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1/12/15 - CFTC Spells Out Its Expectations for Annual CCO Reports

Swap dealers, futures commission merchants, and major swap participants face tough new standards this year in submitting chief compliance officers' annual reports to the Commodity Futures Trading Commission.

The CFTC put forth the new standards in a staff advisory issued in late December by its division of swap dealer and intermediary oversight. The division said it had received numerous questions and had many discussions with registrants about the content of the reports, and hoped to "foster better compliance" by issuing guidance to all registrants.1

In a companion letter, the division also issued no-action relief allowing registrants additional time to consider the advisory as they develop this year's submissions; registrants will have up to 120 days after fiscal year-end to submit the CCO report, as long as they report material noncompliance issues within 90 days.2 Though the CFTC said the content of its advisory constituted guidance rather than a requirement, it also said registrants should consider implementing the recommendations "to improve the clarity and quality of the annual reports going forward." The additional time provided by the commission implies that it expects registrants to take a close look at the guidance and, where possible, incorporate it into this year's submission.

Key Takeaways from the Advisory

  • Registrants should include a definition of materiality. The CCO reports must list material changes to compliance policies and procedures and material noncompliance issues; the advisory said the reports should also describe the standard of materiality to provide helpful context about the changes and issues. The advisory, however, provides only limited guidance concerning how registrants should define materiality.
  • The description of compliance resources should be comprehensive. The advisory lists the types of information the division recommends including when describing the financial, managerial, operational, and staffing resources set aside for compliance. This list includes total budget for personnel, technology, and training, among other items. Perhaps more problematic for large registrants is the recommendation that the report identify shared resources and include "detailed infrastructure information" (on computers, technology, etc.).
  • CCO reports should provide both an overview and details. The division recommends including a summary of the compliance program, as well as a requirement-by-requirement assessment of compliance. The division suggests using charts to convey large amounts of information in the detailed assessment, though it cautioned that charts alone were not a substitute for a full description of substantive matters. Given the audience — the board or senior officer of the registrant and the CFTC — a sound approach would be to provide summary information and key conclusions within the body of the report, and provide granular information in appendices.
  • Tighter scrutiny of registrants' assessment of the effectiveness of policies and procedures. The division stated that a number of CCO reports had shortcomings in this area, and specifically criticized CCO reports that described the assessment methods only in broad terms, neglected to include conclusions, or focused on external reviews with little discussion of internal activities. While a narrative description of the overall assessment process is an important component of the CCO report, registrants must also assess the effectiveness of policies and procedures on a requirement-by-requirement basis.

Contact Promontory

We would be happy to discuss any questions you may have about the CFTC's advisory and how registrants should prepare their CCO reports. For more information, please contact:

Doug Harris
Managing Director, New York
+1 212 365 6568

DJ Hennes
Principal, New York
+1 212 365 6989

2. The relief is limited to registrants whose fiscal year ends on or before January 31, 2015. CFTC No-Action Letter No. 14-154. http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-154.pdf