On February 10th, the National Futures Association (NFA) published three Notices to Members identifying common deficiencies noted in examinations of commodity pool operators (CPOs), commodity trading advisors (CTAs), futures commission merchants (FCMs), forex dealer members (FDMs), introducing brokers (IBs), and swap dealers (SDs).

This blog post summarizes these notices and the identified deficiencies.

In addition, we have prepared A Summary of Deficiencies Found in NFA Exams February 2020 to supplement the information presented in this blog post.

Continue Reading NFA Announces Common Deficiencies Identified During Examinations of CPOs, CTAs, FCMs, FDMs, IBs and Swap Dealers

The Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) announced parallel enforcement orders against an investment adviser (the “Adviser”) and its Chief Executive Officer for derivatives-related oversight failures.  The alleged failures related to the Adviser’s management of a registered investment company that invested primarily in options on stock-index futures contracts.  The Adviser was regulated by the SEC and the CFTC as a registered investment adviser and registered commodity pool operator (“CPO”), respectively.

This blog post will summarize these enforcement orders, since we believe that they are relevant to investment advisers subject to joint oversight by the SEC and the CFTC.  As a general matter, we also believe that this matter highlights the importance of disclosure and consistent risk management practices in connection with any advisory client’s derivatives-based investment strategy.

Continue Reading Mutual Fund Corner: SEC and CFTC Charge Investment Adviser and Portfolio Manager for Derivatives-Related Failures

On February 5, the International Swaps and Derivatives Association (“ISDA“) announced that it will seek additional information from market participants about the development of contractual language that can be used to replace references to LIBOR and other interbank offered rates in swaps and other the over-the-counter (“OTC“) derivative contracts.  ISDA refers to this replacement contractual language as “fallback language”.

On February 6, ISDA provided an updated timeline that relates to the development and implementation of this fallback language.  Also, ISDA confirmed that buy-side firms will not be charged a fee, if they adhere to the final fallback protocol within three months of its publication.

This post will provide additional information about these two developments.

Continue Reading LIBOR Transition Planning: ISDA Makes Important Annoucements About LIBOR Replacement Language for Swaps

The Alternative Reference Rates Committee (“ARRC”) has published a Buy-Side/Asset Owner Checklist (the “Buy-Side Checklist”) that is intended to assist asset managers and asset owners transition from U.S. Dollar (USD) LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The Buy-Side Checklist establishes goals and concrete implementation steps for 10 “work categories”.  This blog post will provide asset management firms with an overview of this checklist. Attached to this post is a A Summary of The ARRC’s Buy-Side Checklist.   Continue Reading The ARRC Publishes a Buy-Side Checklist and Vendor Survey for LIBOR Transition / SOFR Adoption

In my initial post on the SEC’s reproposed rules for regulating the use of derivatives by investment companies (“funds”), I noted favorably that the regulations would extend beyond funds to registered broker/dealers and investment advisers. I think this reflects a more comprehensive, less piecemeal, approach to these proposed rules. I also appreciate the coordination of the Divisions of Investment Management and Trading and Markets in drafting the proposed rules. Read the full post on our sister blog Asset Management ADVocate.

We previously explored the treatment of “leveraged/inverse investment vehicles” under SEC’s reproposal for regulating how funds  use derivatives in compliance with Section 18 of the Investment Company Act of 1940 (proposed Rule 18f-4), and related proposed Rule 15l-2 under the Securities and Exchange Act of 1934 and Rule 211h-1 under the Investment Advisers Act of 1940. In this post we consider the options available to retail investors for leveraged trading and whether a more consistent approach may make sense. Read the full post on our sister blog Asset Management ADVocate.

In its November 25, 2019 Open Meeting, U.S. Commodity Futures Trading Commission (“CFTC”) commissioners voted to approve final rules amending Part 4 of the CFTC rules addressing registration and compliance requirements for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”). The CFTC proposed amendments to Part 4 in October 2018. The final rule will be effective thirty days after publication in the Federal Register.

This post summarizes select key amendments in the rule and what action must be taken by firms intending to take advantage of the new amendments, if any.

Continue Reading CFTC Votes To Codify CPO/CTA Registration Relief at Open Meeting

We are still digesting the SEC’s reproposal for regulating how mutual funds, ETFs, closed-end funds and BDCs (“funds”) may use derivatives in compliance with Section 18 of the Investment Company Act of 1940 (proposed Rule 18f-4), but one surprising aspect is proposed Rule 15l-2 under the Securities Exchange Act of 1934. As explained more fully below, Rule 15l-2 would increase the due diligence required before a broker/dealer permits a customer to trade in “leveraged/inverse investment vehicles.” Including this rule in the proposal required the cooperation of both the Trading and Markets and Investment Management Divisions of the SEC. There is even a parallel rule proposed for investment advisers (proposed Rule 211h‑1). This shows that the SEC is taking a more comprehensive view of the SEC’s authority over the use of leverage in securities trading.

Although we find this non-compartmentalized approach heartening, we think that more could be done to fully deploy the SEC’s powers in this area. We even dare to suggest that, having avoided silos within itself, the SEC might try to work with the Fed to better rationalize regulation of leverage in the financial system. Read the full post on our sister blog Asset Management ADVocate.

FINRA has recently submitted a filing with the Securities and Exchange Commission (“SEC”) to propose another delay to the implementation of TBA margin requirements under Rule 4210. The new implementation date would be March 25, 2021.

FINRA has requested that the deferred implementation date becomes effective immediately upon filing of the rule change by FINRA with the SEC.   Continue Reading FINRA Rule 4210 Update: FINRA Proposes To Delay TBA Margining (Again) Until March 25, 2021

This post is Part 2 of a series of posts that addresses the impact of recent regulatory developments on the use of limited recourse provisions in futures customer agreements entered into between a futures commission merchant (an “FCM”) and an investment manager on behalf of one or more of the manager’s clients.

In this post, we provide an overview of recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the“JAC”) of several large futures exchanges and the National Futures Association that prohibit the use of limited recourse provisions in futures customer agreements. Continue Reading Limited Recourse Provisions in Futures Customer Agreements: Part 2 – I Cannot Guarantee Your Client’s Losses