April 13, 2016
2015 was a significant year for the Enforcement Division of the U.S. Commodity Futures Trading Commission (CFTC or Commission). Five years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and its expansion of the CFTC’s enforcement authority, annual enforcement fines have become very substantial–the Commission ordered a record $3.14 billion in civil monetary penalties in 2015. The CFTC has vigorously moved to take on more complex cases and to enforce its regulations under the Dodd-Frank Act’s derivatives market reform provisions, and it shows no signs of slowing down. This Client Alert describes 2015’s most significant CFTC enforcement actions and principal enforcement themes, which suggest that 2016 will see the following developments continue:
The 2014 to 2015 fiscal year saw key developments in the CFTC’s pursuit of alleged benchmark rate manipulation. The CFTC imposed penalties of approximately $2.73 billion in the area. Including prior years’ actions for benchmark manipulation, the CFTC has now imposed over $4.6 billion in civil monetary penalties based on 15 actions against banks and brokers.
On November 11, 2014, the CFTC settled charges against Citibank N.A., HSBC Bank PLC, JPMorgan Chase Bank N.A., Royal Bank of Scotland PLC and UBS AG, relating to alleged manipulation of certain foreign exchange (FX) rates, including the World Markets/Reuters Closing Spot Rates (WM/R Rates) which are used to establish values for different currencies. The orders in the action alleged that, from 2009 through 2012, employees of the banks used private electronic chat rooms to share confidential information and coordinate trading. Specifically, it was alleged that during a sixty-second period, FX traders at the banks would collude to bid up the prices of currencies in order to inflate the rates so they could reap a profit. The CFTC also claimed that the behavior by traders at the banks occurred without detection in part “because of internal control and supervisory failures.” Collectively, the CFTC fined the banks at issue more than $1.4 billion.
The CFTC continued bringing enforcement actions directed at the alleged manipulation of the London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR)–both widely used international rates that form the basis of trillions of dollars of financial instruments including interest-rate swaps, mortgages, and student loans. In previous years, the CFTC had imposed more than a billion dollars in penalties for abuses of LIBOR, EURIBOR, and other interest rate benchmarks; yet this fiscal year stands out for the magnitude of its fines. Specifically, on April 23, 2015, the CFTC issued an order settling charges against Deutsche Bank AG (Deutsche Bank) relating to allegations of manipulating and falsely reporting LIBOR and EURIBOR, imposing an $800 million penalty.
The Deutsche Bank order alleged that from 2005 through 2011, at least twenty-nine Deutsche Bank employees were involved in improper submission of LIBOR and EURIBOR rates. Rather than submitting rates that reflected Deutsche Bank’s cost of borrowing unsecured funds in the cash markets, Deutsche Bank allegedly based its LIBOR and EURIBOR submissions on its own cash and derivatives trading positions for the purpose of making profits on those positions. The CFTC also alleged that Deutsche Bank aided manipulation attempts by other banks. The CFTC claimed that the improper submission of rates resulted from an inappropriate culture of information sharing between traders at Deutsche Bank and the personnel who submitted rates for benchmarks; from a lack of internal controls, procedures and policies; and a failure of appropriate supervision.
The CFTC also brought an enforcement proceeding alleging the manipulation of ISDAFIX, a leading global benchmark referenced in a range of interest rate products. On May 25, 2015, the CFTC issued an order settling charges against Barclays PLC (Barclays) for allegedly manipulating ISDAFIX. The CFTC claimed that Barclays and other banks were responsible for submitting rates to an interest rate swaps broking firm (Swaps Broker), and that from 2007 through 2012, Barclays engaged in acts of false reporting and manipulation of ISDAFIX by executing transactions in targeted interest rate products during a critical “fixing time” with the intent to affect rates and spreads. By doing so, Barclays allegedly manipulated the rates through its trading and made submissions to the Swaps Broker that benefited derivatives positions held by Barclays. The Barclays order also alleged that certain Barclays traders attempted to manipulate ISDAFIX by making submissions to the Swaps Broker that were “false, misleading, or knowingly inaccurate” for the purpose of skewing the rates and spreads in a direction to benefit Barclay’s trading positions. The CFTC fined Barclays $115 million.
The principal lesson from recent years’ benchmark manipulation cases is straightforward: the CFTC is aggressive in its enforcement, and penalties are higher than ever. In addition, every financial institution (and both interdealer brokers) to have settled with the CFTC in the benchmark manipulation cases agreed to prospective remedial steps, such as implementation of firewalls, auditing, CFTC-approved training, and regular compliance reports to the CFTC. In flexing its regulatory muscle so publicly and so forcefully, the CFTC has served notice that, in its view, it has broad jurisdiction over conduct that affects commodities transactions in the U.S., including conduct that occurs exclusively abroad.
Title VII of the Dodd-Frank Act established a broad, new regulatory regime that created many significant new obligations for swap market participants, with the objective of increasing transparency and reducing systemic risk in the historically more opaque over-the-counter derivatives markets. Among other things, Title VII required new real-time public reporting procedures, trade monitoring, registration and compliance requirements for swap dealers, the establishment of systems for obtaining information subject to mandatory disclosure, and other mandatory reporting and compliance requirements. Under former Chairman Gary Gensler, the CFTC took the lead in promulgating regulations under these provisions. Although the CFTC initially granted market participants a “phase-in” period to implement the new reforms, the enforcement period clearly has now begun.
On September 17, 2015, the CFTC entered into a settlement with Australia and New Zealand Banking Group Ltd. (ANZ), a registered swap dealer, to pay a $150,000 civil monetary penalty for allegedly violating CEA Section 4s(f), and CFTC Regulations 20.4 and 20.7. Because of the volume of ANZ’s trading activity, Part 20 of the CFTC’s Regulations required ANZ to file daily large trader reports (LTRs) for reportable positions in physically settled commodity swaps. Such reports must conform to the form and manner for reporting and submitting information as set forth in CFTC Regulation 20.7, and contain the enumerated data elements provided in CFTC Regulation 20.4.
According to the CFTC, the LTRs that ANZ submitted between March 2013 and November 2014 routinely failed to comply with these requirements. At times the reports did not identify any underlying commodity, presented information in improper formats, reported non-zero positions with a value of zero, and misidentified counterparty positions as ANZ’s own positions, among other errors. As a result of these mistakes, the CFTC claimed that ANZ inaccurately reported its own positions, in one case reporting a position that was more than 5,000 times its actual size. Moreover, ANZ allegedly neglected its duties entirely on some days by failing to submit a report at all.
On September 30, 2015, the CFTC entered into a settlement with Deutsche Bank, also a registered swap dealer, with respect to allegations that it violated certain reporting requirements under Parts 23, 43, and 45 of the CFTC’s Regulations. CFTC Parts 43 and 45 specify requirements for real-time public reporting of swaps, the reporting of swaps to a swap data repository (SDR), and the reporting of continuation data. The CFTC alleged that Deutsche Bank had violated these regulations between January 2013 and July 2015 by failing to properly report cancellations of its swap transactions, which qualify as continuation data that is required to be reported under CFTC Part 45, and which must be reported as soon as technologically practicable under CFTC Part 43 if the cancellation changes the price of a previously reported swap. The alleged faulty reporting included instances in which Deutsche Bank sent cancellation messages to its SDR when in fact there were no cancelled swap transactions to justify them, as well as other instances in which it properly sent cancellation messages but did not timely investigate the unsuccessful processing notifications it received in response.
The CFTC claimed that the violations were in part due to Deutsche Bank’s lack of an adequate system to supervise all of its activities related to compliance with swap reporting requirements, which was, in itself, a violation of CFTC Regulation 23.602. That rule requires that registered swap dealers must maintain a system for diligently supervising their activities and employees that is reasonably designed to achieve compliance with the requirements of the CEA and the Commission’s regulations.
As with ANZ, Deutsche Bank accepted the CFTC’s offer of settlement, resulting in a $2.5 million civil monetary penalty and an order that Deutsche Bank cease and desist from committing further violations of the CFTC’s regulations. In imposing the fine, the CFTC noted that it needed accurate swaps data in order to meaningfully oversee the swaps market, and that market participants require such data for price discovery purposes. More recently, the CFTC has taken note of widespread issues related to the current infrastructure of swap reporting. In a November 4, 2015 speech, CFTC Chairman Timothy Massad noted that improvements were needed to current swap reporting practices, and discussed several proposals that the CFTC is currently developing to address these issues. One such improvement is the need to reform the role of SDRs in swap reporting. Massad explained that within the next year, the CFTC intends to propose rules that would give SDRs the ability to verify the completeness and accuracy of swap data before it is submitted to the CFTC for review. Relatedly, SDRs will also be held accountable for “the manner in which they collect, compile and report the data that they receive.”
The CFTC has signaled its intention to remain aggressive in prosecuting swap reporting violations in 2016. In the same November 4, 2015 speech discussed above, Chairman Massad stated that the CFTC “will not hesitate to carry out enforcement actions” against industry participants who fail to engage in timely, complete and accurate reporting. Furthermore, although the CFTC has focused on swap dealers this past year, it remains to be seen whether the CFTC will begin to scrutinize the swap reporting and recordkeeping requirements of non-registrants.
In 2015, the CFTC made enforcement of spoofing activities a priority, focusing on the acquisition of physical commodity trading positions in an amount well exceeding a party’s capacity to accept physical delivery of that commodity. In doing so, the CFTC made use of new Dodd-Frank Act provisions: new CEA Section 6(c)(1), which empowers the CFTC to promulgate rules and regulations prohibiting the use of “any manipulative or deceptive device or contrivance”; new CEA Section 6(c)(3), which prohibits price manipulation and attempts to do the same; and new CEA Section 4c(a)(5), which prohibits certain trading practices deemed disruptive of fair and equitable trading, including “spoofing,” or “bidding or offering with the intent to cancel the bid or offer before execution,” as well as its rules thereunder.
CFTC Regulation 180.1 was promulgated under CEA Section 6(c)(1), which prohibits any person, “in connection with” any swap, contract of sale of any commodity, or future contract, from “intentionally or recklessly” doing any of the following:
CEA Section 6(c)(1) was deliberately “patterned after” section 10(b) of the Securities Exchange Act (Exchange Act); based on this resemblance, the CFTC modeled CFTC Regulation 180.1 on SEC Rule 10b-5 and has stated that it will be guided by judicial precedent applying that SEC rule. It should be noted that finding an insider trading violation under CFTC Regulation 180.1 does, however, require the CFTC to show either that the defendant breached a preexisting duty (established by another law, rule, agreement, understanding, or other source) or that the defendant executed trades based on material, non-public information acquired through fraud or deception.
CFTC Regulation 180.2, promulgated under CEA Section 6(c)(3), addresses non-fraud based manipulation. The CFTC has stated that in applying CFTC Regulation 180.2, “it will be guided by the traditional four-part test for manipulation that has developed in case law arising under [CEA Sections] 6(c) and 9(a)(2),” namely:
The CFTC has emphasized that, unlike CFTC Regulation 180.1, “a person must act with the requisite specific intent” under CFTC Regulation 180.2, and “recklessness will not suffice.” According to the CFTC, “this level of intent [is] necessary to ensure that legitimate conduct is not captured by” the regulation. That being said, however, the CFTC has also stated that “an artificial price may be conclusively presumed under certain facts and circumstances.” For example, where “a trader violates bids and offers in order to influence the volume-weighted average settlement price, an artificial price will be a reasonably probable consequence of the trader’s intentional misconduct.”
CFTC Regulation 180.2 also amplifies the pre-Dodd Frank Act CEA provision for price manipulation, CEA Section 9(a)(2), in that the latter, unlike CFTC Regulation 180.2, does not include any express provision that prohibits “indirectly” manipulating or attempting to manipulate prices. The CFTC has interpreted the term “indirectly” in CFTC Regulation 180.2 to “include a circumstance where a person uses a third party (e.g., an executing broker) to execute trades designed to manipulate.”
The CFTC has opted to issue orders providing interpretive guidance rather than promulgate a regulation under CEA Section 4c(a)(5). Under this guidance, the CFTC has advised that CEA Section 4c(a)(5) generally has no manipulative intent requirement. Regarding the statute’s spoofing prohibition specifically, the CFTC has interpreted it to require scienter “beyond recklessness”; in other words, a person must “intend to cancel a bid or offer before execution” to commit spoofing. A spoofing violation therefore “will not occur when the person’s intent . . . was to cancel such bid or offer as part of a legitimate, good-faith attempt to consummate a trade.” The CFTC has also articulated four non-exclusive examples of spoofing:
In “distinguishing between legitimate trading and ‘spoofing,'” the CFTC has expressed its intention to evaluate “all of the facts and circumstances of each particular case,” including “the person’s pattern of trading activity (including fill characteristics), and other relevant facts and circumstances.” The CFTC also has stated that the “spoofing” prohibition does not require a pattern of activity; “even a single instance of trading activity can violate” this provision, “provided that the activity is conducted with the prohibited intent.”
All of the foregoing provisions were at issue in CFTC v. Nav Sarao Futures Ltd. PLC. In this enforcement action, the CFTC charged Navinder Singh Sarao (Sarao) and Nav Sarao Futures Limited PLC (Sarao Futures) with violating CEA Sections 4c(a)(5)(C), 6(c)(1), 6(c)(3), and 9(a)(2), and CFTC Regulations 180.1 and 180.2. The CFTC alleged that the defendants engaged in various forms of spoofing tactics that manipulated prices of the Chicago Mercantile Exchange’s E-mini S&P 500 futures (E-mini S&P) from June 2009 to April 2015. The alleged spoofing tactics stemmed from an algorithm that the CFTC asserted the defendants used to create temporary volatility in the price of E-mini S&P contracts. The defendants’ algorithm “layered four to six exceptionally large sell orders into the visible E-mini S&P central order book” by first placing an order three to four price levels above the best asking price, then placing each subsequent order one price level above the next (for example, on a day when the best asking price was $1172.50, the algorithm placed orders at $1173.25, $1173.50, $1173.75, and $1174.00). The algorithm also tracked the market’s price movement in response to the algorithm’s orders and shifted its sell-side order price levels so that they would remain three to four price levels from the market’s best asking price.
According to the complaint, the goal of the algorithm was to overload the E-mini S&P sell side in order to temporarily lower the market price. The defendants allegedly switched the algorithm on and off to create price volatility as the price would rebound when the algorithm was not in use. While the price was unstable, the defendants were alleged to have traded high volumes of E-mini S&P futures contracts worth a daily average of $7.8 billion in notional value, which garnered approximately half a million dollars in daily profits.
The CFTC did not contend that the use of the algorithm itself violated the CEA or CFTC Regulations; rather, the CFTC alleged that the defendants used the algorithm to place sell orders they had no intention of fulfilling. To establish the defendants’ intent, the CFTC focused on time periods where the defendants’ use of the algorithm was at its highest, and pointed out that the defendants on average canceled over 99% of sell orders on days where the rest of the market never cancelled more than 49% of orders. Furthermore, the defendants’ orders through the algorithm were modified an average of 161 times per order, versus just one modification per order in the rest of the market. In addition, the size of the defendants’ algorithm orders was far larger than orders placed by the rest of the market: an average of 504 futures contracts per order versus just seven per order across the rest of the market. These disparities, the CFTC contended, demonstrated the defendants’ manipulation of E-mini S&P futures prices.
The CFTC further stated that the defendants’ alleged use of their algorithm to spoof the market and their 188/289-Lot flash spoofing contributed to a “Flash Crash” on May 6, 2010, where the E-mini S&P and other U.S. equities’ prices fell sharply and then recovered in a matter of minutes. The CFTC claimed that, throughout the course of that day, the defendants’ algorithm and 188/289-Lot spoofing pushed the E-mini S&P price downward hundreds of basis points. In April 2015, the Northern District of Illinois issued a statutory restraining order that froze the defendants’ assets and required the defendants to allow the CFTC and the National Futures Association to access their books and records.
The case of CFTC v. Heet Khara cautions that the CFTC may take notice of potential spoofing behavior even when the volume of trading is not extremely high. Here, the CFTC alleged that defendants Heet Khara and Nasim Salim spoofed the gold and silver futures markets in violation of CEA Section 4c(a)(5). The CFTC alleged that between February and April 2015, Khara and Salim, acting alone and later in concert, engaged in illegal spoofing by habitually entering large orders for gold and silver futures contracts that they did not intend to execute in order to ensure that their smaller orders on the opposite side of the market were filled. Once the smaller orders were filled, the defendants cancelled the larger orders. During February 2015, Khara purportedly made $200,000 from this type of trading behavior. In May 2015, the Southern District of New York issued a statutory restraining order freezing both defendants’ assets, and ordering them to allow the CFTC to inspect their books, records, other documents, email accounts, bank accounts, and electronic devices. (Even before the Khara action, the CFTC had established its aggressive enforcement of spoofing: in July 2014 the CFTC won summary judgment against–and in October 2014 announced a $1.56 million settlement with–Eric Moncada for his 2009 scheme to enter and immediately cancel large transactions in wheat futures, which benefited his smaller orders on the opposite side of the fictitious orders.)
While the enforcement actions against Khara and Moncada’s spoofing turned on plainly fictitious transactions, the CFTC also aggressively brought enforcement actions involving more subtle forms of manipulation of futures markets. In April 2015, the CFTC filed a complaint against Kraft Foods Group, Inc.(Kraft), alleging that Kraft had engaged in price manipulation in violation of CEA Sections 6(c)(1), 6(c)(3), and 9(a)(2) and CFTC Regulation 180.2. The CFTC alleged that Kraft acquired a long position of December 2011 wheat futures to raise the price of such futures and decrease the price differential between December 2011 futures and cash wheat. The CFTC’s price manipulation allegations stem from the percentage of futures in the market Kraft purchased, and the high rate at which Kraft subsequently cancelled its orders. The CFTC also relied on allegations that Kraft could not accept the amount of wheat it initially ordered. The CFTC alleged that Kraft’s inability to take physical delivery of its order demonstrated that Kraft had no intention of having its orders fulfilled and was attempting to manipulate the market.
The Kraft case has the potential to affect the commodities and derivatives industries profoundly. Commercial end users, such as Kraft, are permitted to apply for hedging exemptions that allow them to carry long futures positions in excess of generally imposed limits. Although Kraft did not have an exemption when it acquired the December 2011 wheat futures, the complaint suggests that the CFTC would have brought manipulation charges regardless since it viewed Kraft’s actions as reaching beyond proper commercial hedging. The outcome of this case may affect the way that hedge exemptions are viewed or granted in the future.
For the first time in 2015, the CFTC exercised its broad anti-fraud authority under the Dodd-Frank Act to take enforcement action against insider trading. On December 2, 2015, the CFTC simultaneously brought and settled charges against defendant Arya Motazedi for allegedly trading on confidential, material, and non-public information. Motazedi, a trader in gasoline and other energy products employed by a large, publicly-traded corporation, traded gasoline and energy futures through his employer’s trading account. In doing so, he had access to confidential, material, and non-public information regarding the times, amounts and prices at which his employer intended to trade gasoline and energy futures.
The Motazedi case represents a significant departure from the CFTC’s historical approach to combatting insider trading. Before the passage of the Dodd Frank Act in 2010, the CFTC’s authority to prosecute insider trading was limited to cases involving three general categories of persons: CFTC Commissioners, CFTC employees, and CFTC agents. Furthermore, the elements of an insider trading claim were difficult to prove. To prevail on its claim, the CFTC had to show that: (1) the defendant had the ability to manipulate market prices; (2) the defendant specifically intended to influence market prices in a manner that does not reflect legitimate sources of supply and demand; (3) an artificial price existed; and (4) the defendant caused that artificial price.
The Dodd Frank Act greatly expanded the scope of the CFTC’s reach by amending CEA Section 6(c) to prohibit fraud and manipulation “in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity.” These amendments also eliminated the need to show that a defendant’s fraudulent or manipulative activity caused an artificial price, and lowered the scienter requirement to allow recklessness to suffice for liability. As noted above, the CFTC implemented CEA Section 6(c)(1) by promulgating Rule 180.1. Taken together, CEA Section 6(c) and CFTC Regulation 180.1 provide the CFTC with broad authority to prosecute insider trading activity through the CEA’s prohibitions on fraud and manipulation. Indeed, the CFTC in its Notice of Proposed Rulemaking for CFTC Regulation 180.1 stated that the regulation’s goal was “as a broad, catch-all provision reaching fraud in all its forms–that is, intentional or reckless conduct that deceives or defrauds market participants.”
In charging Motazedi with insider trading under CEA Section 6(c) and CFTC Regulation 180.1, the CFTC alleged in its settlement order that Motazedi fraudulently misappropriated and traded on his employer’s confidential, material and non-public information through several different types of transactions. First, Motazedi used his personal trading account to enter into at least 34 non-competitive, fictitious trades against his employer’s trading account. Using his employer’s proprietary information, Motazedi arranged his buy or sell orders to match the times, prices, and amounts of futures on which his employer intended to trade. These trades were executed at prices that were profitable to Motazedi, but disadvantageous to his employer. Second, on at least 12 different occasions, Motazedi used his employer’s proprietary information regarding the times, amounts and prices at which it intended to trade futures, so as to trade ahead of, or “frontrun,” his employer’s orders. In these transactions, any subsequent price movement resulting from Motazedi’s frontrunning caused his employer’s orders to be executed at disadvantageous prices.
In alleging that Motazedi had committed insider trading, the CFTC noted that Motazedi had a relationship of trust and confidence with his employer, which he breached by misappropriating his employer’s confidential and proprietary information. Furthermore, Motazedi acted with the requisite scienter because he “knowingly or recklessly” misappropriated this information to trade for his own benefit, while failing to disclose his trading activity to his employers. In total, Motazedi’s trading activity cost his employer $216,955.80 in trading losses. The CFTC’s order required Motazedi to pay a civil monetary penalty of $100,000, and restitution in the amount of $216,955.80. In addition, Motazedi was permanently banned from trading or registering as a futures professional with the CFTC.
In addition to spoofing, market manipulation and insider trading, the CFTC proved itself to be a powerful force in sanctioning trade practice violations, including, among other things, wash sales, fictitious sales, noncompetitive transactions, position limit violations and unauthorized trading. With electronic trading now the norm, the complexity of evidence has increased, the number of relevant documents that must be reviewed has multiplied, and the amount of data that must be analyzed during an investigation has similarly significantly grown.
The CFTC brought four major cases alleging a variety of trade practice violations dating back to late 2014. On December 18, 2014, Judge Alvin K. Hellerstein of the United States District Court for the Southern District of New York approved a settlement with Royal Bank of Canada (RBC) in which RBC agreed to pay a civil monetary penalty of $35 million for alleged trade practice violations. The crux of the CFTC’s allegations was that RBC and its subsidiaries pre-arranged transactions of stock futures–transactions that occurred between related parties, with offsetting purchases and sales in order to avoid taking actual positions–in order to realize Canadian tax benefits.
Shortly thereafter, on January 20, 2015, the CFTC filed and settled charges against Olam International, Ltd. and its subsidiary for alleged position limits violations for cocoa futures traded on ICE Futures U.S. Inc. and for impermissibly entering into the exchange of futures for physical transactions opposite each other. The CFTC also alleged that the respondents failed to disclose that their cocoa future trading accounts were not independently operated. They were ordered to pay $3 million in monetary civil penalties for these violations.
In addition to sanctioning companies for trade practice violations, the CFTC filed an Order against an individual for violating CFTC regulations. Gregory Christopher Evans, a former risk management consultant, allegedly engaged in 30 unauthorized swap transactions on behalf of one of his employer’s customers, to hide earlier losses and to increase his income. As the deception progressed, it became harder to conceal, considering the original customer’s account contained a negative balance of $550,276.03. Evans allegedly attempted to cover up the losses with a number of reverse mark-ups, but was unable to erase the customer’s deficit and resigned from the firm on July 21, 2013. Evans was ordered to pay a civil monetary penalty of more than $1.2 million. In a related action, the provisionally registered swap dealer of FCStone, Inc. was ordered to pay $200,000 for its alleged failure to supervise its employees, including Evans, pursuant to CFTC Regulation 23.602 and failing to have suitable policies in place to control the transfer of positions between customer accounts. It was also required to cease and desist from violating CFTC Regulation 23.602. This was the first CFTC enforcement action charging a registered swap dealer with failure to meet its swaps supervisory obligations required by the Dodd-Frank Act.
Finally, the CFTC took action against certain exchanges, filing a case against the Intercontinental Exchange (ICE) for reporting erroneous trading data, and against the Chicago Mercantile Exchange (CME) regarding the leaks of customer trading secrets. The CFTC is urging the CME to increase its penalties and to be more aggressive in acting as an effective mechanism to prevent trade practice violations. As a result, we are likely to see designated contract markets and swap execution facilities bringing more actions for trade practice violations and requesting information from members and participants relating to potential trade practice violations, including spoofing, wash trades, and position limits violations. Accordingly, market participants should be in a position to produce the appropriate pre-trade and post-trade records upon request not just from the CFTC, but also from the exchanges on which they trade.
Several CFTC regulations protect customer funds through capital requirements and segregation of customer accounts. These regulations govern the operations of FCMs, swap dealers with respect to uncleared swaps, derivatives clearing organizations with respect to cleared swaps, and transfers by debtors in bankruptcy. They also apply to retail foreign exchange dealers (RFEDs) by requiring minimal capital holdings in proportion to investment risks. The regulations also specify the currencies in which those accounts, respectively, must be denominated, and how segregated funds may be invested. Section 724(a) of the Dodd-Frank Act expanded these regulations by adding the segregation requirements for FCMs as to cleared swaps; but when the CFTC began to focus more acutely on protection of customer funds in recent years, observers and commissioners alike attributed that increased vigilance to the high-profile failures of MF Global and Peregrine Financial, rather than to the Dodd-Frank Act.
The CFTC has enforced these customer protection rules aggressively, especially with a sort of “sweep” at the tail end of 2014 (part of the CFTC’s Fiscal Year 2015) that involved several orders and settlements in quick succession. Illustrating the rules’ complexity and high stakes, several of the firms charged with violating the rules are large institutions that self-reported their violations upon realizing that they had missed some regulatory mark.
In this complex area, the CFTC has added an extra layer of exposure through failure-to-supervise liability. Specifically, CFTC Regulation 166.3 requires that each registrant (e.g., an FCM or swap dealer) “diligently supervise the handling by its partners, officers, employees and agents . . . of all commodity interest accounts carried, operated, advised or introduced by the registrant.” Adding breadth to that requirement, the regulation also calls for the same diligent supervision for all “activities of [the registrants’] partners, officers, employees and agents . . . relating to its business as a  registrant.” The CFTC frequently adds failure-to-supervise charges when it finds other violations, but it can also charge failure to supervise as an independent violation even in the absence of any other underlying violation. The CFTC can demonstrate failure to supervise by showing either that the registrant “lack[ed] an adequate supervisory system” or that the system in place was not “diligently administered.” Although Regulation 166.3 has been in the CFTC’s regulatory arsenal for more than 30 years, it has taken on new significance since the Dodd-Frank Act, allowing the CFTC to charge defendants with failing to educate their personnel about the Dodd-Frank Act’s complex new requirements.
In the last quarter of 2014, Friedberg Mercantile Group, Inc. reached a $70,000 settlement with the CFTC, under which it was alleged that Friedberg had commingled customer funds with its proprietary funds, failed to meet its “secured amount” by approximately $240,000, and failed to notify the CFTC of the secured amount deficiency. The issue arose when a customer instructed Friedberg to transfer money from the segregated account to cover a margin deficit; Friedberg’s bank revealed that there were insufficient funds to cover the transfer. At the same time, Friedberg allegedly made incorrect adjustments to its equity books (backing out from its equity system the money that the customer had requested), prompting it to report to the CFTC that it had excess funds in the segregated account and in the secured account.
Also at the end of 2014, the CFTC and Deutsche Bank Securities settled charges that Deutsche Bank Securities had improperly invested customers’ segregated funds and failed to make proper records and reports about those funds. A CFTC Regulation 166.3 failure-to-supervise charge was added as well. Although Deutsche Bank had invested its segregated customer funds in the permitted types of investment products under CFTC regulations, it allegedly violated concentration limits for those investments. Specifically, its investments in large money market mutual funds exceeded the 50% “asset-based” concentration limit for those investments, by accounting for customer margins in a way that made the investments’ concentration appear smaller than it was in fact. Deutsche Bank paid a $3 million civil fine.
IBFX, Inc., a Japanese-owned, Florida-based RFED formerly known as Tradestation Forex, settled with the CFTC at the end of 2014, paying a $600,000 penalty for failing to meet minimum capital requirements on several occasions. Additional charges included failing to report these deficiencies and failing to supervise its employees in this regard. On one occasion, the capital deficiency was the result of an employee’s “fat finger” error, in which the employee took a position in the wrong currency, for the wrong amount. Although the error was discovered and corrected in 44 minutes, the increased risk during the intervening time left IBFX approximately $8 million under its minimum net capital requirements. Because the rules specify that an RFED must maintain its capital requirements “at all times,” the duration of the deficiency was irrelevant, and the dealer was in violation of the regulation.
On August 6, 2015, the CFTC ordered Morgan Stanley to pay a $300,000 civil fine, on the grounds that Morgan Stanley had not held sufficient U.S. Dollars in segregated accounts to meet the firm’s obligations to cleared swaps customers. The deficits ranged from $5 million to $265 million at various points in time, sometimes representing more than ten percent of the amount Morgan Stanley was obligated to maintain. The alleged violation took the form specifically of a currency denomination issue: because Morgan Stanley had held “portions of its U.S. Dollar obligations in other currencies,” there were insufficient U.S. Dollars in the accounts in the United States for purposes of the CFTC currency denomination requirements. Notably, the CFTC never alleged that Morgan Stanley held inadequate capital in the segregated funds overall, but only that the currency allotment in the segregated accounts was improper. At the same time that it ordered the fine, the CFTC noted that Morgan Stanley had reported its own deficiencies to the Commission and implemented corrective measures.
2015 saw the expansion of CFTC enforcement into the realm of cryptocurrency with the settlement of cases involving derivatives referencing bitcoins. Most notably, in an order concluding the CFTC’s case against Coinflip, Inc., the Commission asserted for the first time that bitcoins are commodities under the CEA. Although the CFTC has made clear that its position is that derivatives on bitcoins (and other digital currencies for that matter) fall under the CEA, it is not yet clear whether the CFTC will seek to use its general authority over manipulation of the price of a commodity in interstate commerce over transactions in bitcoin (and other digital currencies) that are not derivatives or that do not have a derivatives component.
Focusing on bitcoin derivatives for the moment, therefore, the CFTC issued two orders relating to violations of CEA Section 5h, which regulates swap execution facilities (SEFs). At this early stage of involvement in bitcoin derivatives trading, the CFTC has refrained from imposing monetary penalties or broader trading bans.
In September, the CFTC published a settlement order with Coinflip, Inc. (Coinflip) and Francisco Riordan, Coinflip’s founder, CEO, and controlling person, for violations of CEA Section 5h(a)(1), and Rule 37.3(a)(1), which prohibit the operation of an unregistered SEF. Coinflip is said to have violated these requirements in March and April 2014 by operating Derivabit, a trading platform that listed bitcoin options, without registering the platform as a SEF. Coinflip advertised Derivabit as a “risk management platform . . . that connects buyers and sellers of standardized Bitcoin options and futures contracts,” and listed several put and call options as eligible to be traded on Derivabit; in addition, users had the ability to post, and did post, bids and offers.
The settlement order also asserted that by publically confirming bids and offers made on the platform by its 400 users, Coinflip violated CEA Section 4c(b) and CFTC Regulation 37.3(a)(1), which bar persons from confirming the execution of transactions that are not in compliance with any of the CFTC’s rules, regulations, or orders. As a penalty, the order settling the case required Coinflip to cease their aforementioned violations. In compliance with the order, Coinflip subsequently shut down the Derivabit platform.
The CFTC also settled an action against TeraExchange LLC (Tera) in September 2015. The settlement order alleged that, in October 2014, Tera arranged and facilitated a prearranged wash trade of $500,000 of Bitcoin between the only two traders currently registered on their trading platform. This action violated SEF Core Principle 2, which Tera, as a properly registered SEF, was required to comply with under CEA Section 5h(f)(1). According to the order, when questioned about the trade by the CFTC and the National Futures Association, Tera stated that it was a legal, preoperational trade done in order to test the platform. Although such preoperational trades are permissible, the CFTC asserted that Tera had advertised this trade as “the first bitcoin derivative transaction to be executed on a regulated exchange” in both a press release and at the CFTC’s Global Markets Advisory Committee meeting. These representations, along with the fact that the trade was between two traders registered on the platform, indicated to the CFTC that the trade was not a preoperational test run and was an illegal prearranged wash.
The settlement order required Tera to cease violations of SEF Core Principle 2, but notably required no monetary penalties and did it issue any trading bans. CFTC Commissioner Bowen dissented from the CFTC’s order against Tera noting that she believed “fictitious trading deserves a penalty” and that she “fundamentally disagree[s] with the notion that [Tera] deserve[s] no penalty.”
The Chairman, Commissioners and Directors play a key role in enforcement policy at the CFTC. Accordingly, their public statements, both in connection with orders and in other forums, provide important insight into the agency’s enforcement focus.
Aitan Goelman, Director of the CFTC’s Enforcement Division, assumed his position in June 2014. Foremost among his notable statements was his announcement that the CFTC will again make use of administrative courts for contested enforcement cases–the last contested enforcement case filed before a CFTC administrative law judge (ALJ) was in 2001. The CFTC’s goal in the use of ALJs is to conserve resources and enable faster litigation than in the federal district courts. In addition to the criticisms that administrative courts have received in the SEC context, the CFTC has another issue–it no longer has its own ALJs and re-implementing the administrative enforcement process will require the CFTC to borrow ALJs from other administrative agencies. Mr. Goelman has stated that it is important for the CFTC to “present a credible trial threat” to those that violate CFTC rules and he believes that instituting administrative court proceedings will allow the judges to increase their knowledge of complex derivatives fraud matters. Despite Mr. Goelman’s indication that the CFTC intends to use the administrative courts, in 2015 the CFTC did not hire any ALJs, nor did the agency hear any cases through the administrative enforcement process.
Second, the CFTC is not shying away from large enforcement matters involving multiple regulatory agencies. The benchmark manipulation investigations offer a powerful example, with the CFTC touting the effort as “unprecedented international cooperation with agencies such as U.K. Financial Conduct Authority, Japanese Financial Services Agency, Dutch National Bank, Dutch Public Prosecutor’s Office and others.” The CFTC’s cooperation with other U.S. law enforcement agencies–such as the DOJ and SEC–is even more commonplace.
Third, in keeping with a growing trend, the CFTC has renewed its attention to individual responsibility. This renewal coincides with a broader shift in the government’s emphasis on individual responsibility, as signaled most publicly by the memorandum from Deputy Attorney General Sally Quillian Yates announcing that federal prosecutors will seek to hold individual actors civilly and criminally responsible for corporate misdeeds (Yates Memorandum). Although the Yates Memorandum attracted popular attention, the CFTC’s efforts began nearly a year before the Yates Memorandum, when Director Goelman stated his goal of “putting actual human beings in jail” for spoofing or other types of market manipulation. For example, in addition to being the subject of a civil enforcement action for spoofing, Navinder Singh Sarao of Nav Sarao Futures Limited PLC was indicted for wire fraud and commodities fraud. Director Goelman stated further that the CFTC is “going to try very hard to increase the number of CEA violations that are prosecuted criminally.” Market participants should keep an eye on the continued collaboration of the CFTC with federal criminal authorities; imprisonment for wrongdoing is now a real possibility.
Finally, Director Goelman, in addition to Chairman Massad, has stressed that compliance with reporting requirements, including those resulting from the Dodd-Frank Act, is an enforcement priority. In March 2015, when the CFTC ordered ICE Futures U.S., Inc. to pay a $4 million civil monetary penalty for submitting incomplete and erroneous data to the CFTC over nearly two years, Mr. Goelman stated: “Today’s action makes clear that registrants who fail to meet their reporting obligations will be held accountable and that the CFTC takes a particularly dim view of reporting violations that continue over many months, especially after CFTC staff has repeatedly alerted the registrant in question to the problems in its reporting.”
Similarly, Mr. Goelman remarked, when the CFTC ordered Deutsche Bank AG to pay a $2.5 million civil monetary penalty for failing to properly report swap transactions , which was the first action pursuant to the new Dodd-Frank Act requirements governing the reporting of swap transactions: “This is another in a series of cases the CFTC has brought this year highlighting the importance of complete and accurate reporting . . . . When reporting parties fail to meet their reporting obligations, the CFTC cannot carry out its vital mission of protecting market participants and promoting market integrity.” Chairman Massad similarly underlined the significance of compliance with reporting requirements: “For those industry participants who do not make timely, complete and accurate reporting, we will not hesitate to carry out enforcement actions. . . . We will continue to promote compliance in recordkeeping and reporting–and hold those who are not in compliance accountable.”
Cross-jurisdictional issues were also very significant in 2015–between the CFTC and the SEC, and between the CFTC and the Federal Energy Regulatory Commission (FERC).
With respect to the SEC, the jurisdictional line between the CFTC and the SEC grows even more complex as investment products blur the line between commodity derivatives and securities. As a formal matter, the CFTC maintains exclusive regulatory control over all futures and option contracts related to commodities, but the two commissions share concurrent jurisdiction over some hybrid entities or instruments, such as commodity pools and security futures products.
The Dodd-Frank Act complicated the jurisdictional picture by splitting the jurisdiction of over-the-counter swaps between the two agencies in the form of “swaps” and “security-based swaps.” Under that law, the CFTC has jurisdiction over the vast majority of the swaps market, which includes foreign exchange, interest rate, and other commodity swaps, as well as credit default and equity derivatives based on indices, two or more loans, and a broad-based (10 or more) group of securities. The SEC’s jurisdiction is limited to “security-based swaps”–credit default and equity swaps based on a single security or loan or a narrow-based (nine or fewer) group or index of securities (including any interest therein or value thereof) or events relating to a single issuer or issues of securities in a narrow-based security index.
In July 2015, tension between the commissions arose when the CFTC approved a futures contract on a dividend index over the SEC’s objection. On July 2, the SEC expressed to the CFTC its “substantial legal and policy concerns” with the proposed futures contract, and appealed to the Commissions’ “long history of cooperating to find solutions to facilitate trading and appropriate market oversight of futures that may be classified as security futures.” Notwithstanding this comment, on July 22, the CFTC determined that the dividend index at the heart of the futures contract was in fact an “excluded commodity” as such term is defined in CEA Section 1a(19) and not a “security-based index.” This is because its value was “beyond the control of the parties to the relevant contract;” the CFTC therefore assumed exclusive jurisdiction over the contract and approved it.
Notwithstanding these jurisdictional differences, the commissions also displayed their capacity for coordinated enforcement in 2015. For example, in December 2015, the CFTC and SEC jointly announced a settlement with JPMorgan Chase Bank for failure to disclose conflicts of interest related to commodity pools. The agencies alleged that JPMorgan’s wealth management arm had given preferential treatment to JPMorgan-affiliated hedge funds and mutual funds. The bank reached a global settlement with the CFTC and SEC, pursuant to a separate order from each commission. Altogether, JPMorgan agreed to pay a $40 million fine to the CFTC, a $128 million fine to the SEC, $139 million in disgorgement and interest and to cease and desist from the alleged violations that gave rise to the settlement. The two agencies were mutually involved in the case because the JPMorgan funds at the heart of the case included both securities-based funds and commodities-based funds.
Finally, there is the issue of the CFTC’s efforts to shoehorn agency-friendly precedent from the securities context into futures litigation–a strategy that backfired against the CFTC in 2015. In Kraft’s motion to dismiss claims for manipulating wheat prices, the defendants argued to the U.S. District Court for the Northern District of Illinois that because CEA Section 6(c)(1) and CFTC Regulation 180.1 are anti-fraud rules, any cause of action based on those provisions must (like any other fraud claim) satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b). The defendants’ arguments were based in part on analogies to Section 10(b) of the Exchange Act and Rule 10b-5; the CFTC responded by arguing distinctions between Rule 10b-5 and CFTC Regulation 180.1. The district court agreed with the defendants, with much of the analysis focused on the “nearly identical” securities statute and SEC regulation. Specifically, the court looked to the case law interpreting Section 10(b) of the Exchange Act and Rule 10b-5, and concluded that courts “routinely” interpret those provisions as creating causes of action for fraud. The court therefore held that the CFTC’s claims under CEA Section 6(c)(1) are fraud claims and must satisfy Rule 9(b)’s heightened pleading standard.
* * * * *
Although the Federal Power Commission was rechristened as FERC amid the deregulation policies of the 1970s, its more recent history is characterized by a series of attempts to broaden its enforcement authority. These attempts have been fueled by the Energy Policy Act since 2005, which was Congress’s pro-regulatory reaction to (among other things) revelations of Enron’s manipulation of energy markets in the western United States. As a result, the FERC’s enforcement actions have come into tension with the exclusive commodities futures jurisdiction of the CFTC. (Although the CFTC has jurisdiction over fraud and manipulation in the physical markets that impact the derivatives markets, it does not have exclusive jurisdiction over those transactions in the same way it does over futures contracts.) Two recent decisions have sought to resolve these tensions: the 2013 case of Hunter v. FERC, and the 2015 case of FERC v. Barclays Bank PLC.
In the first case, the two agencies began concurrent actions against Brian Hunter, an energy trader for the Amaranth Advisors hedge fund, who was accused of manipulating gas futures in 2006. Early in the investigation, the commissions appeared to work closely together. But on the day after the CFTC sued Hunter, FERC issued a $30 million proposed penalty, far greater than the amount the CFTC sought in its lawsuit. When Hunter challenged FERC’s penalties in federal court, the CFTC made an unusual show of inter-agency tension by entering the litigation in support of Hunter and in opposition to FERC. It wrote to the court that “FERC’s assertion of jurisdiction directly conflicts with the express statutory grant of exclusive jurisdiction to the CFTC over futures trading on futures exchanges.”
The U.S. Court of Appeals for the D.C. Circuit agreed with the CFTC, holding that the CFTC’s exclusive jurisdiction over futures contracts foreclosed any FERC enforcement action for Hunter’s alleged transactions. The court reasoned that “manipulation of natural gas futures contracts falls within the CFTC’s exclusive jurisdiction and . . . nothing in the Energy Policy Act clearly and manifestly repeals the CFTC’s exclusive jurisdiction.” Following the D.C. Circuit’s decision, the CFTC (now left to its own devices without interference by FERC) set a trial date in its case against Hunter and then, in September 2014, reached a $750,000 settlement.
Against the backdrop of Hunter, a federal court upheld FERC’s jurisdiction over Barclays Bank PLC and four Barclays traders for manipulation of electricity markets in 2015. FERC accused the defendants of manipulative trades on a daily index that was based on “day-ahead fixed-price physical electricity transactions at a particular trading location.” The defendants moved to dismiss FERC’s action, arguing that because these trades were motivated by Barclays’s swaps positions, and “because trading swaps may serve a similar purpose as trading futures–in that they both can be used to speculate on future changes in the price of electricity,” the trades at issue belonged in the exclusive jurisdiction of the CFTC. FERC responded that the trades were in the physical market, because the index in question traded on essentially current prices of electricity, which just happened to benefit swaps as well.
The U.S. District Court for the Eastern District of California distinguished Hunter, explaining that in that case, the key to the manipulation was in the futures markets. In Barclays’ case, however, the alleged manipulative scheme occurred in the physical market to benefit its swaps positions. Accordingly, the court determined that the day-ahead index at issue in Barclays was “a FERC-jurisdictional market” in contrast to Hunter’s trades on a core futures market that was exclusively regulated by the CFTC. It should also be noted that at the time of the alleged activity in Barclays, the CFTC had no jurisdiction over swaps, since the activity predated the passage of Title VII of the Dodd-Frank Act.
Taking Hunter and Barclays together, the FERC-CFTC jurisdictional boundary depends on a highly fact-specific analysis of where the manipulative scheme or activity actually occurs. That is, does it occur in a futures market with an effect on the physical market thereby triggering CFTC exclusive jurisdiction, as in Hunter, or does it occur in a physical market that also affects a related derivatives market, thereby avoiding CFTC exclusive jurisdiction and allowing FERC enforcement. This line is not yet fully defined, leaving market participants with uncertainty over the jurisdictional boundaries of the derivatives and physical energy markets.
Created as a result of the Dodd-Frank Act in 2010, the CFTC’s whistleblower program finally got going in 2015. The SEC’s program has been very successful for several years, and the Dodd-Frank Act provided the CFTC with the tools to take steps to follow the trend.
The whistleblower program provides monetary rewards for people who voluntarily report violations of the CEA. The information must be original and it must lead to a judgment of more than $1 million. Whistleblowers do not need to report the misconduct internally and they are eligible for 10 to 30 percent of the funds collected, not just from the CFTC but from other entities that utilize the information whistleblowers provide.
In May 2014, the CFTC issued the first whistleblower reward for approximately $240,000 in hopes of sending a signal that people really will be rewarded. Further, the CFTC now has $268 million in its own fund specifically budgeted for whistleblower awards. The success of the program can be seen through the number of whistleblowers tips, which rose from 58 in 2013 to 138 in 2014. Division of Enforcement Director Goelman has stated, “[r]eceiving high quality information from whistleblowers is an essential part of the CFTC’s overall enforcement program. Such information allows the staff to bring cases more quickly and with fewer agency resources and we will continue to provide financial incentives for people with specific and credible information about violations of the CEA to come forward.” As the CFTC continues to present more people with awards for their valuable information and people continue to learn about the whistleblower program, there is likely to be additional CFTC enforcement actions.
Most recently, in April 2016, the CFTC announced that it would pay more than $10 million to a whistleblower who provided original information leading to a successful CFTC action. This award, a record for the agency, far exceeds the CFTC’s previous whistleblower rewards, and shows the importance that the CFTC is placing on incentivizing future whistleblowers. In connection with the award, the Director of the CFTC’s Whistleblower Office, Christopher Ehrman, explained that he hopes “this multimillion dollar award will encourage others to come forward with information that will assist the Commission in protecting our markets.”
Aided by the Dodd-Frank Act’s expansion of its enforcement authority, the CFTC has clearly joined other leading U.S. government agencies as a regulator with an active and aggressive agenda. We expect the CFTC to continue down the enforcement path it blazed in 2015. Companies located in the U.S. and abroad that are active in the many areas where it is possible for the CFTC to assert jurisdiction, therefore, must pay close attention to continued developments, especially in the areas of market or other price manipulation and compliance with the Commission’s derivatives market regulations. As the CFTC continues to bring enforcement actions relying on its new statutory arsenal, and as the courts become more familiar with these new provisions, we would expect an increase in the CFTC’s confidence to pursue all of the legal remedies that are available to it, and this confidence is itself a development for which one cannot be too well prepared.
 See Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Releases Annual Enforcement Results for Fiscal Year 2015 (Nov. 6, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7274-15.
 Compare Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Releases Annual Enforcement Results for Fiscal Year 2015 (Nov. 6, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7274-15 ($4.6 billion to date from benchmark actions), with Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Releases Annual Enforcement Results for Fiscal Year 2014 (Nov. 6, 2014), available at http://www.cftc.gov/PressRoom/PressReleases/pr7051-14 ($1.87 billion to date from benchmark actions).
 See CFTC Releases Annual Enforcement Results for Fiscal Year 2015, supra note 1.
 Unless noted otherwise in this Client Alert, Respondents in all of the CFTC settlement orders discussed herein neither admitted to nor denied the allegations that the CFTC brought against them.
 See In re Citibank, N.A., CFTC No. 15-03 (Nov. 11, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcitibankorder111114.pdf.
 See In re HSBC Bank plc, CFTC No. 15-07 (Nov. 11, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfhsbcorder111114.pdf.
 See In re JPMorgan Chase Bank, N.A., CFTC No. 15-04 (Nov. 11, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfjpmorganorder111114.pdf.
 See In re The Royal Bank of Scotland plc, CFTC No. 15-05 (Nov. 11, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfroyalbankorder111114.pdf.
 See In re UBS AG, CFTC No. 15-06 (Nov. 11, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfubsorder111114.pdf.
 See In re Citibank, N.A., CFTC No. 15-03 (Nov. 11, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcitibankorder111114.pdf.
 See Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Orders Five Banks to Pay over $1.4 Billion in Penalties for Attempted Manipulation of Foreign Exchange Benchmark Rates (Nov. 12, 2014), available at http://www.cftc.gov/PressRoom/PressReleases/pr7056-14.
 See, e.g., Press Release, U.S. Commodity Futures Trading Comm’n, Deutsche Bank to Pay $800 Million Penalty to Settle CFTC Charges of Manipulation, Attempted Manipulation, and False Reporting of LIBOR and Euribor (Apr. 23, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7159-15 (describing “the largest fine in the CFTC’s history”).
 In re Deutsche Bank AG, CFTC No. 15-20 (Apr. 23, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder042315.pdf. In the settlement order, Deutsche Bank did not admit to or deny the CFTC’s allegations “except to the extent [that it] admitt[ed] those findings in any related action against [Deutsche Bank] by, or any agreement with, the Department of Justice or any other governmental agency or office, [it] consent[ed] to the entry [of] and acknowledge[d] service of [the settlement order].” Id. at 1.
 See In re Deutsche Bank AG, CFTC No. 15-20 (Apr. 23, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder042315.pdf.
 In re Barclays PLC, CFTC No. 15-25 (May 20, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbarclaysorder052015.pdf.
 See In re Australia and New Zealand Banking Group Ltd., CFTC No. 15-31 (Sep. 17, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfaustraliaorder091715.pdf.
 See In re Deutsche Bank AG, CFTC No. 15-40 (Sep. 30, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder093015.pdf.
 Specifically, the CFTC alleged violations of CFTC Regulations 43.3(a), 43.3(e), 45.4(a), 45.14(a) and 23.602.
 See In re Deutsche Bank AG, CFTC No. 15-40 (Sep. 30, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder093015.pdf.
 Timothy Massad, Chairman, U.S. Commodity Futures Trading Comm’n, Keynote Remarks of Chairman Timothy Massad before the Futures Industry Association Futures and Options Expo (Nov. 4, 2015), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-33.
 7 U.S.C. § 6c(a)(5) (2016).
 7 U.S.C. § 6c(a)(5)(C) (2016).
 17 C.F.R. § 180.1 (2015).
 17 C.F.R. §§ 180.1(a)(1)–(4) (2015).
 Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation,76 Fed. Reg. 41398, 41399 (July 14, 2011) (to be codified at 17 C.F.R. § 180).
 7 U.S.C. §§ 9, 13(a)(2) (2016).
 Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. at 41407.
 Id. at 41408 (quotation marks omitted).
 Compare CEA Section 6(c)(3), 7 U.S.C. § 9 (2016), and 17 C.F.R. § 180.2 with CEA Section 9(a)(2), 7 U.S.C. § 13(a)(2)( 2016).
 Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. at 41408.
 Interim Procedures for Considering Requests From the Public for Textile and Apparel Safeguard Actions on Imports From Panama, 78 Fed. Reg. 31886 (May 28, 2013); Antidisruptive Practices Authority, 78 Fed. Reg. 31890, 31892 (May 28, 2013).
 Antidisruptive Practices Authority, 78 Fed. Reg. 31890, 31892, 31896 (May 28, 2013).
 See Complaint, CFTC v. Nav Sarao Futures Ltd. PLC, No. 15-cv-3398 (N.D. Ill. Apr. 17, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfsaraocomplaint041715.pdf; Statutory Restraining Order, CFTC v. Nav Sarao Futures Ltd. PLC, No. 15-cv-3398 (N.D. Ill. Apr. 17, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfsaraoorder041715.pdf.
 See Complaint, CFTC v. Khara, No. 15-cv-3497 (S.D.N.Y. May 5, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfkharacomplaint050515.pdf; Order, CFTC v. Khara, No. 15-cv-3497 (S.D.N.Y. May 5, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfkharaorder050515.pdf.
 See Consent Order, CFTC v. Moncada, No. 12-cv-8791 (S.D.N.Y. Oct. 1, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfmoncadaorder100114.pdf.
 See Complaint, CFTC v. Kraft Foods Group, Inc., No. 15-2881 (N.D. Ill. Apr. 1, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfkraftcomplaint040115.pdf.
 Kraft had previously been granted an exemption allowing it to carry positions that matched its unfilled requirements up to a month in the future, but the exemption expired on December 1, 2011, and Kraft did not apply for a renewal.
 See In re Arya Motazedi, CFTC No. 16-02 (Dec. 2, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfmotazediorder120215.pdf.
 See 7 U.S.C. § 13(c) (2016).
 Prohibition of Market Manipulation, 75 Fed. Reg. 67,657, 67,658 (CFTC Nov. 3, 2010). Application of the rules to insider trading violations would be limited to situations where there is trading on material nonpublic information in breach of a pre-existing duty (established by another law, rule, agreement, etc.) or that was obtained through fraud or deception. See Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. at 41403.
 Motazedi, CFTC No. 16-02, at 7.
 See Consent Order, CFTC v. Royal Bank of Canada, No. 12 Civ. 2497 (S.D.N.Y. Dec. 18, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfrbcorder121814.pdf.
 See In re Olam International Ltd., CFTC No. 15-13 (Jan. 20, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfolamorder012015.pdf.
 See Consent Order, CFTC v. Evans, No. 14-0839-CV-W-ODS (W.D. Mo. June 16, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfgregoryorder061615.pdf.
 See In re INCE Futures U.S., Inc., CFTC No. 15-17 (Mar. 16, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enficeorder031615.pdf.
 See Complaint, CFTC v. Byrnes, No. 13 civ 1174 (S.D.N.Y. Feb. 21, 2013), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbyrnescomplaint022113.pdf.
 Nick Baker & Sam Mamudi, CME Market Surveillance Found Lacking by its Chief Regulator, Bloomberg Business (Nov. 24, 2014), http://www.bloomberg.com/news/articles/2014-11-24/cme-s-market-surveillance-found-lacking-by-its-chief-regulator.
 See 17 C.F.R. § 30.7(a) (2015) (providing that a Futures Commission Merchant “must maintain in a separate account or accounts, money, securities and property in an amount at least sufficient to cover or satisfy all of its current obligations to foreign futures or foreign options customers denominated as the foreign futures or foreign options secured amount. Such money, securities and property may not be commingled with the money, securities or property of such futures commission merchant, with any proprietary account of such futures commission merchant, or used to secure or guarantee the obligations of, or extend credit to, such futures commission merchant.”); id. § 30.7(e)(2) (prohibiting commingling).
 See id. pt. 23, subpt. L (“Segregation of Assets Held as Collateral in Uncleared Swap Transactions”).
 See id. § 190.06(f)(1)(i).
 See id. § 1.49(b)(1) (“[O]bligations to a customer shall be denominated: (i) [i]n the United States dollar; (ii) [i]n a currency in which funds were deposited by the customer or were converted at the request of the customer, to the extent of such deposits and conversions; or (iii) [i]n a currency in which funds have accrued to the customer as a result of trading conducted on a designated contract market, to the extent of such accruals.”); id. § 1.49(e)(1)(i) (providing that a Futures Commission Merchant “must, as of the close of each business day, hold in segregated accounts . . . [s]ufficient United States dollars, held in the United States, to meet all United States dollar obligations”); id. § 22.9(b) (“[O]bligations to a Cleared Swaps Customer may be denominated in a currency in which funds have accrued to the Cleared Swaps Customer as a result of a Cleared Swap carried through such [FCM], to the extent of such accruals.”).
 See 7 U.S.C. § 6d(a)(2) (2016) (providing that customer funds “may be invested in obligations of the United States, in general obligations of any State or of any political subdivision thereof, and in obligations fully guaranteed as to principal and interest by the United States, such investments to be made in accordance with such rules and regulations and subject to such conditions as the Commission may prescribe”); 17 C.F.R. § 1.25 (2015) (listing permissible investments and concentration limits).
 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 124(a), 124 Stat. 1376, 1682–83 (2010).
 See, e.g., J. Christopher Giancarlo, Commissioner, Commodity Futures Trading Comm’n, Statement for the Market Risk Advisory Committee Meeting (June 1, 2015), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement060115 (attributing CFTC’s renewed focus on consumer protection rules to “[t]he collapse of MF Global and Peregrine Financial”); Jamila Trindle, CFTC Moves to Safeguard Customer Funds, Wall St. J. (Sept. 4, 2013), http://www.wsj.com/articles/SB10001424127887323623304579055003171577962 (reporting on CFTC focus on protection of customer funds “in the wake of implosions at MF Global Holdings Ltd. and Peregrine Financial Group Inc.”).
 17 C.F.R. § 166.3 (2015); see also id. § 5.21 (same for retail foreign exchange dealers).
 Order of Remand, In re Collins, No. 94-13, 1997 WL 761927, at *10 (CFTC Dec. 10, 1997).
 Id.; see Opinion and Order, In re GNP Commodities Inc., No. 89-1, 1992 WL 201158, at *19 (CFTC Aug. 11, 1992), aff’d sub nom. Monieson v. CFTC, 996 F.2d 852 (7th Cir. 1993).
 In re Friedberg Mercantile Group, Inc., CFTC No. 15-01 (Oct. 8, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enffriedbergorder100814.pdf.
 In re Deutsche Bank Securities Inc., CFTC No. 15-11 (Dec. 22, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder122214.pdf.
 See In re IBFX, Inc., CFTC No. 15-10 (Dec. 10, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfibfxorderdf121014.pdf.
 17 C.F.R. § 5.7(a)(3) (2015).
 See, e.g., In re Morgan Stanley & Co. LLC, CFTC No. 15-26 (Aug. 6, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfstanleyorder080615.pdf.
 In re Coinflip, Inc., CFTC No. 15-29 (Sept. 17, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf (“Section 1a(9) of the [Commodity Exchange] Act defines ‘commodity’ to include, among other things, ‘all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.’ . . . The definition of a ‘commodity’ is broad. . . . Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”) (citations omitted).
 For more information on bitcoin and other digital currencies, please refer to Gibson Dunn’s Digital Currencies and Blockchain Technologies practice group webpage: https://www.gibsondunn.com/practices/pages/FIN_DIG.aspx.
 7 U.S.C. § 7b-3(a)(1) (2016).
 Coinflip Inc., CFTC No. 15-29, at 2. Although Coinflip mentioned futures contracts in its solicitation materials, it did not actually list any futures contracts.
 In re TeraExchange LLC, CFTC No. 15-33 (Sept. 24, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf.
 SEF Core Principle 2 requires an SEF to prohibit abusive trading practices, like wash trading and prearranged trading. 17 C.F.R. pt. 37, subpt. C (2015).
 7 U.S.C. § 7b-3(f)(2)(B) (2016).
 Transcript of CFTC Global Markets Advisory Committee Meeting at 108, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/gmac_100914_transcript.pdf.
 Press Release, Commodity Futures Trading Comm’n, Dissenting Statement by Commissioner Sharon Y. Bowen Regarding TeraExchange LLC (Sept. 24, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/bowenstatement092415.
 See In re Anthony J. DiPlacido, CFTC No. 01-23 (Nov. 5, 2008), available at http://www.cftc.gov/idc/groups/public/@lropinionsandadjudicaryorders/documents/legalpleading/ogcdiplacido110508.pdf. The respondent in DiPlacido was a floor broker on the NYMEX who had improperly executed trades, making this matter the first time the CFTC “considered a manipulation case based on trading floor practices in an adjudicated decision.” Id. The CFTC ruled that the respondent’s conduct met the traditional manipulation test, and therefore violated the CEA, even in the absence of market power or control of the cash market. See id. The U.S. Court of Appeals for the Second Circuit affirmed the CFTC’s decision. See DiPlacido v. CFTC, 364 F. App’x 657 (2d Cir. 2009) (summary order).
 See, e.g., Jean Eaglesham, SEC Gives Ground on Judges, Wall St. J. (Sept. 25, 2015), available at http://www.wsj.com/articles/sec-gives-ground-on-judges-1443139425; Gretchen Morgenson, Crying Foul on Plans to Expand the SEC’s In-House Court System, N.Y. Times (June 26, 2015), available at http://www.nytimes.com/2015/06/28/business/secs-in-house-justice-raises-questions.html?_r=0.
 Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Releases Annual Enforcement Results for Fiscal Year 2014 (Nov. 6, 2014), available at http://www.cftc.gov/PressRoom/PressReleases/pr7051-14.
 See, e.g., Leslie R. Caldwell, Assistant Attorney General, Dep’t of Justice, Remarks at the New York City Bar Association’s Fourth Annual White Collar Crime Institute (May 12, 2015), available at https://www.justice.gov/opa/speech/assistant-attorney-general-leslie-r-caldwell-delivers-remarks-new-york-city-bar-0 (praising DOJ-CFTC cooperation); Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Releases Annual Enforcement Results for Fiscal Year 2015 (Nov. 6, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7274-15 (offering examples of DOJ cooperation).
 See Memorandum from Deputy Attorney General Sally Quillian Yates to the Assistant Attorney General, Antitrust Division and others (Sept. 9, 2015), available at https://www.justice.gov/dag/file/769036/download.
 Jean Eaglesham, CFTC Turns Toward Administrative Judges, Wall St. J. (Nov. 9, 2014), available at http://www.wsj.com/articles/cftc-turns-toward-administrative-judges-1415573398.
 Stephanie Russell-Kraft, CFTC Plans More Administrative Actions, Criminal Crackdowns, Law360 (Nov. 7, 2014), available at http://www.law360.com/articles/594484/cftc-plans-more-administrative-actions-criminal-crackdowns.
 In re ICE Futures U.S., Inc.,CFTC No. 15-17 (Mar. 16, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enficeorder031615.pdf.
 In re Deutsche Bank AG, CFTC No. 15-40 (Sept. 30, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder093015.pdf.
 Timothy Massad , Chairman, U.S. Commodity Futures Trading Comm’n, Keynote Remarks Before the Futures Industry Association Futures and Options Expo (Nov. 4, 2014), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-33.
 See 7 U.S.C. §§ 1a(47), 1a(42) (2016); 15 U.S.C. § 78c(a) (2016).
 Letter from Brian A. Bussey, Associate Director, U.S. Sec. & Exch. Comm’n & David R. Fredrickson, Associate Director and Chief Counsel, U.S. Sec. & Exch. Comm’n, to Christopher Kirkpatrick, Secretary, U.S. Commodity Futures Trading Comm’n (July 2, 2015) (on file with author), available at http://www.cftc.gov/groups/public/@otherif/documents/ifdocs/ProdCMECommentLetter_150702.pdf.
 U.S. Commodity Futures Trading Comm’n, Order Approving the Listing of the Chicago Mercantile Exchange’s S&P 500 Dividend Index Futures Contract (July 22, 2015), available at http://www.cftc.gov/groups/public/@otherif/documents/ifdocs/ProdCMEApprovalOrdrDividx_1507.pdf.
 JP Morgan admitted to the allegations in both the settlement with the SEC and the settlement with the CFTC. See In re JPMorgan Chase Bank, N.A., CFTC Docket No. 16-05 (Dec. 18, 2015), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfjpmorganorder121815.pdf; In re JPMorgan Chase Bank, N.A., Exchange Act Release No. 76694 (Dec. 18, 2015), available at https://www.sec.gov/litigation/admin/2015/33-9992.pdf.
 Notably, the district court held that the CFTC’s allegations did indeed satisfy this heightened standard, and so it denied the motion to dismiss. As a result, the district court’s interpretation of CEA Section 6(c)(1) and Regulation 180.1 are unlikely to be challenged on appeal.
 See Hunter v. FERC, 711 F.3d 155 (D.C. Cir. 2013).
 See FERC v. Barclays Bank PLC, 105 F. Supp. 3d 1121 (E.D. Cal. 2015).
 See Hunter, 711 F.3d at 156.
Amanda Bransford, CFTC Challenges FERC’s Authority to Fine Gas Trader $30M, Law360 (Apr. 26, 2012), available at http://www.law360.com/articles/334686/cftc-challenges-ferc-s-authority-to-fine-gas-trader-30m.
 See Hunter, 711 F.3d at 156.
 See Consent Order, CFTC v. Hunter, 07 Civ. 6682 (Sept. 15, 2014), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbhunterorder091514.pdf.
 See FERC, 105 F. Supp. 3d at 1125.
 See Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Issues First Whistleblower Award (May 20, 2014), available at http://www.cftc.gov/PressRoom/PressReleases/pr6933-14.
 Meanwhile, the CFTC’s entire operating budget ($250 million in fiscal year 2016) is smaller than the funds held by the Whistleblower Program.
 Press Release, U.S. Commodity Futures Trading Comm’n, CFTC to Issue Whistleblower Award of Approximately $290,000 (Sept. 29, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7254-15.
 Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Announces Whistleblower Award of More Than $10 Million (Apr. 4, 2016), available at http://www.cftc.gov/PressRoom/PressReleases/pr7351-16.
The following Gibson Dunn lawyers assisted in preparing this client update: Lawrence Zweifach, Arthur Long, Robert Trenchard, Joel Cohen, Michael Bopp, William Scherman, Jeffrey Steiner, Jeffrey Jakubiak, Mary Kay Dunning, Tina Samanta, Jason Fleischer, Casey K. Lee, Amy Mayer, Matthew Greenfield, Diane Chan, Tarana Riddick, Kyle Neema Guest, Julie Anne Inglese.
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