CFTC examination

The Commodity Futures Trading Commission (CFTC) recently announced the inaugural release of its Examination Priorities. These priorities focus on ensuring that CFTC registrants have sufficient compliance mechanisms in place to effectively self-regulate, in accordance with the CFTC’s regulatory priorities.

Registrants should consider this announcement as signalling an increase in the CFTC’s attention to its supervisory efforts and as a potential precursor to increased enforcement activity. Accordingly, firms are advised to take a proactive approach and identify deficiencies in advance of any formal CFTC examination. Evidence of such compliance efforts are not only a best practice but would serve as support should the CFTC come calling.

Division of Market Oversight

The Division of Market Oversight (DMO) Compliance Branch separately published its 2019 Examination Priorities and confirmed that such publications will be released annually. They stated that their examinations will focus on specific elements of designated contract markets (DCMs) self-regulatory programs, as well as emerging areas of self-regulation, encompassing the following:

  • cryptocurrency surveillance practices;
  • surveillance for disruptive trading;
  • trade surveillance practices (selected elements);
  • block trade surveillance practices;
  • market surveillance practices (selected elements);
  • real-time market monitoring practices;
  • practices around market maker and trading incentive programs; and
  • DCMs’ relationships with and services received from regulatory service providers.

Regulated entities who do not meet the agency’s standards for adequate surveillance practices may face enforcement actions, particularly for a failure to supervise. Examinations in this area may also result in an unfavourable finding if a firm’s systems and controls are found to be deficient.

Division of Swap Dealer & Intermediary Oversight

The Division of Swap Dealer & Intermediary Oversight (DSIO) Examinations Branch oversees derivative markets intermediaries. These include futures commission merchants (FCMs), swap dealers (SDs), major swap participants (MSPs) commodity pool operators (CPOs), commodity trading advisors (CTAs), introducing brokers (IBs) and retail foreign exchange dealers (RFEDs). While the core focus of DSIO examinations is the protection of customer funds, the 2019 Examination Priorities include:

  • withdrawal of residual interest from customer accounts;
  • accepted forms of non-cash margin;
  • compliance with segregation requirements;
  • FCM use of customer depositories;
  • FCM customer account documentation; and
  • SD/MSP relationships with third-party vendors.

DSIO examinations generally involve a review of a registrant’s notices, risk management programs, financial statement filings, risk exposure reports, risk assessment reports, and chief compliance office annual reports.

Division of Clearing & Risk

The Division of Clearing & Risk (DCR) examines derivative clearing organizations (DCOs) including those that have been designated as systemically important by the Financial Stability Oversight Council. The goal of DCR examinations is to identify areas of weakness or non-compliance that can impede an efficient clearing process. DCR examinations typically include review of a DCO’s financial resources, risk management, system safeguards and cyber-security policies, practices, and procedures.

How we can help

Bovill has deep experience in supporting clients to make sure that regulatory aspects are properly managed in advance of an examination or audit. As part of our Markets and Commodity and Derivatives services, we can help you understand your firm’s regulatory exposure and any examination implications, then deliver the associated organizational change and test the resulting systems and processes. We can also carry out a health check to see whether existing practices are being managed and monitored in a way that safeguards compliance and minimizes risk.

Get in touch to explore how we can work together.

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