United States: Status Of NFA's Section 4s Reviews And Swap Dealer Examinations

Summary: The National Futures Association (NFA), the self-regulatory organization for the US derivatives industry, processes registrations as the delegee for the Commodity Futures Trading Commission (CFTC). Swap dealer applications are filed with the NFA, together with the swap dealer's policies, procedures and other documentation required to demonstrate the entity's ability to comply with swap dealer obligations under Section 4s of the Commodity Exchange Act and the CFTC's implementing regulations. The CFTC has delegated to the NFA the processing of Section 4s Submissions to determine whether they demonstrate that the applicant for registration is able to comply with the Section 4s Requirements. Swap dealers are also required to become NFA members and, as such, become subject to NFA examinations. This memorandum describes the status of the registration and examination process, as well as the NFA's new Continuous Monitoring Program.

Beginning on December 31, 2012, swap dealers began filing applications for registration with the Commodity Futures Trading Commission (CFTC). As of October 2015, 104 entities are provisionally registered as swap dealers.1 Approximately half are located in the United States; the rest are located in other jurisdictions, including Australia, Canada, the European Union (EU), Hong Kong, Japan, Mexico, Singapore and Switzerland. The CFTC has issued several "comparability determinations" in accordance with the policies and procedures set forth in its 2013 Cross-Border Guidance. 2 The comparability determinations permit non-US swap dealers in the relevant jurisdictions to comply with the applicable requirements of their home jurisdiction rather than the relevant CFTC requirements (i.e., substituted compliance). 

The National Futures Association (NFA), the self-regulatory organization for the US derivatives industry, processes registrations as the delegee for the CFTC. Swap dealer applications are filed with the NFA, together with the swap dealer's policies, procedures and other documentation (Section 4s Submissions) required to demonstrate the entity's ability to comply with swap dealer obligations under Section 4s of the Commodity Exchange Act and the CFTC's implementing regulations (Section 4s Requirements). The CFTC has delegated to the NFA the processing of Section 4s Submissions to determine whether they demonstrate that the applicant for registration is able to comply with the Section 4s Requirements. Swap dealers are also required to become NFA members and, as such, become subject to NFA examinations.

  1. Section 4s Submission Review

After a swap dealer applicant submits all required documents for the Section 4s Submission and the NFA confirms that the submission is complete, the applicant becomes a provisionally registered swap dealer. The NFA then begins a substantive review of the Section 4s Submission, which may involve an iterative process with or notifications of deficiencies to the swap dealer. The NFA coordinates with the CFTC during this process. The swap dealer may be required to submit additional information and/or revised policies and procedures. A provisional swap dealer will become fully registered when the NFA and CFTC determine that the complete Section 4s Submission demonstrates compliance with all the final Section 4s Requirements. 

To date, the NFA has completed a facial review of the Section 4s Submission for all provisionally registered swap dealers. It has also coordinated with the CFTC and completed a detailed substantive review of the chief compliance officer (CCO)-related requirements for all US swap dealers, and is in the process of conducting the CCO requirement review for non-US swap dealers (some of these non-US swap dealer CCO reviews have been completed). Feedback and corrective action letters relating to CCO requirements have been sent out. The NFA has followed up where corrective action was required and has sent acknowledgment letters to the relevant swap dealers where the CCO review has been completed and all corrective actions have been addressed. 

The NFA has also completed detailed substantive Section 4s Submission reviews relating to business continuity and disaster recovery, conflicts of interest, and risk management programs. Non-US swap dealers are comprised of those that have elected substituted compliance and those that have not elected substituted compliance or for which substituted compliance is not available. US swap dealers and those non-US swap dealers not relying on substituted compliance have been sent acknowledgment letters for the Section 4s Submission reviews relating to these rule areas. While the reviews have been completed for non-US swap dealers relying on substituted compliance, these swap dealers have not yet been sent acknowledgment letters.3  

The NFA is still conducting the Section 4s Submission review of remaining items, such as segregation, documentation, business conduct, treatment of special entities, and reporting and recordkeeping.

  1. NFA Examinations
  1. Overview

The NFA's routine onsite examinations of US swap dealers began in the summer of 2014. The first cycle of examinations covered the CCO function and requirements for US swap dealers. Because of the complexities of substituted compliance, non-US swap dealers were generally not examined during this cycle, except that non-US swap dealer affiliates of US swap dealers may have been examined with other swap dealer members of the corporate group to the extent that they are not relying on substituted compliance. The NFA announced during a recent audioconference for member swap dealers4 that all of these CCO examinations have been completed and only a small number of examination reports remain to be issued. Significant findings from this round of examinations are discussed below. 

The NFA's next exam cycle, due to begin shortly, will be risk-based and focus on risk management and market practices. In particular, in the risk management area, the examinations will focus on risk governance, market risk, credit risk, business unit responsibilities and annual testing of the risk management program. The market practices part of the examination will focus on fraud, manipulation and other abusive practices. The NFA has stated that, while the CCO examinations were consolidated around a discrete set of requirements, this next cycle of examinations will be more layered to reflect a maturing of the NFA's efforts and begin capturing the wider range of requirements to which swap dealers are subject. In this regard, the second cycle will be more predictive of the NFA's approach to swap dealer examinations in the future.

The NFA plans to schedule examinations in a particular area only after it has completed feedback on the related Section 4s Submission review so that firms "know where they stand ahead of their particular exam," although firms will not necessarily have received an acknowledgment letter prior to the examination. 5 Consistent with this approach, the NFA has identified nine firms for the first round of second-cycle examinations. Before the examinations begin, each firm will be provided with a first-day letter that lists the material the NFA requires before it begins the onsite process and identifies the initial swap dealer personnel meetings (with topics) it seeks. In general, the NFA expects to arrive onsite approximately 30 days after sending the first-day letter. The NFA expects each exam to last four to five months. The NFA plans to have an examination team of five to six examiners, supported by a director or associate director, onsite for approximately one to two of these months. The timeframe may vary depending on the size and complexity of the firm. 

The onsite examinations will include meetings with key personnel, testing through review as well as exception and management reports, and observing in real time. The examiners will also raise issues identified in the course of the examination. The NFA will share its findings in writing before closing the examination and will conduct a closing meeting, after which it will issue a written examination report.

The NFA has identified 51 member swap dealers that it will examine as part of the second examination cycle. Because of corporate affiliations and the NFA's consolidated corporate group approach, it intends to conduct 31 separate examinations of these 51 swap dealers. 

The NFA does not yet intend to examine non-US swap dealers. With respect to non-US swap dealers that are not relying on substituted compliance or rule areas for which substituted compliance is not available, the NFA has stressed that it will examine non-US swap dealers but plans to do so towards the end of or after the second examination cycle. With respect to non-US swap dealers relying on substituted compliance, the timeline is less clear. The CFTC continues to work with foreign regulators to address interpretive and implementation issues around substituted compliance, and the NFA continues to engage with the CFTC on these issues as well. The NFA has also been reaching out to relevant foreign regulators to help forge a path towards beginning non-US swap dealer examinations. In the meantime, as discussed below, the NFA is including both US and non-US swap dealers in its new Continuous Monitoring Program (CMP). 

  1. CCO Examinations: Key Findings and Better Practices

The CCO examinations identified three key areas of concern: (1) training, (2) compliance monitoring and (3) tracking of non-compliance issues. They also observed certain "better practices" relating to resource allocation and layering of compliance reviews. 

  1. Concerns
  1. Training. The NFA expects that swap dealers will have trained all relevant employees on applicable regulations and implemented a training monitoring program. The examinations found that some firms had not yet provided training or did not yet have a training program in place. In addition, some firms only trained senior, front-office personnel and then expected those individuals in turn to train their staff. More commonly, firms did not adequately evidence their training, e.g., they did not maintain training attendance logs.
  2. Compliance Monitoring. The examinations revealed instances of inadequate compliance with regulations, either because a CCO was too removed from or not knowledgeable enough about the firm's compliance monitoring activities, or because the CCO relied too heavily on individuals to use their own discretion as to whether to escalate concerns to the CCO. In addition, while the CCO is not a risk officer, swap dealers are expected to have a process that ensures that the CCO is engaged in risk-management compliance issues. The NFA notes that "the CCO is responsible indeed to monitor the firm's compliance with" risk management requirements. 6 The examinations found insufficiencies here too. The NFA has indicated that appropriate engagement of the CCO could include being on certain committees and at key meetings, or receiving reports that highlight risk management compliance concerns. The NFA recommends that the CCO receive relevant reports from Operations and other departments that have responsibility for compliance with internal business conduct requirements and that the CCO "get comfortable" with the testing of the risk management program, including reviewing results of the testing.7
  3. Tracking of Non-Compliance Issues. The examinations identified gaps in the CCOs' tracking of non-compliance issues and monitoring for remediation of these issues. The NFA's expectation is that "all non-compliance issues" will be included as part of a CCO's responsibilities. However, in some cases, certain non-compliance issues identified by Operations or internal audits were not tracked by the CCO and other issues were logged, but remediation plans were insufficient because they were missing target dates or owners, or did not appear to be updated in a timely manner.
  1. Better Practices

Compliance Resources. The NFA observed that firms with dedicated swap dealer compliance resources have generally allowed those firms to meet the CCO requirements effectively. Dedicated swap dealer compliance resources also play a key role in a firm's ability to prepare adequate CCO annual reports. Conversely, where firms have not dedicated resources to help the CCO, the CCO has "struggled" to meet the CCO requirements.8 

Electronic Communication Surveillance. Most firms rely on electronic or keyword searches to flag potential issues, which can capture a very large number of emails. Some firms' compliance departments add an additional layer of surveillance by performing targeted reviews of or deeper dives into particular subsets of emails (e.g., those of a particular trading desk based on volume flagged by keyword searches or rotating deeper dives).

  1. Self-Reporting of Non-Compliance

The NFA encourages swap dealers to notify it and the CFTC of material non-compliance issues when they occur and stresses that "timeliness [rather than being able to provide detailed information] is often the more important factor for firms to consider when self-reporting." 9 Swap data recordkeeping and reporting and recording of swap-related telephone conversations have been two of the more commonly reported non-compliance issues. After receipt of a self-report, the NFA typically requests a written summary as well as an appropriate remediation plan. The NFA and CFTC have coordinated their follow-up efforts, including setting up joint conference calls with the swap dealer. 

  1. Continuous Monitoring Program

In the spring of 2015, the NFA rolled out its new CMP, the goal of which is to provide the NFA with a way to keep abreast of significant industry developments. The CMP has conducted introductory meetings with several swap dealer CCOs, including non-US swap dealer CCOs, to introduce them to the program. The NFA intends that all swap dealer CCOs will have had at least an introductory meeting by the spring of 2016.

The CMP's activities occur through a combination of periodic meetings with swap dealer CCOs and other key personnel (which, depending on the monitoring information obtained, may be quarterly or every six months); reviews of swap dealer reports, including the NFA's new annual questionnaire; and assessments of events or trends that could have an impact on swap dealers more generally. For the first few years, the focus of the CMP will be to develop a baseline understanding of firms' swap dealer business and supporting infrastructure, to follow up on remediation of issues identified in an NFA examination, and to learn more about regulatory implementation initiatives and challenges.

Footnotes

1.National Futures Association SD/MSP Registry.

2.Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013) (Cross-border Guidance). All of the CFTC's comparability determinations are available on its website.

3.See NFA, SD and MSP Member Regulatory Conference (May 7, 2015); Update on NFA's Swap Dealer and Major Swap Participant Program, National Futures Association Audio Conference, March 4, 2015 (March 2015 Audio Conference).

4.Audio Conference for Swap Dealers and Major Swap Participants on September 24, 2014 (September 2015 Audio Conference).

5.Id.

6.March 2015 Audio Conference.

7.Id.

8.Id.

9.Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.