The self-regulatory organization (SRO) overseeing derivatives was in front of Congress, laying out its vision.
The National Futures Association (NFA) is the SRO for the derivatives industry and NFAs President, Thomas Sexton, was one of four witnesses to testify late last month in front of the Senate Agriculture Committee in a hearing entitled: The State of the Derivatives Market and Perspectives for CFTC Reauthorization
Sexton hit on four main points during his opening remarks.
FCM Bankruptcy Customer Provision:
Sexton explained that for approximately thirty years following rules implemented by the Commodities Futures Trading Commission (CFTC), customers have received priority when there is a shortfall during a Future Commission Merchant (FCM) bankruptcy.
“Those rules provided that if there is a shortfall in customer segregated funds, the term customer funds would include all assets of the FCM until customers were made whole.” Sexton said. “Several years ago, a district court decision, the Griffin Trading decision, cast doubt on the validity of the CFTC’s rule. Although that decision was subsequently vacated, a cloud of doubt remains on that decision. Congress should remove that doubt and ensure that customers have priority if there is a shortfall in customer funds.”
Sexton said that amending Section 20 of the Commodity Exchange Act by Congress would provide this assurance.
As a result of Dodd/Frank, Sexton said, oversight of swap dealers by the NFA increased dramatically.
“In partnership with the CFTC, we have developed a regulatory oversight program that reviewed in detail their policies and procedures upon registration, performs regular examinations of US and non-US swap dealers, collects certain risk information from these firms, and we and we approve and monitor these firms initial margin models for uncleared swaps.” Sexton said.
Sexton said cybersecurity “is an issue that is of critical importance to all of us.”
He continued, “Our technical staff and budget have grown significantly throughout the past few years. We adopt best practice frameworks and standards, engage independent parties to conduct security testing and continually assess the data that we hold and whether that is critical to our mission, and if it isn’t, we no longer collect that data.” Sexton said. “We have imposed specific cybersecurity requirements on our NFA members, requiring them to have written information security systems, and doing a risk assessment of their cybersecurity risks.”
Customer Protection Issues
“Detecting and combating fraud is central to our mission,” Sexton said. “These issues involve the oversight of firms and individuals, safeguarding of customer funds, swaps proficiency requirements which we hope to launch in early 202, virtual currencies, in coordination with the SEC, CFTC, and NFA, particularly commodity pools which are duly registered.”
What is the NFA?
Sexton said the NFA “is the industry-wide self-regulatory organization for the derivatives industry.”
“Our responsibilities include registering all firms and industry professionals on behalf of the CFTC, passing rules to ensure fair dealing with customers, monitoring our members for compliance with those rules, and taking enforcement actions against those members who violate those rules.”
He also noted, “the CFTC oversees every single aspect of our regulatory authority,” with the NFA’s “overriding objective to help the CFTC.”