In our previous blog post, An Intro to NFA Reporting: How prepared are you?, we discussed the background of the National Futures Association (NFA), the association’s relatively new reporting requirements, and suggestions on smoothing out the filing process. Since thousands of pools require individual reporting, the requirements for your firm may have increased exponentially. Most firms don’t realize the detail required in the filings and this level of detail doesn’t always come at the push of a button in existing reporting or trading systems.
Hopefully, this blog will provide you with some helpful insight/methodologies on where to get more information, how to deconstruct the NFA questions, building a data dictionary and benefits of documentation.
(1) Where to go?
The NFA’s 2014 Annual Review says “Throughout the year, NFA received lots of questions and feedback from CPO members regarding the difficulties faced with completing the information forms correctly and completely.” The NFA took steps to clarify questions and allows Commodity Pool Operators to electronically file their annual financial statements and quarterly reports using the EasyFile system.
Some of these clarifications can be found in the sample template form on the NFA website. This can be found in Electronic Filings > EasyFile (Pool Filers) > Quarterly Pool Reports > CPO PQR Template with Help Text. The sections on this sample form in light blue are intended to clarify some of the questions filers had. The EasyFilePlus Template available here shows how detailed the requirements can be.
(2) Breaking down the questions
In this section, we will break down one of the questions on the 35-page POOL QUARTERLY REPORT FOR COMMODITY POOL OPERATORS Template and discuss where some of this information might be found.
If you find that your trading, risk or data warehouse doesn’t maintain this information, now is a good time to list some requirements for enhancements so this doesn’t stay a manual process. IMP has methodologies that work when deciphering this type of requirement.
“Provide the following information about the Pool’s counterparty credit exposure. Do not include CCPs as counterparties and aggregate all Affiliated Entities as a single group for purposes of this question. Your responses should take into account (i) mark-to-market gains and losses on derivatives, (ii) margin posted to the counterparty (for subparagraph 3.b.) or margin posted by the counterparty (for subparagraph 3.c.), and (iii) any loans or loan commitments. Your responses should not take into account: (i) assets that the counterparty is holding in custody on your behalf; (ii) derivative transactions that have been executed but not settled; (iii) margin held in a customer omnibus account at a CCP; or (iv) holdings of debt or equity securities issued by the counterparty.”
Let’s break the question down… 
- “Provide the following information about the Pool’s counterparty credit exposure. Do not include CCPs as counterparties” Check that counterparty information is tagged to show CCPs separate from other counterparties.
- “Document and aggregate all Affiliated Entities”. This includes maintaining a list of the counterparties aggregated into each group.
- “Responses should take into account (i) mark-to-market gains and losses on derivatives” Validate Mark-to-Market gains and losses by checking some of the valuations. This can be done by unit testing one of each type of derivative, future, commodity etc. Note: while it is easy to rely on third party vendors and valuations, it is always best to validate this information in house.
- “Responses should take into account (ii) margin posted to the counterparty” (for subparagraph 3.b.) Check to see if margin posted by the counterparty is updated automatically. Is this a manual process? If so, were all of the margin account updates complete as of the date that your NFA filing covers.
- “Your responses should not take into account: (ii) derivative transactions that have been executed but not settled” Check that these are in fact excluded up to the date on the NFA filing. As part of this, you may want to check that these are properly tagged in the data you are using for reporting.
(3) Building a data dictionary and interpretations guidelines
There are several IMP methodologies, which are related to reporting (e.g. having a Data Dictionary Guide for NFA Terms as it relates to your firm and your data/calculations, as well as an interpretations guideline). In addition to aggregating the information required to answer the question above (and all of the other questions on the NFA filings), it is always helpful to have an interpretations guideline document and data dictionary. This will help you validate and understand whether your firm defines something differently than the requirements.
As an example, you may want to ask the basic questions such as these to make sure your firm calculates the necessary fields the same way the NFA expects to see them:
- Define “Exposure”
- Define “Counterparty” What am I defining specifically as the “counterparty", where is it stored, what record is it on, position? Trades level fields? Security master?
- How does your firm check counterparties mechanically? Is it as simple as running a query on your holdings? Auditing your counterparty records? Checking that CCP are tagged?
(4) Document, Document, Document…
For all of these, a complete record of everything that was included and excluded in your calculations should be saved. By saving the exact data, you will be able to replicate the numbers that you report. This data should be kept in an internal system and not only at a third party administrator.
Firms often don’t realize the extent and detail of the reporting and disclosure requirements for the NFA. If all transactions are in a firm’s trading system, shouldn’t it be easy to pull the right numbers at the click of a button? What many don’t realize is that this can be a labor intensive and part-manual process. Not every trading system stores the data in the exact format that the NFA requires. As a result, many firms struggled to complete the new forms correctly. By anticipating the requirements and carefully documenting what was reported, you will be in a better position.
This outline is for informational purposes only and does not constitute legal, regulatory or investment related advice. Additional information can be found at www.nfa.futures.org
 https://www.nfa.futures.org/NFA-about-nfa/annual-reviews-files/2014_annualreport.pdf pg 13.
 https://www.nfa.futures.org/EasyFilePlus/EFPTemplate.aspx?template=PQR pg 9 of 35
 This is just a sample of some of the request. See the full test for all of the requirements.