Organization
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Rule 240.15fk-1(c)(2)(i)
THIS DOCUMENT IS A TECHNICAL ILLUSTRATION OF HOW CERTAIN DISCLOSURES IN SEC FILINGS ARE TO BE TAGGED. IT DOES NOT INDICATE WHICH PARTICULAR DISCLOSURES MUST BE INCLUDED AND/OR TAGGED IN COMMISSION FILINGS, AND IT DOES NOT CONSTITUTE LEGAL GUIDANCE OF ANY SORT.
Domestic SBS Dealer
Introduction
US Security-Based Swap Company (SwapCo) registered with the U.S. Securities and Exchange Commission (SEC) as a Security-Based Swap Dealer (“SBSD”) on January 1, 2022. Under 17 CFR § 240.15fk-1, SBSDs are required to annually prepare and submit to the SEC a written report that describes information relevant to their most recently completed fiscal year that is signed by the Chief Compliance Officer (CCO). This Report covers the time period from January 1, 2024, through the end of SwapCo’s fiscal year, which was December 31, 2024 (the “Reporting Period”). Included below are a description of SwapCo’s (i) SBSD compliance program including a description of its policies and procedures, the effectiveness thereof and material changes thereto, (ii) governance and controls, (iii) areas of improvement, (iv) material non-compliance issues, (v) financial, managerial, operational, and staffing resources allocated to compliance with the Dodd-Frank Act, and (vi) a description of any material deficiencies in such resources. Pursuant to Rule 83 of the SEC’s Rules on Information and Requests, 17 C.F.R. § 200.83, SwapCo hereby requests that the contents of this report be accorded confidential treatment under the Freedom of Information Act (“FOIA”), 5 U.S.C. § 552.
SwapCo’s Business
SwapCo engages in SBSD dealing activities with U.S. and non-U.S. person counterparties globally. SwapCo offers SBSD trades to (i) offer hedging derivatives to large corporations, and (ii) to consolidate risk from banking activities, plus derivative activity from securities affiliates in the US and internationally, and to hedge those risks into the market. In order to hedge, SwapCo trades rates, credit and equity products (cash, derivatives and repo) with market counterparties and large corporates, acting as a market maker where necessary to ensure market relevance. SwapCo’s client base is solely wholesale, located primarily in the U.S.
Organization
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Compliance Program and Material Changes Thereto
SwapCo manages its SBSD compliance risk in accordance with is Risk Management Policy, a copy which is attached as Exhibit A. The policy includes processes to identify, measure and mitigate external and internal risk, which includes ensuring appropriate limits are in place to limit SwapCo’s exposures to credit, market, liquidity, reputational or other risks. Every employee of SwapCo is responsible for understanding, identifying, mitigating, and escalating compliance and operational risks and issues.
SwapCo also has a Risk Management Department that actively monitors business developments, product offerings and reviews proposals for new financial products. SwapCo’s Risk Management department is responsible for conducting employee training, testing internal controls via internal audits, and performing surveillance. The Risk Management department, in consultation with the Legal Department, is also responsible for reviewing new regulatory obligations, filing regulatory reports, and interacting with regulators.
The CCO has determined that SwapCo’s policies and procedures are reasonably designed to effectively supervise its SBSD business. Similarly, the SBS compliance program operates effectively to mitigate risk and comply with the SBSD rules. This assessment is based on reviews of the existing Risk Management Policy and risk management frameworks and reviews described this section.
For purposes of this Report, SwapCo defines a “material change” to the policies and procedures under 17 CFR 240.15Fk-1(c)(2)(i)(B) to mean an amendment necessary to meet regulatory requirements, the deletion or creation of a policy, or a change made to an existing policy that changes the scope of the policy (i.e., requiring additional reporting or changes in SwapCo practice). Changes that are non-substantive, such as clerical updates (e.g., updates to contact information) or clarifying existing practices are considered non-material.
For 2024, SwapCo amended its counterparty reporting policy to meet the T+1 settlement cycle required under new CFTC rules.
Governance
SwapCo is overseen by its CEO in accordance with policies and procedures approved by SwapCo’s Board of Directors (Board), which meets quarterly (or more frequently, as necessary). The Board has established committees to handle specific duties and recommend policies or procedures to be adopted by the Board. The board reviews the CCO report prior to submission to the Commission and serves as the final escalation point for any conflicts of interest or other risk-related issues.
The committees include an Audit and Compliance Committee, of which the CEO is a member. The Audit and Compliance Committee meets quarterly and reports to the Board at each quarterly Board meeting. The Compliance Committee reviews and approves SwapCo’s Risk Management Policy on an annual basis. The Compliance Committee also assesses allegations of material non-compliance, the impact of new rules and regulations, and reviews reports from the CCO regarding allegations of misconduct or non-compliance with Dodd-Frank. The Audit and Compliance Committee is also responsible for overseeing the external auditor, establishing protocols for internal audit testing and reviews, and reviewing internal and external audit findings and reports. For the 2024 fiscal year, SwapCo engaged with PwC to complete an independent audit of its SBSD operations.
The CCO reports to the Board. Each Compliance Committee meeting includes a report from the CCO on areas of risk. Each year, prior to submitting the CCO Report to the Commission, the CCO will present the CCO Report to the Board.
Areas of Improvement
The average time to review SBS trades increased from 2022 to 2024 as a result of increased trade generation stemming, in part, from increased market volatility. In order to improve this timeframe, SwapCo has engaged an outside consultant to assist in assessing ways to classify trades as higher or lower priority for risk assessment. SwapCo has also budgeted for two additional staff members on the Risk Management team.
SwapCo also began a technology upgrade in Q1 of 2024. The new technology is expected to enable enhanced quality assurance related to timely trade reporting. SwapCo has also engaged with a third-party vendor to install a compliance system for conflicts management, including personal trading disclosures.
The CFTC implemented new requirements for trade reporting in April 2024. As a part of this requirement, SwapCo updated its reporting for various SEC required fields as a result of enhancements made by the DTCC to North American Trade reporting. This project involved changes that impacted the way that SEC trades are reported to DTCC and included the addition of complex mandatory fields and changes to existing fields. These complex modifications required substantial planning and technological work. The work to implement these changes was performed during 2024 and the changes were implemented on December 5, 2024.
Recommended Changes to Compliance Program
As noted above, staffing will be increased and a system for conflicts management will be installed.
In determining the materiality of any non-compliance issues, SwapCo considers whether the issue:
| i) | would lead to serious financial consequences to SwapCo, its counterparties or other market participants; |
| ii) | a significant failure in SwapCo’s compliance and control infrastructure; |
| iii) | a failure that impacted a large number of counterparties; or |
| iv) | a failure to comply with a relevant regulatory framework. |
Any material non-compliance issue would be reported to the Audit and Compliance Committee of the Board.
On July 1, 2024, SwapCo became aware that 30 SBS trades reported to its Swap Data Repository failed to include the Product ID, as required by 17 CFR § 242.901(c)(1), if available. In all cases, trades were reported timeline under 17 CFR 242.901(j), and other identifying information was provided for the trades. This issue was corrected September 30, 2024, and all previous in-scope trades were updated with the correct Product ID.
Financial, Managerial, Operational and Staffing Compliance Resources
In 2024, SwapCo allocated $10 million for compliance costs, the majority of which is for staffing costs. In 2024 the Compliance Department had 50 full-time employees and there was budget for an additional 5 unfilled roles. The Risk Management Department was allocated $8 million, the majority of which was for staffing cost and technologies (described in further detail below). The Risk Management department had 20 full-time employees and SwapCo anticipates hiring an additional 5 employees in 2025.
SwapCo’s Compliance Department and Risk Management Department invest in and utilize various compliance technologies:
| · | SurveillanceSuite - Utilized to capture, surveil, monitor, and retain approved electronic communications and social media posts. |
| · | TradeComplianceSuite - Utilized to capture and monitor employee trading. It is also used to document the approval/denial of employees’ private security transactions and outside business activities. Additionally, ComplianceSuite is used to share written supervisory procedures with employees and obtain attestations to reading the policies or attending training sessions. |
| · | DueDiligenceSuite- The AML Department utilizes DueDiligenceSuite to conduct due diligence reviews of new clients using public and proprietary records. |
| · | HighRiskDDSuite - AML utilizes HighRiskDDSuite to conduct Enhanced Due Diligence (EDD) reviews of high-risk clients. |
| · | TrainingSuite - Provides financial industry-specific course offerings to assist the SwapCo with training requirements. Annually, the firm conducts a “Needs Analysis” and the business and regulatory environment. |
| · | ClientTradeSuite - This surveillance platform monitors and reports client trades. |
In additional to Compliance Department and Risk Management Department employees and costs, other SwapCo employees and managers within different departments are integral to compliance with SEC and other applicable laws and regulations, such as Legal and Accounting.
The primary manager dedicated to SwapCo’s compliance resources is the Chief Compliance Officer. Mr. John Doe is SwapCo’s Chief Compliance Officer. He has been the CCO of SwapCo since January 2022. Mr. Doe has more than 20 years of experience in law and financial services.
CCO Certification
This CCO Report covers SwapCo’s Fiscal Year of January 1, 2024 through December 31, 2024. SwapCo’s Audit Committee and Board reviewed the report prior to furnishing this report to the Commission. To the best of my knowledge and reasonable belief, and under penalty of law, the information contained in the attached Annual Report, is accurate and complete in all material respects.
John Doe
January 3, 2025.