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Enforcement Round-Up
Additional Referral and Self-Reporting Advisory
On April 17, 2025, as previewed in the Division of Enforcement’s (“DoE”) February 25, 2025, “Advisory on Self-Reporting, Cooperation, and Remediation”, the Staff of the Market Participants Division (“MPD”) laid the remaining groundwork for the CFTC’s new program designed to provide more transparency on self-reporting, cooperation, and remediation. This additional advisory provides criteria that the CFTC’s Operating Divisions will use moving forward to determine referrals to DoE. As a reminder, the CFTC now permits registrants and registered entities to receive self-reporting credit if they report a potential violation first to one of the CFTC’s Operating Divisions—e.g., MPD, the Division of Clearing and Risk, or the Division of Market Oversight—that has “primary” responsibility for the “interpretation and application of each regulation, as applicable, that is the subject of the potential violation”, whereas previously any self-reporting credit required the self-report to go directly to DoE.
The April 17 Advisory makes clear that an Operating Division will refer only those supervision or non-compliance matters that are “material”—e.g., involving harm to clients, counterparties, or customers, harm to market integrity, or significant financial losses—to DoE. Non-material supervision or non-compliance matters will be addressed by the Operating Divisions without needing to necessarily involve DoE. Operating Divisions are to apply a “reasonableness” standard in deciding what qualifies as a material supervision or non-compliance issue based on these criteria: (1) especially egregious or prolonged systematic
deficiencies or material weakness of the supervisory system or controls, or program; (2) knowing and willful conduct by management, including concealment; or (3) lack of substantial progress toward completion of a remediation plan for an unreasonably lengthy period of time (e.g., several years). Failure to meet, or an extension of, a deadline for a corrective action or remediation plan is insufficient on its own to warrant referral to DoE. Further, a single instance of a control, technical, or operational issue or failure is not material absent other circumstances, such as widespread impact to clients, counterparties, or customers. Operating Divisions will assess the totality of the circumstances in applying these factors, including the size, activity, and complexity of the
registrant or registered entity.
To no surprise, this guidance is in line with Acting Chair Pham’s keynote address in March at an industry conference. But questions remain on the resulting impact this guidance will have on self-reporting and cooperation, particularly given the ambiguity in what may be considered “reasonable” to an Operating Division. For example, how will the Operating Divisions interpret what qualifies as “egregious” or “prolonged” or “lack of substantial progress”? And will the Operating Divisions differ in how they interpret and apply these criteria? Answers to these questions should form as the CFTC begins announcing actions and resolutions with registrants and registered entities under this new self-reporting program.
We are excited to announce that we have prepared a new CLE program that explores our analysis of the CFTC’s new self-reporting program in detail. Contact us if you are interested in scheduling this CLE for you and your colleagues!
April Enforcement Actions
While we are still anxiously awaiting the anticipated results from DoE’s sprint initiative, there were no CFTC enforcement action updates to report for the month of April. Looking forward, we share the potential concern across the street that the self-regulatory organizations (“SROs”), like CME, may pick up some of the regulatory enforcement drop off caused by the more streamlined enforcement approach announced by the CFTC and Staff leadership under the current administration and are therefore more closely monitoring the enforcement dockets of relevant SROs. Any significant cases and observed trends will be covered in our future
updates.
Tiffany Payne and Drew Newman | Email
NFA Proposed Interpretive Notice on AP Supervision
[Moments before publishing this newsletter, the NFA’s letter was listed as withdrawn. We’re providing here so you can see what almost was.] On April 21, 2025, the NFA released a lengthy Proposed Interpretive Notice 9083, titled “Compliance Rules2-9(a) and (d), 2-36(e) and 2-51(d): Member Supervisory Obligations for Associated Persons and Amendments to Other Impacted Interpretive Notices.” If you are an Associated Person or supervise Associated Persons – I highly advise reading this proposed interpretive notice. I have no doubt compliance and legal professionals are all over this one. The Interpretive Notice becomes effective today.
While the Interpretative Notice doesn’t materially change the NFA’s approach to AP supervision, it memorializes and clarifies the NFA’s existing views on this topic. Specifically, the Interpretive Notice provides FCMs, CTAs, CPOs, IBs, SDs, and MSPs (collectively referred to as “Members”) with specific guidance and minimum standards related to AP supervision – all while recognizing that each Member’s program varies by size, type, and complexity. The NFA expects each Member’s supervision of APs to be sufficiently tailored to account for any variations in their program in order to achieve compliance. The Interpretive Notice
sets out certain criteria that are intended to serve as the “minimum components” when establishing and implementing an AP supervision framework. Those components include (but are not limited to):
Written Supervisory Program – Members must have written policies and procedures to address issue escalation, the frequency of certain compliance activities, records used to address and evidence supervisory measures, and usage of third-party service providers.
Qualified AP Supervisory Personnel – Members must ensure AP Supervisory Personnel are qualified and that written policies should identify what areas of the firm are responsible for each AP supervisory function, the title/position of those ultimately accountable, and all of the components listed below.
AP Qualification Due Diligence – Members must ensure APs are qualified and eligible to perform their job. Such due diligence may include (but is not limited to) background checks, inquiring about disciplinary actions (active or pending), review of CFTC Form 8-R, and screening for statutory qualifications. Member policies should require the AP to notify the member of any disciplinary, criminal, or other matter.
Pre-Trade Communications with Counterparties and Related Internal Communications – Members must follow various pre-trade communication recordkeeping rules, and Members should document and execute a systematic review of those records (accounting for different languages) as part of their supervisory oversight of APs. If Members permit the use of personal devices for communications by APs, Members must ensure they can capture and retain required communications from those devices. Unapproved communication devices should be prohibited, absent exigent circumstances.
Order Handling and Trading – Members must document and execute a systematic supervisory review of APs’ order handling and trading activities tailored to their activities and reasonably designed to identify potential trading misconduct and market abuses. Members should periodically review the effectiveness of their supervisory review of order handling and trading.
Training – Before an AP interacts with a counterparty or customer, the Member should ensure the AP has been trained on requirements from the CFTC, NFA, and the Member’s own policies. Members should provide APs with training on material changes to CFTC and NFA requirements.
Other notable updates in the Interpretive Notice require Members to designate supervisory personnel to review website and social media posts and that the Member retain a copy of the APs’ posts or updates to websites and social media platforms.
Barrett Morris | Email
Perpetual Contracts and 24/7 Trading
On April 21, 2025, the CFTC released two requests for comment – the first on 24/7 Trading and the second on Perpetual Contracts in Derivative Markets. The two concepts are tied to the administration’s push to advance workable rules and requirements surrounding digital assets, but there are broader applications than digital assets (e.g., commodities) and considerations for both 24/7 trading and perpetual contracts.
This week Barrett Morris and John Lightbourne had an article published in Law360 as an Expert Analysis regarding perpetual contracts. In the article we discuss some of the use cases and risks regarding perpetual contracts in consideration of the CFTC’s request for comment. Here is a link to that article. In the event you cannot access the article and would like a PDF or if you have any questions or comments, please reach out to Barrett and John. Responses on requests for comment are due back to the CFTC on May 21, 2025.
Barrett Morris and John Lightbourne | Email
PTMMM
The No-Action Letter
On April 4, 2025, consistent with the CFTC’s reprioritization of rule violations involving fraud and manipulation, the MPD Staff issued a no-action letter regarding CFTC Regulation 23.431, which has been part of CFTC regulations since 2012. The no-action letter principally provides—at least for the indefinite future—that with respect to 23.431’s pre-trade mid-market mark (“PTMMM”) requirements for swap dealers and major swap participants, MPD “will not recommend enforcement action against Swap Entities, for failure to satisfy the PTMMM Requirement for their swaps with non-Swap Entity counterparties.” Unlike the Staff’s prior no-action relief concerning PTMMMs, the latest letter is not limited to certain swap types.
Since 2017, Reg. 23.431 has been a steady source of generally low-hanging fruit for DoE to open investigations and then bring enforcement actions where the provision of PTMMMs to counterparties for in-scope trades was untimely, inaccurate, or did not happen at all, as well as for related supervision and recordkeeping failures. For example, in 2020, the Bank of Nova Scotia agreed to a $50 million civil penalty as well as a compliance monitor and other undertakings for its years-long failures in satisfying PTMMM requirements. See In the Matter of The Bank of Nova Scotia, CFTC Docket No. 20-26 (Aug. 19, 2020).
What Firms Are Doing in Response Now
While it’s unclear where firms go from here, what is clear is that registered firms have devoted significant time and resources to building out complex PTMMM compliance frameworks, including systems for calculating and delivering PTMMMs in real-time and capturing required records for retention as well as supervisory processes for ensuring the timely and accurate provision of PTMMMs for in-scope products. We’ve heard that firms’ initial responses to the no-action letter vary and range from an iterative approach of first assessing the universe of policies and systems that reference/rely on PTMMMs for potential updates to the more
extreme one of ceasing the PTMMM requirement entirely. As with any change in Staff policy —even in a more steady regulatory environment—a measured approach is probably best.
What This May Mean in the Future
The letter acknowledges some of the longstanding criticisms of the PTMMM requirements, including, e.g., the failure to meaningfully reduce any perceived informational asymmetries between the swap dealer and its counterparties, most of whom are sophisticated market participants. However, because Reg. 23.431 remains in effect and the letter can be replaced at any time, the letter likely provides only limited comfort. As such, for this Regulation, perhaps a Request for Comment process, in lieu of no-action relief, would have led to more certainty for firms regarding the long-term status of this somewhat divisive rule. For
example, despite the no-action relief, what if a counterparty still requests a PTMMM and later it is determined that the PTMMM provided is inaccurate? Given the 5-year statute of limitations and the likelihood of an administration change causing further changes in Staff leadership, firms therefore may want to consider the potential implications of how they decide to address their existing compliance and records retention for PTMMMs in light of the no-action relief to better account for the possibility of a future DoE investigation.
We are continuing to track what we hear firms on doing in response to this no-action letter. As with any of the topics in this letter, if you have any questions or would like us to review your policies and practices in this area to help you assess next steps, please reach out to us.
Tiffany Payne | Email
SEC Treasury Clearing Rule & SOFR
The SEC’s treasury clearing rule, which will require the clearing of certain U.S. Treasury-secured repurchase agreements, is currently scheduled to go into effect on June 30, 2027. The U.S. Office of Financial Research (“OFR”) published a report on April 22, 2025, analyzing the potential impact the rule will have on the calculation of SOFR. Any impact to SOFR as a result of the rule could impact the pricing of loans and swaps. Although we know some market participants are expressing concern, OFR’s analysis saw no impact (or minimal impact in some instances) to the calculation of SOFR. This is something we recommend firms keep on their radar.
Barrett Morris | Email
FX Window Forwards and Tomorrow/Next Transactions
On April 8th, the CFTC released a Staff Interpretation regarding Window FX Forwards and Spot FX Transactions. Importantly the CFTC’s interpretation provides that:
(1) neither type of transaction should be considered a “swap” under 1a(47) of the Commodity Exchange Act (“CEA”); and
(2) Window FX Forwards should be considered exempt “foreign exchange forwards” under the Treasury Determination and (3) Spot FX Transactions should not be considered foreign exchange swaps under section 1a(25) of the CEA.
As a reminder, all exempt FX swaps and FX forwards are subject to the CFTC’s Part 45 reporting requirements (not Part 43), anti-evasion rules, and business-conduct requirements.
Window FX Forwards
The Staff’s Interpretation settles an issue I know many dealers have gone back and forth on. Specifically, whether or not FX forwards that can be settled on a series of specified dates should be considered “foreign exchange forwards” and therefore exempt from the term “swap” under the Treasury Determination, or whether the transaction should be considered a “swap”.
1a(24) of the CEA defines “foreign exchange forwards” as “a transaction that solely involves the exchange of 2 different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the exchange.” The CFTC’s interpretation states that “foreign exchange forward transactions where delivery may take place on one or more dates within a series of dates, sometimes identified as individual specific dates and sometimes specified as any date in a specified “window” of dates” are not considered to be “swaps”, but instead “foreign exchange forwards”, which are exempt from the definition of “swap”.
Two things have to be clear to qualify for this treatment: (1) the price (which according to the interpretation can actually be variable based on the date of delivery or fixed), and (2) the delivery date(s) (which can be specific dates or a range of dates within a defined window of time). The interpretation does not limit either the duration of time from execution to settlement or the duration of the window. With regard to variability, the variability of the price on different dates within the window must be determined when the contract is entered into, so that it is “fixed” – but it can be based on the FX rate and the embedded
interest rate as of the date of delivery.
Packaged Spot FX Transactions
The second part of the CFTC’s interpretation addressed Packaged Spot FX Transactions, which are sometimes referred to as tomorrow/next transactions. These are typically a series of transactions where under the first transaction the parties agree to physically exchange two currencies on the next business day (or same business day) and under the second transaction, the parties agree to the same transaction, but in the other direction on the next business day. Each leg physically settles no later than T+2 and is documented by its own confirmation. Importantly, if the first leg fails, parties are still obligated to do the second leg.
The CFTC finds that Spot FX Transactions should not be considered “foreign exchange swaps” as defined in section 1a(25) of the CEA or “swaps” as defined in section 1a(47) of the CEA.
What does this mean?
Because Window FX Forwards and Packaged Spot FX Transactions are exempted from the definition of “swap” under the CEA, Swap Dealers are not required to post or collect regulatory margin and the products are not required to be traded on a registered exchange. As discussed above, Window FX Forwards remain subject to the CFTC’s Part 45 reporting requirements (not Part 43), anti-evasion rules, and business-conduct requirements.
Barrett Morris | Email
Interesting Links
What We’re Listening To
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