CFTC Archives - The Industry Spread

Intercontinental Exchange granted Clearing House status from Monetary Authority of Singapore

December 12, 2018 by Ricardo Esteves Leave a Comment Filed Under: Industry News Tagged: CCP, CFTC, Intercontinental Exchange - ICE, Monetary Authority of Singapore - MAS, SEC

Intercontinental Exchange, through its U.S.-based credit default swap (CDS) clearing house ICE Clear Credit, has been granted Recognised Clearing House status from the Monetary Authority of Singapore with effect from December 7, 2018.

ICE Clear Credit is the first global CDS clearinghouse to be recognised in Singapore. The firm now has the authority to on-board clearing members from Singapore for clearing of CDS contracts.

Stan Ivanov, President of ICE Clear Credit, commented:

“I would like to thank the Monetary Authority of Singapore for this recognition. ICE Clear Credit is now the first global clearinghouse for credit default swaps in Singapore meaning that it can now have clearing members from Singapore and further serve our customers in the region. Singapore is the hub for our Asian business and this recognition will help us to expand our offering to customers across Asia and Australia.”

The leading operator of global exchanges and clearing houses and provider of data and listings services launched ICE Clear Credit and ICE Clear Europe CDS in 2009. Both subsidiaries offer clearing for more than 500 single name and 160 index CDS instruments based on corporate and sovereign debt, and have reduced counterparty risk exposure by clearing approximately $110 trillion in gross notional amount, with open interest of approximately $1.6 trillion.

Recognized as a third-country CCP under the European Market Infrastructure Regulations by the European Securities and Markets Authority for products regulated by the Commodity Futures Trading Commission, ICE Clear Credit has 30 participants including big industry names such as Bank of America, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Merrill Lynch, Nomura, Morgan Stanley, Societe Generale, UBS, and Wells Fargo.

ICE Clear Credit offers portfolio margining relief with respect to clearing member house/proprietary transactions. Pursuant to CFTC and SEC Orders, ICE Clear Credit provides similar relief for broker dealer/FCMs that maintain clearing accounts for customer-related transactions.

Sterling Sinks Further on No-Confidence Vote Talk, Dollar Up

December 12, 2018 by Michael Moran Leave a Comment Filed Under: Market News, Market News - Asia Open Tagged: AUD/USD, CFTC, EUR-USD, GBP-USD, PM May, sterling exchange rate, US Ten-year Bond Yield, USD/DXY

Summary: Sterling drove lower hit by reports that lawmakers had the numbers to trigger a no-confidence vote on PM May’s leadership. The Pound opened at 1.2480, fresh 20-month lows. Tensions between China and the US eased as officials between Beijing and Washington discussed plans to avert a trade war. The Dollar Index (USD/DXY) ended up 0.26% to 97.45.

US Bond yields rose as November Producer Prices beat forecasts. The yield on the US 10-year note rose to 2.88% from 2.85% while the 2-year yield was up 5 basis points.
Wall Street stocks closed in the red after rallying for most of the session. The DOW slipped 0.47%.

GBP/USD – slip-sliding away, traders continued to hammer the Pound lower to 1.2480 in early Asia before settling at 1.2487 currently. While there was no official announcement, reports from different sources indicated that the numbers for a threshold to trigger a no-confidence vote on PM May’s leadership were reached. Sterling’s sentiment remains fragile with more volatility ahead
EUR/USD – finished at the lower end of its recent range at 1.1318 (1.1327 yesterday) ahead of tomorrow’s ECB policy rate meeting, the last for 2018. The ECB is expected to end its asset purchasing program and present its economic assessment of the Eurozone. Expect the range between 1.1300-1.1430 top remain intact in the current environment.
AUD/USD – outperformed, rallying 0.20% to 07207 from 0.7189 on higher resource prices. The Aussie was also buoyed by reports that trade negotiations between China and the US were progressing to ease tensions. Although no details were given on the discussions.
US Ten-Year Bond Yield – bounced off 2.85% to finish at 2.88%. Other global bond yields were mostly flat.

On the Lookout – Expect Asia to continue monitoring news headlines with further volatility in all markets. Today’s economic data releases will focus on Japan’s Core Machinery Orders and Producer Price Index (November), Euro Zone Industrial Production and US Headline and Core CPI.
US Headline Inflation is expected to have slipped in November to 0.0% from October’s 0.3% while Core inflation is forecast flat. A lower number will see a lower Dollar.
The speculative market’s position is long of US Dollar bets. The CFTC Commitment of Traders report (week ended Dec 4) saw net long Dollar bets to their highest level since December 2016. Net speculative Dollar long bets increased in 6 out of 9 IMM currencies (EUR, JPY, GBP, CAD, NZD, and MXN). Net speculative USD longs were trimmed against the AUD to -AUD 50,800 contracts from -AUD 53,900.

Trading Perspective

USD/DXY – Unless we see a surprise in the US inflation numbers tonight, the Dollar Index should stay within it’s recent 96.30-97.60 range. This has been the range since November 20. The unknown is Sterling, which is vulnerable to further sell-offs. The Pound carries an 11.9% weight in the Dollar Index. Likely range today 96.75-97.55.
GBP/USD – this currency pair opens on a soft note in Asia, unable to rebound off its lows. All the news out of the UK are focussed on Brexit which is overwhelmingly negative, for now. The next significant support level for Sterling is at 1.2370/1.2400. Short term support lies at 1.2460 and then 1.2420. Immediate resistance can now be found at 1.2535 and 1.2585. The latest CFTC report saw speculative GBP shorts increased to -GBP 39,800 contracts from -GBP 39,100. This is the largest number of GBP shorts since September 2017. The topside is just as risky and we can expect more volatile times ahead for the Pound.
AUD/USD – The Aussie outperformed the Majors and finished up 0.2%. This currency pair continues to hold supports between 0.7160 and 0.7180. Immediate resistance lies at 0.7220 and 0.7250. A weaker US Dollar could see another strong Aussie attempt at the topside.
USD/JPY – The Dollar rose against the Yen in tandem with the higher US ten-year yield. Risk sentiment also stabilised. USD/JPY traded to a high of 113.47 before settling at 113.378 in Asia. Total net speculative JPY shorts increased to -JPY 109,300 contracts from -JPY 104,300 according to the latest CFTC COT report. These are the largest net JPY shorts since February this year. Likely range today 112.75-113.55. Look to sell rallies.

CFTC Commissioner Behnam Announces Members of the Market Risk Advisory Committee’s Interest Rate Benchmark Reform Subcommittee

December 9, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: CFTC, CFTC Commissioner, Interest Rate Benchmark Reform Subcommittee, LIBOR, Market Risk Advisory Committee, MRAC, SOFR

Washington, DC — Commodity Futures Trading Commission (CFTC) Commissioner Rostin Behnam today announced the members of the Interest Rate Benchmark Reform Subcommittee (Subcommittee) of the CFTC’s Market Risk Advisory Committee (MRAC). Commissioner Behnam is the sponsor of the MRAC.

Thomas Wipf, Vice Chairman of Institutional Securities at Morgan Stanley, will chair the 21-member Subcommittee, which is comprised of a wide range of industry participants that have a high-level of expertise and experience with interest rate benchmarks, as well as LIBOR transition efforts, including asset managers, exchanges, clearinghouses, end-users, intermediaries, market makers, service providers, swap execution facilities, and trade associations.

“I am grateful to all of the extremely qualified individuals who volunteered to join the Subcommittee. I am confident this group of 21 members will thoughtfully fulfill the stated goals of the Subcommittee by providing the MRAC, and ultimately the Commission, with well-reasoned recommendations that will serve to both guide a smooth transition to a risk-free rate, and ultimately protect millions of American consumers from higher costs,” said Commissioner Behnam.

The Subcommittee was established to provide reports and recommendations to the MRAC regarding ongoing efforts to transition U.S. dollar derivatives and related contracts from LIBOR to a risk-free rate (RFR), the Secured Overnight Financing Rate (SOFR), and the impact of such transition on the derivatives markets. Topics and issues this Subcommittee may consider include, but are not limited to, the following:

The treatment, under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, of existing derivatives contracts that are amended to include new fallback provisions or otherwise reference RFRs such as SOFR and new derivatives contracts that reference RFRs; and
Impact on liquidity in derivatives and related markets during the transition.

See full list of MRAC Interest Rate Benchmark Reform Subcommittee members under Related Links.

CFTC Allows Additional UK Multilateral Trading Facilities to Operate without CFTC Registration as Exempt SEFs

December 8, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: CEA, CFTC, Commodity Exchange Act, MTF, OTF, SEF, statutory standards, swap execution facilities, trading, trading facilities

Washington, DC — The Commodity Futures Trading Commission (CFTC) today issued an amended order that will allow an additional four multilateral trading facilities (MTFs) authorized within the European Union (EU) to be exempted from the requirement to register with the CFTC as swap execution facilities (SEFs).

The amended order exempts four United Kingdom-based MTFs – Creditex Brokerage LLP, Currenex, FX Connect, and Thomson Reuters – from SEF registration. These MTFs have been added to the CFTC’s original December 2017 order that exempted certain MTFs and organised trading facilities (OTFs) from the SEF registration requirement.

Under the December 2017 order, the CFTC allowed the European Commission to request that additional MTFs and OTFs, which satisfy certain legal requirements, be added to the list of MTFs and OTFs that were granted exempt SEF status under the order. Entities covered by the exemption are subject to certain continuing statutory standards and other requirements under the Commodity Exchange Act (CEA) and CFTC regulations.

CEA section 5h(g) provides that the CFTC may grant an exemption from SEF registration if it determines that a foreign facility is subject to comparable supervision and regulation by the appropriate governmental authorities in the facility’s home country.

The new MTFs bring the number of exempted MTFs and OTFs to 20 EU-authorized trading venues.

See amended order under Related Links.

CFTC Market Risk Advisory Committee Meets

December 6, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: benchmark reform, CFTC, Giancarlo, LIBOR, Markets Risk Advisor Committee, MRAC, Risk Advisory, Rostin Behnan, SOFR, Tom Wipf

The Markets Risk Advisor Committee (MRAC) of the Commodities Futures Trading Commission (CFTC) met and announced the formation and chair of a new sub-committee.

The MRAC met on December 4, 2018, for its most recent committee meeting where the committee was going to discuss “clearing and vendor risk management.”

CFTC Commission Rostin Behnan is the chair of this committee and in his opening statement he made this announcement about a new sub-committee and its new chair.

“Today’s agenda begins with Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and our newly appointed Chairman of the Interest Rate Benchmark Reform Subcommittee. Tom has more than forty years of experience as an industry leader and has served in multiple capacities at Morgan Stanley in New York, London, and Tokyo.” Behan stated in his opening remarks.“Over the years, he has held several key roles at the U.S. Treasury, the Federal Reserve Bank of New York, and currently serves as a member of the Alternative Reference Rates Committee (‘ARRC’) of the Board of Governors of the Federal Reserve System (‘Federal Reserve Board’), which will be particularly relevant to his role as the Subcommittee Chairman.

“The last meeting of the MRAC in July introduced benchmark reform as a key topic of interest not only to MRAC members, but also to anyone who has a car or small business loan, student loan, mortgage, or credit card. As highlighted by Chairman Giancarlo in remarks last week at the 2018 Financial Stability Conference, despite huge improvements in the governance process to produce LIBOR, the market for unsecured inter-bank term lending that underlies LIBOR has dried up, and the regulatory mandate compelling LIBOR submissions has an expiration date. Fortunately, there are coordinated initiatives underway specifically targeted at addressing the myriad of impending issues specifically related to the derivatives market. Chief among these initiatives is the ARRC, which is tasked with leading and directing the transition away from LIBOR to SOFR, the Secured Overnight Financing Rate.”

Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley

The SOFR, or secured overnight financing rate, was created by the ARRC, or Alternative Rate Reform Committee, which was created after the LIBOR trade fixing scandal.

The SOFR was supposed to compete and hopefully replace LIBOR as a market driven overnight rate.

The SOFR went live in April 2018, by May the CME created a SOFR future, and in July, the first SOFR swap was traded.

As The Industry Spread has exclusively been reporting, in October 2018, Chairman Giancarlo announced that with a full slate of commissioners the committees of the CFTC would be fully functional.

There are six committees on the CFTC.

Since that pronouncement, The Industry Spread has taken its own deep dive and found that in many cases the committees are out of date or have not held hearings in years; this is not true of the Market Risk Advisory Committee.

It has continued to hold hearings regularly and this was the third of three scheduled meetings for 2018.

That committee is a who’s who of industry heavyweights and this most recent hearing was an example.

According to the agenda, there were several items up for debate:

Clearinghouse Risk Management and Governance Today
Non-Default Losses in Recovery and Resolution
Central Counterparty Resolution, Leverage Ratio, and Incentives to Clear
Oversight of Third-Party Service Providers and Vendor Risk Management

The entire meeting was approximately six hours long and The Industry Spread will follow up on clearinghouse risk management in an upcoming article; for now, the meeting was another who’s who of industry heavyweights.

Speakers included:

Salman Banaei, Executive Director, Global Head of Clearance and Settlement, IHS Markit
Lazaro Barreiro, Director for Governance and Operational Risk Policy, Office of the Comptroller of the Currency
Sayee Srinivasan, Deputy Director, Risk Surveillance, Division of Clearing and Risk, CFTC
Marcus Stanley, Policy Director, Americans for Financial Reform
Robert Wasserman, Chief Counsel, Division of Clearing and Risk, CFTC
Biswarup Chatterjee, Managing Director, Co-Head Electronic Trading & Automated Market Making, Global Spread Products, Citigroup
Teo Floor, Systemic Risk Policy Advisor, Eurex Clearing AG
Eileen Kiely, Managing Director, BlackRock
Dennis McLaughlin, Chief Risk Officer, LCH Group Limited
Eric Nield, General Counsel, ICE Clear Credit, LLC
Lee Betsill, Managing Director and Chief Risk Officer, CME Group
Alicia Crighton, Chief Operating Officer, Prime Services, US Clearing, Goldman Sachs, Representing the Futures Industry Association
Dale Michaels, Executive Vice President, Financial Risk Management, The Options Clearing Corporation
Marnie Rosenberg, Managing Director and Global Head of Clearinghouse Risk & Strategy, JP Morgan Chase & Co
Lindsey Hopkins of the Minneapolis Grain Exchange

Insights on the US Treasury Market by Giancarlo

December 4, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: Alexander Hamilton, CFTC, Giancarlo, James Madison, liquidity, Thomas Jefferson, US Treasury

The 10-year US Treasury futures contract is the most liquid US Treasury contract, the US Treasury market is going through a “liquidity hierarchy”, and as volatility increases in US Treasuries, liquidity migrates from less liquid cash securities to more liquid futures contracts.

Those were just three of numerous bits of insight given by the Commodities Futures Trading Commission (CFTC) Chairman Christopher Giancarlo in New York about the US Treasury Market; he made the remarks in front of the fourth annual Conference on Evolving Structures of the US Treasury market.

Earlier this year the CFTC released a study by its Office of the Chief Economist; the study was authored by Lee Baker, LIhong McPhail and CFTC’s Chief Economist, Professor Bruce Tuckman and called “The Liquidity Hierarchy in the U.S. Treasury Market Summary Statistics from CBOT Futures and TRACE Bond Data.”

Giancarlo summarized the findings in the speech.

The US Treasury Market and Technology

Giancarlo has been in the securities industry for thirty-four years and he described how technology has shaped his years in the business.

“Then, the provision of trading liquidity was entirely a human activity, analog and personal, conducted by market specialists who crowded into the financial district and its trading pits and dealing floors each day from ferries, buses and subways. Today, liquidity is increasingly machine conducted, digital and anonymous, from all parts of the country and all corners of the globe.

“But what of that change? What difference, if any, does it make? That is part of what this New York Fed conference and the three that proceeded it are designed to explore – the evolving structure of the market for US Treasury securities. That evolving structure has direct parallels, not only in markets for other government debt, but also in those for corporate debt and, for us at the CFTC, in the range of exchange traded and over-the-counter derivatives.”

Giancarlo on the liquidity hierarchy?

The idea that the US Treasury market was going through liquidity hierarchy was among the most interesting ideas while US Treasuries are traded over the counter, most if not all US Treasury futures products are exchange traded.

“The study portrays a highly complex and dynamic ‘liquidity hierarchy’ in the US Treasury Market. It shows that, while overall risk volume is greater across all cash securities than across all futures contracts, the liquidity hierarchy is more complex, with certain futures contracts more liquid than certain cash securities, and vice versa.” Giancarlo said.

He expanded later.

“The sophisticated liquidity hierarchy of the US Treasury market is well served by the diversity of new and traditional market makers and liquidity providers. Trading cash treasuries in this complex hierarchy is also appropriately conducted by the varied methods of trade execution that Governor Brainard reviewed for us this morning, from electronic trading and batch auction-based systems to traditional voice execution.

“This dynamic and complex liquidity hierarchy is also present in financial and other swaps markets overseen by the CFTC. Regulated swaps markets require the same diversity and flexibility in execution methods that continue to provide a robust and resilient foundation for cash markets for US Treasury securities.”

Parallels in The US Treasury and SWAPs markets

Giancarlo continued making comparisons between the US Treasury Market and the SWAPs market.

“In fact, we observe quite similar developments in US and global derivatives markets, where both broker-dealers and proprietary trading firms play important, often complementary, roles in liquidity provision. In swaps, we also see the growing use of electronic trading, including batch auction-based systems. “ Giancarlo said. “Yet, those more automated trading systems continue to operate alongside more traditional, ‘squawk box’ voice execution, just as Governor Brainard (Brainard also spoke at the conference) confirmed remain active in less liquid segments of cash Treasuries.

“What makes all of those methods of swaps execution continually viable is the complex and dynamic hierarchy of swaps liquidity. It is the reason why the CFTC recently put forward a proposal to sanction within our swaps trading mandate a wider scope of trading methodologies similar to what is available in US cash treasuries. Our new proposal is designed to encourage greater flexibility, competition and innovation in methods of swaps trade execution without impacting larger financial stability goals. The dynamic and complex liquidity hierarchy of financial swaps requires the same diversity and flexibility in execution methods that are widely used in cash markets for US Treasury securities.”

Other Conclusions

Giancarlo also noted these trends between the US Treasury cash securities and futures.

Futures contracts play a dynamic role in liquidity-challenged environments. The relative amount of risk traded through futures contracts is higher on days with large price movements and at times outside of U.S. trading hours.
Average trade size, in risk terms, is much higher for cash securities than for futures contracts. This is likely due to the higher prevalence of automated trading in futures markets and execution on electronic exchanges, which in turn results in futures trades being broken down into smaller orders for execution.”

Giancarlo, Thomas Jefferson, Alexander Hamilton and James Madison

Giancarlo also recalled an interesting anecdote describing how New York and Washington D.C. became financial and government hubs.

“It is good to be on Maiden Lane, where in 1790, at a house just down the block, Number 57, Thomas Jefferson, Alexander Hamilton and James Madison produced the compromise of 1790. Under that agreement the national capital would move out of New York (satisfying the two Virginians, Jefferson and Madison) and the new Federal government would undertake and settle the Revolutionary War indebtedness of the thirteen states (satisfying Hamilton). This compromise assured that the new District of Columbia would be America’s political capital and New York City would be its financial centre.”

Jeffersonian Vs Hamiltonian

Both Jefferson and Hamilton have been previously noted in stories in The Industry Spread.

Their philosophies are the centre of the most important politically philosophical debate for the American- and maybe even global- financial services industry.

Hamilton was a believer in a strong federal government, while Jefferson feared that a strong federal government would simply replace the monarchy in tyranny.

As George Washington’s first US Treasury Secretary, Hamilton’s vision of a central banking system won out; Jefferson, as Washington’s first Secretary of State, argued against it but Washington sided with Hamilton.

The Bank of the United States was chartered under Hamilton’s watchful eye in 1790 with an initial investment of $10 million; it was an early pre-cursor to what is now the Federal Reserve and the national banking system.

The argument is fought over today on the tenth amendment, which grants the states anything not enumerated in the US Constitution, and the commerce clause which grants the federal government power to regulate interstate commerce.

The Dodd/Frank bill was one example of the Hamiltonian philosophy winning out; Fintech has recently started being approved for federal charters under the OCC in another Hamiltonian victory.

Jeffersonianism has suffered numerous setbacks; while all out tyranny has never formed, Jefferson would consider income tax rates as high as nearly forty percent a form of tyranny.

The federal income tax wasn’t even first instituted until 1861.

Ironically, Jefferson had the same distaste of big banks as Massachusetts Democratic Senator Elizabeth Warren- specifically their distaste for the power they wield- their solutions to limiting this power would vary vastly.

Hamilton’s vision has largely been realised. The Federal Reserve and the Office of Comptroller and Currency, which created a national banking system by making the OCC a single regulator for member banks, are both manifestations of his vision.

Jefferson favoured a state banking system then; today, there is a parallel state banking system, with banks being chartered in a single state and operating in that state.

He, like Republicans, would oppose anything like Dodd/Frank and like Republicans favour any law which would help those banks be free of any federal burden.

He would likely concur with Republican complaints that the Volcker rule applies unnecessarily to state banks which occasionally trade in SWAPs repos, and other fancy instruments, even though the effect on the system is negligible.

Hamiltonians believe that financial services are inherently interstate commerce and require one set of rules while Jeffersonians believe that states are the incubators of ideas and good ideas are standardised across states over time while bad ideas serve as warnings to other states.

CFTC and K-State to Host 2nd Agricultural Commodity Futures Conference

November 30, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: agricultural, Agricultural Commodity, agricultural futures markets, CFTC, Conference, K-State, Land Grant Mission, markets, risk management

Washington, DC — The Commodity Futures Trading Commission (CFTC) and the Center for Risk Management Education and Research (CRMER) at Kansas State University will host AgCon2019, the 2^nd annual agricultural commodity futures conference on April 11-12 in Overland Park, Kansas.

The CFTC and CRMER will again jointly host the conference, which brings together federal, state, and local governments with agribusiness and academia to discuss a range of topics that are important to the agricultural community who depend on the futures markets.

“We are excited to once again partner with K-State to discuss significant derivatives-markets issues affecting the agricultural community. AgCon2018 brought together stakeholders from industry, government and academia — to explore a wide range of topics facing the agricultural futures markets,” said CFTC Chairman J. Christopher Giancarlo. “The robust presentations and insightful

Christopher Giancarlo, CFTC chairman

panel discussions from that first conference started important conversations on numerous issues facing the agricultural community. Next year, we plan to continue those conversations with a focus on some key areas that sparked great interest, including electronic trading and the use of matching algorithms and lack of convergence in certain contracts, and we will explore other emerging issues that affect users of agricultural futures markets.”

“Kansas State University is pleased to partner with the CFTC to host our second conference focused on agricultural futures markets. The need for derivative markets that offer effective price risk management for the agricultural and food industry has never been greater,” said K-State President Richard Myers. “Last year’s conference significantly elevated the conversation facilitating ideas and actions to enhance market resilience. The 2019 conference will continue the discussion to build ever stronger agricultural markets. This conference aligns perfectly with K-State’s Land Grant Mission bringing together industry, government, and academia in a forum for engaged dialogue.”

AgCon2019 conference details and registration information will be announced in the coming months.

CFTC Explains Smart Contracts

November 29, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: CFTC, Commodities Futures Trading Commission, Daniel Gorfine, digital signatures, LabCFTC, payment transactions, smart contracts, virtual currency

The digital world is getting even more digital and the Commodities Futures Trading Commission (CFTC) is staying up.

The CFTC released a white paper entitled: “Primer Smart Contracts”.

“Smart contracts are being used to drive further automation in our markets and may have an impact across a range of economic activities,” said LabCFTC Director Daniel Gorfine. “This primer is focused on explaining smart contracts, exploring how they may impact our markets and highlighting potentially novel risks and challenges.”

What is a smart contract?

A smart contract is, “a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.” According to its Wikipedia page.

A smart contract, the paper notes, “Allows self-executing computer code to take actions at specified times and/or based on reference to the occurrence or non-occurrence of an action or event (e.g., delivery of an asset, weather conditions, or change in a reference rate).”

These sorts of contracts are especially popular in virtual currency transactions.

The paper further notes, “Smart contracts use digital signatures – private cryptographic keys held by each party to verify participation and assent to agreed terms.” Continuing, “Smart contracts use oracles – a mutually agreed upon, network authenticated reference data provider (potentially a third-party); this is a source of information to determine actions and/or contractual outcomes, for example, commodity prices, weather data, interest rates, or an event occurrence.”

Smart contracts are executed, including payment transactions, electronically without the need for humans to act through the process.

“A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.” Said computer scientist Nick Szabo in 1996. The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.”

The potential benefits, the paper noted, include everything from faster speed to security.

CFTC

The CFTC and Smart Contracts

The paper noted that smart contracts can be used in everything from vending machines, crypto, and even credit default swaps, the latter two being regulated by the CFTC.

Smart contracts can “Streamline trading of products subject to oversight by the CFTC (e.g., options, futures, and swaps) and enhance efficiency from pre-trade through post-trade (e.g., price discovery, execution, clearing, and settlement).” The paper noted further.

While smart contracts have the potential of making transactions go faster, they also have the potential of making transactions less transparent and to “Unlawfully circumvent rules and protections.”

It is there where the CFTC plays a role.

For instance, the paper noted, “Smart contracts may be manipulated by insiders who may have ‘backdoors’ or ‘kill switches’ to the code or a deeper understanding of how the smart contract will react to particular events or inputs.”

“As with other areas of innovation, while there are many potential benefits, it is also critical to understand and mitigate risks and challenges; the primer accordingly works through a range of operational, technical, cybersecurity, fraud and manipulation, and governance risks and challenges.” The CFTC said in a statement.

The primer was released by LabCFTC, created in 2017 and CFTC’s fintech initiative.

CFTC and State of Utah Charge Salt Lake City Precious Metals Dealer and His Company with Engaging in $170 Million Precious Metals Ponzi Scheme

November 26, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: CFTC, CFTC Regulations, commerce division, investors, Metals Dealer, Ponzi scheme, Salt Lake Cit

Washington, DC — The Commodity Futures Trading Commission (CFTC) and the Utah Department of Commerce, Division of Securities, through its Attorney General, jointly filed a civil enforcement action in the U.S. District Court for the District of Utah, Central Division, against Defendants Gaylen Dean Rust (Rust) and Rust Rare Coin, Inc. (RRC) of Layton, Utah and Salt Lake City, Utah, respectively. The Complaint charges Rust and his company RRC with defrauding at least 200 individuals — from Utah and at least 16 other states — and fraudulently obtaining more than $170 million from investors since May 2013 in a precious metals Ponzi scheme.

According to the complaint, the Defendants’ fraud, as alleged, is ongoing. In the first eight months of 2018, the Defendants received at least $42 million from investors in a pool that purportedly bought and sold silver. The Defendants also attempted to solicit new investors in this pool at least as recently as October 8, 2018, as alleged in the Complaint.

Court Freezes Defendants’ Assets and Appoints a Temporary Receiver

On November 15, 2018, the Honorable Tena Campbell, U.S. District Court Judge for the District of Utah, entered a restraining order freezing the assets of the Defendants and the Relief Defendants and permitting the CFTC and the State of Utah to inspect all relevant records of the Defendants and the Relief Defendants. The Court also appointed Jonathan O. Hafen as a temporary receiver to take control of RRC and the corporate Relief Defendants, as well as the assets of Rust and the individual Relief Defendants.

CFTC Director of Enforcement Comments

James McDonald, CFTC’s Head of Enforcement

Director of Enforcement James McDonald commented, “As alleged, for at least a decade, the Defendants defrauded their friends, customers, and business associates out of more than $170 million. The Defendants allegedly concealed their fraud with false account statements and Ponzi payments; however, their scheme was brought to light through the combined efforts of the CFTC and our law enforcement partners. This is yet another example of the CFTC’s commitment to coordinate with our law enforcement partners both to protect our markets from fraud and to ensure that wrongdoers are held accountable. I’m grateful to the Utah Department of Commerce, Division of Securities and Utah’s Attorney General and their staffs for their assistance in this matter.

Defendants’ Deceptive and Fraudulent Precious Metals Scheme

According to the Complaint, from at least as early as 2008 and continuing through the present, the Defendants tricked investors into believing that the Defendants were pooling investor money for the purpose of entering into contracts of sale for silver, a commodity in interstate commerce (Silver Pool). As alleged, the Defendants told investors and prospective investors that they would sell silver held in the pool as market prices rose and buy silver for the pool as market prices fell; thereby increasing the amount of silver held in the Silver Pool, as well as the value of each investor’s share in that pool.

As alleged in the Complaint, the Silver Pool was a sham. The Defendants falsely told investors and prospective investors in the Silver Pool that by trading silver in this manner, they generated extraordinarily high profits, averaging 20 to 25 percent per year and sometimes as high as 40 percent per year or more. The Defendants provided investors with false account statements that showed every trade made by the Defendants as being profitable. The Defendants also told investors that the Silver Pool possessed approximately $77 to $80 million of silver, which was stored at Brink’s, Incorporated (Brink’s) depositories in Salt Lake City, Utah and/or Los Angeles, California, even though the Defendants never purchased and stored anything approaching that amount at Brink’s.

According to the Complaint, the Defendants did not use contributions from investors to purchase silver for the Silver Pool. Instead, the Defendants misappropriated investor funds and used these funds to make payments to other investors in the manner of a Ponzi scheme, transfer money to other companies owned by Rust, and pay personal expenses.

In their continuing litigation against the Defendants, the CFTC and the State of Utah seek disgorgement of ill-gotten gains, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act, CFTC Regulations, and Utah securities laws, as charged.

The CFTC acknowledges and appreciates the cooperation and assistance of the Utah Department of Commerce, Division of Securities; the Utah Attorney General’s Office; the Federal Bureau of Investigation; the U.S. Attorney’s Office for the District of Utah; and the Securities and Exchange Commission, Salt Lake City Regional Office.

CFTC Division of Enforcement staff members responsible for this action are Jenny Chapin, Stephen Turley, Thomas Simek, Joyce Brandt, Christopher Reed, and Charles Marvine.

CFTC’s Precious Metals Customer Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Precious Metals Fraud Advisory, which alerts customers to precious metals fraud and lists simple ways to spot precious metals scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

CFTC Approves a Final Rule to Amend Uncleared Swap Margin Requirements

November 25, 2018 by industryspread Leave a Comment Filed Under: Regulatory Annoucements Tagged: CFTC, FDIC, Federal Reserve System, FRS, FTC Margin Rule, OCC, Prudential Regulator, swap margin requirements

Washington, DC — The Commodity Futures Trading Commission (CFTC) announced today that it has approved a final rule to amend its uncleared swap margin requirements (CFTC Margin Rule) to better align with certain rules (QFC Rules) adopted by the Board of Governors of the Federal Reserve System (FRS), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) that impose restrictions on certain qualified financial contracts.

This final rule is consistent with rule changes recently adopted by the Prudential Regulators to the Prudential Margin Rule and addresses suggestions received as part of the CFTC’s Project KISS initiative for the CFTC to harmonize its uncleared swap margin regime with that of the Prudential Regulators.

The final rule amendments are effective 30 days after the publication date in the Federal Register.

The amendments ensure that master netting agreements are not excluded from the definition of “eligible master netting agreement” under the CFTC Margin Rule based solely on such agreements’ compliance with the QFC Rules. They also ensure that any legacy uncleared swap that is not subject to the CFTC Margin Rule would not become so subject if it is amended solely to comply with the QFC Rules.

The CFTC is required to establish margin requirements for uncleared swaps for all CFTC registered swap dealers (SD) and major swap participants (MSP) for which there is not a Prudential Regulator (i.e. the FRS, FDIC, OCC, Farm Credit Administration, and Federal Housing Finance Agency). The Prudential Regulators impose similar margin requirements on SDs and MSPs for which there is a Prudential Regulator in their margin rule (Prudential Margin Rule).

The CFTC Margin Rule was issued in January 2016 and establishes minimum requirements for SDs and MSPs to collect and post initial and variation margin for certain swaps that are not cleared by a registered derivatives clearing organization or a derivatives clearing organization that the CFTC has exempted from registration. The CFTC Margin Rule is designed to help ensure the safety and soundness of SDs and MSPs while being appropriate for the risk associated with the uncleared swaps.