Appendix 4. Industry Trends and CFTC Resource Requirements

Industry Trend 3: Intermediaries are Investing in New Business Processes and Technology

The application of CEA core principles related to business conduct standards, reporting, and recordkeeping standards and requirements to swap dealers, major swap participants, and end-users requires varying degrees of business process and technological changes. Large financial institutions have a high level of sophistication under prudential regulation, but may have a high-level of fragmentation in internal order, trade, and settlement information systems. Smaller entities, including some end-users, might have little to no experience under regulation (outside of accounting and auditing standards) but have such a low transaction volume that only a single information management system is in place.  The Dodd-Frank business conduct standards attempt to move all the players to best practices of customer interaction, corporate governance, and recordkeeping. Likewise, Dodd-Frank reporting requirements may lead to changes to operations, infrastructure, and internal processes in order to move end-of-day transaction entry, confirmation, and reporting systems to an efficient real-time activity. Critical to ensuring registrants' compliance with CEA core principles and CFTC's regulations is the examinations mission activity.

Examinations

• Examinations are formal, structured assessments of regulated entities' operations or oversight programs to assess on-going compliance with statutory and regulatory mandates.  Regular examinations are the most effective method of ensuring that the entities' are complying with the core principles established in the CEA (as amended). Reviews of registered intermediaries ensure compliance with mandated standards regarding the fitness and conduct necessary to ensure the protection of market participants and the financial soundness of the market. Examinations are performed by multi-disciplinary teams of attorneys, risk analysts and accountants depending on the scope and entity.
• Examinations of FCMs' and RFEDs' compliance with applicable capital, segregation, and financial reporting requirements help ensure that markets are protected from systemic risk and that the funds belonging to customers are protected from loss.
• The Commission will evaluate NFA methodologies and processes for monitoring CPO and CTA compliance with CEA and Commission regulations.
• Oversight of the financial surveillance and compliance programs of DSROs are designed to ensure that the DSROs are effectively monitoring the financial integrity of market intermediaries and protecting customer funds.
• The Commission will require resources to work closely with NFA, in its role as first-line regulator, on the development of a comprehensive program for the oversight and assessment of SD and MSP compliance.  The program will be administered by the NFA. In addition, the CFTC will need additional subject matter experts to conduct direct examinations of swap dealers and major swap participants, either jointly with NFA or independently.
• Limited scope direct examinations of key intermediaries, including FCMs, swap dealers, and MSPs, CPOs, and CTAs will become increasingly resource intensive to the Commission to ensure compliance with new rules related to customer protection.  In addition, the Commission anticipates an increase in the number of registered intermediaries, including foreign institutions registering as swap dealers and MSPs, that will be sizable enough to warrant direct examinations.
• The Commission will likewise perform direct reviews of the DSRO examinations programs. The reviews will include an assessment of the DSRO's oversight of member compliance with minimum financial and related reporting requirements, as well as certain non-financial requirements including disciplinary programs.  The results of these reviews will be used to identify areas of weakness and develop solutions for improvement.
• The Commission's examinations expertise will need to be expanded to examine SDRs' electronic systems accessibility by reporting counterparties, including swap dealers, MSPs, and other market participants.  In addition, CFTC examinations will address SDR compliance with their responsibilities to notify the Commission in instances of untimely reporting of swap transaction data, including off-facility transactions, from reporting counterparties.