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Outcome Objective 2.2

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Outcome Objective 2.2: Commodity professionals meet high standards.

Performance Measure 2.2.1



Performance Measure 2.2.1: Percentage of self-regulatory organizations that comply with core principles.
Status: Effective
Data Source: Documentation from SROs and FCMs under review, agency reports, and files from reviews and analyses.
Verification: Review and analysis of systems, data, procedures, policies, practices, and manuals, including on-site visits at SROs and FCMs.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

DCIO met the performance target for FY 2010.

Core Principle 11 provides, in relevant part, that a DCM shall establish and enforce rules to ensure the financial integrity of FCMs and the protection of customer funds. DCMs, in their capacity as SROs, receive and review monthly financial reports submitted by FCMs for the purpose of assessing whether the FCMs are in compliance with the Commission’s and the SRO’s minimum financial requirements, including requirements related to the safeguarding of customer funds. In addition, Commission regulations and SRO rules require an FCM to file a notification with the Commission and the FCM’s designated SRO whenever the SRO fails to meet capital and segregation requirements.

DCIO staff conducts periodic, routine examinations of the financial and sales practice programs of the SROs for the purposes of reviewing the effectiveness of such programs and to assess whether SROs enforce DCM and Commission rules related to financial and related reporting requirements. DCIO’s examinations of SROs generally involve an assessment of some or all of the following areas: the level of staffing by SROs dedicated to conducting financial and sales practice reviews of FCMs; the conduct of infield examinations of FCMs; the review of financial statements and regulatory notices submitted by FCMs; the review of the FCM’s maintenance of required books and records; and the review of the SRO’s disciplinary program.

Staff also conducts reviews of all regulatory notices and monthly financial reports filed by FCMs with the Commission and with the SROs. Staff consults with the SROs regarding any material financial issues raised by the FCM filings. Such reviews and consultation provides staff with an opportunity to assess the effectiveness of the SROs oversight programs and their enforcement of DCM and Commission financial, compliance and related financial reporting requirements.

Performance Highlights

DCIO staff initiated a full-scope review of an SRO’s financial and sales practice program during FY 2010. The scope of the review encompasses the SROs’ staffing levels and conduct of infield examinations, and review of financial statements and regulatory notices. Staff anticipates completing the review during FY 2011. Staff also reviewed all regulatory notices and financial reports filed by FCMs during FY 2010 for compliance with Commission regulations, and consulted with the appropriate SRO regarding any evidence of apparent violations of Commission or DCM financial rules. Staff also conducted several direct examinations of FCMs during FY 2010 for the purpose of assessing the firms’ compliance with Commission and DCM regulations. Such reviews of the regulatory notices, financial filings, and direct examinations, provide an opportunity for staff to assess the effectiveness of SRO oversight programs and the extent to which SROs enforce their financial requirements.

Performance Measure 2.2.2



Performance Measure 2.2.2: Percentage of derivatives clearing organizations that comply with core principles.
Status: Effective
Data Source: Documentation from DCOs, agency reports and files, and financial surveillance materials.
Verification: Review and analysis of systems, data, procedures, policies, practices, and manuals, including on-site visits at DCOs.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

DCIO met the performance target for FY 2010. Three reviews to assess compliance with certain core principles were completed during FY 2010. Based on its reviews, staff determined that the DCO programs met the applicable requirements of the CEA and Commission regulations. In addition to conducting these reviews, DCIO staff conduct financial and risk surveillance of DCOs and clearing members on a daily basis, a central element of DCIO’s ongoing oversight. Staff have identified no instances of noncompliance. Another component of DCO oversight is the review of rules and rule changes of DCOs. During the past fiscal year, 58 rule submissions, many containing multiple rules, were filed by DCOs under the self-certification provisions of the CEA. Staff reviewed each of the submissions and found none that violated core principles.

Performance Highlights

Completed reviews of DCOs focused on core principles for financial resources, risk management, and treatment of funds. Based on its reviews, staff determined that the DCO programs met the applicable requirements of the CEA and Commission regulations.

Performance Measure 2.2.3



Performance Measure 2.2.3: Percentage of professionals compliant with standards regarding testing, licensing, and ethics training.
Status: Effective
Data Source: NFA’s audit reports.
Verification: NFA audits and the agency’s ongoing oversight of NFA’s compliance and registration programs.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

DCIO met the performance target for FY 2010, i.e., 100 percent of professionals were compliant with standards regarding testing, licensing, and ethics training.

Performance Highlights

In September 2010, the Commission published final rules concerning off-exchange retail foreign currency transactions. (75 Fed. Reg. 55410, September 10, 2010.) Proposed rules were published in January with a 60 day period provided for public comment. (75 Fed. Reg. 3282, January 20, 2010.) The Commission received, reviewed and considered approximately 9,000 comment letters before releasing the final rules.

The rules follow the passage of the Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1651, 2189-2004 (2008), also known as the Farm Bill, and the Dodd-Frank Act, P.L. No. 111-203 (2010). In particular, the Farm Bill: 1) clarified the scope of the CFTC’s anti-fraud authority with respect to retail off-exchange foreign currency transactions; 2) provided the CFTC with the authority to register entities wishing to serve as counterparties to retail forex transactions as well as those who solicit orders, exercise discretionary trading authority and operate pools with respect to retail off-exchange foreign currency transactions; and 3) mandated minimum capital requirements for entities serving as counterparties to such transactions.

Pursuant to this authority, the Commission devised a comprehensive scheme that puts in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital, and other operational standards. Specifically, the regulations require the registration of counterparties offering retail foreign currency contracts as either FCMs or RFEDs, a new category of registrant created by the Farm Bill. Persons who solicit orders, exercise discretionary trading authority and operate pools with respect to retail forex also are required to register, either as IBs, CTAs, CPOs, or as APs of such entities. The regulations also include robust customer protections and financial requirements designed to ensure the financial integrity of firms engaging in retail forex transactions. Pursuant to the provisions of the Dodd-Frank Act, the rules became effective October 18, 2010.

Performance Measure 2.2.4



Performance Measure 2.2.4: Percentage of self-regulatory organizations that comply with requirement to enforce their rules.
Status: Effective
Data Source: Documentation from SROs, agency reports, and files from reviews and analyses.
Verification: Review and analysis of systems, data, procedures, policies, practices, and manuals, including on-site visits at SROs.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

DCIO met the performance target for FY 2010. As part of DCIO’s oversight program to assess SROs’ compliance with requirements to enforce rules, staff substantially completed the review of the financial surveillance program of an SRO, and completed one review to assess an SRO’s registration program during FY 2010.

Core Principle 11 provides, in relevant part, that a DCM shall establish and enforce rules to ensure the financial integrity of FCMs and the protection of customer funds. DCMs, in their capacity as SROs, receive and review monthly financial reports submitted by FCMs for the purpose of assessing whether the FCMs are in compliance with the Commission’s and the SRO’s minimum financial requirements, including requirements related to the safeguarding of customer funds. Commission regulations further require, and SRO rules require, an FCM to file a notification with the Commission and the FCM’s designated SRO whenever the SRO fails to meet capital and segregation requirements.

DCIO conducts periodic, routine examinations of the financial and sales practice programs of the SROs for the purposes of reviewing the effectiveness of such programs, and assessing the SROs’ compliance with applicable core principles, Commission regulations, and staff interpretations. DCIO also reviews the programs of registered futures associations for compliance with Section 17 of the CEA. DCIO’s examinations of SROs generally involve an assessment of some or all of the following areas: the level of staffing dedicated by the SRO to conduct financial and sales practice review of FCMs; the conduct of infield examinations of FCMs; the review of financial statements and regulatory notices; the review of the FCM’s maintenance of required books and records; and the review of the SRO’s disciplinary program.

Performance Highlights

DCIO substantially completed a review of an SRO’s financial surveillance programs that focused on the SRO’s oversight of member FCMs compliance with the Commission’s, and SROs’ minimum financial and related reporting requirements. Staff will present the final report for this review to the Commission in early FY 2011. DCIO also completed a review of an SRO’s registration program. DCIO determined that the SRO’s registration program was in compliance with applicable provisions of the CEA and Commission regulations. DCIO is in the process of conducting two other reviews of SROs’ oversight programs that will be completed during FY 2011.

Performance Measure 2.2.5



Performance Measure 2.2.5: Percentage of total requests for guidance and advice receiving CFTC responses.
Status: Effective
Data Source: Signed letters (formal) and email and telephone responses (informal).
Verification: Agency files maintained in chronological files and responses to formal requests published on the Commission’s Web site.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
95% 75% 90% 90% 90%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

90%

Performance Analysis & Review

CIO met the performance target for FY 2010. DCIO staff respond to numerous requests for guidance and advice on the CEA and Commission regulations each year. Requests are received from members of the public, market participants, intermediaries, SROs, foreign entities, and others. These requests may be formal, such as written requests for no-action, interpretative, or exemption letters; or informal requests for guidance and advice via e-mail and phone calls.

Although DCIO responds to all requests that it receives, it is not always possible for DCIO to respond within the fiscal year that it receives a request. DCIO estimates that up to 10 percent of requests may fall in this category. Some requests that raise novel or complex issues, or requests in the form of no-action letters, interpretations, or exemptions, require more time to research and to prepare a response. It should be noted, that the statistics on numbers of letters issued or e-mails responded to may not reflect the complexity of any particular matter, or the resources necessary to address one issue as compared to another issue. In addition, matters commenced in one fiscal year may overlap, and be completed during the subsequent fiscal year, resulting in some imprecision in statistical measures for a given year. DCIO makes every effort to respond to requests as quickly as possible, but the timeliness of a response also is affected by the speed with which a requester provides additional information sought by staff, and the length of time required by other Commission divisions or offices to review a draft response, factors outside the control of DCIO.

Performance Highlights

In FY 2010, DCIO responded to numerous requests, both formal and informal, for interpretations of the Commission’s registration requirements, and issued exemptive and no-action letters addressing various issues. Among the issues addressed are the circumstances under which general partners of commodity pools may be relieved from CPO registration requirements when a registered designee serves as the pool’s operator; registration implications where employees of a foreign branch of a U.S. bank serve in the capacity of IBs; and disclosure, reporting and recordkeeping requirements for CPOs of exchange-traded commodity pools. In connection with the no-action relief provided regarding exchange traded commodity pools, in September 2010, the Commission published proposed rules that would “codify” past relief and simplify procedures for CPOs seeking comparable relief in the future. (75 Fed. Reg. 57794 (Sept. 9, 2010))

Additionally, DCIO issued an exemption from the disclosure document requirements for a CPO of a commodity pool operated as a Delaware Series Limited Liability Company. Because there was limited liability and segregation of assets amongst the various series of the pool, staff permitted the CPO to distribute multi-part disclosure documents to prospective participants wherein the first part of the document contained disclosures regarding the pool as a whole and the second part contained disclosures relevant to the offered series only.

DCIO also issued a letter in FY 2010 providing guidance to CPOs on complying with the financial reporting requirements set forth in Part 4 of the Commission’s regulations. The letter assisted CPOs in meeting their reporting requirements by highlighting recent regulatory changes affecting the financial filings required of CPOs, and identified common deficiencies observed in prior years’ financial filings.

 

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