On April 21, 2015, Kevin Piccoli, the deputy director of examinations for the Division of Swap Dealer and Intermediary Oversight (“DSIO”) at the Commodity Futures Trading Commission (“CFTC”) spoke at SIFMA’s Compliance and Legal Division lunch. In his remarks, he provided insight on the DSIO’s examination priorities and process, and how the staff coordinates with other regulators.
Piccoli stated that DSIO is moving towards conducting risk-based examinations. However, because this is a fairly recent initiative, it would likely take the staff several years to fully implement a risk-based program. Piccoli also stressed that DSIO’s exams should not be duplicative of the exams already conducted by the National Futures Association (“NFA”) and other self-regulatory organizations such as the futures exchanges. He noted that DSIO’s exams will have a targeted purpose and the exam generally will only last a few days. In addition, Piccoli stated that it would be difficult for DSIO to conduct a broad-scope exam of a firm given the CFTC’s constrained resources.
In his remarks, Piccoli also emphasized that the CFTC’s examination function was distinct from the CFTC’s enforcement function and he asked that firms have an open and honest dialogue with the examiners. In making this request, he noted that DSIO is not required to report its findings to the CFTC’s Enforcement Division, although it could do so if it discovers actions or conduct that potentially violates the Commodity Exchange Act or CFTC regulations.
Piccoli also spoke about the CFTC’s coordination efforts with other US and foreign regulators. He said that at the staff level, the CFTC is in constant communication with the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). Staff of the regulators have quarterly meetings where they discuss issues that jointly affect them and also have joint training programs. He noted that the CFTC staff also coordinates with foreign regulators, however, he acknowledged that this coordination could be improved.
Finally, Piccoli discussed exam priorities for the upcoming year. He said that DSIO is in the process of reviewing Risk Exposure Reports, required of swap dealers and major swap participants. The CFTC wants to understand firms’ risk, which includes a firm’s governance, and how issues involving risk to the firm are escalated within the organization when they arise. However, Piccoli said he did not believe that DSIO would be focused on market or credit risk.
He also said that DSIO is interested in target residual interest calculations of registered futures commission merchants (“FCMs”). CFTC Regulation 1.23(c) requires FCMs to establish targeted residual interest amounts (i.e., excess funds) that are designed to reasonably ensure that the FCM is in compliance with segregation requirements at all times. Piccoli noted that the CFTC intentionally left it up to the FCMs to decide their target percentage because each firm is different and subject to different risks.
In addition, Piccoli stated that anti-money laundering issues are a priority for DSIO. The CFTC is working with the Financial Crimes Enforcement Network (“FinCEN”) to educate firms regarding the types of activities or incidents that need to be reported on Suspicious Activity Reports (“SARs”). He noted that historically there have been very few SARs filed by FCMs. He said that the CFTC wants firms to accurately understand the types of information that does and does not need to be reported.