On March 25, 2019, the National Futures Association (NFA) published amendments to NFA Bylaw 301 and Compliance Rule 2-24 to require all associated persons (APs) of registered swap dealers (SDs), major swap participants (MSPs), futures commission merchants (FCMs), commodity pool operators (CPOs), commodity trading advisors (CTAs), and introducing brokers (IBs) who engage in or supervise activities involving swaps to satisfy new swaps proficiency requirements (the Swap Proficiency Rules).
All existing APs and supervisors, as well as new applicants, will be required to satisfy the new Swap Proficiency Rules effective January 31, 2021. Online access to the proficiency requirements will become available January 31, 2020.
When the U.S Commodity Futures Trading Commission (CFTC) initially expanded its regulatory scheme under the Commodity Exchange Act to include swap-related activity, registered entities and persons were exempted from the historical NFA proficiency exams related to the futures markets if their sole activities subject to CFTC regulation were limited to swap-related activity. The new Swap Proficiency Rules will apply to all swap APs whose activities involve CFTC regulated swaps. The NFA has indicated that there will not be any grandfathering, and thus any APs or supervisors who do not satisfy the new Swap Proficiency Rules by January 31, 2021, will not be allowed to continue their swap-related activities until such requirements have been satisfied.
The Swap Proficiency Rules contemplate that there will be two different sets of training and testing modules: the “Short Track” and the “Long Track”. SD APs who negotiate, price and/or execute swaps with counterparties on behalf of an SD and/or manage an SD’s swaps related risk (as well as their supervisors) will be required to satisfy the Long Track proficiency requirements. All other APs at an SD and all intermediary swap APs (as well as their supervisors) will be required to satisfy only the Short Track proficiency requirements.
The NFA has indicated that both the Short Track and Long Track will be composed of training and testing modules that will be available on-line after January 31, 2020. The tracks are expected to cover topics geared toward ensuring knowledge of the swaps market and related risks and oversight, including swap products and applications; swaps market regulation; onboarding; transactional disclosures; risk management; supervision; trade execution, clearing and margin; and antifraud and ethical practices. The Short Track will consist of four modules, and the Long Track will contain eight. NFA estimates it will take about one hour to complete each module. The fees to be charged for the modules, which are subject to approval by the NFA board of directors and the CFTC, have not yet been published.
While the NFA will monitor compliance of the new Swap Proficiency Rules for intermediary swap APs, each SD will be responsible for ensuring compliance with the new Swap Proficiency Rules for each AP associated with the SD. As part of this compliance obligation, each SD will be required to keep records showing compliance with the Swap Proficiency Rules for each AP (and their supervisors), and such records must be provided to the NFA during an examination or on request. The new Swap Proficiency Rules do not extend to individuals acting as APs at a non-U.S SD or a non-U.S. branch located outside the U.S. so long as such APs solely solicit or accept swaps from non-U.S. counterparties or non-U.S. branches of U.S. swap dealers.
While there is a reasonable amount of time before the January 31, 2021 deadline for compliance with the new Swap Proficiency Rules, registered entities will want to begin identifying individuals in their organizations who will be subject to these new requirements and communicating the new requirements to them. SDs should also set out a plan to have their APs complete the modules timely so that there are not any staffing disruptions surrounding the cutoff date.