10/9/18 - CFTC Issues Final Amendments to Its Rules for Swap Dealer CCOs
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10/9/18 - CFTC Issues Final Amendments to Its Rules for Swap Dealer CCOs

On Aug. 21, 2018, the Commodity Futures Trading Commission unanimously approved final amendments to its rules for chief compliance officers. The amendments clarify and simplify regulations governing duties of, and annual compliance-reporting requirements for, CCOs of futures commission merchants, swap dealers, and major swap participants. In a press release describing the amendments, CFTC Chairman Christopher Giancarlo stated that they demonstrate “[the CFTC’s] commitment to efficient and effective regulation”1 and ensure that CCO rules “are not overly burdensome, while maintaining or improving their overall effectiveness.”2

The CFTC also provided supplementary information clarifying its expectations on issues that the amendments do not necessarily address and that swap dealers frequently inquire about. These include:

Enhanced Expectations for Swap Dealer CCOs

Swap dealers have long known that under CFTC requirements, swap dealer CCOs have responsibilities (and associated liabilities) beyond those typically required of compliance officers of other types of financial institutions. For example, swap dealer CCOs are, among other things, required to attest to the effectiveness of policies and procedures that are outside of the purview of the compliance function at most institutions, including risk management. The CFTC indicates that the role of a swap dealer CCO, “under the Dodd-Frank Act, goes beyond the customary and traditional advisory role of a CCO and requires more active engagement.”3

The Stature of Swap Dealer CCOs

Given the central role played by swap dealer CCOs in swap dealer compliance programs and the enhanced responsibilities placed on swap dealer CCOs by the CFTC rules and supplementary information, swap dealers may want to consider raising the stature of the swap dealer CCO within their organizations. Some swap dealers have designated the CCO of their broader organization as their swap dealer CCO. In such cases, swap dealers may also want to consider appointing the CCO to a position on an executive-management committee or board. This would not only heighten the stature of the swap dealer CCO, it would heighten the stature of the entire swap dealer compliance function — both within the swap dealer as well as the broader institution — and enhance and facilitate reporting to the senior officer and board of directors. The CFTC and the National Futures Association would likely view this as a positive development.

The Policy and Procedural Duties of Swap Dealer CCOs

Swap dealers often struggle with issues related to ownership of their swap dealer compliance manual, as well the manual’s policies and procedures. In addition to suggesting that swap dealer CCOs must be more engaged than other types of CCOs, the commission amended CFR 3.3(d)(1) to state that a swap dealer CCO’s duties include “administering each of the registrant’s policies and procedures relating to its business.”4 Further, the commission states that a swap dealer CCO may “be able to fulfill his or her role through actively engaging in processes involving ‘reviewing, evaluating, and advising’ on policies and procedures and compliance matters.”5 However, the CFTC does not intend for the swap dealer CCO’s increased involvement to come at the expense of the direct involvement of other senior officers, including those in the first line:

[This] is not intended to diminish the role and direct involvement of other senior officers, supervisors and other employees with more direct knowledge, expertise, and responsibilities for various regulated activities within their business lines … other personnel may implement the procedures on a day-to-day basis when undertaking related activities in the normal course of business.6  

Accordingly, swap dealer compliance functions should own and administer the swap dealer compliance manual and most swap dealer compliance procedures, while other functions may be responsible for implementation. (Certain procedures that are specific to the various functions or units responsible for implementing a firm’s policies may be owned and administered by those functions or units.)

How Promontory Can Help

Promontory’s markets-businesses solution center has assessed the design and operating effectiveness of clients’ processes related to the CCO rule and assisted in their implementation and remediation.

Members of our solution center combine extensive industry experience with deep regulatory knowledge to provide clients with practical solutions to key issues and insight into industrywide challenges and regulators’ concerns. The solution center is co-led by one of the Office of the Comptroller of the Currency’s former senior deputy comptrollers for capital markets, who is currently a member of the NFA’s board and serves on the NFA’s compliance and risk committee. Members of our solution center also include a former chief compliance officer of Santander’s U.K. swap dealer, as well as compliance professionals who have hands-on experience assisting swap dealers in all matters related to registration, compliance, and exam preparation.

Promontory can assist your firm with any onboarding challenges commonly faced by swap dealers.

Contact Us

Munib Ali
Managing Director
mali@promontory.com
+44 207 997 3427

Doug Harris
Managing Director
dharris@promontory.com
+1 212 365 6568

DJ Hennes
Senior Principal
djhennes@promontory.com
+1 212 365 6989


FOOTNOTES

1. “CFTC Unanimously Adopts Rule Amendments Simplifying Chief Compliance Officer Duties and Annual Report Rules for FCMs, Swap Dealers and Major Swap Participants,” Commodity Futures Trading Commission (August 21, 2018).

2. Ibid.

3. “Chief Compliance Officer Duties and Annual Report Requirements for Futures Commission Merchants, Swap Dealers, and Major Swap Participants,” CFTC, Federal Register (August 27, 2018).

4. Ibid.

5. Ibid.

6. Ibid.