Trends in Trade Surveillance and Regulation
In the first installment of this blog series we took a look at the details surrounding the CFTC’s enforcement activities in the 2018 fiscal year as laid out in a speech from the agency’s Enforcement Director, James McDonald. McDonald focused on the agency’s four priorities – preserving market integrity, protecting customers, promoting individual accountability and enhancing coordination with other regulators. Individual accountability is the focus here.
There are two main events in recent history that have led to the CFTC adopting a more aggressive enforcement: the rise of electronic trading and the passage of Dodd-Frank following the financial crisis. Electronic trading not only led to more cases simply because of dramatic increases in volume (more volume = more cases) but also because electronic trading makes previously un-imagined forms of manipulation “easier” than they were with manual trading. Dodd-Frank specifically prohibits disruptive trading, including spoofing, under amended section 4c(a) of the Commodity Exchange Act and this is driving the CFTC to emphasize individual accountability as a way to encourage appropriate behavior.
Towards a “culture of accountability”
McDonald spent a great deal of time in his speech addressing this very issue. The CFTC is striving to help companies create a “culture of accountability,” and McDonald elucidated what the agency hopes to achieve in this area. Importantly, a major emphasis has been placed on making sure that individuals – and not just their companies – are held accountable for illegal acts. This extends up the food chain as well, as enforcement actions were leveled against individuals including supervisors, desk heads, CEOs and even a Chairman of the Board last year. (Read the full text here.)
It’s not all punishment, however: the agency is applying a “carrot-or-the-stick” methodology to addressing the issue with an emphasis on working with those firms that self-report transgressions and cooperate with the resulting investigations. So, while the CFTC was particularly strict and aggressive with its enforcement efforts last year, it is also making it very clear that the agency prefers cooperation over punishment. McDonald finished his remarks on this note, stating that “our end goal is to foster a true culture of compliance in our markets”.
CFTC surveillance and enforcement policy
The CFTC sent a very clear message through McDonald’s speech: it remains vigilant and aggressive with enforcement but is open to cooperation. For anyone in a firm trading or facilitating trading of futures, swaps or cryptos the message should be obvious: not only is it possible that enforcement action will be swift and strong, it’s also true that those who establish clear and consistent trade surveillance and market risk monitoring programs producing comprehensive alerts and reports will have the best chance of finding a spirit of cooperation from the CFTC. To paraphrase Louis Pasteur: fortune favors the prepared.
For Further Reading
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