NFA Proposed Interpretive Guidance: Internal Controls for Futures Commission Merchants, May 2013
On May 22, 2013, the National Futures Association (NFA) published and submitted to the CFTC an interpretive notice regarding new Compliance Rule 2.9: FCM Internal Control Systems. The NFA board approved the proposal on May 16, 2013, and requests review and approval by the commission. Compliance RUle 2.9 places the obligation on all members to "diligently supervise its employees and agents in all aspects of their futures activities for or on behalf of the member." This includes providing "reasonable assurance" that the member's books and records are accurate so that financial reports are reliable, and that the member is in compliance with regulators.
Summary of the Proposed Amendments
The interpretive notice offers guidance in five specific areas:
- Separation of Duties: requires, at minimum:
- the FCM assigns duties to different employees or has automated controls that encourage cross-checking of work performed,
- separation of operational and financial reporting functions,
- no one person should be responsible for initiating a transaction, approving the transaction, recording the transaction and reconciling the account to third party documentation and information, and
- compliance, risk management, or other control personnel should not be subject to supervision by those placing trades or making sales, and compensation should not be directly tied to trading or sales activity.
- Customer Segregated Funds, Secured Amount Funds and Cleared Swaps Collateral: controls should ensure proper titling of collateral, daily reconciliation, compliance with Reg. 1.25, and monitoring of transfers and withdrawals.
- Risk Management and Trading Practices: include appropriate controls on customer due diligence, accepting trades and give-ups, risk and credit limits, margin practices and additional sources of FCM liquidity/
- Restrictions on Access to Information and Communication Systems: Firms should establish controls over the information and communication systems used to initiate, authorize, record, process and report transactions used in areas relating to customer segregated funds, the firm's capital compliance, financial reporting, risk management and trading.
- Capital Compliance controls include the monitoring of intra-month capital position, proper treatment of financial statement entries, changes to key calculations used to compile capital charges, recording of transactions related to capital position, and proper approval of capital withdrawals.
The guidance also requires written policies and procedures that explain the FCM's internal control system and at least one principal responsible for overseeing compliance. Also, the internal control systems must undergo a periodic review
Related Document: Interpretive Notice on Compliance Rule 2-9