The National Futures Association (NFA) requires each NFA member commodity pool operator (CPO), commodity trading advisor (CTA), futures commission merchant (FCM) and introducing broker (IB) engaged in swaps activities regulated by the Commodity Futures Trading Commission — for example, activities related to nondeliverable FX forwards, interest rate swaps, and certain security index derivatives — to be approved by NFA as a swap firm and requires each associated person (AP) of a swap firm whose activities involve swaps to be approved as a swap AP.1
Although persons associated with swap dealers (SDs) are not required to be approved by NFA, and the statutory and regulatory provisions applicable to such persons differ from those applicable to APs of CPOs, CTAs, FCMs and IBs, an SD may also have one or more APs to whom the requirements described in this Sidley Update will apply. For the purpose of this Sidley Update, such persons are referred to as swap APs. Individuals who supervise swap APs are also swap APs. This is true for all persons above a swap AP in a firm’s supervisory chain.
Effective January 31, 2020, NFA will implement its long-awaited swaps proficiency requirements. Swap APs of NFA member CPOs, CTAs, FCM and IBs will be required to take and pass a newly developed examination. Swap APs of SDs will also generally be required to take and pass the exam; however, swap APs of SDs located outside the United States, including in non-U.S. branches of U.S. SDs, generally will not be required to take and pass the exam if they limit their swap-related activities to swap counterparties that are themselves non-U.S. persons or non-U.S. branches of U.S. SDs.
The swaps proficiency requirements may be satisfied by taking and passing each module of an online examination. The online exam will be available beginning January 31, 2020. Swap APs who are subject to the swaps proficiency requirements must satisfy the requirements by no later than January 31, 2021.2 Swap APs who fail to satisfy the swaps proficiency requirements will not be allowed to act as swap APs after January 31, 2021.
Two Tracks
NFA has created two tracks for satisfaction of the swaps proficiency requirements. The Long Track is designed for swap APs at SDs. Most swap APs at SDs will be required to satisfy the Long Track. However, some SDs have designated certain APs as not being in the SD’s sales or trading areas and as not being involved in negotiation, pricing or execution of swaps or managing swap-related risk. These individuals may have the option of satisfying only the Short Track. The same is true of individuals supervising such APs.
Swap APs at CPOs, CTAs, FCMs and IBs will be required to satisfy the Short Track.
The exams are administered online, and each track is composed of topical modules, each of which includes both a learning component and a testing component.
The Modules
The Long Track includes eight modules with a total of 100 questions:
- swap products and applications (20 test questions)
- regulation of the swaps market (20 test questions)
- onboarding (10 test questions)
- transactional disclosures (10 test questions)
- antifraud and ethical practices (10 test questions)
- trade execution/clearing/margin (10 test questions)
- risk management (10 test questions)
- supervision (10 test questions)
The Short Track includes four modules with a total of 60 questions:
- swaps products and applications (20 test questions)
- regulation of the swaps market (20 test questions)
- supervision (10 test questions)
- compliance, antifraud, and other requirements (10 test questions)
Persons taking the exam must complete the learning component of each module before proceeding to the testing component, and they must complete the modules in the order listed above. Even the most experienced swap APs will not be allowed to skip the learning component.
Passing and Failing
Swap APs must receive a score of 70 percent or greater on each testing module to satisfy the swaps proficiency requirements. Individuals who do not get a score of 70 percent or greater on a module may retake that module as many times as needed to pass without any waiting period; however, swap APs will not be prompted to retake a failed module until they have completed the entire track, at which time they can go back and retake any failed modules (again, in the order listed above). Further, test questions will be randomized so that a swap AP will be asked different questions on subsequent attempts. Swap APs will not be told which questions they answered correctly, which questions they answered incorrectly or the correct answers to questions they answered incorrectly. Swap APs should pay close attention to the learning component of each module to ensure that they receive a passing score on the module on their first attempt.
Exam Preparation
The test questions in each module are based exclusively on the material covered in the learning component of the module. As swap APs are required to complete the learning component for each module before being tested on the material, NFA has advised that there is no need to complete additional training or review a study guide before taking the exam.
Swaps Proficiency Requirements Administrators
Each NFA member firm that has swap APs subject to the swaps proficiency requirements must designate with NFA a swaps proficiency requirements administrator (Administrator). The Administrator will handle online enrollment for the exam of swap APs. Although NFA has not imposed a deadline for member firms to designate Administrators, NFA is encouraging firms to do so by January 31, 2020, to provide sufficient time for swap APs to satisfy the swaps proficiency requirements by January 31, 2021. It is important that each swap AP coordinate with his or her Administrator to ensure that the firm’s enrollment code is used to register him or her for the applicable exam.
Although Administrators will be responsible for handling enrollment of swap APs, any authorized user of NFA’s online registration system (ORS) will be able to access reports indicating each swap AP’s progress in completing the swaps proficiency requirements, which swap APs have satisfied the requirements and the dates on which they did so.
Timing and Length
NFA estimates that the Long Track will take approximately eight hours to complete and the Short Track will take approximately four hours to complete. Given the length of the exams, swap APs are not required to complete the entire Long Track or Short Track, as applicable, in a single session. Swap APs can complete the applicable track in multiple sessions. There is no time limit for completing a module or the entire exam. The testing system will save each swap AP’s progress, including if the swap AP is automatically logged out of the testing system due to a period of inactivity. This will be helpful for swap APs who intend to complete testing modules during the workday, as it will give them the flexibility to continue to satisfy their day-to-day work functions while working their way through the exam modules.
The exam will be administered exclusively online and will be available to take at any time once the system becomes active on January 31, 2020. NFA member firms with swap APs who will be required to take the exam should consider whether and to what extent swap APs will be allowed or required to take the exam on work time and what systems and test conditions should be provided to ensure that swap APs are able to take the exam and maximize their chances of passing exam modules on the first attempt.
1 The term “swap” is complex and is beyond the scope of this Sidley Update.
2 APs of NFA member CPOs, CTAs, FCMs and IBs become “associate members” of NFA and are directly subject to NFA’s jurisdiction. Individuals acting as APs of NFA member SDs are not associate members of NFA, and therefore NFA is not able to exercise direct jurisdiction over such individuals. However, NFA will prohibit member SDs from having any AP that has not satisfied the swaps proficiency requirements, so these requirements apply to APs of SDs in a similar manner to other APs. As swap APs of SDs do not register as such with NFA, it may be more difficult for SDs to identify those APs to whom the swaps proficiency requirements apply. SDs should factor this into their planning to ensure that all persons to whom the requirements apply satisfy the requirements by the deadline.
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