NFA Reminds Swap Dealers on Regulatory Obligations

The NFA reminded swap dealers ("SD") of their regulatory obligations by highlighting common deficiencies identified during examinations.

In the Notice, the NFA highlighted deficiencies associated with the following rules:

• Marketing Materials. Compliance Rule 2-9(d) requires SDs to supervise their marketing materials to ensure compliance with NFA and CFTC regulations. Interpretive Notice 9077 defines marketing materials and sets forth supervisory requirements, including record retention and employee training. The NFA found failures to: (i) define the scope of marketing materials; (ii) maintain copies of marketing materials; and (iii) properly train employees.

• Market Practice. CFTC Regulations 23.402 ("General provisions"), 23.410 ("Prohibition on fraud, manipulation, and other abusive practices") and 23.433 ("Communications-fair dealing") requires SDs to implement supervisory programs to prevent fraud, manipulation and abusive practices. The NFA found insufficient trade surveillance and failures to tailor communication surveillance for fair and balanced interactions.

• Swap Data Reporting. CFTC Regulations 23.204 ("Reports to swap data repositories") and 23.205 ("Real time public reporting") require SDs to ensure accurate and complete reporting of swap transaction data to swap data repositories. The NFA found the following deficiencies: (i) incomplete reporting, including failure to accurately report required data fields to the SDR and to remediate errors and omissions ASATP after discovery; (ii) failure to reconcile positions; and (iii) delays in communicating error remediation to the CFTC.

• Initial Margin Calculation. CFTC Regulation 23.154 ("Calculation of initial margin") and NFA requirements require SDs using NFA-approved risk-based models to conduct periodic model validation, monitor performance and ensure consistency across regulatory filings. The NFA found: (i) inadequate model performance monitoring; (ii) lack of documentation supporting monitoring activities; and (iii) delayed reporting of model issues.

• Capital Requirements: CFTC Regulation 23.101(a)(1) ("Minimum financial requirements for swap dealers and major swap participants") requires SDs to maintain regulatory capital as defined under bank holding company regulations. The NFA found: (i) inadequate documentation supporting monitoring activities; (ii) failures to timely provide MRM's opinion on the quarterly testing results submitted to the NFA; and (iii) failures to notify NFA of new product types.

The NFA further reminded SDs that they must: (i) maintain complete and accurate records of swap activities in accordance with CFTC Regulations 23.201 ("Required records") and 23.202 ("Daily training records"); (ii) establish an independent risk management unit with sufficient authority and resources under CFTC Regulation 23.600 ("Risk Management Program for swap dealers and major swap participants:); (ii) report certain swap valuation disputes to the NFA in accordance with Interpretive Notice 9072; and (iv) submit Member Questionnaires at least annually and update it promptly following material changes to business operations as required by Compliance Rule 2-52.