2019 NFA Annual Review Highlights Swaps Proficiency Requirements and CPO Internal Controls

December 30th | 2019

The NFA’s Fiscal Year 2019 Annual Review, published on November 26, 2019, highlighted compliance initiatives undertaken by the NFA’s Executive Committee in the NFA’s Fiscal Year 2019. Chairman of the Board Michael C. Dawley highlighted the following NFA Member Firm compliance obligations.

1. Swaps Proficiency Requirements

Individuals acting as Associated Persons (“APs") at Swap Dealers and those APs engaged in swaps activities at FCMs, IBs, CPOs and CTAs will be required to complete the Swaps Proficiency Requirements - an online learning program that consists of a series of modules, each with a training and testing component.

These modules contain both a long track and short track. Individuals acting as APs at Swap Dealers must complete the long track with limited exceptions for APs who are not in the Swap Dealer’s sales and trading areas and who do not negotiate, price and/or execute swaps with counterparties on behalf of the Swap Dealer or manage the Swap Dealer’s swaps related risks. Swap APs acting at intermediary firms such as FCMs, IBs, CPOs, and CTAs, are required to satisfy the short track. The Swap Proficiency Requirements must be completed by individuals responsible for supervising Swap APs. The NFA’s Swaps Proficiency Requirements will launch in late January 2020 with a compliance date of January 31, 2021.

Swap APs cannot take the Swaps Proficiency Requirements at this time, however, the NFA requires that each NFA Firm subject to the Swaps Proficiency Requirements designate a Swaps Proficiency Requirements Administrator (SPRA). Member Firms may designate an SPRA through the NFA Online Registration System now. Follow this link to visit the NFA’s Swaps Proficiency Requirements FAQs.

2. CPO Internal Controls

The NFA’s April 1, 2019 Interpretive Notice entitled NFA Compliance Rule 2-9: CPO Internal Control Systems adopted a principles-based approach designed to provide CPO Members with some flexibility in determining how to implement their internal controls framework on a risk basis considering size and the complexity of operations. CPO Members are required to implement the following:

  1. Procedures that must outline an escalation policy instructing employees how to report any suspicions of improper override of the firm’s controls.

  2. CPOs must perform a risk assessment to identify the firm’s most critical risks relating to the mishandling or fraudulent activity of pool participant funds.

The NFA’s Self-Examination Questionnaire has been updated to include questions on these new topics and we focus on subpart (b) here. The NFA noted that they will send firms the CPO Internal Control Questionnaire supplement to the Self-Examination Questionnaire prior to each NFA examination team’s arrival for examinations. The NFA exam teams expect to have your responses to this questionnaire available when they come onsite for each exam. The NFA states that they are looking for the following components regarding CPO internal controls (1) whether the firm conducted a risk assessment; (2) whether the firm has processes in place to ensure that controls are executed on a consistent basis; (3) whether the right people are in place with the proper education and experience to perform those controls; and (4) whether the firm has criteria for follow-ups to address control issues that may arise.

NFA Members are encouraged to thoroughly review their responses to their CPO Internal Control Questionnaire. This NFA Internal Controls Webinar provides additional guidance on the NFA’s interpretive notice position.

Titan Regulation & Advisory is always available to discuss your internal controls related to your NFA registration needs. Please feel free to contact us to find out why you should #TradeUpToTitan.

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