The National Futures Association ("NFA") expressed its willingness to review and approve swap dealers' ("SDs") internal models for calculating market and credit risk exposures in order to determine whether the models are in compliance with the proposed regulations. In comments submitted to the CFTC, the NFA considered proposed rule changes that would allow swap dealers ("SDs") and major swap participants to use internal models to calculate market and credit risk capital charges instead of using standardized rules-based capital charges. The CFTC indicated that it would delegate the model-approval process to the NFA.

The NFA differentiated its experience and expertise to review and approve SD internal models for the calculation of margin on uncleared swaps from that of capital markets. The NFA noted the complexity of such a new responsibility given that firms may submit multiple models for review, and that those models may govern different market and credit risks.

The NFA advocated an approach that would exempt SDs from the formal review process when they used models that had been reviewed previously by a prudential regulator. This approach would allow the NFA and the CFTC to focus on models that had never been subjected to any regulatory review. Additionally, the NFA asked the CFTC to require firms to submit approval requests within 90 days of the final rules' effective date, and to set the compliance date at one year after the effective date.

Commentary / Steven Lofchie

The NFA's advocacy for automatic approval by the CFTC of models approved by another regulator is consistent with the comments of trade industry associations, although narrower. That is, the NFA requested automatic approval for models approved by the prudential (banking) regulators, but not (for some reason) for models approved by the SEC or non-U.S. regulators. Further, it does not appear that the time period for model review suggested by the NFA is likely to be sufficient. Even if models could be submitted within three months, which many firms might not be able to do, it is hard to see how the NFA could review and comment on them and also give firms sufficient time to build implementing technology.

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