On February 12, 2019, the Commodity Futures Trading Commission (CFTC) released its inaugural examination priorities for its Division of Market Oversight (DMO) Compliance Branch, the Division of Swap Dealer & Intermediary Oversight (DSIO), and the Division of Clearing & Risk (DCR).
The DMO Examination Priorities
The DMO examination priorities apply to the 14 designated contract markets (DCMs) and 23 swap execution facilities (SEFs) registered with the CFTC, which are collectively referred to in the release as regulated entities.
The DMO will build on their existing utilization of Rule Enforcement Reviews (RERs), seeking to monitor regulated entities’ compliance with the Commodity Exchange Act and CFTC regulations.
This updated and more clearly defined examination process will focus on the DCMs’ traditional self-regulatory programs, and on particular areas where regulatory requirements and best practices may still be developing, according to a CFTC press release.
The DMO will take a comparative approach in 2019 examinations to help it more easily identify model regulatory practices across DCMs, a model of best practices intended to assist others in improving their operations.
These priorities represent areas that the Compliance Branch has identified, through a high-level review of 11 DCMs conducted during 2018, as being of particular importance to effective self-regulation in U.S. derivatives markets.
The 2019 priorities are listed as:
- Cryptocurrency surveillance practices
- Surveillance for disruptive trading (including DCMs' rules, surveillance practices, investigations, and disciplinary cases)
- Trade surveillance practices
- Block trade surveillance practices
- Market surveillance practices
- Real-time market monitoring practices
- Practices around market maker and trading incentive programs
- DCMs’ relationships with and services received from regulatory service providers
This release of exam priorities is a transparent, clearly communicated signal that firms need to conduct internal examinations, reviews, and risk assessments pertaining to these stated areas of concern, and take action to revise weak areas in policies and procedures to see that they comply with the Commodity Exchange Act and other current regulatory conditions ahead of a possible RER.
DSIO Examination Priorities
The DSIO Examinations Branch oversees derivative markets intermediaries, which includes futures commission merchants (FCMs), swap dealers (SDs), major swap participants (MSPs) commodity pool operators, commodity trading advisors, retail foreign exchange dealers, and introducing brokers.
DSIO exams will primarily focus on protecting customer funds through its oversight of approximately 65 FCMs, as well as limited oversight responsibilities of approximately 100 SDs.
The DSIO exams will focus on the following priorities in 2019:
- 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
- SD/MSP relationships with third-party vendors
DSIO exams will continue to routinely monitor CFTC registrants’ activities, including, but not limited to the following:
- Reviewing notices
- Risk management programs
- Financial statement filings
- Risk exposure reports
- Risk assessment reports
- Chief compliance officer annual reports
A Continued Focus on Cryptocurrency
It is notable that the ever-developing field of cryptocurrency trading is headlining the list of CFTC (the DMO, in particular) examination priorities.
Given that trading in virtual currencies is still a new practice, and proper regulatory guidance is still in a scattered, developmental phase, it is important for firms to stay abreast of the most recent regulatory developments and legal precedents in order to stay clear of possible enforcement.
With regards to any of the above examination priorities, including the trading of virtual currencies, Core Compliance & Legal Services, Inc., can help firms in the creation or review of compliance policies and procedures, utilizing decades of experience to help you stay current with the latest regulatory priorities.
Core Compliance can also assist firms with the preparation of any regulatory examination process- we ensure that our clients have solid policies, procedures and controls in place. Listen to our latest episode of the CCO Buzz Podcast for even more guidance on how to prepare for an examination.