NFA's Examination Approach for Swap Dealers and Major Swap Participants
National Futures Association Audio Conference
June 5, 2014
10:00AM CT
Operator:
Excuse me, everyone. We now have our speakers in conference. As a
reminder, please be aware that this call is being recorded. Please be aware that each of
your lines is in a "listen only" mode. At the conclusion of the presentation we will open
the floor for questions. At that time instructions will be given if you would like to ask a
question. I would now like to turn the conference over to Mr. Larry Dyekman. Please
begin, sir.
Larry Dyekman:
Thank you and welcome everyone. Thanks for joining us today.
My name is Larry Dyekman. I'm the Director of Communications and Education at NFA.
Before I turn the program over to the panelists, I just want to make a couple of
announcements. As the operator just mentioned, there will be a question and answer
session following a presentation; however, please do not attempt to ask a question until
you're being prompted to do so by the operator. Also, this program is scheduled to last
one hour, and we will try to answer as many of your questions as we can within that
timeframe. If we don't get to your question, please call our information center, and you
will be transferred to an OTC derivative staff member.
There are two telephone
numbers you can use to reach our information center. The first is 312-781-1410, and
the
second
is
800-621-3570.
You
can
also
email
a
question
to
[email protected], and I will repeat that contact information at the end of the
presentation. And so without farther adieu, I will turn the program over to Jamila Piracci,
NFA's Vice President of OTC Derivatives. Jamila?
Jamila Piracci:
Thank you, Larry, and thank you all very much for joining this call.
Before we get started with the formal presentation regarding our examinations of swap
dealers and major swap participants, I just wanted to reiterate some key points of
context. You will all recall that NFA acts as delegee for the CFTC for the processing of
registrations, and we do this for a number of categories. But for swap dealers and major
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swap participants there is an additional substantive aspect to registration, and it is - I
think you know - the submission of policies and procedures that demonstrate compliance
with the Section 4s implementing regulations under the Commodity Exchange Act. So,
our first function has been as a delegee to review those policies and procedures and
ultimately determine whether they demonstrate an ability to comply. You're all familiar
with working with us in that particular capacity.
The second role that we have with regard to SDs and MSPs is to conduct member
examinations because, as you know, swap dealers and major swap participants are not
only required to register with the CFTC, but they are also required to become members
of a registered futures association. In our capacity as a registered futures association,
NFA will conduct member examinations of SDs and MSPs just as we do for other
membership categories.
As many of you know by now, we expect to begin these
examinations this summer, and the purpose of this informational session is to ensure
that the SD MSP membership has the opportunity to learn more about what to expect
from the first examinations of swap dealers and major swap participants. The launch of
NFA's examination program marks a critical milestone in the implementation of Title 7
under Dodd-Frank, and we expect that we will learn a lot from each other, especially in
these early days.
We've said before that this will be an iterative process, and NFA is committed to working
with you as you strive to comply. Our goal is to begin a dialogue and to help you in your
efforts to achieve these fee-changing objectives set forth in Title 7. As Larry mentioned,
we will answer questions at the end of our formal remarks about these examinations,
time permitting, and we additionally welcome the opportunity to speak with your firm
individually if you have further questions that we don't have time to answer today or if
you have firm-specific concerns that would be more appropriately addressed individually.
With that, I'd like to turn it over to my colleagues who have key leadership roles in the
development of NFA's swap dealer and major swap participant examination program.
First, Shuna Awong, our Director of OTC Derivatives, joined NFA in 2012 after a nearly
20 year career in internal audit in the industry.
Cliff Allen, also a Director of OTC
Derivatives, joined NFA this year after over 15 years of internal audit and operations
roles also in the industry. Dan Dan Liu, our Manager of OTC Derivatives, has over eight
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years of experience in regulatory compliance, covering both futures and OTC derivatives
products. The three of them will brief you on the examination program and provide you
with some key information about what to expect, and we look forward to hearing your
questions at the end of the presentation and working with you as we all enter this
process. Thank you again for joining, and I will turn it over to Shuna now.
Shuna Awong:
Thank you very much, Jamila. I will briefly describe our annual
examination plan.
Then Dan Dan will walk you through how we will conduct
examinations.
Lastly, Cliff will describe the monitoring program we are currently
developing. So, with respect to examination plans, NFA is utilizing a risk-based
approach to examinations.
To determine which rules area to review and which
(inaudible 05:59) to examine at any particular time, we will consider factors such as the
inherent risk of a rule topic area and developments in the industry or at a particular
member (inaudible 06:12).
Every year we will develop an annual examination plan
which will outline the rule areas we will review and the firms we will review with the
approximate timing for that review.
As I mentioned earlier, we will develop an annual examination plan which will follow our
fiscal year of July 1 through June 30th. Our plan for the first fiscal year which is from
July 1, 2014, to June 30, 2015, is to perform examinations of US flood dealers and
MSPs with a focus on the role and function of the Chief Compliance Officer. Where
affiliated US swap dealer entities exist we hope to leverage the commonalities between
those entities and conduct a single exam visit. To date we have spoken with a few firms
and have gotten comfortable with this approach.
Now, Dan Dan will walk you through our examination process.
Dan Dan Liu: Thank you, Shuna. Early in our planning phase NFA staff will call the firm
to advise them of the upcoming examinations, and I will send documents to the firms
surely. What is what is referred to as a first day lever which provides formal notification
of the upcoming examinations, the expected time and durations of the onsite visit, any
requests for certain documents to be provided, and the first day they will be on site. We
will plan to arrive on site about 30 days after the first day lever is sent. The second
document is a questionnaire which seeks to obtain information to assist in the planning
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and scoping of the examinations. Some of it is background information. It addresses
whether certain events have occurred such as a change in CCO or a change in CCO's
reporting lines. We will also provide instructions for firms to submit documents to us
electronically through a (inaudible 08:32) drop box.
This provides a single secure
location for firms to send documents rather than having to email documents to different
examiners.
As mentioned before, we will start the onsite phase of our examinations about 30 days
after the first day lever is sent to the firm. We are estimating three weeks for us to be
onsite. Where we need to cover multiple entities during one onsite visit, we are allowing
for the possibility for additional time. Our examination team will be comprised of a
director, a manager, and two or three examiners. Our onsite examination will consist of
meetings and enquiries with key personnel to understand the infrastructure and
procedures in place supporting the firm's compliance with the regulations. We will also
verify our understanding by examining supporting evidence such as exception reports,
management reports, or observing evidence real time (inaudible 09:40).
We plan to discuss any potential issue during the course of the examinations and not
only at the end of the examination.
This will allow more time for any research or
clarification that might be needed and will facilitate a smoother exit interview. At the exit
interview we will summarize our draft findings and recommendations. After the exit
interview the exam team will return to the office to wrap up any remaining items in order
to close out the examinations. We will then finalize and issue a written report. Now, Cliff
will speak to you about the monitoring programs.
Cliff Allen:
Thank you, Dan Dan. As Shuna noted earlier, developments or trends in
industry and at member firms will help us to prioritize our examinations and use our
resources effectively. To do this we are in the early stages of developing a monitoring
program which we will roll out in phases over the next few years.
Our monitoring
program of member firms will focus on identifying significant developments at a firm.
This monitoring will occur through a combination of meetings and the review of key
reports. While we do not currently obtain reports filed with the CFTC, we are anticipating
a request on these items in the future as well as existing internal reports. We expect our
primary meetings to be with CCOs who can involve other individuals as needed.
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Furthermore, after we develop a history of examinations and work more closely with
swap dealers and major swap participant members, the benefit of that experience will
help us to prioritize our work. Finally, in addition to planned examinations, NFA will
conduct investigations due to events occurring at a swap dealer or major swap
participant or due to developments in the industry that warrant regulatory scrutiny. This
concludes the formal remarks, and we will now be happy to take questions.
Operator:
Thank you. At this time we will open the floor for questions. If you would
like to ask a question, please press the star key followed by the one key on your
touchtone phone now. Questions will be taken in the order in which they are received. If
at any time you would like to remove yourself from the questioning queue, press star
two. Again, if you would like to ask a question, press star one now. Our first question
comes from Pam Collier with BTMU.
Charles Constantin: This is actually Charles Constantin from BTMU. We were actually
cut off at the start of the remarks, and we just wanted to confirm whether or not the first
year of exams would only include US swap dealers and US MSPs.
Shuna Awong:
Yes, that's correct. The first year we will only cover US swap
dealers and MSPs.
Operator:
Thank you.
Jamila Piracci:
In addition to that, the monitoring that we will begin to do will
assist us in getting to know non-US swap dealers and MSPs, but given that the non-US
swap dealers and MSPs are working through a number of things with regard to
substituted compliance, we are taking the lead from the CFTC with regard to
developments there and the interpretation of what substituted compliance will mean. So,
we will keep you posted as those developments continue to progress.
Operator:
Thank you. Our next question comes from Ramona Ramsey with Bank of
Tokyo.
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Rhona Ramsey:
Actually, that's Rhona Ramsey. I have just a follow-up question to
what my colleague just asked with respect to, I guess, for foreign swap dealers and the
right now provision of registration. When do you think… Or I guess that I'm asking
really is do you get formally registered after you've gone through the registry
examinations?
Jamila Piracci:
No. The provisional registration of swap dealers and major swap
participants is due to the ongoing nature of the 4s requirement requiring firms to submit
policies and procedures demonstrating compliance with Section 4s of the act. So, the
provisional registration process is actually quite separate from the examination process
in terms of they don't relate so directly. The full registration of swap dealers and major
swap participants will be granted once all Section 4s requirements are final and require
compliance and the firm's policies and procedures with respect to those Section 4s
requirements have been deemed to demonstrate an ability to comply with the
requirements. Therefore, that process will be continuing even while swap dealer and
major swap participant members undergo onsite examinations with NFA.
Rhona Ramsey:
Thank you.
Jamila Piracci:
You're welcome.
Operator:
Thank you. Our next question comes from Andy Rutherford with
RBS.
Andy Rutherford:
Hi.
So, just to confirm, for non-US dealers you guys aren't
expecting to do any sort of onsite exams until after, you know, all the substituted
compliance determinations have been made. So, as of yesterday, the latest delay in no
action relief for non-US persons (inaudible 15:47), so I would assume then that you guys
won't make a determination until sometime next year.
Jamila Piracci:
It's a little more nuanced than that, I would say.
The onsite
examination program that consists of evaluating the function and role of the Chief
Compliance Officer is clearly something that pertains to US swap dealers because of the
substituted compliance determination granted with respect to the duties of the Chief
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Compliance Officer for non-US firms, but that does not mean that NFA does not have an
interest in non-US swap dealer members. Therefore, there could be monitoring activities
that we may engage in with non-US swap dealers, for one, and in addition, the
substituted compliance determinations are actually out but what I was referring to is that
the interpretation of what that means with regard to NFA's role and which requirements
non-US firms need to comply with and what to do when there are areas where there is
no substituted compliance - all of those things are being worked out with the CFTC.
We're in regular conversation with the CFTC about that, and so I can't say for sure that it
would be next year when that is concluded.
I think that there could be other kinds of activities that we may need to engage in with
non-US swap dealers, but with regard to the formal onsite examination of the Chief
Compliance Officer duties, that is something that we're obviously focusing on US swap
dealers because of the fact that those rules are not required of non-US swap dealers in
whole.
Andy Rutherford:
Okay. Thank you.
Jamila Piracci:
You're welcome.
Operator:
Thank you. Our next question comes from David Buschman with
Citi Group.
David Buschman:
Hi. Good morning. Thanks. Just real quick, I heard you say that
you were going to call the firms prior to a first day letter coming out. Is that true? And if
so, who would you be calling? The CCO?
Shuna Awong:
Yes. We will be contacting the CCO or the compliance contact,
and we will do that via a phone call with the firm and then we will send out the first day
letter.
David Buschman:
Operator:
Okay. Thank you very much.
Thank you. Our next question comes from Antonia Fong with ANZ.
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Antonia Fong:
Hi. Thanks. Just for where the first day letter provides 30 days'
notice to the firm for the onsite examinations, will there be some sort of notice period for
the monitoring, any calls for this issue that we need to organize? What can we expect in
terms of notice for that?
Jamila Piracci:
The purpose of monitoring is that it should be ongoing, and
therefore I wouldn't say that… I can't give you a timeline as to when some sort of period
of notice or anything like that. The purpose of a monitoring program is to engage in fairly
regular dialogue, and it could involve calls or requests for meetings on an ad hoc basis.
Certainly if there's a request for a meeting, we will do our best to coordinate schedules
for calendaring purposes.
Antonia Fong:
Okay.
Thank you.
And I assume the contact will be made
through the compliance contact?
Jamila Piracci:
That's correct.
Antonia Fong:
Thank you.
Operator:
Thank you.
Our next question comes from Yojna Verma with
BTIG. Your line is now open.
Yojna Verma:
Hi.
Just wondering if the new swap dealers that are with
provisional registrations, are they subject to exam for this year as well?
Jamila Piracci:
All swap dealers have provisional registration because the
provisional registration status stems from the fact that not all Section 4s regulations are
in final form or require compliance, and it also stems from the fact that in order for full
registration to occur all of the requirements must be final. Compliance must be required
and the policies and procedures submitted by a firm seeking to demonstrate that
compliance have to be approved by NFA in consultation with the CFTC. Therefore,
there are no full fully registered swap dealers or major swap participants.
registration status is provisional, but it is technical rather than (inaudible 20:35).
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The
Yojna Verma:
Great. Thank you.
Jamila Piracci:
You're welcome.
Operator:
Thank you. Just a reminder - if you would like to ask a question,
press star one now. Our next question comes from George Glorioso with Macquarie.
George Glorioso:
Oh, hi. How are you? This is George Glorioso. Question for you
is if I were going to be on the calendar for examination in fiscal year 2014, would we
have already received a first day letter or is that going to kind of roll out throughout the
year?
Shuna Awong:
So, our examination starts in July of this year. So, it's really fiscal
2015. So, around the beginning of July we will begin contacting the firms we have first
scheduled to perform examinations and start that process of sending out the first day
letter and the questionnaire.
George Glorioso:
Got you. All right. Thank you. Appreciate it.
Shuna Awong:
Okay.
Operator:
Thank you. Our next question comes from Stephen Chamberlain
with Bank of Tokyo.
Stephen Chamberlain:
Hi. Good morning. I just have a question on in the past
the NFA has prepared a guidance document for preparation for examinations for FCMs,
CPOs, CTAs, et cetera. Do you plan on providing one for swap dealers as well?
Jamila Piracci:
The swap dealer and major swap participant examination
program, as you realize, is quite new. It is just being launched, and so the accumulation
of guidance and materials is small and narrow at this point which is why we're having
this call. In the future you can expect to see a more fulsome set of pieces of guidance,
interpretive notices, et cetera, to help you both with your ongoing compliance as well as
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help you prepare for examinations, but at this point, no there is not a guidance document
that is going to be prepared because we will need some time experiencing the
examinations to identify the areas where we can generalize and provide the guidance.
So, at this time, if you'll indulge us, we anticipate, as we said, giving you a call to let you
know first day letter is coming and working with you during the examination, and over
time we do anticipate creating the full set of guidance materials that people who are
familiar with the FCM examinations would be used to having. In the meantime, we are
available for any question you have to try to help you out.
Stephen Chamberlain:
Thank you. That's appreciated.
Jamila Piracci:
No problem.
Operator:
Thank you. Our next question comes from Belinda Blaine with
Morgan Stanley.
Belinda Blaine:
You already answered this in part, but on the monitoring program
when do you expect that to begin and also are you open to coordinating with other
regulators that have a monitoring program such as the one you're contemplating?
Jamila Piracci:
I should clarify what we mean by monitoring. The monitoring that
we are seeking to do is really something that we've already begun if you think about it.
We've been working with swap dealers and major swap participants since their
registration, and the purpose of our dialogue with the membership is to keep abreast of
developments in general. What we are doing by initiating and developing a formal
monitoring program is to really put a little more structure around that so that we can ask
key questions and obtain feedback from firms between onsite exams. So, in terms of
how we're envisioning this, absolutely in answer to the question about coordination we
obviously welcome any opportunity to coordinate.
NFA always seeks to minimize any kind of duplication and we try to avoid any conflicts
of course, but coordination requires other regulators to also have what they need in
place to provide that kind of sharing. So, we have been in touch with both US and non-
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US (inaudible 25:06) regulators. We've had meetings. We've introduced ourselves, and
so the process of working with other regulators is something that we have done on a
regular basis since the program was launched in 2011.
The other thing I should note about coordination is that we are an SRO overseen by the
CFTC, and so ultimately a lot of the formality and the ability to coordinate with other
regulator will require CFTC engagement on an agency-to-agency basis. So, we are also
in dialogue with the CFTC about where we can see lots of doors for coordination, and
we support their efforts where they try to begin those conversations. So, in terms of
monitoring, we feel that we've actually begun the beginning stages of that.
We've
actually already had meetings with CCOs at some swap dealers and will continue those
as the early stages of an effort to keep abreast of significant developments in swap
dealer and major swap participant member firms.
Operator:
Thank you. Our next question comes from Virginia Harnisch with SMBC
Capital Market.
Virginia Harnisch:
Hello. Our question is will all US swap dealers be examined by
the NFA during this fiscal year?
Jamila Piracci:
I hesitate to share the exact numbers of firms that will be
examined in a particular exam plan year. Suffice it to say that each firm will be given
sufficient notice as described, and we'll continue to update the industry if there are
changes to the plan.
Virginia Harnisch:
Operator:
Okay. Thank you.
Again, just a reminder - if you would like to ask a question, press star one
now. Our next question comes from Antonia Fong with ANZ.
Antonia Fong:
Hi.
(inaudible 27:18) when the time comes for the onsite
examinations for non-US swap dealers, should we be expecting you to visit us in our
home office in Australia?
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Jamila Piracci:
NFA has anticipated the fact that there would be non-US swap
dealers back when the registration of swap dealers was anticipated, and we have
prepared for onsite visits in the local jurisdictions where swap dealers operate. This is
not a straightforward proposition, both in terms of resources or in terms of… I think a
higher level of coordination is required with other regulators when it comes to non-US
onsite visits, and so we are aware of complications but it is our intention to conduct
onsite visits of any swap dealer or major swap participant member. And the outlines of
how that will occur, whether we try to make use of US local persons to have
conversations with, all of those things are things that we keep in mind and that we try to
consider. In terms of actually travelling abroad and conducting onsite visits, we do
anticipate more efficient "onsite" examination, but we do not foreclose the possibility that
we will need to travel abroad and visit with people in other countries.
Antonia Fong:
Okay. Thanks.
Operator:
Thank you. Our next question comes from Robby Mangroo with
Goldman Sachs.
Robby Mangroo:
This question relates to timing of examinations.
I understand
there are a number of firms and limited staff at the NFA. When can we expect or can we
reach out to you to find the timing or window when we can expect you to come on site to
conduct the swap dealer examination.
Jamila Piracci:
We don't have constraints with regard to fielding your calls or
questions. So, you should feel free to call us. I don't think I've done a staffing update in
a while with regard to NFA's OTC derivatives program, but we now have a staff of 68
individuals focused on swap dealer and major swap participant members. So, we are
very comfortable having you call and ask any questions you need. We certainly have
people available who'd be happy to work with you. As discussed earlier with regard to
the general timeline, we will reach out to the compliance contact or CCO at each firm
and then subsequent to that provide a first day letter which will then provide you with the
notice regarding your particular onsite exam.
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Operator:
Thank you.
Our next question comes from David Ryan with DTG
Consulting.
David Ryan: Yes, hi. Dan Dan, you mentioned earlier that you anticipate to spend was
it three days or three weeks with actual onsite visits? And a followup to that is that do
you plan also on, of course, in addition to the Chief Compliance Officer, do you plan on
spending time with those who are part of an operational risk management overview with
actual traders and (inaudible 30:51). How do envision the actual onsite interaction to
go?
Dan Dan Liu: So, for, in terms of the timing of the examinations for a swap dealer, we
do plan to be there onsite for three weeks; however, if there are multiple affiliates, then
we might need additional time for the onsite, and Jamila will answer your second
question.
David Ryan: Okay. Thank you.
Jamila Piracci:
With regard to the personnel that we may meet with, that will
depend on the meeting - the exam - itself. As any regulator and as a membership
organization, our examinations involve a plan which we will share with the firm, and that
plan can include conversations with a range of personnel.
And so, each particular
examination will be somewhat bespoke in terms of who we may want to speak with, but I
cannot predict beforehand what your particular exam will require or the personnel that
we may wish to speak with.
David Ryan: Okay. So, the three weeks it's pretty fair to say that the breadth of the
onsite audit itself (inaudible 32:06) multi personnel and other departments that may go a
little bit noncompliance, I guess. Just observations of the operation itself, I guess, right?
Jamila Piracci:
Any regulatory examination I think most firms are very familiar with
can involve, you know, any number of personnel from potentially a range of places in the
organization, but we will inform you at the time of your examination or ahead of your
examination if possible of whom we would want to speak. And it's possible that during
the examination there may be other people that are added depending on what we are
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discussing. So, it's a very… It will need to be a flexible process, but we will provide the
normal kinds of notice and requests that you would be familiar with in other settings.
With regard to the timeframe, we've indicated that we expect to be onsite approximately
three weeks, but please bear in mind that this will be the first ever set of swap dealer
examinations under Title 7. Therefore, we're trying to give you a range to make sure
that people are kind of familiar with what's going to occur so that you're not sort of
walking in the dark, but the actual timeframe could vary depending on your particular
firm and the nature of questions that we need to ask.
David Ryan:
Very good. Okay. Thank you.
Jamila Piracci:
No problem.
Operator:
Thank you.
Our next question comes from Leone Brown with
Mitsubishi Securities.
Leone Brown:
Yes, hi. The question is in regard to policies and procedures that
we've filed with you over the last 12 to 18 months. When do you propose and how do
you propose to provide us with feedback and your commentary on that, and as a non-US
swap dealer would that potentially be during the course of the monitoring or other exam
visit?
Jamila Piracci:
The 4s policy and procedure review we have provided feedback
on. The policy and procedure review is an iterative process that we have conducted on
a horizontal basis by rule topic area. We started with the Chief Compliance Officer
duties and role and appointment, and at this point US swap dealers have received not
only informal but also formal feedback letters. And we've actually requested revisions
and we have received revisions, and we are now reviewing those revisions.
In addition, we are working with the CFTC on each of the subsequent areas of 4s
review. For non-US swap dealers this process will involve a substantive review as well,
and it will be very similar to what has occurred for US swap dealers which is that we
consult with the CFTC with regard to the feedback and the things we have seen in the 4s
policies and procedures. The CFTC then conducts a review of its own on a scoped
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basis and provides their further comments, and then after that we send the formal
feedback letters for final signoff by the CFTC after which those letters go to the firms in
order to guide them in revisions to their policies and procedures.
So, it will be a continuing process that will require rounds of comments and revisions,
and I think that non-US firms can expect something similar. As I've said, the substituted
compliance framework has required a little bit of work in terms of understanding CFTC
interpretation, but we would anticipate turning to the substantive review for non-US firms
and starting to provide that feedback soon.
Leone Brown:
All right. Thanks very much.
Jamila Piracci:
You're welcome.
Operator:
Thank you. Our next question comes from Yojna Verma with BTIG.
Yojna Verma:
A question about the substantive procedures now. In terms of
substantive procedures, are they going to be very similar to the substantive procedures
that usually US auditors, staff auditors do when they do the audit based on US GAAP
rules? And the second question is as part of your exam will there be a technical review
as well which means looking at the systems as to what we use to be able to execute
swaps or anything like that, or would you require (inaudible 36:44) as part of your review
as well?
Shuna Awong:
So, NFA's approach is a review focused on review of internal
controls. So, we will not be utilizing as you said approaches that a public accounting
firm would use with respect to following US cap rules. Our approach is to essentially
understand the process you have and the infrastructure you have that supports your
compliance with the rules and regulations. A number of this would mean discussions
with key personnel, a review of certain reports and of systems. At this time there's no
plan to do a technical review of the systems, but we would focus on controls surrounding
the systems such as whether a critical system has been independently reviewed, for
example, by your internal audit department.
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Yojna Verma:
And this applies to the new swap dealers as well, right?
Jamila Piracci:
In terms of I think you mentioned new swap dealers, could you
explain what you mean by "new" swap dealers?
Yojna Verma:
Swap dealers that have recently completed their registration or
are in the process of completing their registration.
Jamila Piracci:
We don't distinguish among swap dealers based on the timing of
registration, I should note. All swap dealers and major swap participants are members
of NFA, and therefore the programs that we will initiate apply regardless of the timeframe
of the particular registration timing. There are distinctions, of course, with regard to US
firms versus non-US firms. NFA uses a risk-based approach and so developments at a
particular firm may impact the timing of scheduled or ad hoc exams and of course it may
impact the level of monitoring, but we don't make a distinction between new or older
registrants, I should point out.
With regard to the way we will conduct our examinations, as Shuna notes we have a
focus on internal controls. That does not mean that we will not require technical reviews
at times. So, just keep in mind that we have a responsibility as a self-regulator to assist
the membership with its compliance, and we would use the tools necessary to do that.
That will include an initial focus on internal controls and then some technical testing
where required. So, the nature of the tools that we will use with a particular firm or in a
particular exam will depend very much on the context of that particular firm and the
appropriate processes to use at that time.
Yojna Verma:
Great. Thank you.
Jamila Piracci:
You're welcome.
Operator:
Thank you.
Our next question comes from Debra Roth with
Morgan Stanley.
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Debra Roth: Hi. Thank you very much. Can you tell us please to what extent the
CFTC will be involved in reviewing the NFA exams' progress or results?
Jamila Piracci:
The CFTC is NFA's oversight body and the CFTC does audit
NFA's exams, and so they will look at our work to confirm that NFA is carrying out its
mission in accordance with the charter under which we operate.
And the CFTC
obviously is the overall oversight body for the swap dealer and major swap participant
registrants. Therefore, it may have its own activities as well.
Debra Roth: Okay. Thank you.
Jamila Piracci:
You're welcome.
Operator:
Thank you. Our next question comes from Marcia Tu with Credit Suisse.
Marcia Tu:
Yeah. I was just wondering will the examination team be leveraging the
information that's submitted by firms in the 4s process and the monitoring process so
that we don't have to submit it again as part of the exam process.
Jamila Piracci:
Yes, definitely. Our plan is to try to do it efficiently and effectively.
So, in preparation for the examinations we definitely will look through the latest policies
and procedures and use that to obtain our baseline knowledge of your process before
we come onsite.
Marcia Tu:
Okay. Thank you.
Operator:
We are currently holding for questions.
If you would like to ask a
question, press star one now. Our next question comes from John Baughman with
BTIG.
John Baughman:
Hi. Yeah, my question is do you have a list of focus issues that
you guys are putting out or maybe as you guys gain more experience with this process
will the NFA be publishing a list of common problem areas during exams for swap
dealers? Thank you.
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Jamila Piracci:
I think you can anticipate that NFA will produce the kinds of
guidance and interpretive notices that you will have seen with regard to other
membership categories in the future going forward.
As to specific topics or
troubleshooting or best practices, those kinds of things we will have to see how things
evolve, but you can expect the kinds of information that NFA generally publishes for
member guidance and education.
John Baughman:
Okay, thanks.
Jamila Piracci:
Sure.
Operator:
Thank you. Our next question comes from Ramona Ramsey with
Bank of Tokyo.
Rhona Ramsey:
This is a followup on something that someone said. Did I hear
right or did NFA say that formal feedback letters have already been sent to some swap
dealers? And were these swap dealers only US swap dealers?
Jamila Piracci:
Yes, feedback letters have been provided to US swap dealers with
regard to Chief Compliance Officer appointment and duties and business continuity and
disaster recovery.
Rhona Ramsey:
Thank you.
Jamila Piracci:
You're welcome.
Operator:
Thank you.
Our next question comes from George Glorioso with
Macquarie.
George Glorioso:
Hi. I appreciate that this will probably depend a good amount on
materiality, but is there kind of a response and give or some high level feedback on how
exception findings will be handled throughout the exam process in terms of interaction
between us and you guys?
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Shuna Awong:
Our plan during examinations is to have a constant dialogue with
the compliance function so when we identify potential issues we would discuss this at
the time it arises and with the hope that as the examination progresses, any clarification
(inaudible 44:39) that is needed is able to be complete by the end of the examination. At
the end of the examination we will summarize what we see as the potential findings
pertaining resulting from our review.
George Glorioso:
Thank you and just a quick follow-up question on that. Would you
envision a scenario where there could be things that would go into a bucket of
recommendations versus actual findings? Is there kind of a breakout there?
Jamila Piracci:
I think that that is something that's very specific to the particular
firm's exam, and so we will share with firms as we progress through the exam how
things will be laid out. So, we'll do all of that in planning and conversation with each firm.
George Glorioso:
Understood. And a quick final question. Will the CFTC get a copy
of the findings?
Jamila Piracci:
Yes.
George Glorioso:
Thank you.
Operator:
Thank you. Our next question comes from Yojna Verma with BTIG.
Yojna Verma:
These are just two separate questions. One is will there be any
joint examinations either now or in the future with other exchanges such as either the
New York Stock Exchange or with the FCC or (inaudible 26:05)? And second are you
planning to designate an NFA examiner or someone that we can continue to have a
relationship with after the examination in the future in terms of getting guidance on rules
and internal control procedures?
Jamila Piracci:
With regard to coordination, as I've noted we feel very strongly at
NFA that we should seek to minimize duplication and also avoid any kind of conflicts
with regard to other regulatory regimes. We are very aware of sources of regulatory
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overlap when it comes to the swap dealer membership community. Where we will end
up being in terms of the level of coordination and the tools that we use I can't predict at
this moment, but I can tell you that we have met with US (inaudible 47:07) regulators
and we have introduced ourselves to at least a couple of non-US regulators in order to
begin a dialogue that will allow us over time to get better and better at minimizing these
areas where there could be significant overlap.
With regard to designating points of contact, we actually designated points of contact for
all swap dealers and major swap participants at the time of registration. There is a
relationship manager for each firm that each firm can use as a point of contact at any
time. As we head into examinations, firms will actually have multiple points of contact
because they will have a point of contact on the examination side and they will also have
a point of contact in terms of the 4s review. Those people work very closely together,
and so you can expect that no matter whom you reach out to you will be able to get
answers to questions and not have to ask them multiple times.
With regard to the relationship manager structure, we don't envision that you would
forever have the exact same relationship manager, but we do anticipate in the initial
three to five years that you will have one person that you can reach out to. I should note
that it's not perfect and there can be changes and some firms have had their relationship
manager changed, but we try to minimize the occurrence of that to enable you to
operate more efficiently in terms of talking to us.
Yojna Verma:
So, this person - relationship manager - will be in addition to the
(inaudible 48:52) relationship manager that we might have in existence?
Jamila Piracci:
Yes.
Yojna Verma:
Okay. Thank you.
Operator:
Thank you. We are currently holding for questions. If you would like to
ask a question, press star one now.
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Larry Dyekman:
Hi. This is Larry again. I know we're getting close to the end of
the hour so it looks like the questions are tapering off a little bit, but if after the
conference you think of a question or need some additional information, I just want to
repeat these telephone numbers for you to reach our information center. The first is
312-781-1410 and the second is 800-621-3570,
and an information center
representative will transfer you to an OTC derivative staff member to whom you can
address
your
questions.
You
can
also
email
your
questions
to
[email protected]. Thanks.
Operator:
There are no more questions at this time. I would like to turn it back over
for closing remarks.
Jamila Piracci:
the call again.
Thank you very much. I'd like to just thank everyone for joining
We realize the significant shift that Dodd-Frank represents and the
tremendous work that everyone is undertaking in order to complete the implementation
of Title 7 requirements. We recognize that that implementation will take time, and as
always NFA is committed to working with you toward your compliance. So, if you have
further questions, we really hope that you won't hesitate to reach out to your regular
contact or to the information line. That person on the information line will then direct you
to someone on the OTC derivative staff. Thanks again. We very much look forward to
our work together.
Operator:
Thank you, ladies and gentlemen. This concludes today's conference.
You may disconnect your lines now.
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