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National Futures Association Simplifies Section 4s Submission and Review Process for Swap Dealer Registration

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07 August 2017

​On July 24, 2017, the National Futures Association (“NFA”) adopted measures to streamline the process for registration of swap dealers pursuant to Section 4s of the Commodity Exchange Act.

Previously, entities seeking to register as a swap dealer submitted documentation to the NFA intended to demonstrate their ability to comply with regulations of the Commodity Futures Trading Commission (“CFTC”) implementing the Section 4s requirements (“4s Implementing Regulations”). These requirements include, among other things, capital and margin obligations; recordkeeping and reporting responsibilities; business conduct standards; segregation-of-funds requirements; and risk-management mandates. 

CFTC Rule 3.10(a)(v) provides that an applicant for registration as a swap dealer must submit documentation to the NFA establishing its ability to comply with each of the 4s Implementing Regulations. Before the recent modifications to its process, the NFA required each prospective swap-dealer registrant to provide a copy of its actual policies and procedures to demonstrate compliance with the 4s Implementing Regulations for NFA review. The NFA then responded with a Feedback Letter identifying any deficiencies in the submission. In lieu of resubmitting revised documentation, the swap dealer was permitted to submit an attestation certifying that it had amended its policies and procedures in accordance with the Feedback Letter. 

Under the new regime, swap dealers will no longer submit policies and procedures and related documentation for any 4s obligation to the NFA, with the exception of the risk-management mandate. Rather, a prospective swap-dealer registrant will satisfy CFTC Rule 3.10(a)(v) by submitting a simple attestation, signed by a principal of the firm, stating that “[t]o the best of [the principal’s] knowledge and reasonable belief, the registrant has adopted policies and procedures or other appropriate documentation reasonably designed to ensure that the registrant is in compliance with the [4s Implementing] Regulations.” 

Although swap dealers will no longer provide copies of their respective policies and procedures during the registration process, the NFA  noted that it will continue to review this documentation as part of its examination process. This may mean that, moving forward, 4s policies and procedures will receive greater scrutiny than in past swap dealer examinations, given that NFA staff will not have previously reviewed and approved this documentation, as was the case prior to this change. Indeed, the NFA indicated that the examination cycle -- expected to begin in the summer of 2017 and last for 18 to 24 months -- will focus on a number of the 4s topic areas, such as margin, segregation of funds, recordkeeping and documentation, and risk management (including cybersecurity capabilities). Accordingly, though the modified review process will alleviate the burdens of revising 4s policies and procedures to the NFA’s satisfaction during the registration process, a similar degree of time and effort may be required to ensure that this documentation meets the NFA’s standards in connection with the examination process.