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May 30, 2017
Monthly Risk Data Reporting Requirements for Swap Dealers
NFA Financial Requirements Section 17 requires swap dealers (SD) and major swap participants (MSP) to file the financial, operational, risk management and other information required by NFA in the form and manner prescribed by NFA. NFA adopted this requirement to specify NFA's general authority to collect information from SDs and MSPs that NFA deems necessary to effectively carry out its oversight responsibilities.
A key component of NFA's regulatory oversight program for SDs is the risk monitoring function, which allows NFA to identify firms that may pose heightened risk and allocate NFA's regulatory oversight resources accordingly. NFA's Board of Directors (Board) has determined that NFA's risk monitoring function will be more effective if it includes the ability to monitor SD risk exposures on a regular basis. Therefore, NFA's Board has approved a list of specific risk metrics that SDs will be required to report electronically to NFA on a monthly basis through WinJammerTM (Risk Data Report). The first Risk Data Report as of December 29, 2017 will be due January 31, 2018. NFA will provide detailed filing instructions well in advance of the first filing date. The purpose of this Notice is to provide more information on the required risk metrics.
Unless otherwise stated, the risk data must be reported in USD at either the SD registrant level or the business line level. The SD must set the reporting scope to include all activity or only swaps activity. Each SD has the option of selecting its reporting level and scope of activity, but once selected, the SD must report all metrics at that level on an ongoing basis. An SD is not permitted to change the reporting level or scope of activity from month to month, without prior approval from NFA.
Required Risk Data
Understanding an SD's market and credit risk exposures will provide NFA with a basic insight into the SD's risk profile. Working with a number of industry participants, NFA identified a list of metrics related to market and credit risk that will provide NFA with important information for SD risk monitoring, without imposing undue burdens on SDs.
Most SDs currently use these or similar metrics as part of their own risk management program. However, based on feedback from industry participants, NFA recognizes that not all SDs operate using the same business model and that a few SDs do not find all these metrics relevant for risk management purposes. Therefore, NFA is providing some flexibility in the reporting requirements by providing non-financial SDs with alternative reporting metrics for total stressed VaR (SVaR) and commodity market sensitivities. More information on the specified risk metrics and the definition of non-financial SD is included in the appendix below.
The specific metrics are as follows:
- Value at Risk (VaR) for each of the following:
- Interest Rates
- Total VaR
- Total Stressed VaR (SVaR) (non-financial SDs may elect to report an equivalent stress measure in lieu of SVaR)
- Interest Rate Sensitivity, DV01 (by tenor bucket)
- Total DV01
- Credit Spread Sensitivity, CS01
- FX Market Sensitivities
- Commodity Market Sensitivities (non-financial SDs may elect to report under option 2)
- Option 1:
- Change in MTM of a 1% appreciation in Precious Metals prices
- Change in MTM of a 1% appreciation in Base Metals prices
- Change in MTM of a 1% appreciation in Energy prices
- Change in MTM of a 1% appreciation in Other Commodity prices/indices
- Option 2 (by tenor bucket) (for non-financial SDs only):
- Prompt month equivalent sensitivity of a 1% appreciation in Base Metals prices by tenor bucket: 1yr, 2yr, 5yr, 10yr, 30yr
- Prompt month equivalent sensitivity of a 1% appreciation in Energy prices by tenor bucket: 1yr, 2yr, 5yr, 10yr, 30yr
- Prompt month equivalent sensitivity of a 1% appreciation in Other Commodity prices/indices by tenor bucket: 1yr, 2yr, 5yr, 10yr, 30yr
- Option 1:
- Total Swaps Current Exposure before Collateral
- Total Swaps Current Exposure net of Collateral
- Total Credit Valuation Adjustment or Expected Credit Loss
- List of 15 Largest Swaps Counterparty Current Exposures (identified by Legal Entity Identifier or Privacy Law Identifier, if applicable) for each of the following:
- Current Exposures before Collateral
- Current Exposures net of Collateral
The Risk Data Report must report the metrics as of the last business day of the reporting month. The Risk Data Report must be filed by the last business day of the following month. For example, the Risk Data Report as of January 31, 2018 must be submitted by February 28, 2018.
NFA will offer educational programs to SDs on these new filing requirements and system instructions well in advance of the December 31, 2017 effective date. In the meantime, if you have any questions on these requirements, please contact George O'Donnell, Senior Risk Analyst II (firstname.lastname@example.org or 212-513-6070), or Alessandra Riccardi, Director (email@example.com or 212-513-6029).
Appendix of Definitions for Risk Data Reports
- Non-Financial Swap Dealer (SD): An SD that meets the following two criteria: (1) The SD's consolidated gross financial revenues in either of the two most recently completed fiscal years represents less than 15 percent of the SD's consolidated gross revenue in that fiscal year (15% revenue test) and (2) the consolidated total financial assets of the SD at the end of its two most recently completed fiscal years represents less than 15 percent of the SD's consolidated total assets as of the end of the fiscal year (15% asset test). For purposes of calculating the 15% revenue test or the 15% asset test, an SD's financial activities shall be deemed financial activities if such activities are defined as financial activities under 12 CFR 242.3 and Appendix A of 12 CFR part 242, including lending, investing for others, safeguarding money or securities for others, providing financial or investment advisory services, underwriting or making markets in securities, providing securities brokerage services, and engaging as principal in investing and trading activities; provided however, an SD may exclude from its financial activities accounts receivable resulting from non-financial activities.
- Value at Risk (VaR): A statistical measure of the potential loss in value of the SD's current portfolio over a 1 day time horizon at either a 95% or 99% confidence interval, calculated for internal risk management purposes. For example, if the three worst forecasted daily losses for a given portfolio in 300 scenarios were $1 million, $3 million and $5 million, then the 1 day 99% VaR would be $1 million.
- Stressed VaR: VaR (as previously defined) but with model inputs calibrated to a period of significant financial stress as commonly understood by the market and appropriate to the SD's current portfolio. For example, if the three worst forecasted daily losses during a period of significant market stress for a given portfolio in 300 scenarios were $3 million, $9 million and $15 million, then the 1 day 99% Stressed VaR (SVaR) would be $3 million.
- Equivalent stress measure: Non-financial SDs that are not affiliated with a prudentially regulated SD, and do not currently calculate SVaR, may elect to provide the highest potential loss under the SD's pre-defined set of stressed scenarios in lieu of SVaR.
- Interest Rate Sensitivity (DV01): Change in dollar value of a position which results from a one basis point increase in the interest rates curves for the applicable tenor bucket. For example, if the SD has interest rate exposure in the 2yr tenor bucket and a one basis point increase in interest rates results in a MTM gain of $10,000, then the DV01 would be $10,000 for that tenor bucket.
- Credit Spread Sensitivity (CS01): Change in dollar value of a position which results from a one basis point increase in credit spreads. For example, if the SD has a credit portfolio in which it is a net buyer of credit protection (i.e. net short credit risk), and a one basis point increase in credit spreads results in a MTM gain of $10,000 then the CS01 would be $10,000.
- FX Market Sensitivities: Change in dollar value of a position which results from a one percent appreciation in all currencies against the USD. For example, if the SD has an FX portfolio with a net long USD equivalent currency position, and a one percent appreciation in all currencies against the USD results in a MTM loss of $10,000 then the FX Market Sensitivity would be -$10,000.
- Commodity Market Sensitivities: We have identified four main buckets of data collection for Commodities: Precious Metals, Base Metals, Energy, Other Commodity prices/indices. The fourth bucket is meant to be a "catch-all" bucket, where, for example, CM Indices and Baskets will flow.
Option 1: The change in MTM of the portfolio for a one percent appreciation in the four Commodity classes (Precious Metals prices, Base Metals forward curves, Energy forward curves, Other Commodity prices/indices forward curves). For example, if the SD has an energy portfolio that is long one thousand contracts maturing in three years and is short one thousand contracts maturing in one year then the SD has a net position of zero contracts. A one percent appreciation in energy prices across the curve, assuming a flat curve, would cause no net change in MTM and the resulting Energy Market Sensitivity would be $0.
Option 2: The change in MTM of the portfolio for a one percent appreciation in the three Commodity classes that are based on a forward curve (Precious Metals are excluded from this option as they are spot based), Base Metals, Energy, Other Commodity prices/indices, by tenor bucket using prompt month (front month futures contract) equivalent sensitivities. For example, assume the SD has an energy portfolio that is long one thousand contracts maturing in three years, and short one thousand contracts maturing in one year. Assume also that using existing market prices, correlations and volatilities, the corresponding prompt month equivalent positions are long 1,500 prompt month contracts associated with the five year position, and short one thousand prompt month contracts associated with the one year position. If a one percent appreciation in the price of the prompt month energy contract results in a MTM gain of $15,000, associated with the five year long position, and a MTM loss of $10,000, associated with the one year short position, then the Energy Market Sensitivity would be +$15,000 and -$10,000 in the 5yr and 1yr tenor buckets respectively.
- Swaps Current Exposure before Collateral (excluding inter-affiliate exposures): Net positive mark to market value of a portfolio without adjustments for collateral held to mitigate these risks. If the net mark to market value is negative or zero, the SD should report $0.
- Swaps Current Exposure net of Collateral (excluding inter-affiliate exposures): Net positive mark to market value of a portfolio after adjusting for collateral held to mitigate these risks. If the mark to market value is negative or zero, the SD should report $0.
- Credit Valuation Adjustment (CVA), or Expected Credit Loss: The difference in MTM between the current portfolio with a counterparty and that same portfolio with a hypothetical riskless counterparty. For SDs that do not currently calculate CVA, expected credit loss can be reported as an alternative.
- List of 15 Largest Swaps Counterparty Current Exposures: An SD should report the information by counterparty and exclude inter-affiliate exposures.