Interpretive Notices

9076 - NFA COMPLIANCE RULE 2-9(d): SUPERVISION REQUIREMENTS FOR SWAP DEALER AND MAJOR SWAP PARTICIPANT MEMBERS

(Effective September 30, 2019.)

NFA Compliance Rule 2-9(d) places a continuing responsibility on each Swap Dealer and Major Swap Participant (collectively SD) Member to diligently supervise its employees and agents in the conduct of their swap activities for or on behalf of the Member. Compliance Rule 2-9(d) is broadly written to provide each firm with some degree of flexibility in determining what constitutes "diligent supervision" and to develop and implement written supervisory procedures tailored to meet the Member's particular needs. Although NFA leaves the exact form of supervision to the SD Member, all SD Members are required to have written policies and procedures designed to achieve ongoing compliance with applicable NFA and CFTC requirements. In discharging their supervisory obligations, SD Members should have written policies and procedures (supervisory program) governing the use of marketing materials if they provide marketing materials to counterparties and potential counterparties (collectively counterparties). NFA is adopting this Notice to provide guidance to SD Members on meeting their regulatory obligations under Compliance Rule 2-9(d) related to their use of marketing materials

NFA recognizes that the CFTC has issued Interpretive Guidance (Guidance)1 permitting certain non-U.S. SD Members to substitute compliance with the requirements of their home jurisdiction's law and regulation for compliance with certain CFTC entity-level requirements under the Commission's regulations. In particular, under the Guidance, the CFTC permits certain non-U.S. SDs to substitute compliance with a non-U.S. jurisdiction's supervisory requirements for the CFTC's diligent supervision requirement under CFTC Regulation 23.602. Similarly, this Guidance provides that, depending on the status of the counterparty, certain non-U.S. SDs and foreign branches of U.S. banks that are SDs may substitute compliance with their home jurisdiction's law and regulation for compliance with certain CFTC transaction-level requirements under the Commission's regulations. The CFTC's substituted compliance framework for both entity-level and transactional-level requirements is contingent on the CFTC finding that the home jurisdiction's requirements are comparable with and as comprehensive as the corollary area(s) of regulations contained in the applicable CFTC entity-level and/or transaction-level requirements. Importantly, the CFTC has retained examination and enforcement authority over SD Members in areas of substituted compliance, and NFA retains similar authority.

NFA reminds non-U.S. SD Members that in those instances where NFA finds a violation of applicable CFTC requirements and/or NFA requirements that indicate a non-U.S. SD Member has failed to diligently supervise its employees and agents in the conduct of their swap activities for or on behalf of the Member, NFA may find that the SD Member has also violated NFA's supervision requirement under NFA Compliance Rule 2-9(d). For example, if NFA determines that a non-U.S. SD Member failed to set up the appropriate framework to comply and monitor for compliance with NFA's requirement that the firm file monthly risk data reports under NFA Financial Requirements Section 17, if appropriate, NFA could also charge the firm with failing to meet its supervisory obligations under NFA Compliance Rule 2-9(d).

NFA's Board of Directors recognizes the importance that all NFA Members, regardless of their geographic location, have an appropriate supervisory framework to oversee the swap related activities of their employees and agents and their ongoing compliance with applicable NFA and CFTC requirements. Therefore, the Board determined to adopt NFA Compliance Rule 2-9(d) to ensure that SD Members are fully aware of their obligation and to provide NFA with clear authority to enforce this requirement.¹

¹ See, Commodity Futures Trading Commission – Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013).