The Commodity Futures Trading Commission (“CFTC”) fined Interactive Brokers LLC (“Interactive Brokers”) $1,750,000 and required Interactive Brokers to pay restitution of $82,570,000 to customers for trading system failures. Interactive Brokers failed to prepare its electronic trading system for negative futures prices, even after internally acknowledging that such negative pricing could and possibly would occur. In this order, the CFTC stressed the importance of trading integrity on trading platforms. Emphasizing a registered futures commission merchant’s duty to supervise all activities relating to its business (unless conducted by associated persons, whom have their own statutory responsibilities), the CFTC reminds us that a violation of this duty to diligently supervise under 17 C.F.R. §166.3 is in itself “an independent violation for which no underlying violation is necessary.”
Interactive Brokers’ failure to enable its systems to trade negative oil futures also exposed systemic failures in its initial margin calculations. When those calculations gathered only a third of the initial margin Interactive Brokers would normally have required, Interactive Brokers fixed its coding issue within a day. Interactive Brokers self-reported to and cooperated with the CFTC’s staff, restored funds to customer accounts impacted by its failures, and “promptly implemented substantial system remediation changes”, which reduced its fine. In her concurring statement, Commissioner Stump questioned how much more promptly than the day after its systems failure Interactive Brokers could have self-reported. Pointing out that the CFTC’s Division of Enforcement’s 2017 “Updated Advisory on Self-Reporting and Full Cooperation” contains a factor requiring voluntary disclosure to the Division of Enforcement be made “within a reasonably prompt time after the company or individual becomes aware of the misconduct,” Commissioner Stump states that “it is natural” that Interactive Brokers’ first priority was determining what went wrong with its systems and fixing it on the day it occurred, and notifying the CFTC on the following day. Watching advisories and enforcement actions in the years to come will show whether Commissioner Stump’s observation about “reasonably prompt” disclosure timing comports with other commissioners’ views or the CFTC staff’s recommendations.
For more details about these CFTC enforcement actions, visit https://www.cftc.gov/LawRegulation/EnforcementActions/index.htm