The CFTC issues a press release here discussing the consent order executed on August 9 and 12 by the parties. The order is an injunction upon Kraft to prohibit Kraft from any violation of Sections 6(c)(1) (unlawful to use any swap or contract for sale for deceptive purposes), Section 6(c)(3) and 9(a)(2) (unlawful to attempt to manipulate the price of any swap, commodity in interstate commerce, or any commodity for future delivery), Section 4a(b) or 4a(e) (unlawful to hold long or short position in violation of position limits) or Section 4c(a) (unlawful to confirm an execution that is a wash sale) of the Commodity Exchange Act.
The CFTC had alleged that Kraft took positions in the physical market and then took swap positions based on their knowledge that they would reverse the physical positions in a manner that would cause the swaps to experience gains well in excess of any losses from the reversing physical transactions. Kraft had expressed the defense that the positions and activities were undertaken in their normal course of business as a commodity consumer. This consent order closes the proceedings.
The fine was $16 million dollars. The Court Consent Order is available below.
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVSION
U.S. COMMODITY FUTURES TRADING COMMISSION,
KRAFT FOODS GROUP, INC. and MONDELEZ GLOBAL LLC,
Case No. 15 CV 2881
Hon. John Robert Blakey
On April 1, 2015, Plaintiff Commodity Futures Trading Commission (the "Commission"
or "CFTC") filed a Complaint for Injunctive Relief, Civil Monetary Penalties, and Other
Equitable Relief  against Defendants Kraft Foods Group, Inc. and Mondelez Global LLC
( collectively, "Defendants") alleging that Defendants used or attempted to use a manipulative or
deceptive device in connection with the December 2011 wheat futures contract traded on the
Chicago Board of Trade (Count I), manipulated or attempted to manipulate the price of the
December 2011 wheat futures contract and of cash wheat (Count II), unlawfully held December
2011 wheat futures positions in excess of speculative position limits (Count Ill), and engaged in
wash sales or fictitious sales by trading both sides of EFP contracts (Count IV) in violation of
Sections 4a(b), 4a(e), 4c(a), 6(c)(l), 6(c)(3), and 9(a)(2) of the Commodity Exchange Act
("CEA"), 7 U.S.C. §§ 6a(b), 6a(e), 6c(a), 9(1), 9(3), 13(a)(2) (2012), and Commission
Regulations ("Regulations") 1.38, 150.2, 180.1, and 180.2, 17 C.F.R. §§ 1.38, 150.2, 180.1,
Case: 1:15-cv-02881 Document #: 310 Filed: 08/14/19 Page 2 of 9 PageID #:23993
Defendants filed their Answer onJanuary 15, 2016, and have denied that they (1) used
or attempted to use a manipulative or deceptive device in connection with the December 2011
wheat futures contract traded on the Chicago Board ofTrade as alleged by the CFTC in Count I of
the Complaint; (2) manipulated or attempted to manipulate the price of the December 2011 wheat
futures contract and of cash wheat as alleged by the CFTC in Count II of the Complaint; (3)
unlawfully held December 2011 wheat futures positions in excess ofspeculative position limits as
alleged by the CFTC in Count III of the Complaint; and ( 4) engaged in wash sales or fictitious
sales by trading both sides of EFP contracts as alleged by the CFTC in Count IV of the
Complaint. Defendants denied any violation of Sections 4a(b), 4a(e), 4c(a), 6(c)(l), 6(c)(3), and
9(a)(2) of the CEA, 7 U.S.C. §§ 6a(b), 6a(e), 6c(a), 9(1), 9(3), 13(a)(2) (2012), and Regulations
1.38, 150.2, 180.1, and 180.2, 17 C.F.R. §§ 1.38, 150.2, 180.1, 180.2 (2014 ).
The CFTC and Defendants have reached a resolution and are settling this action in
accordance with the terms arising from the Court's settlement conference on March 22, 2019 and
as set forth below.
I. CONSENTS AND AGREEMENTS
To effect settlement of the matters alleged in the Complaint without a trial on the merits or
any further judicial proceedings:
1. The CFTC and Defendants consent to the entry of this Consent Order and agree to
be bound by its terms;
2. The Court has jurisdiction over the parties and the subject matter of this action
pursuant to Section 6c of the Act, 7 U.S.C. § 13a-l (2012);
3. The CFTC has jurisdiction over the conduct and transactions at issue in this action
pursuant to the Act, 7U.S.C. §§ 1-26(2012);
4. Venue properly lies with this Court pursuant to Section 6c(e) of the Act, 7 U.S.C.
Case: 1:15-cv-02881 Document #: 310 Filed: 08/14/19 Page 3 of 9 PageID #:23993
§ 13a-l( e )(2012);
5. The CFTC and Defendants waive any and all rights of appeal from this action;
6. The CFTC and Defendants consent to the continued jurisdiction of this Court over
them for the purpose of implementing and enforcing the terms of this Consent Order;
7. The CFTC and Defendants do not consent to the use of this Consent Order by any
patiy in any other proceeding;
8. Neither paiiy shall make any public statement about this case other than to refer to
the terms of this settlement agreement or public documents filed in this case, except any patiy
may take any lawful position in any legal proceedings, testimony or by court order.
Nothing in this Order reflects an agreement or a legal determination that Defendants have
or have not violated any provision of the CEA. Defendants agree to, and the Comi hereby
orders, the entry of an injunction prohibiting the Defendants from in the future violating any of the
(a) Section 6(c)(l) of the CEA, 7 U.S.C. § 9(1) (2012), and Regulation 180.1, 17 C.F.R. § 180.1 (2018), which makes it unlawful for any person to use or employ or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative or deceptive device or contrivance;
(b) Sections 6(c)(3) and 9(a)(2) of the CEA, 7 U.S.C. §§ 9(3), 13(a)(2) (2012), and Regulation 180.2, 17 C.F.R. § 180.2 (2018), which make it unlawful for any person to manipulate or attempt to manipulate the price of any swap, or of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity;
(c) Sections 4a(b) and 4a(e) of the CEA, 7 U.S.C. §§ 6a(b), 6a(e)(2012), and Regulation 150.2, 17 C.F.R. § 150.2 (2018), which make it unlawful to hold or control a net long or short position in any commodity for future delivery on or subject to the rules of any contract market in excess of any position limit fixed by the Commission for or with respect to such commodity, or violate a rule of a contract market or board of trade
Case: 1:15-cv-02881 Document #: 310 Filed: 08/14/19 Page 4 of 9 PageID #:23993
fixing limits on the amount of trading which may be done or positions which may be held by any person if such rule was approved by the CFTC; and
(d) Section 4c(a)ofthe CEA, 7 U.S.C. § 6c(a)(2012), and Regulation 1.38, 17 C.F.R. § 1.38 (2018), which makes it unlawful to offer to enter into, enter into or confirm the execution of a transaction involving the purchase or sale of any commodity for future delivery that is, is of the character of, or is commonly known to the trade as a 'wash sale,' that is a fictitious sale, or that is used to cause any price to be reported, registered, or recorded that is not a true and bona fide price, or that is executed noncompetitively but not in accordance with the written rules of the contract market which have been submitted to and approved by the Commission.
III. CIVIL MONETARY PENALTY
Defendants agree to pay, and the Court orders, a monetary penalty according to the terms
set fmih below:
1. Defendant Mondelez Global shall pay a civil monetary penalty in the amount of
SIXTEEN MILLION DOLLARS ($16,000,000) ("CMP Obligation") within ninety (90) days of
the date of entry of this Consent Order. Defendants are jointly and severally liable for the CMP
Obligation. If the CMP Obligation is not paid in full within ninety days of the date of entry of this
Consent Order, then post-judgment interest shall accrue on the CMP Obligation beginning on the
date of entry of this Consent Order and shall be determined by using the Treasury Bill rate
prevailing on the date of entry of this Consent Order pursuant to 28 U.S.C. § 1961 (2012).
2. Defendant Mondelez Global shall pay the CMP Obligation and any post-judgment
interest by electronic funds transfer, U.S. postal money order, cetiified check, bank cashier's
check, or bank money order. If payment is to be made other than by electronic funds transfer,
then the payment shall be made payable to the Commodity Futures Trading Commission and
sent to the address below:
MMAC/ESC/ AMK326 Commodity Futures Trading Commission Division of Enforcement 6500 S. MacAtihur Blvd.
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HQ Room 181 Oklahoma City, OK 73169 ( 405) 954-6569 office (405) 954-1620 fax 9-AMC-AR-CFTC@faa.gov
If payment by electronic funds transfer is chosen, Defendants shall contact Marie Thome or her
successor at the address above to receive payment instructions and shall fully comply with those
instructions. Defendants shall accompany payment of the CMP Obligation with a cover letter that
identifies Defendants and the name and docket number of this proceeding. Defendants shall
simultaneously transmit copies of the cover letter and the form of payment to the Chief Financial
Officer, Commodity Futures Trading Commission, Tlu-ee Lafayette Centre, 1155 21st Street,
NW, Washington, D.C. 20581.
3. Partial Satisfaction: Acceptance by the CFTC of any partial payment of
Defendants' CMP Obligation shall not be deemed a waiver of their obligation to make further
payments pursuant to this Consent Order, or a waiver of the CFTC's right to seek to compel
payment of any remaining balance.
IV. MISCELLANEOUS PROVISIONS
4. Notice: All notices required to be given by any provision in this Consent Order
shall be sent certified mail, return receipt requested, with reference to the name and docket
number of this action, asfollows:
Notice to the CFTC:
Scott Williamson, Acting Deputy Director U.S. Commodity Futures Trading Commission, Division of Enforcement 525 W. Monroe St., Suite 1100 Chicago, IL 60661
Notice to Defendants:
Kraft Foods Group, Inc. and Mondelez Global LLC
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C/O Jenner & Block LLP Attn: Dean N. Panos and J. Kevin McCall 353 N. Clark Street Chicago, IL 60654-3456
5. Change of Address/Phone: Until such time as Defendants satisfy in full their
CMP Obligation as set forth in this Consent Order, Defendants shall provide written notice to the
CFTC by certified mail of any change to their telephone number or mailing address within ten
calendar days of the change
6. Entire Agreement and Amendments: This Consent Order incorporates all of the
te1ms and conditions of the settlement among the pmties hereto to date. Nothing shall serve to
amend or modify this Consent Order in any respect whatsoever, unless: (a) reduced to writing; (b)
signed by all pmties hereto; and (c) approved by order of this Court.
7. Invalidation: If any provision of this Consent Order or if the application of any
provision or circumstance is held invalid, then the remainder of this Consent Order and the
application of the provision to any other person or circumstance shall not be affected by the
8. Waiver: The failure of any pmty to this Consent Order at any time to require
performance of any provision of this Consent Order shall in no manner affect the right of the
pmty at a later time to enforce the same or any other provision of this Consent Order. No waiver in
one or more instances of the breach of any provision contained in this Consent Order shall be
deemed to be or construed as a fmther or continuing waiver of such breach or waiver of the
breach of any other provision of this Consent Order.
9. Continuing Jurisdiction of this Comt: Upon entry by the Court of this Consent
Order all of the claims asserted by the CFTC in the Complaint are dismissed with prejudice.
However, this Court shall retain jurisdiction of this action to ensure compliance with this Consent
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I 0. Injunctive Provisions: The injunctive provisions of this Consent Order shall be
binding upon Defendants, upon any person under their authority or control, and upon any person
who receives actual notice of this Consent Order insofar as he or she is acting in active conce1i or
participation with Defendants.
11. Authority: Undersigned Counsel for Defendants hereby warrants that he is the
attorney for Defendants Kraft Foods Group, Inc. and Mondelez Global LLC, and that this
Consent Order has been duly authorized by Defendants Kraft Foods Group, Inc. and Mondelez
Global LLC, and that he has been duly empowered to sign and submit this Consent Order on
behalf of Defendants Kraft Foods Group, Inc.and Mondelez Global LLC.
12. Counterpa1is and Execution: This Consent Order may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and shall become
effective when one or more counterpmis have been signed by each of the pmiies hereto and
delivered (by hand delivery or certified mail) to the other pmiy, it being understood that all
parties need not sign the same counterpmi. Any counterpart or other signature to this Consent
Order that is delivered by any means shall be deemed for all purposes as constituting good and
valid execution and delivery by such party of this Consent Order.
There being no just reason for delay, the Clerk of the Couti is hereby directed to enter
this Consent Order.
IT IS SO ORDERED on this 14th day of August, 2019.
The ICE fines trader for "disruptive trading" in the pre-open - a term that is broader than "spoofing"
While there have been multiple disciplinary notices from the CME regarding entering orders without intent in the pre-open, a disciplinary notice from ICE US Futures is the first from that entity that DCM has noted regarding per-open orders entered without intent to trade but rather for market intelligence.
The ICE notice references two factors: "the intent to determine market depth and the effect these orders would have on the Indicative Opening Price (“IOP”)." This has been a common theme for these types of disciplinary actions - using orders as an information gathering tool, not for execution. It should be noted that the recent CME and ICE notices reference "disrptuive trading" which is the name of the general rule that covers entering orders without intent to execute, even if they are not intended to move the market to enable a trade in the opposite direction. Companies should be using this term regardless of whether they also use "spoofing" as a term in their training.
It feels like a broken record repeating this but I have had multiple conversations with different regulators and they all have a common view of US futures markets - that these are markets for execution, not negotiation. If you wish to utilize the futures markets for anything other than execution, your actions are improper. to the regulators, just the act of entering these orders causes other participants to misunderstand the liquidity of the market and, therefore, that order is disruptive.
You are allowed to change your mind based on information received after the order is placed but you to have intent to execute when the order is entered.
The fine was $50K and a ten day suspension from accessing the market. notice is case no. 2017-023 from ICE US Futures issued August 14, 2019. I do not have a link to the notice at this time.
The ICE bars a trader, no fine, for entering orders without intent to trade ("spoofing") - second spoofing case in two months
The Intercontinental Exchange issued another spoofing disciplinary action earlier this month - this time in the coffee, sugar, and cocoa markets. I thought this was rather clever on their part in the notice:
"a manual trader, engaged in a pattern of placing one or more fully visible large order(s) on one side of the market while having a smaller order (typically an ICEberg order) resting on the opposite side of the market"
Not seen the capitalization that way before.
Two important things here:
First, again, the exchange stressed it was a manual trader - I can't say how many times a client has told me they don't have to worry because they don't have trading algorithms. The exchange doesn't care how you enter your orders, they care how you manage them.
Second, there was no fine but there was a permanent suspension from the exchange. This might indicate that the trading activity wasn't all that profitable (no disgorgement) but still got the trader a lifetime suspension.
The full order is here
Using MNPI - Material Non-Public Information - can be a violation of exchange rules - here is one way how
The CBOT just fined a firm $350K and imposed a $9,715 disgorgement - that is right they made $9,715 on the trade and got fined $350K. The fine was the old familiar "failure to supervise" because it " failed to diligently supervise its traders in the conduct of their business relating to the Exchange by failing to give sufficient guidance and adequately train its employees on how to comply with its riskless principal mandate without pre-hedging block trades."
The facts are that the firm was invited multiple times to participate in a block trade with a customer. The company had a "riskless mandate in effect." The concept of a riskless principal on a block trade - i.e., consummating a block trade with the customer while having a market transaction that offsets the customer trade - is that banks even include in their block trading and best execution policy manuals (see the Credit Suisse Client Order Execution policy here also can be searched for online). The requirement however is that the hedge trade cannot be consummated before the client block trade is.
And that was the problem here. Traders at an affiliate of the broker consummated the offsetting trade before the customer trade - in essence, front running the customer block order. The CBOE found this happened multiple times.
You can do a block and you can do the offset - you just can't front run a customer block order. And that is how use of material non-public information can get a large fine from the CME.
The full order is here
The CME also issued a similar disciplinary notice for an individual trader today. This does not appear to be the trader related to the order for a firm above as the dates for activity cited do not coincide and the firm violations was on CBOT and this violation was on NYMEX. This interesting point is that the stated violations are the same for roughly equivalent periods of time but the trader fine was $19K and a five day suspension of trading privileges. The full order is here
This is in line with DCM advice to clients that the "failure to supervise" fines frequently are more severe than the fine to the individual trader. This should always be a point of focus for any firm's compliance program.
One of the more interesting problems to show up on the radar in the last six months has been an increasing number of inbound questions regarding Dodd Frank compliance questions. Quite bluntly, this had become the Sargasso Sea of consulting expertise - a lot of old flotsam and jetsam (I just love old maritime law terms) waiting for someone to come by and claim it. And it appears that day has come.
The interest seems to be arising from two areas - first, the renewable power space is moving away from bank inter mediated trades to direct developer to consumer (especially large corporate) trades. These trades are increasingly not Power Purchase Agreements ("PPAs") which are considered physical and non-reportable under Dodd Frank towards Virtual Power Purchase Agreements ("VPPAs") which are reportable. That brings a whole new range of participants into the reporting world. I see a number of firms recommending hiring a third party reporting entity - DCM's advice is that this may be overkill and and unnecessary expense.
The second area is non-US entities becoming more involved in the US swap market. The reduction in liquidity for OTC swaps has created a business opportunity for firms that feel they have the capital and knowledge to capture customer business that may require reportable components to the transaction. In many cases, they come from jurisdictions where the equivalent of the swap dealer de minimis calculation have significantly different inclusion of financial products. The greatest challenge appears to be translating what is required and how industry standard practices apply to these companies in the US environment. Some companies have found they can adopt existing non-US compliance processes with a reduction in process complexity rather than building new processes from scratch.
So, from the ashes of the USA compliance consulting environment, Dodd Frank may arise anew for the commodity market. We are not sure this is necessarily the ascent of a great new world but it does mean there may be changes in the offing for financial products the US commodity markets.
I have been asked by multiple clients and industry contacts to define "conduct compliance" and why they should care. Much of my response comes from my history of working on a trading desk and as a risk consultant - the vast majority of my work has been what I call trading compliance. I see that as working to prevent the few bad apples at the bottom of the barrel for spoiling the bunch. You all know the stereotype - the compliance officer having to dig through numbers to figure out how the devious trader is getting around the rules.
But conduct compliance is different - to the trading compliance consultant it feels "squishy", less analytical. But it is a real thing. The best I can describe my concept of conduct compliance is that it is the system to assure that the other 95+ percent of the employees - the earnest, want to do right employees - don't do bad things because they believe the organization wants them - or their manger instructs them - to do bad things. Think of most of the major "conduct" fines we have seen in the last years - Enron, Wells Fargo and the LIBOR cases come to mind. In all of them, the organization at some level embraced and encouraged and compensated the staff for heading into what were, at best, very murky waters. At worst, they encouraged and drove blatantly criminal activity activity.
In a number of these cases, the employees indicated their direct, one level above manager, or even the person the were replacing led them to believe their performance and possibly job retention would be premised on doing questionable things or it was "just the way we do things". The employees likely would not have done these things on their own - they felt it was part of their job description. And that is where conduct compliance comes to play - it is trying to ascertain whether the organization, at some level, is driving the improper behavior either explicitly or, more difficult to determine, by inference.
And that is why conduct compliance gets "squishier". How do you measure the inferred pressure on the employees by their manager? If questioned, will the manager say "of course I said no such things. Who is saying that about me?" And we all know what happens to the poor employee that reported that the boss was pushing them to open fake accounts.
And that is the problem with conduct compliance - how do you find the root cause of a problem caused by interpersonal communication rather than market conduct you can observe from an analytical model?
And the new Dept of Justice compliance program guidelines - blogged by DCM and available lower on this page - speaks to this "culture of compliance" and even asks whether employee sentiment on the commitment to compliance has been surveyed as an indicator of an effective compliance program. This is a foundation of conduct compliance - does the employee feel safe to question perceived pressure to behave unethically or improperly and will the organization protect the employee from the potential blow back from their supervisor when questions arise?
Let's be honest - any low level employee in a secure job is going to be very reluctant to rock the boat when the first indication start - it is too easy to say "my boss didn't mean that" or "I can just ignore that". That works until it doesn't. How does senior management really know that employees feel safe from repercussions of challenging these pressures?
Here is a simple structure to start from - operational management cares about how much money was made; risk management cares about how much money was at risk to make the money and was the potential downside managed; and compliance management is about understanding the manner in which the money was made and whether the "why money was made" fits with the corporate culture. Do the lower level employees really feel senior management cares about whether the P&L was brought about by unethical behavior and would protect someone from pointing out where someone is cutting corners? If senior management assumes everyone feels safe, then they don't really have a handle on conduct compliance for their firm.
Conduct compliance is about knowing that the how money was made fits with the corporate rules of what is an acceptable way to make money. If a firm says ok to money made in a manner that would cause a problem when repeated on a TV interview, you have a conduct compliance issue.
I hope that helps differentiate between conduct and trading compliance. The conduct compliance issue tends to expand with the scale of the company - the more layers, the more possibilities for the message to get garbled before it gets to the boots on the ground, so to speak
ERCOT power market fine on ICE - with attached "failure to supervise" - for a major bank subsidiary for disruptive trading
Today The ICE issued a disciplinary notice to Macquarie Energy LLC regarding orders entered in the ERCOT North 345 KV Real Time Off Peak contract that "made it seem to other market participants that an advantageous buying opportunity was available in the Peak Future". The interesting point is that the individual - referred to as "former employee" - " initiated this conduct after he unknowingly fell victim to the same circumstances he then caused to occur. The problem was that there was a chance to misunderstand high off peak offers as attractive on peak offers. It would infer that the trader had bought off peak at a high price by misreading the offer. The former employee intended to prove the point that he was dissatisfied with the price adjustment provided by ICE Operations in accordance with the Exchange’s Error Policy after executing a series of trades in a wrong market." This means that the trader felt there was a structure that would cause market participants to misunderstand their risk
Macquarie was also hit for failure to supervise as, while they had compliance and surveillance in place that oversaw this individual , they may not have had oversight adequate to assure the individual was acting in accordance with exchange rules. The total fine was $250,000. The total notice is here
This is an interesting case because the notice reads that the employee entered the orders in knowingly and with the intent that other traders would make the same mistake he made. It also reads that the trader was trying to make a point that directly to The ICE by way of other traders - and potentially to make other traders also angry at The ICE> If nothing else, if the trader felt he suffered harm from The ICE's error policy, then he was acting to have other participants also incur that harm.
This points out three things:
The corresponding trader disciplinary notice is here. The description is mostly the same but does indicate "As a result, in some instances, Alexander caused participants to believe they were transacting in the Peak Future, when in reality, they transacted in the Off-Peak Future, and subsequently to report the trades as an error, which resulted in significant price adjustments from the price at which they originally traded." This specifically points out the disruptive nature of the activiities.
The trader was fined $85K and suspended from the exchange for 9 months.
"orderly conduct of execution" - another area of disruptive trading regulation, another CME summary action
The CME issued a summary action against an individual today for "reckless disregard for the adverse impact on the orderly conduct of trading." In this instance, the individual had "large positions" in Live Cattle and Feeder Cattle futures. He entered orders during the post settlement period that "exceeded all the quantity in five visible levels of the order book in relatively short periods of time and resulted in significant and disruptive price movements." The exchange noted that the individual should have known the orders were visible to the market and would cause the price movements observed after the orders were placed. The fine was $20 and a suspension from market access for 20 days. The order is here - https://www.cmegroup.com/notices/disciplinary/2019/05/CME-17-0755-BC-CODY-EASTERDAY.html#pageNumber=1
Please note there are a couple different things to unpack here:
first, the order indicates the trader should have known the relative size of the order versus the existing visible screen liquidity. This should mean to any trader that the exchange expects you to take into account market liquidity when determining the appropriate size of visible orders; and 'second, the issue was using a visible order book. The exchange allows block trades for a reason. A primary reason is to allow an escape valve for exactly this situation - the need, or desire, to execute a very large trade in a less liquid market. Use of a block trade allows the order to get executed in a manner that reflect but does not disrupt the market. Firms or traders that can anticipate the need to execute large orders should understand the availability of brokered or direct block trades, the reporting requirements for the different types (including method of reporting and reporting time windows), and the authorities required so as to have a pre-approved method for avoiding this situation, and
finally, firms and individuals should have a firm handle on their open positions and time period for closing these transactions and plan for closing positions in a manner that conforms to exchange rules.
DCM LLC provides a full line of consulting services for participants in commodity markets with special expertise in risk, compliance and trade surveillance.
Plans for 2020 Army Corps work plan causes 2019 shift in CBOT rules - yes, this happened and it may effect you
Friday, the CBOT issued a rule, effective June 2 for June 3, 2019 trades, changing the rules on delivery for corn, soybeans and wheat. The Army Corps has announced maintenance work in 2020 on the Illinois River that will heavily impact barge traffic in the Mid-Continent. That caused the CBOT to review its rules on barge load out procedures - specifically
"Due to the anticipated closure, the Exchange reviewed the language in Rule 703.C.G.(9) and found it to be outdated. Rule 703.C.G.(9) stipulates specific barge freight to be paid by the taker to the maker of delivery under this rule. However, since barge freight has become significantly more expensive in the last two decades, the amount specified in Rule 703.C.G.(9) is no longer relevant. "
In response, the CBOT changed Rule C.G.(9) to remove all fixed barge load out fees and substituted "current barge freight rates as the applicable fee. This is likely to insert a degree of price volatility in certain situations that many firms currently do not consider as a risk.
Another small example of how market regulation notices can have a spill over effect into risk management concerns.
While the CFTC recently published guidance on how an investigation is managed, DCM believes the Department of Justice updated its guidelines to prosecutors on evaluating a corporate compliance program published two weeks ago is more critical to compliance operations. The DOJ guidance talks to what DOJ expects a firm to be doing when they consider acting against that firm.What does that mean?
This is the document that is supposed to inform a prosecutor in a criminal case as to how the review a company's compliance program should impact the "charging decision or resolution" as to whether the company is to be charged with a crime, a plea deal is to be agreed to or sentencing for a crime. Let's unpack this - as a consultant, I note that this could mean the level of a compliance program could impact whether a company is even charged for a crime. So, a compliance program that meets the guidance could not just reduce my sentence but has at least the potential to keep me out of court. That sounds like a reputational risk win right there.
This guidance is a significant expansion of the prior guidance – from 9 to 19 pages. It does follow basically the same structure as prior guidance but with a lot of new pieces. It also shifts away from a foundation of what did the company do to find underlying misconduct in a specific instance to whether the compliance program as a whole is well founded.
The new guidance has fundamentally altered the structure of the guidance from the original edition. The prior guidance has a single introduction and then listed eleven topics. The new guidance asks three basic questions:
In general, the guidance now stresses that "policies and procedures – from appropriate assignments of responsibility, to training programs, to systems of incentives and discipline – that ensure the compliance program is (sic) well-integrated into the company’s operations and workforce." The prior guidance spoke to whether there were “applicable procedures to prohibit the misconduct” – this was focused on whether there was a procedure to prohibit the misconduct being looked at, not a systemic view of the program. This really means that:
The DOJ has grouped six sections from the prior guidance under this specific area and now done a fairly deep dive into how effective and current the company assessment of compliance risk is. It has retained six specific areas of focus on program design but has shifted some of the operational impacts:
The guidance is looking for regular updates of the risk assessment and then the ability to track changes in the risk assessment to changes in policies and procedures - many companies have very tenuous documentation of the connection between updated compliance risk assessments and the policies and procedures that are adjusted due to that assessment and why. The guidance also points to metrics – both in tracking misconduct and how it loops back to inform the compliance program.
Policies and Procedures
The guidance conforms to fairly standard industry practices for code of conduct, tone from the top, and comprehensiveness. A couple points are worth noting:
Every company has some training program. However, the guidance raises new points that are not always included in a company's program. These include:
The guidance addresses internal communication of compliance issues by employees. This section actually speaks to the issues most commonly being addressed by larger firms. Specific new points are:
The guidance has already brought bribery and corruption issues into compliance programs here. Much of the content is similar. The new guidance does amplify a couple topics:
The specific points addressed in the guidance did not change from the prior guidance. There is an introductory statement that does include the caution that
“Flawed or incomplete due diligence can allow misconduct to continue at the target company, causing resulting harm to a business’s profitability and reputation and risking civil and criminal liability.
The extent to which a company subjects its acquisition targets to appropriate scrutiny is indicative of whether its compliance program is, as implemented, able to effectively enforce its internal controls and remediate misconduct at all levels of the organization.”
The guidance has grouped three areas in the section regarding earnest and good faith implementation:
“Even a well-designed compliance program may be unsuccessful in practice if implementation is lax or ineffective. Prosecutors are instructed to probe specifically whether a compliance program is a “paper program” or one “implemented, reviewed, and revised, as appropriate, in an effective manner".
There is a new discussion to head this section – all addressing the need for tone from the top and leadership for compliance to be effective.
This is an area where the focus of the guidance shifted significantly between the original guidance and the new guidance. The original guidance spoke the compliance role in terms of operational activities, their stature (titles, compensation, reporting lines), and funding and resources. Those topics still appear but a new focus on the role of compliance at the management level – engagement of compliance at a strategic level. Questions concerning compliance's input on transactions or deals and whether it has been responded to, up to and including having transactions or deals stopped by compliance.
The prior guidance focused primarily on whether the incentives and compensation incentivized bad behavior – the new guidance expands that focus to include looking at whether incentive structure incentivizes ethical behavior (not always easy to effectuate).
The prior guidance also focused on the specific misconduct being examined and the follow through for that instance. The new guidance focuses more on the process itself – is it consistent, has the company looked to identify instances where the process is applied inconsistently.
The new guidance calls this area “a hallmark of an effective implementation”. It even notes “Some companies have even made compliance a significant metric for management bonuses and/or have made working on compliance a means of career advancement.”
“Does the Corporation’s Compliance Program Work in Practice?”
The discussion in the guidance here is very interesting as it incorporates two very different concepts. First, was the program working effectively at the time misconduct occurred? Second, is the program now working effectively at the time the prosecutor is considering bringing charges or proffering a sentencing recommendation? This indicates that a company’s response between the time an investigation opens and charges or a sentence are considered can have a major impact. That was not discussed in the prior guidance.
The focus is in the first line of the discussion here – “One hallmark of an effective compliance program is its capacity to improve and evolve.” This is not always the case and can be a significant burden to smaller organizations. If a small firm has a one or two-person compliance function, how does this process get managed and effectuated?
This is a completely new section in this guidance. It does capture a portion of a section called “Analysis and Remediation of Underlying Misconduct” from the prior guidance – that section has been retained in the guidance - but it has a broader coverage and focus. The prior section focused on whether root and systemic causes of the misconduct were examined, whether there were prior indications of issues, and what remediation occurred – all actions focused on the specific event.
The new guidance focuses on the investigations process – is there a “well-functioning and appropriately funded mechanism”? This speaks to an ongoing process with dedicated resources. This is not likely to occur in many smaller entities. Therefore, the real question is what would evidence an appropriate mechanism for investigations? The guidance may offer more options here:
This section has been retained from the prior guidance though, as noted above, a section was moved to Investigations. It has also incorporated the “Operational Integration” section from the prior guidance. The discussion for this section focuses on whether there is a pattern of misconduct within the organization that would indicate the company has not worked to eliminate underlying causes or compliance system weaknesses that encourage misconduct. Much of the content is directly from the prior guidance.
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