Preserving market integrity

15 January 2021
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Deanna Reitman, Of Counsel, Jesse Medlong, Associate, and Jeffrey Bourdon, Attorney at DLA Piper, explain why commodities marketing and trading firms should focus on their regulatory compliance policies.

The U.S. Commodity Futures Trading Commission (CFTC) revealed in its latest annual report that the federal agency had set records for the size of enforcement orders, number, and types of enforcement actions pursued in 2020.

For example, the CFTC filed its largest-to-date spoofing and manipulation case, which resulted in an order for $920 million, the largest monetary relief that the CFTC has yet ordered in a single case. Besides the scope and gravity of the violations in this case, the case was also notable for the CFTC’s use of technology-assisted data analytics, which allowed more sophisticated market surveillance.

The CFTC also litigated over 140 cases against both corporate and individual defendants in various courts. These cases covered, among others, violations for manipulation, spoofing, fraud, misappropriation of confidential information, and illegally offering new products.

Against this backdrop of record setting enforcement measures, commodities marketing and trading firms are encouraged to respond to the CFTC’s increased enforcement activity by reviewing their regulatory compliance policies. These firms are encouraged to place a particular emphasis on the training and trading surveillance mechanisms of their program’s components because appropriate and regular regulatory compliance training is one of the simplest ways to mitigate regulatory compliance risk.

On the other hand, trading surveillance may be more complicated because these components of a compliance policy are often based in algorithms and statistics. But there are methods for simplifying surveillance. For example, regularly performing a manual review of a sample of transactions, as opposed to conducting a full audit, could be a strategy firms leverage to observe whether their programs function properly. These regular, smaller-scale reviews would then give these firms frequent status updates on their ability to mitigate regulatory compliance risk.

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“Commodities marketing and trading firms are encouraged to respond to the CFTC’s increased enforcement activity by reviewing their regulatory compliance policies.”

Additionally, commodity marketing and trading firms should ensure that their compliance programs are fit-for-purpose while also meeting the applicable standards for their respective industry. A compliance program that is truly fit-for-purpose is one that allows employees to readily assess their own—and their firms’—compliance with applicable requirements, policies, and procedures. Such a program may more readily mitigate regulatory risk because it could create an environment where potential issues are raised more immediately and before the issues become more consequential. Furthermore, compliance programs that meet industry standards not only preemptively mitigate regulatory risk but can also mitigate regulatory penalties in enforcement situations.

Despite other strategies a firm may have in place to monitor its regulatory compliance, and even if the firm is confident that its compliance program satisfies the targets discussed above, firms are encouraged to routinely audit their compliance program since this can offer further evidence the program’s strength and identify areas that are more vulnerable to potential regulatory violations.

Looking ahead, the CFTC expects to emphasize efforts in four key areas:

  1. Preserving market integrity. Given the importance of market integrity and market participants’ confidence to the proper functioning of commodities and derivatives markets, the Division is particularly focused on detecting, investigating, and prosecuting misconduct with the potential to undermine that confidence and integrity.
  2. Protecting customers. The division will continue to leverage new technologies to support its ongoing commitment to protecting customers of the commodities and derivatives markets from fraud and other abuse.
  3. Promoting individual accountability. The report emphasises the Division’s view that individual accountability is integral to deterring violations, and that holding companies accountable for wrongdoing must be accompanied by holding individuals responsible for their roles in that misconduct.
  4. Coordinating with other regulators and criminal authorities on parallel matters. The Division highlights the importance of coordination with other regulators at the state and federal level, but also with the international regulatory community.

Healthy markets remain of central importance to a healthy economy. At the same time, the Enforcement Division’s increased activity in 2020 showcased how certain market participants took advantage of sophisticated technologies to subvert market rules and reap illicit gains. The CFTC and the Enforcement Division demonstrated its ability to address such activity by stepping up their enforcement actions, even using the same technologies to fight back. Going forward, commodities marketing and trading firms can minimize their exposure to regulatory violations by evaluating and strengthening their compliance programs in ways that allow them to more immediately identify and resolve potential issues before they rise to a level that might draw the attention of an increasingly active Enforcement Division.

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