Over the last several months, National Futures Association (“NFA”) has filed complaints against member firms for improper accounting practices.  Turnkey wanted to emphasize the importance of ensuring that all accounting and valuations are accurate at IBs and Swap Firms in light of these complaints. Failure to comply with NFA accounting standards and regulations can result in a hefty monetary penalty. In fact, NFA ordered London, U.K. firm Makor Securities London Ltd. to pay a $375,000 fine for accounting violations as of August 18, 2022.

Firms should always monitor NFA complaints to ensure that they are current with applicable industry best practices.  The Makor Securities action is one we feel IBs and Swap Firms should consider closely. For full details of the case please review NFA’s website. What follows is a simple summary of what we believe are the key points NFA noted when filing its complaint.

NFA alleged that Makor had violated certain Financial Requirement regulations, namely sections 4,5(a), and 5(c) by failing to maintain Adjusted Net Capital from as early as July of 2017. Readers are reminded that although net capital presentations for many firms are only required to be compiled monthly; regulator expectations are that all members subject to net capital obligations observe capital compliance at all times.

According to the complaint the primary reason Makor was out of capital compliance stemmed from a loan on the firm’s balance sheet made to one of Makor’s affiliates.  When mentioning the loan NFA stated that the balance had not been properly classified pursuant to CFTC regulation 1.17.  In particular that the receivable for the loan to the affiliate had to be excluded as a current asset. Their reasoning?  That unless the receivable is secured by readily marketable, unencumbered, collateral that can be converted promptly into cash it must be carried as non-current. NFA further added that any such collateral must also be in the possession or in the control of the registrant. NFA also went on to state that commissions and fees receivable as a result of swap transactions may be considered as current assets so long as the receivables are not outstanding for more than a specific number of days from the month-end accrual date, provided that they were billed promptly after the close of the month of their inception.

Based on the complaint it appears to Turnkey that Makor had executed certain swaps transactions with affiliates and incorrectly classified receivables balances on its balance sheet. Further, it appears that Makor had made inter-company transfers between affiliated entities and not properly classified or documented these transfers as loans.  These incorrect classifications impacted the firm’s balance sheet as certain amounts became non-current and thus non-allowable for the firm’s 1-FR net-capital presentation. Due to this incorrect classification, although the assets were allowed to be included on the balance sheet but only as non-current, the firm was then hit with several “follow on” violations. These included its failure to notify regulators of being under capital, failure to properly supervise its accounting processes, and a catch all charge, under strict liability standards, of having “known or should have known” it was violating regulations as far back as 2017 related to the incorrect classifications.

As stated above Turnkey monitors NFA complaints and considers the allegations as they are made public. We then review what occurred at the member firm in question to ensure that our internal processes and understanding of CFTC regulations and NFA rules are accurate. Swap firms and organizations with affiliates should take note of the case information above.  Inter-company transfers and the proper aging of swap commissions receivable are two areas that can be difficult to book and monitor correctly under CFTC regulations and NFA rules.  Turnkey  suggests that all registered firms use the details of such complaints and decisions to make sure one’s own firm is up to date with all financial requirements. Firms seeking additional accounting guidance and support should contact Turnkey today for a consultation.