CFTC Releases Exam Priorities

In a first time release, stemming from agency initiatives to improve its relationship with regulated entities, the Commodity Futures Trading Commission (CFTC) recently announced its 2019 Examination Priorities for registrants of the Division of Market Oversight (DMO), the Division of Swap Dealer & Intermediary Oversight (DSIO), and the Division of Clearing & Risk (DCR).

Division of Market Oversight (DMO)

DMO conducts examinations of designated contract markets (DCMs) to monitor their compliance through Rule Enforcement Reviews. In 2019, Rule Enforcement Reviews will focus on elements of DCMs’ self-regulatory programs, as well as emerging areas of self-regulation where requirements and best practices may be developing. DMO’s Compliance Branch’s 2019 Examination Priorities include:

  • cryptocurrency surveillance practices;
  • trade surveillance practices, including disruptive trading and block trades;
  • market surveillance and monitoring practices;
  • practices around market maker and trading incentive programs; and
  • DCMs’ relationships with and services received from regulatory service providers.

In addition to conducting examinations, priorities for 2019 include regulatory consultations with swaps execution facilities to provide oversight while the CFTC finalizes new rules and develops its examination program for swaps execution facilities.

Division of Swap Dealer & Intermediary Oversight (DSIO)

DSIO’s Examinations Branch is primarily responsible for overseeing derivative markets intermediaries, including futures commission merchants (FCMs), swap dealers (SDs), major swap participants (MSPs) commodity pool operators, commodity trading advisors, introducing brokers and retail foreign exchange dealers. The core focus of DSIO Exams is the protection of customer funds, with resources primarily focused on the oversight of FCMs, the only registrants permitted by regulation to hold listed derivative customers’ funds. The DSIO also performs limited oversight of approximately 100 swap dealers. DSIO’s Compliance Branch’s 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 Exams will continue to monitor the activities of CFTC registrants including reviewing notices, risk management programs, financial statement filings, risk exposure reports, risk assessment reports, and chief compliance officer annual reports.

Division of Clearing & Risk (DCR)

DCR examines derivative clearing organizations (DCOs) including those that have been designated as systemically important by the Financial Stability Oversight Council, which are reviewed in consultation with the Board of Governors of the Federal Reserve. The scope and methodology for each examination is risk-based and individually tailored to the organization and the products it clears, seeking to identify areas of weakness in activities that are critical to a safe and efficient clearing process – financial resources, risk management, system safeguards and cyber-security policies, practices, and procedures – to assess the maturity, capabilities, and overall resilience of the DCO.

We love to see regulators work in tandem and collaborate. The SEC and FINRA led the way in providing transparency with regard to exam priorities. We can see the CFTC thought that was a good act to follow. Now, if we could just get more regulator collaboration on a global scale, we might not see the issues the SEC is having with the registration of European managers due to GDPR.