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Performance Audit: 

U.S. Commodity 

Futures Trading 

Commission’s

Oversight of the 

National Futures 

Association

 

Office of the Inspector General

May 31, 2017
U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5110

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TO: J. Christopher Giancarlo, Acting Chairman 

Sharon Y. Bowen, Commissioner

Eileen Flaherty, Director

Division of Swap Dealer and Intermediary Oversight

FROM: Miguel A. Castillo, CPA, CRMA 

Assistant Inspector General for Auditing

DATE: May 31, 2017

SUBJECT: Performance Audit: U.S. Commodity Futures Trading Commission

Oversight of the National Futures Association

Introduction

The Commodity Futures Trading Commission (CFTC or Commission) 1 Office of 

Inspector General (OIG)2 has completed a performance audit of CFTC’s oversight of the 

National Futures Association (NFA). NFA is the sole registered futures association 

(RFA) under the Commodity Exchange Act (CEA), and is the designated self-regulatory 

organization (DSRO) for all Swap Dealers (SD) and some Futures Commission 

Merchants (FCMs).3 The CFTC Division of Swap Dealer and Intermediary Oversight 

(DSIO) is the CFTC component charged with oversight of NFA and its duties. DSIO’s

Registration and Compliance Branch and Examination Branch perform the bulk of NFA 

oversight.4 Because the current Director of DSIO started with CFTC in August 2015, 5

and the Deputy Director for the Examinations Section began with CFTC in June 2016, 

we believe this audit may assist new leadership to make program improvements. 

DSIO identified eight program areas where NFA has responsibility by statute or 

delegation: 1) registration of all categories of Commission registrants and the 

examination of FCMs and SDs; 2) Commodity Pool Operator (CPO)/Commodity 

Trading Advisor (CTA) special provisions; 3) foreign futures and options special 

provisions; 4) financial surveillance program; 5) arbitration program; 6) sales practices; 

7) telemarketing supervision; and 8) other. 

 

1 CFTC is the primary federal regulator for futures markets, including futures exchanges and 

intermediaries including Futures Commission Merchants, Retail Foreign Exchange Dealers, Commodity 

Pool Operators, Commodity Trading Advisors, Introducing Brokers, Floor Brokers, Floor Traders, 

Leverage Transactions Merchants, Associated Persons, and since passage of the Dodd-Frank Act two new 

categories, Swap Dealers and Major Swap Participants.

2 CFTC OIG is described in its Semiannual Report to Congress, September 30, 2016.

3 Background information on NFA may be found at Appendix C. Definitions of terms such as FCM and 

DSRO are found at Appendix E. 4 The relevant DSIO sub-organizations are displayed at Appendix D. 5 CFTC Chairman Massad Announces the Appointment of Eileen T. Flaherty as Director of the Division of 

Swap Dealer and Intermediary Oversight, July 24, 2015.
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For Calendar Year (CY) 2012 through CY 2016, we evaluated DSIO’s oversight of the 

eight program areas. DSIO’s oversight consists of daily interactions with NFA, quarterly 

meetings, consultation and approvals for examinations; processing of NFA rules and 

rule amendments; written reviews or reports of NFA operations; and follow-up of 

recommendations. Finally, we evaluated CFTC staffing levels and the extent to which 

CFTC is able to leverage NFA’s staff. 

Summary Findings

Daily interactions and quarterly meetings. In fulfilling oversight responsibilities, DSIO 

displayed a high degree of daily collaboration with NFA regarding registration and 

regulatory issues. Daily collaboration permits DSIO and NFA to address technical and 

compliance issues timely and with minimal bureaucracy. DSIO’s quarterly meetings 

with NFA management permit DSIO to address technical and compliance issues in 

similar fashion.

FCM and SD examinations. While DSIO’s oversight of NFA’s FCM examinations 

appears adequate, CFTC has not finalized Swap Dealer exam criteria for financial 

requirements because the Commission has not yet adopted capital requirements and 

NFA therefore has not performed Swap Dealer financial examinations. NFA 

examinations are an essential part of its delegated registration authority given the 

significant size of the cleared swap market; a weekly average of $4.6 trillion during 

January 2017.6 In addition, NFA examinations tie directly to CFTC’s objective of “strong 

governance and oversight of Commission registrants.” 7 

Written reviews or reports. For four of eight NFA program areas, DSIO could not show

that it performed written reviews periodically.8 As such, DSIO cannot demonstrate how 

well NFA performs delegated tasks related to the Arbitration Program, CPO/CTA special 

provisions, Foreign Futures and Options (Part 30) programs, and the tasks falling in the 

catch-all category “other” (which includes NFA disciplinary proceedings and anti-money 

laundering programs). 

For the written reviews conducted, DSIO does not rigorously follow government audit or 

other recognized quality standards; 9 however, we identified no requirement that it do 

 

6 Source: Transaction Dollar Volume by Cleared Status (Millions of USD) (Single-Count). 

http://www.cftc.gov/MarketReports/SwapsReports/L1TransDollarVolCS

7 CFTC, Strategic Plan for Fiscal Year 2014-2018, p. 21. 8 CFTC has stated that it “will continue to monitor NFA activities through periodic rule enforcement 

reviews.” 17 CFR Part 3 Appx A. 

9 CFTC has stated that some staff reviews are not performed in accord with audit standards. See Proposed 

Rule, Commodity Futures Trading Commission, 17 CFR Parts 1, 3, 22 et al., 77 FR 67866, *67868 (Nov. 

14, 2012); Testimony of Gary Gensler, Chairman, CFTC, before the U.S. Senate Committee on Agriculture, 

Nutrition and Forestry, Washington, DC (Aug. 1, 2012). 
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so. 10 Consistently following quality standards would permit DSIO to uniformly report 

NFA’s performance over time and facilitate recommendation follow-up. 

With regard to reporting, we found no evidence that DSIO’s reports were distributed to 

the Commission or made public. Six of ten written reviews were not distributed to NFA

in final; the other four were distributed to NFA in final after the arrival of the current 

DSIO Director. Always providing final written reviews to NFA would permit DSIO to 

better communicate and prioritize findings and recommendations, to better document 

NFA’s receipt of findings and recommendations, and would permit NFA to commit to 

corrective actions. While the Commission may obtain any DSIO report, we believe 

furnishing the Commission with final written reviews of NFA would be the better 

practice. 

Follow-up of recommendations. Since August 2015, DSIO has closed out 

recommendations in four written reviews under the scope of our audit (i.e., the ones 

that were given to NFA). However, NFA expressed concerns regarding 

recommendations contained in two of the four reviews. It appears there was confusion, 

possibly on both sides, as to what was intended. We will be taking a look at this in the 

next year. We hope CFTC will be precise in any advice given, and NFA will respond 

precisely to any suggestions CFTC may have. 

As for the rest of the reports prior to August 2015, DSIO discussed recommendations 

with NFA on an ongoing basis but did not formally track or otherwise document the 

follow-up process through recommendation closeout. DSIO does not preserve a status 

log of recommendations made to NFA. 

The impact of NFA’s efforts on CFTC staffing levels. Finally, we learned that NFA’s 

services are essential for performing tasks beyond the CFTC’s and DSIO’s resources, and 

therefore the agency leverages NFA staff to a great extent to perform its regulatory 

oversight of registrants. NFA is funded through member fees and assessments. NFA 

pays for CFTC’s oversight services; the fee is remitted to the U.S. Treasury. Nevertheless, 

we believe NFA should evaluate whether it may be able to obtain audit and review 

services more cheaply. 

Appendix A provides furthers details of the results of our audit.

 

10 In contrast, our 2015 Performance Audit of the Division of Market Oversight’s Rule Enforcement 

Review, noted “the Market Compliance Branch staff utilized a checklist for each RER conducted. This 

checklist is structured into five (5) sections and includes a listing of standard questions and procedures 

that must be asked and/or performed by the Market Compliance Branch staff.”
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Recommendations

We recommend the Director of DSIO:

1. Approve a plan for NFA to examine Swap Dealer members for financial 

requirements after the Commission adopts financial capital rules.

2. Adopt written standards for reviews of NFA, including a periodic schedule for 

completion. 

3. Evaluate NFA’s performance of delegated tasks related to the Arbitration Program, 

CPO/CTA special provisions, Foreign Futures and Options, and “other,” or: 

Following a study of costs, require NFA to submit its eight program areas to 

engagements (as scheduled) by an independent public accountant (IPA) or other 

suitable entity whenever it would be cost-effective for the NFA or for CFTC. 

 

4. Furnish all final written reviews and audits to NFA and to the Commission and 

revisit disclosure policies. 

5. Establish a system for tracking status and closing recommendations. 

Management Comments

Management generally concurred with the recommendations, has taken corrective 

action(s), or plans to take corrective action(s). Management also detailed their 

perspectives for each finding. See Appendix F for management comments in its entirety.

With respect to recommendation 1, DSIO will work with NFA to develop an examination 

program for assessing swap dealers’ compliance with relevant capital requirements once 

the Commission adopts final capital rules for swap dealers. They also detailed ongoing 

oversight activities in the interim.

With respect to recommendation 2, DSIO agrees that its examinations of NFA program 

areas should follow written standards but details its disagreement with any assertion

that it currently does not follow written standards in conducting oversight examinations 

of NFA. DSIO understands that the recommendation is directed to the written reports 

that are prepared as part of its NFA oversight examinations. DSIO also understands that 

the impetus for the recommendation is the OIG’s belief that a more fulsome discussion 

of the methodology and standards of the examination should be included in future 

written reports. DSIO has no objection to providing additional details on these points in 

future written examination reports. 

With respect to the recommendation that the Division maintain a written schedule of 

the completion of examinations, DSIO established a three year written schedule of 

examinations. This three-year schedule was established in March 2016 at the request of 
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current Division management, independent of this Performance Audit, and a copy has 

been provided to OIG staff.

With respect to recommendation 3, DSIO agrees that there should be a formal schedule 

for the oversight of NFA SRO programs and/or delegated responsibilities. In this 

connection, DSIO as previously stated maintains a three-year examination schedule of 

NFA financial and non-financial program areas. The current schedule lists examinations 

that are to be performed during the fiscal years ending September 30, 2017 through 

2019. DSIO believes that the frequency of DSIO examinations of NFA program areas 

should be risk-based, with greater emphasis on and frequency of examinations of NFA 

program areas that, if not effectively performed, pose a greater risk to customers, 

market participants, and/or the financial system as a whole.

However, DSIO does not agree to submit its eight program areas to engagements by an 

independent public accountant. DSIO opines that outsourcing of the Commission’s 

direct oversight of NFA’s performance of its statutory, regulatory and delegated 

responsibilities to a third-party independent public accountant is inconsistent with 

Section 3 of the Commodity Exchange Act. Further, DSIO has significant doubts as to 

whether independent public accounts can adequately assess NFA’s oversight programs 

for compliance with the Act, Commission regulations, and NFA rules and 

interpretations, particularly at a substantial savings over the fees assessed by the 

Commission. 

With respect to recommendation 4, regarding disclosure of NFA reports, DSIO agrees 

with the recommendation, states that the decision for the current policy stemmed from 

a previous administration, and intends to elevate this issue to the Commission for its 

consideration.

Lastly, with respect to recommendation 5, DSIO agrees that a centralized 

recommendations log for financial and non-financial examinations is appropriate, and 

this recommendation has been implemented.

Evaluation of Management Comments

Management’s corrective actions planned or implemented are generally responsive to 

the findings and recommendations. As it pertains to following quality standards for its 

reviews, we focused on reporting and follow-up procedures. DSIO’s stance that it “does 

generally incorporate similar procedures and requirements as are included in such 

standards” ignores the fact that neither GAGAS nor AICPA standards allow for partial 

adoption, and that both provide for accountability through peer reviews to ascertain 

compliance. We believe that as an independent agency, when conducting “reviews” or 

“examinations” CFTC should follow and communicate in written products a recognized 

standard of work with established accountabilities for quality, or at the least should 

create standards applicable to all NFA examinations and communicate them to NFA. In 

reference to outsourcing reviews to independent IPAs, we believe DSIO would benefit 

professionally from a pilot project in collaboration with the NFA. The outcome should 
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show whether certain examinations are better left to the private sector as desired by the 

President in his executive order11 for reorganizing the executive branch. 

We conducted this performance audit in accordance with Generally Accepted 

Government Auditing Standards. Appendix B provides the objective, scope, and 

methodology for our audit. We will publish this report on the Office of the Inspector 

General’s web page and the report will be summarized in our September 30, 2017, 

Semiannual Report to Congress. If you have any questions, please contact me at (202) 

418-5084 or Tony Baptiste, lead analyst, at (202) 418-5115. 

Cc: Michael Gill, Chief of Staff

Daniel Davis, General Counsel

Anthony Thompson, Executive Director

Melissa Jurgens, Chief, Executive Secretariat Branch

A. Roy Lavik, Inspector General

Judith Ringle, Deputy Inspector General and Chief Counsel

 

11 Presidential Executive Order on a Comprehensive Plan for Reorganizing the Executive Branch, March 

13, 2017.
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Appendix A – Detailed Findings

DSIO Collaborates with NFA for Registration Activities

To confirm our understanding of collaboration between NFA and DSIO, we viewed 

weekly and quarterly meetings with NFA counterparts to address open registration and 

regulatory matters, and watched an Associate Director for registration matters 

discussing registration exceptions with staff at NFA. 12 Independent queries of a 

computer database and reports used by DSIO and NFA staff further confirmed NFA’s 

responsiveness to DSIO oversight inquiries. 

We noted that NFA and DSIO closely collaborated on procedures for evaluating 

registration applications. Specifically, we reviewed documents DSIO exchanged with 

NFA for conducting their review of potential registrants. These documents showed 

active dialogue with NFA to address policies and procedures and to refine criteria for 

NFA to effectively assess applications. As an example, we noted DSIO’s registration staff 

along with NFA’s staff forged a common analytical framework to ensure regulatory 

harmonization for Swap Dealer registrations. 

DSIO Collaborates with NFA for Examinations of FCMs but Swap Dealer Financial 

Examinations are not Conducted

In its role as a DSRO, NFA is required to prepare examination plans of FCMs for DSIO 

approval that, at a minimum, conform to Joint Audit Committee standards. 13 After that, 

NFA conducts examinations and directs results to DSIO. We attended quarterly 

meetings and observed DSIO staff discussing proposed examinations and open issues 

with NFA staff. These observations show an effective working relationship between NFA 

and DSIO staff for risk-based exams of FCMs. 

We observed that the DSIO Deputy Director and Regional Associate Directors in the 

Examinations Branch are aware of daily financial compliance information filed by FCMs

with NFA. NFA shares this information with DSIO through a common database. 14 

 

12 In a 2007 report, the U.S. Government Accountability Office (GAO) stated with regard to CFTC’s verbal 

interactions with large traders, “actions taken by CFTC staff to inquire about potential problems may not 

always be documented,” and that, “[w]thout such data, CFTC’s measures of the effectiveness of its actions 

to combat fraud and manipulation in the markets will not reflect this surveillance activity, and CFTC 

management might miss opportunities to both identify trends in activities or markets and better target its 

limited resources.” GAO, Trends in Energy Derivatives Markets Raise Questions about CFTC’s Oversight, 

GAO-08-25 (Oct. 19, 2007). We are not prepared to recommend documenting each interaction with NFA 

at this time because, in contrast to interactions with traders, interactions with NFA generally do not raise 

the same regulatory interests. 

13 The Joint Audit Committee is a cooperative organization comprised of representatives of US futures 

exchanges and regulatory organizations. Among other things, it determines the practices and procedures 

to be followed by each DSRO in the conduct of audits and financial reviews of FCMs. For a full list of the 

Committee's members and to learn more about the Committee, visit the JAC website. 14 Financial Analysis & Audit Compliance Tracking System. See CFTC, Privacy Impact Assessment for 

NFA Applications Suite System, Sept. 30, 2016, for more information. 
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DSIO staff told the review team that NFA is responsible for database content; we did not 

verify the accuracy of the database. DSIO staff uses the common database to verify that 

NFA monitors the FCMs for which it is the DSRO. 

With regard to financial compliance by intermediaries, DSIO’s oversight activities do 

not end with monitoring NFA and other SROs and DSROs. In addition, DSIO 

undertakes exams of intermediaries that are regulation specific. In conducting these 

examinations, DSIO relies on financial audit reports produced by independent CPA 

firms, examinations undertaken by NFA to fulfill its oversight role, and targeted 

examinations by DSIO to fulfill its oversight role. 15 

Since DSIO monitors NFA’s completed FCM examinations, we evaluated the volume of 

FCM examinations completed. Figure 1 illustrates the number of examinations 

performed including by NFA since CY 2012. As of December 31, 2016, it appears the 

trend of closed exams corresponds with a required 15 to 18-month cycle. 16

120

108

100 92

80 74 71

65 66 66

60

52 50

40 35

20

0

2012 2013 2014 2015 2016

Total FCM Count at Year End

FCM Exams Closed by NFA

Figure 1. FCM Examinations Completed as Compared to all FCMs. 

 

15 For more information see CFTC, Proposed Rule, 17 CFR Parts 1, 3, 22 et al., 77 FR 76866, *76868 

(Nov. 14, 2012).

16 17 CFR 1.52(c)(1)(iv)(A). 
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For Swap Dealers, neither the Commission nor the NFA had conducted examinations of

the 104 SDs provisionally registered at the time of our audit. NFA’s application reviews 

started in 2012 after the Commission delegated to NFA responsibility for managing

swap entity registrations and withdrawals. However, the Commission’s implementation

regulations is not complete. Therefore, NFA has not started examinations of 

provisionally registered Swap Dealers for financial requirements as the Commission has 

not yet adopted final capital rules. 

DSIO Reviews Are Lacking for Some Program Areas 

DSIO’s Major Review Section (MRS) staff, including senior auditors, conducts periodic 

program reviews of NFA’s delivery of delegated tasks. 

While DSIO has not fixed a review frequency for each program area, Commission 

regulation 1.52(c)(2)(iv) states, “a self-regulatory organization must cause an 

examinations expert to evaluate the supervisory program and such self-regulatory 

organization’s application of the supervisory program at least once every three years.” 

Therefore, as a benchmark, we applied a three-year period to evaluate DSIO’s 

completion of reviews (see Table 1). DSIO reviews NFA’s financial surveillance program 

roughly every six months, has reviewed NFA’s registration program within the past 

three years, and completed reviews of two other program areas after the close of cut-off 

date for our fieldwork (see Table 2); however, for 4 of 8 program areas DSIO has not 

completed a written review within the past three years. Thus, DSIO cannot demonstrate

how well NFA performs delegated tasks related to the Arbitration Program, CPO/CTA 

special provisions, Foreign Futures and Options (Part 30) programs, and the tasks 

falling in the catch-all category “other.” 

We realize DSIO may believe three years is not the optimal timeframe to assess NFA 

performance in each of the eight program areas. We encourage DSIO to document 

procedures for determining timeframes for formal review of NFA program areas.

Table 1. Reviews of NFA Major Program Areas

Oversight Program Area Description Year of Last 

Review

1 Registration Program (including 

examinations)

NFA is responsible for registering members, 

including swap dealers (SDs) and futures 

commission merchants (FCMs). 17 

2016 (and 

Collaborative)

2 Commodity Pool Operators (CPO)/ 

Commodity Trading Advisors (CTA) 

Special Provisions

Conduct reviews of disclosure documents filed by 

CPOs (for privately offered pools) and CTAs. 18 Collaborative 

 

17A detailed description of NFA may be found at Appendix C. 18 17 CFR 4.26(d), 4.36(d).
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Oversight Program Area Description Year of Last 

Review

3 Foreign Futures and Options (Part 

30) Special Provisions

Perform fitness checks with respect to foreign 

firms. 19

No report on 

record. DSIO 

indicated that 

reviews of sales 

practices are 

encompassed in 

the reviews of 

the disciplinary 

process.

4 Financial Surveillance Program Review commodity pool annual financial 

reports. 20 9 reports since 

2012 

5 Arbitration Program Rules provide a fair, equitable, and expeditious 

procedure through arbitration or otherwise for the 

settlement of customers’ claims and grievances 

against any member or employee. 21

None since 

2008

6 Sales Practices Establish training standards and proficiency 

testing for persons involved in the solicitation of 

transactions, their supervisors and a program to 

audit and enforce compliance with such 

standards. 22

No report on 

record during 

the scope of our 

audit. DSIO 

finalized a 

report to NFA 

April 2017.

7 Telemarketing Supervision Establish special supervisory guidelines to protect 

the public interest relating to the solicitation by 

telephone of new futures or options accounts. 23 

No report on 

record during 

the scope of our 

audit. DSIO 

finalized a 

report to NFA 

April 2017.

8 Other Design rules to prevent fraudulent and 

manipulative acts and practices, to promote just 

and equitable principles of trade, in general, to 

protect the public interest and remove 

impediments to and perfect the mechanism of free 

and open futures trading (includes disciplinary 

processes and anti-money laundering 

programs). 24

Collaborative

Because we received a hotline complaint, we took an interest in the NFA arbitration and 

disciplinary programs. NFA arbitrations are not appealable to the Commission or to 

federal or state courts. As NFA does not publish its arbitration decisions, it is apparent 

that NFA arbitration decisions are not subject to evaluation and comment by other 

 

19 17 CFR 30.5, 30.10, and Part 30 Appx. A 20 17 CFR 4.7(b)(3), 4.22(c). 21 All RFAs are required to maintain an Arbitration Program, or another such method, for the settlement 

of customers’ claims or grievances against any member or employee of an RFA. 7 USC 21(b) (10), 17 CFR 

170.8.

22 7 USC 21(p)(1).

23 7 USC 21(p)(4). 

24 7 USC 21(b)(7).
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entities, the press, etc. We are therefore especially sensitive to the need for periodic 

oversight of NFA’s arbitration program, in order to ensure that arbitrators are qualified 

and unbiased, and that complaining customers, as well as NFA members (and their 

employees), receive all due process required. 

In contrast to arbitration proceedings, NFA disciplinary proceedings 25 may be appealed 

to the full Commission,26 and thereafter to the federal courts.27 Nevertheless, CFTC 

oversight is necessary in order to assure, among other things, that NFA is not neglecting 

to bring disciplinary actions when warranted. CFTC last reported on NFA’s disciplinary 

function (which falls under the catch-all category “other”) in 2002.28 

DSIO demonstrated ongoing collaboration with NFA with regard to registration and 

regulatory matters, CPO/CTA special provisions, and tasks falling in the catch-all 

category “other.” We have no recommendations to improve the collaboration 

demonstrated by DSIO with regard to these various functions, but believe that these 

functions should also be subject to periodic reviews at documented intervals. We note 

that DSIO also demonstrated ongoing collaboration with NFA relating to registration 

and examinations, and completed its most recent review of the registration function in 

2016. 

DSIO’s NFA Reports are Documented but Lack Established Standards 

There is no requirement for DSIO to follow formal audit standards in the creation of its 

reports. CFTC has publicly reported that some reviews are not performed in accord with 

audit standards.29 Based on our fieldwork, we are satisfied that DSIO generally 

documents its work for its written reviews.30Nevertheless, we believe adopting written 

quality standards, especially with regard to reporting and recommendation follow-up, 

would improve its oversight of NFA as discussed in the next sections. 

DSIO Has Not Reported All Reviews to NFA or the Commission; DSIO’s NFA Reviews 

are not Published to the CFTC Website

 

25 NFA’s enforcement and registration actions are available here: 

http://www.nfa.futures.org/news/newsActionsList.asp. 26 7 USC 21(h); 17 CFR Part 171. In addition, the Commission may institute review of disciplinary actions 

taken by a RFA on its own motion. 17 USC 21(h)(3). 

27 7 USC 21(i)(4).

28 CFTC, Division of Clearing and Intermediary Oversight, Review of the Disciplinary Program of National 

Futures Association, July 2002. 

29 In our 2013 report, Review of the Commodity Futures Trading Commission’s Regulation and Oversight 

of MF Global, we noted that the DSIO examinations branch did not follow audit standards with respect to 

its reviews of FCMs (including MF Global) and opined: “The reports created by the Examinations Branch 

did not conform to audit standards, and it does not appear that the Examinations Branches were subject

to peer reviews or other detailed internal examination. This does not ipso facto mean that the 

Examinations Branch performed poorly.”

30 See fn.8. 
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DSIO’s written reviews are not always provided to NFA or to the Commission. Reviews 

are sometimes communicated to NFA and separately to the Commission in meetings or 

in-person presentations. Table 2 shows the reports we reviewed and their distribution. 

Table 2. Reports Distribution 

Program 

Area

Title Date Report 

Distribution

1 Financial 

Surveillance

Review of the Examinations, Processing of Financial Statements, 

Staffing, and Regulatory Notices Components of the National 

Futures Association's Unit and Financial Surveillance Program 

Feb-12 NFA -Draft

2 Financial 

Surveillance

National Futures Association Quarterly Review Jun-12 NFA - Files

3 Financial 

Surveillance

DSIO's Review of the National Futures Association's Evaluation of 

Member Firm Internal Controls and Risk Assessment Policies and 

Procedures

Feb-13 NFA - Files

4 Financial 

Surveillance

Review of the Examinations, Financial Statement Processing, 

Notice Processing, and Various Other Components of the National 

Futures Association's Audit and Financial Surveillance Program 

Feb-14 NFA -Draft

5 Financial 

Surveillance

Review of the National Futures Association’s Financial Surveillance 

Program 

Oct-14 NFA - Draft

6 Financial 

Surveillance

Review of the National Futures Association’s Financial Surveillance 

Program 

Apr-15 NFA -Draft

7 Financial 

Surveillance

Review of the National Futures Association’s Financial and 

Compliance Surveillance Program

Nov-15 NFA - Final

8 Financial 

Surveillance

Review of the National Futures Association’s Financial and 

Compliance Surveillance Program

May-16 NFA - Final

9 Financial 

Surveillance

Review of the National Futures Association’s Financial and 

Compliance Surveillance Program

Aug-16 NFA - Final

10 Registration Review of the National Futures Association’s Financial and 

Compliance Surveillance Program Swap Dealer/Major Swap 

Participant 4s Registration/Application Review

Nov-16 NFA - Final

DSIO provided no evidence that six of ten written reports we reviewed were provided to 

NFA. None were addressed to the Commission as final reports. The four final reports 

transmitted to NFA occurred after the current DSIO Director was appointed. Providing 

final reports to NFA would permit DSIO to better document NFA’s receipt of findings 

and recommendations, and would permit NFA to commit to corrective actions.31 While 

the Commission may obtain any DSIO report, we believe also furnishing the 

Commission with final written reviews of NFA would be the better practice.

 

31 See GAO-12-331G Government Auditing Standards, 2011 Revision, Section 5.52. (“Audit organizations 

in government entities should distribute reports to those charged with governance, to the appropriate 

audited entity officials, and to the appropriate oversight bodies or organizations requiring or arranging for 

the engagements. As appropriate, auditors should also distribute copies of the reports to other officials 

who have legal oversight authority, and to others authorized to receive such reports.”) 
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CFTC is inconsistent with its disclosure policies for written reports. DSIO’s final written 

reviews are not published to the CFTC website. However, in our 2015 audit,

“Performance Audit of the Division of Market Oversight’s Rule Enforcement Reviews,”

we noted that [final] reports were made public through the CFTC website. CFTC may 

wish to formalize disclosure policy for its reports on Designated Contract Markets, 

SROs, RFAs, and others.32 

DSIO Does Not Maintain a Log of NFA Recommendations

DSIO management does not maintain a log of recommendations documenting that 

recommendations have been addressed prior to close out. As previously stated, DSIO 

provided OIG copies of ten reviews of NFA’s performance since 2012. The ten reviews 

contained 49 recommendations (see Table 3). The majority of recommendations issued 

by MRS consisted of matters involving NFA examination procedures. 

The six oldest reports were not given to NFA. DSIO staff indicated that due to the close 

working relationship with NFA, recommendations in those six reports were likely 

discussed. The four most recent reports were given to NFA; those reports contained 11 of 

the 49 recommendations. DSIO closed the recommendations for the four recent reports 

even though NFA conveyed difficulty in identifying specific instances that support 

DSIO’s recommendations in 2 of 4 reports. Thus, we plan to follow up on DSIO’s 

recommendation close out procedures in a subsequent review. 

The lack of documented recommendation tracking and close out potentially reduces the 

significance of review findings and corrective action. In addition, recommendations may 

not receive attention from those charged with governance at NFA. Best auditing 

practices anticipate that auditors will follow up on recommendations so as to ensure

that management is aware of risks of inaction.33 As a benchmark, Generally Accepted 

Government Auditing Standards (Rev. 2011)34 require that auditors follow up on 

known material [significant] findings and recommendations from previous audits that 

could affect an audit. Due to the Commission’s statutory partnership with NFA, it is 

vitally important that DSIO’s MRS recommendations are addressed so as to 

continuously improve oversight of the commodity and swaps derivatives industry. 

 

 

32 Exemption (b)(8) of the Freedom of Information Act permits an Agency to withhold from disclosure 

information “contained in or related to examination, operating, or condition reports prepared by, on 

behalf of, or for the use of an agency responsible for the regulation or supervision of financial 

institutions.” 5 USC 552(b)(8). 

33 See the following relevant guidance: AICPA General Standards Rule regarding Due Professional Care

for private/public entities and OMB Circular A-50 Audit Follow up Revised for government related 

entities.

34 See GAO-12-331G Government Auditing Standards, 2011 Revision, Section 7.05 Reporting Standards 

for Performance Audits (“The purpose of audit reports are to . . . facilitate follow-up to determine whether 

appropriate corrective actions have been taken”). 
14 | Page

Table 3. DSIO Recommendations to NFA Summarized by Type 

Recommendation Type Count of 

Recommendations

Examination Program Execution 34

Financial Statement Processing/Reporting 6

Program Design 3

Regulatory Notice 3

Other 3

Grand Total 49

DSIO Leverages NFA Staff

DSIO, with limited resources and renewed leadership, relies on the NFA for registrant 

oversight and other delegated responsibilities.35 NFA states that, in FY 2016, it 

increased budget and staffing for swaps regulatory programs by close to 20%. This 

increase resulted in an average NFA headcount of 100, which exceeds DSIO’s allocated 

staff. DSIO collaborates and will continue to leverage this additional resource for 

performing registration, compliance and examination tasks. 

Between fiscal year 2012 and 2015, DSIO’s employee count increased by 26%, while 

NFA staff increased by 64%. Overall, the CFTC staff grew by 4% for the same time 

period. Although industry supervision employs electronic tools as well as human 

expertise, growth in NFA staff fills a regulatory need not addressed by the growth in 

DSIO employees. In examining DSIO staffing totals we found that during FY 2015 the 

examination branch accounted for 47 FTEs out of 91 FTEs assigned to the division. 

During the same period, another 19 FTEs were assigned to the registration and 

compliance branch. See Table 4. 

 

NFA is privately funded by fees and annual assessments levied on members for its 

operations including regulatory services, at no cost to the taxpayer. Therefore, NFA is a 

cost-effective means for the Commission to accomplish its oversight responsibilities and 

reinforces the stated Congressional goal of setting up the Commission as an oversight 

regulator.36 

 

35 CFTC relies on NFA because, “[i]n 2000, Congress affirmed the Commission’s reliance on SROs by 

amending section 3 of the Commodity Exchange Act to state: ‘It is the purpose of this Act to serve the 

public interests through a system of effective self-regulation of trading facilities, clearing systems, market 

participants and market professionals under the oversight of the Commission.’’’ Proposed Rule, 

Commodity Futures Trading Commission, 17 CFR Parts 1, 3, 22 et al., 77 FR 67866, *67868 (Nov. 14, 

2012)(referring to the Commodity Futures Modernization Act of 2000, Sec. 108, P.L. 106-554, 114 STAT. 

2000 (Dec. 21, 2000)).

36 Then-Commissioner Thomas J. Erickson said in 2000, “In short, CFTC has moved from being a ‘frontline’ regulator to an ‘oversight regulator. In general terms, this means that the Commission must take a 

much more flexible approach to regulation – one which allows industry participants more latitude in 
15 | Page

Table 4 On-board Summary

NFA May Be Able to Obtain Independent Engagements at Lesser Cost

CFTC annually assesses and collects fees from NFA for the conduct of oversight reviews, 

and those fees are remitted to the U.S. Treasury. CFTC publishes NFA’s annual fees 

(along with its calculation methodology) in the Federal Register each year. For the past 

several years, CFTC has assessed NFA as follows: 

Table 5. NFA Fees FY 2012 through FY 2015

Fiscal Year Amount

2015 $321,97637

2014 $363,48038

2013 $703,445 39

2012 $577,54940

Given the fact that DSIO does not rigorously follow government audit or other 

recognized or internal standards in the creation of its written reviews of NFA, we are 

sensitive to appearance issues that may arise from the amounts paid by NFA to CFTC 

(albeit for deposit to the US Treasury) expressly for CFTC oversight. In addition, we are 

not certain it is cost-effective for NFA to pay CFTC for DSIO’s written reports. It may be 

more cost-effective for NFA to engage an IPA or other suitable entity to perform the 

engagements, similar to its current practice for its financial statement audits, and to 

provide the resulting audit reports to the Commission. DSIO currently reviews the NFA 

financial statement audit yearly and could do the same if NFA adopts this course (or if 

the Commission requires it). 

 deciding how best to comply with regulatory requirements.” Commissioner Thomas J Erickson, Remarks 

before the National Introducing Brokers Association, Chicago, IL, June 23, 2001. 

37 80 FR 66493 (October 29, 2015). 

38 79 FR 62418 (October 10, 2014).

39 78 FR 52907 (August 27, 2013). 

40 77 FR 74351 (December 14, 2012).

FY 2012 FY 2015 Period Percentage 

Change

Commission-wide On-Board Total 703 731 4%

DSIO On-Board Total 72 91 26%

NFA On-Board Total 322 528 64%
16 | Page

In addition to benefitting NFA’s finances, engaging IPAs to conduct audits of eight 

program areas on a regular basis could also permit DSIO to devote staff resources to 

other mission-critical regulatory efforts, such as targeted reviews. Independent 

engagements could indicate areas of concern for targeted review by DSIO.
17 | Page

APPENDIX B

Objective, Scope, and Methodology

 

Our objective was to evaluate CFTC’s oversight of NFA’s registration, examination of 

Futures Commission Merchants and Swap Dealers, written reviews of NFA operations, 

and follow up of recommendations contained in formal reviews. In addition, we 

evaluated the impact of NFA’s efforts on CFTC staffing levels and the extent to which 

CFTC is able to leverage NFA’s staff. To answer our objective, we:

• Documented our understanding of the NFA oversight function through interviews 

and reviews of available data;

• Selected Calendar Years (CY) 2012 through 2016 as the scope of the audit given that

in October 2011 DSIO reorganized to focus on financial intermediaries; 

• Selected eight program areas for evaluation; 

• Acquired program reports produced by MRS; and 

• Interviewed DSIO staff who interacted daily with NFA staff. 

We evaluated DSIO oversight of NFA’s service delivery along the following vectors: 

• Oversight of Commission established delegated tasks, namely registration, and 

examination; 

• Frequency of DSIO initiated reviews; and 

• Follow-up of recommendations. 

To evaluate DSIO’s approach for assessing NFA’s service delivery, we reviewed ten

reports produced by DSIO’s MRS between CY2012 through CY2016. We acquired a 

listing of all tasks delegated by the Commission to NFA. We verified delegation 

authorities to Federal Register Notices and Commission decisions. We conducted 

interviews with supervisors and senior managers in DSIO to confirm their 

understanding of tasks delegated to and performed by NFA. We reviewed DSIO’s 

participation in discussions with NFA’s annual registrant examination plans, observed 

quarterly meetings between DSIO management and NFA senior leadership, and 

reviewed DSIO’s controls over tasks performed by NFA staff. We discussed with 

supervisory auditors in three41 regional Commission offices their experience with NFA. 

Specifically, we discussed NFA personnel’s knowledge of registrants’ current adherence 

to CEA requirements, NFA personnel’s responsiveness to inquiries by Commission staff, 

and overall performance in delivering delegated tasks. 

We planned and completed this audit under Generally Accepted Government Auditing 

Standards (GAGAS). We used data from the Financial Analysis & Audit Compliance 

Tracking System. We did not verify the reliability of the data; however, nothing came to 

our attention to question the accuracy of the database content.

 

41 We interviewed DSIO staff located at CFTC offices in New York, Chicago, and Kansas City.
18 | Page

APPENDIX C

NFA Background

When Congress created the Commodity Futures Trading Commission (CFTC) (in 1974, 

it simultaneously authorized CFTC to establish registered futures associations (RFA) 

with authority to regulate the practices of its members. 42 CFTC granted NFA formal 

designation as an RFA in 1981,43 and NFA currently is the sole RFA. 44 NFA is financed 

exclusively from membership dues and assessment fees and operates at no cost to the 

taxpayer. 

In 1983, Congress authorized the CFTC to delegate registration authority.45 CFTC 

delegated this authority to NFA the same year.46 CFTC currently requires NFA to 

perform all registration functions for futures commission merchants, retail foreign 

exchange dealers, introducing brokers, commodity trading advisors, commodity pool 

operators, swap dealers, major swap participants, leverage transaction merchants, floor 

brokers, floor traders, and associated persons.47 NFA’s registration functions include 

evaluation of candidates’ fitness,48 and the conduct of member compliance 

examinations. 49 

NFA’s regulatory role subsequently expanded to include establishing and maintaining 

computer systems for intermediaries to file financial statements, as well as tasks 

associated with its role as a DSRO, 50 including ensuring that intermediaries properly 

disclose risks to customers and collect mandated regulatory filings. 51 

In this audit we identified eight program areas where NFA has responsibilities: 1) 

registration and examination of Futures Commission Merchants and Swap Dealers, 2) 

Commodity Pool Operator (CPO)/Commodity Trading Advisor (CTA) special provisions, 

 

42 Commodity Futures Trading Commission Act of 1974, Title III, P.L. 93-463, 88 STAT. 1406 (Oct. 23, 

1974). 

43 CFTC, Order Granting Registration and Approving Rules (September 27, 1981). 

44 Proposed Rules, Commodity Futures Trading Commission, 17 CFR Parts 1, 23, and 140, 81 FR 91252 

(Dec. 16, 2016) (“Currently, the [NFA] is the only RFA under section 17 of the CEA”).

45 Futures Trading Act of 1982, § 224, P.L. 97-444, 96 STAT. 2310 (Jan. 11, 1983). SROs are defined by 

regulation as a contract market, a swap execution facility, or a registered futures association. 17 CFR 

1.3(ee). 

46 48 FR 35158 (Aug. 3, 1983).

47 17 CFR 3.2, 3.10, 3.11, 3.12. Section 17(o) of the CEA, 7 USC 21(o), provides that the Commission may 

require NFA to perform Commission registration functions in accordance with the Act and NFA rules (as 

approved by the Commission). 

48 17 CFR 3.2. See 17 CFR 3.12(h)(1)(iii).

49 Examinations are performed by NFA staff in its function as DSRO and seek to ascertain members’ 

compliance with Commission regulations. 17 CFR 1.52(c).

50 NFA serves as DSRO for all SDs and FCMs which are not members of any commodity exchange and, in 

some cases, NFA by agreement is the DSRO for certain exchange member firms. CFTC Proposed Rules, 

Foreign Commodity Options, 17 CFR Part 30, 60 FR 63472 (Dec. 11, 1995).

51 17 CFR 3.2, 3.75. 
19 | Page

3) foreign futures and options special provisions, 4) financial surveillance program, 5) 

arbitration program, 6) sales practices, 7) telemarketing supervision, and 8) other 

(which includes NFA disciplinary proceedings and anti-money laundering programs). 

Table 6 displays NFA delegations by delegation origin and identifies the DSIO branch 

largely responsible for monitoring NFA’s oversight. DSIO characterized 31 delegations 

into 8 major program areas. Most delegated tasks are tied to registration and 

compliance matters. However, examination of registrants is a significant task performed 

by NFA. NFA’s examination program follows established protocols for conducting 

registrant examinations. 

Table 6 - Oversight Tasks Delegated to NFA 

Delegation Category Total 

Delegations 

to NFA

DSIO Branch 

Registration & 

Compliance Branch 

(R&CB)

DSIO Branch 

Examinations 

Branch (EB)

I. Delegations to NFA Pursuant to “Notice and 

Order” by the Commission

21 19 2

II. Financial filings that have not been delegated 

to NFA pursuant to "Notice and Order," but 

pursuant to Commission rules that filings must 

be submitted to NFA

6 1 5

III. Other Delegations pursuant to the 

Commodity Exchange Act

4 1 3

Totals 31 21 10

Source: Calculated from DSIO supplied data. 52

 

52 Specifically, DSIO provided citation to over 60 CFTC Federal Register releases establishing or amending 

NFA authorities. In addition, Congress has delegated authority to RFAs as set forth at Section 17 of the 

Act, 7 USC 21. 
20 | Page

APPENDIX D 
21 | Page

APPENDIX E

Key Terms and Descriptions53

Associate – A person who is registered with National Futures Association (NFA) as an 

Associate or was so registered when the acts or transactions that are the subject of 

dispute occurred. 

Commission – U.S. Commodity Futures Trading Commission (CFTC). Its mission is 

to foster open, transparent, competitive, and financially sound markets. By working to 

avoid systemic risk, the Commission aims to protect market users and their funds, 

consumers, and the public from fraud, manipulation, and abusive practices. To promote 

market integrity, the CFTC polices the derivatives markets for various abuses. It also 

seeks to lower the risk of the futures and swaps markets to the economy and the public.

Division of Swap Dealer and Intermediary Oversight (DSIO)–Oversees the 

compliance activities of the futures industry self-regulatory organizations (SROs), 

including the U.S. futures exchanges, with respect to financial and other requirements 

applicable to intermediaries. DSIO conducts periodic reviews of SRO programs.

Designated Self-Regulatory Organizations (DSRO)–A self-regulatory 

organizations (i.e., the commodity exchanges and registered futures associations) that 

enforce minimum financial and reporting requirements for their members, among other 

responsibilities outlined in the CFTC's regulations. When a futures commission 

merchant (FCM) is a member of more than one self-regulatory organization (SRO), the 

SROs may decide among themselves which of them will assume primary responsibility 

for these regulatory duties and, upon approval of the plan by the Commission, be 

appointed the 'designated self-regulatory organization' for that FCM.

Futures Commission Merchant (FCM) – A futures Commission merchant as that 

term is used in the Commodity Exchange Act, and that is required to be registered as 

such under the Commodity Exchange Act and Commission Rules.

Major Review Section (MRS)–A business unit of DSIO that conducts program 

reviews of NFA.

Major Swap Participants (MSP) – MSPs maintain a substantial position in swaps 

for any of the major swap categories as determined by the Commission. The Commodity 

Exchange Act requires all major MSPs to register as such, unless they already are 

registered as an MSP or otherwise do not meet the conditions set forth in Commission 

regulations. 

 

53 Summarized from the public CFTC Glossary. 

http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/glossary_f. 
22 | Page

Member – A member of NFA or any other self-regulatory organization.

Swap Dealers (SDs) – Regularly enters into swaps with counterparties as an ordinary 

course of business for its own account or engages in any activity causing the person to be 

commonly known in the trade as a dealer or market maker in swaps. 

The Commodity Exchange Act requires all SDs to register as such, unless they already 

are registered as an SD or otherwise do not meet the conditions set forth in Commission 

regulations. All registered SDs are required to be members of the NFA. SDs must satisfy

minimum standards for:

• Business conduct standards, including disclosure requirements 

• Recordkeeping and reporting requirements

• Swap documentation requirements

Self-Regulatory Organizations (SROs)–Exchanges and registered futures 

associations that enforce financial and sales practice requirements for their members.
23 | Page

APPENDIX F - MANAGEMENT COMMENTS
24 I ii a i:;. 

MEMORANDUM 

TO: 	 A Roy Lavik, Inspedor GenuaJ. 

Office ofthe Inspector General 

FRO~ Eilttn T_ Flaherty, Director 

Division of Swap Dealer and Inrermediary Oversight 

DATE-	 ~lay 25, 2017 

SUBJECT: 	 Management Response to the Draft OIG Performance Audit of the Commodity 

Futures Trading Commission's Overnight of the National Furures Association 

The Division of Swap Dealer and Intermediary Oversight \Division" or "DSIO'') of the 

Commodity Futures Trading Commission \Commission" or "CFTC') appreciates the 

oppor1unity to respond to the Office of the Inspector General' s (-OIG') April 28, 2017 

Perf ormmcc Audit ofthe Division's oversight of the National Futures ASS()ciation (''NFA") (the 

''Performance Audit)_ The Division's overnight ofNF A is part of its general program of 

ongoing monitoring ofthe perfoana.nce ofthe self-regulatory organizations ("'SR.Os'). The 

Division' s progmn assesses whether the SROs are adequ.itely meeting their respective 

obligations to e.umine futures and swap mad:ets intermediaries and participants for compliance 

with relevant provisions of the Commodity Exchange Act ("Act'), CFfC regulations, md rules 

md mterprdations oftbe applicable SROs. 

The Commission designated NF A a registered futures association ("RF A') under section 17 of 

the Act on September 22, 19&1, and NF A commenced operations w 1982. As an RF A, NF A is 

required to meet certain standards set forth in section 17 of the Act, indudi.ng establishing 

minimum c:apital. segregation. and other financial requirements applicable to its members for 

which such requ:irmients a.re impo~ by the Commission and implementing a program to audit 

and enforce compliance with such requirements. The Commission also bas delegated 

responsibilities to NF A, commencing with the delegation ofcertain registration responsjbilities 

in 1983. Furthermore, NFA is a designated self-regulatory orgamzallon ("DSRO") as defined 

under Regulation U(ff)_ As a DSRO, NF A is responsible for perfon:ning the primary financial 

sur\'cillance ofnon-clearing futures commission merchants ("FCMs") and retail foreign 

exchange dealers. and other intermediaries_ The Perfoo:nance Audit is lhe firn m'1ew that the 

OIG bas perfoimed of the Di\i.sion's oversight ofNFA, and the Division appreciates the OIG's 

feedback_ 

The Division's specific responses to the recommcndabons conw.ned m the Perfonnancc Audit 

are set forth below. 

1.: 
OIGRtcommendation 1: Diat tl1e Director ofDSIO approve a pla11for NFA to e:xam i11e Swap 

Drmler membes for jilla11cial requirenrimts after the C-Ommission adopts financial capital rules. 

DSIO Responst: The Oi\ision agrees ~ith this recommendation. 

The Perlomimce Audit found that DSIO's ovcrsigb1 ofNFA's examinations ofFCMs nppears 

adequate. The Performance Audit further found that the Commission has not adopted final 

regulations imposing capital requirements for swap dealers and, therefore., NFA has not 

pafooned swap dealer finmcial examina.tions. The OTG recommends that the Director ofDSIO 

approve a plm for NFA to examine swap dealer members for financial requirements after the 

Commission adopts capital md other financial requirements for swap dealers.. 

Thaecmrentl)' arc lOlpro\isionally-registered swap dealers. While, as explained below, NFA 

has not yet performed fe\.iews ofswap dealer compliance with cap.ital requirements, NF A has 

peifmmed swap dealer compliance examinations in otha areas and to date has issued 98 final 

rqiorts to swap dealers. These examinations have assessed swap dealers' compliance with 

material CFfC regulatory requirements, including those concerning risk governance, m.:u:J.:et 

practices, marl:d risk, business trading unit responsibilities, recordkeeping, credit risk, and 

operational risk. 

Furthennore, the Commission has adopted final lllllfgin rules for swap dealers eng;igingin swap 

tJansactions that are not cleared by a registered derivatives clearing organization ("DCO") or a 

DCO that has oblained an order exempting it from registering with the Commission. These 

margin roles became effective September l , 2016. As part ofit.s financial oversight ofswap 

dealers, NFA performed a comprehensi\re review and analysis ofthe margin models submitted 

by swap dealers subject to the September 1, 2016 effective date to assess the models' compliance 

with tbf quantitative and qualitative requirements set forth in CommissionRegnlation 23.154. A 

swap dealer is not pennitted to use a margin model unW ii has obtained written approval from 

NFA. NFA also has started to review the effectiveness ofthe margin models by reviewing backtesting results prepared by the swap deal.en as required by the mies. 

DSIO commits lo continuing lo work with NF A on swap dealer registration and exaarination 

issues. In this connection, DSIO will work with NFA lo develop an e.umimtion program for 

assessing SW3Jl dealers' compliance with relevant capital requirements once the Commission 

adopts final capi:ti.I rules for swap dealers. 

2 

25 I pH t!.: 
OIG Rtcommmdation 2: T11at Ilia Direcior ofDSIO adopts "Krifren standards for nniews of 

NFA, including a periodic schcdulo fol' compleiiotL 

DSIO lksponse: DSIO agrees that its examinations ofNFA program areas should follow 

~ntten standards. DSIO, however, disagrees that it cm:renJly does not follow written standards 

in amducting oversight examinations ofNFA. Furlhfi, DSIO has a scliednle for completion. 

Based upon the detailed findings set forth in Appendix A ofthe Performance Audit, DSIO 

n:ru!emands that the rec-0mmend.ation i:s directed to the written reporls that are prepared as part of 

the NFA oversight e.umination. DSIO understands that the recommendation does not extend to 

other area:s ofthe NFA examinations including: (1) the technical training and proficiency of 

staff; (2) independence ofstaff; (3) due professional care in the perfonnance ofthe e.~tion, 

planning and supervision offield work by staff; (4) documentation ofexamination evidence to 

support conclusions~ and, (5) stafrs process for obtaining tm undt"l'Standing ofNFA for purposes 

ofa!>Sessing examination risk. In thi:s connection, Appendix A ofthe Performan.ce Audit states 

that based upon the OIG's field work, it is &at:isfied that DSIO genBally documents its wod: for 

its written re\iiews. Fmthermore, DSIO provided OIG staffv.;th detailed written programs for 

the examination ofNF A that are maintained in the audit roftware database. 

Consistent with DSlO 's understanding regarding the scope of the recommendation, DSIO notes 

that the PerfoID.lallce Audit states that for the written reviews conrlncted DSIO does not 

rigorously follow government audit or other recognized quality standards. The Performance 

Audit further states that consistently following quality stmdmls would pemrit DSIO to 

uniformly report NFA's pezformance over tim.e and facilimte recommendation follow~up. The 

Perfonnance Audit. however, further states that DSJO is not required to follow any government 

audit standards or other recognized quality reporting standards as part of its SRO examination 

program. 

DSlO agrees that it is not required to follow gm;emmcnt audit or other audit standards in the 

preparation ofe.'t.IUilination reports.

1 DSIO is not subject to government audit standards or 

generally accepted auditing standards issued by the Amaican Institutes of Certified Public 

Arxomrtants ('"AICP A") because such standards are not applicable to the types ofexaminations 

that DSIO performs in its oversight ofNFA. In this regard, Generally Accepted Government 

Auditing Standards ("GAGAS') specifically inclndes the statement that "[GAGAS] standards 

are for use by auditors of government entities and entities lhat receive go••emment rewards and 

audit organizations performing GAG AS audits . ..a None ofthese stated situations are applicable 

to DSIO's overnght ofNFA's firumcinl mrveillance program. Inaddition., AICPA audit 

1 osro also notes I.bat it is not reqmn.d ID !i>llaw l:D\'ellll!Wll mdil stmclud:s or my otl!.er rKopnud Sllmd.nds in 

the amdDc:t orits usmimtions ofNFA in my mu, inclnding l'lpOl'tint, 

t P:rngaph U>t, Purposo and,fpplicabrliry q/G...IG..fS, Gcn·emmmi AlXllnug Sum.d.luds (1011 RA!'.isioa), U..S. 

Gcn"l!lllDleJU Accolllllllbility Office. 

3 

26 1p ,) ~ ...: 
271 P al:'. l' 

standards for repo~ are applicable to the expression ofan audit opinion regarding the 

pr~tation of firumciaJ statements in accordance with generally accepted ru:countingprinciples. 

This situation also is not applicable to DSIO's oversight ofNFA 

Notwithstruiding that DSIO is not required to follow GAGAS or AICPA auditing sb.mdards in 

conducting eicuninations, including the prepanrlion ofexamination reports, DSIO does genemUy 

incorporate similar procedures and requirements as are included in such standards into its 

reporting. In this regard, DSIO 's exmllnation repoI1s for itse.uminations of the NF A finnncial 

surveillance program contain: (I) an explanation ofthe period of time that the examination 

co1:ers; (2) the pmposc ofthe examination; (3) a description ofthe NF A program areas subj eel to 

the e..umination; ( 4) the methodology that staffemployed in conducting the exanrination; (5) the 

exrunination findings and recommendations; (6) and, a statement ofthe date ofthe e..'rit 

conference with NF A. Th.ese requirements are genera!Jy cxmsistent with the content ofreporting 

standards under both GAGAS standards and AICPA generally accepted auditing standards. 

DSIO understands that the impetus for the recommendation is the OIG's belief that a more 

fulsome discussion ofthe methodology and standards ofthe examination should be included in 

future written reports. DSIO has no objection to providing additional details on these points in 

the written reports during future examinations. 

With respect to the recommendation th.at the Division. maintain a written schtdule ofthe 

completion ofexruninations, DSIO has a three year written schedule ofexaminations. 

OIG Recommendation 3: That the Director ofDSIO tnYJluatB NFA 's performance ofdelegated 

tasks related to ills Arllitraiion Program, CPOICTA spt"Cial prmmons, Foreign Futures and 

Options and "other" or: 

Following a study ofcost:s, raquirsNrA to llllmrit its eight program areas to engagemsnil (as 

scheduled) by a11 i11dgpende11t public accountant (1P...CJ or other sui1ablB entity whemrvcr it would 

be cost-effective for the NFA or CFIC. 

DSIO response: DSIO agrees that there should be a fonnaJ schedule for the oversight ofNF A 

SRO programs and/or delegated respoDSlbilities. Jn this connection, DSIO currently main1ai.ns a 

three-year e.--wnination schednle ofNFA financial and non-fin.aDcial program nreas. This threeyear schedule w-as established independent oftbe Pe:rfonnan.ce Audit in March 2016 at the 

request ofC111Tent Division IIJJUJagem.ent., and a copy has been pro\rided to OIG staff The current 

schedule lists examinations that are to be ped'onned during the fiscal years ending September 30, 

2017 through 2019. 

The Perfoananc:e Audit uses a three-yearperiod as a bendunarl; to assess the timeliness of 

DSIO 's examinations of the diffaentNFA program areas_ DSIO does not agree that each NF A 

program area sh.ould be examined once every three years. 

4 
DSIO belie1;cs th.it the frequency ofDSIO examinations of NFA program areas should be risJ:­

based, with gruter emphasis on and frequency ofexaminations ofNFA program areas that, if 

not effecti\1!.ly performed, pose a greater risk to customers, market participants, and/or the 

fuu.ncial system :as a whole. In this regard, a.s noted in the Performance Audit, the Division has 

perfomied examinations of NF A's FCM financiaJ SUJ'\'eillance program once e1:ery si."t months 

during the period of review. DSlO places a high degree ofemphasis on the NFA FCM financial 

sun'eill.aru:e program as it addresses FCMs' cnmplinnce with cap1tal, the segregation ofcustomer 

funds, financial reporting. margin practices, and anti-money laundering among other provisions 

which are considered higher-risk ifnot effectively O\'erseen. DSIO believes that given the 

central function that FCMs h.n-c in ensuring the safety ofcustomer funds md the effective 

opention ofthe futures mnl:m, that such program areas should be m:iewed more frequently 

than once every three )'em> and more frequently Ihm other NFA program areas. 

Other NFA progrun areas pose a much lower ~gree ofrisJ; to customer funds and the safety of 

the financial system and, therefore, those should be md are subject to less frequent vt3.llllil.3tion. 

For example, only seven FCMs were subject to the NFA telemarketing restrictions during the 

most re:ent DSIO exa:min.ation ofthe NFA telemarketing program. Accordingly, DSIO would 

not perform a revi~ ofthis area reguLvly, even on a routine three-year cycle unless for alteaUle 

reasons significmt issues were raised. 

The Performance Audit also i~es the following NFA program areas as not being subject to 

m e.~on by the Di'i.sion during the OIG's review period of January l, 2012 through 

December 31. 20 16: (1) Arllitration Program; (2) CPO/CTA special provisions; (3) Foreign 

Futures and Options (Part 30) programs, and (4) tam falling in the catch-all categoiy "Other." 

DSTO agrees that enmi.nations were not complered for the arbitration program or CPO/CT A 

special pron11ons during the period 2012 through 2016. A review ofthe NFA arl>itration 

program, CPO/CTA special proTisions program md Foreign Futures md Options (Part 30) are 

currently scheduled as pm ofthe three year written schedule. 

The "'Other" category includes NFA di.saplin.a.Jyproceedings md anti-money Iaundenng 

programs. The DSIO November 101.5 examination ofNFA 's fi..uancial smvW!ance program 

included the review ofNFA's o\·ersigbt of FCM's compliance with relevant anti-money 

lrund.ering regubtions. This examination also reviewed NFA's disciplinary proceedings The 

fin.a.I November 201.5 DSIO wri1tc:n report was pro\ided to NF A at the conclusion of the 

exmrination, and a copy ofthe wrinen report was pro\-i.ded to OIG staffduring the Performance 

Audit 

Lastly, the "Othe.r" category also includes the Division's assessment ofwhetherNFA has ~ties 

designed to pre,:ent fraudulent and lllllllJl'tlative practices, and to promote just and equitable 

principles of trade, in genenl, to protect the public interest and remove impediments lo and 

5 

28 111 ·' :.! t.: 
perfect the mcchmism offree md open futmcs trading."3 DSIO does not agrtt that it has not 

conducted a review ofNF A mles during the miew period. NFA is required under section 17© 

ofthe Ac:t to submit a ·ery rule (l\'~ther a rule addition, rule deletion., or rule amendment) which 

is reviewed by DSIO prior to submitting to the Commission for its review and approval 

Accordingly, the Commission has raiewed a·ery rule and rule amendment that NFA has 

adopted since its approval as m RFA in 1981 to the present. 

DSJO does not agree with the recommendation to require NF A, following a study ofcosts, lo 

submit its eight program areas to engagements (as scheduled) by an independent public 

acco1mtant (IPA) or other suitable entity whenever it would be cost-effective for the NF A or 

CFrC. Section 3(a) ofthe AD. states that transactions subject to the Act ::tre entered into 

regularly in interstate md international com.men:e and are affected with a national public interest 

by proVldmg a ll'.lle'aru for trading in liquid, fuir and financially secure trading facilities. Section 

3(b) provides that the purpose ofthe Act is to serve the public interest dcscnl>ed in Section 3(a) 

through a system ofeffecti\-e self-regulation oftrading fucilities, clearing systems, market 

puticipants and market professionals under the oversight of the Commission. 

The outsourcing oftbe Commission's direct oversight ofNFA's performance ofits statutory, 

regull!tory md delegated responstl>ilities to a third-party indepmdent public accotmtmt is 

inconsistmt with Section 3 ofthe Act. In addition., in such a situation., NFA would be the client 

and the pany in the c.ontractml rehtionship "';th the independent public accomrtmt. 

Accordingly, the Commission would h.a\-e no jurisdiction over the indepmdent public accmmtant 

and may be limited in its ability to review the independent public accountant's wod.: product or 

to discuss the independent public accomrtmt's wod.: at NFA. 

DSlO believes that direct and actfre o\·ersight ofNFA is necessary to perfo!DI the responsibility 

of proper oversight and outsourcing resulting in merely reviewmg a report by a third party would 

not satisfy those obligations.. Further, DSIO bas significant doubts as to whether independent 

public aCCOODts cm adequately oversee and assess NF A's oversight programs for complimre 

with lhe Act, Commission regnlations, and NF A rules and interpretlllons, particularly at a 

subst2ntial savin~ over the fees assessed by the Commission. The eight program areas 

identified in the Petfomwx:e Audit cover a broad spectrum ofNFA oversight respoIWl>ilities, 

including registration., foreign furores, telematketing. sales practices, FCM examimtions, capital, 

segregatioo of~funds. mti-money laundering. CPO financial reporting. introducing 

broker financial reporting. swaps repoiting requirements, swaps business conduct requirements, 

sw1ps margin requircmen!s, regulatory notices, and other areas. DSIO is not confident th.at my 

mdcpendmt public accounting fum or other entity has the expertise to perform a detailed 

assessmcm ofthe dfecti\!cness ofNFA's oversight ofsuch a broad range ofcomplex regulatory 

areas Fw1hcmwre, as ooted above, without jurisdiction over these scnice providers, the 

Tlblt l - h\ilws ofNFA :M.j<W Pmumi Anll, IJ:l~ 7-8 ofthe ~llll!UlCt Audn 

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Commission ha:s no ~sm to bring a discipllll3J'}' action against them for tiiilure to properly 

NFA's o\·ersight programs. 

OIG R~commend:uioo 4: That the Director ofDSIO famish allfinal li-ritfen nn'iirws and audits 

lo NF.A and lo the Commission and nn-isit disclos11rt1 policics. 

DSIO RtspoD.R: DSIO agiees with the recommendation that all final written reviews ofNF A 

prognm areas should be pro\idcd to NF A and to the Commission. 

DSJO policy for many years was for written reports to be prepared at the conclusion of 

each re-.icw ofan SRO's prognm are.a. The SRO subject to the review would then have an 

opportunity to prepare a wnttcn response to the Di\'ision 's findings and rccommcJJd.ations_ The 

fuW written rqmrts were pro\ilrkd lo the SRO and copies were provirkd to the Commission. 

This practice was stopped several }~ars ago and final reports were not issued to the SROs. 

DSlO admowledgcs that NF A did not rccei\"e final written reports for six reviews that DSIO 

conducted ofth.e NFA financial sun'eillancc program, spanning February 2012 through April 

2015. While the findings and recommendations cont.ained in the draft reports or staff won 

papers were communicated to NFA staffeither \ia email or during the examinations. NF A was 

not pro'i.dcd with a finaJ report, n.or was NFA rcqwred to acknowledge recCJpt of the findings 

and rCCXJmmendations. The decision to not issue final written reports for the six reviews was 

made by prior DSIO management Current DSIO management revised this policy prior to the 

PcrfoDJJanCe Audit to require that NF A receii;e a final written report for all reviews. 

Cmrc:nf management's change ID policy to pro\1de NFA with a written finaJ report is reflected in 

the Perl'ormmce Audit In this regard, DSIO pro"ided NF A with a fin.al written repon for the 

four most Tccent DSlO examinations covered by the Performance Audit (the Financial 

Swveill.ance examinations perl'ormed as ofNo,;cmber2015, May 2016, and August 2016, and 

the Regisuation examination performed as ofNo\'embcr 2016). In addition, DSIO pro\lided a 

final written report in April of2017 to NFA CO\ CT~ the Division's examination oftbe NFA 

telemarlreting a:nd promotional material program. The tclcmadeting and promotion.al material 

ex.uniution was conducted outside of the timefnunc of the Perfann:mce Audit. 

The Performance Audit also contains a rccommendabon that the DSIO Director raisit the 

currmt practice ofnot publicly disclosing the final written reports ofDSIO e.'l31llinations of 

NF A. DSJO notes that its practice currently mirrors the guidance prm.ided by the Commission 

in 2002 when it adopted a policy not to disclose the written reports ofstaffs' c..'t4Illin:ations of the 

SRO fimncial smvcillance progiams ofcontract m.:ukcts and e.'Wllinations ofDCOs. 

\Virile DSIO believes that there should be no change lo the CUJTent practice. which, as noted 

abO\'C, is consistent wuh the Commission's 2002 policy, it further believes tluI my chmge 

should be made in consultation with the Commissio.n and not solely by DSIO staff. DSJO will, 

however, elevate this issu.c to the Commission for its consideration. 

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OIG Rtcommendntion 5: That Ilia Director ofDSIO establish a s;;-stemfor tracking status and 

closing racommm1datio11s. 

DSIO Response: DSIO agrees with the recommendation.. In response to this recommendation., 

DSIO has implemented a centralized system lo track the status ofall recommendations arising 

from NFA financial and non-financial examinations. The antralized tradcing S)'Stem will 

further document the closing ofrecommendations. 

The Performance Audit states that for certain examinations, DSIO discussed recommendations 

with NFA on an ongoing basis but did not formally tracl: or otherwise dOCll1lleilt the follow-up 

process through recommendation closeout Th.e Perfcmnance Audit further states that DSIO does 

not preserve a status log of recommendations mad.e to NFA. 

As DSro notes above, DSIO agrees that a ccntrnlized recommendatio.ns log for financial and 

non-financial examinations is appropriate, and this recomm.cndation has been implemented. 

Howe\·er, the Performance Audit's description ofDSIO's process for documenting and tracl:ing 

the stnhts and closing of recommendations made dming examinations is not accmate. 

Stafffully documents recommendations for each financial and non-financial e.'UII!ination in 

staff's wort papers and in the written reports. Specifically, with resped to the financial 

examinations, recollllllendations are maintained in the audit software database and staff ronducts 

the necessary follow-up on the status ofthe recommendations during the conduct ofsubsequent 

examinations. As c.'UID.in.ations ofNF A's financial surveillance program were generally 

paformed once every six mo.nths during the period of time covered by the Perfonnance Audit, 

staffwas able to effectively track that status of recommmdations from prior examinations wit!Un 

reasonable timeframes. 

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