In late September, the director of the Division of Swap Dealer and Intermediary Oversight (DSIO) of the US Commodity Futures Trading Commission (CFTC), Joshua Sterling, announced a new examination program for commodity pool operators (CPOs) and swap dealers that would commence in the first quarter of 2020. Since this announcement, the industry has had many questions about what the program will look like given its imminent implementation. In remarks on October 30 at an Alternative Investment Management Association meeting, Mr. Sterling provided more information about DSIO’s thematic review program.
The goal of the thematic review program is to help staff understand key areas relevant to how large swap dealers and CPOs operate and interact with one another in derivatives markets. The reviews or examinations are intended to provide DSIO with insight into important considerations as it contemplates improving swap dealer and CPO rules. In connection with the recent announcement that DSIO would move away from issuing no-action relief, the examinations will help DSIO gather facts to run its programs and support the CFTC’s mission as DSIO sees “fewer fact patterns coming in the door on an ad hoc basis.” Ultimately, DSIO hopes to prevent blind spots in its oversight and enhance its engagement with the registrants that it oversees.
A “thematic review” is targeted, focusing on a few issues on which DSIO has considered recommending CFTC action. At this point, the examinations will not be event-driven sweeps. Examinations will be confidential and educational, with a document request in advance of a five-business-day onsite visit, and will culminate in a general report of review wherein DSIO will share its findings on areas of improvement. DSIO does not intend to have follow-up requests or visits as part of the thematic examination program. The thematic reviews are “informational” in that DSIO will (1) gather information from swap dealers and CPOs, (2) assess the information, and (3) compare assessments across firms to identify “potential[ly] better ways of doing things.” Under DSIO’s thematic review program, it will not issue deficiency letters—at least not until DSIO publishes an examination manual to provide firms a greater understanding of the process.
DSIO will select firms for thematic examinations based on their size and amount of derivatives trading. The thematic examination program will not replace National Futures Association (NFA) examinations, nor will it duplicate NFA’s examination efforts. The CFTC’s Division of Enforcement will not participate in the examinations and, although DSIO will not look for matters to refer to the Division of Enforcement, it will retain the ability to refer issues relating to noncompliance to the Division of Enforcement.
While there isn’t a lot for most firms to do at the moment, the large swap dealers and CPOs that may be subject to examination should review policies and procedures to confirm that these are up to date and readily available.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Katherine Dobson Buckley
Chicago
Michael M. Philipp
New York
Thomas V. D’Ambrosio
Washington, DC
Steven W. Stone
Laura Flores
Mana Behbin
Philip K.W. Smith