sd and msp member regulatory conference may 7, 2015
TRANSCRIPT
SD and MSP Member Regulatory ConferenceMay 7, 2015
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Introduction to NFA Senior Staff and Department Overview Examinations – Observations from SD and MSP Examinations Continuous Monitoring Program
Today’s Topics
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Investigations and Business Conduct Committee Update on Section 4s Policy and Procedure Review New SD and MSP WinJammer Filings Regulatory Coordination Update
Today’s Topics
May 7, 2015
OTC DERIVATIVES OVERSIGHT PROGRAM & TEAM STRUCTURE
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OTC Derivatives Oversight Program & Team Structure
Documentation Compliance• Firm 4s policy and
procedure review• Swaps rule reviews• Internal and external notices
Departmental Planning
Project Management
Staff Management
Firm Examinations • Routine examinations• Targeted reviewInvestigations
Continuous Monitoring Program
• Member visits and updates
Risk Management• Risk, capital, and margin
analysis• Examination support
May 7, 2015
SD AND MSP EXAMINATION OBSERVATIONS
Discussion Topics
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Training Compliance Monitoring Issue Tracking and Remediation
Practices Observed Examination Issues Identified
SD and MSP Examination Topics
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Firm Type Number of Firms
G15 8
Non-Bank Financial Services 7
Non-G15 Banks 5
RFED 2
Energy 1
Total 23
Firms Observed
May 7, 2015
SD AND MSP EXAMINATION OBSERVATIONS
Training
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At a minimum – Sales and Trading Personnel
Certain firms trained all employees impacted by the regulations – including Risk, Operations and Technology
Who is Trained
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Some firms are still transitioning training from an “ad hoc” or “as needed basis” into more routine training programs.
More common – annual training that includes topics relevant to DF and other DF topics covered on a cycle e.g. every two or three years
Annual training on DF to new employees. Training provided on a cycle to other employees.
Training Frequency
In-person Town hall, classroom Manual or electronic tracking
Electronic (6 firms) Webinar – in-house or third party Testing – minimum score required
Combination of In-person and Electronic
Training Methods 12
Training program in development, so training not yet provided Ad-hoc training but ongoing training program in development Limited subject matter coverage Not all relevant sales and trading personnel included in training Insufficient oversight of training provided to sales and trading
personnel outside of US Tracking and assessment of attendance not effective
Common Findings on Training13
May 7, 2015
SD AND MSP EXAMINATION OBSERVATIONS
Compliance Monitoring Programs
Monthly/Quarterly reports including: Upcoming Compliance Dates Compliance testing and surveillance results Non-compliance Issues Training status Audit reports and issue summaries Changes to Risk Management Program Key metrics - confirmations, SDR reporting, reconciliation
breaks
CCO Monitoring Reports15
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Many firms use automated reports in their monitoring program
More Common: External Business Conduct Standards – e.g. ECP status, missing LEIs SDR Reporting – late trade reporting Trades Booked Late or Cancel and Corrected Aged Confirmations
Less common: Aged Portfolio reconciliation breaks and disputes MAT trades Swap Trading Relationship Documentation Mandatory Clearing
Automated Reports
Most firms use risk assessments to identify high risk areas for testing
Several firms have dedicated Compliance testing teams
More common areas: External Business Conduct Standards, e.g. ECP status, pre-trade
disclosures, daily marks to counterparties Recordkeeping Swap Trading Relationship Documentation SDR Reporting
Sample Testing17
Less common areas: Confirmations Portfolio Reconciliation
Sample Testing, cont’d.18
More commonly observed: Compliance Committee Risk Committee Operational Committee
Less commonly observed: Dodd-Frank Committee New Products Committee Conflicts Committee Audit Committee
CCO Committee Participation19
CCOs involved through one or more of the following:
Risk Committees and Senior Management BU meetings Forum for discussion of risk reports including RER
Review of Key Risk Reports Operational Risk Dashboards Risk Management Committee Reports
Annual Testing of Risk Management Program Annual test will meet regulatory requirement Review of results
CCO Involvement in Risk Management Program Compliance
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Insufficient or gaps in surveillance or testing Insufficient documentation to support work CCO not sufficiently involved in the Risk Management
Program to become aware of non-compliance issues
Common Compliance Monitoring Findings
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May 7, 2015
SD AND MSP EXAMINATION OBSERVATIONS
Issue Tracking and Remediation
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How CCOs are tracking non-compliance issues and remediation
Regular meetings with direct reports Member of key committees Review Reports Summary reports and more detailed reports
Non-Compliance Issue Tracking and Remediation
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Central firm-wide issue tracking – (8 firms)
Multiple tracking systems – (8 firms) Compliance Internal Audit Operational Risk
Automatic alerts of updates to issue log (2 firms)
Issue Tracking
Timely escalation and documentation
Clear process for determining materiality and recording issues
Central database showing remediation status
Process to alert key personnel when remediation is not on target
Common Themes of Effective Tracking25
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Various approaches observed: Compliance retesting Internal audit retesting Approval by “owner” area of firm Committee review remediation of significant issues
Retesting and Review of Remediation
Gaps in Compliance tracking No or inadequate documentation of issues or remediation Responsibility for retesting not clearly defined Inability to identify SD related issues
Common Issue Tracking and Remediation Findings
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May 7, 2015
SD AND MSP EXAMINATION OBSERVATIONS
Annual Report – Sub-Certification
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Majority of CCOs require key senior personnel to sub-certify information provided in the annual report
Some firms use multi-level sub-certifications More Common:
Assess effectiveness of policies and procedures Identify material non-compliance issues Identify material changes to policies and procedures
Less Common: Identify resource deficiencies Identify areas that need improvement
CCO Annual Report Sub-Certifications
Better Practices Observed
Personnel responsible for activities covered by the rule perform testing, which sub-certifiers review
Sub-certifier required to input responses in addition to attestation Identify changes to policies and procedures Identify material non-compliance issues
Semi-annual sub-certifications
CCO Annual Report Sub-Certifications30
May 7, 2015
UPCOMINGEXAMINATION PLAN
Focus on certain aspects of the Risk Management Program Covers US Swap Dealers Scope varies depending on firm On-site exams planned to start fall 2015
Upcoming Examination Plan32
May 7, 2015
CONTINUOUS MONITORING PROGRAM
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Keep NFA informed of significant developments at member firms and in the industry – e.g. changes in business activities, key personnel
Assist NFA in executing a risk-based approach to examinations
Objectives of Monitoring
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Periodic meetings with Chief Compliance Officers and other firm personnel as necessary
Review certain SD and MSP reports
Assess specific events relating to SDs and MSPs
Monitoring Activities
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Introductory meetings
Meet with small number of member firms each quarter
Complete all introductory meetings by spring 2016
Develop plan for frequency of subsequent meetings (i.e. post introductory meetings)
Monitoring Next Steps
May 7, 2015
INVESTIGATIONS AND BUSINESS CONDUCT COMMITTEE
Section Title
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SD and MSP Members are encouraged to notify NFA and CFTC of material non-compliance matters when they occur.
NFA makes a preliminary assessment of each self-reported incident in order to determine the appropriate course of action.
NFA coordinates its due diligence with the CFTC.
Self-reporting to NFA
Self-reported Issue Metrics
Majority of issues Telephone Recording Swap Data Repository Reporting
Most issues involve: Technology component Recordkeeping component
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Section Title
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NFA would not expect a self-reporting of every non-compliance incident at a firm. Only material non-compliance incidents need to be reported.
Firms should apply the same materiality standards used for reporting material non-compliance incidents in the CCO Annual Report.
Materiality in Self-reporting
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NFA Disciplinary Process Overview
Examiners
Enforcement Attorneys
Business Conduct Committee (BCC)
Hearing Committee
Identify apparent violations of NFA rules from regular examinations or investigations
Work with examiners to review apparent rule violations and determine whether the matter should be presented to NFA’s Business Conduct Committee for formal action
Reviews information presented by NFA staff and determines whether to issue a Complaint
Makes final determination of whether rule violations occurred and appropriate penalty
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Identifying apparent rule violations: NFA’s Disciplinary cases are limited to violations of NFA’s rules
Potential violations are identified in examinations or investigations
Examiners work with NFA enforcement attorney to reach initial conclusion on whether violation has occurred
Senior staff determine whether to bring matter to BCC
NFA Disciplinary Process
BCC Review: Background on BCC
BCC reviews a report prepared by staff on the apparent rule violation(s)
BCC authorizes a formal Complaint if it believes the evidence provided supports a probable cause determination that an NFA rule(s) has been violated
Complaint identifies the alleged rule violations and the activity that constitutes the violations
NFA Disciplinary Process43
Post Complaint:
Background on NFA’s Hearing Committee Prehearing Conference Settlements Hearings Decision Penalties Appeals Process
NFA Disciplinary Process44
Emergency Disciplinary Action: NFA also has authority to take an emergency action known as a
Member Responsibility Action (MRA)
NFA’s Executive Committee will issue an MRA at the recommendation of staff when it believes the action is necessary to protect the markets, customers or other Members
MRA may summarily suspend a Member, impose restrictions on the Member’s operations or impose other remedial sanctions without a hearing
NFA Disciplinary Process 45
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Emergency Disciplinary Action: Member respondent is entitled to a prompt hearing on the MRA
3 person Hearing Panel presides over the hearing
Issues a decision that may affirm, modify or lift the MRA
Member respondent may appeal an adverse decision to the CFTC
NFA Disciplinary Process
May 7, 2015
UPDATE ON SECTION 4S POLICY AND PROCEDURE REVIEW
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Facial Review – Complete for all provisionally registered entities
Detailed Review NFA policy and procedure review and coordination with CFTC Feedback letters on specific topics
Corrective Action follow-up Acknowledgement Letters
Section 4s Policy and Procedure Review Process
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Section 4s Policy and Procedure Review Status
Complete Work in progress - Status Future Feedback and Correction Topics
CCO – Acknowledgement letters sent
Business Continuity and Disaster Recovery – Corrective action review/acknowledgement letters
Conflicts of Interest – Corrective action review
Risk Management Program – Feedback letters sent – awaiting Member response
KYC Disclosures Market Practice
Special Entities Documentation Duties (misc &
general) Processing & Clearing Recordkeeping Reporting Segregation
May 7, 2015
NEW SD AND MSP WINJAMMER™ FILINGS
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Rule 2-49 Amendment Requires SDs and MSPs to submit documents, notices, and
reports to NFA and CFTC in manner prescribed by NFA.
Requirements to submit reports via WinJammer Periodic Risk Exposure Reports Chief Compliance Officer Annual Reports Business Continuity and Disaster Recovery Contact Information
Submit NFA Annual SD/MSP Questionnaire via Annual Questionnaire System
New SD and MSP WinJammer™ Filings
Information on Filing Requirements
Select Swaps Information at the top of NFA’s homepage.
Choose ‘Filing Requirements for Swap Dealers and Major Swap Participants’ from the list of options available in left hand pane
Section Title
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Resources Available
At bottom of Filing Requirements for Swap Dealers and Major Swap Participants there is information on applicable rules, notices, CFTC press releases, and WinJammer.
Section Title
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May 7, 2015
REGULATORY COORDINATION DISCUSSION
May 7, 2015
QUESTION & ANSWERSESSION