Swap Dealer Agrees to Pay $1 Million to Settle Initial Margin Violations
A swap dealer settled NFA charges for disclosure, risk management, recordkeeping and supervision violations relating to the firm's value-at-risk and initial margin calculations.
NFA found that the dealer failed to notify counterparties that certain daily initial margins were not calculated according to customary procedures because certain historical data was deleted and no longer taken into account. NFA also found that, in adjusting its IM calculations once most data was available, the dealer excluded certain products from its calculation that resulted in an inaccurate adjustment. NFA said that the loss of data was in part due to a failure by the dealer to successfully enforce its initial margin risk management program.
Additionally, NFA found that the dealer did not keep full and complete records relating to its swap activities. NFA said that the dealer failed to retain both internal and external instant messages and phone communications, as well as records of instances where the dealer provided counterparties with the required pre-trade mid-market marks. NFA also identified additional supervisory failures during the investigation, including (i) failure to oversee swap sales and trading activity and (ii) failure to develop written controls for reviewing communications.
NFA determined that the swap dealer violated NFA Compliance Rule 2-4 ("Just and Equitable Principles of Trade"), Rule 2-9 ("Supervision") and Rule 2-49 ("Swap Dealers and Major Swap Participants Regulations"). NFA determined that the dealer also violated CFTC Rule 23.201 ("Required records"), Rule 23.431 ("Disclosures of material information") and Rule 23.600 ("Risk Management Program for swap dealers and major swap participants"). To settle the charges, the swap dealer agreed to a civil monetary penalty of $1 million.
Commentary
The case is interesting in that it centers around margin calculations, but does not actually involve violations of relevant margin regulations. Instead, the case indicates that NFA expects that the method for determining margin collected at a "house" level must still be appropriately disclosed to customers, presumably even for counterparties where the dealer has full discretion to set margin levels. (The Complaint does not indicate that the facts were limited to "lockup" customers.)