Interpretive Notices

9078 - NFA FINANCIAL REQUIREMENTS SECTION 18: NFA PRE-APPROVAL OF THE USE OF SUBORDINATED DEBT

NFA Financial Requirements Section 18 sets forth minimum capital requirements for swap dealers (SDs) and major swap participants (MSPs). Subsection (d) requires certain SD Members that elect to comply with the Bank Based (BB) capital requirements under CFTC Regulation 23.101(a)(1)(i) or the Net Liquid Asset (NLA) capital requirements under CFTC Regulation 23.101(a)(1)(ii) to obtain NFA's pre-approval of a subordinated debt loan agreement before using subordinated debt for capital purposes. As described more fully below, NFA adopted this requirement to provide non-SEC registered Member SDs with the ability to use subordinated debt as regulatory capital to meet their capital requirements.

Both the BB and NLA alternatives permit SD Members to use subordinated debt as capital if the subordinated debt qualifies under SEC Regulation 240.18a-1d. This SEC regulation requires that the SEC approve the subordinated debt loan agreement prior to the agreement's effective date (i.e., before the subordinated debt may be used as capital) and to approve any pre-payments of the subordinated debt. SD Members that are also registered with the SEC as broker-dealers or security-based swap dealers are expected to obtain the requisite approvals under applicable SEC Regulations. Certain SD Members that are not registered with the SEC may also elect one of these alternative methods to calculate their capital requirements and may wish to use subordinate debt for capital purposes. However, since these SD Members are not SEC registered, the firms will not be able to obtain approval by the SEC of the subordinated loan agreement and thus will not be able to use subordinated debt as capital. In order to permit these non-SEC registered SD Members to use subordinated debt in appropriate circumstances, NFA Financial Requirements Section 18 permits a Member SD that is not otherwise registered with the SEC to use subordinated debt for capital provided the SD Member obtains NFA's pre-approval of the subordinated debt loan agreement. Financial Requirements Section 18 also prohibits a Member SD from making any pre-payment of the subordinated debt without prior approval of NFA.

Proposed subordinated loan agreements must be filed with NFA at least 30 days prior to the proposed execution date of the agreement. NFA will review the agreement for conformity, consistency and applicability with SEC Regulation 240.18a-1d and CFTC Regulations 23.101(a)(i) and 23.101(a)(ii). An SD Member may not use subordinated debt to meet its capital requirement, or make a pre-payment of previously approved subordinated debt, until it receives NFA's approval.