Statement of Commissioner Kristin N. Johnson Regarding The Importance of Futures Commission Merchants’ Compliance and The Need to Heighten the Consequences of Failing to Comply
December 20, 2022
Today, the Commodity Futures Trading Commission (Commission or CFTC) issued a complaint and settlement order involving CHS Hedging, LLC (CHS), a registered futures commission merchant (FCM). The order details many egregious violations, including CHS’s failure to comply with basic recordkeeping and supervisory obligations.
In the wake of the terrorist attacks on September 11th, Congress strengthened U.S. banking law. Section 5318(h) of the Bank Secrecy Act (BSA), for example, requires “financial institutions” to establish anti-money laundering (AML) programs and specifies that these programs must contain minimum standards and compliance requirements. Under the statute and our regulations, FCMs are subject to AML obligations. FCMs must implement reasonable procedures to verify the identity of any person seeking to open an account, to maintain records of the information used to verify the identity of transacting persons and to determine whether they appear on any lists of known or suspected terrorists or terrorist organizations. CHS ignored obvious red flags and failed to implement fundamental risk controls required by banking laws and Commission regulations, leading to the systemic failures outlined in the Commission's order.
Where conduct is characterized by such pervasiveness, we must aim to calibrate penalties and remedial undertakings accordingly. In instances where previous consequences have failed to effectively deliver the message, a more aggressive approach may be justified. Over the last twenty years, CHS has acquired a lengthy record of repeated violations. The Commission must begin to think carefully about additional approaches to deter this type of misconduct, particularly in contexts where the conduct is repeated in so many instances over so many years. Let’s ensure that penalties and remediation measures effectively deter repeat offenders.
I continue to be a strong proponent for strengthening rules pertaining to registered market participants. A sharp focus on these rules is especially important where intermediaries perform a central role in properly functioning derivatives markets. It is also critical to begin to think carefully about how we import these important rules and regulations in contexts where the market structure evolves away from reliance on traditional intermediaries.
As I previously noted in other market contexts, recordkeeping rules are essential to the Commission’s oversight of market participants and the integrity of the derivatives markets. CHS flouted these fundamental principles in its many failures to preserve transaction records. Preserving records enables regulators to conduct surveillance and bring enforcement actions when appropriate—reducing fraud and market manipulation, protecting investors, and ultimately engendering authentic trust in our markets, which are preeminent globally. Accordingly, I continue to promote enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for futures commission merchants and other market participants that handle customer funds.
As a sponsor of the Commission’s Market Risk Advisory Committee, I am deeply thoughtful about ensuring the Commission continues to focus on systemic risks that threaten the stability of the derivatives markets, which begins with ensuring that each market participant adheres to the established, well-tailored, fundamental rules. I commend the diligent work of our Enforcement team, including Ashley J. Burden, Joseph Patrick, Ben Sedrish, Allison V. Passman, Scott R. Williamson, and Robert Howell, for their efforts in this matter.