NFA to Review Margin Models Used to Satisfy CFTC Uncleared Swap Margin Rules | Practical Law

NFA to Review Margin Models Used to Satisfy CFTC Uncleared Swap Margin Rules | Practical Law

The National Futures Association (NFA) issued a notice reminding members of upcoming margin requirements for uncleared swaps under the CFTC's final rules and announcing that it will review all internal initial margin models submitted under the rules.

NFA to Review Margin Models Used to Satisfy CFTC Uncleared Swap Margin Rules

Practical Law Legal Update w-001-6206 (Approx. 3 pages)

NFA to Review Margin Models Used to Satisfy CFTC Uncleared Swap Margin Rules

by Practical Law Finance
Law stated as of 15 Mar 2016 • USA (National/Federal)
The National Futures Association (NFA) issued a notice reminding members of upcoming margin requirements for uncleared swaps under the CFTC's final rules and announcing that it will review all internal initial margin models submitted under the rules.
On March 10, 2016, the National Futures Association (NFA) issued a notice reminding members of initial margin requirements for uncleared swaps entered into by swap dealers (SDs) and major swap participants (MSPs) under final CFTC rules scheduled to take effect in September 2016 (see Legal Update, CFTC Adopts Final Rules on Uncleared Swaps Margin). In the notice, the NFA announced that it will review all internal initial margin models submitted under the final CFTCrules.
SDs that are subject to the final rules have the option of calculating initial margin by either:
  • Using a standardized grid-based calculation.
  • Using an internal risk-based initial margin model approved by the CFTC or NFA.
The CFTC's final uncleared swap margin rules apply to all SDs and MSPs that are not subject to oversight by a prudential regulator. These "CFTC Covered Swap Entities" include non-bank subsidiaries of bank holding companies (BHCs) and non-US firms subject to foreign prudential regulation.
Instances of overlap exist when firms that are subject to the CFTC's margin rules are affiliates of entities whose margin models are subject to review by one of the prudential regulators, and therefore subject to the final bank uncleared swap margin rules (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Final Bank Margin Rules). In cases of overlap, the NFA and CFTC will coordinate with the prudential regulators in order to avoid duplicative review.
In the notice, the NFA announced that it will review all internal risk-based initial margin models, which must be approved by the NFA. Therefore, a CFTC Covered Swap Entity that chooses to use an internal risk-based initial margin model must submit to the NFA:
  • Documentation supporting its model and the firm's use of that model.
  • Documentation of quantitative standards for the model (such as required parameters and incorporation of relevant risks and correlations) and qualitative standards for the firm (such as having an independent risk management program as well as policies and procedures for back-testing and stress testing). Quantitative and qualitative standards for the internal risk-based initial margin model submissions are described in the CFTC's final margin rules.
The NFA will issue further details regarding the process for submitting documentation for review.
For details on the final CFTC margin rules for uncleared swaps, see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Final CFTC Margin Rules.