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CFTC Announces Limited No-Action Relief in Response to COVID-19 Pandemic

March 18, 2020, Covington Alert

On March 17, 2020, the Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) and Division of Market Oversight (DMO) each released an announcement regarding a series of no-action letters in response to the ongoing global COVID-19 pandemic (see here for the DSIO announcement and here for the DMO announcement). The CFTC’s announcements come in the wake of high-profile efforts by other financial regulators to quickly address the financial and regulatory effects of the outbreak.

The CFTC’s no-action relief is temporary in nature and designed to “facilitate trading and liquidity in [the] derivatives markets” in the face of practical difficulties or impossibilities created by the spread of COVID-19, including the displacement of personnel based on social distancing arrangements. The CFTC’s no-action letters provided varying relief for a number of market participants, including swap dealers (SDs), members of designated contract markets (DCMs), members of swap execution facilities (SEFs), futures commission merchants (FCMs), introducing brokers (IBs), retail foreign exchange dealers (RFEDs), and floor brokers (FBs).

Additionally, on March 18, 2020, the National Futures Association announced that it plans to issue parallel relief for its members who conform with the terms of the CFTC’s no-action relief.

The CFTC’s no-action letters contain the following relief:

Annual Dodd-Frank Compliance Report Deadline Extensions – SDs, FCMs, IBs, and SEFs

Two DSIO letters granted no-action relief from CFTC Regulation 3.3 for SDs (CFTC Letter No. 20-06) and FCMs and IBs (CFTC Letter No. 20-03). Under Regulation 3.3(f)(2)(i), firms must submit annual chief compliance officer reports to the CFTC within 90 days of the end of the fiscal year. The no-action relief grants firms an additional 30 days to submit their reports, provided that the reports were required to be furnished to the CFTC prior to September 1, 2020.

A DMO letter (CFTC Letter No. 20-08) granted similar relief to SEFs from the provisions of CFTC Regulation 37.1501, which requires SEFs to submit annual chief compliance officer reports to the CFTC within 60 days of the end of the fiscal year. This no-action relief grants SEFs an additional 60 days to submit their reports, provided that the reports were required to be furnished to the CFTC prior to September 1, 2020.

Fourth Quarter Financial Report Deadline Extensions – SEFs

A DMO letter (CFTC Letter No. 20-08) granted no-action relief from CFTC Regulation 37.1306 for SEFs. Under Regulation 37.1306(d), a SEF must submit quarterly reports to the CFTC within 40 days of the end of the SEF’s first three fiscal quarters and within 60 days of the end of the SEF’s fourth fiscal quarter. The no-action relief grants SEFs an additional 60 days to submit their fourth quarter reports, provided that the reports were required to be furnished to the CFTC prior to September 1, 2020.

Relaxed Requirements on Recording of Oral Communications – SDs, FCMs, IBs, RFEDs, and FBs

The DSIO letters granted no-action relief from provisions of CFTC Regulation 23.202 for SDs (CFTC Letter No. 20-06), and Regulation 1.35 for FCMs and IBs (CFTC Letter No. 20-03), RFEDs (CFTC Letter No. 20-05), and FBs (CFTC Letter 20-04) that require firms to collect and maintain recordings of certain oral communications, including those related to voice trading. The relief applies when firms’ written business continuity plans require the physical absence of personnel normally responsible for these functions, including under social distancing arrangements meant to prevent the spread of COVID-19. Firms must still memorialize oral communications in writing. Additionally, to fall within the scope of the no-action relief, FCMs, IBs, and RFEDs must take steps to collect and maintain written materials composed by the affected personnel, and FBs must take steps to collect and maintain written materials related to the oral communications. This relief expires June 30, 2020.

Other Relaxed Audit Trail Requirements – SEFs and DCMs

One DMO letter (CFTC Letter No. 20-07) granted no-action relief to SEFs from CFTC regulations requiring the recording of voice communications. Specifically, it granted relief for non-compliance with Regulations 37.205(a)–(b) (requiring SEFs to capture and maintain audit trail information), 37.400(b) (requiring SEFs to monitor swaps trading), 37.406 (requiring SEFs to have the ability to comprehensively and accurately reconstruct trading on its facility), and Regulations 37.1000(a)(1) and 37.1001 (each imposing recordkeeping requirements) that pertain to maintaining a complete audit trail. The relief is subject to a number of conditions:

  • Non-compliance arises from the displacement of voice trading personnel caused by the SEF’s response to the pandemic;
  • The SEF continues to record voice communications at its normal business sites;
  • The SEF makes reasonable efforts to create written or electronic records of unrecorded voice communications;
  • The SEF captures and records terms of all transactions; and
  • Orders entered by voice trading personnel are retained in the SEF’s normal electronic audit trail and subject to existing credit and risk filters.

The DMO noted that relief from Regulation 37.400(b), the requirement of real time swaps trading monitoring, is limited to situations in which the SEF is unable to conduct in-person surveillance or reconstruct trading because of a lack of voice recordings. This relief expires June 30, 2020. The DMO further noted that all other requirements under Regulations 37.1000(a)(1) and 37.1001, including the provisions imposing record retention requirements, are not subject to this no-action relief.

Another DMO letter (CFTC Letter No. 20-09) granted no-action relief to DCMs under CEA sections 5(d)(4) and (10) and related CFTC regulations imposing audit trail requirements, based on the no-action relief provided to SDs, FCMs, IBs, RFEDs, and FBs (which the letter collectively labels “Affected Market Participants”) under the series of DSIO letters. The relief to DCMs in Letter No. 20-09 is subject to a number of conditions:

  • The DCM requires Affected Market Participants to otherwise conduct business in accordance with exchange rules, including the preparation of a written record of oral communications;
  • The DCM retains customer orders in its system’s normal electronic audit trail and subject to existing credit and risk filters; and
  • The DCM ensures that “[a]ll other exchange rules, including those relating to the handling of customer orders and trade practices,” will continue to apply to trading activity by Affected Market Participants.

This relief expires June 30, 2020. The DMO further stated its expectation that DCMs will “remain particularly vigilant in their self-regulatory functions” and will implement compensating controls aimed at preventing affected market participants from “tak[ing] advantage of market volatility to engage in improper trading.”

Relaxed Requirements for Time-Stamping – SDs, DCMs, SEFs, FCMs, IBs, FBs, and RFEDs

The DSIO letters granted no-action relief from provisions of CFTC Regulation 23.202 for SDs (CFTC Letter No. 20-06); Regulation 1.35 for DCMs (CFTC Letter No. 20-02), SEFs (CFTC Letter No. 20-02), FCMs and IBs (CFTC Letter No. 20-03), and FBs (CFTC Letter No. 20-04); Regulation 155.3 for FCMs and IBs (CFTC Letter No. 20-03); and Regulation 5.18 for RFEDs (CFTC Letter no. 20-05) that require firms to time-stamp certain documents. The relief applies when firms’ written business continuity plans require the absence of personnel normally responsible for this function. This relief expires June 30, 2020.

Waiver of Physical Location Requirements – FBs

A DSIO letter (CFTC Letter No. 20-04) granted no-action relief from provisions of CFTC Regulation 1.3 requiring that FBs be physically located in a specific location if the FB is required by the written business continuity plan of any DCM to be absent from such location. It also provided relief from requirements to register as an IB that would normally flow from the FB’s failure to be physically located in such a location. This relief expires June 30, 2020.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Corporate practice.

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