In September 2021, just days prior to its fiscal year end, the Commodity Futures Trading Commission (CFTC) announced enforcement actions against four Swap Dealers, with monetary fines ranging from $750,000 to $1.5 million. Here are four takeaways from these actions:
Reporting Pain Points. Each of these enforcement actions has a reporting failure charge. Three are related to Swap Data Repository (SDR) reporting (Parts 43 and 45); one relates to Large Trader Reporting (Part 20). While the new SDR reporting rules greatly simplify the reporting requirements, they also impose new obligations on SDs to reconcile their books and records against the SDR and to correct errors and omissions within seven business days. These obligations will likely continue to pose significant compliance challenges for firms.
Supervisory Failures. Each of these cases has an associated charge for supervisory failures tied to the specific charges cited in the order, as opposed to broad supervisory failures at the firms. In fact, in one case the CFTC limited the supervisory failure to one of the two charges cited in the report. This result makes sense, as the second charge (inaccurate SDR valuation data) seems to be a result of the first charge (inaccurate daily marks) rather than an independent issue.
Delayed Detection of Non-Compliance. Swap Dealers are expected to have adequate internal controls in place to detect non-compliance issues in a timely manner. The non-compliance issues cited in these orders occurred at these firms over a long period of time, some up to seven years. It is safe to assume that these elongated periods of non-compliance are one of the key reasons for the supervisory failure charge in each of the orders.
Daily Marks and Portfolio Reconciliation Failures. Two of these orders include charges pertaining to the failure to provide daily marks or accurate daily marks to counterparties, as well as the failure to perform portfolio reconciliation with counterparties. This is the first CFTC order concerning portfolio reconciliation. While we probably have not seen the last of these types of reporting cases from the CFTC, we expect to see more cases regarding other rules areas, especially those with a counterparty impact or related to capital adequacy.
Patomak has deep experience in designing and assessing compliance programs at banks, swap dealers, broker-dealers, digital asset trading platforms, fintechs, futures commission merchants, and other financial firms. If you’d like to learn more on how Patomak can partner with you, contact Jamila Piracci (firstname.lastname@example.org) or Sudhir Jain (email@example.com).