2020 has been a strange year.  Throughout this unprecedented period Turnkey’s staff has had a front row seat for watching the derivatives landscape evolve. New trends, patterns, and approaches have been put in place by regulators as well as industry participants. Here are several areas to pay attention to going into 2021.

CFTC Becomes Federal Bitcoin Regulator

Turnkey staff has been involved in compliance long enough to see several new product types go from unregulated to regulated.  Based on this experience, it appears Bitcoin, Ether, Ripple, and all other crypto assets are likely to be classified as currency by regulators. It also seems that a federal regulatory framework is coming and also needed for the still nascent space.  What is currently evolving with digital currency regulation screams of what occurred with spot retail forex in the early to mid-2000s. Reading the tea leaves, for better or worse, all forms of crypto currency appear they will be regulated in a similar fashion to how traditional fiat currency is regulated. While that statement may be controversial to some, the regulatory play book and approach unfolding is something Turnkey has seen before. Expect significant regulatory changes in the cryptocurrency world during 2021.

Industry Growth Trends

As a derivatives consulting firm Turnkey’s customer base is very broad and diverse. Our clients engage in traditional exchange cleared commodity futures and options products, off-exchange spot foreign currency transactions, blocked and voice brokered commercial futures, physical commodities, OTC swaps of all types, and a variety of digital assets.  For years new applications for CFTC and NFA registration have been trending down.  Industry consolidation, the close of the trading floors, and a runaway stock market taking “fear” off the table all worked to create significant headwinds for the space.  April of 2020 saw most of the world shut down. However, during this period the derivatives industry ramped up. Layoffs, work from home edicts, and intense shifts to investor sentiment brought many new industry participants to the table. While this exuberance has abated after the US election, in Turnkey’s view, the trend looks like it may hold into 2021. Expect increasing competition in 2021.  Many of Turnkey’s newest startup customers will be hitting the ground running the first of the year.

Regulatory Audit Activity

Onsite, in-office, regulatory examinations after March of 2020 have all been conducted virtually.  After years of supporting industry participants through regulatory exams, Turnkey saw a significant uptick in the number of reviews being conducted. Initially, it appeared as if routine examination activity may grind to a halt. However, by the end of April and into May a much higher percentage of Turnkey’s customer base than usual had been selected for review. This pattern has held since that time and does not show signs of changing.  It is Turnkey’s opinion examiners not being able to travel significantly increased their efficiency. With no travel restrictions examiners can now cover more reviews and manager more audits at a time. While the breadth of exams seems to have increased, the timeliness of exams has suffered. Turnkey typically experienced routine audits taking 3 to 4 months pre-pandemic. Post-pandemic these review times have shot up in some cases to as long as six months. Based on feedback from our contacts in the industry we don’t expect audit travel to pick up any time soon. If you haven’t been reviewed recently 2021 is likely the year auditors will show up – virtually.

Compliance Will Be More Challenging

During October of 2020 Turnkey wrote about observed shifts in CFTC, NFA, and CME expectations regarding written supervisory procedures. In that article Turnkey included what we refer to as “Hidden” WSP obligations. Take the time to read this piece in 2021. Over the course of the year regulator’s “exam style” appears to have shifted from how industry reviews have been traditionally conducted. As an example, in the past NFA’s audit approach was one that Turnkey would characterize as being “regulatory centric”. Examiners would consider a rule or regulation, review company WSPs, ensure the policies addressed what needed to be addressed, and they would mark the testing item off with little fanfare. Today’s exams are different. During 2020 Turnkey observed NFA auditors using what we’d refer to as an “evidence centric” approach.

Using the same example from above, today’s NFA examiner will consider a rule or regulation, review company WSPs, engage with firm staff about what has been written, compare this against the regulatory obligation, and then will require the firm provide documentary evidence to ensure that the policy in place is in fact being followed. While Turnkey believes this new audit approach is far superior with regard to overall audit quality, it will create significantly more work for industry participants. For 2021 make sure that all WSP processes that can be documented are in fact documented in writing. Examiners will be asking for evidence of how process works and no longer will simply take the company’s word for it.

Turnkey Ready to Help in 2021

Firms considering registering with the CFTC and NFA during 2021 should contact Turnkey. Firms thinking about launching a brokerage or trading business in the cryptocurrency space should speak with Turnkey. Firms that have not been audited within several years should contact Turnkey to learn about the latest CFTC, NFA, and CME audit approaches. Firms that are not familiar with audit process and technique, should speak with Turnkey.  While 2020 has been wholly unpredictable, Turnkey has remained a reliable industry leader and valuable partner to many derivatives businesses. We’re thankful for all the clients who have placed their trust in us over the years. We’d love to earn your business in 2021!  Here’s to an incredible (pandemic free!) New Year.

More 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. Not a subscriber to our newsletter? You’re missing out! Sign up and request to receive more information here.