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NFA Proposes Guidance on Exact Nature of Internal Control Systems FCMs Must Maintain

Compliance Weeds    News Developments    Between Bridges   
Published Date: May 29, 2013

In another post-MF Global development, the NFA on May 22, 2013 submitted to the CFTC for its approval proposed guidance related to internal control systems that must be adopted by all FCMs. Approval is expected.

In submitting this guidance, NFA proposed certain minimum standards that must be part of each FCM's internal control system, which itself must be documented in writing. These policies and procedures should also describe the FCM's supervisory system generally, and should identify at least one firm principal by title who is responsible for ensuring that the FCM has met each element of the proposed guidance and for responding to regulatory inquiries. The policies and procedures must provide specific procedures and not general exhortations. For example it is not sufficient for the policies and procedures to state that the FCM must do something; it must describe in particular how the firm will do that something. According to the NFA, for example:

"...with respect to the internal controls over customer segregated funds, secured amount funds and cleared swaps customer collateral, the policies and procedures should describe the manner in which the firm monitors the impact of market volatility on excess segregated funds, secured amount funds and cleared swaps customer collateral. Similarly, with respect to risk management and trading practices, the policies and procedures should describe the firm's due diligence procedures used to assess customer risk before establishing a relationship. It is not sufficient for the policies and procedures to merely state, for example, that the FCM will monitor a certain area or has particular automated controls to do so."

The policies and procedures must be approved by the FCM's governing body, the CEO, CFO, CCO, COO or other individual who is a principal of the FCM and who either holds a position with knowledge of the FCM's financial requirements and financial position or is an officer that is specifically granted the authority and responsibility to fulfill the requirements of senior management by the Governing Body.

The internal control system must address:

  1. an adequate system of separation of duties;
  2. the firm's procedures for complying with customer segregated funds, secured amount funds and cleared swaps customer collateral requirements;
  3. establishing and complying with appropriate risk management and trading practices;
  4. restrictions on access to communication and information systems; and
  5. monitoring for capital compliance.

Each FCM must also include in its internal control policies and procedures that it must conduct periodic reviews of them to ensure their adequacy, and describe the process for determining the scope and frequency of such reviews. All reviews must be documented and be conducted by a person(s) independent of the function reviewed.

FCMs should begin to evaluate their policies and procedures to assess necessary amendments to conform to these guidelines.

For more information see:

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of May 29, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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