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 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?

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.

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. Though this is not an exhaustive list, at a minimum, most 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
  • Electronic Communications Collection/Supervision
  • Third Party Service Provider Policy

Under 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.

“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).  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”.

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.