The Situation: As a regulator of the global derivatives markets, the U.S. Commodity Futures Trading Commission ("CFTC") has powers to investigate violations of its rules and the Commodity Exchange Act ("CEA") occurring both within the United States and overseas.
The Result: A MENA-based non-U.S. person trading derivatives such as futures and options on certain exchanges in the UAE, or internationally, may be liable for breaches of the CEA and CFTC regulations, even if that non-U.S. person has no direct link to the United States. This may also be true with "over-the-counter" transactions in swaps or physical commodities that are conducted with a U.S. person or that otherwise have a connection to the United States.
Looking Ahead: MENA commodities and derivatives traders should understand the potential extra-territorial reach of the CFTC and put in place compliance processes that: (i) effectively mitigate against breaches of the CEA and CFTC regulations; and (ii) place the organization in the best possible position to respond to an enforcement investigation by the CFTC (or other U.S. law enforcement agencies such as the Department of Justice ("DOJ")) and reduce any potential penalties.
Established in 1974, the CFTC was originally responsible for overseeing and regulating the commodity futures and options markets in the United States. Initially, its primary focus was to regulate trading of futures related to agricultural commodities. Over time, the CFTC has evolved to become the U.S. federal regulator of the global derivatives markets, with extensive extra-territorial reach. The CFTC now regulates almost all types of derivatives, as well as the trading of the underlying assets to which those derivatives relate. Its jurisdiction has grown to encompass non-U.S. futures exchanges that permit access to trading by U.S. persons and—since 2010—swap transactions that have a direct and significant connection with activities in, or an effect on, U.S. commerce. The CFTC also has expansive enforcement powers with respect to trading of physical commodities where it is empowered to pursue cases for alleged market manipulation or other potential wrongdoing.
The CFTC has expansive authority to make rules, require reporting of market information, and bring actions either administratively or in U.S. courts for alleged violations of the CEA and associated regulations. As such, the CFTC maintains a robust enforcement program that takes action against derivatives and commodities market participants for fraud, market manipulation, disruptive trading, and violations of its regulatory requirements. The CFTC often acts in parallel with the DOJ, which has authority to prosecute criminal violations of the CEA and other related laws, including the U.S. Foreign Corrupt Practices Act ("FCPA") and the U.S. Bank Secrecy Act ("BSA"). As the CFTC Division of Enforcement's 2020 Annual Report highlighted, between 2017 and 2020, the CFTC and DOJ brought 46 cases in parallel. Joint enforcement action by the CFTC and DOJ is expected to continue and, if anything, increase significantly in the years ahead.
Given the international expansion of U.S. companies and the growing interdependency of global economies—particularly as a result of the increasing digitization of the international markets—the CFTC's outlook has in turn become more global. The CFTC now seeks to more regularly enforce U.S. laws against U.S. and non-U.S. persons for potentially problematic trading in overseas markets, including when that trading is alleged to have had an adverse impact on U.S. persons and markets. This reach potentially includes non-U.S. persons operating in the UAE and wider MENA region.
How Can the CFTC Exercise its Powers Over Non-U.S. Persons in the MENA Region?
There are a number of ways in which the CFTC may exercise its powers over non-U.S. persons operating in the MENA region. For example, the recently established ICE Futures Abu Dhabi ("IFAD") exchange and the Dubai Mercantile Exchange ("DME") are registered with the CFTC as foreign boards of trade ("FBOTs"). This registration enables U.S. persons to have "direct access" to trade on those markets. In turn, FBOTs are required to:
Accordingly, the CFTC has access to significant information about activity on FBOTs and to even more detailed information about transactions that involve U.S. persons. The CFTC is therefore well positioned to evaluate activity on FBOTs for potential violations of the CEA and CFTC regulations.
Non‑U.S. persons who also trade on FBOTs might therefore also come within the scope of a CFTC investigation into such violations, which might possibly be conducted alongside the DOJ. The CFTC and DOJ also have the ability to access information and pursue potential wrongdoing pursuant to relevant bilateral and multilateral memoranda of understanding with the Dubai Financial Services Authority and the Financial Services Regulatory Authority of Abu Dhabi, again potentially placing non-U.S. persons under CFTC scrutiny.
The CFTC also may have jurisdiction with respect to certain over-the-counter transactions, such as swaps and physical commodities transactions. A transaction in a physical commodity that has some connection to "interstate commerce"—meaning a transaction between a person in a U.S. state or territory and someone anyplace outside that same state or territory—potentially falls within the CFTC's broad antifraud and antimanipulation authority under the CEA. The CFTC likewise has authority over swaps that have a direct and significant connection with activities in, or an effect on, U.S. commerce. The CFTC has been particularly active in policing these kinds of "off exchange" transactions outside the United States that it suspects have adversely affected the markets for commodities and derivatives. The CFTC and DOJ in particular have recently focused on over-the-counter transactions that involve violations of both the FCPA and the CEA on the same or similar sets of facts.
What Are the Consequences of a CFTC Investigation?
The costs and consequences of a CFTC investigation can be considerable. The CFTC is empowered to seek civil monetary penalties and injunctive relief, and it will often require remedial measures as a condition of resolving a matter. Companies and individuals can be held directly liable for CEA violations, and individuals in positions of authority can also be liable as control persons. Monetary penalties can range considerably, from a few hundred thousand U.S. dollars for minor infractions to US$1bn or more for violations that involve aggravating factors such as significant market or customer harm or misleading the agency during the course of an investigation. Companies and individuals can potentially reduce penalty amounts by self-reporting violations, cooperating during investigations, and implementing remedial measures, as stated in existing CFTC guidance (click here to access CFTC's policy statements, which provide more information on these matters).
The DOJ can also seek significant penalties in criminal proceedings for violations of the CEA or related laws.
What Should Businesses be Doing to Mitigate Enforcement Risk?
No one can predict whether or when an investigation may arise. However, designing an effective compliance program that positions your organization to reduce the likelihood of misconduct (and respond effectively to an inquiry from the CFTC or DOJ if necessary) is a crucial step in mitigating enforcement risk from the long arm of the U.S. regulators.
There are a number of important nuances that MENA businesses may wish to consider when designing and evaluating their compliance programs. These include:
In the best-case scenario, an effective compliance program can deter employee misconduct in the first place. If employee misconduct does occur, a well-designed compliance program can help a company to gather the facts and implement a response quickly. It can also increase the likelihood that misconduct is detected early, better positioning a company to consider self-disclosure, and allowing it to take advantage of the benefits available for cooperation and remediation. And in the event of an enforcement action, the design and effectiveness of a compliance program are variables that can impact the form and size of any resolution.
Jones Day has a long-standing presence in Dubai and Saudi Arabia and understands the MENA business environment exceedingly well. We also have a significant team of lawyers in the United States who are highly experienced in government investigations by the DOJ and CFTC, including several former U.S. Attorneys, a former Acting Assistant U.S. Attorney General for the DOJ's Criminal Division (which pursues commodities fraud cases), and a former Division Director of the CFTC. As the CFTC and DOJ continue to pursue actions involving non-U.S. conduct in the derivatives and commodities markets, we can partner with clients to address compliance with the CEA and CFTC regulations relevant to their businesses.
Three Key Takeaways