CFTC Adopts Internal Business Conduct Rules - Sullivan & Cromwell

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The Proposed Rules consist of the following sets of rules: “Implementation of Conflicts of Interest
Policies and Procedures by Futures Commission Merchants and Introducing Brokers,” 75 FR
70152 (November 17, 2010); “Implementation of Conflicts of Interest Policies and Procedures by
Swap Dealers and Major Swap Participants,” 75 FR 71391 (November 23, 2010); “Reporting
Recordkeeping, and Daily Trading Records Requirements for Swap Dealers and Major Swap
Participants,” 75 FR 76666 (December 9, 2010); “Designation of a Chief Compliance Officer;
Required Compliance Policies; and Annual Report of a Futures Commission Merchant, Swap
Dealer or Major Swap Participant,” 75 FR 70881 (November 19, 2010); and “Regulations
Establishing and Governing the Duties of Swap Dealers and Major Swap Participants,” 75 FR
71397 (November 23, 2010).
Transcript at 11.
Transcript at 30.
Letter to Director Jeffrey Zients, dated February 23, 2012, available at
http://cftc.gov/ucm/groups/public/@newsroom/documents/file/omalialetter022312.pdf.
Id. at 1.
Id. at 2-3.
OMB. Circular A-4, Regulatory Analysis (September 17, 2003).
Final § 3.1(g).
Adopting Release at 8.
“Business Conduct Standards for Swap Dealers and Major Swap Participants With
Counterparties,” 77 FR 9734 (February 17, 2012). For additional information on these rules, see
our Memorandum to Clients, dated February 6, 2012, “CFTC Imposes External Business Conduct
Standards on Swap Dealers and Major Swap Participants.”
17 CFR §§23.600 to 23.607.
Final Rule 23.601(a) requires that an SD or MSP incorporate its policies and procedures for
monitoring position limits into its risk management program. Violating the positions limits by an
affiliate established by the Commission, a DCM or an SEF is a risk that an SD or MSP should
consider in its risk management program. It is unclear whether the Internal Business Conduct
Rules would require an SD or MSP to monitor the position levels of affiliates in connection with its
risk management program. If an SD or MSP must do so, such monitoring could potentially
preclude such an SD or MSP from relying on exemptions from the position limit rules such as the
independent account operator exemption. 17 CFR § 151.7(f).
Under Final Rule 23.603, SDs and MSPs are required to establish business continuity and
disaster recovery plans. These plans should include “procedures for the maintenance of back-up
facilities, systems, infrastructure, personnel, and other resources to achieve the timely recovery of
data and documentation and to resume operations generally within the next business day.”
Adopting Release at 66. The Commission would allow alternative methods for staffing back-up
facilities rather than employing a full-time back-up staff so long as prompt recovery is ensured.
See id. at 66-7.
Pursuant to Final Rule 1.71(b)(2), if an IB has generated less than $5 million over the past three
years from its activities as an IB, then such IB will not have to “implement written policies and
procedures reasonably designed to ensure compliance” but will instead only have to “establish
structural and institutional safeguards reasonably designed” to separate research and nonresearch
personnel as well as trading and clearing personnel.
Proposed Rule 23.605(a)(2).
CFTC Adopts Internal Business Conduct Rules
March 8, 2012
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