The self-regulatory organization responds to the US derivatives market’s shift to remote working arrangements.
By Yvette D. Valdez, Carlos Alvarez, Brett M. Ackerman, J. Ashley Weeks, and Deric Behar
As the novel coronavirus outbreak (COVID-19) continues to spread across the globe, causing various disruptions, derivatives regulators are addressing the resulting legal and regulatory uncertainty. This post provides an overview of recent relief and guidance from the National Futures Association (NFA), the self-regulatory organization for the US derivatives industry. Latham & Watkins will discuss recent US Commodity Futures Trading Commission (CFTC) relief in a separate alert and continue to provide updates to the derivatives community.
Pandemic Risk Assessment
On March 4, 2020, the NFA issued a notice to its member firms — introducing broker (IB), futures commission merchant (FCM), retail foreign exchange dealer (RFED), commodity pool operator (CPO), commodity trading advisor (CTA), and swap dealer (SD) member firms (collectively, Members) — urging they prepare and communicate with NFA of impacts related to COVID-19. The NFA is encouraging Members to review business continuity plans and update them as needed to address contingencies resulting from COVID-19 and to ensure operational resilience. The NFA also recommends that Members “identify key relationships (e.g., clearing firms, telecommunications networks, third party providers, internal departments, mail or email services, utilities, etc.), assess the risks a pandemic poses to those relationships, and understand how a pandemic may materially impact their businesses.”
The NFA has clarified in a notice that the CFTC expects to be notified if an SD implements a teleworking plan or activates its business continuity plan (for purposes other than testing). CFTC Rule 23.603 requires SDs to both (i) have robust business continuity and disaster recovery plans and (ii) notify the CFTC of any emergency or other disruption which may have a significant adverse effect on the SD, its counterparties, or the market.
Remote Working for Associated Persons
The NFA has provided relief from registration of a branch manager and listing of a branch office for associated persons (APs) of IB, FCM, RFED, CPO and CTA Members (each, a Non-SD Member) who are permitted or required to temporarily work from home or another remote location pursuant to business continuity plans implemented as a result of COVID-19. The NFA has clarified that it will not pursue disciplinary actions against a Non-SD Member who permits APs to temporarily work from locations not listed as a branch office and without a branch manager, provided that the Member has implemented robust supervisory methods to adequately supervise the AP and the Member meets its recordkeeping requirements. This relief is not necessary for APs of SDs, as those APs are not subject to these NFA rules.
Additional Compliance Considerations
While the foregoing clarifications and relief are tremendously helpful to the market, the NFA has not yet issued guidance on other concerns which are beginning to weigh on Members.
For example, upcoming risk reporting deadlines have not yet been delayed and the question remains as to whether or not the NFA will extend the compliance period for its new swaps proficiency exam requirements. Under NFA rules, all swaps APs will need to take and pass a proficiency exam by January 2021 in order to continue to do business in swaps. The circumstances may pose difficulties for APs to prepare for and take the examination by the deadline.
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