Notices to Members

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Notice I-21-33

October 28, 2021

Swap dealers may include security-based swaps when calculating initial margin on a net portfolio basis subject to certain conditions

NFA has received a number of requests from swap dealers (SD) to extend NFA's approval of its IM model to include security-based swaps (SBS) in initial margin (IM) calculations on a net portfolio basis. NFA will extend its IM Model approval to include SBS under the conditions outlined below.

Starting November 1, 2021, SDs may include SBS in IM model calculations on a net portfolio basis subject to the following three conditions:

  • The SD notifies NFA in writing via email at that it meets the requirements outlined in CFTC No Action Letter 16-71 (PDF download) or the SEC Margin Rules (PDF) and intends both to post and collect margin on a net portfolio basis for swaps and SBS and include SBS in the IM Model calculation;
  • The SD's Model Risk Management (MRM) team has issued either an approval, a preliminary positive opinion, or a waiver on the inclusion of SBS in the IM model, which may include establishing effective compensating controls or an enhanced monitoring framework to ensure the conservativeness of the IM calculated on a net portfolio basis using an IM Model; and
  • If the SD's MRM team authorizes the inclusion of SBS in IM portfolios via waiver, the MRM team must establish, and the SD must communicate to NFA, the timeframe (no longer than six months after its implementation in production) for conducting its in-depth review of the product types introduced in the IM model.

To ensure SBS exposure is properly treated when calculating IM using an IM model, the SD's MRM team must adequately validate the inclusion of SBS exposure in the SD's portfolios. As part of its validation activities, the MRM team must, at a minimum:

  • Identify the products to be added and the expected volumes;
  • Assess the model assumptions and limitations specifically relating to SBS and on a net portfolio basis;
  • Complete an impact analysis on the compositions and risk profiles of the existing portfolios due to the introduction of SBS;
  • Perform an assessment of material proxies and approximations introduced by SBS into the IM model framework, including remediation and compensating controls for material proxies and approximations; and
  • Assess testing results for SBS at the product level as well as the overall impact of the introduction of SBS on the quarterly model performance testing results of the current portfolios approved to be margined on the IM model. The assessment must cover, at a minimum:
    • Backtesting (covering a minimum period of three months);
    • Benchmarking to relevant internal and external data sources or estimation techniques (including a corporate risk measure integrated into the SD's risk management systems, such as corporate VaR, and observable margin standards such as a derivatives' clearing organization); and
    • Risks not in the IM model.

In order to ensure the conservativeness of IM model calculations, the MRM team must also assess whether compensating controls, thresholds and/or an enhanced monitoring framework should be added. Any compensating controls previously established should also be reviewed by the MRM team.

NFA will review each SD's implementation of SBS in its IM model at a later date, which will focus on the MRM team's validation activities.

If you have questions please contact Alessandra Riccardi, Managing Director, Models and Risk ( or 212-513-6029) or Antonina Harden, Director, Models and Risk ( or 212-513-6040).

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