The CFTC provided guidance for swap dealers, futures commission merchants ("FCMs") and major swap participants on annual compliance report requirements.
According to the guidance, the Chief Compliance Officer ("CCO") Annual Report should include:
- areas for improvement including an explanation as to (i) why an area needs improvement and (ii) the timeframe for implementing improvements;
- an outline of the "financial, managerial, operation and staffing resources" that are allocated to comply with CFTC regulations, which the CFTC stated is the most common deficiency in CCO Annual Reports;
- a description of material noncompliance issues that have been identified through (i) an internal self-assessment or (ii) an external entity, including a self-regulatory organization;
- presentation of the CCO Annual Report to the appropriate senior officer of the Registrant, and furnishing of the report to the audit committee; and
- certification by the CCO.
The Guidance also requires CCO reports to "include cross-references to the regulations that the area(s) for improvement and recommended changes would address," "additional context" for areas identified for improvement, and various other detailed discussions to allow DSIO Staff to "form a complete view as to the Registrant's state of compliance."
Commentary
The scope of "common deficiencies" outlined in the Guidance appears to be so wide, and the level of diligence required to meet the standards in the guidance so high, that firms are likely to have a hard time trying to meet those standards. At the very least, CCOs and firms will need to spend a lot more time and resources in preparing such reports in order to satisfy DSIO's standard. Two examples illustrate this:
First, although the Guidance acknowledges that the CFTC has not defined the term "material," DSIO "reiterates" and "emphasizes" that "the standard of materiality should be included in the CCO Annual Report's discussion of material non-compliance issues under § 3.3(e)(5)." Second, the Guidance states that if a "precise numerical budget and staffing information related to compliance with the CEA and the Commission's regulations," is not possible, then "an effort should be made to reasonably estimate the portion of the aggregated numerical information dedicated to such compliance."
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