CFTC Orders Australian Swap Dealer to Pay $500,000 for Supervision Failures

This week the US CFTC announced (click here) an enforcement action against Australia and New Zealand Banking Group (ANZ), a registered Swap Dealer (SD), for failing to ensure that its transaction surveillance solution was functioning effectively. The case is not energy and commodities-specific and relates to ANZ’s trading in Eurodollar futures on the CME which it used to hedge its swap positions. The CFTC’s order may be found here.

The facts of the case are briefly summarised as follows:

• The case relates to two periods where ANZ’s surveillance tool did not operate effectively – the first was from November 2019 to June 2020 (“First Gap Period”) the second from November 2020 to February 2021 (“Second Gap Period”);
• During an investigation into certain trading activities ANZ staff disclosed to CFTC staff that their “spoofing surveillance tool” was not operating effectively due to futures data supplied by a vendor during the First and Second Gap Periods;
• There was a mismatch in the timing of when relevant data was available for ingestion into the surveillance tool and when the tool was run;
• Specifically, the tool was scheduled to start its daily run before certain data was available which resulted in it failing to surveil any of the futures data from this data source;
• A change in timing of the data delivery was made unilaterally at the start of the First Gap Period by the vendor that supplied the data and was not due to a decision made by ANZ;
• The CFTC determined that during the First Gap Period, ANZ failed to diligently monitor the surveillance tool to ensure that it was operating effectively and thereby failed to surveil these activities for a six-month period;
• On discovering this, ANZ reset the time that the tool was scheduled to run in order to capture this data but they failed to establish additional safeguards to prevent the same issue from reoccurring;
• Specifically, they failed to:

1. Ensure that the data vendor did not make any additional unilateral timing changes without being notified; and
2. Conduct spot checks on its surveillance tool to identify or prevent recurrence.

• These failings led to the Second Gap Period which was essentially an exact replication of the first and extended over a four-month period before again being discovered;
• The second event led to “thousands of orders” that were not surveilled in a timely manner;
• The CFTC contends that ANZ “should have but did not receive a substantial number of surveillance alerts that would have been generated during the two Gap Periods” – it is not stated how they reached this conclusion;
• As a result of the failings in the Second Gap Period, ANZ corrected the timing mismatch (again) and implemented an additional control to ensure that the data was received from the vendor in a timely manner before analysis runs commenced;
• The CFTC determined that ANZ had failed to diligently supervise its business as a swap dealer in violation of:

1. Section 4s(h)(1)(B) of the Act, 7 U.S.C. § 6s(h)(1)(B); and
2. Regulation 23.602(a), 17 C.F.R. 23.602(a) (2022).

• The CFTC recognized the “substantial cooperation” of ANZ with the CFTC enforcement team during the investigation;

The following penalties were agreed:

• ANZ to cease and desist from violating Section 4s(h)(1)(B) of the Act and Regulation 23.602(a);
• Orders ANZ to pay a civil monetary penalty of USD $500,000; and
• ANZ completes a programme of remediation which includes:

1. Re-running its spoofing tool on previously unanalyzed data and dispositioning the alerts that the tool had previously failed to generate; and
2. Creating an automatic alert to advise ANZ when its system may not be timely or accurately processing or receiving relevant data.

 RegTrail Insights

While this case is not specific to energy and commodities, there are several learnings from the case, particularly for Swap Dealers. Surveillance data completeness and integrity is an area of increasing interest for many regulators. Firms must ensure that some level of oversight over the activities of third-party data providers and surveillance vendors is in place to ensure that gaps in data, and therefore surveillance, are identified quickly and rectified.