Many Commodity Futures Trading Commission registrants and other market participants are responding to the coronavirus (COVID-19) pandemic by implementing business continuity plans that move personnel from their “normal business sites,” which implicates CFTC regulatory requirements. The CFTC’s Division of Swap Dealer and Intermediary Oversight and the Division of Market Oversight issued eight temporary no-action letters on March 17 focused on registrant and certain market participant responses to the COVID-19 pandemic. This LawFlash provides a summary of each no-action letter and the relief provided.
The National Futures Association (NFA) issued similar relief on March 18, and you can read the full text of the CFTC no-action letters on the CFTC website.
The relief is specific to the type of registrant or market participant, as described below:
The Division of Swap Dealer and Intermediary Oversight (DSIO) has provided relief from the time-stamp requirement—any requirement to record the date and time by time-stamp or other timing device pursuant to CFTC Regulation 1.35—if the personnel responsible for making such record are required to be absent from their normal business site, provided that a written record of the date and time, to the nearest minute, is otherwise created and maintained in accordance with CFTC Regulation 1.35 (Time-Stamp Requirement).
DSIO issued futures commission merchants (FCMs) and introducing brokers (IBs) relief from the Time-Stamp Requirement. DSIO also issued FCMs and IBs relief from recording oral communications pursuant to CFTC Regulation 1.35 if the personnel required to use recorded lines are required by the FCM’s or IB’s written business continuity plan to be absent from their normal business site, as long as
In addition, DSIO expects that FCMs and IBs will require affected personnel to maintain and deliver any such materials to the registrant for retention (Oral Communications Recordkeeping Requirement).
For FCMs and IBs whose annual Chief Compliance Officer (CCO) report is required to be furnished to the CFTC prior to September 1, 2020, DSIO has provided an extension of 30 calendar days following the date the report would have otherwise been required to be submitted to the CFTC (Annual CCO Report Requirement).
Relief applicable to FCMs and IBs is available until June 30, 2020, except with regard to the annual CCO report, which is subject to a 30-day extension. In addition, an FCM or IB must comply with all applicable rules of any DCM or SEF on which the FCM or IB has trading privileges. DSIO also expects an FCM or IB to establish and maintain a supervisory system that is reasonably designed to supervise the activities of personnel while acting from an alternative or remote location during the COVID-19 pandemic, and that FCMs and IBs will return to compliance with these regulatory obligations once COVID-19-related risks decrease.
Similar to the relief provided to FCMs and IBs, DSIO issued floor brokers (FBs) relief from compliance with the Oral Communication Recordkeeping Requirement and the Time-Stamp Requirement (as it relates to CFTC Regulation 1.35).
DSIO also provided relief from the requirement that an FB be physically located in any place provided by a contract market pursuant to the definition of “floor broker” in CFTC Regulation 1.3, and from IB registration by virtue of the FB’s inability to be physically located at the exchange, so long as the FB is required by the written business continuity plan of any DCM to be absent from such place. This relief for FBs is available until June 30, 2020, subject to similar conditions as the relief applicable to FCMs and IBs.
DSIO has also provided retail foreign exchange dealers (RFEDs) with relief from compliance with the Oral Communication Recordkeeping Requirement and the Time-Stamp Requirement (including with respect to CFTC Regulation 5.18). The relief is available until June 30, 2020, subject to DSIO’s expectations related to supervisory systems and that FBs will return to compliance with these regulatory obligations once the COVID-19-related risks decrease.
DSIO has also provided swap dealers (SDs) with relief from compliance with the Oral Communication Recordkeeping Requirement (as it relates to CFTC Regulation 23.202), the Time-Stamp Requirement (as it relates to CFTC Regulation 23.202), and the Annual CCO Report Requirement, as long as the report is submitted to the CFTC within 30 calendar days following the date the report would have otherwise been required to be submitted to the CFTC.
The relief is available until June 30, 2020 (except with regard to the annual CCO report, which is subject to a 30-day extension), subject to DSIO’s expectations related to supervisory systems and that SDs will return to compliance with these regulatory obligations once the COVID-19-related risks decrease.
With the displacement of SEFs’ voice trading personnel from their normal business sites, voice communications related to indications of interest, requests for quotes, orders, and trades may not be captured and recorded on an SEF’s systems. As a result, a SEF may be unable to comply with CFTC audit trail requirements, recordkeeping requirements related to maintaining a complete audit trail, and monitoring requirements related to audit trail reconstruction. The Division of Market Oversight (DMO) provided SEFs relief from compliance with CFTC Regulations 37.205(a)-(b), 37.400(b), 37.406, 37.1000(a)(1), and 37.1001, to the extent that non-compliance arises in connection with displacement related to their COVID-19 response. The relief is available until June 30, 2020, and is conditioned on several requirements detailed in the no-action letter.
DMO also provided SEFs with relief from the Annual CCO Report Requirement (for reports due before September 1, 2020), extending the submission deadline 120 days after the end of a SEF’s fiscal year. In addition, DMO has provided relief from the requirement to submit a fourth quarter financial report pursuant to CFTC Regulation 37.1306(d) if the report was due before September 1, 2020, and provided that it is submitted to the CFTC no later than 120 days after the end of the SEF’s fiscal year.
DMO provided DCMs with audit trail relief similar to that provided to SEFs, and to the extent that non-compliance relates to COVID-19-related displacement of FCMs, IBs, FBs, SDs, and other market participants subject to the DSIO COVID-19 relief (Affected Market Participants) from an exchange’s trading floor or other designated premises from which customer orders may be placed.
DMO noted its expectation that DCMs “remain particularly vigilant in their self-regulatory functions and to implement compensating controls designed to ensure that this relief does not facilitate or allow Affected Market Participants to take advantage of market volatility to engage in improper trading.” In addition, DMO’s relief is subject to the following:
In addition to the above-mentioned CFTC no-action relief, on March 13, 2020, the NFA provided relief to its member firms that permit associated persons (APs) to temporarily work from a location that the firm has not listed as a branch office and that do not have a branch manager, as long as the member firm implements alternative supervisory methods to adequately supervise AP activities and meet its recordkeeping requirements. NFA expects member firms to document these procedures. When a member firm no longer operates under contingencies pursuant to its business continuity plan, NFA expects APs to return to the main office or a listed branch office.
The CFTC is actively monitoring futures and swaps markets and market participants to determine if markets are functioning appropriately and without disruption. Market participants are encouraged to reach out to CFTC staff if issues arise.
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If you have any questions or would like more information on the issues discussed in this alert, please contact any of the following Morgan Lewis lawyers:
Michael M. Philipp
Katherine Dobson Buckley