May 19, 2022

NFA Provides Guidance on Use of ARRs in Initial Margin Models

NFA provided guidance on use of alternative reference rates ("ARRs") in initial margin calculation models for uncleared swaps.

NFA indicated the circumstances under which firms may use proxies for transactions that reference ARRs because not all such rates are directly modeled in an approved initial margin framework. NFA already permitted use of SOFR, but indicated steps that can be taken to use other ARRs, in compliance with CFTC Rule 23.154(b)(2)(xi) ("Calculation of initial margin"). In particular, NFA indicated that relevant swap dealers must (i) notify NFA that it is incorporating ARRs by proxy or approximation in its risk management system, (ii) obtain written approval, preliminary positive opinion or waiver from its model risk management team to use the proxy and (iii) establish a timeframe to conduct in-depth review of the proxy that is within six months of implementation.

In the Notice, NFA included the minimal considerations for model risk management teams (including a relevant reference rate by proxy or approximation in the initial margin model). NFA also reminded firms of obligations to have policies and procedures for identifying and evaluating proxies and approximations in the model framework and for identifying and addressing deteriorating performance.

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