015.
After receiving a B.Sc. from the University of Toronto and a J.D. from the University of Pennsylvania Law School, Greg joined Vinson & Elkins LLP as an associate in 2000 and King & Spalding LLP as an associate in 2002 before joining the bank in 2005.
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