CFTC, NFA, CME – Written Supervisory Procedures

Commodity Futures Trading Commission (“CFTC”) registrants often mistakenly believe company written supervisory procedures (“WSPs”) once established do not need to be adjusted. Many times, after Turnkey Trading Partners (“Turnkey”) establishes a consulting relationship with a new customer, it is quickly determined that an overhaul of company policies and procedures is necessary. How can this be? Where is the disconnect between industry participants and regulators occurring?  Can this problem be avoided?

Obligations At Registration

The most common mistake Turnkey has identified when a brokerage or trading firm has poor WSPs, stems from their perception of the National Futures Association (“NFA”) registration process. For those unfamiliar, to register with the CFTC for commodity interest trading activities an application must be submitted to NFA.  Through this submission certain documents and forms are collected and reviewed dependent upon the type of CFTC registration being pursued.  Once approved for registration, firms are often under the mistaken impression that the policies requested by NFA during an applicant review are all that is required of them. This is simply not the case.  Readers of this article that work at an organization which only has in place the policy documents requested by NFA at the time of registration should contact Turnkey immediately.

Known WSP Obligations

At the time of registration NFA does not require applicants to provide all necessary and required policies and procedures.  Rather, regulators have an expectation that from the date of registration going forward all required policies and procedures are in place and are known by the firm. This means registrants are required to have WSPs within a “compliance manual” that can be referenced by applicable company staff. Though this is not an exhaustive list, at a minimum, registered CFTC firms should put in place the following policies:

  • Account Opening Procedures                                                 Ethics Training Policies                 
  • Business Disaster Recovery                                                   Social Media/Public Communications 
  • Promotional Procedures                                                        Allocation Procedures
  • Supervisory Procedures                                                         Market Analyst and Research Policy
  • A Variety of Operational Procedures                                     Identity Theft/Data Protection Policy
  • A Privacy Policy                                                                      Cybersecurity Policies
  • Recordkeeping Policy                                                            Ethics Procedures
  • Pandemic Provisions (Covid-19)                                          Electronic Communications Policy
  • Order Handling Policy                                                          Internal Controls and Review Considerations

Once again, CFTC and NFA regulated firms that have not considered, at a minimum, the above written policies should consider contacting Turnkey immediately. Under regulatory audit, firms without these documents in place could encounter significant regulatory problems. It is always better to fix such problems prior to examiners beginning a review rather than during a review. While certain regulatory obligations may have been missed prior to the implementation of policies and procedures, at least these errors will not be ongoing and compounded. Firms that do have such policies in place should keep reading to learn about what Turnkey refers to as “Hidden” obligations and updates.

“Hidden” WSP Obligations

Turnkey has consulted hundreds, if not thousands of derivatives firms on a wide range of operational, accounting, and regulatory compliance matters.  Turnkey’s staff members are some of the best in the industry at understanding regulator expectations. This applies to rules and regulations required by the CFTC, NFA, and also the exchanges (primarily CME Group).  Turnkey has found that in general industry participants either do not understand or cannot keep up with how the industry announces and establishes new regulatory precedent. Unlike other regulatory bodies, the CFTC, NFA, and CME utilize what are known as Interpretive notices, No Action Letters, and/or Regulatory Advisories to adjust the practical or expected application of rules and regulations during examinations. This often leaves industry participants unaware of changes to regulator expectations with regard to a particular regulatory obligation. For this reason, Turnkey refers to such obligations as “hidden”.

The following is an example of a situation that Turnkey recently encountered with a customer. This customer contacted Turnkey due to an upcoming regulatory examination. The firm had been having difficulty with its WSPs and needed help. Overall the examiners felt the firm’s policies were in good order. They had been a registrant for over a decade with a great deal of experience in the commodity interest trading space. One area the firm had overlooked, and is now navigating with NFA, has been detailed below.

During the fall of 2019 NFA announced that they were making “technical” adjustments to their Interpretive Notice 9037.  For those who are unfamiliar this notice offers commentary on membership rules 2-9, 2-10, 2-29, 2-36. It also, and most importantly in this instance, provides guidance on the use and supervision of websites, social media, and other electronic communications.  When the interpretive notice was put in place January 1, 2020, NFA’s changes ended up being more than just technical. For the first time NFA’s expectation had been put in writing that member firms must put in place “written” procedures related to how they supervise electronic communications. These procedures were required to include a representation of the systematic review and consideration of email, instant messages, text messages, and social media messages. Prior to this adjustment NFA had not been implicit that such reviews, policies, and controls had to be put into writing and made a part of a firm’s WSPs.

As of today (October 2020) NFA is auditing NFA member firms with an expectation they are abiding by Interpretive Notice 9037.  If written policies related to the review of all electronic communications have not been put in place then NFA exams will be a struggle. Registrants without such policies will undoubtedly have to pursue corrective action, may receive lengthy audit reports, and the findings could potentially result in regulatory fines.  Turnkey encourages all NFA member firms to review this, and all other interpretive notices, no action letters, and regulatory advisories closely.

Practical Application

At least once annually, compliance staff must fully review and consider company WSPs. Current operational and compliance practices should be evaluated against all applicable rules and regulations. Be sure to remember that this includes all interpretive notices, no action letters, and regulatory advisories where “hidden” obligations can be found.  Compliance staff should also ensure that they are included on all applicable regulator and Turnkey communication distributions. This typically means signing up for an email list. While not all regulator notices are applicable to all firms, each notice sent should be read in its entirety. Lastly, compliance staff should be engaged with operational, brokerage, and trading staff to determine if any business changes have occurred since the firms WSPs were put in place or last reviewed.

About Turnkey

Regulated brokerage and trading firms have their work cut out for them in keeping up with the latest compliance obligations. Turnkey Trading Partners is an award winning firm that provides customized support to the brokerage and trading industry. We can assist Commodity Trading Advisors (“CTA”), Commodity Pool Operators (“CPO”), Introducing Brokers (“IB”), and Futures Commission Merchant’s (“FCM’s”) working within the alternative investments space.  Our team is well versed in both operational and regulatory matters relating to commodity futures, equities, bonds, options, swaps, forex, digital currency, cash and physical trading, as well as several other specialized financial markets transaction types.