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February 8, 2021
Educational resources, common deficiencies and other important regulatory information for SD Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, swap dealer (SD) Members can access information detailing their regulatory obligations including the following:
Visit NFA's COVID-19 page for guidance, current relief and updates related to the ongoing pandemic.
Virtual Member Education
NFA will hold a virtual Member regulatory workshop in spring 2021. The workshop agenda will cover examinations and recent rulemaking initiatives, among other topics. More workshop information will be distributed shortly.
Regulatory Obligations Related to Common Deficiencies
The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations.
Business Conduct Standards: SD Members are required to obtain and retain a record of essential facts to accurately categorize their counterparties to facilitate compliance with various regulatory requirements pursuant to CFTC Regulation 23.402. The failure to properly identify and classify counterparties may result in non-compliance with other transaction-specific requirements. Additionally, SD Members are required to make several disclosures to non-SD counterparties pursuant to CFTC Regulation 23.431. Common deficiencies in this area include:
- Failure to disclose material information and pre-trade mid-market marks to counterparties prior to entering into uncleared swap transactions; and
- Failure to disclose daily marks to counterparties for the life of uncleared swap transactions.
Market Practice: SD Members are required to implement policies and procedures designed to prevent fraud, manipulation, and other abusive practices prohibited by CFTC Regulation 23.410. Additionally, SD Members are required to communicate with counterparties in a fair and balanced manner as detailed in CFTC Regulation 23.433. Common deficiencies in this area include:
- Failure to implement adequate trade surveillance to detect fraud, manipulation and abusive practices; and
- Failure to conduct communication surveillance reasonably designed to ensure fair and balanced communications and the prohibition of fraud, manipulation and other abusive practices.
Portfolio Reconciliation: SD Members must engage in portfolio reconciliation pursuant to CFTC Regulation 23.502. Firms are required to establish, maintain and follow written procedures to resolve discrepancies identified by portfolio reconciliation.
Swap Data Reporting: SD Members must report swap transaction data to swap data repositories pursuant to CFTC Regulation 23.204 and CFTC Regulation 23.205. Additionally, they must report corrections of identified errors or omissions as soon as technologically practicable (ASATP) after discovery. Common deficiencies in this area include:
- Failure to report required regulatory messages, either at all or within the regulatory timeframes;
- Failure to report accurately required data fields to the SDR; and
- Failure to remediate errors and omissions ASATP after discovery.
Cybersecurity: SD Members must adopt a written information systems security program (ISSP) pursuant to Interpretive Notice 9070 to address the risk of unauthorized access to or attack of their information technology systems and to respond appropriately should unauthorized attacks occur. Members are also required to notify NFA of certain cybersecurity incidents related to their commodity interest activities via NFA's Cyber Notice Filing System. Common deficiencies in this area include:
- Failure to provide cybersecurity training to employees upon hiring and at least annually thereafter; and
- Failure to establish appropriate identity and access controls to their systems and data.
Members that fail to establish and implement an ISSP may be subject to disciplinary action.
Recent Amendments and Reminders
I-20-48: Effective date for Interpretive Notice establishing SD supervision requirements over use of marketing materials
I-20-26: Effective date for NFA rule amendments related to NFA's penalties and other disciplinary procedures
I-20-21: Increase in Fraudulent Phishing Emails Warrants Member Vigilance
Recent CFTC Amendments
Capital: On July 22, 2020, the CFTC approved its final rules for SD capital requirements. Pursuant to the final rules, based on the nature of their business, SDs can elect to use the net liquid assets method, the bank-based method, or the tangible net worth method to meet minimum capital requirements. The compliance date for the new capital requirements is October 6, 2021.
Phase VI Margin Requirements: On December 8, 2020, the CFTC approved a final rule for margin requirements for uncleared swaps for SD Members without a prudential regulator. The final rule includes revisions to the calculation method for determining which entities are in the initial margin requirement scope for Phase VI and the timing for compliance with the initial margin requirements. Additionally, the final rule addresses minimum transfer amount rules for separately managed accounts and allows for separate minimum transfer amounts for initial and variation margin. Phase VI margin requirements begin on September 1, 2022.
Reporting Requirements: On September 17, 2020, the CFTC approved final rules for swap dealer reporting. The final rules revise the current CFTC reporting requirements in order to improve the quality, accuracy, and completeness of the reporting data. The compliance date for the new reporting requirements is May 25, 2022.
Cross-Border Application: On July 23, 2020, the CFTC approved final rules to address the cross-border application of SD regulations and establish a process for requesting comparability determinations from the CFTC. SDs must comply with these requirements no later than September 14, 2021.
If you need assistance with any NFA requirements, please contact NFA's Information Center (312-781-1410 or 800-621-3570 or firstname.lastname@example.org).