The Federal Spoofing Conviction: 8 Things You Should Know

On Tuesday, October 3 a jury convicted Michael Coscia of six counts of commodities fraud and six counts of “spoofing” commodities markets. This ruling has sweeping ramifications for market participants, including traders and hedgers.

Mr. Coscia, of Panther Energy Trading, was accused of entering large orders of futures that he did not intend to execute, in order to lure other market participants into the market and profit on smaller, often opposite, transactions. This activity occurred in 2011. Spoofing is illegal since the Dodd-Frank Act went into effect and was regulated as market abuse in some markets long before Dodd-Frank legislation.

These are eight things market participants should know:

  1. This is the first criminal prosecution related to spoofing the markets. It comes with the potential of $1MM in fines and 10 years in jail for each incident. Sentencing will occur in 2016.
  2. Mr. Coscia’s defense included statements that he intended to execute each and every order placed and only cancelled these orders when the risk profile of the transaction changed.
  3. The defense also claimed that no one was harmed if found fraudulent. They contested that other market participants, such as hedge funds, are sophisticated and understand market risks. Rebuttal included that less sophisticated investors and commercial hedgers can also be caught in the wake of this type of trading activity.
  4. It is largely believed the act of entering and cancelling transactions is a common trading practice to facilitate price discovery and gauge market liquidity. There is a fine line to be monitored.
  5. This verdict sets new and narrower precedent and definition of spoofing. It demonstrates what lines of defense Regulators and Department of Justice will deem inadequate. Appeal is yet to occur.
  6. Common belief in compliance circles is that the ruling may ignite regulators to enact on more assertive pursuit. It also may curtail trading activity and impact liquidity and market prices.
  7. The CME and ICE have market surveillance in place to identify possible spoofing violations and have investigated, warned and in few occasions sanctioned market participants.
  8. All market participants, including commercial hedgers, will need to systematically self-monitor any transaction activity that can be perceived as spoofing.

Though this case was framed by the media as an activity associated with High Frequency and Algorithmic Trading, not honoring bids and offers has long been a violation of open-outcry trading. In fact, the London trader who is accused of spoofing that may have contributed to the flash crash of 2011 was using manual order entries. Regulations against spoofing are also not limited to futures markets. Rules exist in physical commodity, bonds, currency and equity markets.

Some organizations are taking action to protect itself from potential regulatory violation.

They are strengthening oversight with new compliance policies, training programs, mapping rules and regulations to transaction lifecycle activities and implementing algorithms to detect potential market manipulation violations to self-police, document and discipline.

Unfortunately, many others are still latently being reactive to regulators data requests and investigations; exposing their organizations to high investigation costs and potentially large fines and loss of trading privileges.

For more information about this case read:

For more information about Spoofing read my blog:

For help improving your organization’s approach to regulatory compliance, contact me at info@pivotalriskadvisors.com.


Please share your insights and questions. And, if you like what you have read please “like” this blog, follow me and share with your colleagues and social media.


Sid Jacobson works with organizations to improve their risk management and compliance capabilities. With over 25 years of experience driving change and growth for companies engaged in energy and derivatives markets, Sid is known for strategic visioning complemented with a successful track record implementing improved commodity strategies, commercial operations, risk management and regulatory compliance.

Most recently, Sid has helped companies improve their compliance policies and governance structures, transaction lifecycle processes and implement trade surveillance algorithms and case management tools.

Sid is the founder of Pivotal Risk Advisors.

8 Things You Should Know About Margining Uncleared Swaps

Commercial entities, as well as, financial institutions will be impacted by new margin requirements for uncleared swaps. Most will fare better than expected. There are some facts organizations that transact in Swaps should know.

  1. The FDIC and the Office of the Comptroller of Currency approved final margin requirements for uncleared swaps on Thursday October 22nd.
  2. Uncleared Swaps are bilateral Swap transactions between two counterparties that are not margined through third-party central clearing houses, such as the ICE or CME.
  3. Rules are proposed to be phased-in over four years beginning September 2016, as per a prioritization calendar. There will be no retroactive requirements.
  4. The final rule establishes the minimum amount of initial and variation margin that the covered swap entity must exchange with counterparties. Approximately 30% more collateral will be required for uncleared swap transactions, than cleared swaps.
  5. Final rules ease inter-affiliate margining requirements. They require a “covered swaps entity” to collect margin from the affiliate at the outset of a transaction. Both entities were required to post collateral in previous drafts.
  6. Commercial entities, and small banks, will be exempt from clearing when transacting swaps to hedge commercial activity. Exemption does not mean financial institutions will not require collateral. Banks still need to manage their counterparty credit exposures.
  7. A broader list of acceptable collateral is proposed in the final rules than in earlier drafts.
  8. The SEC and CFTC still need to finalize their rules. These rules may be different than FDIC rules. They were consulted on FDIC rules.

The 2010 Dodd-Frank Act requires that all swap transactions are cleared through a central clearing house to reduce systematic risks stemming from default. In theory, clearinghouses provide financial assurance by collecting standardized collateral from all cleared transactions. Many transactions are still contracted bilaterally between two counterparties and some are too complex for common clearing. 75% of Treasury Swaps and between 40-60% of other asset classes are currently cleared.

To encourage clearing and ensure capital adequacy, regulators are required by the Dodd-Frank Act to create collateralization rules for uncleared swaps. Rules for margining uncleared swaps have been under debate for some time due to the many issues such as complexity of transactions, intercompany transactions, regulatory jurisdiction by multiple regulators and global regulatory harmonization. This final rule is good progress, even if not the best answer.

Given the SEC and CFTC are yet to finalize rules, FDIC rules should act as a template, but not a final for commercial end-users of derivatives. Data retention and reporting rules are still essential.

For more information see FDIC Press Release and Links.

Please share your thoughts in the comments section. And, if you like what you have read please “like” this blog, follow me and share with your colleagues and through social media.

Sid Jacobson works with organizations to improve their risk management and compliance capabilities. With over 25 years of experience driving change and growth for companies engaged in energy and derivatives markets, Sid is known for strategic visioning complemented with a successful track record implementing improved commodity strategies, commercial operations, risk management and regulatory compliance. Sid is the founder of Pivotal Risk Advisors.

Will the revised Dodd-Frank Swap Reporting rules cost you?

Swap Reporting is about to get easier!

On August 19th, 2015 the CFTC proposed sweeping revisions to the Commodity Exchange Act Section 21, Part 45 on how “cleared swaps” will be reported.

Over three years I moderated an energy industry roundtable focused on defining the impacts of Dodd-Frank Act regulations. Of the 25 organizations who participated, a reoccurring debate was related to uncertainty with the obligation of Continuation Reporting once a swap is cleared through a Designated Clearing Organization (DCO). No consensus was reached. Some moved aggressively with automation and attempts at regular reconciliation. Others plodded slowly relying on ad-hoc or delegated reporting. Once a Swap cleared, most organizations assumed the DCO was reporting on their behalf. Yet, many still felt uneasy and exposed.

Proposed Part 45 revisions aim to improve data integrity, reduce reporting redundancies and create a more efficient reporting process. As a result, it also clarifies confusion related to Continuation Reporting.

The greatest impact to market participant’s current processes, (and data systems), is that the proposed rule revisions will now bifurcate a swap cleared with a DCO into an “Original Swap” and two offsetting “Clearing Swaps”. The simplest explanation for this rule change is that in the current Swap clearing transaction lifecycle, the DCO offsets the bilateral Swap with new swaps between the DCO and each transacting party. When this occurs, the bilateral Swap is extinguished and one transaction now becomes three.

The proposed rules more accurately reflect how DCOs clear a swap. However, the rule revisions will also impact the socialized practices of market participants. Despite knowledge of how a swap is cleared, few commonly “think of” a cleared swap as two offsetting transactions and many CTRM systems represent these trades as a single or two manually entered transactions.

Organizations that made investments in compliance reporting may find themselves with a sunk cost and need for reinvestment. For the slower movers it should provide relief and a fresh start to refine compliance processes.

To summarize the proposed rule changes:

  • The CFTC will introduce two new defined terms.
    1. Original Swap – the swap that is accepted for clearing by the DCO whether executed bilaterally, through a Swaps Execution Facility (SEF) or Designated Contract Market (DCM).
    2. Clearing Swap – the swap(s) created by the DCO, where the DCO becomes the counterparty to the swap and the Original Swap is offset. It also includes any Swaps executed directly with the DCO for clearing.
  • The DCO is now the reporting party for the Clearing Swap. As a result the DCO will be accountable for reporting Creation and Continuation Data.
  • The SEF, DCM or Reporting party will be responsible for reporting Primary Economic Terms (PET) of the Original Swap. Confirmation Data reporting will be eliminated if the Original Swap is accepted for clearing.
  • The SEF or DCM will be responsible for designating which SDR the Original Swap is reported. If bilateral, the Reporting Party will choose the Swap Data Repository (SDR).
  • The DCO will be required to report all data for a particular Clearing Swap to a single SDR. In a CFTC example, the SDR for the Original and Clearing Swap is the same.
  • The DCO will be responsible for reporting termination of the Original Swap and Continuation Data for the Clearing Swap; alleviating years of reporting consternation by market participants.
  • More emphasis will be placed on assuring that the Legal Entity Identifiers (LEI) and Unique Swap Identifier (USI) are reported so that the SDR can better track reporting through the lifecycle of a transaction and eliminate inadvertent duplication.
  • Swap Dealers and Major Swap Participants will be relieved by the DCO for reporting daily valuation of Cleared Swaps.
  • Clarity over USI creation by the DCO and additional PET fields are also defined in detail.

The rule changes should be a net benefit to market participants by greatly reducing the rigor of daily reporting requirements and inconsistencies around continuation reporting. However, the near term impact will require new investment into systems and changes in policies and procedures. Despite the 60-day comment period, (and the fact we have seen these comment periods slip sometimes for years (e.g. position limits, margining)); there is high probability that after a few sharpened pencils the rules will be adopted. It is time to mobilize.

Which leads to a new question, how will these additional transactions impact Swap Dealer and Major Swap Participant Thresholds?


As a special gift to readers, I drafted a transaction lifecycle map that illustrates the decision and impact points of these proposed changes through the lifecycle of a transaction. If you are interested in receiving this document, please request on the contact page.


Please also share your comments and questions, with particular interest in how you see the rules impacting your organization. Meanwhile, if you like what you have read please like this blog and repost to your social media! If you would like more updates, please sign up below! Thank you.