Regulatory alert! A reminder from the Joint Audit Committee to FCM Legal and Compliance staff
The Joint Audit Committee (JAC) is a club of futures exchanges, in their capacity as self-regulatory organizations (SROs). Under a delegation of authority from the Commodity Futures Trading Commission (CFTC), the JAC monitors and reviews member futures commissioners (FCMs) to ensure that they comply with financial, reporting and risk management (including rules on segregation of client funds) adopted by members. SROs and CFTCs. The JAC issued a Regulatory Alert, 22-02, reminding FCM members of their obligations under CFTC Regulation 1.11. It is safe to infer that the alert is based on compliance gaps detected during recent FCM regulatory reviews by member SROs.
CFTC Regulation 1.11 requires an FCM to establish, maintain and enforce a system of risk management policies and procedures designed to monitor and manage the risks associated with the FCM’s activities. JAC Alert 22-02 identifies several requirements that FCM Legal and Compliance staff will want to confirm are adequately considered when reviewing their Regulation 1.11 risk management programs. Learn more about the requirements included in JAC Alert 22-02.
SEC Proposes Rules Regarding ESG Disclosure by Investment Advisors and Investment Firms
On May 25, the Securities and Exchange Commission (SEC) proposed changes to various fund and adviser rules incorporating environmental, social and governance (ESG) factors into disclosure. The proposed changes seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific information in prospectuses, annual reports and adviser brochures based on the ESG strategies they pursue. For example, a fund that seeks to achieve an ESG-related goal would be required to disclose how it measures progress toward that goal. If enacted, the amendments will apply to certain registered investment advisers, advisers exempt from registration, registered investment companies and business development companies.
The comment period for proposed changes will remain open for 60 days after publication in the Federal Register. Check out the SEC’s proposal.
SEC proposes changes to investment company law ‘name rule’
The SEC has proposed amendments to Rule 35d-1 under the Investment Company Act of 1940 (the “Names Rule”). The naming rule currently requires that a registered investment company or business development company (BDC) whose name suggests either a focus on a specific type of investment, a focus on investments in a specific industry or a geographical focus, adopts a policy of investing at least 80 percent of the value of its assets in the investments suggested by its name.
The amendments propose, among other things: (i) to extend the 80% investment policy requirement to any registered investment company or name of BDC with language suggesting that the fund focuses on investments that have, or investments whose issuers have, special characteristics (including, for example, “growth” or “value”); (ii) limit the circumstances under which a registered investment company or BDC is permitted to deviate from its 80% investment policy; (iii) require any registered unlisted investment company or BDC to obtain a shareholder vote before changing its 80% investment policy; (iv) impose specific guidelines on the use of environmental, social and governance (ESG) terms in the names of registered investment companies or BDC; and (v) implement related reporting, notice and record keeping requirements. Learn more about the name rule.
FINRA Proposes Changes to Strengthen TRACE Reporting Obligations
The Financial Industry Regulatory Authority, Inc. (FINRA) has filed a proposed rule amendment with the Securities and Exchange Commission (SEC) to amend FINRA Rule 6730 to:
(i) require Members to report electronically executed trades in U.S. Treasury securities to FINRA’s Trade Reporting and Compliance Engine (TRACE) in the finest increment captured by the system used to execute the trade, subject to an exception for members with limited trading volume in the United States Treasury securities; and
(ii) reduce the timeframe for reporting transactions in US Treasury securities to generally require reporting to TRACE as soon as possible but no later than 60 minutes.
Read FINRA’s proposed rule change.
CME Derivative Blocks – A new way to price block trades on select CME and CBOT security index futures
On May 23, the Chicago Mercantile Exchange (CME) implemented a new feature as part of its block trading rule allowing dealers to trade “derivative blocks” in certain equity index futures contracts. . A derivative block trade is a block trade whose price and quantity depend on hedging trades made by the broker after the block trade has been agreed, but before it is submitted to the exchange. Derivative block trades are only available on CME E-mini Select Sector futures and CBOT Dow Jones US Real Estate Index futures, at the existing minimum block trading thresholds applicable to such contracts. Learn more about the functionality of CME Derived Blocks.
The LME consultation on the OTC position statement
The London Metal Exchange (LME) has announced a consultation with its members on a proposal to require reporting of all “over-the-counter (OTC) positions” in certain physically deliverable metals contracts. The proposal was prompted in response to a spike in nickel prices on March 8 when the LME suspended trading in all nickel contracts (which did not resume until March 16) and canceled all trades executed after midnight. That day. The LME’s “independent review” of these events and their consequences is ongoing (as are regulatory reviews by the Financial Conduct Authority (FCA) and the Bank of England), but the exchange has already identified a salient contributing factor: “significant positions in the OTC market and the lack of direct visibility of the LME on this activity.
Under the proposal, members would be required to submit, on a weekly basis, details of all OTC positions (i.e. positions in LME contracts not cleared by LME Clear) in aluminum and aluminum alloy , cobalt, copper, lead, nickel, tin and zinc, including all OTC contracts that are financially settled against an LME reference price or physically deliverable with LME warrants or warehouse receipts . OTC baskets and index trades referencing specified LME contracts would also be reportable where the LME constituents represent at least 20% of the underlying. No minimum threshold would apply; all positions, regardless of size, would be subject to reporting. Learn more about the LME consultation.