NFA extended its initial margin ("IM") model approval to include security-based swaps ("SBS"), beginning November 1, 2021. NFA conditioned the inclusion of SBS in IM calculations on a net portfolio basis on the swap dealer's ("SD"):
- notification to NFA that it (i) meets the requirements under CFTC Letter 16-71("Portfolio margining of uncleared swaps and security-based swaps") or the SEC margin rules and (ii) intends to post and collect margin on a net portfolio basis for swaps and SBS, and include SBS in the IM model calculation; and
- receiving from the SD's model risk management team an approval, preliminary positive opinion or waiver on inclusion of SBS in the model, which may include conditions. If a waiver is provided, the SD's model risk management team must then also establish (and communicate to NFA) the timeframe for conducting a review of products to be included in the model.
NFA stated that the SD's model risk management team must validate SBS exposure in the portfolios by:
- identifying added products and expected volumes;
- assessing relevant model assumptions and limitations;
- completing an impact analysis on the compositions and risk profiles of portfolios as result of including SBS;
- assessing material proxies and approximations introduced by SBS into the framework; and
- assessing testing results for SBS at a product level, as well as overall impact on quarterly model performance testing results, which must include (i) backtesting, (ii) benchmarking to internal and external data sources and (iii) consideration of other risks not in the IM model.
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