CFTC Chairman Delivers Speech on Enforcement Priorities

This week Rostin Behnam, the Chairman of the US CFTC, delivered a speech (click here) primarily addressing the Commission’s enforcement priorities by referencing recent cases and the CFTC’s current agenda. Salient points from the speech include:

• Market innovation does not absolve registrants and market participants of their duties under the Commodity Exchange Act (CEA), CFTC regulations, and self-regulatory organizations (SRO) obligations.
• Regardless of your registration status you are subject to the Commodity Exchanges Act (CEA) if you participate in any CFTC regulated markets – this extends to the prohibitions on fraud, manipulation and disruptive trade practices. 
• Firms registered with the CFTC have additional duties to supervise various persons and activities within their businesses – the duty to comply with the rules and regulations and contribute to the integrity of the market cannot be “abdicated” if they rely on technology or outsourcing to third-parties.
• Enforcement efforts should focus on the need for a culture of compliance and achieving deterrence – this can be achieved through cooperation, and ensuring education for new market entrants.
• The value of all the orders entered in FY 2023 issued by the Division of Enforcement totalled approximately USD $6.0 billion. Continuing their fight against fraud and illegal conduct involving digital assets, 47 of the enforcement actions involved digital asset related misconduct, representing over 35% of the 133 such actions brought by the CFTC since 2015. The Chairman’s speech goes into some detail on the key Crypto market cases – those interested in this topic should consult the main text directly.
• Outside the digital asset space, the CFTC continues to uncover and vigorously prosecute retail fraud and in FX. The Chairman’s speech goes into the detail of some cases focused exclusively on retail market customers - these are not addressed further in this summary.
• The CFTC’s “zero tolerance policy“ towards manipulative, deceptive, and spoofing transactions was shown in several enforcement cases as was enforcement relating to supervisory and recordkeeping failures (click here). The Logista Advisors case (click here) previously covered by RegTrail (see Week in Review: Sep 4 – 8) is mentioned in the context of trading in crude oil and natural gas futures.
• The CFTC is aggressively addressing issues relating to jurisdictional oversight citing the action against the Options Clearing Corporation (OCC) (click here) a systemically important derivatives clearing organization (DCO) noting that DCOs play a critical role in US futures and options markets and any failure to establish policies and procedures designed to manage their risks puts markets and the larger financial system at risk.
• The CFTC is addressing disclosure gaps and what it means to inform customers and communicate in good faith, and in a fair and balanced manner citing a recent case (click here).
• The CFTC continues to focus on recordkeeping and supervisory violations related to internal and external communications via unapproved communication methods (click here) building on the 12 orders issued in FY 2022 (click here) noting that the CFTC has imposed over USD $1 billion in civil monetary penalties against financial institutions for these types of recordkeeping failures.
• Concerning the CFTC’s agenda, by the end of 2023 they are looking to put out final rules covering numerous areas including:

1. Enhancing risk management and resilience across intermediaries, exchanges, and DCOs;
2. Fostering sound and responsive practices regarding cybersecurity and the use of third-party vendors;
3. Strengthening customer protections;
4. Promoting efficiency and innovation;
5. Improving reporting and data policy; and
6. Addressing duplicative regulatory requirements and amplifying international comity and domestic coordination with both federal and state regulators.

• By the end of 2023, Chairman Behnam anticipates that the CFTC will have roughly a dozen additional matters for consideration and public comment, some of the relevant priority topics include:

1. Proposed amendments to the swap dealer business conduct standards and documentation requirements to codify into rules long-standing staff no-action positions related to prime broker arrangements and swaps executed with the intention that such swaps be cleared;
2. Proposed rulemaking addressing operational resilience programs for FCMs, swap dealers (SDs), and major swap participants (MSPs) designed to adapt to the risk profiles of those registrants and the evolving nature of the cyber risk; 
3. The Market Participants Division (MPD) will develop and issue guidance regarding the use of third-party service providers to satisfy compliance obligations;
4. Proposals aimed at levelling the playing field for systemically important derivatives clearing organizations (SIDCOs), Subpart C DCOs, and other DCOs by making certain requirements in Part 39 of the Commission rules applicable to all registered DCOs;
5. Regarding intermediaries, a proposed codification of staff no-action letters addressing swap dealer business conduct standards and documentation requirements will be considered. 
6. Finally, potential rulemakings by the Division of Market Oversight (DMO) may include addressing conflicts of interest and governance for SEFs and DCMs, and proposing Unique Product Identifier (UPI) supplemental reporting fields.

In his conclusion, Chairman Behnam noted that the CFTC recently hired its first Chief Data Scientist and that it will soon select a new Chief Data Officer highlighting a renewed commitments to improving its data science capabilities.

The speech covers other areas which may be of interest to compliance professionals in the US market. You are advised to read the lengthy speech in full given the significant amount of ground covered.