Trends in Trade Surveillance and Regulation
2018 was a record-breaking year for the CFTC and this point was brought home forcefully in a recent speech from Enforcement Director James McDonald. Speaking to the NYU School of Law, McDonald delivered a clear and forceful recounting of the enforcement actions that the agency undertook during the year and went on to detail a vision of how the CFTC would like to guide market participants to develop a “culture of accountability” that encourages and reinforces good behavior.
In this blog post series, we examine McDonald’s comments to:
- Gain an understanding of the breadth and depth of the market enforcement that the CFTC is pursuing
- Examine how market participants can take positive action to achieve a “culture of accountability” for trade surveillance and risk monitoring
- Look at what this means for the future of enforcement, specifically trade surveillance
A record year for enforcement
In several areas, CFTC enforcement actions in the 2017-2018 fiscal year were quite extraordinary. For example, the number of cases filed was the third highest in agency history while new, all-time records were set for the number cases involving large-scale matters (judgments greater than $10 million), the number and amount of whistleblower awards, and the most ever charges of manipulative conduct. On this last point, in the period from 2009 through 2017, the CFTC averaged approximately six cases per year for manipulation, spoofing and other disruptive practices but filed over four times that many – a total of 26 – last year.
In his speech, McDonald explained that the actions of the agency are guided by four underlying priorities:
- Preserving Market Integrity – Since the promulgation of Dodd-Frank, the CFTC has continually expanded the scope of action that it is willing to take in the name of market integrity. In the most recent period, that has included “complex and novel patterns of manipulation – include those that cross markets, cross exchanges, or even cross international borders”. They also looked for new forms of manipulative conduct, including “those that abuse technology”, a topic we’ll return to in our final blog post in this series.
- Protecting Customers – Going after fraud and abuse has always been a bedrock issue for the agency, and the advent of new products or technologies has raised the stakes and kept the CFTC very busy. Particularly notable were actions that involved digital options and cryptocurrencies. In fact, one investigation began as a case involving digital options and later transformed to include cryptocurrencies as the alleged fraudsters evolved their scheme.
- Promoting Individual Accountability – A key issue for the agency that will be discussed in our next blog post.
- Enhancing Coordination – : As the regulators become more sophisticated in their enforcement, bad actors also evolve, and this sometimes entails crossing “the technical boundaries of different regulatory jurisdictions” and even international borders. To counter this, the CFTC has been more aggressive working with other entities, including the U.S. Department of Justice.
The realities of regulation
As the world of trading has evolved and become more complex, so have the resulting responses from regulators like the CFTC to meet the new challenges. Long-time industry veterans will tell you that actions similar to spoofing and other now illegal behaviors existed in the days of floor-based open outcry trading, but the scope and scale of possible manipulation is vastly increased in an electronic arena. It is essential that regulators continue to adopt an aggressive stance with trade surveillance in order to maintain and preserve the functioning and faith in markets.
For further reading
- Enforcement Trends at the CFTC (Part Two): Building a Culture of Accountability
- Enforcement Trends at the CFTC (Part Three): What the Future Holds
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