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A Look Back at the Year in CFTC Enforcement and What Lies Ahead in 2016 December 2, 2015 Presented By: Greg Kaufman, Sutherland Asbill & Brennan LLP Casey McFaden, ConocoPhillips Association of Corporate Counsel www.acc.com
Overview Historical Averages Overview of Actions Initiated in FY 2015 Compare FY 2015 to Prior Years Highlight Significant Differences Identify Enforcement Priorities Highlight Notable Cases from FY 2015 Focus on Actions Relying on Authorities Provided in the Dodd-Frank Act What Might We See in FY 2016 Will the Energy Industry Keep a Clean Sheet?
Number of Enforcement Actions Initiated Since 2000 Actions Initiated By Year 120 100 80 60 61 71 65 50 56 77 102 82 67 69 40 36 32 39 40 42 20 0
Historical Averages An average of 57 actions initiated per year since FY 2000 Post-recession (2009-2104) an average of 72 actions initiated per year Since FY 2000, fraud actions constitute the largest category of actions brought Typically one-third or more of cases initiated Ponzi schemes and forex fraud accounted for more than onethird of all actions initiated from FY 2009-2011 Significant and continuing decrease beginning in FY 2012 Since FY 2000, an average of four manipulation (including attempted) actions initiated per year
Penalty Explosion: Billion is the New Million FY 2015 FY 2014 1,800 In Millions FY 2013 1,500 FY 2009 90 0 1,000 2,000 3,000 4,000
CFTC Beats the SEC For the first time ever, the CFTC collected more in fines than the SEC CFTC collected $2.8B versus the SEC s $2B CFTC 69 actions SEC 807 actions CFTC Enforcement Staff 164 people SEC Enforcement Staff 1,343 people CFTC Enforcement Budget $49M SEC Enforcement Budget $495M
FY 2015 Just the Stats Please Type of Action No. of Actions Percentage of Total Actions Fraud 22 32% Manipulation 9 13% Illegal Off-Exchange Transactions 6 9% Reporting Violations 6 9% Failure to Supervise 4 6% Trade Practice 4 6% False Statements 3 4% Failure to Register 3 4% Segregated Funds 3 4% Registration Revocation 3 4% Disruptive Trading Practices 2 3% Recordkeeping 2 3% Minimum Capital Requirements 1 1% Core Principal Violation 1 1%
Key Historical Comparisons Manipulation Nine actions most since 2005 Nine actions in 2005 (individuals) and seven actions in 2003 (companies) all related to natural gas price reporting investigation Averaged three actions per year over prior five years Reporting Violations Record setting year for these types of violations Averaged one action per year over prior five years First actions (two) enforcing new DFA large trader reporting requirements for physical commodity swap positions and real-time reporting of swap transactions and reporting of swap data to swap data repositories
Key Historical Comparisons Failure to Supervise Four actions is less than the average number of actions for failure to supervise as compared to the prior five years Averaged five actions per year over prior five years Trade Practice Four actions is well below the average number of actions for trade practice violations as compared to the prior five years Averaged eight actions per year over prior five years Signaling a shift in priorities or delegation of responsibility?
FY 2015 Enforcement Highlights Disruptive Trading Actions brought under authority provided in the Dodd-Frank Act Disruptive trading Spoofing bidding or offering with the intent to cancel the bid or offer before execution Two spoofing actions First criminal conviction for spoofing Manual vs. automated No actions brought for violating bid/offers or disorderly execution of transactions during the closing period
FY 2015 Enforcement Highlights Manipulation (No Energy Market Cases) Two manipulation actions initiated Kraft/Mondelēz (active litigation) Deutsche Bank AG (settled) Seven attempted manipulation/false reporting actions initiated and settled Six involved banks and foreign exchange benchmark rates One involved Barclays and USD ISDAFIX (benchmark for interest rates products) Barclays settled attempted manipulation charges under Rule 180.1(a) Unlawful to intentionally or recklessly use or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud Kraft charged under 6(c)(1) and Rule 180.1(a) What is the scope of any manipulative or deceptive device or contrivance in 6(c) (1)?
FY 2015 Enforcement Highlights Reporting Violations Six actions initiated (and settled) for failing to file or filing inaccurate reports to the CFTC Third most frequently brought action in FY 2015 Tied with Failure to Supervise actions Energy industry does not have to concern itself with Forms 204 (grains) and 304 (cotton) CFTC Form 40 (Statement of Reporting Trader) The CFTC may issue special calls to investigate a threat of market manipulation or other market disorders Provides the CFTC with additional information about traders and/or a participant s trading and delivery activity, including information on persons who control or have a financial interest in the account Special calls may also request information about positions and transactions in the underlying commodity Focus on benchmark pricing
FY 2015 Enforcement Highlights Trade Practice Violations Trade practice violations include: Wash trades Unlawful prearranged trades Non-bona fide off-exchange transactions Exchange for Related Position (EFRP) transactions Block trades Only four trade practice actions initiated (none involving the Energy Industry) Two for position limit violations and two wash trade violations Olam Action (aggregation issue resulted in findings of position limit violations and non-competitive EFPs between subsidiaries) What of the 2013 EFRP Special Calls?
Looking Ahead to FY 2016 Difficult to predict the future but there are indicators that suggest potential areas of enforcement activity in FY 2016 In the category of where there is smoke there is fire Benchmark index pricing FX benchmark rates, Libor and ISDAFIX enforcement actions provide a roadmap for future investigations CFTC has identified benchmark pricing as an enforcement priority Spoofing Coscia conviction and criminal indictment in the flash crash incident provide momentum for future spoofing enforcement actions Sense that spoofing as defined by the CFTC is a common occurrence Hope for guidance that distinguishes between legitimate trading and unlawful spoofing
Looking Ahead to FY 2016 Continue to see a heightened level of CME and ICE Futures U.S. enforcement activity addressing trade practice violations Fifteen to twenty combined ICE and CME Disciplinary Actions per month is becoming the norm Addressing all manner of trade practice violations Position and accountability limits Block trading EFRP transactions Recordkeeping Supervision will continue to be an area of emphasis for CFTC and the Exchanges Exchanges less willing to give individuals a pass Where employees are subjected to disciplinary action, supervision charges will likely follow
Looking Ahead to FY 2016 Off-Exchange transactions EFPs between affiliated entities lacking independence of control and/or lacking the simultaneous exchange of futures and the physical commodity likely to make a significant appearance Clarity on the scope of the CFTC s new anti-fraud authority Decision on Kraft s motion to dismiss manipulation claims currently pending in the U.S. District Court for the Northern District of Illinois Do charges under 6(c)(1) and Rule 180.1 require allegations of fraud or can they capture non-fraudulent manipulative acts?
Looking Ahead to FY 2016 Potential enforcement activity in a low oil/natural gas environment Potential for investigations around areas of constraints BP pipeline investigation regarding crude shipped on Enbridge s mainline system BP announced early in 2015 that the CFTC planned to recommend an enforcement action alleging violations of anti-fraud and reporting rules in connection with Canadian pipeline nomination procedures and related trading July 2015 civil class action complaint regarding gasoline prices in California Resurrection of the administrative process? Challenges to the constitutionality of the SEC administrative process
Questions? Casey McFaden Senior Counsel ConocoPhillips Commercial Legal Group Legal Department Houston, TX 281.293.5610 Casey.P.McFaden@conocophillips.com Greg Kaufman Partner Sutherland Asbill & Brennan LLP Washington, DC 202.383.0325 Greg.kaufman@sutherland.com
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