In a regulatory first, the Commodity Futures Trading Commission (CFTC) announced its 2019 examination priorities for registrants of the Division of Market Oversight (DMO), the Division of Swap Dealer and Intermediary Oversight (DSIO), and the Division of Clearing and Risk (DCR). The CFTC chair, Christopher Giancarlo, noted the issuance of these priorities is in line with Project KISS, an initiative that aims to simplify and modernize the CFTC’s rules.
The divisions’ examination priorities are:
DMO: This division’s compliance branch will focus on designated contract markets’ (DCMs’) self-regulatory programs, including emerging areas of self-regulation. It will also consult with swap execution facilities (SEFs) while the CFTC finalizes new SEF rules. Additional details regarding DMO's examination priorities can be found in another document published by the DMO. The CFTC noted that they would focus on the following areas in connection with examinations at DCMs:
- Cryptocurrency surveillance
- Surveillance for disruptive trading
- Trade surveillance practices (selected elements)
- Block trade surveillance practices
- Market surveillance practices (selected elements)
- Real-time market monitoring practices
- Practices in market maker and trading incentive programs
- DCMs’ relationships with and services received from regulatory service providers
DSIO: The DSIO’s main focus is the protection of consumer funds. To that end, it oversees derivative markets intermediaries such as futures commission merchants (FCMs), swap dealers (SDs), major swap participants (MSPs), commodity pool operators and commodity trading advisors. Most of the examination branch’s resources are dedicated to the oversight of approximately 65 FCMs (the only registrants permitted by regulation to hold listed derivative customers’ funds). The branch also performs limited oversight of approximately 100 SDs. Specific examination priorities include:
- 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
- SD/MSP relationships with third-party vendors
DCR: This division is charged with examining derivative clearing organizations (DCOs). It examines systemically important DCOs in consultation with the Federal Reserve Board. Each examination is tailored to the unique characteristics of each DCO and the products it clears. At a high level, the examinations seek to identify areas of weakness in activities that are “critical to a safe and efficient clearing process.” Specifically, the division will focus on examining each DCO's financial resources, risk management, system safeguards, and cybersecurity policies, practices and procedures to assess the maturity, capabilities and overall resilience of the DCO.
We recently reported on the 2019 priorities of the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) and noted the SEC is also increasing its scrutiny of emerging areas such as cryptocurrencies. Additionally, both the SEC and the CFTC noted that cybersecurity remains an examination priority. Securities and derivatives registrants should be prepared to demonstrate that their organization is monitoring these areas closely and that they are resilient to potential cyberthreats in order to prevent potential compliance issues.