Nasdaq Futures, Inc. Slapped with $22 Million Penalty Amid Concerns Over CFTC's Regulatory Approach

The Commodity Futures Trading Commission (CFTC) has ordered Nasdaq Futures, Inc. to pay a $22 million civil monetary penalty. The penalty stems from the company's failure to adhere to core regulatory principles, its lack of full disclosure regarding incentive programs, and for providing false and misleading information to the CFTC.

The CFTC's order details that from July 2015 to July 2018, Nasdaq Futures, Inc. operated as a designated contract market (DCM) with a focus on energy commodity futures contracts. During this period, Nasdaq Futures implemented an incentive program for traders, known as the "Designated Market Maker" (DMM) program. Publicly, the program was disclosed as offering a fixed monthly stipend to market makers, but significant details were withheld.

Nasdaq Futures also provided additional payments to select DMM participants based on the volume of contracts they traded—a key component that was never disclosed as required by the Commodity Exchange Act (CEA) and related regulations. The CFTC's investigation found that Nasdaq Futures’ rule submissions not only omitted this volume-based component but also included outright denials of its existence.

When questioned by CFTC staff, Nasdaq Futures employees repeatedly asserted that no volume-based incentives were part of the DMM program—a claim the company reasonably should have known was false and misleading.

Regulatory Breach and Misleading Conduct

This lack of disclosure led to significant breaches of several core principles governing DCMs under the CEA. Additionally, Nasdaq Futures ignored recommendations from its regulatory service provider to investigate certain trading activities of DMM program participants or document why such actions were not taken, further compounding its regulatory violations.

CFTC Director of Enforcement Ian McGinley emphasized the gravity of the situation, stating, "The CFTC’s oversight regime depends upon CFTC-designated exchanges providing the CFTC and market participants accurate information. Nasdaq Futures, Inc.’s conduct here represents significant violations of both its duty to provide such information and several statutory Core Principles applicable to CFTC-designated exchanges."

A Dissenting Voice

However, the settlement has not been without controversy. Commissioner Caroline D. Pham issued a dissenting statement, criticizing the CFTC's approach and expressing concern about the broader implications for market regulation. Pham highlighted that the CFTC's order targets a market that has been defunct since 2020, arguing that "exchange incentive programs are commonplace in both securities and derivatives markets" and warning that the CFTC's "anti-competitive speaking order will create confusion and discourage exchanges from maintaining liquid, efficient markets."

Pham also took issue with what she described as the CFTC's increasingly aggressive stance towards legal and compliance professionals. "This settlement continues the CFTC’s campaign against highly respected legal and compliance professionals by slapping on allegations of making false statements even when information was provided honestly to the best of their knowledge in good faith and without intent to defraud," she stated.

Finally, Pham criticized the CFTC for what she sees as a departure from its traditional regulatory framework, noting, "This settlement order is a new prescriptive approach to the CFTC’s longstanding Core Principles regulatory framework for futures exchanges. You can’t play by the rules when the game keeps changing."

The hefty $22 million penalty imposed on Nasdaq Futures serves as a clear message from the CFTC about the importance of transparency and compliance with regulatory obligations. However, Commissioner Pham's dissent highlights the tension within the CFTC regarding the balance between regulation and market efficiency. As the CFTC continues to oversee market practices, this case underscores the need for regulated entities to navigate a complex and evolving regulatory landscape with caution.

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