The updated regulations call for future commission merchants, clearing members, foreign brokers and reporting firms to report position information for the largest futures and options traders to the Commission.

The finalised rules substitute the data elements listed in the CFTC’s regulations with an appendix specifying applicable data elements.

In addition, the final rules will also mean the publication of a separate Part 17 Guidebook which details the form and manner for reporting.

The rules also remove what the CFTC describes as “outdated” 80-character data submission standard in the watchdog’s regulations. That standard will be replaced by a FIXML standard, as also detailed in the Part 17 Guidebook.

“These amendments will modernise the CFTC’s large trader position reporting and align it with other reporting structures set out in the CFTC’s regulations,” said Vince McGonagle, director of the division of market oversight.

The final rules are effective 60 days after publication in the Federal Register, with reporting firms required to comply with the final rules two years after publication.

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Expected to launch in January 2024, the development will help create capital efficiencies for clearing members that trade and clear both US treasury securities and CME Group interest rate futures.

The arrangement will enable clearing members of CME and the Government Securities Division (GSD) of DTCC’s Fixed Income Clearing Corporation (FICC) to cross-margin an increased range of products, including CME Group SOFR futures, Ultra 10-year US treasury note futures and FICC-cleared US treasury notes and bonds.

“In line with our longstanding commitment to provide capital efficiencies to market users, we are very pleased to bring this enhanced cross-margining arrangement to the treasury marketplace in January,” said Suzanne Sprague, CME Group’s global head of clearing and post-trade services.

“We appreciate the opportunity to further our collaboration with DTCC for the benefit of market participants who trade across cash and futures markets.”

In addition, repo transaction that have treasury collateral with a time to maturity that exceeds one year will also be eligible for the new cross-margining arrangement.

­­“The approval of the arrangement paves the way for increased efficiency and resiliency of the overall US treasury market, and we look forward to working with CME Group to deliver upon these important enhancements,” added Laura Klimpel, general manager of FICC and head of SIFMU business development at DTCC.

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The move follows one from November 2019, where the CFTC found that Goldman Sachs had failed to record the phone lines of a trading and sales desk for 20 calendar days between January and February 2014, following a software patch which caused its recording hardware to malfunction.

Following this, the CFTC ordered Goldman Sachs to pay a $1 million civil monetary penalty and to avoid further violations of CFTC recordkeeping provisions.

The CFTC found that since the issuance of the November 2019 order, the bank had additional recordkeeping failures, which violated the cease-and-desist provision of the earlier order.

Separately, from March 2020, Goldman Sachs experienced software issues connected to a new software which resulted in failures to properly record audio, which impacted thousands of calls. A permanent fix resulting from a software update was completed in June 2022.

As charged, the bank is required to pay a $5.5 million civil monetary penalty and to cease and desist from further violations of the recordkeeping provisions of the Commodity Exchange Act and CFTC regulations.

Ian McGinley, director of enforcement at the CFTC, said: “As this case demonstrates, the CFTC will continuously pursue swap dealers that fail to meet their recording obligations and there will be consequences for violating CFTC orders, including increased penalties.

“We are committed to holding swap dealers accountable when they fail to comply with their regulatory obligations and fail to abide by obligations imposed by prior CFTC orders.”

The CFTC’s order recognises Goldman Sachs’ cooperation with the CFTC’s investigation, while also acknowledging the bank’s “representations concerning its remediation in connection with this matter”.

Goldman Sachs did not respond to a request for comment. 

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This move relates to swaps transitioning from USD LIBOR and other rates to risk-free rates and specifically concerns swaps transitioning under the ISDA LIBOR fallback provisions.

The no-action position is in respect to the commission’s 45.4 and 43.3 regulations. Part 43 sets forth real-time public reporting requirements – governing the public dissemination of swap pricing and transaction information, whilst Part 45 of the commission’s regulations covers both record-keeping obligations and the regulatory reporting of swap data.

Specifically, the letter states that no action will be taken against entities which “fail to timely report the change in the floating rate pursuant to the ISDA Fallbacks for an uncleared swap referencing any Impacted Rate” under regulation 45.4. This is only in cases where entities have made best efforts to report the change by applicable deadlines.

Additionally, under the no-action approach, no enforcements are to be taken in the event that an entity fails to report “the change in the floating rate pursuant to the ISDA Fallbacks for an uncleared swap referencing any Impacted Rate” under regulation 43.3.

Speaking in the letter, the Alternative Reference Rate Committee (ARRC) highlighted that market transparency and data integrity could potentially be harmed, explaining that “Part 43 reporting of changes that occur pursuant to the ISDA Fallbacks could lead to a significant number of messages being published by swap data repositories that do not serve a price discovery function.”

Libor rates for major currencies officially ended on 31 December 2021, beginning the industry transition to alternative risk-free rates. A month prior to the official cessation, the CFTC issued a request for information and comment related to its swap clearing requirement regulations to gain insight from participants on how aspects of the swap clearing requirement may be affected by the transition from IBORs to alternative reference rates.

The Financial Conduct Authority (FCA) confirmed back in July 2017 that it would no longer be supporting banks using Libor settings after 31 December 2021 following years of allegations that the benchmark had been manipulated.

However, although Libor settings for sterling, euro, Swiss franc, Japanese yen, and the one-week and two-month US dollar settings ceased in December 2021, the remaining US dollar settings are only set to cease today, 30 June.

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Trading began earlier on 17 April outside of the US. The contract was developed in collaboration with FTSE Russell and Digital Asset Research (DAR).

Speaking in an announcement, Eurex highlighted how this move is a further step towards offering secure and trusted access to cryptocurrencies within a regulated market environment.

It added that, from now, US participants can will benefit from additional trading and hedging opportunities. This includes access to more participants and liquidity pools during European, North American, and APAC hours.

This approval means that Eurex is the first exchange in Europe to offer bitcoin index futures. The new futures contracts trade in both euros and US dollars, has a contract multiplier equivalent to one bitcoin (BTC), and cash settlement on expiry with no position limits.

According to the business, the contracts are a demonstrable step forward in meeting the needs of investors within the digital assets market in terms of transparency, accurate price discovery, and consistency.

Michael Lie, head of digital asset trading at Flow Traders, said: “We welcome Eurex, one of the major derivatives exchanges, to expand its digital asset offering, which strengthens the belief of the acceptance and adoption of digital assets.”

He further emphasised: “The approval of the first exchange-traded Bitcoin future in Europe by the CFTC [making it accessible to the US market] represents another significant step towards increasing the accessibility of cryptocurrencies among institutional investors.”

Since the launch, more than ten members have traded hundreds of contracts, with others set to join. According to the business, at least five market makers provided liquidity during global trading hours.

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The CFTC found that Mizuho failed to make adequate disclosures to customers related to certain foreign exchange forward transactions know as deal-contingent FX forwards.

According to the CFTC, Mizuho failed to disclose that it was trading in the minutes or seconds before it provided the spot exchange rate to, and executed the forward transaction with, the customer. This activity was found to have occurred from June 2018 to December 2020.  

The actions by Mizuho likely contributed to moving the spot exchange rate in the relevant currency pair against the customer, which may have resulted in customers obtaining the currency it sought to acquire via the foreign exchange forward at a less favourable rate.

As part of the order, Mizuho is required to cease and desist from further violations of these standards, pay $1,847,182.90 in restitution, and pay a $5 million civil monetary penalty.

Mizuho declined to comment.

“The CFTC’s settlement with Mizuho is the latest in a series of enforcement actions against swap dealers for violations of the Business Conduct Standards,” said Ian McGinley, director of enforcement at the CFTC.

“Congress mandated these standards to ensure that honesty and transparency prevail in swaps markets, including over-the-counter swaps markets. Our significant penalties here reflect the consequences swap dealers face from failing to meet these standards.”

Earlier this month, Goldman Sachs received a similar penalty for violations of the CFTC’s Business Conduct Standards applicable to swap dealers. Goldman Sachs was found by the regulator to have failed to disclose dozens of pre-trade-mid-market marks (PTMMM) alongside failing to communicate to clients in “a fair and balanced manner based on principles of fair dealing and good faith”.

The CFTC’s order imposed a $15 million civil monetary penalty to Goldman Sachs.

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Goldman Sachs was found by the CFTC to have failed to disclose dozens of pre-trade-mid-market marks (PTMMM) alongside failing to communicate to clients in “a fair and balanced manner based on principles of fair dealing and good faith”.

According to the CFTC, Goldman Sachs admits that for nearly all “same-day” swaps executed in 2015 and 2016, it either failed to disclose any PTMMM or failed to disclose an accurate PTMMM, and that this conduct violated a CFTC regulation.

The CFTC’s order imposes a $15,000,000 civil monetary penalty.

Goldman Sachs declined to comment.

The CFTC’s order found that Goldman Sachs obscured the value of the same-day swap by failing to disclose to clients the PTMMM of these swaps – frequently disclosing a PTMMM for a different swap instead.

Goldman Sachs was found to have opportunistically solicited or agreed to enter into same-day swaps only on days and at times that were financially beneficial to the bank and disadvantageous to its clients.

In addition, the CFTC found that Goldman Sachs’ communication to clients caused the same-day swaps to appear more economically advantageous than they actually were.

“The purpose of the CFTC’s Business Conduct Standards is to promote transparency and fairness in the swaps market,” said Ian McGinley, director of enforcement.

“The CFTC is committed to ensuring that swap dealers abide by these standards, so that swap counterparties receive disclosures allowing them to assess material aspects of the swaps before entering into them. [The] penalty against Goldman demonstrates [that] the CFTC will aggressively pursue swap dealers that violate these business conduct standards.”

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The cyber-attack that brought down the derivatives platform of ION Group on 31 January continues to see its effects ripple through the market, despite reportedly bringing customers back online from last week. According to a statement from CFTC, the agency is still monitoring reporting delays due to the incident at ION Cleared Derivatives, which provides order management, execution, trading and trade processing services.  

“Although the impact of the cyber-related incident at ION has been mitigated, firms that are responsible for reporting are continuing to experience some issues with respect to the submission of timely and accurate data to the CFTC,” said the regulator on 10 February.  

Read More – ION suffers cyber attack on derivatives platform

“As a result, the weekly Commitments of Traders report, that is produced by CFTC staff, will continue to be delayed until all trades can be reported. A report will be published upon receipt and validation of data from those firms.” 

The CFTC also confirmed that there remain impacts to some reporting firms, and recommended that all affected market participants should “continue their best efforts to expedite compliance obligations” in preparing the daily large trader reports required under CFTC regulations, as well as filing revised reports once systems are back up and running.  

“CFTC staff will consider any necessary further action as appropriate,” warned the regulator.  

Read More – ION has reportedly paid the ransom – but could it cause more harm than good?

According to reports, Euronext has also delayed its weekly commodity derivatives report until further notice, due to the fall-out from the ransomware attack.  

ION has declined to comment further. However, a person familiar with the matter told The TRADE that full service has now been resumed for a majority of clients.  

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According to Russian hacker group Lockbit, which claims responsibility for the cyber-attack on ION Cleared Derivatives (a division of ION Markets) last week, the alleged ransom has been paid and a decryption key provided to the firm – although it declined to give details. However, even with the decryption key, sources close to ION tell The TRADE that the firm plans to build new infrastructure for its derivatives platform rather than risk returning to the hacked systems.

Starting from scratch 

“They are not relying on restoring or reactivating any compromised structures,” said the source. “The focus right now is on rebuilding and mitigating any further risk.”  

The self-spreading, automated ransomware works by gaining access to a system – usually through a compromised server or remote desktop account – and encrypting it so that it cannot be used or its information accessed. A ransom demand is then issued, often accompanied by the threat of making confidential information public if it is not paid. However, even if the ransom is paid, it can take substantial time and effort to restore affected files and systems, which usually need to be wiped once retrieved, as they can no longer be trusted.  

Read More – ION suffers cyber attack on derivatives platform

ION declined to formally comment as to whether it has paid the ransom or not. However, even with access to its systems restored, this could just be the start of its problems.  

A slap on the wrist?  

The authorities take a dim view of cyber-attack ransoms being paid – and could respond with financial penalties that match or exceed the ransoms themselves. In 2018, for example, the UK’s Financial Conduct Authority (FCA) fined Tesco Bank £16.4 million for “failing to exercise due skill, care and diligence” in protecting its personal current account holders against a cyber-attack that took place in 2016.  

The UK regulators have since made their position on the payment of ransoms clear. In July 2022, the UK’s National Cyber Security Centre (NCSC) and Information Commissioner’s Office (ICO) issued updated guidance stating that: “Paying ransoms to release locked data does not reduce the risk to individuals, is not an obligation under data protection law, and is not considered as a reasonable step to safeguard data.” 

“Ransomware remains the biggest online threat to the UK and we are clear that organisations should not pay ransom demands,” said NCSC CEO Lindy Cameron. The ICO has clarified that it will not take this into account as a mitigating factor when considering the type or scale of enforcement action. 

In March 2022, the ICO handed down its first Monetary Penalty Notice for a ransomware attack and data infiltration incident under the UK General Data Protection Regulation (GDRP). The £98,000 fine, against criminal law firm Tuckers, was regarding a cyber-attack in August 2020 in which the firm paid the requested ransom and was subsequently subject to an enforcement action.

In 2018, the introduction of GDPR saw the limit on data breach fines bumped up from a max of £500,000 to a possible 4% of total global turnover or £17.5 million (€20 million in the EU), whichever is greater – making it rather more than just a slap on the wrist, should the penalty for paying the ransom be enforced.  

US position  

In the US, the Department of Treasury’s Office of Foreign Asset Control (OFAC) issued an updated advisory in September 2021 warning all ransomware victims that if they succumb to ransomware demands and pay foreign actors who are subject to US sanctions, they could also be subject to financial penalties.  

Read More – ION cyber concerns continue: US Treasury steps in

“Facilitating a ransomware payment that is demanded as a result of malicious cyber activities may enable criminals and adversaries with a sanctions nexus to profit and advance their illicit aims,” said the statement. “The US government strongly discourages the payment of cyber ransom or extortion demands.”  The US Treasury has already convened a working group in partnership with industry associations in response to the recent ION attack. 

Companies involved in facilitating ransomware payments on behalf of victims should also consider whether they have regulatory obligations under Financial Crimes Enforcement Network (FinCEN) regulations 

Tightening regulation 

According to the FBI, there was a nearly 21% increase in reported ransomware cases and a 225% increase in associated losses from 2019 to 2020. The UK saw a 51% increase in “material cyber incidents” in 2021, while a 2023 report from Chainalysis claims that globally, $457 million was paid worldwide in ransom payments in 2022. It’s a growing trend, and as the risks increase, so too does regulatory scrutiny.  

In the UK, new FCA and PRA requirements in relation to operational resilience came into force on 31 March 2022, with a focus on cyber resilience forming a key element of the FCA’s 2022/23 Business Plan, while the FCA has also indicated that it wants to increase its powers of direct oversight of service providers like ION. 

Meanwhile in the US, Commodities Futures Trading Commission (CFTC) chairman Rostin Behnam has laid out plans to tighten up cyber regulation on his own side of the pond. “The growth of cybersecurity threats to financial institutions is well-documented and widely recognised as an important and increasingly urgent problem,” he said in prepared comments.  

“While many of our registrants are subject to cyber requirements through prudential and other regulatory regimes, there is a greater role for the Commission to play in fostering sound and responsive cybersecurity practices among our registrants.” 

He confirmed his support for a new operational resilience rule for futures commission merchants (FCMs) and swap dealers (SDs). 

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Wash trading – the practice of creating artificially inflated trading volumes –gained traction (and headlines) with the rapid rise of electronic trading in the early 2010s, as algos and electronic trading programs became able to churn trades at unprecedented speeds. But cryptocurrency has opened up a whole new world of opportunity, which is having serious consequences on price transparency.

A report from the National Bureau of Economic Research in the US, published in December 2022, found that illegal wash trading may account for almost three quarters (over 70%) of average trading volumes on unregulated exchanges.  

Researchers from Cornell University in the US, Newcastle University in the UK and Tsinghua University in China conducted systematic tests exploiting robust statistical and behavioural patterns in trading to detect fake transactions on 29 cryptocurrency exchanges. 

“Abnormal first-significant-digit distributions, size rounding, and transaction tail distributions on unregulated exchanges reveal rampant manipulations unlikely driven by strategy or exchange heterogeneity,” reported the study.  

These fabricated volumes, effectively the result of firms (and exchanges) illegally trading with themselves, can amount to trillions of dollars annually. The fraudulent practice can offer a false impression of liquidity, resulting in an improved (but inaccurate) exchange ranking, as well as temporarily distorting prices.  

But regulators are cracking down.

“Regulators – particularly in the US and the UK – are now deploying sophisticated market data analytics to identify all forms of market abuse, including wash trading,” said compliance and reporting specialist SteelEye. “Never before have regulators had such technology firepower at their disposal to combat market manipulation.” 

Wash trading was first banned in the US in 1936 through the Commodity Exchange Act, while the Commodity Futures Trade Commission (CFTC) also prohibits brokers from profiting from wash trading, which it views as a form of market abuse. The US Securities and Exchange Commission (SEC) prosecutes wash trading through the Securities Act 1933 and the Securities Exchange Act 1934; while in the UK and EU the practice is banned under the Market Abuse Regulation.  

Now, the regulators are turning their attention to crypto markets, and prosecutions are on the rise. In March 2021, the CFTC fined Coinbase $6.5 million for “false, misleading or inaccurate reporting and wash trading”, claiming that between 2015 and 2018 the exchange operated two automated trading programs, Hedger and Replicator, which generated orders that at times with one another in certain trading pairs, resulting in trades between accounts owned by Coinbase. This “potentially resulted in a perceived volume and level of liquidity of digital assets, including Bitcoin, that was false, misleading, or inaccurate,” said the CFTC.  

“Reporting false, misleading, or inaccurate transaction information undermines the integrity of digital asset pricing,” added acting director of enforcement Vincent McGonagle. “This enforcement action sends the message that the Commission will act to safeguard the integrity and transparency of such information.” 

In the same month the UK’s Financial Conduct Authority (FCA) fined Adrian Horn, formerly a market making trader at Stifel Nicolaus Europe, £52,500 for market abuse and wash trading. 

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