NFA Details Review Process for CFTC Uncleared Swap Margin Models | Practical Law

NFA Details Review Process for CFTC Uncleared Swap Margin Models | Practical Law

The National Futures Association (NFA) issued a notice providing details on the margin model review process for covered swap entities (CSEs) under the CFTC's final margin rules for non-cleared swaps.

NFA Details Review Process for CFTC Uncleared Swap Margin Models

Practical Law Legal Update w-001-9228 (Approx. 3 pages)

NFA Details Review Process for CFTC Uncleared Swap Margin Models

by Practical Law Finance
Published on 25 Apr 2016 • USA (National/Federal)
The National Futures Association (NFA) issued a notice providing details on the margin model review process for covered swap entities (CSEs) under the CFTC's final margin rules for non-cleared swaps.
On April 14, 2016, the National Futures Association (NFA) issued Notice I-16-13, which provides details on the NFA's margin model review process for covered swap entities (CSEs) under the CFTC's final margin rules for non-cleared swaps.
Under CFTC margin rules, CSEs can choose to calculate initial margin (IM) using either a standardized calculation or an internal risk-based model (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Initial Margin Under the Final CFTC Rules). If the CSE chooses to use an internal risk-based model, either the CFTC or the NFA must approve the model for use by the CSE.
For CSEs with outstanding notional amounts greater than $3 trillion in transactions facing counterparties with outstanding notional amounts greater than $3 trillion, the initial date for such approval is September 1, 2016.
Notice I-16-13 provides an overview of the NFA's review process for CFTC CSE margin models which involves exploratory discussions with each CSE, in connection with which firms must provide:
  • A broad understanding of the intended margin model.
  • The application of the margin model to the firm's business.
  • The firm's effort to prepare for the deployment of the margin model.
CSEs must submit margin model proposals to the NFA that demonstrate that the margin model meets the applicable CFTC requirements set out in the CFTC's margin rules. Margin model submissions must include:
  • A cover letter from the Chief Risk Officer (or equivalent) describing senior management's involvement in and approval of the margin model implementation process, the proposed start date for using the margin model and a statement confirming that the margin model meets all applicable CFTC requirements.
  • A detailed description of the margin model implementation process including governance and limitations, an evaluation of the margin model demonstrating that it complies with the CFTC's requirements, a description of all relevant supporting documentation, a summary report on back-testing results, an affirmation of risk accuracy and completeness, an assessment of the inherent margin model risk, and documentation of exceptions and exclusions.
  • A detailed description of any assumptions related to the margin model's application, including assumptions relating to materiality and anticipated future deliverables.
  • A detailed description of the work performed to conduct an independent review of the margin model regarding the CFTC CSE's adherence to requirements under CFTC Regulation 23.154(b), work performed in support of the conclusions, and the effectiveness of controls to ensure adherence to all applicable CFTC regulations.
  • Any additional detail on the suitability, implementation, assumptions, and internal review of the application and internal assessment of the inherent risk and use of the margin model.
Firms should expect a 90-day turnaround.
The NFA will review each CSE's margin model submission and conduct onsite reviews as necessary to evaluate whether:
  • The submitted margin model is appropriate to the CSE.
  • The descriptions provided in the margin model submission are adequate and comprehensive.
  • The CSE can demonstrate adherence to applicable CFTC regulations.
Once approved, the CSE may use the model in order to comply with the CFTC's margin rules for uncleared swaps.
Once a margin model is approved, the NFA will continue to review the overall governance around the model and its use, analyze margin model back-tests, and monitor for compliance with margin regulations.
If a CSE makes any material changes to an approved margin model, the CSE must notify the CFTC and NFA in writing 60 days prior to the changes taking effect.