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Division Summary: Swap Dealer and Intermediary Oversight

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The DSIO program oversees the registration and compliance activities of intermediaries and the futures industry self-regulatory organizations (SROs), which include the U.S. derivatives exchanges and the National Futures Association (NFA).   Program staff develops regu­lations concerning registration, fitness, financial adequacy, sales practices, protection of customer funds, cross-border trans­actions and anti-money laundering programs, as well as policies for coordination with foreign market authorities and emergency procedures to address market-related events that impact intermediaries. With the passage of the Dodd-Frank Act, DSIO is responsible for the development of, or monitoring for compliance with, regulations addressing registration requirements, business conduct standards, capital adequacy, and margin requirements for swap dealers and major swap participants.

Budget Overview by Mission Activity

Swap Dealer and Intermediary Oversight Request
($ in thousands)
  FY 2011
FY 2012
FY 2013
Budget Positions FTE Budget FTE Budget FTE
Swap Dealer & Intermediary Oversight $16,040 70 71 $17,839 79 $30,334 130

Swap Dealer and Intermediary Oversight Request by Mission Activity
($ in thousands)
Mission Activity FY 2012
FY 2013
Budget FTE Budget FTE Budget FTE
Swap Dealer & Intermediary Oversight $17,839 79 $30,334 130 $12,495 51
Registration and Registration Compliance   $3,675 15
Data  Acquisition, Analytics, and Surveillance   $1,470 6
Examinations   $6,125 25
Economic and Legal Analysis   $1,225 5

Registration and Registration Compliance

Registration of Swap Dealers and Major Swap Participants. The Commission requests an additional seven FTE for FY 2013 to develop and implement a program to oversee the National Futures Association’s program for monitoring swap dealers’ and major swap participants’ compliance with applicable business conduct standards.  DFA directs the Commission to adopt both external and internal business conduct standards for these entities.  The proposed business conduct standards address such areas as:  risk management, monitoring position limits, diligent supervision, business continuity and disaster recovery, conflicts of interest, recordkeeping, reporting, swap confirmation, portfolio reconciliation, portfolio compression, and disclosure. These detailed business conduct standards are new regulatory requirements, and generally outside of the scope of CFTC requirements for other registrants such as futures commission merchants or introducing brokers.  The additional FTE are necessary to develop and implement a program to assess National Futures Association’s swap dealer and major swap participant compliance program to assess such entities’ compliance with these fundamentally new business conduct requirements.

An initial component of this program will require Commission staff to work with the staff of the National Futures Association in the design and implementation of an effective National Futures Association examination program.  Once such a program has been established and implemented by National Futures Association, the Commission’s role will switch to one of oversight over National Futures Association’s execution of the business conduct program.  Commission staff also will conduct direct examinations of certain swap dealers and major swap participants to access their compliance with the business conduct requirements.  Such direct examinations may be part of Commission’s assessment of National Futures Association’s execution of its oversight program.  Alternatively, the direct examinations may be conducted in response to a specific issue or general Commission concern with a particular swap dealer or major swap participant.  Direct examinations also are necessary to ensure that Commission staff maintains an adequate understanding of the operations at major swap participants and swap dealers so that staff is better positioned to respond to evolving business processes and other developments, particularly in responding to urgent situations.

The request for seven additional FTE to fulfill these responsibilities is based upon the Commission’s overall experience with the staffing resources needed to conduct financial surveillance oversight of self-regulatory organizations.

The National Futures Association expects to establish membership categories for swap dealers and major swap participants during the course of FY 2012.  The Commission will be required to respond to numerous requests for information regarding the registration obligations of certain entities, including domestic and foreign-based swap dealers and major swap participants in FY 2012 and beyond.  In addition, the Commission will also be required to review numerous National Futures Association rule submissions in support of registration of these entities, to assess whether the proposed rules are consistent with the CEA and Commission regulations.  Four additional FTE are requested to respond to issues in registration and retail foreign currency issues.

The Commission also anticipates that numerous registration issues will arise regarding foreign-domiciled entities that would otherwise be required to register as swap dealers or major swap participants as those terms are defined under the CEA and Commission regulations.  These issues may require the establishment of a program to assess the comparability of developing swap regulations in foreign jurisdictions in a manner consistent with the Commission’s current Part 30 program.  The Commission anticipates that it will need four additional FTE to properly staff this function.

Data Acquisition, Analytics, and Surveillance

Capital, Margin and Segregation requirements for intermediaries. The capital, margin, and segregation level of effort is currently eight FTE.  The staff is responsible for responding to requests for guidance or informal interpretation of the Commission’s capital, segregation, and financial reporting regulations.  In addition, staff also provide guidance and interpretation on the financial reporting and capital requirements for retail foreign exchange dealers, and provide guidance on the financial reporting requirements imposed upon commodity pool operators.  The staff also provides guidance on the applicability of generally accepted accounting principles to the regulatory accounting requirements of futures commission merchants, introducing brokers and commodity pool annual reports.  Staff further provides assistance and technical support in the analysis of potential regulatory violations and other issues.

The Commission requests an additional six FTE in FY 2013 to respond to requests for clarification, guidance, and interpretation promptly and completely.  The Commission further anticipates that revised or new regulations will be necessary after the implementation of the proposed regulations to address issues that were not foreseen in the original rule proposals.  Finally, additional FTE are necessary for the Commission to respond to the anticipated requests of numerous major swap participants and swap dealers to compute both initial margin and market risk and credit risk capital charges using proprietary mathematical models.  After the initial review and assessment of such models, staff will be required to perform periodic reviews of such models to assess their performance.  

While of limited scope in FY 2013, the Commission anticipates a major effort in 2014 to review bank entities that are registered with the Commission to assess their compliance with certain restrictions or limitations on proprietary trading and investments in hedge funds (i.e., the Volcker Rule).


Major Swap Participants, Swap Dealers and Managed Funds. Currently, the Commission has no staff devoted to the examinations and financial statement reviews of major swap participants and swap dealers.  The Commission requests an increase of 13 FTE to support this requirement.  The additional FTE resources would allow the Commission to initiate a program for the oversight of swap dealers and major swap participants, including:

While the bulk of the examinations of major swap participants and swap dealers will be performed by the NFA, the Commission will be required to undertake direct examinations of these entities in response to possible violations of the Commission's regulations, or as part of the oversight of the NFA's major swap participant and swap dealer surveillance program.  The Commission also supports routine direct examinations of these entities as necessary for staff to obtain an understanding of the books and records, and general back-office operations.  Such knowledge and familiarity of the operations of a major swap participant or swap dealer is necessary in order for staff to be properly prepared to respond in situations when these entities fail to meet its minimum financial requirements or other regulatory requirements.  The Commission would focus its direct examinations that are not conducted on a for-cause basis on those entities that present the greatest potential exposure.  These entities generally would be the most active and largest major swap participants and swap dealers, including the six members of the "G-14" dealers that are part of domestic banking organizations. 

Approximately three-to-five staff members are required to conduct a limited scope direct examination of a large FCM or, as measured by regulatory capital and customer funds on deposit, other comparable intermediary. These examinations generally run for six months from start to report generation.  Staff currently performs approximately 20 direct examinations each year. An increase of 13 FTE would allow the Commission to conduct limited scope direct examinations of selected swap dealers or major swap participants annually on a for-cause and routine basis, while also performing the other functions highlighted above.

In addition, the Commission requires two additional FTE to be allocated to the review of financial data submitted by the operators of large funds, including hedge funds.  Under the Dodd-Frank Act, the operators of large funds that are subject to the jurisdiction of both the CFTC and SEC are   required to file financial data with the SEC through the Financial Industry Regulatory Authority (FINRA).  Operators of large funds that are only registered with the CFTC as commodity pool operators will file financial data with NFA.  Both the CFTC and SEC would review the financial data for potential systemic risk issues and provide information to the Financial Stability Oversight Council.    The two additional FTE would review such data to identify potential systemic risk issues.  Financial and risk surveillance systems will be augmented or modified to support this monitoring.

National Futures Association. In addition to working with NFA on the development of NFA's program to oversee major swap participants and swap dealers, the CFTC also will develop a program to assess NFA's self-regulatory responsibilities with respect to major swap participants and swap dealers.  The development of this program began in the first quarter of 2012 in order to ensure that the Commission is prepared to fulfill its regulatory responsibility to oversee the NFA once NFA commences its reviews. 

The Commission currently has 20 FTE committed to conducting annual reviews of the financial surveillance programs of the NFA and CME.  In order to conduct an annual review of the NFA's oversight program over major swap participants and swap dealers, and to continue the current review of self-regulating organization, it is estimated that an additional 10 FTE would be necessary to fulfill the Commission's mandate.  The additional FTE reflect that NFA and CME currently oversee 123 futures commission merchants, while the Commission is anticipating approximately 200 swap-related entities to register as a result of the DFA rulemakings.  In addition, hedge funds, large financial entities, large commercial entities and other major swap participants are likely to be much more sophisticated from an operational and bookkeeping perspective than many of the current futures commission merchants that have limited balance sheets and engage primarily in on-exchange futures transactions and/or off-exchange retail forex transactions.  These sophisticated institutions will require additional staff for data acquisition and analysis. In addition, the staff assessing these sophisticated institutions will be supported by the integration of NFA systems and data with CFTC systems and data.  Information will be presented for analysis in consolidated views so they can focus on analysis and review and spend less time correlating data from multiple sources.

Economic and Legal Analysis

Commission-wide legal counsel. FY 2013 will be the first full year under DFA rules.  The complexity and scope of the Commission’s regulatory framework, pursuant to its new statutory mandate, will meet with the day-to-day reality of a significantly expanded and global marketplace, including fundamental changes to historically regulated entities as well as to participants in the previously unregulated swap markets. 

Interpretation and Guidance. Market participants will have requests for clarification and guidance once the new regulations are adopted and during the implementation period.  Further, rules that have been proposed jointly by the CFTC and SEC would establish a formal process to address inquiries regarding the treatment of products as swaps or security-based swaps and the applicable regulation of mixed swaps.  Staff will be required to review and develop proposed interpretations, policies, and possibly regulations for all aspects of the DFA changes.    Based on experience over the years with the implementation of other new registration schemes (e.g., for commodity pool operators and commodity trading advisors, for introducing brokers, and for retail foreign exchange dealers), there are bound to be questions arising that need a response – whether informally, by way of email or telephonic inquiry, or formally, by way of a staff-issued interpretative, no-action or exemptive letter or a Commission-issued order or regulation (or amendment thereto).  Because of the tremendous consequences of not providing adequate support for new regulated entities, the Commission is requesting resources to ensure prompt, well-reasoned and accurate responses.  Also, because many of these issues will be questions of first impression, the time taken to provide responses to the issues will be longer than it is today.  The Commission also anticipates the need to be actively involved in the preparation of interpretations relating to jurisdictional issues arising under the Dodd-Frank Act amendments to the CEA.  Timeliness is key to minimizing disruption to the orderly workings of the marketplace.

Top FY 2011 Accomplishments

DSIO staff members were appointed Team Leads of six Commission rulemaking teams to develop regulations mandated by the Dodd-Frank Act.  DSIO was the Team Lead of the following regulatory areas: Capital and Margin for Non-Banks; Registration; Internal Business Conduct Standards; Off-Exchange Foreign Currency Transactions with Retail Participants; Investment Adviser Reporting; and the Volcker Rule.  DSIO also led interdivisional teams on the review and development of proposed amendments to the registration regulations and commodity pool operator and commodity trading advisor regulations contained in Part 3 and Part 4, respectively, of the Commission’s regulations to conform such regulations with the Dodd-Frank Act. 

DSIO conducted reviews of the financial surveillance oversight programs of the National Futures Association, CME Group, and Minneapolis Grain Exchange.  DSIO’s reviews focused on the self-regulatory organizations’ program for the assessment of member-FCMs’ compliance with exchange and Commission minimum capital, customer funds protection, and financial reporting requirements.

DSIO staff conducted direct examinations of select FCMs to assess their compliance with Commission requirements including minimum capital, customer funds segregation, and financial reporting regulations.  These reviews provide staff with an opportunity to monitor and to assess the back-office operations of Commission registrants, including proprietary recordkeeping systems and recordkeeping systems provided by third-party service providers.  Such reviews provide staff with the knowledge and experience necessary to respond promptly to a potential financial crisis, including instances of an FCM failing to comply with minimum capital or segregation requirements.

The Commission approved final regulations establishing a comprehensive regulatory regime governing off-exchange forex transactions with retail participants in September 2010.  The regulations became effective October 2010.  Since the adoption of these regulations, DSIO has addressed numerous requests for informal interpretation and general questions regarding the application of the forex regulations from the general public and other US regulators.  In this regard, DSIO staff provided information concerning the development and operation of the forex regulations to staff of the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Securities and Exchange Commission to assist with the development of their respective forex regulations.  DSIO staff also drafted proposed technical amendments to the Commission forex regulations to incorporate necessary changes resulting from the Dodd-Frank Act, and drafted an interpretation of the Commission’s jurisdiction over forex transactions involving retail foreign exchange dealers. 

DSIO staff drafted and recommended to the Commission that it publish in the Federal Register final rule amendments affecting certain commodity pool operators of commodity pools whose units of participation are listed and trading on a national securities exchange.  Specifically, the amendments codified certain relief from disclosure, reporting, and recordkeeping requirements that Commission staff previously had provided to these commodity pool operators on a case-by-case basis. 

Top FY 2012 Planned Outcomes

DSIO staff will recommend to the Commission final regulations mandated by Dodd-Frank Act in the following regulatory areas Capital and Margin for Non-Banks; Registration; Internal Business Conduct Standards; Off-Exchange Foreign Currency Transactions with Retail Participants; Investment Adviser Reporting; and Volcker Rule:  Also, complete the proposed conforming amendments to Part 3 and Part 4 of the Commission’s regulations.

DSIO staff will work closely with the National Futures Association on the development of a comprehensive program for the oversight and assessment of swap dealers’ and major swap participants’ compliance with the new business conduct standards established by the Commission under the Dodd-Frank Act.  The program will be administered by the NFA, in consultation with DSIO staff.  In addition to NFA conducting direct examinations, DSIO staff also will conduct direct examinations of swap dealers and major swap participants to assess their compliance with business conduct standards.  DSIO direct examinations may be conducted jointly with NFA or on a separate basis.

DSIO staff will develop a program for staff to follow in assessing the NFA’s oversight of swap dealers’ and major swap participants’ compliance with the Dodd-Frank requirements, including business conduct, capital, margin, and segregation requirements. 

DSIO will perform a review of the financial surveillance programs of the major self-regulatory organizations, the NFA and the CME Group. The reviews will include an assessment of the SRO’s oversight of members’ compliance with minimum financial and related reporting requirements, as well as certain non-financial requirements including sales practices and disciplinary programs.

DSIO staff will respond to requests for interpretation or other requests for relief or information resulting from the Dodd-Frank rulemakings.  In this regard, DSIO anticipates numerous requests from industry participants and other members of the public regarding clarification or relief from the swap dealer and major swap participant registration requirements.  Staff further anticipates requests for interpretation of other rulemakings including capital, margin, and business conduct regulations.

Top FY 2013 President's Budget & Performance Planned Outcomes

Develop and issue rulemakings, orders, interpretations, and other regulatory work product related to swap dealers, major swap participants, FCMs, IBs, CPOs, CTAs, and APs.

Conduct annual reviews of SRO oversight programs, including NFA’s program for the oversight of swap dealers and major swap participants.

Conduct direct reviews of Commission registrants, including FCMs, swap dealers, and major swap participants to assess their compliance with applicable regulations governing financial requirements and business conduct standards.

Review commodity pool financial data submitted by commodity pool operators for the purpose of assessing whether the financial positions of a commodity pool may pose systemic risk issues.

Review, evaluate and make determinations concerning applications submitted by FCMs, swap dealers, and major swap participants to use proprietary models to compute regulatory capital and margin for uncleared swap transactions. 


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