NFA Publishes Interpretive Notice on Swap Valuation Disputes
The National Futures Association ("NFA") announced CFTC approval of NFA's Interpretive Notice (the "Notice") on NFA Compliance Rule 2-49 (see previous coverage). The Notice outlines the type of "valuation" disputes that the NFA will require to be reported pursuant to CFTC Rule 23.502(c) and NFA's compliance rule. The Notice provides additional guidance regarding requirements for amending and updating reports that have been previously submitted. The NFA announcement specifies the compliance date for the Notice and the specific data fields that will need to be included in reports.
In January 2016, the CFTC issued an order authorizing the NFA to receive and review notices of valuation disputes that swap dealers and major swap participants are required to file under CFTC Rule 23.502(c). The NFA Notice explains that the rule requires the NFA to inform members that it will require them to submit electronic reports of disputes related to the following (provided the disputed amount is greater than a $20 million reporting threshold and is outstanding for at least the period of time specified in CFTC Rule 23.502(c)):
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initial margin ("IM") amounts to be posted or collected as part of a "Collateralized Eligible Master Netting Agreement" (meaning an ISDA Master Agreement and credit support annex ("CSA"));
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variation margin amounts to be posted or collected as part of a Collateralized Eligible Master Netting Agreement; and
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where parties do not exchange collateral, transaction or portfolio valuations provided by a swap dealer that are disputed by the counterparty.
The Notice obligates swap dealers to file updates on the 15th and last business days of the month if the amount of a dispute has changed sufficient to move from one $20 million band to another $20 million band (e.g., from between $20-$40 million to between $40-$60 million), and to close out reports for disputes that have been resolved.
The Notice will be effective for dispute notices filed beginning on January 2, 2018.
Commentary
While the NFA presents its action as a technical interpretation of existing requirements under CFTC Rule 23.502(c), it is quite clear that the CFTC rule does not require reporting of IM disputes (“valuation” is explicitly defined for purposes of the CFTC rule to mean market or net present value of a swap). This IM reporting requirement is new, and it is unclear (as there is little public record), what consideration went into the substance of the requirement. Given the CFTC’s record with designing data reporting rules, this is cause for concern. The Interpretive Notice represents the second time in as many months that NFA has used vague authority to impose what is effectively a new data reporting rule on its members outside of a formalized consultation or notice and comment process.
That process point underlined, it is not terribly surprising that the NFA and CFTC would require the reporting of IM disputes as well as disputes regarding swap valuations. The Notice to Members and Interpretive Notice do appear to provide useful standardization of data for valuation dispute reports required under CFTC rules. For example, the Interpretive Notice clarifies that for parties that exchange variation margin, reportable dispute thresholds are measured at the CSA level. However, some of the new guidance is fairly ambiguous, and in particular the NFA's requirements for updating dispute reports are fairly unclear. The NFA advises that it will provide member training on the new requirements in the fall and invites questions.