On March 5, 2019, the National Futures Association (NFA) submitted to the Commodity Futures Trading Commission (CFTC or Commission) proposed amendments to NFA Bylaw 301 and NFA Compliance Rule 2-24 and the proposed Interpretive Notice entitled NFA Bylaw 301 and Compliance Rule 2-24: Proficiency Requirements for Swap APs (Interpretive Notice).1 NFA’s Board of Directors (Board) unanimously approved the proposed amendments and Interpretive Notice on February 22, 2019. NFA is invoking the “ten-day” provision of Section 17(j) of the Commission Exchange Act (the Act) and plans to make this proposal effective ten days after receipt of this proposal by the CFTC unless the CFTC notifies the NFA that the Commission has determined to review the proposal for approval.
Section 17(p) of the Act requires the NFA to “establish training standards and proficiency testing for persons involved in the solicitation of transactions subject to the provisions of the Act.” This provision is not limited to those who are required to be registered as associated persons (APs). The Board has determined that APs engaging in swaps activities at Futures Commission Merchants (FCMs), Introducing Brokers (IBs), Commodity Pool Operators (CPOs), and Commodity Trading Advisors (CTAs), as well as individuals acting as APs at Swap Dealers (SDs) and Major Swap Participants (MSPs), should be required to meet a minimum proficiency standard that tests both their market knowledge and their knowledge of regulatory requirements involving swaps activities. Note though that the NFA is not imposing these requirements directly on individuals acting as APs since these individuals are not required to register with the CFTC and thus are not NFA Associate members subject to NFA regulations. Instead, the proficiency requirements would be imposed on the SDs and MSPs.
Amendments to Bylaw 301(l) and NFA Compliance Rule 2-24
NFA Bylaw 301(l) requires FCM, IB, CPO, and CTA Members engaged in Commission regulated swaps activities, and registered APs of these Members whose activities involve Commission regulated swaps, to be approved by NFA as a swap firm or swap associated person, respectively. Under the proposed amendments to this rule, NFA would specify that an individual applying for approval as an FCM, IB, CPO and CTA Member swap firm or a swap AP of an FCM, IB, CPO or CTA Member must pass the proficiency requirements in NFA Compliance Rule 2-24 (NFA’s Swaps Proficiency Requirements).
Under the proposed amendments to NFA Compliance Rule 2-24, NFA would also prohibit SD and MSP Members from having associated with it any person acting as an AP unless that person has satisfied NFA’s Swaps Proficiency Requirements.
NFA’s Swaps Proficiency Requirements
NFA’s Swaps Proficiency Requirements cover topics included in the content outline developed by the NFA.2 The proficiency requirements will be administered online through a number of individual modules covering specific topic areas, each of which contains both a training and testing component.
Recognizing the differences in the type of swaps activity performed by an individual, NFA has developed two proficiency tracks-- a Long Track and a Short Track.3
- For SDs:
- Long Track: SDs must ensure that individuals designated as APs in the sales and trading areas who negotiate, price and/or execute swaps with counterparties on behalf of the SD and/or manage the SD’s swaps related risks satisfy the Long Track. The SD must also ensure that designated APs who are responsible for supervising APs acting in this capacity at the SD satisfy the Long Track.
- Long or Short Track: An SD that has designated APs who perform functions other than those described above has the option of permitting those individuals to satisfy either the Long Track or the Short Track. The SD has the same option for designated APs responsible for supervising these APs. However, if the responsibilities of an AP who has satisfied the Short Track expands to the sales and trading areas described above, the AP must satisfy the remaining modules in the Long Track.
- For Intermediary swap APs:
- Short Track: Intermediary swap APs (FCM, IB, CPO or CTA) are required to satisfy the Short Track. Individuals responsible for supervising intermediary swap APs are also required to satisfy the Short Track.
Individuals acting as APs at SDs are not required to register with the CFTC and are not NFA Associate Members. Thus, SDs are responsible for making sure that such individuals satisfy the NFA’s Swaps Proficiency Requirements. For individuals who satisfied NFA’s proficiency requirements prior to joining the SD, the SD will meet its obligations if it ensures:
- That the individual satisfied the proficiency requirements, required by the AP’s functions, within the prior two years; or
- The individual satisfied the track of the proficiency requirements, required by the functions of the AP, and since the date of doing so, there has been no period of two consecutive years during which the individual has not been employed by an SD (or its affiliated entity) that is a Member of NFA, approved as a swap AP of an FCM, IB, CPO or CTA or approved as a swap firm that is a Member of NFA.
No notification to the NFA is needed when an individual satisfies the NFA’s Swaps Proficiency Requirements. However, a record must be kept demonstrating that the individuals satisfied the requirements, and such record should be provided to the NFA during an examination or upon request. Examples of adequate record-keeping include a log identifying individuals and dates of completion, or copies of certificates of completion.
Individuals acting as APs at SDs located outside the US (including non-US branch offices of a US SD) who solely solicit or accept swaps with counterparties that are non-US persons and/or non-US branch offices of US SDs are excluded from NFA’s Swaps Proficiency Requirements.
The Interpretive Notice states that the Compliance Date to complete the proficiency requirements is January 31, 2021. All individuals who are approved as swap APs at an FCM, IB, CPO or CTA Member firm or are acting as APs at SDs on the Compliance Date are required to satisfy the applicable NFA Swaps Proficiency Requirements (i.e., no grandfathering provision) by that date in order to maintain its approved status after the Compliance Date. Any individual seeking approval as a swap AP at an FCM, IB, CPO or CTA after the Compliance Date must satisfy NFA's Swaps Proficiency Requirements prior to being approved as a swap AP and engaging in swaps activities.