On December 1, 2020, the US Commodity Futures Trading Commission (CFTC)’s Division of Enforcement ("the Division") released its fiscal year 2020 report, which provides US commodities markets participants with some important insights into the Division’s priorities and expectations.
These points will be especially valuable in the coming months as the economy recovers from the COVID-19 pandemic that roiled commodities markets with historic volatility, causing the Division’s then-Director to name COVID-19-related issues as a priority back in March 2020.
Active, co-ordinated enforcement
2020 was a significant year for CFTC enforcement by many measures. The report details the following enforcement highlights from fiscal year 2020:
- the largest-ever CFTC monetary penalty ($920m);
- the most enforcement actions filed in one year in CFTC history (113);
- the most retail fraud actions in a year (56), including a record-high seven actions related to digital assets;
- the second-highest number of enforcement actions focused on manipulative or disruptive trading (e.g. spoofing); and
- the fourth-highest total penalties in CFTC history (more than $1.3bn – 2020 was the second consecutive year this figure topped $1bn).
The Division also continued its pre-existing efforts to co-ordinate its work closely with the US Department of Justice and other authorities (we’ve discussed this trend before). For example, it filed 16 actions in parallel with federal prosecutors and filed an enforcement action alongside 30 state regulators.
Data analytics and compliance programs
The report highlights the Division’s "robust market surveillance program that utilizes sophisticated systems to analyze trade data and respond to outlying events" – a capability that is sure to be engaged in reviewing the massive commodity price swings that occurred during COVID-related market disruption (e.g. oil futures trading at a negative price). The report flags that this "surveillance technology resulted in the three largest spoofing cases in the Commission’s history," including this year's record-setting $920m penalty.
The Division’s own capabilities in this space dovetail with its expectations for what companies should be doing on their own. The report notes that "companies stand as the first line of defense to prevent misconduct" and "the Commission expects a compliance function to serve as a meaningful check." It follows that the Division likely expects regulated entities to build, develop, and review their own market surveillance and compliance functions – a theme that the Division explained in several key pieces of guidance this year, including its "Guidance on Evaluating Compliance Programs in Connection with Enforcement Matters", which we blogged about in September.
The Division demonstrated how seriously it takes compliance failures this year by, for example:
- a high-profile matter involving “a case where a financial institution’s compliance staff had substantial information regarding spoofing misconduct and failed to stop the unlawful trading” (which we explored in detail on our podcast);
- pursuing the first-ever enforcement actions under 17 C.F.R. § 42.2, which requires futures commission merchants and introducing brokers to comply with the Bank Secrecy Act – including the requirement that they implement adequate anti-money laundering procedures; and
- resolving the first-ever charges against a commodities exchange for its employees’ improper disclosures of material non-public information (this one isn’t called out in the report – but it fits the broader story that the CFTC expects regulated entities to police themselves).
Lastly, the report notes that the Division granted applications for approximately $20m in whistleblower awards – and more seem likely to come, since "between 30 to 40% of the Division’s ongoing investigations now involve some whistleblower component." The whistleblower statistics serve as a stark reminder of what can happen if a compliance system fails. Other market participants – including commercial counterparties, trading partners, industry observers, or even employees who feel they have nowhere else to turn to report misconduct – may detect wrongdoing on their own and seek economic gain by reporting it to the Division. We’ve seen similar dynamics at play for many years (for example, the 2015 spoofing action that was apparently triggered by a report from another entity in the market).
What’s next?
The report identifies four priorities going forward into 2021:
- Preserving market integrity. This priority appears first in the report, and focuses on "detecting, investigating, and prosecuting misconduct—fraud, manipulation, spoofing, or other forms of disruptive trading—that has the potential to undermine the integrity of the markets."
- Protecting consumers. The Division intends to focus on its historical strengths in "precious metals, forex, and binary options," while continuing to expand into digital assets and other new products.
- Promoting individual accountability. The report states plainly that "[i]ndividual accountability must sit at the center of any effective enforcement program," and the Division commits to "hold accountable the supervisors and others in control who may be culpable as well."
- Co-ordinating with criminal authorities and other regulators. The Division intends to "work[] closely with colleagues in the enforcement and regulatory community, both domestic and international," continuing the trend discussed above.
Finally, the report notes that the Division supported these four priorities in 2020 through the "core value" of "[c]larity," which is "achieved by providing market participants with greater transparency about the Division’s procedures and decision-making criteria," including the various forms of guidance that the Division published this year.
