Interactive Brokers: CFTC Stump questions self-reporting credit issue in settlement

Rick Steves

“Even more troubling would be to deny a self-reporting credit based on a view that in order to receive such a credit, IB had to have made a self-report before April 20.”

Interactive Brokers has settled charges brought forth by the CFTC for failing to handle its customer accounts during oil’s 2020 trip into negative pricing.

The broker, however, voluntary cover $104 million worth of its customers’ losses when prices plunged below zero for the first time ever

According to the CFTC, the broker was on notice of the possibility of negative oil futures prices, but the firm did not prepare its electronic trading system to recognize negative prices.

In an official statement, IBKR said the broker had engaged in extensive systems testing and had begun implementing necessary coding changes in advance of April 20, it was not able to fully deploy new software before crude oil futures traded in negative territory.

After April 20, 2020, IBKR promptly put in place measures to ensure that systems are prepared for similar negative-pricing of futures products going forward.

The U.S. markets regulators said on Tuesday the discount broker didn’t configure its electronic trading system to receive negative prices and calculate margin on April 20, 2020.

CFTC Commissioner Dawn Stump has agreed with the agency’s findings against Interactive Brokers LLC (IB) for failing to diligently supervise its electronic trading system’s preparedness for, and ability to handle, negative crude oil futures prices as occurred on April 20, 2020.

While agreeing that Interactive Brokers does not qualify for a self-reporting credit under the Advisory because the firm’s disclosure on April 21, 2020 was not made “prior to an imminent threat of exposure of the misconduct”, Commissioner Stump has reservations.

“However, as a matter of general application, I am troubled by the position that a self-reporting credit also should be denied because IB failed to satisfy the Advisory’s separate requirement that the disclosure be made “within a reasonably prompt time after the company becomes aware of the conduct.”

“In my view, this position reflects an unwarranted stinginess in granting credit for self-reporting, and a misguided focus with respect to achieving the Commission’s objectives under our governing statute, the Commodity Exchange Act”, she continued.

“The settlement Order in this matter states that IB “reported its system issues to the Division on or about April 21, 2020. My conclusion based on the information available to me is that this communication occurred on April 21, 2020. Yet, a self-reporting credit to IB is being denied, in part, because IB’s disclosure did not meet the “within a reasonably prompt time” requirement in the Advisory”.

What is “reasonably prompt time”?

A “reasonably prompt time” does not mean “immediately”, Commissioner Dawn Stump affirmed, adding that it is inappropriate for the Commission to suggest that IB should have diverted focus on April 20 to self-report to DOE. Self-reporting to DOE the next day was within a reasonably prompt time.

“Even more troubling would be to deny a self-reporting credit based on a view that in order to receive such a credit, IB had to have made a self-report before April 20. IB was recently aware of the potential for negative oil futures prices and knew that its trading system was not yet capable of handling such an event should it occur, and IB was in the process of updating its system when prices went negative on April 20”, she added.

Negative crude oil futures prices had never happened before and it was not guaranteed that they would happen in April 2020.

“I cannot accept that in these circumstances, IB was required to self-report before April 20 that its system could not accommodate negative crude oil prices at that time so that, if prices went negative for the first time in history, and if that occurred before IB’s remediation efforts were completed, and if its customers lost money as a result—then IB could receive a self-reporting credit if the Commission subsequently decided to bring an enforcement action against it for violating its duty of diligent supervision”.

Commissioner Stump, however, agrees that IB is not entitled to a self-reporting credit in this case. But the reason for “such a fuss” lies in the Advisory itself.

“I wholeheartedly support the Advisory’s stated objectives of transparency in granting credit for self-reporting and utilizing such credits to increase voluntary compliance with the law. But I believe we undermine these very objectives when self-reporting credit hinges on a company calling DOE rather than the appropriate oversight division.

“And I do not believe that denying self-reporting credit to a company for failing to report a gap in its system that is not presently a problem but that might become a problem if certain events happen in the future—and that is already being remediated by the company—does anything to further our objective of increasing voluntary compliance with the law.

The CFTC specifically credited IBKR for its substantial cooperation in this matter and the broker’s proactive compensation of affected customers, exceeding the firm’s restitution obligation.

The broker voluntary covered $104 million worth of its customers’ losses when prices plunged below zero for the first time ever.

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