• On December 2, the CFTC reminded non-U.S. swap dealer chief compliance officers of annual reporting requirements.
• This Staff Advisory asserts that many non-U.S. swap dealers have been deviating from chief compliance officer annual reporting requirements.
• Dually registered swap dealers and security-based swap dealer that intend to submit the same or similar report to the CFTC and SEC should consider this advisory when preparing their report.

Over the years, Commodity Futures Trading Commission (CFTC) staff have issued multiple advisories in connection with the preparation and submission of Chief Compliance Officer Annual Reports (CCO AR), including in 2014 (later codified in the 2018 CCO rule amendment) and 2019. On December 2, 2022, the CFTC Market Participants Division (MPD) issued an advisory (Staff Advisory) on non-U.S. swap dealer (SD) CCO ARs.[1] The advisory highlights the conditions from the CFTC entity-level comparability determinations that non-U.S. SDs must follow if they rely on substituted compliance to comply with the CFTC’s SD CCO AR requirement.

Background

A non-U.S. SD can satisfy CFTC requirements by complying with the corresponding standards of a foreign jurisdiction, so long as the standards are found to be comparable pursuant to a comparability determination issued by the CFTC. With respect to CCO ARs, if the non-U.S. SD fails to comply with their foreign jurisdiction’s standards and the conditions specified in the CFTC’s comparability determination, the CFTC may require a registrant to file an amended CCO AR or, in more serious circumstances, initiate an action for violating CFTC regulations 3.3(e) and/or (f).

In December 2013, the CFTC issued entity-level comparability determinations for six foreign jurisdictions including: Canada, Hong Kong, Japan, Switzerland, the European Union (EU), and the United Kingdom (UK) (at the time, the UK was part of the EU). The CFTC determined that the regulatory requirements of the six jurisdictions relating to CCO ARs were as comprehensive as the CFTC’s requirements in regulation 3.3, except with respect to the CCO AR requirement.

In the determinations, the CFTC noted that a non-U.S. SD would generally be considered compliant with regulation 3.3(f) as long as it prepares a CCO AR as required by the foreign jurisdiction and submits the same report to the CFTC, with the required certification. The report must have been prepared for a home regulator and cannot have been altered or redacted.

Staff Advisory

The recent Staff Advisory asserts that many non-U.S. SDs have deviated from the terms of the comparability determination with respect to the CCO AR requirement. The MPD contends that such firms have either been furnishing an altered or redacted home regulator report or have been mimicking CFTC regulation 3.3(e) in a manner that leaves out many “substantive requirements,” including material non-compliance issues and areas for improvement.

MPD staff held that to meet the CCO AR requirement non-U.S. SDs must submit the report exactly as it was provided to the relevant home regulator, with the only exception being to translate the report into English, although they also noted that in the event non-U.S. SDs found themselves in a position of having to redact portions of the report, they should consult with MPD to discuss the specific issue.

The MPD also stated that if a non-U.S. SD wished to withhold certain information from a home regulator report, its only alternative was to prepare, certify, and furnish to the CFTC a CCO AR in full compliance with regulation 3.3(e).

Commissioner Caroline Pham issued a statement positing that the requirement to submit a full home regulator report should be limited to the swap dealing activity of the non-U.S SD pursuant to section two of the Dodd-Frank Act and section 4s of the Commodity Exchange Act. This means that non-U.S. swap dealers that are also commercial banks should only be required to submit the sections of their home regulator report that relate to their swap dealing activity, for requiring a full report exceeds the CFTC’s authority.

Commissioner Pham also pointed out that many jurisdictions have privacy laws that may prohibit sharing certain information from home regulator reports. Because of this, Pham suggested that non-U.S. SDs discuss any such limitations with the MPD before making any redactions.

The preparation of a CCO AR takes a significant amount of time, with larger firms often spending months developing it. As a result, this advisory has significant implications. This is especially true for firms dually registered as an SD and a security-based swap dealer (SBSD). Section 15Fk-1 of the Securities Exchange Act requires an SBSD to submit the CCO AR to the board of directors and audit committee (or equivalent bodies) of the SBSD prior to submission to the U.S. Securities and Exchange Commission (SEC). This contrasts with the CFTC regulations, which consider submission to the senior officer as sufficient. Dually registered SDs and SBSDs that intend to submit the same or similar report to the CFTC and the SEC should consider this advisory when they prepare their annual report.

Put Patomak’s Expertise to Work

Patomak has deep experience in designing and assessing compliance programs at banks, swap dealers, broker-dealers, digital asset trading platforms, futures commission merchants and other financial firms. If you’d like to learn more about how Patomak can partner with you, contact Jill Sommers (jsommers@patomak.com), Jamila Piracci (jpiracci@patomak.com), or Sudhir Jain (sjain@patomak.com).

[1] See CFTC Letter No. 22-17 released on December 2, 2022.