On February 12, 2019, the Commodity Futures Trading Commission (CFTC or Commission) published for the first time its examination priorities for the coming year.1 The release of the priorities will provide legal and compliance staff of CFTC-regulated entities greater insight into the Commission’s examination programs and assist them in better preparing for, and successfully navigating, an examination. The Commission bases its priorities on four pillars: (1) effective communication, (2) a risk-based determination of priorities, (3) continuous improvement and (4) efficiency.
Designated Contract Markets and Swap Execution Facilities
The Division of Market Oversight’s (DMO) Compliance Branch plans to supplement its Rule Enforcement Reviews of designated contract markets (DCMs) and swap execution facilities (SEFs) with additional targeted examinations of DCMs and their self-regulatory programs, focused on a six-month time period and on emerging regulatory practices where industry best practices may still be developing. The DMO specifically will focus on:
- cryptocurrency surveillance practices;
- surveillance for disruptive trading;
- trade surveillance practices (selected elements);
- block trade surveillance practices;
- market surveillance practices (selected elements);
- real-time market monitoring practices;
- practices around market-maker and trading incentive programs; and
- DCMs’ relationships with and services received from regulatory service providers.
Division of Swap Dealer and Intermediary Oversight
The Division of Swap Dealer and Intermediary Oversight (DSIO) conducts direct examinations of intermediaries, primarily 65 futures commission merchants (FCMs), centered on the protection of customer funds, including specifically:
- withdrawal of residual interest from customer accounts;
- accepted forms of noncash margin;
- compliance with segregation requirements;
- FCM use of customer depositories;
- FCM customer account documentation; and
- swap dealer (SD) and major swap participant (MSP) relationships with third-party vendors.
The DSIO’s Examination Branch also performs limited oversight with respect to approximately 100 SDs.
The DSIO will continue to routinely monitor the activities of CFTC registrants, including, but not limited to, reviewing notices, financial statement filings, risk management programs, risk assessment reports, risk exposure reports and chief compliance officer annual reports for all intermediaries, including SDs, MSPs, FCMs, commodity pool operators, commodity trading advisors, introducing brokers and retail foreign-exchange dealers.
Clearinghouses
The Division of Clearing and Risk (DCR) is responsible for examining derivative clearing organizations (DCOs).2 The DCR did not identify specific exam priorities, noting that the scope and methodology for a DCR examination is risk-based and uniquely tailored to the individual characteristics of the DCO and the products it clears.
Takeaways
While the stated examination priorities may not be surprising, they will assist regulated entities in better understanding the Commission’s examination programs. In addition, they offer regulated entities an opportunity to examine their own practices and policies in light of the Commission’s stated priorities for 2019.
This client alert was republished by NYU Law’s Program on Corporate Compliance and Enforcement Blog.
