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From Securities Regulation Daily, February 12, 2019

CFTC divisions announce 2019 exam priorities

By Anne Sherry, J.D.

The release of 2019 examination priorities for the Divisions of Market Oversight, Swap Dealer & Intermediary Oversight, and Clearing & Risk marks the first time the agency has published examination priorities for its divisions.

The CFTC has for the first time published division examination priorities, an event that Chairman Giancarlo said comports with his Project KISS initiative by improving the relationship between the agency and regulated entities and promoting a culture of compliance. The Compliance Branch of the Division of Market Oversight said that it will focus on specific elements of designated contract markets’ existing and emerging self-regulatory programs. The Division of Swap Dealer & Intermediary Oversight will maintain its core focus of protecting customer funds, while the Division of Clearing & Risk will continue to tailor each examination to the individual derivative clearing organization and the products it clears.

Division of Market Oversight. DMO published the most extensive list of priorities, which apply to all designated contract markets and swap execution facilities. The Compliance Branch said it intends to publish exam priorities annually with a goal of increasing awareness and attention on areas that the branch has identified as being of particular importance to effective self-regulation in the derivatives markets. The 2019 priorities are based on the pillars of communication, risk-based prioritization, continuous improvement, and efficiency.

Based on a high-level review conducted in 2018, the Compliance Branch identified topics for potential examination at DCMs. These include cryptocurrency surveillance practices; surveillance for disruptive trading; trade and block trade surveillance practices; market surveillance practices; real-time monitoring; market maker and trading incentive programs; and DCMs’ relationships with regulatory service providers.

DMO said that the target period for examinations will be six months and that most DCMs will undergo at least one examination this year. Many examinations will be conducted comparatively so that the Compliance Branch may identify model regulatory practices across DCMs.

The Compliance Branch’s 2019 priorities also include quarterly or biannual calls (depending on the size of the DCM, allowing a two-way dialogue between the division and the regulated entities. It will also begin consulting with swap execution facilities and designing an exam program for SEFs.

Division of Swap Dealer & Intermediary Oversight. DSIO emphasized that the core focus of its exams is on the protection of customer funds. Its Examinations Branch oversees 65 futures commission merchants—the only registrants permitted to hold listed derivative customers’ funds—and it performs limited oversight of approximately 100 swap dealers. For 2019, DSIO’s examination priorities include withdrawal of residual interest from customer accounts; accepted forms of non-cash margin; compliance with segregation requirements; FCM use of customer depositories; FCM customer account documentation; and swap dealer and major swap participants; relationships with third-party vendors.

DSIO exams will also continue to monitor the activities of CFTC registrants including reviewing notices, risk management programs, financial statements, risk exposure and assessment reports, and chief compliance officer annual reports.

Division of Clearing & Risk. The primary goal of DCR’s examination process is to identify areas of weakness or noncompliance in activities that are critical to safe and efficient clearing. This includes examining financial resources, risk management, system safeguards, and cybersecurity policies and procedures. Because the examinations are risk-based, the scope and methodology for each will be individually tailored to the unique characteristics of the derivative clearing organization and the products it clears. Furthermore, examinations of systemically important DCOs are performed in consultation with the Fed.

MainStory: TopStory CFTCNews CommodityFutures Derivatives ExchangesMarketRegulation FinancialIntermediaries RiskManagement Swaps

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