SD and MSP Member Regulatory Conference May 7, 2015.

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