The Commodity Futures Trading Commission (CFTC or Commission) has issued a series of eight staff letters which will facilitate the functioning of the derivatives markets during the COVID-19 pandemic.1 These actions will assist designated contract markets (DCMs), swap execution facilities (SEFs) and derivatives intermediary firms in implementing their business continuity/pandemic plans and in operating on a dispersed basis. In addition, the National Futures Association (NFA) has issued a member notification which will facilitate member firms’ implementing social distancing practices for their employees.2 Chairman Heath P. Tarbert has committed the agency to continuing to provide “swift, practical, targeted relief” to “facilitate orderly trading and liquidity” in the derivatives markets as needed.
The series of staff no-action letters address compliance with various aspects of the regulatory framework made difficult or impossible when social distancing practices are implemented. The relief, in part, addresses rules that are location-specific, thereby enabling industry infrastructure providers and professionals to disperse their employees. In addition, the staff has temporarily delayed various specified reporting obligations in order to permit affected persons to redirect staff resources during the crisis.
As a response to the program to encourage, and in some places enforce, social distancing, the staff letters relieve DCMs, SEFs and industry professionals from requirements tied to performance of duties in a specific location, such as floor brokering, and rules requiring location-specific compliance systems, such as audit trail requirements that apply to recording of oral communications and time stamps. In addition, NFA has provided relief with respect to supervision requirements tied to the location of a firm’s associated persons (APs). Specifically:
Floor brokering. The definition of “floor broker” generally ties performance of duties by the registrant to a defined location—the trading floor. However, in response to calls for social distancing, the Chicago Mercantile Exchange closed its trading floor effective March 13, 2020. The Division of Swap Dealer and Intermediary Oversight (DSIO), in Letter No. 20-04, provided relief to floor brokers from the requirement to be physically located in any pit, ring, post or other similar place pursuant to the definition of “floor broker,”3 if required to be absent from the trading floor by the written business continuity plan of any DCM. Such persons are also relieved from any requirement to register as an introducing broker (IB) by trading other than while physically present on a trading floor.
Oral communications. Commission rule 1.35 requires floor brokers (FBs), futures commission merchants (FCMs), IBs, registered foreign exchange dealers (RFEDs) and Swap Dealers (SDs) to make and maintain a record of oral communications that are provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest.
Compliance with this requirement is often tied to a recording system that is operational at a specific place of business. DSIO has provided relief from this requirement “if the personnel required to use recorded lines are required by the registrant’s written business continuity plan to be absent from their normal business site, provided that a written record of the oral communication, including date, time, identifying information of the persons participating, and subject matter of the communication, is created and maintained as a written communication in accordance with Commission regulation 1.35.”4 In addition, the registrant must collect the handwritten notes or other contemporaneous or subsequently created transcripts or summaries of the oral communication and maintain such written summaries as a required book or record under Commission rule 1.31.5
Time stamps. DSIO is also granting no-action relief to members of a DCM or SEF, including FBs, FCMs and IBs as well as RFEDs; and SDs for failing to record the date and time by time stamp or other timing device, as mandated by Commission rule 1.35, if the responsible personnel are required to be away from their normal business site.6 A record of the date and time, to the nearest minute, must otherwise be created and maintained. In each case, the relief is also conditioned on remaining in compliance with all other rules of the applicable DCM or SEF.
Market audit trail requirements. In companion letters No. 20-08 and 20-09, the Division of Market Oversight (DMO) issued no-action relief to SEFs and DCMs, addressing their respective obligations to capture and monitor a complete audit trail relating to trading where the dispersal of personnel has challenged the routine compliance systems. For example, certain SEFs operate on a voice-facilitated system, relying on execution specialists to assist in trade matching and entry. DMO has issued temporary no-action relief relating to the capture of such oral communications for staff that are required by the pandemic response to be away from their normal business sites. The relief is subject to a number of conditions, including, in part, that:
- the SEF continues to record voice communications at its normal business sites;
- SEF personnel away from normal business sites create written or electronic records of unrecorded oral communications;
- the electronic capture of transactions by the SEF continue and that such data be retained in the SEF’s electronic audit trail, regardless of where voice trading personnel are located; and
- ongoing monitoring for trade reconstruction of voice trading personnel is relieved only where SEF personnel are not able to be physically present to conduct such reviews or where the information is unavailable.
DCMs have likewise been given targeted, temporary relief from their obligation to produce and maintain a complete audit trail under DCM Core Principles 4 and 10, in light of, and complementing, the relief granted by DSIO to FBs, FCMs and IBs. The staff warned, however, that it “expects the DCMs to 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 parties] to take advantage of market volatility to engage in improper trading.”7
All the staff no-action letters are temporary, expiring on June 30, 2020.
The NFA issued a notice to members stating that it understands that the current situation may necessitate alternative work arrangements, including under member firms’ business continuity plans which are being updated to include social distancing arrangements. By this notice, NFA has taken the position that it will not pursue disciplinary actions against any member that, in response to the pandemic, permits its APs to work from locations not identified to the NFA as a branch.8 As a condition, the member must implement and document the alternative supervisory methods in place to supervise its APs’ activities.
The staff has also recognized that responding to the pandemic has caused industry infrastructure providers and intermediaries to reprioritize staffing. Accordingly, to better enable the industry to focus its human resources on maintaining operations during this time of stress to the financial system, Commission staff has delayed the submission of certain reports. Specifically, it has delayed the deadlines for FCM,9 IB10 and SD11 Chief Compliance Officer Reports until 30 days after their original due date, and for SEF Chief Compliance Officer Annual Compliance Reports and SEF fourth-quarter financial reports until no later than 120 days after the SEF’s fiscal year-end.12
This series of no-action letters evidences the CFTC’s approach of providing practical and targeted relief necessary to assist the derivatives industry in addressing the challenges it faces in responding to the COVID-19 pandemic. Each of the letters in this series makes clear that the CFTC will be receptive to additional requests for relief, as needed. Accordingly, additional letters and guidance will likely be forthcoming in response to new developments.