CFTC Issues Additional Relief in Response to COVID-19

May 12, 2020

The US Commodity Futures Trading Commission recently issued more no-action letters in response to the coronavirus (COVID-19) pandemic, providing relief from capital requirements and fingerprint requirements.

Since the start of state-issued shelter-in-place orders in connection with COVID-19, the US Commodity Futures Trading Commission (CFTC) staff has issued no-action letters to provide relief from regulatory requirements to market participants and CFTC registrants. The CFTC has most recently issued relief from capital requirements to futures commission merchants (FCMs) and introducing brokers (IBs), in response to a request made by the Futures Industry Association and National Introducing Brokers Association, and relief from fingerprint requirements to natural persons who are principals or associated persons (APs), in response to a request made by the National Futures Association (NFA).

Relief from Capital Requirements

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020, provides emergency assistance and healthcare response for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act establishes a $2.2 trillion program designed to provide relief to those who have been adversely impacted by COVID-19 and the Paycheck Protection Program (PPP) aimed to provide relief for small businesses.

Net Capital Relief

The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued no-action relief to FCMs and IBs that receive PPP “covered loans” so that when they compute their net capital under CFTC Regulation 1.17, they may add back to their capital the eligible “forgivable expense amount” (certain costs incurred and payments made during the eight-week period beginning on the date of the origination of the loan, such as payroll expenses).

An FCM or IB may add back to their capital the forgivable expense amount provided that all of the following conditions are satisfied:

  • The covered loan is included as a liability on the FCM’s or IB’s balance sheet.
  • The FCM or IB creates and retains documentation of the basis of the add-back, including a record of its computation of the forgivable expense amount, a record of costs and payments making up that amount, and a record of any estimate of the limits under Section 1106(d) with the basis of such estimate.
  • The amount of the add-back cannot exceed the balance sheet liability for the covered loan that the firm reasonably expects to be forgiven pursuant to the CARES Act, and therefore the add-back amount cannot increase net capital by more than the balance sheet liability for such covered loan.
  • The add-back is reported on line 3070 (Long-term debt pursuant to CFTC Regulation 1.17(c)(4)(vi)) of the statement of the computation of the minimum capital requirements of the applicable Form 1-FR-IB or Form 1-FR-FCM, with an explanation on a separate page, provided that IBs and FCMs that are dually registered with the US Securities and Exchange Commission (SEC) as brokers or dealers may continue to file FOCUS reports in lieu of Forms 1-FR-IB or Forms 1-FR-FCM.
  • An FCM or IB that files a FOCUS report reports the forgivable expense amount add-back on line 3525 (Other (deductions) or allowable credits) as directed by the Financial Industry Regulatory Authority’s (FINRA’s) April 2, 2020 FAQ.

FINRA’s April 2 FAQ permits small firms to add back to net capital the amount of any accrued and unpaid annual assessment fees due to FINRA—reported on line 3525 (Other (deductions) or allowed credits) of the firm’s FOCUS report—until September 1, 2020. DSIO’s relief allows FCMs and IBs that are SEC-registered broker-dealers that qualify as small firms to take advantage of FINRA’s guidance until September 1, 2020.

Relief from Fingerprint Requirements

NFA has suspended its applicant fingerprinting service and DSIO has provided relief from the fingerprint requirement in light of concerns regarding the spread of COVID-19 and federal, state, and local government measures to restrict the movement of, and contact among, individuals that have made it difficult for natural persons seeking to be listed as principals or registered as APs of CFTC registrants to comply with the fingerprint requirement in CFTC Regulations 3.10(a)(2) (for natural person principals) and 3.12(c)(3) (for APs).

Instead of submitting fingerprint cards to NFA, DSIO will permit the sponsoring firm of the principal or AP applicant to perform a criminal history background check of the applicant (similar to the relief available to non-US persons under CFTC Regulation 3.21(e)).

  • The criminal history background check must be of a type that would reveal statutory disqualifications and does not reveal any matters that constitute a disqualification under Section 8a(2)(D) or 8a(3)(D), (E) or (H) of the Commodity Exchange Act (CEA), other than those disclosed to NFA.
  • A certification must be filed with NFA, and signed by a person authorized to bind the sponsoring firm that it completed the background check and that it did not disclose any matters that constitute a disqualification under Section 8a(2) or 8a(3) of the CEA. Records documenting the completion and results of the background check must be retained in the sponsoring firm’s records pursuant to CFTC Regulation 1.31.
  • Once the relief expires, principal and AP applicants must submit their fingerprints to NFA within 30 days of NFA’s notification of its resumption of fingerprint processing.
  • NFA Registration Rules 204(a)(2)(A) and 206(a)(1)(A) impose similar fingerprinting requirements for natural person principals of registrants and applicants for registration and AP applicants, respectively. Therefore, NFA is providing temporary relief from these requirements for registrants and applicants for registration that satisfy the requirements of the CFTC's no-action letter.

The relief is available until July 23, 2020 or such earlier date as NFA notifies the public that it has resumed the processing of fingerprints.

Coronavirus COVID-19 Task Force

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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Michael M. Philipp

Katherine Dobson Buckley

Washington, DC
Laura E. Flores
Ignacio A. Sandoval

New York
Thomas V. D’Ambrosio