MVA White Collar Defense, Investigations, and Regulatory Advice Blog

Our goal is simple, to provide you key updates and insights that you can quickly digest and easily share with your peers, boss, or anyone else that shares a passion for swaps and derivatives news. We know you have to move quickly through emails, so:

• Our updates will be brief and to the point. If you want more information, please don’t hesitate to reach out. Each update will highlight the MVA attorney from the Swaps and Derivatives Team who drafted the entry. If something strikes your interest, you can easily click the link next to their name and send an email directly to the right person.
• We plan to publish updates on a monthly basis, with the occasional emergency update if something material happens (we’re using the NFA’s definition of material, see below).

We hope you enjoy the updated format.

End of Month CFTC Enforcement Updates

The CFTC was no slouch on enforcement actions this September as they reached the end of their fiscal year. The CFTC issued over 20 enforcement actions on topics such as ponzi schemes, registration issues, swaps reporting, position limits, fraud, and so on.

Some interesting numbers on the CFTC’s enforcement efforts so far this year:

• The CFTC has issued 12 orders granting whistleblower awards – the most of any year.
• In March 2024, the CFTC issued the first-of-its kind whistleblower award to an insider whistleblower in a compliance/audit role. This month, the CFTC again issued a whistleblower awards issued to a person with “compliance/audit responsibilities.” It’s only the second time the CFTC has done this.
• The CFTC’s crackdown on unapproved communications continues. Since December 2021, the CFTC has imposed $1.237 billion in civil monetary penalties on 27 different financial institutions for their use of unapproved methods of communication in violation of CFTC recordkeeping and supervision requirements.

Following the end of every month, this distribution will include a summary and brief analysis of every CFTC enforcement action announced during the prior month.

Please click here to download the MVA CFTC Enforcement Summary for September 2024.

Nader Raja & Jeff White | Email

CFTC Letter No. 24-06 – No-Action Position on Compliance with the Block and Cap Amendments

CFTC Letter No. 24-06 will expire on Monday, October 7. This letter served as the second extension of time on relief for failing to comply with the Block and Cap Amendments under 17 CFR 43.6(g) and 17 CFR 43.4(h). You may also recall from this summer when ISDA, SIFMA, and other associations requested to engage the CFTC on the methodology for developing block thresholds and cap sizes. The original compliance date for the Block and Cap Amendments was May 25, 2023. Reasons for the relief included operational and technical challenges related to the implementation have unique product identifiers, collection of data to determine post-initial block and cap sizes, and the challenges of technology releases during the holidays. Come Monday, we will live in a post-Block and Cap Amendment world. I’ve got my Hush Puppies on.

Barrett Morris | Email

NFA Rule on Member Questionnaire Requirements

The NFA’s new Rule 2-52 concerning the NFA Member Questionnaire requirements will be effective October 15, 2024. The NFA is requiring more frequent updates. First, NFA members must now update the questionnaire promptly when there has been a “material change” to the firm’s business operation such that the current questionnaire would be inaccurate or incomplete.  Second, the NFA is requiring “Inactive” firms (those that answer “no” to involvement in commodity interest activities) to update the form approximately six months from the firm’s anniversary date following notice from the NFA.

So, what is a “material change”? The NFA answers that question by saying they will not define the term, but the NFA states that engaging or disengaging in the following activities would by a material change: commodity interest products, micro-contracts, retail forex or digital assets, algorithmic trading activities, or cloud computing; a significant increase or decrease in customer accounts; an IB's revenue increases to exceed the designated threshold that would require it to comply with CFTC Regulation 1.35(a)(1)(iii);4 or, if a CPO has a pool that has just commenced operations.

Yiran Jiang | Email

CFTC Approves Final Guidance on the Listing of Voluntary Carbon Credit Derivative Contracts

The CFTC’s final guidance follows its proposed guidance issued about a year ago and the “Voluntary Carbon Markets Joint Policy Statement and Principles” from May of this year. The final guidance is not binding and applies to Designated Contract Markets (DCM) and focuses on DCM statutory “Core Principles” set out in the Commodity Exchange Act (See 7 USC 7(d)). As of August 2024, there are over 150 derivative contracts on mandatory emissions program instruments listed for trading on DCMs and 29 derivative contracts on voluntary carbon market products listed for trading on DCMs.  According to the CFTC though, only three have open interest – so there’s room to grow.

The guidance primarily addresses physically-settled VCC derivative contracts and provides that DCMs must only list VCC derivative contracts that are not readily susceptible to manipulation (DCM Core Principle 3). DCMs should consider the VCC derivative contract’s (1) quality standards, (2) delivery points and facilities, and (3) inspection points. Along these lines, the CFTC also believes that “in connection with the design of a VCC derivative contract, a DCM should consider whether there is reasonable assurance that the quantification methodology(ies) or protocol(s) used by the crediting program for calculating emission reductions or removals for underlying VCCs is robust, conservative, and transparent”. The CFTC gives further guidance that DCMs must monitor a derivative contract’s terms and conditions as they relate to the underlying commodity market (DCM Core Principle 4). Monitoring will help a DCMs identify circumstances that could cause the contract to become susceptible to price manipulation.

Great, Barrett, but I’m not a DCM. Don’t worry I know you’re not, but VCCs are a relatively new product and developed largely without what I’ll call “regulatory zealousness”. If your institution is executing VCCs or considering executing VCCs, this guidance, as well as the joint policy statement above should be considered and absorbed as you engage in the market and build a compliant program around the product.

Barrett Morris | Email

Technical Amendments to Commodity Pool Operator and Commodity Trading Advisor Rules

The CFTC issued a Final Rule (effective November 25, 2024) that introduces several important amendments for Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs) requirements – many of which had not been updated since the adoption of § 4.7 in 1992.

The key changes include:

Increased Portfolio Requirement Thresholds. The financial thresholds in the Portfolio Requirement for “Qualified Eligible Persons” (QEPs) under § 4.7 have been updated to account for inflation. This means higher asset requirements must be met for certain individuals or entities to qualify as QEPs, reflecting the modern financial landscape. The Securities Portfolio Test was increased from $2 million to $4 million, and the Initial Margin and Premium Test was raised from $200,000 to $400,000. These updates are intended to maintain alignment with the CFTC’s original regulatory intent, ensuring that QEPs continue to represent sophisticated investors with the financial resources and the experience necessary to engage in the commodity interest markets.

Permitting monthly account statements for certain § 4.7 pools. The amendment to § 4.7(b)(3) will permit CPOs of § 4.7 Fund of Funds pools to adopt an alternative monthly account statement schedule, provided such statements are distributed within 45 days of the end of each month, instead of quarterly statements, as was previously required.  The Commission routinely granted exemptive letters for CPOs to follow a monthly schedule, but the new amendment simplifies this process by formalizing the practice into the regulations. CPOs must notify pool participants about this alternate reporting schedule either in the offering memorandum or when the new schedule is implemented.

The key changes do not include:

Minimum disclosure requirement updates. The proposed rule contained new requirements concerning the content and recordkeeping of QEP disclosures that would have proved a substantial burden for CPOs and CTAs. Commenters on the proposed rule persuaded the CFTC to exclude the new QEP disclosure requirements. However, the CFTC is not done considering updates to QEP disclosures, instead they note they are taking “additional time to consider the concerns articulated as well as alternatives to the proposed QEP disclosure requirements.”

Yiran Jiang | Email