Tuesday, November 27, 2018

NFA Annual Review summarizes past year highlights and looks forward to coming attractions

By Brad Rosen, J.D.

The National Futures Association issued its 2018 Annual Review with a focus on the organization’s significant initiatives for the past year as well as a preview for coming attractions. The Annual Review, which covers the NFA’s fiscal year ending June 30, 2018, was released with little fanfare, apparently the day after Thanksgiving. It summarized enforcement activities as well as initiatives regarding the association’s emerging role as a swaps overseer. The review also looked to a number of other undertakings that are part and parcel of NFA’s regulatory mission.

A self-regulator’s year in enforcement. According to the Annual Review, NFA’s enforcement activities in fiscal year 2018 yielded the following results:
  • NFA’s Business Conduct Committee issued 17 complaints against 27 respondents. This compares to 14 complaints brought against 24 respondents in fiscal year 2017.
  • NFA’s disciplinary panels issued 16 decisions, and ordered six expulsions and five suspensions. In comparison, in fiscal year 2017, disciplinary panels issued 21 decisions, and ordered 15 expulsions and 3 suspensions.
  • NFA collected nearly $550,000 in fines in 2018 compared to nearly $700,000 in fines collected in 2017. 
An emerging swaps proficiency requirements program. NFA’s executive committee and board of directors approved the development of swaps proficiency requirements for associated persons (APs) engaging in swaps transactions. These requirements take the form of an online learning program with embedded test questions. The requirements will be applicable to all APs engaging in swaps activities, including those who are designated as swap APs at futures commission merchant (FCMs), introducing brokers (IBs), commodity pool operators (CPOs) and commodity trading advisors (CTAs), and those individuals who act as APs at swap dealers (SDs). The NFA already has proficiency requirements for all APs.

To begin this project, the board approved the formation of a Swaps Proficiency Requirements Advisory Committee composed of industry experts from the various membership categories that will be impacted by these requirements. The advisory committee is currently consulting with and assisting staff regarding the development and implementation of the requirements. The NFA is also working closely with the CFTC, the board, NFA members, and relevant trade associations with regard to the undertaking. According to the Annual Review, it is anticipated that this program will be launched in early 2020.

Evolving swap dealer oversight activities. The NFA’s swap dealer oversight program has continued to evolve in an effort to enhance NFA’s monitoring of all SDs, including non-U.S. SDs. Staff has also stepped up its program for risk-based SD exams tailored to the specific regulatory concerns of each SD by enhancing its SD risk profiling system. The system is used to identify SDs that pose heightened regulatory risk and allocate NFA’s regulatory resources accordingly. The system also utilizes information from a number of sources including policies and procedures reviews, prior exam findings, risk exposure reports, and other monitoring activities.

NFA’s board has also approved the collection of standardized swap valuation (SVP) dispute information and SD monthly market and credit risk data. These additional data inputs enable NFA to gain further insights into an SD’s activities. This additional data, along with other quantitative and qualitative factors, is now being used to prioritize SD exams and help determine a particular exam’s scope. NFA will look to further enhance its SD profiling system to ensure that it is functioning as designed and accomplishing regulatory objectives.

Other regulatory activities. The Annual Review also identified a number of other activities conducted by the NFA and their related statistics as noted: 
  • In fiscal year 2018, NFA’s Registration Department processed nearly 500 firm registrations and approximately 8,400 individual registrations.
  • NFA’s Information Center—a service NFA offers to Members and the investing public—received more than 24,000 calls and responded to over 3,000 emails.
  • NFA’s restitution program disbursed more than $10 million to nearly 2,500 harmed investors during the fiscal years. Most of the victims served by this program were harmed by had dealings with non-NFA members.
  • NFA’s Fitness Investigations Group opened approximately 1,300 cases. These fitness investigation cases are due to fingerprint card results, answers to disciplinary history questions on the application, or regulatory information obtained during NFA’s background checks. 
Looking forward. In a letter accompanying the Annual Review, NFA Chairman of the Board Michael C. Dawley looked to the future and pointed to regulatory topics that are awaiting CFTC action such as the CFTC’s swap dealer capital rules and the SEF market reform that was discussed in CFTC Chairman Giancarlo’s White Papers. Dawley also noted that in his White Papers, Chairman Giancarlo has expressed his desire to raise the professional standards of individuals engaging in swaps-related activity. As a result, the NFA will be focused on the development of proficiency requirements for individuals engaged in swaps activities. Dawley also observed that flexibility and nimbleness are critical as the NFA adapts to changing regulatory and industry landscapes.