Category Archives: FinReg

NatWest Plc pleads guilty in criminal proceedings

National Westminster Bank Plc (NatWest) entered guilty pleas at Westminster Magistrates’ Court to criminal charges brought by the Financial Conduct Authority (FCA) under the Money Laundering Regulations 2007 (MLR 2007).

NatWest accepts that it failed to comply with regulation 8(1) between 7 November 2013 until 23 June 2016; and regulations 8(3) and 14(1) between 8 November 2012 until 23 June 2016 under MLR 2007 in relation to the accounts of a UK incorporated customer. These regulations require certain firms, including those regulated by the FCA, to ensure they have adequate anti-money laundering systems and controls to prevent money laundering.

The case has now been referred to the Southwark Crown Court for sentencing.

This is the first criminal prosecution under the MLR 2007 by the FCA.

No individuals are being charged as part of these proceedings.

CFTC Orders Interactive Brokers LLC to Pay a $1.75 Million Penalty for Supervision Failures

The Commodity Futures Trading Commission today filed and simultaneously settled charges against Interactive Brokers LLC, a registered futures commission merchant, for failing to diligently supervise the handling of its customer accounts by not adequately preparing and configuring its electronic trading system to receive negative prices and calculate margin on April 20, 2020, in violation of CFTC Regulation 166.3.         

The order requires Interactive Brokers to pay a civil monetary penalty of $1.75 million and restitution of $82.57 million to its customers. Interactive Brokers is credited the full restitution due to its compensation payment to its customers. 

“This enforcement action demonstrates that the CFTC will hold registrants responsible for their handling of customer accounts and ensuring the integrity of trades on their trading platforms and electronic systems, including during instances of market volatility,” said Acting Director of Enforcement Vincent McGonagle.

Case Background

According to the order, Interactive Brokers’ supervisory failures were discovered on April 20, 2020, when the benchmark West Texas Intermediate light, sweet crude oil (CL) futures contract on CME Group Inc.’s New York Mercantile Exchange (NYMEX) traded into negative prices, settling at negative $37.63 per barrel for the May 2020 contracts set to expire the following day. This price was the basis for determining the settlement price for certain cash-settled contracts, including the E-mini crude oil (QM) futures contract on the NYMEX and the West Texas Intermediate light, sweet crude oil (WTI) futures contract on the Intercontinental Exchange Europe. Because the QM and WTI contracts settle based on the trading of the CL contract in the settlement window, both contracts settled at negative $37.63 per barrel. Interactive Brokers customers held long positions in the May QM and WTI contracts on April 20, 2020 and experienced trading losses on those positions as a result of the firm’s systems issues.

The order finds that Interactive Brokers was on notice of the possibility of negative oil futures prices prior to April 20, 2020, but did not adequately prepare and configure its electronic trading system to recognize negative prices. Specifically, Interactive Brokers failed to deploy necessary system changes before negative prices occurred resulting in two significant systems issues on April 20, 2020: (1) negative prices were not displayed to customers and customers were unable to place orders with negative-priced limit orders to buy or sell; and (2) internal minimum margin requirements were not correctly enforced prior to trade execution for trades in the WTI contract. These issues impacted hundreds of customer accounts that held long QM or WTI futures positions into settlement, and those customers experienced trading losses on April 20, 2020, initially determined by Interactive Brokers to exceed $82.57 million. 

The order recognizes Interactive Brokers’ substantial cooperation and systems remediation in the form of a reduced civil monetary penalty. 

The Division of Enforcement staff members responsible for this matter are Danielle Karst, Julia Colarusso, Dmitriy Vilenskiy, Christine Ryall, and Paul G. Hayeck.

CFTC Imposes A $1.25 Million Penalty against Kraken for Offering Illegal Off-Exchange Digital Asset Trading and Failing to Register as Required

The Commodity Futures Trading Commission issued an order filing and settling charges against respondent Payward Ventures, Inc. d/b/a Kraken (Kraken) for illegally offering margined retail commodity transactions in digital assets, including Bitcoin, and failing to register as a futures commission merchant (FCM). Kraken, founded in 2011, is one of the largest digital asset exchanges in the U.S.

The order requires Kraken to pay a $1.25 million civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act (CEA), as charged.

“This action is part of the CFTC’s broader effort to protect U.S. customers,” said Acting Director of Enforcement Vincent McGonagle. “Margined, leveraged or financed digital asset trading offered to retail U.S. customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations.”

Case Background

The CFTC’s order finds that from approximately June 2020 to July 2021, Kraken offered margined retail commodity transactions in digital assets to U.S. customers who were not eligible contract participants. According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margin for the duration of a customer’s open margined position. 

Where a customer purchased an asset using margin, Kraken supplied the digital asset or national currency to pay the seller for the asset. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days. Customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated. Kraken could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur.

These transactions were unlawful because they were required to take place on a designated contract market and did not. Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken illegally operated as an unregistered FCM.

The Division of Enforcement staff responsible for this action are Daniel Jordan, Rishi Gupta, Erica Bodin, and Rick Glaser. Philip W. Raimondi of the Legal Division, Richard Mo of the Division of Data, Rachel K. Reicher of the Division of Market Oversight, and former staff member of the Division of Market Oversight, Thomas Leahy assisted in this matter.

Treasury Takes Robust Actions to Counter Ransomware

As part of the whole-of-government effort to counter ransomware, the U.S. Department of the Treasury today announced a set of actions focused on disrupting criminal networks and virtual currency exchanges responsible for laundering ransoms, encouraging improved cyber security across the private sector, and increasing incident and ransomware payment reporting to U.S. government agencies, including both Treasury and law enforcement. Treasury’s actions today advance the United States government’s broader counter-ransomware strategy, which emphasizes the need for a collaborative approach to counter ransomware attacks, including partnership between the public and private sector and close relationships with international partners.

“Ransomware and cyber-attacks are victimizing businesses large and small across America and are a direct threat to our economy. We will continue to crack down on malicious actors,” said Treasury Secretary Janet L. Yellen. “As cyber criminals use increasingly sophisticated methods and technology, we are committed to using the full range of measures, to include sanctions and regulatory tools, to disrupt, deter, and prevent ransomware attacks.”

Ransomware attacks are increasing in scale, sophistication, and frequency, victimizing governments, individuals, and private companies around the world. In 2020, ransomware payments reached over $400 million, more than four times their level in 2019. The U.S. government estimates that these payments represent just a fraction of the economic harm caused by cyber-attacks, but they underscore the objectives of those who seek to weaponize technology for personal gain: to disrupt our economy and damage the companies, families, and individuals who depend on it for their livelihoods, savings, and futures. In addition to the millions of dollars paid in ransoms and recovery, the disruption to critical sectors, including financial services, healthcare, and energy, as well as the exposure of confidential information, can cause severe damage.

Some virtual currency exchanges are a critical element of this ecosystem, as virtual currency is the principal means of facilitating ransomware payments and associated money laundering activities. The United States has been a leader in applying its anti-money laundering/countering the financing of terrorism (AML/CFT) framework in the virtual currency area, including with the Financial Crimes Enforcement Network (FinCEN) publishing guidance regarding the application of Bank Secrecy Act rules in this area in 2013 and 2019. FinCEN has also taken important enforcement action against non-compliant virtual currency money transmitters facilitating ransomware payments, such as BTC-e in 2017 and the virtual currency mixing service Helix in 2020. In addition, the United States is taking steps to improve transparency regarding ransomware attacks and associated payments.

DESIGNATION OF FIRST VIRTUAL CURRENCY EXCHANGE FOR COMPLICIT FINANCIAL SERVICES

Today’s actions include the Department of the Treasury’s Office of Foreign Assets Control’s (OFAC) designation of SUEX OTC, S.R.O. (SUEX), a virtual currency exchange, for its part in facilitating financial transactions for ransomware actors. SUEX has facilitated transactions involving illicit proceeds from at least eight ransomware variants. Analysis of known SUEX transactions shows that over 40% of SUEX’s known transaction history is associated with illicit actors. SUEX is being designated pursuant to Executive Order 13694, as amended, for providing material support to the threat posed by criminal ransomware actors.

Virtual currency exchanges such as SUEX are critical to the profitability of ransomware attacks, which help fund additional cybercriminal activity. Treasury will continue to disrupt and hold accountable these entities to reduce the incentive for cybercriminals to continue to conduct these attacks. This action is the first sanctions designation against a virtual currency exchange and was executed with assistance from the Federal Bureau of Investigation.

While most virtual currency activity is licit, virtual currencies can be used for illicit activity through peer-to-peer exchangers, mixers, and exchanges. This includes the facilitation of sanctions evasion, ransomware schemes, and other cybercrimes. Some virtual currency exchanges are exploited by malicious actors, but others, as is the case with SUEX, facilitate illicit activities for their own illicit gains. Treasury will continue to use its authorities against malicious cyber actors in concert with other U.S. departments and agencies, as well as our foreign partners, to disrupt financial nodes tied to ransomware payments and cyber-attacks. Those in the virtual currency industry play a critical role in implementing appropriate AML/CFT and sanctions controls to prevent sanctioned persons and other illicit actors from exploiting virtual currencies to undermine U.S foreign policy and national security interests.

SANCTIONS IMPLICATIONS

As a result of today’s designation, all property and interests in property of the designated target that are subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from engaging in transactions with them. Additionally, any entities 50% or more owned by one or more designated persons are also blocked. In addition, financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. Today’s action against SUEX does not implicate a sanctions nexus to any particular Ransomware-as-a-Service (RaaS) or variant.

OFAC UPDATES ADVISORY ON POTENTIAL SANCTIONS RISKS FOR FACILITATING RANSOMWARE PAYMENTS

OFAC today also released an Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments. The Advisory emphasizes that the U.S. government continues to strongly discourage the payment of cyber ransom or extortion demands and recognizes the importance of cyber hygiene in preventing or mitigating such attacks. OFAC has also updated the Advisory to emphasize the importance of improving cybersecurity practices and reporting to, and cooperating with, appropriate U.S. government agencies in the event of a ransomware attack. Such reporting, as the Advisory notes, is essential for U.S. government agencies, including law enforcement, to understand and counter ransomware attacks and malicious cyber actors.

OFAC strongly encourages victims and related companies to report these incidents to and fully cooperate with law enforcement as soon as possible to avail themselves of OFAC’s significant mitigation related to OFAC enforcement matters and receive voluntary self-disclosure credit in the event a sanctions nexus is later determined.

ADDITIONAL AUTHORITIES

FinCEN, in addition to the guidance and enforcement activities above, has also engaged with industry, law enforcement, and others on the ransomware threat through the FinCEN Exchange public-private partnership. FinCEN held a first Exchange on ransomware in November 2020 and a second Exchange in August 2021. FinCEN is taking additional action under its authorities to collect information relating to ransomware payments.

INTERNATIONAL COOPERATION AND IMPORTANCE OF AML/CFT MEASURES FOR VIRTUAL CURRENCIES AND SERVICE PROVIDERS

Countering ransomware benefits from close collaboration with international partners. At the Group of Seven (G7) meeting in June, participants committed to working together to urgently address the escalating shared threat from criminal ransomware networks. The G7 is considering the risks surrounding ransomware, including potential impacts to the finance sector. For example, the G7 Cyber Expert Group (CEG), co-chaired by Treasury and Bank of England, met on September 1 and September 14, 2021 to discuss ransomware, which remains a grave concern given the number and breadth of ransomware attacks across industry sectors. The participants considered the effects of ransomware attacks on the financial services sector, as well as the broader economy, and explored ways to help improve overall security and resilience against malicious cyber activity.

Given the illicit finance risk that virtual assets pose, including ransomware-related money laundering, in June 2019 the Financial Action Task Force (FATF) amended its standards to require all countries to regulate and supervise virtual asset service providers (VASPs), including exchanges, and to mitigate against such risks when engaging in virtual asset transactions. Among other things, countries are expected to impose customer due diligence (CDD) requirements, and suspicious transaction reporting obligations across VASPs, which can help inhibit cybercriminals’ exploitation of virtual assets while supporting investigations into these illicit finance activities. Because profit-motivated cybercriminals must launder their misappropriated funds, AML/CFT regimens are a critical chokepoint in countering and deterring this criminal activity. This magnifies the need for all countries to effectively and expeditiously implement and enforce the FATF’s standards on virtual assets and VASPs. The United States is committed to continued work at the FATF and with other countries to implement the FATF standards, and we welcome the FATF’s ongoing work on this issue.

SEC Charges Crowdfunding Portal, Issuer, and Related Individuals for Fraudulent Offerings

The Securities and Exchange Commission today charged three individuals and one issuer with conducting a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. The SEC also charged the registered funding portal and its CEO, who placed the offerings on the portal’s platform.

According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC.  Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors. As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd’s platform. Petrescu allegedly failed to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.

“Crowdfunding offerings enable issuers to cast a wide net for potential investors, emphasizing the importance of full and honest disclosure,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers, and individuals accountable and enforce the protections in place for all investors.”

The SEC’s complaint, which was filed in the U.S. District Court for the Eastern District of Michigan, charges Shumake, Birch, Jackson, and 420 Real Estate with violating the antifraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934, and seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and officer and director bars. The complaint also charges TruCrowd and Petrescu with violating the crowdfunding rules of the Securities Act and seeks disgorgement plus pre-judgment interest, penalties, and permanent injunctions.

The SEC’s Office of Investor Education and Advocacy has issued an investor bulletin on crowdfunding and investor alerts on the red flags of investment fraud. Additional information is available at Investor.gov.

The SEC’s investigation was conducted by Jerrold H. Kohn, Dante A. Roldán, Pesach Glaser, and Kristine Rodriguez, and supervised by Ana D. Petrovic, and the litigation will be led by John Birkenheier, all of the Chicago Regional Office. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

CFTC Charges Former Hawaii Resident in Forex and Futures Ponzi Scheme

The Commodity Futures Trading Commission today filed a civil enforcement action in the U.S. District Court for the District of Hawaii against Gregory Demetrius Bryant, Jr., formerly of Hawaii, for fraudulent solicitation, misappropriation, operation of an unlawful commodity pool, and failure to register with the CFTC.

According to the complaint, Bryant fraudulently solicited approximately $426,000 from at least 35 participants for pooled futures and foreign currency (forex) trading—misappropriating at least $356,000 to pay personal expenses, including international travel, shopping, and rent, as well as at least $66,000 to make Ponzi payments to conceal and further his fraudulent scheme.

Case Background

The complaint alleges that since approximately September 2016 through at least June 2020, Bryant—while using the alias “Gregory Surrey England,” purported president of the nonexistent company “Surrey Libor Capital, LLC”—falsely guaranteed monthly futures and forex trading returns of $6,000 to $8,000 in some instances and 60 percent to 80 percent in other instances. It is further alleged that Bryant made numerous false statements to prospective and current pool participants about his trading experience, his trading success, and being registered with the National Futures Association. According to the complaint, Bryant also failed to tell pool participants that he was a convicted criminal with a history of financial problems, including three bankruptcies.

Rather than trade futures and forex as he represented in his solicitations, Bryant, as alleged, misappropriated the vast majority of pool funds for personal expenses and to make purported “returns” to pool participants. Bryant further concealed his fraud and misappropriation of pool participants’ funds by falsely telling them their accounts were “in great shape,” to expect returns or disbursements soon, and/or that his business was being impacted by the coronavirus pandemic.

In its continuing litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The CFTC acknowledges and thanks the National Futures Association, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the District of Hawaii for their assistance.

The Division of Enforcement staff members responsible for this case are Elsie Robinson, Rachel Hayes, Jenny Chapin, Jeff Le Riche, Christopher Reed, Charles Marvine, and former staff member Jo Mettenburg.

CFTC’s Commodity Pool and Forex Fraud Advisories

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Commodity Pool Fraud Advisory and the Forex Fraud Advisory, which alert customers these types of fraud and list simple ways to spot them.

The CFTC also strongly urges the public to verify a company’s or individual’s registration with the CFTC before committing funds. If unregistered, a customer should be wary of providing funds to that company or individual. A company’s or individual’s registration status can be found using NFA BASIC.

Customers and other individuals can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected paid from the Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA. 

Prepared Remarks of Gary Gensler, Chair of the Securities and Exchange Commission, Before the American Bar Association Derivatives and Futures Law Committee Virtual Mid-Year Program

Thank you for the kind introduction. It’s good to be back with the American Bar Association’s Derivatives and Futures Law Committee.

As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

When I first appeared before this committee more than a decade ago, Washington was still developing the regulatory response to the 2008 financial crisis.

That crisis had many chapters, but a form of security-based swaps — credit default swaps, particularly those used in the mortgage market — played a lead role throughout the story.

International banks were using credit default swaps to hedge their bank loan portfolios — or so they thought.

These derivatives were also at the core of the $180 billion bailout of AIG, whose near-failure accelerated the crisis.

Reliance on those same credit default swaps allowed many banks to lower regulatory capital requirements to dangerously low levels.

CDS also contributed to weak underwriting standards, particularly for asset securitizations. Investors and Wall Street allowed them to stand in for prudent credit analysis.

At the end of 2007, the CDS market had notional value of $61 trillion[1] — more than 10 times larger than it had been in 2004.[2]

Though it’s a smaller market these days, credit default swaps still play an important role. The notional value of credit default swaps is more than $8 trillion.[3]

Further, the security-based swaps market involves more than just the credit default swaps that were at the center of the 2008 crisis. It also comprises single-name and narrow-based equity swaps, some of which are labeled total return swaps.

Though we don’t yet have reliable data on the size of equity swaps and total return swaps, from time to time they too have played an important role in our capital markets.

When Congress decided to bring reforms to the overall swaps market, they assigned authority over security-based swaps to the SEC. They assigned the bulk of the swaps market —including interest-rate, energy, agricultural, and other commodity-based swaps — to our sister agency, the Commodity Futures Trading Commission, which I had the honor of chairing at the time.

In these reforms, Congress sought to address two main issues in this previously unregulated market: reducing risk and increasing transparency.

The reforms included two main ways to reduce risk. First, dealers would have to register with the SEC. In doing so, they’d need to have key back-office controls and adequate cushions against losses, through both their capital levels and customer margin.

This year, the SEC is implementing rules related to some of those authorities mandated by Congress 11 years ago.

To that end, security-based swap dealers and major security-based swap participants will begin registering with the Commission by Nov. 1. We expect that 45 to 50 entities will register as security-based swap dealers — some of which will be from the same family of firms.

The registration requirements include new counterparty protections, requirements for capital and margin, internal risk management, supervision and chief compliance officers, trade acknowledgement and confirmation, and recordkeeping and reporting procedures. These areas are focused on reducing risk in our markets.

Further, given the global nature of the security-based swaps market, international dealers have asked the SEC for the ability to comply with rules from their home jurisdictions, while still meeting U.S. regulations.

There’s a process that the Commission established several years ago by which we consider whether to grant this substituted compliance to dealers. For the Commission to grant substituted compliance, dealers’ home jurisdictions must have comparable rules of the road to ours in the U.S. and effectively supervise and enforce those rules.

To grant substituted compliance, we must ensure that those other regimes indeed produce comparable outcomes to the SEC’s own regulations. We don’t want dealers to be incentivized to move among jurisdictions so they can take advantage of regulatory arbitrage.

For the last 18 months, the agency has engaged with a number of foreign authorities and security-based swap dealers in consideration of substituted compliance.

The Commission has finalized a substituted compliance determination order with respect to key back-office controls for German firms with a prudential regulator. We expect to receive additional applications for substituted compliance from foreign jurisdictions soon.

One of the features of the SEC’s application process is that completed applications for substituted compliance are also published for notice and comment, and we value the input of commenters into this process. The Commission has noticed applications for the UK and France.

Given the coordination with applicants and foreign authorities, evaluating these substituted compliance applications is a significant undertaking. For example, our substituted compliance regime requires, for jurisdictions where substituted compliance is granted, that there be a supervisory and enforcement memorandum of understanding or other arrangement in place to facilitate information-sharing between the SEC and the relevant foreign authorities. In light of that, SEC staff are working to finalize recommendations to the Commission for substituted compliance determination orders and for the Commission to enter into MoUs expeditiously.

The other part of Dodd-Frank’s risk-reduction regime is through central clearing.

In 2016, we adopted new rules for clearinghouses. The SEC regulates three clearinghouses that voluntarily clear security-based swaps: ICE Clear Credit, ICE Clear Europe, and LCH SA.

Next, I’d like to discuss transparency. Congress determined that the security-based swap markets would benefit from more transparency, promoting efficiency of markets and lowering risks.

Post-trade, this would mean the public could see the price and volume of transactions. Pre-trade, this would mean that buyers and sellers could meet on a trading platform with transparent prices.

In 2015 and 2016, the SEC completed rules related to post-trade transparency. On Nov. 8, these new rules will go into effect, requiring these transaction data to be reported to a swap data depository, and thus available to the SEC and, under appropriate circumstances, other regulators.

Then, beginning on Feb. 14, 2022, the swap data repositories will be required to disseminate data about individual transactions to the public, including the key economic terms, price, and notional value.

Together, this information will greatly enhance post-trade transparency on a transaction-by-transaction basis.

Further, to allow the Commission and the public to see aggregate positions, Congress under Exchange Act section 10B gave us authority to mandate disclosure for positions in security-based swaps and related securities. I’ve asked staff to think about potential rules for the Commission’s consideration under this authority.

As the March collapse of the family office Archegos Capital Management showed, this may be an important reform to consider.

At the core of that story was Archegos’ use of total return swaps based on underlying stocks and significant exposure that the prime brokers had to the family office.

The limited transparency in this market, combined with potential shortcomings in market participants’ risk management, contributed to firms’ taking overly large positions and to subsequent system-wide tremors when firms started to unwind those positions.

I believe additional public disclosure of that fund’s positions, as well as public dissemination of individual transactions in total return swaps, may have helped.

This wasn’t the first time that one fund’s use of total return swaps had far-reaching implications for the capital markets, as the 1998 collapse of Long-Term Capital Management showed.[4]

In addition, the Commission has yet to finish the rules for the registration and regulation of security-based swap execution facilities (SEFs).

Back in 2011, the SEC proposed rules for security-based SEFs. I’ve asked staff to recommend how we can best harmonize security-based SEFs rules with those that have been in place under the CFTC for nine years and have been effective. To accomplish this, I would envision that we would put out another notice-and-comment rulemaking.

I believe aligning the SEC’s regime with the CFTC’s could garner many of the same benefits — bringing together buyers and sellers with transparent, pre-trade pricing and lowering risk in the marketplace.

This approach also could limit additional costs on security-based SEFs and their market participants because many of them already are subject to the CFTC’s rules.

Together, the rules going live this fall will increase transparency and reduce risk in the derivatives market. I believe they’re long overdue.

Various market events over the decades — from Long-Term Capital Management in 1998 to AIG in 2008 to Archegos in 2021 — remind us that we need to consider using all of our authority if we are to meet our obligations under the Dodd-Frank Act.

Thus, I’ve asked staff to consider ways we can continue to increase transparency and reduce risk through our unused authorities, particularly with regard to security-based SEFs and position reporting. I’ve also asked staff to make recommendations on proposed rules for the Commission’s consideration on the anti-fraud and anti-manipulation mandate from Dodd-Frank, as now included in Section 9(j) of the Exchange Act.

Before I conclude, I’d briefly like to discuss the intersection of security-based swaps and financial technology, including with respect to crypto assets. There are initiatives by a number of platforms to offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives.

Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.

If these products are security-based swaps, the other rules I’ve mentioned earlier, such as the trade reporting rules, will apply to them. Then, any offer or sale to retail participants must be registered under the Securities Act of 1933 and effected on a national securities exchange.

We’ve brought some cases involving retail offerings of security-based swaps; unfortunately, there may be more.

We will continue to use all of the tools in our enforcement toolkit to ensure that investors are protected in cases like these.

Thank you again for having me today, and I look forward to answering your questions.


[1] See Bank for International Settlements, “The credit default swap market: what a difference a decade makes” (June 2018), available at https://www.bis.org/publ/qtrpdf/r_qt1806b.htm.

[2] See CFA Institute, “Credit Default Swaps and the Credit Crisis (Digest Summary),” available at https://www.cfainstitute.org/en/research/cfa-digest/2010/05/credit-default-swaps-and-the-credit-crisis-digest-summary.

[3] See BIS Statistics Explorer, “Credit default swaps, by type of position,” available at https://stats.bis.org/statx/srs/table/d10.1?f=pdf. Cited number refers to notional amounts outstanding for the second half of 2020.

[4] See “Treasury Under Secretary Gary Gensler Testimony Before the House Committee on Banking and Financial Services” (May 6, 1999), available at https://www.treasury.gov/press-center/press-releases/Pages/rr3137.aspx.

Readout of the Meeting of the President’s Working Group on Financial Markets to Discuss Stablecoins

Secretary of the Treasury Janet L. Yellen convened the President’s Working Group on Financial Markets (PWG), joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to discuss stablecoins. In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place.

The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations for addressing any regulatory gaps. The PWG expects to issue recommendations in the coming months.

In attendance were:

  • Janet L. Yellen, Secretary of the Treasury
  • Jerome Powell, Chair, Board of Governors of the Federal Reserve System
  • Gary Gensler, Chair, Securities and Exchange Commission
  • Rostin Behnam, Acting Chairman, Commodity Futures Trading Commission
  • Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
  • Michael J. Hsu, Acting Comptroller of the Currency
  • Randal Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System
  • J. Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury

Eddie Yue: Opening remarks on regtech

Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the HKMA’s “Unlocking the Power of Regtech” event, 30 June 2021.

Introduction

  1. Good morning, good afternoon and good evening everyone. A very warm welcome to all the participants of today’s event, “Unlocking the Power of Regtech”.
  2. Just a few years ago, a virtual conference like this would have been a near impossibility. I am sure you would also remember the days of expensive international travel, but today, advances in technology have transformed our ability to communicate and share with others in every part of the world. Similarly, technology has also fundamentally revolutionised the way banking business is undertaken.

HKMA’s banking technology goals

  1. One of the HKMA’s key policy goals is to encourage the application of innovative technology in the banking industry. Our recently announced “Hong Kong Fintech 2025” strategy, which goes far beyond our Smart Banking Initiatives which were announced a few years back, is an ambitious plan for getting Hong Kong’s banking sector to embrace and adopt new technology and rise to a high level of sophistication.
  2. And within that Fintech journey that we are promoting, Regtech constitutes an integral and important driver within our strategy. On that, we have developed a vision that by 2025, Hong Kong will become a leading hub for developing Regtech solutions and cultivating Regtech talents. My colleague Arthur first presented this vision at the Hong Kong Fintech Week last November. On that occasion, we also announced a series of activities to be launched these two years in pursuit of the vision. And today’s event is one of the many activities that we have planned for this year, 2021.
  3. In practical terms, how should we go about bringing our Regtech vision into reality? We do recognise that we are starting from a position in which many banking practitioners remain quite unclear about the concept of Regtech. They may be uncertain about what values Regtech might bring, or exactly how they should leverage on Regtech in order to bring about measurable benefits. Here, we see four essential actions that are needed to transform bank attitudes and practices towards Regtech.

Four actions towards Regtech 2025

  1. The first action is that we at the HKMA must understand the Regtech landscape evolution in Hong Kong. It’s no good launching initiatives that are out of touch with what’s actually happening on the ground. We need to be able to map our progress towards Regtech 2025, and understand where our banks and other ecosystem partners are at in that journey.
  2. Our White Paper on Regtech published in November last year provided a very good starting point, supplemented by the Regtech Adoption Index that we have just launched recently. These have shown that most banks here are already using at least some form of Regtech in their operations, most commonly in preventing and detecting financial crimes. But they are using Regtech much less in their risk management and regulatory compliance activities, despite the many advantages that doing so could bring for them.
  3. More generally, banks currently have little engagement with the wider Regtech ecosystem. We found that only 16% of banks are currently taking part in associations and industry groups and only 33% of banks are partnering with Regtech firms. So this is an area that definitely needs more work.
  4. Our second action is to raise Regtech awareness among banks – in particular their awareness of the benefitsapplications and solutions associated with Regtech.
  5. Our Regtech Adoption Index told us that a massive 86% of banks consider one of the top public sector activities in this space should be to enhance the engagement between the banking sector and the Regtech ecosystem.
  6. And this is where today’s virtual event comes in! It brings together banks, regulators, Regtech providers, industry associations, and representatives from other parts of the Regtech ecosystem. We see this as a perfect opportunity for banks to learn more about the potential benefits of Regtech for their own operations and also for their customers.
  7. As part of the efforts to raise awareness, the HKMA has also been publishing a series of Regtech Watch newsletters since November 2019. This series of articles outlines the benefits of Regtech through providing high-level sample use cases for areas like Cyber Risk, Credit Risk, AML/CFT, and also Conduct Management.
  8. Building on the Regtech Watch, we are launching a new series called “Regtech Adoption Practice Guides”. This provides more practical implementation guidance when you use Regtech. We also plan to create a centralised Regtech knowledge hub as a platform for sharing Regtech information and content. We do hope that all these initiatives taken together will allow banks to become much more familiar with Regtech and also help them manage the Regtech adoption process.
  9. The third action we are taking is to encourage new Regtech solutions. It’s one thing to help banks become willing and ready to embrace Regtech. But they will only do this if there are fit-for-purpose Regtech solutions to enhance the way that they manage their businesses. This requires commitment from Regtech companies and financial institutions, and also support from the regulators and Government.
  10. One way to encourage new solutions and innovation is through offering incentives and organising competitions to resolve real-life pain points. In March this year the HKMA launched the Global Regtech Challenge. This competition motivated 86 global and local Regtech firms to come up with possible Regtech solutions for four specific pain points faced by banks in Hong Kong in the areas of Governance, Risk and Compliance; Conduct and Customer Protection; Customer Data Privacy; and also Stress Testing. Later today we will announce the winners from this Challenge, and the audience will hear more about how the innovative solutions can benefit banks in Hong Kong.
  11. Working alongside us is the Financial Services and the Treasury Bureau. This January, the Bureau launched a Fintech Proof-of-Concept Subsidy Scheme. This scheme provides financial incentives to banks to transform their processes through the use of innovative Regtech solutions. Regtech firms will also benefit as they will have more opportunities to showcase and validate their solutions and gain experience in the Hong Kong market.
  12. In addition to offering incentives and opportunities for developing innovative use cases, I would also like to highlight several key infrastructure developments that will make launching Regtech solutions easier.
  13. One example of these is that the HKMA is developing the CDI, the Commercial Data Interchange, that will allow SMEs to grant financial institutions access to their data at different commercial establishments, of course with their consent. These will include e-commerce platforms and utilities companies. With more alternative data available to financial institutions, SMEs will stand a better chance of obtaining bank financing and also other customised services that will be made possible by the use of advanced data analytics.
  14. I should also mention the HKMA’s collaboration with the Government on the “iAM Smart” platform, which is a one-stop personalised digital services platform available free of charge for everyone in Hong Kong. Financial institutions can now leverage iAM Smart to provide customers with Regtech services such as remote onboarding and log-in authentication. The HKMA is now exploring a corporate version of iAM Smart, which will offer another important infrastructure to support Regtech development.
  15. Finally, the fourth action that the HKMA will pursue is to expand the Regtech ecosystem, including in particular the nurturing of talents.
  16. We are working on a Regtech skills framework to incorporate Regtech skillsets into a package that banks can adopt in ensuring that their staff are properly equipped for the Regtech journey. We will also translate this into an Enhanced Competency Framework module to encourage current and aspiring practitioners to get qualified and recognised for this area of work. This will hopefully generate momentum among banks in upskilling their banking practitioners to prepare for the Regtech evolution ahead.
  17. In addition, we will continue to look for ways to enhance interaction within the ecosystem. The HKMA will organise events like today’s conference to bring together partners in the ecosystem and to foster co-operation. We will also work closely with financial institutions and the tech community, whether they are in Hong Kong or elsewhere, to ensure that new Regtech initiative is widely publicised and actively participated.

Summary

  1. So there we have it – four actions to realise the Regtech 2025 vision: Understand the Regtech landscape; raise the Regtech awareness; encourage Regtech solutions; and expand the Regtech ecosystem.
  2. Everyone here has a part to play in this. I warmly invite you to reflect on what you can offer, and what is on offer for you. I trust that everyone here today will make good use of our networking lounge and virtual booths to connect and exchange ideas and insights. And I believe that the future of Regtech in Hong Kong is very bright, and there are opportunities for everyone.
  3. Thank you for joining us on our Regtech journey. Before I finish, let me take this opportunity to express my heartfelt thanks to so many distinguished speakers who have taken time out of their respective busy schedule to contribute towards the discussion sessions today. I should of course also thank everyone of you participating in this event from around the world. I’m confident that the event will deliver rich rewards for all of us. Thank you very much.

Consumer warning on Binance Markets Limited and the Binance Group

Binance Markets Limited is not permitted to undertake any regulated activity in the UK. This firm is part of a wider Group (Binance Group).

Due to the imposition of requirements by the FCA, Binance Markets Limited is not currently permitted to undertake any regulated activities without the prior written consent of the FCA.

No other entity in the Binance Group holds any form of UK authorisation, registration or licence to conduct regulated activity in the UK.

The Binance Group appear to be offering UK customers a range of products and services via a website, Binance.com.

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