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Notice I-16-13

April 14, 2016

NFA approval process for risk-based initial margin models for uncleared swaps for certain SDs and MSPs

In March, NFA issued a Notice to Members with an overview of the CFTC's final rules on the margin requirements for uncleared swaps of swap dealers (SD) and major swap participants (MSP) (CFTC's Margin Rules). These requirements allow SDs and MSPs 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 (margin model) approved by the CFTC or NFA.

The CFTC's Margin Rules apply to each SD and MSP 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. The first approval 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. 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.

The purpose of this Notice to Members is to provide further detail regarding NFA's review process of CFTC Covered Swap Entities' margin models subject to the September 1, 2016 approval date. The information in this Notice can also be found on NFA's website. NFA will provide further details, including information on the system that CFTC Covered Swap Entities will use to submit documentation, in a subsequent Notice to Members.

NFA approval of new margin models

NFA's review process of CFTC Covered Swap Entities' margin models involves a number of steps: exploratory discussions, margin model submission, review and assessment, and approval. The following is an overview of the review process for CFTC Covered Swap Entities seeking NFA approval of a margin model by September 1, 2016:

  1. Exploratory discussions: NFA will have exploratory discussions with each CFTC Covered Swap Entity. In order for NFA to determine the reasonableness of the CFTC Covered Swap Entity's margin model plans, the firm will be expected to provide a broad understanding of its intended margin model, the application of the margin model to the firm's business, and the firm's efforts to prepare for the deployment of the margin model.

  2. Margin model submission: Each CFTC Covered Swap Entity will need to submit a margin model proposal to NFA that demonstrates that the margin model meets the applicable CFTC requirements. The quantitative and qualitative standards for margin model submissions are set forth in the CFTC's Margin Rules. Typically, firms should expect a 90-day turnaround for NFA's review of margin model submissions. For all CFTC Covered Swap Entities submitting a margin model to NFA for review, each submission will be expected to include the following:

    • 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 Covered Swap Entity'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; and
    • 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.

    In addition to the components outlined above, CFTC Covered Swap Entities that have affiliates whose margin models are subject to review by one of the prudential regulators (Affiliated OCC/FRB Entities) and that intend to use the same model will be required to complete an NFA provided form that confirms that the margin model submitted to NFA is the same in design and implementation as a margin model approved by a prudential regulator for use in an Affiliated OCC/FRB Entity.

  3. Review and assessment: To assess a margin model submission, NFA will review each CFTC Covered Swap Entity's margin model submission and conduct onsite reviews as necessary to evaluate whether:

    • The submitted margin model is appropriate to the CFTC Covered Swap Entity;
    • The descriptions provided in the margin model submission are adequate and comprehensive; and
    • The CFTC Covered Swap Entity can demonstrate adherence to applicable CFTC regulations.

  4. Approval: A CFTC Covered Swap Entity that seeks approval for its margin model may employ that model for purposes of complying with the CFTC's Margin Rules upon receiving NFA approval. A subsequent Notice to Members will outline how CFTC Covered Swap Entities will receive notice of approval.

On an ongoing basis, NFA will oversee CFTC Covered Swap Entities by, at a minimum, reviewing the overall governance around the model and its use, analyzing margin model back-tests, and monitoring for compliance with margin regulations.

NFA approval of material modifications to existing margin models

Pursuant to the CFTC's Margin Rules, CFTC Covered Swap Entities must notify the CFTC and NFA in writing prior to extending the use of an approved margin model to additional product types or if there are any material changes to an approved margin models 60 days prior to the changes taking effect. The process to review material modifications or changes to a previously approved margin model will follow the margin model approval process outlined above. However, the volume and depth of information may vary depending on the specific modifications being requested.

For more information on margin models, including related resources, please visit NFA's website. If you have any questions regarding this Notice, please contact Alessandra Riccardi, Director of Capital and Risk ( or 212-513-6029) or Richard Taylor, Associate Director ( or 212-346-5640).

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