February 13, 2019
by Elizabeth Lan Davis

For the first time, the CFTC published its Examination Priorities for its Division of Market Oversight (“DMO”), Division of Swap Dealer & Intermediary Oversight (“DSIO”), and Division of Clearing & Risk (“DCR”). [1]  The agency’s announcement referenced the more detailed four-page 2019 Compliance Branch Examination Priorities of DMO’s Compliance Branch, and briefly summarized the priorities of DSIO and DCR.  Chairman Giancarlo commented that the publication of these examination priorities was intended to improve the relationship between the CFTC and the entities that it regulates while promoting a culture of compliance at its registrants.  The priorities, most notably those of the DMO’s Compliance Branch, provide some insight as to where the agency’s examination focus will be during 2019.   

DMO’s Compliance Branch examines designated contract markets (“DCMs”) to monitor compliance with the Commodity Exchange Act and the Commission’s regulations through Rule Enforcement Reviews.  After completing a high-level review of various aspects of 11 DCMs, the Compliance Branch established a baseline for each DCM’s self-regulatory operations and identified the following areas that will likely be the focus of DMO’s examination of one or more DCMs in 2019:  cryptocurrency surveillance practices, surveillance for disruptive trading, selected elements of trade surveillance practices, block trade surveillance practices, selected elements of market surveillance practices, real-time market monitoring practices, practices around market maker and trading incentive programs, and relationships with and services received from regulatory service providers.   

The priorities outlined by DMO’s Compliance Branch also shed light on its examination processes and timing.  DMO’s Compliance Branch noted that most DCMs will undergo at least one examination in 2019 and that the target period for such examinations typically will be for a six-month period.  “[K]ey entities and subject areas will receive the most attention,” and the branch will consider factors such as a DCM’s market share, time since the entity’s last review, findings during the last review, concerns expressed by market participants and other Commission offices and divisions, new products, rules or technology implemented by a DCM, as well as significant organizational changes at the DCM.  As the Compliance Branch is taking steps to expedite and streamline its examination process, look for more frequent and prompt examinations focusing on emerging trends, products and technologies as well as targeted aspects of traditional compliance functions.  Periodic calls will also provide DCMs the opportunity to ask questions of Compliance Branch staff and are intended to give DMO’s Compliance Branch the opportunity to stay current on the DCMs’ regulatory investigations, discuss new products and rules, better understand volume trends and market participants’ behavior on the exchanges and obtain current information regarding changes at the DCM.  Finally, while swap execution facilities (“SEFs”) will not be included in examinations in 2019 given the pending changes to the Commission’s Part 37 rules, the Compliance Branch will engage in regulatory consultations with a number of SEFs to provide effective oversight. 

Focusing on the protection of customer funds, DSIO’s Examinations Branch monitors the activities of derivative market intermediaries such as futures commission merchants (“FCMs”), swap dealers (“SDs”), major swap participants (“MSPs”), commodity pool operators, commodity trading advisors, introducing brokers, and retail foreign exchange dealers.  DSIO’s stated examination priorities for 2019 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’s examinations will “continue to conduct its series of routine functions to constantly monitor the activities of CFTC registrants,” which includes reviewing notices, risk management programs, financial statement filings, risk reports, and chief compliance officer annual reports.

DCR examines derivative clearing organizations including those designated as systematically important by the Financial Stability Oversight Council.  In identifying areas of weakness or noncompliance in activities that are critical to a safe and efficient clearing process, DCR will examine financial resources, risk management, and system safeguards.

 

[1] Press Release, CFTC Divisions Announce Examination Priorities, (CFTC Feb. 12, 2019), available at: https://www.cftc.gov/PressRoom/PressReleases/7869-19?utm_source=govdelivery.

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