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Notice I-21-14

March 31, 2021

Effective date for NFA's swap dealer capital requirements

On September 15, 2020, the CFTC adopted final rules imposing minimum capital and financial reporting requirements for swap dealers (SD) that are not subject to the rules of a prudential regulator (Covered SDs). These rules establish an October 6, 2021 compliance date. The Commodity Exchange Act requires that NFA adopt rules establishing minimum capital and other financial requirements for its Members, which are at least as stringent as the CFTC's requirements, and to implement a program to monitor and enforce Members' compliance with NFA's requirements. As a result, NFA adopted and amended several rules summarized below that will also be effective October 6, 2021.

Financial Requirements Section 18

NFA adopted Financial Requirements Section 18 to establish NFA's financial requirements for Covered SD Members. Section 18 primarily incorporates the CFTC's capital and financial reporting requirements by:

  • Requiring Covered SD Members to meet the applicable capital requirements in CFTC Regulation 23.101(a);
  • Requiring certain Covered SD Members seeking to use internal models to calculate market and credit risk exposures to submit an application to NFA and obtain NFA's written approval prior to using the models;
  • Permitting Covered SD Members to use internal models approved by certain regulators specified in CFTC Regulation 23.102 prior to NFA's approval, provided they first file with NFA the certification required by CFTC Regulation 23.102(f)(1); and
  • Requiring Covered SD Members to submit regular financial reports to NFA and to file certain notices with NFA in accordance with CFTC Regulations.

The CFTC's final rules do not require Covered SDs to use a specific format for filing the regular financial reports. In order to standardize these filings, NFA developed two new financial reports (FR-CSE-NLA and FR-CSE-BHC). Financial Requirements Section 18 requires Covered SD Members to file the regular financial reports using one of these standardized forms, or for Covered SD Members that are SEC registered broker-dealers or security-based SDs, to use the FOCUS report.

The CFTC's final capital rules permit Covered SDs to use subordinated debt that has been approved by the SEC to meet regulatory capital requirements. However, Covered SD Members that are not registered with the SEC as a broker-dealer or security-based SD are not eligible to receive SEC approval of subordinated debt for capital purposes. Financial Requirements Section 18 gives these non-SEC registered Covered SD Members the ability to use subordinated debt to meet capital requirements provided the Covered SD Member obtains pre-approval of the subordinated loan agreement from NFA and pre-approval of any subsequent prepayments of the subordinated debt.

NFA also adopted a related Interpretive Notice entitled NFA Financial Requirements Section 18 — Pre-Approval of the Use of Subordinated Debt, which provides additional information on NFA's approval of subordinated debt.

Covered SDs seeking NFA approval to use subordinated debt to meet capital requirements must submit subordinated debt agreements to NFA for review at least 30 days prior to the agreement's execution date. Consequently, Covered SDs seeking NFA's approval to use subordinated debt to meet capital requirements as of October 6, 2021 must submit agreements to NFA no later than September 6, 2021.

NFA will provide additional instructions regarding the form and manner of submissions and notices required from Covered SD Members later this year. Additionally, NFA will cover these requirements during forthcoming educational programs.

Other Rule Changes

NFA also made amendments to:

  • Financial Requirements Section 1 to set forth the minimum capital and internal model approval requirements for Covered SD Members that are also registered as futures commission merchants;
  • Registration Rule 201 to specify that for new SD registrants, NFA will review an SD's compliance with minimum capital requirements during the registration process; and
  • Financial Requirements Section 10 to impose a $1,000 per business day late fee for financial reports required to be filed under Financial Requirements Section 18.

NFA's Swap Participant Advisory Committee supported the proposed new Financial Requirements Section 18 and the related Interpretive Notice, as well as the other amendments. All were unanimously approved by the Board.

More information regarding these changes can be found in NFA's February 26, 2021 submission letter to the CFTC. If you have any questions regarding these amendments, please contact Dale Spoljaric, Managing Director, OTC Derivatives (dspoljaric@nfa.futures.org or 312-781-7415) or Sudhir Jain, Director, OTC Derivatives (sjain@nfa.futures.org or 212-513-6080).

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