The Commodity Futures Trading Commission (CFTC) revealed that it issued a number of orders on Monday against six large financial institutions - HSBC Bank USA, N.A., Société Générale International Limited, The Northern Trust Company, NatWest Markets Plc, The Bank of New York Mellon, and PNC Bank, National Association for reporting failures.

In addition to being charged with reporting failures, Société Générale and The Northern Trust Company were also charged by the commodities regulator with failing to supervise in connection with the reporting failures.

On Monday, HSBC was also charged by the CFTC with violating swap-dealer    Risk Management  Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent. One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, most brokers employ a risk management department tasked with analyzing the data and flow of the broker to mitigate the firm’s exposure to financial markets moves. Why Risk Management is a Fixture Among BrokersTraditionally the company is employing a risk management team that is monitoring the exposure of the brokerage and the performance of select clients which it deems risky for the business. Common financial risks also come in the form of high inflation, volatility across capital markets, recession, bankruptcy, and others.As a countermeasure to these issues, brokers have looked to minimize and control the exposure of investment to such risks.In the modern hybrid mode of operation, brokers are sending out the flows from the most profitable clients to liquidity providers and internalize the flows from customers.This is deemed less risky and are likely to incur losses on their positions.This in turn allowing the broker to increase its revenue capture. Several software solutions exist to assist brokers to manage risk more efficiently and as of 2018, most connectivity/bridge providers are integrating a risk-management module into their offerings. This aspect of running a brokerage is also one of the most crucial ones when it comes to employing the right kind of talent. Read this Term regulations. This is the first time the Commission has brought such an action, it said in the statement released on Tuesday.

Commenting on the orders, CFTC Director of Enforcement James McDonald said: “Accurate reporting is essential to effective fulfillment of the regulatory functions of the CFTC, including meaningful surveillance and enforcement programs."

“As these actions show, the CFTC will continue to vigorously enforce reporting requirements. The CFTC will also take appropriate action where reporting failures are occurring as a result of serious supervisory failures.”

Enforcement action against HSBC

On Monday, the commodities regulator filed and settled charges against HSBC Bank for failing to have sufficient risk management systems for its swap activities. The authority also found that the company failed to properly report swap data in certain categories, for certain swap transactions, to a swap data repository.

Because of this, the US watchdog has imposed a civil monetary penalty against HSBC of $650,000, among other sanctions. According to the statement, this penalty was reduced because the bank cooperated with the regulator and has already taken remediation steps.

“The Commission’s swap-dealer risk management rules are designed to monitor and regulate the systemic risk endemic to the    Swaps  Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of SwapsCommon types of swaps include interest rate swaps, commodity swaps, currency swaps, and debt-equity swaps.Interest rate swaps are used to hedge against interest rate risk and involve cash flows exchanged between two parties that are comprised of a notional principal amount. A financial intermediary or a bank is used for swaps but these are dependent upon both party’s comparative advantage.Commodity swaps use the exchange of a floating commodity price, with a predetermined set price for a specific period while crude oil is the most heavily swapped commodity. Meanwhile, currency swaps involve the exchange of principal payments of debt and interest that are denominated in different currencies. An example of a currency swap would be when the U.S. Federal Reserve conducted a swap with central banks of Europe during the 2010 European financial crisis.Used as a way to reallocate capital structure or refinance debt, a debt-equity swap deals with the exchange of debt for equity. For instance, a public traded company would issue bonds for stocks. Swaps are not exchange-traded instruments but rather customized contracts traded in an over-the-counter market between parties. While the swaps industry is primarily used by firms and financial institutions, retail traders have been known to participate although there is always a risk of counterparty’s defaulting on agreed-upon swaps. Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of SwapsCommon types of swaps include interest rate swaps, commodity swaps, currency swaps, and debt-equity swaps.Interest rate swaps are used to hedge against interest rate risk and involve cash flows exchanged between two parties that are comprised of a notional principal amount. A financial intermediary or a bank is used for swaps but these are dependent upon both party’s comparative advantage.Commodity swaps use the exchange of a floating commodity price, with a predetermined set price for a specific period while crude oil is the most heavily swapped commodity. Meanwhile, currency swaps involve the exchange of principal payments of debt and interest that are denominated in different currencies. An example of a currency swap would be when the U.S. Federal Reserve conducted a swap with central banks of Europe during the 2010 European financial crisis.Used as a way to reallocate capital structure or refinance debt, a debt-equity swap deals with the exchange of debt for equity. For instance, a public traded company would issue bonds for stocks. Swaps are not exchange-traded instruments but rather customized contracts traded in an over-the-counter market between parties. While the swaps industry is primarily used by firms and financial institutions, retail traders have been known to participate although there is always a risk of counterparty’s defaulting on agreed-upon swaps. Read this Term market. At the heart of these regulations is the requirement that swap dealers separately consider the risks unique to swaps as an asset class, separate from their other businesses,” added McDonald.

“This is the first action the CFTC has brought regarding violations of these particular swap-dealer risk management regulations, and the Commission will continue to focus on enforcing these critical requirements.”

CFTC slaps firms with civil monetary penalties

The other companies which the regulator has both filed and settled charges against have also incurred civil monetary penalties. Namely, Société Générale was slapped with a $2.5 million penalty and has also been ordered to continue its remediation efforts in relation to swap data reporting and updating the CFTC on its efforts and compliance.

The Northern Trust Company, a provisionally registered swap dealer, was also charged with numerous violations of the CEA and CFTC regulations relating to swap reporting under Parts 23, 43, and 45 of the CFTC regulations. In order to settle the charges, Northern Trust must pay a $1.0 million civil monetary penalty, among other sanctions.

Due to NatWest’s cooperation and “substantial” remediation, the watchdog has imposed an $850,000 civil monetary penalty, amongst other sanctions. The charges were placed against the firm for failing to comply with its obligations to submit accurate large trader reports (LTRs) for physical commodity swap positions to the CFTC.

BNY Mellon fined $750,000

The Bank of New York Mellon, a provisionally registered swap dealer, was also found to have made numerous violations of the CEA and CFTC regulations relating to swap reporting. Because of this, the world’s largest custody bank and asset servicing company has been ordered to pay a $750,000 civil monetary penalty.

The last firm to be charged is PNC, whose reporting failures were in violation of the reporting requirements of Parts 20, 43, and 45 of the CFTC regulations, the statement said. The regulator’s order imposes a $300,000 civil monetary penalty on PNC, among other sanctions, for these reporting violations.

You can read more about the orders here.