NFA Outlines Approval Process for Calculating Margin by CFTC Covered Swap Entities

Swap dealers subject to the margin rules of the CFTC may calculate initial margin requirements by using either (i) a standardized grid-based model or (ii) an internally developed risk-based model approved by either the CFTC or the NFA. NFA Notice I-16-13 sets out the steps by which the NFA will approve a firm's internal models:

• Exploratory Discussion: The swap dealer will be expected to provide a broad outline of its model and the application of the margin model as to the firm's business.
• Margin Model Submission: The swap dealer must submit a margin model proposal to NFA that demonstrates that the margin model meets certain requirements. Typically, firms should expect a 90-day turnaround for NFA's review of margin model submissions.
• Review and Assessment: The NFA will evaluate each submission and conduct onsite reviews.
• Approval: Upon receiving NFA approval, a dealer may employ that model for purposes of complying with the CFTC margin rules. A subsequent Notice to Members will outline how dealers will receive a Notice of Approval.

The NFA cautioned that it will, on an ongoing basis, oversee swap dealers by, at a minimum: (i) reviewing the overall governance around the model and its use; (ii) analyzing margin model back-tests; and (iii) monitoring for compliance with margin regulations.

The NFA noted that swap dealers must notify the CFTC and NFA in writing prior to extending the use of an approved margin model to additional product types or if there are any material changes to an approved margin model 60 days prior to the changes taking effect, pursuant to the CFTC margin rules.