LEGISLATIVE DEVELOPMENTS

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1 In This Issue: CFTC DEVELOPMENTS... 1 LEGISLATIVE DEVELOPMENTS... 1 ACTIONS TO IMPLEMENT DODD-FRANK... 2 OTHER CFTC REGULATORY ACTIONS... 4 CFTC ENFORCEMENT ACTIONS... 5 BANKRUPTCY LAW DEVELOPMENTS... 7 CME GROUP RULEMAKING... 8 CME GROUP LITIGATION AND ENFORCEMENT ACTIONS... 8 NFA RULEMAKING... 9 NFA ENFORCEMENT ACTIONS CFTC DEVELOPMENTS New Chairman and Commissioners Sworn in at CFTC After being confirmed by the Senate, a new viously was a member of a large law firm and chairman and two new commissioners were the acting chairman of the Securities Investor sworn into office at the CFTC. The new CFTC Protection Corporation board. Giancarlo previously was executive vice president of the GFI chairman is Timothy Massad. Massad previously was the Assistant Secretary of the Treasury for Financial Stability, where he adminis- also operates a swap execution facility. Group, an inter-dealer brokerage firm that tered the controversial TARP program. Massad previously spent 25 years with a large New There will soon be another vacancy to fill, as York law firm. Scott O Malia recently announced that he will resign his position as a CFTC commissioner, The two new commissioners are Sharon effective on August 8, to become CEO of the Bowen and Christopher Giancarlo. Bowen pre- International Swaps and Derivatives Association. LEGISLATIVE DEVELOPMENTS House Passes CFTC Reauthorization Bill Schiff Hardin Practice Carl A. Royal Managing Editor Paul E. Dengel Practice Group Leader Stacie R. Hartman Deputy Practice Group Leader Geoffrey H. Coll Jack P. Drogin Jacob L. Kahn Andrew M. Klein Michael L. Meyer Victoria Pool Michael K. Wolensky John S. Worden Elyse K. Yang On June 24, 2014, the House of Representatives passed H.R. 4413, known as the Customer Protection and End User Relief Act. In addition to reauthorizing the CFTC through September 2018, the bill contains provisions dealing with (1) customer protection enhancements, (2) the internal administration of the CFTC, (3) amendments to Dodd-Frank, and (4) other provisions on miscellaneous subjects. The bill was passed in the House by a vote of 265 in favor and 144 opposed. Its prospects in the Senate are uncertain. The Senate has not yet proposed its own CFTC reauthorization bill. The White House issued a statement strongly opposing H.R. 4413, arguing that the bill would disrupt the effective management and operation of the [CFTC], without providing the more robust and reliable funding that the agency needs. Set forth below are short summaries of some of the bill s more important provisions: 1. Customer protection enhancements The House bill would codify some of the customer protection enhancements recently adopted by the CFTC and NFA, such as daily confirmations of customer segregated funds balances and rules governing the withdrawal of an FCM s residual interest in customer segregated funds. In the event that a commodity broker becomes insolvent, the bill would authorize the CFTC to require that property of the broker s bankruptcy estate be included in customer property to the extent needed to cover the claims of customers. 2. Internal administration of the CFTC The House bill would require that the CFTC, before promulgating a regulation or issuing an order, assess and publish the costs and benefits, both qualitative and quantitative, of its proposed action. If the

2 CFTC s action is appealed to a court, the bill provides that the court shall affirm the CFTC s assessment of costs and benefits, unless the court finds the assessment to be an abuse of discretion. The bill would revise the organizational and operational workings of the CFTC staff by modifying the reporting structure for CFTC division directors, requiring them to report to the full commission rather than only to the CFTC chairman. The bill would establish a specified process for staff actions such as no-action letters and staff guidance. 3. Amendments to Dodd-Frank The bill would exempt non-financial entity end users from margin requirements for those swaps not subject to a mandatory clearing requirement. The bill would provide relief from certain recordkeeping requirements for agricultural and commercial end users. The bill would require the current de minimus threshold of $8 billion for swap dealer registration to be maintained, unless the CFTC affirmatively acts by rule or regulation to revise the threshold. The bill would treat swaps with a government-owned utility as comparable to swaps with other counterparties for the purpose of determining the threshold de minimis amount that would trigger a requirement to register as a swap dealer. The bill would require the CFTC and the SEC to adopt joint rules governing cross-border transactions in swaps and security-based swaps. 4. Other provisions The bill would exempt investment companies that are currently registered with the SEC from an obligation to register with the CFTC as a commodity pool operator, provided that the investment company holds or trades only in financial commodity interests such as futures or swaps on interest rates, currencies, or stock indexes, but not in physical commodity interests such as futures or swaps on agricultural, energy, or metals products. The bill would clarify that certain anticipatory hedging is considered bona fide hedging for the purpose of applying speculative position limits. The bill would require studies on various topics, such as high-frequency trading and CFTC budgetary resources and expenditures. ACTIONS TO IMPLEMENT DODD-FRANK Mandatory Trading on Swap Execution Facilities (SEFs) Under Dodd-Frank, swaps that are subject to mandatory clearing must be executed either on a futures exchange or a SEF, provided that at least one exchange or SEF makes the swap available to trade. Thus far, the CFTC has determined that certain standardized interest rate and credit default swaps are subject to mandatory clearing. (The CFTC has not yet made that determination for swaps in other asset classes.) Various SEFs have made a number of interest rate and credit default swaps available to trade, and those swaps are now subject to the mandatory trading requirement, unless an exception applies. Mandatory Trading of Packaged Swaps Transactions in swaps are often combined with transactions in other financial instruments and executed as a single packaged trade. If at least one of the components of a packaged trade is a swap that is subject to the mandatory trading requirement, the CFTC has taken the position that the entire package must be executed on an exchange or a SEF. On May 1, 2014, the CFTC staff issued a no-action letter stating when this requirement would become effective: For packaged trades in which all components are swaps subject to mandatory clearing, the requirement became effective on June 1, For packaged trades in which the swap components are subject to mandatory trading and the other components are U.S. Treasury securities, the requirement became effective on June 15, For all other packaged trades with at least one swap component that is subject to mandatory trading, the requirement will become effective on November 15,

3 Recordkeeping Relief for Certain SEF Members The CFTC staff recently issued two no-action letters that provide temporary relief to certain SEF members from specified recordkeeping requirements. CFTC Regulation 1.35(a) requires each member of an exchange or SEF to keep full and complete records of all swap transactions and related cash or forward transactions, including both written and oral communications. The requirement to record oral communications does not apply to certain enumerated persons, but it does apply to commodity trading advisors (CTAs) who are members of a SEF. In the first no-action letter, the CFTC staff stated that it would not recommend enforcement action against a CTA for failure to comply, prior to December 31, 2014, with the requirement to record oral communications in connection with swap transactions. The second CFTC no-action letter dealt with members of an exchange or SEF who are not required to be registered with the CFTC in any capacity (Non-registrants). Those members are not required to record oral communications, but they are required to retain all forms of written communications, including s, instant messages, and text messages. Certain Nonregistrants informed the CFTC that it would be cost-prohibitive for them to search, retain, and archive such electronic messages in accordance with the CFTC s regulations. The CFTC staff accepted that argument in part, and it issued a no action letter stating that it would not recommend enforcement action against a Non registrant for failure to record text messages or to keep records in a manner searchable by transaction. However, the Non-registrants will be required to keep all other written records (including s and instant messages) as required by CFTC Regulation 1.35(a). The relief provided by this no-action letter will remain in effect until the CFTC takes final action with respect to the subject matter of the letter. SEC Adopts Final Rules Regarding Cross-Border Transactions On June 25, 2014, the SEC adopted rules regarding how cross border transactions will apply to the definitions of security-based swap dealer and major security-based swap participant. Previous rules exempted an entity that engages in a de minimis quantity of dealing in security-based (SB) swaps from the definition of SB swap dealer. (SB swaps include derivatives that are based on a single security or loan or on a narrow-based security index.) The recent rules address the question of when a cross-border transaction (e.g., a SB swap between a U.S. person and a non-u.s. person) must be counted in determining whether a person has exceeded its de minimis threshold and thus must register as a SB swap dealer. The new SEC rules define the term U.S. person as including: Any natural person who resides in the United States; Any partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States; or Any discretionary or non-discretionary account of a U.S. person. A U.S. person must include all of its SB swap transactions (with both U.S. and non-u.s. persons) in determining whether it exceeds the applicable de minimis threshold. A non U.S. person must include all SB swap transactions with U.S. persons, including foreign branches of U.S. banks (unless the bank is registered as a SB swap dealer), in determining whether it exceeds the de minimis threshold. In addition, a non-u.s. person also must include SB swap transactions with a non-u.s. person counterparty if such transactions are guaranteed by an affiliate of the counterparty that is a U.S. person. The SEC s cross-border rules generally are similar to the crossborder interpretive guidance issued by the CFTC last year, although there are some differences. For example, the CFTC s guidance treats a collective investment vehicle that is majority owned by U.S. persons as a U.S. person itself, while the SEC s rules would not. CFTC Extends Cross-Border Relief to December 31 Last November, the CFTC staff issued an advisory stating that a transaction between a non-u.s. swap dealer and a foreign client is subject to the CFTC s swap rules if the swap is arranged, negotiated, or executed by personnel of the dealer who are located in the United States. Recognizing that the position expressed in the staff advisory is controversial, the CFTC requested public comments on the advisory, and the 3

4 CFTC staff granted no-action relief to non-u.s. swap dealers in that situation that would expire on September 15, In a new CFTC staff no-action letter dated June 4, 2014, the no-action relief was extended until December 31, Overall Progress in Adopting Dodd-Frank Rules As of July 1, 2014, the CFTC had approved final rules that satisfied 50 out of 60 (83%) of its rulemaking requirements under Dodd-Frank. The CFTC is ahead of the other federal regulators in this regard. As of the same date, the SEC had approved final rules covering 42 out of 95 (44%) of its Dodd- Frank rulemaking requirements, while the bank regulators had approved 70 out of 135 (52%) of their Dodd-Frank rulemaking requirements. (These statistics are taken from the Davis Polk Regulatory Tracker.) OTHER CFTC REGULATORY ACTIONS CFTC Issues First Whistleblower Award On May 20, 2014, the CFTC s Whistleblower Program issued its first award, pursuant to which it paid an anonymous whistleblower $240,000 for a tip from the whistleblower relating to violations of the commodities laws. In order to protect the anonymity of the whistleblower, no further information was released about the award recipient or the commodities laws violations that were reported. The Whistleblower Program was created by the Dodd-Frank Act in order to provide awards to whistleblowers who voluntarily provide the CFTC with original information about violations of the Commodity Exchange Act (CEA) resulting in monetary sanctions exceeding $1 million. Awards may range from 10-30% of collected sanctions in an action. The SEC also recently announced its first whistleblower award for The SEC s award of $875,000 will be split between two whistleblowers. This will be the eighth award issued by the SEC s whistleblower program since its inception in Streamlined Approach for Commodity Pool Operator Registration Relief On May 12, 2014, the CFTC s Division of Swap Dealer and Intermediary Oversight (Division) issued CFTC Letter No setting forth a standardized, streamlined approach for considering requests for registration no-action relief for commodity pool operators (CPOs) who delegate certain activities (Delegating CPOs) to a registered CPO. The Letter provides a simple process for requesting relief if certain conditions are met by both the Delegating CPO and the registered CPO to whom the activities are delegated (the Designated CPO). Delegating CPOs who seek no-action relief and meet the requirements set forth in the Letter must submit a request for exemption to the Division using the form application attached to the Letter. The Form requires a certification that all applicable criteria for the exemption from registration have been met and an acknowledgement of designation by the Designated CPO. The following conditions must be met for relief to be granted under the Letter: 1. Pursuant to a legally binding document, the Delegating CPO has delegated to the Designated CPO all of its investment management authority with respect to the commodity pool; the Delegating CPO does not participate in the solicitation of participants for the commodity pool; and the Delegating CPO does not manage any property of the commodity pool. 2. The Designated CPO is registered as a CPO. 3. The Delegating CPO is not subject to a statutory disqualification under Sections 8a(2) or 8a(3) of the CEA. 4. There is a business purpose for the Designated CPO being a separate entity from the Delegating CPO that is not solely to avoid registration by the Delegating CPO under the CEA and the Commission s regulations. 5. The books and records of the Delegating CPO with respect to the commodity pool are maintained by the Designated CPO in accordance with CFTC Regulation If the Delegating CPO and the Designated CPO are 4

5 each a non-natural person, then one such CPO controls, is controlled by, or is under common control with the other CPO. 7. If a Delegating CPO is a non-natural person, then such Delegating CPO and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC s regulations by the other in connection with the operation of the commodity pool. 8. If a Delegating CPO is a natural person and is not an Unaffiliated Board Member, as defined in the Letter, then such Delegating CPO and the Designated CPO have executed a legally binding document whereby each undertakes to be jointly and severally liable for any violation of the CEA or the CFTC s regulations by the other in connection with the operation of the commodity pool. 9. If a Delegating CPO is an Unaffiliated Board Member, then such Delegating CPO must be subject to liability as a Board member in accordance with the laws under which the commodity pool is established. Delegating CPOs who do not qualify for relief under the Letter may continue to submit individual requests for relief from registration, which the Division will consider on an individual basis. Position Limit Comment Period Extended Following its June 19, 2014 Roundtable on its position limits and aggregation proposals, the CFTC extended the deadline for commenting on the proposals to August 4, The position limits proposal, which was published in the Federal Register on December 12, 2013, establishes speculative position limits for 28 exempt and agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to those contracts. The aggregation proposal, which was published in the Federal Register on November 15, 2013, amends existing regulations and applies aggregation standards applicable to position limits. The Roundtable focused on the proposals treatment of hedges of a physical commodity by a commercial enterprise, including gross hedging, cross-commodity hedging, anticipatory hedging, and the process for obtaining a non-enumerated exemption. CFTC ENFORCEMENT ACTIONS CFTC Wins Bench Trial Against Precious Metals Firms and Their Officers In May, a federal court in Florida ruled in favor of the CFTC after a bench trial on fraud claims against Hunter Wise Commodities, LLC and related entities, and the individuals running the companies. The order required the defendants to pay more than $50 million in restitution to defrauded customers and a civil monetary penalty of more than $55 million. It held that the defendants had knowingly defrauded more than 3,000 customers for over a year. In particular, defendants had solicited customers to open precious metals trading accounts on a financed basis. But defendants then charged exorbitant interest rates on financing provided to the customers supposedly to purchase metals, and forced customers to pay high storage fees for those metals. In reality, however, defendants never purchased the metals they told customers they were buying, and more than 90% of the defendants customers lost money through the scheme. In the same case, just a month earlier, the U.S. Court of Appeals for the Eleventh Circuit affirmed a decision by the trial court holding that the CFTC had jurisdiction over the alleged leveraged metals transactions. The Eleventh Circuit held that the Dodd-Frank Act amendments had authorized the CFTC to regulate transactions offered on a leveraged or margined basis, or financed. CFTC Continues to Bring New Enforcement Actions for Civil Perjury Implementing its authority under revised Section 6(c)(2) of the CEA, which prohibits the making of false or misleading statements to the CFTC, the CFTC has already settled two enforcement actions in 2014 for civil perjury offenses. The first case, settled in January, charged foreign national Artem Obloensky with making false statements to the CFTC during an investigative interview. In particular, Obloensky allegedly told CFTC enforcement officials that the two entities with which he is affiliated pursue different strategies and that, as a result, it was [p]ure coincidence that the entities executed 5

6 crossing transactions. In fact, however, the two entities had traded opposite of each other nearly 200 times, and even modified their orders on occasion to ensure that their trades would match. Obloensky was alleged to have made the trading decisions for both entities accounts. He agreed to pay a $250,000 civil monetary penalty to settle the CFTC s charges. In addition, in March 2014, the CFTC settled administrative charges against Sean Stropp alleging that Stropp, during a Division of Enforcement investigation, provided false representations to the CFTC in a signed and notarized financial disclosure statement. The CFTC alleged that Stropp falsely represented that the statement included all of his known assets, and that he deliberately omitted material facts from the statement, such as his control of another entity and his ownership of that entity s bank accounts. Stropp is currently incarcerated as a result of his guilty plea, in February 2014, to operating a fraudulent investment scheme through a leveraged metals firm. He agreed to pay a civil monetary penalty of $250,000 to settle the CFTC s civil perjury charges. FCM Charged with Violating Segregated Fund Rules The CFTC s post-mf Global commitment to enforcing customer segregated and secured fund requirements was evidenced most recently by an administrative settlement with Morgan Stanley Smith Barney LLC (MSSB). MSSB notified the CFTC that it had erroneously transferred $16 million from a secured funds bank account to a segregated funds account, resulting in a secured funds deficiency of $9 million. MSSB cured the deficiency within a day. MSSB subsequently engaged KPMG LLP to review its policies and procedures with respect to segregated and secured accounts. KPMG issued a report recommending that MSSB make certain changes to its policies and procedures, which MSSB then made. Nevertheless, the CFTC in its investigation identified a number of isolated violations of secured and segregated fund rules, which in the CFTC s view showed a lack of appropriate supervision by MSSB. MSSB agreed to pay $490,000 to settle the CFTC s charges. CFTC Settles Two More Speculative Position Limit Cases Despite the ongoing uncertainty regarding the CFTC s new speculative position limits, the CFTC continues to charge market participants with violations of existing speculative position limits. In the past six months, for example, the CFTC has settled two such cases. The first case, against Morgan Stanley Capital Group Inc. (MSCGI), was settled pursuant to an administrative consent order. Under the order, the CFTC found that MSCGI had exceeded the speculative position limits for CBOT soybean meal futures contracts set by CFTC Regulation on two consecutive days in January MSCGI agreed to pay a $200,000 monetary penalty to settle the CFTC s charges. The second case was an enforcement action filed by the CFTC in federal court in Chicago against registered floor trader James Yadgir for violations of CME speculative position limits, which in turn constitutes a violation of Section 4a(e) of the CEA. The CFTC alleged that Yadgir had exceeded limits in (1) live cattle futures contracts on one day in April 2011 (by 70 contracts), and (2) feeder cattle futures contracts on two days in May 2012 (by and contracts, respectively). Five months after the lawsuit was filed, the court entered a consent judgment finding that Yadgir had indeed violated CME s limits on these three occasions. Yadgir agreed to pay $130,000 to settle the CFTC s charges, and consented to the entry of a permanent injunction against further violations of the speculative position limits of a registered entity. CFTC Settles Charges that UK Firms Manipulated Yen LIBOR In May, the CFTC issued an order settling charges that RP Martin Holdings Limited and its subsidiary, Martin Brokers (UK) Limited, had attempted to manipulate and successfully manipulated the London Interbank Offered Rate (LIBOR) for Yen. The CFTC s order also found that the respondents had violated rules regarding false reporting, and aiding and abetting. In particular, the CFTC found that for nearly a year (Sept to Aug. 2009), the respondents knowingly disseminated false and misleading information regarding Yen borrowing rates, offered spoof bids to clients, and even contacted Yen LIBOR submitters to ask them to move their submissions in a particular direction. According to the order, the respondents engaged in this conduct to assist a senior Yen derivatives trader at UBS Securities Japan Co., Ltd. in his efforts to manipulate Yen LIBOR to benefit certain of his derivatives positions. The respondents allegedly accepted more than $400,000 from 6

7 this trader for their efforts. As part of their settlement with the CFTC, the respondents agreed to pay a $1.2 million civil monetary penalty, and to strengthen their internal controls, policies and procedures to ensure that such manipulative activities do not occur in the future. BANKRUPTCY LAW DEVELOPMENTS FCMs Win on Appeal in Sentinel Bankruptcy Case On March 19, 2014, the U.S. Court of Appeals for the Seventh Circuit issued an important decision that allowed FCMs to retain funds that had been transferred to them by Sentinel Management Group before and after Sentinel filed for bankruptcy in The Seventh Circuit reversed the ruling by the district court for the Northern District of Illinois that had ordered the FCMs to return those funds to Sentinel s bankruptcy estate, where the funds could be distributed on a pro rata basis among all clients of Sentinel. Customers. The Trustee also asked the bankruptcy court to clarify its previous order approving the post-bankruptcy transfer. The bankruptcy court ruled that its earlier order was not intended to preclude the Trustee from clawing back the funds transferred to the SEG 1 Customers in order to facilitate a more equitable distribution of Sentinel s assets. The district court then held that both the pre-bankruptcy and post-bankruptcy transfers should be avoided under applicable bankruptcy law principles. As background, Sentinel had held assets belonging to the customers of other FCMs (SEG 1 Customers), as well as for some private investors and some FCMs proprietary accounts (SEG 3 Customers). It did not keep SEG 1 and SEG 3 Customers assets separate as required. It pooled them and used them to purchase securities through repo transactions. When the credit market contracted in 2007, Sentinel transferred approximately $22.5 million to certain SEG 1 Customers and then filed for bankruptcy. Shortly thereafter, it asked the bankruptcy court to approve a $297 million transfer to the SEG 1 Customers. The FCMs carrying the SEG 1 Customer accounts and the CFTC supported the transfer, in part because of their concern that a number of the FCMs would become insolvent if they were required to reimburse their customers without access to the funds that had been invested with Sentinel. The bankruptcy court approved the transfer. The Seventh Circuit reversed the district court regarding both transfers. With respect to the pre-bankruptcy transfer, the Seventh Circuit held that the transfer was a settlement payment that was made in connection with a securities contract, and thus was protected under a safe harbor in the Bankruptcy Code. With respect to the post-bankruptcy transfer, the Seventh Circuit held that the transfer had been authorized by the bankruptcy court s approval order. The Seventh Circuit found that the bankruptcy court s later attempt to clarify that it had not authorized the transfer was an abuse of discretion. The Seventh Circuit noted that avoidance of the transfer would harm the FCMs current customers, not their 2007 customers, and that to give effect to the bankruptcy court s clarification would make parties hesitant to rely on such orders in the future. The Liquidation Trustee for the Sentinel estate filed an action in the district court to avoid the transfers to SEG 1 The Liquidation Trustee has asked the Seventh Circuit to reconsider its decision. Sentinel s Former CEO Found Guilty in Firm s Fraud Sentinel s former CEO, Eric Bloom, was found guilty by an Illinois jury on 18 counts of wire fraud and one count of investment adviser fraud, in connection with Sentinel s mishandling of customer funds. Mr. Bloom could be sentenced to prison for 20 years and a $250,000 fine for each count of wire fraud. Additionally, he could be sentenced to up to five years in prison and a $250,000 fine for the single count of investment adviser fraud. The prosecution accused Mr. Bloom of misleading Sentinel customers about its trading strategy, the firm s financial condition prior to its filing for bankruptcy, and using customers assets as collateral against a large bank loan that was used, at least in part, for the firm s benefit. Mr. Bloom is scheduled to be sentenced on September 30,

8 CME GROUP RULEMAKING CME Group Postpones Effective Date of Ban on Transitory EFRPs On April 14, 2014, the CME Group issued an Advisory Notice amending rule 538 of the CME, CBOT, NYMEX, Comex, and the Kansas City Board of Trade to prohibit the use of transitory Exchange for Related Positions transactions (EFRPs) in most cases. The ban applies to transitory EFRPs wherein the execution of the EFRP is contingent upon the execution of another EFRP or related position transaction between the parties and where the transactions result in the offset of the related positions without the incurrence of market risk that is material in the context of the related position transactions. The new rule requires that each EFPR consist of a bona fide transfer of ownership of the underlying asset between the parties or a bona fide, legally binding contract between the parties consistent with relevant market conventions for the particular related position transaction. The Advisory Notice also amended certain record-keeping requirements related to non-transitory EFRPs. The effective date of the Advisory Notice has been postponed from June 2, 2014 to August 4, CME Group Revises Rules Regarding Transfer Trades and Concurrent Long and Short Positions The CME Group revised its rule regarding transfer trades to, among other things, (1) permit the President or Chief Compliance Officer of a clearing house to permit transfers correcting errors outside of the rule s three-day window, (2) allow the Chief Regulatory Officer to approve transfers facilitating a restructuring or consolidation of a fund or commodity pool; and (3) permit the President of a clearing house to permit transfers of cleared-only products in certain circumstances. prohibiting netting down or transferring during the delivery or spot month to apply solely to physically-delivered futures contracts during the spot month when the futures contracts are subject to spot month position limits, (2) increase the amount of concurrent long and short positions in delivered futures contracts that can be netted to correct an error from 1% to 2%, and (3) prohibit the reestablishment of positions that have been netted down. The CME Group modified its rule regarding concurrent long and short positions to (1) eliminate the existing restriction The revised rules became effective March 10, CME GROUP LITIGATION AND ENFORCEMENT ACTIONS CME Group Settles MF Global Class Action Lawsuit On March 14, 2014, a federal court approved a settlement releasing CME Group from a class action lawsuit filed in 2011 by former customers of broker-dealer MF Global Inc. against MF Global, its CEO and other officers, and affiliated companies and financial institutions. The lawsuit alleged that CME Group, as a self-regulatory organization, failed to exercise appropriate oversight that could have prevented MF Global s bankruptcy. Pursuant to the terms of the settlement, CME Group agreed to direct $14.5 million of the $29 million allowed amount CME Group is seeking in MF Global s Chapter 11 bankruptcy toward the plaintiffs in the lawsuit. CME Group Sued in High-Frequency Trading Case On April 11, 2014, three former Chicago Board of Trade traders filed a class action complaint against CME Group alleging that CME and CBOT committed fraud on the marketplace, engaged in deceptive practice and failed to maintain a marketplace that is free from market disruption and market manipulation by allowing high-frequency traders to purchase access to price data and unexecuted order information prior to other market participants. The complaint alleges that the practice began in CME Group denies the allegations, stating that CME Group has only one data feed and that faster access to the feed cannot be purchased. Highfrequency trading was brought to popular attention by the 8

9 March publication of the book Flash Boys by Michael Lewis, which critically examines the practice of high-frequency trading in the equity markets. The case against CME Group, Braman v. CME Group Inc., is currently pending in the district court for the Northern District of Illinois. EFRP Disciplinary Actions Following the CFTC s 2013 criticism of CME s monitoring of EFRPs, the CME, on February 24, 2014, published nine different disciplinary actions involving EFRPs, with fines ranging from $10,000 to $35,000 against clearing members and traders. The disciplinary actions against Britannic Trading LTD., Cooperatieve Centrale Raiffesisen-Boerenleenbank B.A. (Rabobank), Deutsche Bank AG, George E. Warren Co., Guardian International Gold Corp., Gulf Oil LP, Jefferies Bache Financial Services Inc., Justin G. Martin and Ronin Capital, LLC were each voluntarily resolved by the respective respondents without admitting or denying the alleged violations. Five of the actions were based on allegations of failure to maintain required documentation related to EFRPs, two actions were based on claims of failure to submit timely notice of the EFRPs to the CME, and two actions were based on allegations that the same market participant was on both sides of an EFRP as well as failure to maintain required documentation. NFA RULEMAKING NFA Institutes Fines for Failure to Disclose Disciplinary Matters The NFA adopted a new rule, effective June 1, 2014, that requires member firms to pay a $1,000 fine for failure to disclose disciplinary matters on registration applications or failure to update existing records with information regarding new disciplinary matters. See Notice to Members I The fine is to be assessed for disclosure failures regardless of whether the NFA has taken adverse registration action arising from the failure to disclose the disciplinary matter or the underlying disciplinary matter. If an Associated Person (AP) or principal of an NFA member firm fails to report a disciplinary matter, the firm is responsible to pay the resulting fine. However, the firm is not prohibited by the rule from seeking reimbursement from the AP or principal. Similarly, if an AP or principal who fails to make the required disclosures is represented by multiple firms, each of the firms is responsible for paying the resulting fine and may seek reimbursement from the AP or principal. These obligations are derived from the firm s supervisory responsibilities for its APs and principals under the new rule, which also requires firms to conduct due diligence to reasonably ensure that all matters requiring disclosure are disclosed. NFA Decreases FCM Assessment Fee The NFA s Board of Directors cut the FCM assessment fee that applies to futures contracts and options on such contracts traded on behalf of public customers in half, from $.02 to $.01 per side. The cut still must be approved by the CFTC and, if approved, it would become effective October 1, The cut is based on an increase in futures trading volume, which has increased 7% in the last five years and 11% and 20% in 2013 and 2014, respectively. The NFA believes the lower fee may be sustainable for a few years and that, going forward, the length of time the fee is sustainable will be based on trading volume. The NFA contemporaneously increased its fiscal year 2015 budget to $82 million to accommodate staffing increases needed to monitor swap dealer members and to carry out its expanded regulatory responsibilities that resulted, in part, from the CFTC s elimination of many exemptions from the CPO registration requirements that previously were available. 9

10 NFA ENFORCEMENT ACTIONS NFA Bars Vision Financial Markets LLC and Others The NFA barred FCM Vision Financial Markets LLC (Vision), CTA Ace Investment Strategists LLC (Ace), Ace s principal, Yu-Dee Chang (Chang), and an introducing broker from NFA membership, through their settlement of NFA charges that Ace misappropriated customer funds in connection with trade allocations over a three year period and that Vision facilitated Ace s actions by failing to detect and stop it. Vision also paid over $2 million in restitution to customers and is required to pay a $1.5 million fine to the NFA as part of its settlement. The NFA charged Vision with failure to observe high standards of commercial honor and just and equitable principles of trade, and failure to maintain adequate records and make appropriate inquiries, as well as failure to supervise. It charged Ace and Chang with (1) violating NFA Compliance Rule 2-2(h) for converting customers property, (2) violating NFA Compliance Rule 2-4 for failing to observe high standards of commercial honor and just and equitable principles of trade, (3) violating NFA Compliance Rule 2-13(a) for presenting the performance of accounts that performed materially differently in the same performance capsule, (4) violating NFA Compliance Rule 2-10 for failing to maintain required books and records, and (5) violating Rule 2-9(a) for failing to diligently supervise Ace s operations. Vision s principals notified the NFA that they plan to establish another FCM, High Ridge Futures LLC, which will apply for NFA membership. NFA Permanently Bars Level III Management, LLC The NFA permanently barred CPO and CTA Level III Management LLC (L3 Management) as part of an offer made by L3 Management and its principal to settle charges that L3 Management violated NFA Compliance Rule 2-2(a) by providing misleading information to participants in a commodity pool the entity managed. Also, the principal was ordered to withdraw from NFA membership for no less than seven years and pay a fine of $50,000 to re-apply for membership, as part of this settlement. The NFA alleged that L3 Management misled customers regarding the value of their investments in a commodity pool it managed by providing investors with false and misleading performance information about their investments, acted in a manner that placed its principal s interests before those of its customers by failing to provide adequate disclosure about the risky nature of several investments made with pool participants assets, failed to provide customers with a current and NFA-approved disclosure document, and failed to cooperate with the NFA s investigation by refusing to make the principal available for questioning and failing to produce requested records regarding the pool s investments. A Leader in Derivatives and Futures Schiff Hardin s Derivatives and Futures team advises a broad spectrum of domestic and international market participants and users on all aspects of exchange-traded futures and over-the-counter (OTC) derivatives. With respect to both strategic and day-to-day issues, we represent: Banks Hedge funds Futures commission merchants Introducing brokers Associated persons Swap dealers Commodity pool operators Commodity trading advisors Proprietary trading firms and traders CME/CBOT/NYMEX traders U.S. derivatives exchanges Trading systems providers Forex dealers Foreign brokers End-users 10

11 Our deep understanding of the futures and OTC derivatives markets makes us uniquely qualified to help clients respond to the convergence of these markets as mandated by the Dodd-Frank Act. Our attorneys have extensive familiarity with the following subjects: Futures and other exchange-traded products, such as event contracts OTC derivatives across all asset classes and transaction types The Dodd-Frank Act s derivatives title, including the CFTC s and SEC s proposed and final rulemakings and the requirements that apply to swap dealers, major swap participants, swap execution facilities and end-users Drafting and negotiation of OTC transaction documents, including ISDA and EEI master agreements, schedules and annexes Clearing, collateral, margin and prime brokerage arrangements CFTC, NFA and CME registrations, compliance and rule interpretations Hedge fund and commodity pool formations and regulation, including master-feeder fund structures Compliance procedures, trading procedures, sales practices, recordkeeping and reporting, and antimoney laundering policies Formal and informal investigations and actions before regulatory bodies, including the DOJ, CFTC, NFA and CME Group Resolution of customer complaints, arbitrations and litigations Anti-manipulation and fraud issues Intellectual property in the financial services industry, including patents, trademarks, copyrights and trade secrets Transactions in cash commodities, including physical options Formation, merger, acquisition and disposition of financial services firms Our collaborative, comprehensive approach to legal services ensures that our clients receive the full benefit of our regulatory, transaction, tax, ERISA and litigation experience. We invite you to contact any member of our group to explore how we might serve you. Marguerite C. Bateman mbateman@schiffhardin.com Geoffrey H. Coll gcoll@schiffhardin.com Ralph V. De Martino rdemartino@schiffhardin.com Paul E. Dengel pdengel@schiffhardin.com Jack P. Drogin jdrogin@schiffhardin.com Paul E. Greenwalt III pgreenwalt@schiffhardin.com Stacie R. Hartman shartman@schiffhardin.com Allan Horwich ahorwich@schiffhardin.com Jacob L. Kahn jkahn@schiffhardin.com Andrew M. Klein aklein@schiffhardin.com Michael L. Meyer mmeyer@schiffhardin.com Victoria Pool vpool@schiffhardin.com Mark S. Radke mradke@schiffhardin.com Kathleen E. Roblez kroblez@schiffhardin.com Carl A. Royal croyal@schiffhardin.com Robert B. Wilcox Jr. rwilcox@schiffhardin.com Michael K. Wolensky mwolensky@schiffhardin.com John S. Worden jworden@schiffhardin.com Elyse K. Yang eyang@schiffhardin.com

12 About is a general practice law firm representing clients across the United States and around the world. We have offices located in Ann Arbor, Atlanta, Chicago, Lake Forest, New York, San Francisco and Washington. Our attorneys are strong advocates and trusted advisers roles that contribute to many lasting client relationships For more information visit our Web site at Attorney Responsible for Content: David A. Milberg, Director of Marketing and Communications This publication has been prepared for general information of clients and friends of the firm. It is not intended to provide legal advice with respect to any specific matter. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered advertising material. Prior results do not guarantee a similar outcome. 12