DCM Fined for False Statements to CFTC

A designated contract market ("DCM") settled CFTC charges for failing to disclose a volume-based payment component in a "Designated Market Maker" incentive program and for making misleading statements to the CFTC regarding the program.

In the Order, the CFTC said that the DCM offered a "fixed monthly stipend" in an incentive program designed to promote trading and liquidity on a newly launched exchange. The CFTC found that the DCM also included a "volume-based payment" to program participants, which paid certain market participants based on the number of trades they executed on the exchange. The agency found that this additional payment component was not disclosed to the CFTC or to the public.

The CFTC found that the DCM "explicitly denied the existence of a volume-based incentive" in submissions to the CFTC and made misleading statements to the Commission during an agency Rule Enforcement Review, despite the evidence to the contrary. Further, the CFTC found that the DCM did not disclose the volume-based payments to its internal compliance team or regulatory service provider, nor did it publish it on its website for market participants and prospective participants. The agency also found that the DCM failed to properly establish or enforce the volume-based payment component of its program. 

As a result, the CFTC determined that the DCM violated CEA Section 5(d)(2) ("Designation of boards of trade as contract markets"), Section 5(d)(7) ("Availability of general information"), Section 5(d)(12) ("Protection of markets and market participants") and Section 6(c)(2) ("Prohibition regarding false reporting and manipulation"). Furthermore, the DCM violated CFTC Regulation 38.150 ("Core Principle 2"), Regulation 38.154(c) ("Documentation of actions differing from regulatory service provider recommendations"), Regulation 38.400 ("Core Principle 7"), Regulation 38.401(b) ("Communication with the Commission"), Regulation 38.650 ("Core Principle 12"), Regulation 38.651 ("Protection of markets and market participants"), Regulation 38.4(b) ("DCM rule submission requirements") and Regulation 40.6 ("Self-certification of rules").

To settle the charges, the DCM agreed to (i) cease and desist from further violations, (ii) pay a civil monetary penalty of $22,000,000, and (iii) adhere to ongoing conditions and undertakings to improve compliance.

In a dissenting statement, CFTC Commissioner Caroline D. Pham, argued that this "action is about beating a dead market that de-registered with the CFTC in 2020." She said that the CFTC's actions could create confusion and discourage exchanges from using incentive programs that promote market liquidity.