Notices to Members
2024 | 2023 | 2022 | 2021 | 2020 | Show more yearsNotice I-24-05
February 12, 2024
Educational resources, common deficiencies and other important regulatory information for SD Members
NFA is committed to providing its Members with the resources they need to meet their regulatory obligations as efficiently as possible. This Notice covers educational resources, common deficiencies and links to Notices to Members regarding recent amendments to NFA Rules and Interpretive Notices.
Members Section of NFA's Website
From the Members section of NFA's website, swap dealer (SD) Members can access information detailing their regulatory obligations including the following:
Regulatory Obligations Related to Common Deficiencies
The following section describes several regulatory obligations related to common deficiencies noted during NFA examinations.
Required Records: SD Members are required to make and keep records of all its swaps activity, including daily trading records for all swaps executed, as well as other transaction, position and business records, pursuant to CFTC Regulation 23.201 and CFTC Regulation 23.202. SD Members should ensure required records are both complete and accurate. Additionally, SD Members should consider taking preventative measures against the use of unauthorized or unrecorded channels for pre-execution trade communications.
Business Conduct Standards: SD Members are required to obtain and retain a record of essential facts to accurately categorize their counterparties to facilitate compliance with various regulatory requirements pursuant to CFTC Regulation 23.402. The failure to properly identify and classify counterparties may result in non-compliance with other transaction-specific requirements. Additionally, SD Members are required to make several disclosures to non-SD counterparties pursuant to CFTC Regulation 23.431. A common deficiency in this area is a failure to disclose material information and pre-trade mid-market marks to counterparties prior to entering into uncleared swap transactions.
Market Practice: SD Members are required to have a supervisory program to diligently supervise all activities relating to their business pursuant to CFTC Regulation 23.602 and must implement policies and procedures designed to prevent fraud, manipulation and other abusive practices prohibited by CFTC Regulation 23.410. Additionally, SD Members are required to communicate with counterparties in a fair and balanced manner as detailed in CFTC Regulation 23.433. Common deficiencies in this area include:
- Failure to conduct adequate trade surveillance to detect fraud, manipulation and abusive practices; and
- Failure to reasonably tailor communication surveillance procedures based on approved communication methods, including foreign languages, to ensure fair and balanced communications and the prohibition of fraud, manipulation and other abusive practices.
Swap Data Reporting: SD Members must report swap transaction data to swap data repositories pursuant to CFTC Regulation 23.204 and CFTC Regulation 23.205. To ensure the accuracy and completeness of reporting, once every 30 calendar days, SD Members must reconcile all open swap positions in its internal records to that maintained by the relevant swap data repository. Errors should be corrected within seven business days after discovery. If an error is not timely corrected, the SD Member must notify the Division of Market Oversight. Common deficiencies in this area include:
- Failure to report required regulatory messages, either at all or within the regulatory timeframes;
- Failure to report accurately required data fields to the SDR;
- Failure to remediate errors and omissions ASATP after discovery;
- Failure to perform complete reconciliations of open swap positions in internal records to that maintained by the relevant trade repository; and
- Failure to notify the Division of Market Oversight timely after determining that an error will not be remediated within seven business days after discovery.
Calculation of Initial Margin Using Risk-based Models: SD members using NFA-approved risk-based models to calculate initial margin (IM) must conform to the model requirements pursuant to CFTC Regulation 23.154, and NFA requirements detailed in the IM Model Approval Letter and the IM Model Oversight program. As part of these requirements, each SD must monitor its model performance by employing, at a minimum, all of the tests required by CFTC Regulation 23.154 and NFA. Test results must be assessed with clearly established and justified thresholds for acceptable model performance and remediation procedures for each type of testing.
Each SD must re-validate the IM model on a periodic basis, and at least annually. SD Members must adopt procedures and processes enabling them to implement the new version of the IM model in production on a semi-annual or ad-hoc basis. Each new version of the IM Model must be opined on by the internal Model Risk Management function prior to release into production. Furthermore, the IM Model framework must be subject to annual internal audit activities, responsive to requirements in CFTC Regulation 23.154.
SDs must have controls in place to ensure that the information submitted to NFA on a quarterly and annual basis as part of the IM Model Oversight program is accurate, consistent across various regulatory filings and responsive to NFA requirements. All IM model performance issues reported to NFA must be adequately analyzed, and root causes of deteriorated performance must be assessed. Furthermore, each SD's Model Risk Management team must review, assess, and opine on the ongoing monitoring testing results and reports, in a timely manner on a quarterly basis before submitting them to NFA.
Finally, SDs must notify the CFTC and NFA of certain events related to an NFA-approved IM model. Common deficiencies in this area include:
- Failure to adequately monitor model performance and timely report material model performance issues. Notifications must be made upon identification of the issue, and later, upon the remediation;
- Failure to have adequate documentation supporting monitoring activities; and
- Failure to notify CFTC and NFA in writing 60 days prior to an event specified under CFTC Regulation 23.154 (see Notice 1-22-18).
Capital Requirements: SD Members subject to CFTC minimum capital requirements must maintain regulatory capital as defined under the bank holding company regulations in 12 CFR Part 217 as if the SD itself were a bank holding company or as defined in SEC Regulation 240.18a-1 as if the SD were a security-based SD registered with the SEC. Certain SDs that are predominately engaged in non-financial activities may instead choose to maintain tangible net worth in an amount equal to or in excess of minimum capital requirements. Regulatory capital, tangible net worth and minimum capital requirements are determined at the legal entity level. Additionally, when internal models are used to determine regulatory capital or minimum capital requirements, including those used to determine the risk margin amount, the SD must demonstrate independent model validation and ongoing performance monitoring of the SD's own use of the internal models. Validation and monitoring activities must be conducted at the legal entity level.
The SD with NFA-approved capital models must focus on meeting milestones required in the Approval Letters and update the internal processes in line with the timelines required for quarterly model performance submissions to NFA.
Recent Notices to Members
Contact NFA
If you need assistance with any NFA requirements, please contact NFA's Information Center (312-781-1410 or 800-621-3570 or information@nfa.futures.org).