CFTC releases annual enforcement results for 2015

November 6, 2015 10:50 AM

Bitcoin-Related Enforcement Actions

There is a great deal of excitement and press attention to the potential of Bitcoin, other crypto-currencies and the block chain technology.  The Enforcement Division has acted this year to ensure that those active in these areas understand that they are obliged to comply with the same laws as all other market participants.

· Coinflip, Inc. d/b/a Derivabit (Coinflip), a Bitcoin options trading platform operator, and its CEO, Francisco Riordan, operated a facility for the trading or processing of commodity options without complying with the CEA or CFTC Regulations otherwise applicable to swaps or conducting the activity pursuant to the CFTC’s exemption for trade options.  Additionally, the Order finds that Coinflip operated a facility for the trading of swaps but did not register the facility as a Swap Execution Facility (SEF) or Designated Contract Market (DCM), as required.

· TeraExchange LLC (Tera), a provisionally registered SEF, failed to enforce its prohibition on wash trading and prearranged trading on the SEF platform, which offered for trading a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin, a virtual currency (the Bitcoin Swap).  As a provisionally registered SEF, Tera is required under the SEF Core Principles of the CEA and CFTC Regulations to enact and enforce rules prohibiting certain types of trade practices on the SEF, including wash trading and prearranged trading.  This action is also notable because it is the first action by the CFTC charging a registered entity with a failure to comply with applicable Core Principles.

Reporting Violations

The reporting requirements for market participants are essential to the CFTC’s ability to conduct effective surveillance of the derivatives markets that it regulates.  Since the Dodd-Frank Act, this includes reporting obligations related to swaps transactions, part of the Commission’s responsibility for bringing greater transparency than heretofore.  In FY 2015, the CFTC brought several actions charging reporting violations, including its first enforcement actions enforcing the new Dodd-Frank Act large trader reporting requirements for physical commodity swap positions and for real time public reporting of swap transactions and the reporting of swap data to swap data repositories.  The CFTC also took action against an exchange for recurring data reporting problems, sending a clear message that all persons must be held accountable to meet their regulatory responsibilities.

Swaps Reporting

· Australia and New Zealand Banking Group Ltd. (ANZ) failed to submit certain daily large trader reports (LTRs) for reportable positions in physical commodity swaps and also filed LTRs that were inaccurate; ANZ was ordered to pay a $150,000 civil monetary penalty.  The order noted that ANZ implemented changes to its reporting procedures and submitted corrected historical LTRs.

· Deutsche Bank AG, a provisionally registered swap dealer, failed to properly report its swaps transactions, did not diligently address and correct the reporting errors until the bank was notified of the CFTC’s investigation, and failed to have an adequate swaps supervisory system governing its swaps reporting requirements; Deutsche Bank was ordered to pay a $2.5 million civil monetary penalty.

Other Reporting Violations

· ICE Futures U.S., Inc. (ICE), a designated contract market (DCM), failed to submit accurate and complete reports, which errors included incorrect clearing member reports, permanent record data, and transaction-level trade data; ICE was ordered to pay a $3 million civil monetary penalty.

· Marubeni America Corporation (Marubeni), a dealer and merchant of agricultural commodities and the largest overseas subsidiary of Japan-based Marubeni Corporation, failed to comply with its legal obligation to submit accurate monthly CFTC Form 204 Reports regarding the composition of Marubeni’s fixed price cash grain purchases and sales; Marubeni was ordered to pay an $800,000 civil monetary penalty.

Page 4 of 8
About the Author