CFTC 2022

Reprinted with permission from Futures and Derivatives Law Report , Vol- ume 42, Issue 5, K 2022 Thomson Reuters. Further reproduction without permission of the publisher is prohibited. For additional information about this publication, please visit https://legal.thomsonreuters.com/.

May 2022 ▪ Volume 42 ▪ Issue 5

REPORT

CFTC 2022: A NEW COMMISSION, A NEW AGENDA, SAME AGGRESSIVE ENFORCEMENT By Anne Termine, Claire Cahoon and Annie Willett practice; she is a former Chief Trial At- torney in the U.S. Commodity Futures Trading Commission’s Division of Enforcement. Claire Cahoon is an as- sociate in Bracewell’s Government Enforcement & Investigations group. Their email addresses are anne.termine@bracewell.com and claire.cahoon@bracewell.com. Annie Willett is a former associate of Bracewell and is a judicial law clerk for the Hon. Carolyn N. Lerner at the U.S. Court of Federal Claims. I. INTRODUCTION The Commodity Futures Trading Com- mission (the “Commission” or “CFTC”) experienced a year of transition on both the enforcement and regulatory fronts dur- ing its Fiscal Year 2021, which runs from October 1, 2020 through September 30, 2021 (“FY 2021”). The Division of En- forcement (the “Division”) faced a signif- icant litigation docket due to the 33 federal civil complaints and 20 administrative complaints filed during its record enforce- ment year in FY 2020, which puts pres- Anne Termine is a partner in Bracewell’s Government Enforcement & Investiga- tions Group and leads the firm’s Cryptocurrency and Blockchain

sure on resources for a division of only 150 attorneys. 1 Regardless, the Commis- sion still brought 55 actions in FY 2021, 2 focusing on its traditional areas of ma- nipulation, fraud, and regulatory and reg- istration violations. The agency also brought over 20 actions involving digital assets, a significant area of enforcement focus. 3 On the regulatory front, the CFTC was relatively quiet, reflecting the admin- istration change in the White House and the resulting complete turnover of the Commission. 4 A newly confirmed Chairman and four Commissioners will herald a new regula- tory agenda for the CFTC, focused on defining the agency’s role with respect to digital assets, addressing climate change and energy concerns, ensuring the agency fulfills the mandate of the Dodd-Frank Act, and confronting the changes brought about by the influx of retail market participants. 5 This report will look at the CFTC’s enforcement program during FY 2021 and into the current fiscal year and look ahead to the new regulatory agenda forming under a brand new Commission and how it may inform enforcement priorities.

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II. REGULATORY AGENDA 2022: A FOCUS ON NEW MARKETS AND MAINTENANCE OF OLD RULES

four nominees were unanimously confirmed by the Senate on March 28, 2022. 13

B. A NEW AGENDA

In recent public remarks, Chairman Behnam has laid out an ambitious agenda covering rela- tively new areas for the agency, such as digital assets, climate change, and retail participation in the markets, while at the same time maintaining a focus on Dodd-Frank rules and regulations. 14 While the Chairman’s focus will be on moving the agency forward, he has consistently main- tained the need for a strong enforcement program backing agency initiatives. 15 The backgrounds of the incoming Commissioners indicate they too will support an active and aggressive enforce- ment program. The following describes in greater detail some of the regulatory initiatives that can be expected under Chairman Behnam and notes how they will impact the enforcement priorities. Over the past two years, interest and invest- ment in digital assets has exploded, but the regulatory framework applicable to them remains unclear. The CFTC has consistently taken the po- sition that it has regulatory authority over digital asset products that are derivatives and enforce- ment jurisdiction over the digital asset spot markets, meaning the ability to investigate and civilly prosecute individuals and entities engaged in fraud and manipulation involving digital as- sets that are commodities. 16 As Chairman Beh- nam recently noted, [i]t is understood that the Commission may review cash market operations of exchanges and their members, and prevent and act against fraud or manipulation by any person in such markets. 1. DIGITAL ASSETS

A. A NEW COMMISSION

The presidential election brought numerous changes to the CFTC, resulting in an almost complete turnover of Commissioner seats. In the first three months of 2021, Republican Chairman Heath Tarbert stepped down and departed the agency, 6 along with fellow Republican Commis- sioner Brian Quintenz. 7 Meanwhile, Democratic Commissioner Rostin Behnam was named acting Chairman 8 and fellow Democratic Commissioner Dan Berkovitz stepped down to become General Counsel at the U.S. Securities and Exchange Commission (“SEC”). 9 By the end of the year, the only remaining Commissioner, Republican Dawn DeBerry Stump, announced her intent to depart the agency. 10 On September 13, 2021, President Biden nomi- nated Behnam to serve officially as the Chairman of the Commission and nominated Kristin John- son and Christy Goldsmith Romero to fill the two remaining Democratic Commissioners seats. 11 Then, on December 15, shortly after Commis- sioner Stump publicly announced her departure from the agency, President Biden named Repub- lican nominees Caroline Pham, former Special Counsel and PolicyAdvisor to former Republican Commissioner Scott O’Malia, and Summer Mersinger, current Chief of Staff for Republican Commissioner Stump and former Director of the Commission’s Office of Legislative and Intergov- ernmental Affairs, to fill the seats opened by Commissioners Stump and Quintenz. 12 After sail- ing through a Senate confirmation hearing, all

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CFTC to develop a regulatory framework for the cash digital asset commodity market.” 21 This would be an extraordinary change for the agency, which traditionally only covers derivatives mar- kets for commodities, not the underlying cash market. Ranking Member Glenn “G.T.” Thomp- son of the House Agriculture Committee has released a draft bill that would grant this exten- sion of power to the CFTC. 22 Although this legislation seems to have bipartisan support in both houses, it likely will stay on hold until the CFTC and its sister agencies complete the reports requested in the March Executive Order. While he pursues a regulatory solution to digital assets, Chairman Behnam also believes that any approach will be rooted in “proactive” enforcement. 23 Chairman Behnam has stated: I maintain that we should be reasonable but firm, and let enforcement guide us, but not always take the lead. . . . What we are seeing now appears to be rooted in a lack of risk management or the absence of a structured compliance function. It may be that we need to assert our authority and regulatory oversight, tempered by the need to be clear in the boundaries of our authority, but firm enough to incite a culture of compliance. 24 These statements, and the numerous enforce- ment actions brought by the agency in recent years, all point to a continued aggressive ap- proach by the Division of Enforcement in pursu- ing investigations and enforcement actions against entities and individuals involved in digital assets. 2. CLIMATE CHANGE AND ENERGY MARKETS From his days as a Commissioner to his Sen- ate nomination hearing to recent industry speeches, Chairman Behnam has made address-

The Commission’s broadest authority in such an instance resides in the power to investigate in or- der to implement and enforce the CEA and Com- mission regulations. 17 To date, the Division of Enforcement has been active in using this enforcement authority, pursu- ing over 20 enforcement actions involving digital asset allegations in FY 2021. 18 Chairman Behnam’s regulatory approach to digital assets will be guided by the Biden Admin- istration’s Executive Order on Ensuring Respon- sible Development of Digital Assets, released on March 9, 2022 (“March Executive Order”). 19 The March Executive Order is the Administration’s policy statement on digital assets and blockchain technology. It tasks the CFTC with collaborating with other market, consumer, and banking regula- tors to report on the financial stability risks posed by digital assets, the implications for financial markets and payment systems of wide-spread adoption of digital assets, and the sufficiency of current regulations to protect customers and investors. The March Executive Order also re- quests that the agencies make recommendations for additional regulations and legislation to fill any regulatory gaps and to further ensure the protection of customers and investors. In working with other regulators to identify and formulate a regulatory framework applicable to digital assets, Chairman Behnam likely will advocate for legislation that will grant special authority to the CFTC to regulate digital assets that are commodities. The Chairman has pushed for such legislation in hearings before the Con- gressional committees that oversee the CFTC. 20 He reiterated this point in a recent speech in which he declared, “I will continue advocating for and supporting legislative authority for the

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development of and have a role in the voluntary carbon markets and carbon offset derivatives. 32 The Chairman has called on the industry to proactively engage with the agency in this cli- mate change dialogue. Industry and market par- ticipants should take the Chairman up on his of- fer and be part of the discussions that will likely lead to new regulations, legislation, or enforce- ment programs for the CFTC. Regulation and enforcement of the swaps mar- ket has been and will continue to be at the top of the CFTC regulatory agenda. Under former Re- publican Chairman Tarbert, the agency addressed or amended several swaps rules and worked with international regulators on a framework for substituted compliance. 33 Not all of these changes were supported by then Commissioner Behnam and his fellow Democratic Commissioner Berkovitz. 34 In one dissent, Behnam stated that “to the extent the Dodd-Frank Act was enacted to reduce systemic risk to the financial system, the CFTC’s role is to individually utilize its expertise in addressing risk to the financial system created by interconnections in the swaps market as a mar- ket conduct regulator through supervisory over- sight” of swap dealers and major swap participants. 35 As Chairman, Behnam is ready to take another look at swaps regulations and the reforms imple- mented over under the last administration: In the next months and years, under my leader- ship, and with a new and complete cadre of com- missioners and an exceptional staff, we will continue to monitor the reforms put in place in the wake of the financial crisis and evaluate 3. SWAPS REGULATIONS AND CROSS BORDER HARMONIZATION

ing climate change a regulatory priority. He believes that the CFTC should play a role in “answering the President’s global call to tackle climate change by reinforcing the role of deriva- tives in confronting climate-related risks and sup- porting innovation that addresses these risks and supports capital allocation.” 25 As Commissioner, Behnam sponsored the Commission’s Market Risk Advisory Committee (“MRAC”), which focuses on issues such as interest rate benchmark reform, central counterparty risk and governance, market structure, and climate-related market risk. 26 Under his leadership, the MRAC estab- lished the Climate-Related Market Risk Subcom- mittee, whose members represent financial, agri- cultural and energy markets, academia, data and intelligence providers, and the policy sector. 27 The Subcommittee notably produced a report entitled “Managing Climate Risk in the U.S. Financial System” that made 53 recommenda- tions to mitigate market risks posed by climate change by using existing statutes to monitor, analyze, and address climate risks and working with the private sector in promoting financial in- novation to manage climate risk, among other recommendations. 28 Then, as Acting Chairman, Behnam created the Climate Risk Unit (“CRU”) 29 “to support the agency’s mission by focusing on the role of derivatives in understanding, pricing, and miti- gating climate-related risk, and supporting the orderly transition to a low-carbon economy through market-based initiatives.” 30 The CRU utilizes expertise across the agency to engage with stakeholders in the industry in exploring “market-driven processes” related to climate change. 31 In particular to international efforts at emissions reductions, Behnam has directed the CRU to examine how the agency can assist the

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amendment to its order of registration that would allow it to offer margined products to retail participants without the reliance on a futures commission merchant (“FCM”). 38 The CFTC has opened this proposal up for public comment. 39 Chairman Behnam described the agency’s ap- proach to this proposal as being “careful, patient, and deliberative.” 40 The agency will rely heavily on the public comments it receives to guide its decision-making. As Behnam noted that “[i]t has never been, nor should it ever be our job to choose winners or losers in the industry. Only the market and the customer can do that.” 41 Increased retail participation and disinterme- diation, together and individually, are ground- breaking and may exemplify the future of finan- cial markets. The CFTC, under Chairman Behnam, will be proactive in addressing these seismic changes to ensure they are sufficiently covered by a regulatory framework. Enforcement will take a potentially greater role, as least with respect to retail market participants, to address the chairman’s concern of overly risky market behavior and lack of adherence established rules and appropriate limits. III. ENFORCEMENT OVERVIEW During FY 2021, while experiencing a period of transition, the Enforcement Division filed 55 separate actions, resulting in orders directing total monetary relief of approximately $1 billion. 42 It filed an additional 19 actions between the end of the fiscal year and the end of the calendar year, several of which are worth noting because they exemplify the themes in enforce- ment that have been developing over the past year and will continue to develop under Chair- man Behnam. Those emerging themes, as il-

whether they remain fit for purpose. We will ad- dress new and emerging issues and risks thought- fully, deliberately, and through active engagement. 36 This emphatic statement should put the indus- try on notice that current regulations, even re- cently revised ones, may be subject to change under Chairman Behnam. In order to have a voice on any changes, market participants should pro- actively engage with the Chairman and the new Commissioners on what is, and is not, working with the swap regulatory regime. As the agency reevaluates current regulations, it will continue to insist upon, and it will use the enforcement program to ensure, full compliance with current rules. In his testimony for his nomi- nation hearing before the Senate Committee, Behnam emphasized the need for customer pro- tections and corporate compliance programs, stating “[i]f confirmed, I will prioritize policy that invigorates a culture of compliance rein- forced by an enforcement program that roots out fraud, manipulation, and market abuse, and sends a strong, clear message to bad actors, particularly at a time of rapidly advancing technology.” 37 One of the biggest changes observed in the financial industry today is the increase in retail (or individual) participation, brought about by the ease of market access through electronic platforms and the explosion of interest in digital asset trading. This has led to the proposal of new market models that allow for direct market ac- cess, leading to greater disintermediation of the markets. One derivatives clearing organization (“DCO”) recently proposed to the CFTC an 4. RETAIL PARTICIPATION AND DISINTERMEDIATION

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lustrated by recent enforcement actions, demon- strate the agency’s continued focus on cryptocurrency and swaps markets. Over the past year and a half, the Enforcement Division also continued to hit hard on regulatory violations and targeted a number of areas that have traditionally formed the basis for CFTC enforcement actions, including market manipulation, spoofing, and retail fraud.

benchmark, Acting Director of Enforcement, Vince McGonagle, sought to publicize the case as an example of the Commission’s toughness on market manipulation both in general and in energy markets in particular. 49 He stated, “[t]his enforcement action demonstrates that manipula- tion of energy prices will not be tolerated, and the CFTC will aggressively protect market par- ticipants who rely on the integrity of commodity benchmarks.” 50 In addition to the above types of manipulation cases, CFTC Enforcement also interprets Section 6(c)(1) and Regulation 180.1 to include prohibi- tions against certain forms of insider trading. 51 In FY 2021, the CFTC utilized Regulation 180.1 in an insider trading context for the first time to charge a former energy broker and its owner with misappropriation of nonpublic information on a tipper-tippee theory, in addition to fraud and supervision violations. 52 This charge is part of a sweeping, ongoing investigation by the CFTC and U.S. Department of Justice (“DOJ”) into an alleged conspiracy involving traders and brokers of natural gas futures contracts. 53 The Commis- sion swiftly followed by filing a related com- plaint in federal court against a second individ- ual, identified as the energy trader who was “the last link in [the] tipping chain” and who, through his business, “trade[d] on the basis of . . . mate- rial, nonpublic information, and [entered] into fictitious trades at non-bona fide prices.” 54 In February 2022, the CFTC charged a third indi- vidual, identified as the energy trader who “en- tered into fictitious, non-arm’s length trade . . . on the basis of . . . material, nonpublic informa- tion as disclosed” by the two previously-charged individuals. 55 All three cases also involve ongo- ing parallel criminal investigations by the DOJ. 56 , 57

A. TRADITIONAL ACTIONS: MANIPULATION, SPOOFING, AND RETAIL FRAUD

1. MARKET MANIPULATION AND SPOOFING

In FY 2021, the CFTC brought eight enforce- ment actions involving market manipulation, which generally aligns with historical levels. The Division charged this behavior under both its traditional price manipulation statute Section 9(a)(2) 43 as well as its Dodd-Frank-expanded manipulation authority under Section 6(c)(1) and (3), 44 and related Regulations 180.1(a)(1) 45 and (3), 46 and 180.2. 47 The CFTC also concurrently charged manipulation and disruptive trade prac- tices under Section 4c(a)(1) and (2). 48 Cases involving manipulation are less fre- quently filed than other violations for several reasons. For instance, building a manipulation case may require months or years of information- gathering, whereas proving regulatory violations is less resource-intensive. While manipulation cases are less common than other types of en- forcement actions, they are often quite signifi- cant and involve the highest penalties possible for the Division. With respect to one traditional manipulation case in which the CFTC charged a former fuel oil trader with manipulating a fuel oil

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2. RETAIL FRAUD

CFTC Enforcement brought two actions citing disruptive trading practices under Section 4c(a)(1) and (2), and 7 U.S.C.A. § 6(a)(1) and (2), including the case which, as noted above, was also charged as manipulative conduct. 58 As for spoofing cases, the CFTC settled two pending cases that reflect a shift in the types of cases be- ing pursued by the CFTC from open and obvious spoofing to more nuanced and sophisticated schemes. For example, earlier enforcement cases charged spoofing in one market, where the al- leged actor took a large spoofed position on one side of the market with the intent to cancel the position to benefit a smaller position on the op- posite side of the market. 59 A recently settled case charged conduct that involves layering of orders, where the spoofed orders on one side of the mar- ket are entered rapidly at various prices that are intended to be canceled as soon as a real order is entered on the opposite side of the market. 60 Because of the importance of market evidence in proving spoofing violations, this is one area in which the Division’s advances in data analytics will continue to be of significant importance, particularly with the increasing finesse exercised by violators in this space. Spoofing charges gen- erally require strong evidence of intent, such as emails or other communications, to show that the related murky market data is suggestive of a spoofing scheme. However, as the agency’s data analytics improve, so too will the quality of trading-based evidence that the CFTC is able to glean, which may increase the ability of the CFTC to investigate and potentially bring mat- ters based on the circumstantial evidence of the trading data. This clarity of trading evidence may gradually obviate the need for clear communica- tions to prove intent in charging spoofing.

The Division of Enforcement brought a com- bined 22 actions involving allegations of retail fraud in FY 2021. Fraudulent schemes at the heart of these actions involved a variety of com- modities, including digital assets, 61 binary op- tions, 62 foreign exchange transactions, 63 and pre- cious metals. 64 These cases have long been a mainstay of CFTC enforcement, which under- scores the Commission’s persistent focus on in- vestor protection and maintenance of market integrity. As discussed above, Chairman Behnam has been and will continue to be vocal about these fundamental tenets. The digital asset space is of increasingly urgent concern in this regard be- cause its novelty as a commodity and its ambigu- ous regulatory position has resulted in a wave of new fraud cases. The Chairman, in his public remarks regarding the CFTC’s role with respect to the emerging digital asset marketplace, has emphasized the danger posed by fraudsters as a top enforcement priority and as something that is unquestionably within the CFTC’s jurisdiction, whether or not Congress ultimately bestows on the agency the authority to directly regulate digital assets as a commodities market. 65 Even without congressional authority to di- rectly regulate digital asset markets, the CFTC continued to use its enforcement authority to po- lice cryptocurrency markets for fraud and manipulation. In addition to the numerous actions related to retail fraud involving digital assets, the Commission also brought cases targeting illegal off-exchange transactions in digital assets and actions targeting registration failures by entities B. DIGITAL ASSETS AND CRYPTOCURRENCY

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offering transactions in digital assets. 66 The Com- mission also made history when it charged a manipulative scheme involving digital assets for the first time. 67 In one case demonstrating the role that the regulatory violations framework plays in the enforcement program for digital assets, the CFTC levied a $1.25 million penalty against one of the nation’s largest digital asset exchanges for offer- ing illegal off-exchange trading in digital assets and failing to register as an FCM. 68 The Commis- sion found that the company engaged in margined retail commodity transactions with customers in which they never transferred possession and control of the entire quantity of the assets pur- chased using margin. The CFTC argues that this resulted in denying customers the ability to use the entirety of the assets “freely in commerce away from the execution venue until the customer satisfied the repayment obligation.” 69 The com- pany was charged with significant undertakings going forward, including “implement[ing] and maintain[ing] systems and procedures reasonably designed to prevent margined or leveraged trad- ing on Respondent’s trading platform by U.S. residents who are not eligible ECPs.” 70 In another case, the CFTC ordered a U.S.- based international digital asset exchange opera- tor to pay $6.5 million for false, misleading, or inaccurate reporting and wash trading. 71 The Commission alleged that the exchange “matched orders” between its two independent automated trading programs “with one another in certain trading pairs, resulting in trades between ac- counts owned by [the exchange],” which permit- ted at least one employee to conduct “wash trades.” Notably, Commissioner Stump issued a concurring statement in which she emphasized

the limits of the CFTC’s jurisdiction over digital assets, noting that the CFTC does not regulate cash digital asset exchanges, but rather regulates certain derivatives products . 72 Commissioner Stump again reiterated the notion that the CFTC does not regulate cash transactions or other digital assets more recently in another digital as- set enforcement case brought on March 8, 2022, in which the CFTC charged several individuals with fraud for engaging in Ponzi schemes involv- ing Bitcoin. 73 In her concurring statement, Com- missioner Stump made clear that while the CFTC does not regulate cash commodities, it does have the authority to initiate enforcement actions involving cash commodities. 74 The CFTC and the Financial Crimes Enforce- ment Network of the U.S. Department of Trea- sury (“FinCEN”) made waves after the CFTC is- sued a complaint against BitMEX, a convertible virtual currency derivatives exchange, for viola- tions of the Bank Secrecy Act (“BSA”), regula- tory violations, and violations of FinCEN’s implementing regulations. 75 The complaint was filed on the first day of FY 2021, and was an- nounced concurrently with criminal charges against BitMEX’s founders. 76 A federal court has since entered a consent order requiring BitMEX to pay a $100 million civil monetary penalty, to be split between the CFTC and FinCEN. 77 De- spite advertising its product as a “perpetual Bitcoin U.S. dollar leveraged swap product” and “the XBTUSD perpetual swap,” and despite describing its “perpetual swap contract” as “a product similar to a traditional Futures Contract in how it trades,” BitMEX never registered with the CFTC as a regulated exchange, like a desig- nated contract market (“DCM”) or a swap execu- tion facility (“SEF”). In a press release announc- ing that the BitMEX founders had pled guilty to

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a registration category because of the view that they have a disproportionate impact on market stability and integrity. Although the Commission brought only nine enforcement actions involving the swaps market in FY 2021, this should not be interpreted as the CFTC not being active or interested in enforcement investigations concern- ing swaps. Trends in enforcement actions involving the swaps market centered specifically on “regula- tory” enforcement actions, which stem from violations of recordkeeping, reporting, and inter- nal control requirements. The Enforcement Divi- sion has investigated and the Commission has fined several swap dealers in the past year for various iterations of reporting failures, including failing to report entire categories of required data, 80 reporting inaccurate data to swap data repositories (“SDRs”), 81 and failures associated with daily large-trader reporting requirements. 82 Many of the actions also included a related charge for supervisory failures, which involves not having the proper systems, policies, or proce- dures in place to comply with obligations, moni- tor operations, or catch errors. 83 Significantly larger fines were levied on firms found to have a significant number of reporting errors occurring over a long period of time. These cases also dem- onstrate the implementation of several policy guidance documents issued by the Enforcement Division in the last year that describe the Com- mission’s view on corporate compliance pro- grams and how a company’s self-reporting, coop- eration, and remediation can factor into the penalties assessed in enforcement cases. 84 In one noteworthy reporting failure case that highlights the significance of the Division’s poli- cies regarding reporting, cooperation, and reme-

violating the BSA, the government refuted the argument that BitMEX did not serve U.S. cus- tomers, calling BitMEX’s “purported withdrawal from the U.S. market in or about September 2015 . . . a sham” and pointing out that the company “actively sought out U.S. customers by using U.S.-based cryptocurrency ‘influencers’ to mar- ket to new customers through BitMEX’s so- called ‘Affiliate Program.’ ’’ 78 The Commission will continue to be focused on digital assets for the foreseeable future. It has taken a strong position that many digital assets are commodities and therefore subject at least to the agency’s enforcement authority over fraud and manipulation in commodity markets. Further, the development of the digital asset derivatives markets, which are directly subject to the CFTC’s jurisdiction, is still in nascent stages. As these digital assets gain further market penetration and recognition from other regulators, their impor- tance in the financial sector will increase. With that increased prominence along with the reports expected to be generated in response to the March Executive Order, the CFTC in coordina- tion with other agencies, such as the SEC and DOJ, will maintain and likely increase its aggres- sive enforcement program against misconduct in the digital asset markets over the next few years. The CFTC has continued in its mission to ensure market integrity by bringing approxi- mately nine enforcement actions with a special focus on the swaps market and its participants. 79 These cases adhered to themes of past years, emphasizing swap dealer compliance with the swaps regulatory and reporting regime. Swap dealers are under especially increased scrutiny as C. SWAPS

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participants. The CFTC found that the automated RFQ tool was equivalent to a multiple-to- multiple platform for trading swaps and charged the company with failure to register as a SEF, which is “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, in- cluding any trading facility, that—(A) Facilitates the execution of swaps between persons; and (B) is not a designated contract market.” 87 Two other actions initiated after the close of FY 2021 are also worth highlighting. Just two weeks into FY 2022, the CFTC issued an order settling recordkeeping charges against a multina- tional swap dealer. 88 The company had self- reported—first by phone call in December 2019 and then with a more formal letter on February 21, 2020—that certain voice recordings had only been retained for one day instead of the required year. Despite self-reporting, the CFTC issued an enforcement order that included a $500,000 penalty. Another multinational swap dealer was hit with a similar enforcement order on December 17, 2021. 89 The alleged recordkeeping violations in that case were discovered during “a Commis- sion investigation” into certain trading by the swap dealer, which led investigators to learn that the company’s traders “had been using personal text messages and WhatsApp to communicate.” These methods of communication, which were not recorded and maintained by the company, were in violation of several CFTC rules and regulations. This recordkeeping failure allegedly led the company to fail to produce certain respon- sive communications during that investigation. The CFTC issued a massive $75 million fine, not- ing that compliance with recordkeeping rules “is

diation, the CFTC charged a major multi-national bank and its affiliated entities, all of which are registered swap dealers, with violating swap data reporting obligations by submitting to their SDR “inaccurate daily valuation data for the majority of their equity swap transactions.” 85 Compound- ing the severity of the violations was the fact that the error went on, undetected, for six years. De- spite this, the Commission ordered the respon- dents to pay a $1.5 million civil monetary penalty, which reflected a significantly reduced penalty due to the company’s self-reporting, cooperation, and remediation efforts. In describing the factors which may have impacted the penalty assessed, the CFTC noted that the company remediated the problem for swaps reporting going forward and further corrected the historical record of reported information. The CFTC has held fast to the need to completely correct historical data as part of its requirements for swaps reporting settlements. This can often be a sticking point in negotiations with the agency due to the time and cost to cor- rect old trades. Expanding beyond swaps reporting, the CFTC also focused last year on swap dealer compliance with business conduct standards and disclosures related to the pricing of swaps. In one of these cases, the CFTC brought charges for the first time involving the portfolio reconciliation require- ments under CEA Section 4s(i)(1) and Regula- tion 23.502, which require swap dealers to main- tain and follow written procedures to engage in portfolio reconciliation with non-swap counterparties. 86 Looking beyond swap dealers, the CFTC also brought an action against a finan- cial communications and collaboration company that offered and operated a tool that automated requests for quotes (“RFQs”) in interest rate and cross-currency swaps for swap market

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leged regulatory violations brought in FY 2021, approximately 21 actions, occurred in the context of binary options. 91 Cases involving regulatory violations are a regular feature in the Division’s enforcement program. This is due in part to the relative ease in proving these violations compared to other, more complex ones, such as manipulation cases: regu- latory cases are per se violations and do not demand proof of intent. More importantly, from the Division’s perspective, they underscore the crucial role of proper systems and controls within companies and emphasize the importance of both maintaining a strong compliance department and keeping up with regulatory requirements. These seemingly routine enforcement actions often carry significant penalties and compliance man- dates that require ongoing improvements to systems and controls that must be reported back to the Division, thereby extending the Division’s close review of internal operations. The ongoing emphasis in bringing these types of cases pro- vides an impetus to market participants to review current policies and procedures and ensure that they are in full compliance with applicable regu- lations, based on current business models and personnel. There is a concern, however, that regulatory violations can impose undue sanctions on compa- nies even when they self-disclose and remediate. In a self-disclosure case issued just days after the end of FY 2021, the CFTC ordered a $450,000 penalty against a derivatives clearing organiza- tion organized and based out of the United King- dom for failing to obtain written acknowledge- ment letters from a depository for six of 136 accounts, in violation of consumer protection regulations. 92 The organization had closed all six

essential to the Commission’s efforts to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.” 90 With the pandemic having caused most compa- nies to go remote over the past two years, many companies struggled to execute their compliance duties. This case serves as a stark reminder that regulatory compliance is a clear-cut issue for the CFTC and market participants can expect the CFTC to continue to closely examine registrants for strict compliance. As noted above, the Division of Enforcement will continue to be proactive in reviewing the dealings of swaps market participants to ensure their full compliance with the CFTC’s rules and regulations for swaps. As old rules are reviewed and revised, the Division will quickly follow up to ensure companies have adjusted their internal systems and controls accordingly to stay in compliance. Given the ease with which these types of regulatory enforcement cases can be brought, the Division will have little patience for any excuses or delays in compliance. Prosecuting regulatory violations continues to occupy an important share of the Division of Enforcement’s case load. Common violations include failure to register as an appropriate cate- gory of market participant (such as an FCM, a Commodity Pool Operator, or a Commodity Trading Advisor) and failures to maintain ade- quate reporting systems. During FY 2021, the Commission brought approximately 26 actions alleging registration failures, nine actions alleg- ing supervision failures, one action alleging recordkeeping failures, and nine cases alleging reporting failures. The largest portion of the al- D. REGULATORY VIOLATIONS

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IV. ROLE OF SPECIFIC ENFORCEMENT PROGRAMS

accounts on or before August 12, 2019, having just discovered the violations on August 1, 2019. The DCO was also charged with a violation of CFTC Regulation 39.15(a), which requires DCOs to design and maintain standards and procedures that ensure the safety of funds and assets belong- ing to clearing members and their customers. Even though only two of the six accounts were funded, the CFTC showed an intolerance for any compliance error by DCOs considering the criti- cal role they play in clearing and guaranteeing market transactions. Position limits is another area in which the CFTC is likely to show impatience with compli- ance failures. 93 Despite recent changes to the federal position limits rules, the CFTC will continue to look for and bring enforcement ac- tions involving violations of position limits. 94 The CFTC brought an enforcement action against a national food processing company whose inter- actions with the derivatives market were limited to a small subset of agricultural derivatives futures. The CFTC ordered a $1.5 million penalty for multiple alleged regulatory violations, includ- ing position limits, reporting, and recordkeeping violations. 95 The order was issued on August 13, 2021, just a few months after the Commission’s newly finalized position limits rules went into effect. 96 The CFTC issued another order con- nected to position limits on November 8, 2021, after the close of FY 2021, alleging that a com- modity pool operator failed to disclose in SEC Form 8-Ks that its inability to make further investments in futures contracts was due to ap- plicable position limits. 97 Actions such as these should prod market participants to review their transactions and related bona fide hedge exemp- tions to ensure compliance with the new rules.

A. WHISTLEBLOWER OFFICE

The Commission has issued a number of big payouts to whistleblowers over the past year. 98 The program has become important in support- ing cases that are already underway and in initiat- ing enforcement investigations. The CFTC’s whistleblower program has thus maintained an active role since its creation in 2014. The program permits monetary awards to individuals who provide the CFTC with information that leads to successful enforcement by the CFTC or other regulators. Whistleblower awards range from 10- 30% of monetary sanctions collected through enforcement proceedings. The CFTC provides whistleblowers with anonymity protection and therefore divulges only the fact that an award was made (and in many cases, the amount of the award), rather than connecting the award to a par- ticular enforcement action. Whistleblower com- plaints are submitted daily to the agency and have proven fruitful to the Division in bringing new cases and assisting in cases already underway. Over the course of FY 2021, the CFTC an- nounced six whistleblower awards, totaling more than $3 million. 99 Since the end of FY 2021, the CFTC’s Whistleblower Program issued a nearly $200 million whistleblower award, the largest is- sued to a single whistleblower in CFTC history. 100 Just as whistleblower programs in other agencies, including the SEC and IRS, have enjoyed suc- cess, CFTC Enforcement expects whistleblower complaints to continue to flow into the CFTC and the Division will be proactive in investigating these complaints and bringing enforcement cases stemming from them.

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actions came with parallel criminal actions. 101 In addition to cooperation with criminal authorities, the Division also brought actions with the sup- port of the SEC, the Federal Bureau of Investiga- tions (FBI), the National Futures Association (NFA), and a number of state regulators. 102 CFTC Enforcement also has ongoing information- sharing agreements with many domestic and foreign authorities, and regularly receives assis- tance from foreign authorities in obtaining inves- tigative material from foreign enforcement targets. The Division is certain to continue this trend of cooperation with other government agencies in future investigations and enforcement proceedings in 2022 and years to come. V. CONCLUSION The CFTC may be operating under a new Chairman and Commission but its enforcement program will continue to maintain a highly ag- gressive approach to market manipulation and disruptive trading behavior and any failures to fully comply with agency regulations. A new regulatory agenda will bring new and renewed enforcement focus in certain areas, such as digital assets and retail market participation, but will continue the Division’s intense scrutiny of the swaps market and its participants. This should pressure companies into ensuring that systems and controls in place are up to date and operating effectively. As the agency explores its new regu- latory agenda and the possibility of the new regulations and legislation to expand its powers, market participants should proactively engage with the Commission to help shape the future of the commodity and derivatives markets, rather than sit back and have the future shaped for them.

B. DATA ANALYTICS AND COOPERATION WITH OTHER AGENCIES

Two of the greatest backbones in the CFTC’s enforcement program have become the data analytics program and cooperation with other agencies, which often work hand in hand. The CFTC relies on its data analytics program not only to uphold its main priority of ensuring mar- ket integrity, but to also assist other agencies in their efforts to identify and investigate conduct outside of the CFTC’s jurisdiction and the broader schemes behind disturbances in the market. The CFTC receives troves of data from market participants and from the exchanges it oversees, and much of this data is made available to CFTC Enforcement’s surveillance staff, a group of experienced economic investigators. In the years since the financial crisis of 2008 to 2010, the CFTC has expended significant resources to expand its capabilities to identify market disrup- tive behavior, such as manipulative trading schemes or spoofing, in the data it receives by investing in experienced personnel and develop- ing proprietary software. Under its improved surveillance programs, the CFTC has the ability to obtain and review trading data in a near-real time manner and to examine trading across mar- kets, market participants, and exchanges for disruptive and manipulative trading behavior. This depth and breadth of the information puts the agency at a significant advantage when con- ducting investigations. The Division continued its trend in recent years of working in cooperation with other agen- cies to investigate and bring enforcement actions. Throughout the FY 2021, several enforcement

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ENDNOTES: 1 FY 2020 Division of Enforcement Annual Report , CFTC (Dec. 2020), available at https://w ww.cftc.gov/About/CFTCReports/index.htm (last visited Mar. 31, 2022). 2 FY 2021 Agency Financial Report , CFTC (Nov. 2021), available at https://www.cftc.gov/A bout/CFTCReports/index.htm (last visited Mar. 31, 2022). 3 Id . 4 Paul Kiernan, Biden Moves to Fill CFTC Vacancies , W ALL S T . J. (Sept. 13, 2021), https://w ww.wsj.com/articles/white-house-biden-to-nomi nate-rost in-behnam-as-cf tc-chai rman- 11631567789. 5 Keynote of Chariman Rostin Benham at the FIA Boca 2022 International Futures Industry Conference, Boca Raton, Florida , CFTC (Mar. 16, 2022), https://www.cftc.gov/PressRoom/Spe echesTestimony/opabehnam21 [hereinafter “Boca Keynote”]; H.R. 4173, 111th Cong. (2010). 6 Heath P. Tarbert Concludes Historic Tenure as CFTC Chairman , CFTC (Jan. 21, 2021), http s://www.cftc.gov/PressRoom/PressReleases/ 8354-21. 7 Statement of Commissioner Brian D. Quintez on the End of His Term and Future Plans , CFTC (Aug. 19, 2021), https://www.cftc.gov/Pre ssRoom/SpeechesTestimony/quintenzstatement 081921. 8 President Biden Announces 10 Key Nomina- tions , White House (Sept. 13, 2021), https://ww w.whitehouse.gov/briefing-room/statements-rele ases/2021/09/13/president-biden-announces-10- key-nominations-2/. 9 Statement of Commissioner Dan M. Berkovitz: Intent to Depart , CFTC (Sept. 9, 2021), https://www.cftc.gov/PressRoom/Speeche sTestimony/berkovitzstatement090921; Dan Berkovitz Named SEC General Counsel; John Coates to Leave SEC , SEC (Sept. 28, 2021), http s://www.sec.gov/news/press-release/2021-198. 10 Statement of Commissioner Dawn D. Stump , CFTC (Dec. 9, 2021), https://www.cftc.g

ov/PressRoom/SpeechesTestimony/stumpstatem ent120921. 11 President Biden Announces 10 Key Nomi- nations , supra note 8. 12 President Biden Announces Key Nominees and an Appointee to Board and Commission Roles , White House (Dec. 15, 2021), https://ww w.whitehouse.gov/briefing-room/statements-rele ases/2021/12/15/president-biden-announces-ke y-nominees-and-an-appointee-to-board-and-com mission-roles/. 13 S. PN1513, 117th Cong. (2022); S. PN1514, 117th Cong. (2022); S. PN1655, 117th Cong. (2022); S. PN1513, 117th Cong. (2022). 14 Boca Keynote, supra note 5; H.R. 4173, 111th Cong. (2010). 15 Boca Keynote, supra note 5 (“I believe in a strong, effective, thoughtful, and firm enforce- ment program. Where preservation of market in- tegrity and protecting the public relies on deter- rence, there is a strong case for ensuring that every matter we file, and public action we take, brings about greater compliance and makes the next violation less likely to occur.”). 16 Keynote Address of Chairman Rostin Beh- nam at the ABA Business Law Section Deriva- tives & Futures Law Committee Virtual Winter Meeting , CFTC (Jan. 7, 2022) https://www.cftc.g ov/PressRoom/SpeechesTestimony/opabehn am19 [hereinafter “ABA Keynote”]; Exec. Order No. 14067, 87 Fed. Reg. 14143 (Mar. 9, 2022). 17 ABA Keynote, supra note 16. 18 FY 2021 Agency Financial Report , supra note 2. 19 Exec. Order No. 14067, 87 Fed. Reg. 14143 (Mar. 9, 2022). 20 Examining Digital Assets: Risks, Regula- tion, and Innovation Before the S. Comm. On Agriculture, Nutrition, & Forestry , 117th Cong. (2022) (statement of Rostin Behnam, Chairman, CFTC), available at https://www.agriculture.sena te.gov/hearings/examining-digital-assets-risks-re gulation-and-innovation. 21 Boca Keynote, supra note 5. 22 Thompson Releases Crypto Regulatory

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Blueprint , H OUSE C OMM . ON A GRIC . R EPUBLICANS . (Nov. 16, 2021), https://republicans-agriculture.h ouse.gov/news/documentsingle.aspx?DocumentI D=7123. 23 Boca Keynote, supra note 5; ABAKeynote, supra note 16 (“[T]he Commission’s exercise of its enforcement authorities to address misconduct that has a direct impact on CFTC jurisdictional markets, affects the larger economy, causes pub- lic harm, or interferes with market integrity is just one facet of our approach in innovation and evolution in the financial markets.”). 26 About , Acting Chairman Rostin Behnam , CFTC, https://www.cftc.gov/About/Commission ers/RostinBehnam/index.htm (last visited Mar. 16, 2022). 27 Id. 28 Id.; see also Managing Climate Risk in the U.S. Financial System , CFTC (Sept. 9, 2020), htt ps://www.cftc.gov/sites/default/files/2020-09/9- 9-20%20Report%20of%20the%20Subcommitte e%20on%20Climate-Related%20Market%20Ris k%20-%20Managing%20Climate%20Risk%20i n%20the%20U.S.%20Financial%20System%20 for%20posting.pdf. 29 CFTC Acting Chairman Behnam Estab- lishes New Climate Risk Unit , CFTC (Mar. 17, 2021), https://www.cftc.gov/PressRoom/PressRe leases/8368-21. 30 Boca Keynote, supra note 5. 33 Remarks of CFTC Chairman Heath P. Tar- bert to the 36th Annual FIA Expo 2020 , CFTC (Nov. 10, 2020), https://www.cftc.gov/PressRoo m/SpeechesTestimony/tarbetstatement111020. 34 See, e.g. , Dissenting Statement of Commis- sioner Rostin Behnam Regarding the Cross- Border Application of the Registration Thresh- olds and Certain Requirements Applicable to SDs and MSPs—Final Rule , CFTC (July 23, 2020), https://www.cftc.gov/PressRoom/SpeechesTesti 31 Id. 32 Id. 24 Boca Keynote, supra note 5. 25 ABA Keynote, supra note 16.

mony/behnamstatement072320; Dissenting Statement of Commissioner Rostin Behnam on Capital Requirements of Swap Dealers and Ma- jor Swap Participants , CFTC (July 22, 2020), htt ps://www.cftc.gov/PressRoom/SpeechesTestimo ny/behnamstatement072220b; Dissent ing Statement of Commissioner Dan M. Berkovitz on the Final Rule for Cross-Border Swap Activity of Swap Dealers and Major Swap Participants , CFTC (July 23, 2020), https://www.cftc.gov/Pres sRoom/SpeechesTestimony/berkovitzstatement 072320. 35 Rostin Behnam, Dissenting Statement of Commissioner Rostin Behnam Regarding the Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to SDs and MSPs—Final Rule , CFTC (July 23, 2020), https://www.cftc.gov/PressRoom/Speeche sTestimony/behnamstatement072320. 36 Boca Keynote, supra note 5. 37 To consider the following nomination: The Honorable Rostin Behnam, of Maryland, to be Chairman and a Commissioner of the Commod- ity Futures Trading Commission Before the S. Comm. On Agric., Nutrition, and Forestry , 117th Cong. (Oct. 27, 2021). 38 See CFTC Seeks Public Comment on FTX Request for Amended DCO Registration Order , CFTC (Mar. 10, 2022), https://www.cftc.gov/Pre ssRoom/PressReleases/8499-22. 39 Id. 40 Boca Keynote, supra note 5. 41 Id. 42 CFTC, A GENCY F INANCIAL R EPORT F ISCAL Y EAR 2021 4 (2021). Note that the Commission’s Division of Enforcement has yet to publish its annual report that covers its enforcement activi- ties in more detail and provides relevant statistics. The numbers cited throughout the rest of this article are based on a manual count of publicly available complaints and enforcement orders. 43 See, e.g., Complaint, CFTC v. Gorman , No. 1:21-cv-00870 (S.D.N.Y. Feb. 1, 2021) (charging a swaps trader at a global investment bank with engaging in a scheme to manipulate the price of

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