Notices to Members

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Notice I-22-04

January 13, 2022

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:

Regulatory Obligations Related to Common Deficiencies

The following section describes a number of regulatory obligations related to common deficiencies noted during NFA examinations.

Third-Party Service Providers: Members that outsource regulatory functions must adopt and implement a written supervisory framework over outsourced functions to mitigate outsourcing-related risks pursuant to Interpretive Notice 9079. Firms must maintain records demonstrating that they have addressed the items outlined in the Interpretive Notice and are following their procedures.

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.

Daily Trading Records: SD Members are required to make and keep daily trading records of all swaps executed, including all documents on which transaction information is originally recorded, pursuant to CFTC Regulation 23.202.

Supervision: SD Members are required to have a supervisory program and must diligently supervise all activities relating to their business pursuant to CFTC Regulation 23.602.

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. A common deficiency in this area is a failure to disclose material information and pre-trade mid-market marks to counterparties prior to entering into 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.

Ongoing Updates

On an ongoing basis, each NFA Member must update its Annual Questionnaire in the event of a material change to its operations. For example, if a Member begins soliciting for virtual currency or micro contract products or begins doing business, the Member must immediately update its Annual Questionnaire. Keeping the Annual Questionnaire up-to-date ensures firms receive all applicable notices relating to their reporting requirements in a timely manner and ensures that BASIC displays accurate information about firms' business activities when applicable.

Recent Amendments and Reminders

The following links contain Notices to Members regarding reminders and recent amendments to NFA Rules and Interpretive Notices.

I-21-45: Effective date for amendment to NFA Financial Requirements Section 18

I-21-33: Swap dealers may include security-based swaps when calculating initial margin on a net portfolio basis subject to certain conditions

I-21-32: Effective date for amendments regarding mandatory clearing and trade execution requirements for SDs

I-21-30: Effective date for amendment imposing a late fee for certain SD filings and new Interpretive Notice clarifying existing SD filing requirements

I-21-29: Effective date for amendment to Financial Requirements Section 18

I-21-18: Reminder: Disclosure and Reporting Requirements for NFA Members engaging in virtual currency activities

I-21-13: Effective date for Interpretive Notice regarding Members' use of third-party service providers

Recent CFTC Amendments

Capital Requirements: In July 2020, the CFTC approved its final rules for SD capital requirements. Pursuant to the final rules, SDs that are not subject to prudential regulation are required to compute regulatory capital using either standardized market and credit risk charges or internal models approved by the CFTC or NFA to calculate market and credit risk exposures. SDs electing to use internal models can use the net liquid assets method, the bank-based method, or the tangible net worth method to meet minimum capital requirements, based on the nature of their business. The compliance date for the new capital requirements was October 6, 2021.

Phase VI Margin Requirements: In December 2020, the CFTC approved its final rules for margin requirements for uncleared swaps for SD Members without a prudential regulator. The final rules include 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 rules address 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: In September 2020, the CFTC approved its final rules for SD 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.

Contact NFA

If you need assistance with any NFA requirements, please contact NFA's Information Center (312-781-1410 or 800-621-3570 or information@nfa.futures.org).

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