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March 10, 2016
NFA to review and approve risk-based initial margin models for uncleared swaps for certain SDs and MSPs
On January 6, 2016, the CFTC published its final rules on the margin requirements for uncleared swaps of swap dealers (SD) and major swap participants (MSP)1 (CFTC's Margin Rules). These requirements allow SDs subject to the CFTC's Margin Rules to choose between using a standardized grid-based calculation for initial margin or an internal risk-based initial margin model approved by the CFTC or NFA.
Application to NFA SD Members and coordination with prudential regulators
The CFTC's Margin Rules apply to each SD that is not subject to oversight by a prudential regulator (CFTC Covered Swap Entity), as defined in the Dodd-Frank Act, including non-bank subsidiaries of bank holding companies and non-US firms subject to foreign prudential regulation. US SDs subject to oversight by a prudential regulator and non-US SDs that are overseen by the Federal Reserve Board (OCC/FRB Entities) are not subject to the CFTC's Margin Rules.
In many instances, firms that fall under the CFTC's Margin Rules are affiliates of entities whose margin models are subject to review by one of the prudential regulators. In these cases, NFA and the CFTC plan to coordinate with the prudential regulators to avoid duplicative efforts.
Timing of compliance with the CFTC's Margin Rules
The first compliance date for the CFTC's Margin Rules is September 1, 2016, for CFTC Covered Swap Entities with outstanding notional amounts greater than $3 trillion in transactions facing counterparties with outstanding notional amounts greater than $3 trillion.2 For all other CFTC Covered Swap Entities, the requirement to meet the CFTC's Margin Rules will be phased in each year based on successively smaller outstanding notional value amounts through September 1, 2020.
Approval of Internal Models for Initial Margin
Each CFTC Covered Swap Entity that chooses to use an internal risk-based initial margin model and have it approved by NFA will submit documentation supporting its model and the firm's use of that model to NFA. Each submission will be required to document quantitative standards for the model (e.g., required parameters and incorporation of relevant risks and correlations) and qualitative standards for the firm (e.g., having an independent risk management program as well as policies and procedures for back-testing and stress testing). Both quantitative and qualitative standards for the internal risk-based initial margin model submissions are set forth in the CFTC's Margin Rules.
NFA will issue a Notice to Members shortly further detailing the documentation submittal process for the review of CFTC Covered Swap Entities' initial margin models.
Monitoring for compliance
On an ongoing basis, NFA will oversee CFTC Covered Swap Entities by analyzing model back-tests and monitoring for compliance with margin regulations. NFA will share more information on monitoring in subsequent Notices to Members.
If you have any questions regarding this Notice, please contact David Mengle, Senior Risk Advisor (email@example.com or 212-513-6023) or Richard Taylor, Associate Director (firstname.lastname@example.org or 212-346-5640).
1References to SDs are intended to include MSPs.
2Compliance dates for the CFTC's Margin Rules are based on the average daily notional amount outstanding at a dealer and at its counterparty over a set three-month period. Notional amounts include those for affiliates of the dealer and of the counterparty.