FIA on CFTC enforcements: three areas to watch
In an article published on the Futures Industry Association (FIA) website, author Jeff Reeves highlights three areas that the Commodity Futures Trading Commission (CFTC) has been seemingly focusing on as part of its 2023 enforcements
The three areas of focus mentioned are as follows.
- The CFTC has been increasingly focused on enforcement actions against firms that have failed to maintain required records of communications, including those made via personal devices or unapproved messaging services.
- The CFTC has imposed more than $1 billion in penalties for this type of violation, and it is showing no signs of slowing down.
- Firms need to take steps to ensure that all required communications are captured and preserved, regardless of the channel used.
- The CFTC has also been taking a closer look at firms that may not be properly registered.
- The CFTC has a broad definition of a swap execution facility (SEF), and many firms may not be aware that they are crossing the line into SEF territory.
- Firms that are not registered with the CFTC may be subject to enforcement actions, including fines and penalties.
- The CFTC is also taking a more active role in addressing climate-related issues in the derivatives markets.
- The CFTC has created an Environmental Fraud Task Force to focus on fraud and manipulation in the carbon markets.
- The CFTC is also working on guidance addressing standards for voluntary carbon markets.
CUBE’s data shows that, to date, the CFTC has imposed fines, restitution and disgorgement totalling more than $4 billion during 2023.
Nomura Securities fined $35 million for fraud scheme
Nomura Securities International (NSI), a US-based broker-dealer subsidiary of Japanese financial services firm Nomura Holdings, has agreed to pay a $35 million penalty and restitution to victims of its fraudulent trading of Residential Mortgage Backed Securities (RMBS).
The US Attorney’s Office for the District of Connecticut said that NSI had perpetrated a scheme from 2009 to 2013 to defraud its customers in RMBS trades. The scheme involved NSI traders misrepresenting material facts to deceive and cheat their customers in trades. For example, in certain transactions, NSI traders lied to the buyer about the seller’s asking price (or vice versa), keeping the difference between the price paid by the buyer and the price paid to the seller for NSI. In other transactions, NSI traders misrepresented to the buyer that bonds held in NSI’s inventory were being offered for sale by a fictitious third-party seller, which allowed NSI to charge the buyer an extra, unearned commission.
NSI supervisors instructed its RMBS traders in, and caused them to use, these fraudulent trading practices. NSI, with full knowledge and participation of its supervisors, lied to victims who detected or suspected that they had been the victims of fraud. NSI concealed its fraudulent conduct from its customers, and from its own employees who were not participants in the scheme, in order to prevent or delay discovery.
As part of the settlement, NSI agreed to pay $35 million in penalties and $807,717 in restitution to victims. NSI has already paid $20.1 million in remediation to victims as part of its settlement with the Securities and Exchange Commission.
The US Attorney’s Office stated that the settlement took into account NSI’s extensive cooperation, acceptance of responsibility for its and its employees’ criminal conduct, remediation efforts, including its discipline and/or termination of employees and its commitment to make complete restitution to all impacted customers, enhanced compliance program, and agreement to continue to cooperate with law enforcement.
Here are some key takeaways for compliance teams:
- Be aware of the risks of fraud and deception in the trading of RMBS.
- Implement strong compliance controls to prevent and detect fraud.
- Train employees on the importance of compliance and the consequences of violating the law.
- Investigate any allegations of fraud promptly and thoroughly.
- Take appropriate disciplinary action against employees who violate the law.
- Cooperate with law enforcement if there is an investigation into fraud.
CBDC still “years away” in Australia
The Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) have released a report on the findings from the joint research project involving industry that explored potential use cases for a central bank digital currency (CBDC) in Australia.
The research looked at potential use cases for an Australian CBDC, advancing understanding of CBDC-related matters and Australia’s monetary future. The report concludes that valuable insights emerged regarding CBDC’s role in enhancing the payments system through innovations like programmable payments, tokenised asset settlement, and offline transactions. It also highlighted possibilities for CBDC to support private digital money development, complementing rather than replacing innovations from the private sector.
However, the project spotlighted various legal, regulatory, technical, and operational challenges, emphasising the need for further analysis. While not determining CBDC technology, it also flagged integration and non-functional considerations for future study. The project’s industry engagement underscored the value of collaboration for grasping digital money’s potential. Finally, it concludes that the findings will contribute to an ongoing research agenda, guiding future exploration by the project sponsors, but considering the unresolved issues, a decision on an Australian CBDC is still years away.
APRA speech on operational risk
Australian Prudential Regulation Authority (APRA) member Therese McCarthy Hockey has been speaking about the APRA’s new prudential standard (CPS 230) which focuses on strengthening the management of operational risk by banks, insurers and superannuation trustees.
McCarthy Hockey noted that the operational risk landscape is dynamic and complex, with cyber incidents, scams, and reduced cash usage affecting the financial sector. The emergence of generative AI also introduces transformative potential, leading regulators like APRA to assess its implications.
The speech emphasised that technology integration across financial players creates interconnectivity vulnerabilities. The operational resilience challenge is highlighted by the struggle of entities to meet APRA’s previous information security standard (CPS 234). While many reasons contribute to this, McCarthy Hockey emphasised boards’ need to consider information security a business risk, not just a technology issue.
To address operational resilience, APRA has introduced CPS 230 with a compliance deadline of July 1, 2025. The standard emphasises governance, identifying critical operations and service providers, and adopting a new organisational mindset. APRA plans to assess entities’ readiness throughout 2024 and to that end suggests three key actions boards should be addressing now:
- Putting the right governance arrangements in place;
- Identifying critical operations and material service providers; and
- Beginning to develop a new organisational mindset.
Operational resilience is especially challenging for smaller entities due to budget constraints and the need for IT upgrades. APRA acknowledges the diversity of entities and plans for proportional application of the standard.
McCarthy Hockey concluded her speech by noting that “APRA has delivered a longer than usual implementation period for our new standard on operational resilience given the scale of the change – now it’s up to banks, insurers and super trustees to deliver on the new requirements. Should they fail to do so, don’t be surprised to see APRA apply a little heat of its own.”
SFC fines China Industrial Securities $3.5 million for internal control failures
The Securities and Futures Commission (SFC) has fined China Industrial Securities International Brokerage Limited (China Industrial) $3.5 million for internal control failures relating to monitoring of suspicious trading activities and recording of client order instructions.
The SFC’s investigation found that China Industrial had failed to effectively implement its internal policy on post-trade monitoring and ensure all unusual transactions flagged by its post-trade surveillance system (Alerts) were properly examined. This failure could have allowed suspicious trading activities to go undetected.
In addition, the SFC found that China Industrial had failed to comply with the regulatory requirements on recording of telephone order instructions. This failure could have made it difficult to track and investigate potential market misconduct.
The SFC’s disciplinary action against China Industrial is a reminder to all brokerage firms of the importance of strong internal controls. By failing to implement and enforce its internal policies, China Industrial exposed itself to the risk of market misconduct and put its clients at risk.
A selected summary of key developments for regulated financial institutions
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