On April 14, National Futures Association (NFA) issued Notice I-16-03, which provides further details regarding NFA’s review and approval process for margin models used by swap dealers and major swap participants that are not subject to the oversight of a prudential regulator (Covered Swap Entities). To comply with Commodity Futures Trading Commission margin rules, Covered Swap Entities must first choose between a standardized grid-based calculation for initial margin or an internal risk-based initial margin model. (For a more complete discussion of initial margin models, see the Corporate & Financial Weekly Digest edition of March 11.) Once a Covered Swap Entity has chosen a margin model, CFTC or NFA approval must be secured. For Covered Swap Entities with outstanding notional amounts greater than $3 trillion in transactions facing counterparties with outstanding notional amounts greater than $3 trillion, the initial date for such approval is September 1.

To assist Covered Swap Entities seeking to comply with the September 1 approval date, Notice I-16-03 outlines the process NFA will use when reviewing a Covered Swap Entity’s choice of margin model. NFA’s review process will include exploratory discussions with each Covered Swap Entity to determine the reasonableness of the proposed margin model plan. A Covered Swap Entity will then be required to go through a submission process where NFA will evaluate whether the chosen margin model complies with CFTC requirements. Before granting final approval, NFA will review each margin model submission and conduct onsite reviews to ensure that the chosen margin model is appropriate to that particular Covered Swap Entity. Post-approval, NFA will continue to review various governance aspects related to a Covered Swap Entity’s margin model through analyzing margin model back-tests and monitoring the entity’s compliance with margin regulations.

NTM I-16-13 is available here.