Capital Requirements

On July 22, 2020, the CFTC adopted final rules regarding capital requirements for swap dealers (SD) (Capital Rules). The CFTC's Capital Rules apply to each SD that is not subject to prudential regulation (covered SD) and became effective on October 6, 2021 (compliance date).

The Capital Rules require each covered SD to calculate market risk exposure and credit risk exposure in computing its regulatory capital. A covered SD may determine these exposure requirements using either:

• Standardized market risk and credit risk charges; or
• Internal models that have been approved by the CFTC or NFA to calculate market and credit risk exposures.

Effective October 6, 2021, covered SDs must obtain CFTC or NFA approval prior to using internal models to compute capital requirements unless such SDs meet the requirements of CFTC Regulation 23.102(f)(1)¹. Covered SDs meeting the requirements of CFTC Regulation 23.102(f)(1) may use internal models pending approval by the CFTC or NFA. Going forward, covered SDs that register and do not meet the requirements of CFTC Regulation 23.102(f)(1) must rely on standardized market risk and credit risk charges until they receive internal model approval by the CFTC or NFA.

All covered SDs, including covered SD not intending to seek approval of internal models, must complete and submit a Capital Model Election questionnaire to NFA.

All covered SDs seeking approval for internal models will be required to satisfy the following requirements in the EasyFile Capital Model Submission System, in addition to the Capital Model Election Questionnaire:

• Capital Model Questionnaire
• Document Request²
• Self-Assessment

Those covered SDs using models that meet the requirements of CFTC Regulation 23.102(f)(1) must also complete the certification and Model Approval Application outlined in the CFTC's regulation, in addition to the above requirements.

¹ A covered SD may use internal market risk or credit risk models upon the submission to the CFTC and NFA of a certification, signed by the CEO, CFO, or other appropriate official with knowledge of the SD's capital requirements and the Capital Models, that such models are in substantial compliance with CFTC's model requirements and have been approved for use in computing capital by the SD, or an affiliate of the SD, by the SEC, a prudential regulator (as defined in CFTC Regulation 1.3), a foreign regulatory authority in a jurisdiction that the CFTC has found to be eligible for substituted compliance under CFTC Regulation 23.106, or a foreign regulatory authority whose capital adequacy requirements are consistent with the capital requirements issued by the Basel Committee on Banking Supervision.

² NFA will notify covered SDs via email each time NFA makes a request. Each request will have an associated due date.

The Capital Model Election questionnaire collects information regarding each SDs' election in terms of the capital computation approach (e.g., bank holding company approach), whether the covered SD is seeking internal model approval, as well as the models for which each covered SD is seeking NFA approval (i.e. VaR, stressed VaR, specific risk, incremental risk, comprehensive risk, MPE models and/or "other" models).

The Capital Model Election questionnaire is available in the EasyFile Capital Model Submission System.

The Capital Model Questionnaire requires covered SDs seeking internal model approval to complete the following questionnaires for each internal model identified in the Capital Model Election Questionnaire

• Model Specific Questionnaire;
• Model Development Questionnaire; and
• Model Risk Management Questionnaire.

The Capital Model Questionnaires becomes available in the EasyFile Capital Model Submission System once the EasyFile Capital Model Submission System is submitted. To assist covered SDs in submitting Questionnaires, a User Guide is accessible through the "Help" function in the EasyFile Capital Model Submission System. The User Guide will continue to be updated with instructions for submitting other filings as they become available.

Covered SDs that meet the requirements of CFTC Regulation 23.102(f)(1) are required to submit to the CFTC a completed model approval application that meets the requirements of CFTC Rule 23.102(c). In January 2021, the CFTC determined that NFA's SD capital model requirements and review program are comparable with the CFTC’s SD capital model requirements and review program.

Therefore, to comply with this requirement, covered SDs must generate a PDF of both the completed Capital Model Questionnaires and Capital Model Certification, utilizing the "Printer Friendly" option at the top of each page in the EasyFile Capital Model Submission System. Covered SDs must then submit these PDFs through the WinJammer^TM Online Filing System. For technical help related to satisfying this requirement, please contact Jamie Syrek, Associate Director, Project Management and Reporting (msyrek@nfa.futures.org or 312-781-1577).

Covered SDs relying on the Capital Model Questionnaires of a primary entity must also submit the Joint Submission Request and the Capital Model Certification to the CFTC but are not required to resubmit the Capital Model Questionnaires if satisfied by the primary entity's submission.

Corporate families with multiple SDs that operate under the same risk management framework, use the same capital computation approach, and make the same model elections, may submit a joint submission through one SD (primary entity¹) to satisfy NFA's capital model approval requirements. The primary entity must submit the Capital Model Questionnaire, Self-Assessment, and any additional information (including satisfaction of NFA's Document Requests) required by NFA's capital model review. All SDs will still be required to complete their own Capital Model Election Questionnaire and Certification Filing.

All SDs relying on the primary entity's submission (affiliate SDs) must upload a Joint Submission Request to their Capital Model Approval Document Request "All Other" folder (not the primary entity's) stating that the affiliate SD is relying on the information provided by the primary entity, operates under the same risk management framework, uses the same capital approach, and makes the same model elections. Additionally, the letter must certify that the primary entity's submission includes all information required of the affiliate SD. In satisfying any requests in the Capital Model Approval Document Request, all documents must be appropriately titled and submitted by the primary entity. The documents will be considered submitted on behalf of all the entities unless the document is clearly marked as specific to a particular entity.

All affiliate SDs relying on the primary entity's submission must also submit the Joint Submission Request to the CFTC in accordance with instructions to be provided by the CFTC.

Amendments to any model elections of the Capital Model Election Questionnaire must be promptly communicated to NFA. For corporate families relying on a joint submission, affiliate SDs will be issued a new Capital Model Election Questionnaire, and primary entities will be required to update the elections made in the Capital Model Questionnaire.

CFTC Rule 23.102(f)(1) allows covered SDs using internal models approved by a qualified regulatory body¹ for the covered SD or an affiliate to continue using such models, pending NFA's review and approval.

Covered SDs availing themselves of this provision must submit to NFA and the CFTC a certification signed by the Chief Executive Officer, Chief Financial Officer or other appropriate official with knowledge of the capital requirements and models, certifying that such models are in substantial compliance with CFTC model requirements and have been approved for use by a regulator specified in the Capital Rules.

To satisfy this requirement, NFA has released an electronic certification (Capital Model Certification), which is available in the EasyFile Capital Model Submission System. To assist firms in submitting the certification, NFA has provided a User Guide which can be accessed by clicking "Help" at the top of the filing.

¹ This includes cases where the qualified regulatory body permits the covered SD's use of internal models.

NFA's model approval program to use internal models to calculate capital charges also requires covered SDs to submit responses to a document request. Unless otherwise indicated, information will be requested through a document request, as part of NFA's First Day Letter which will indicate associated due dates. To assist firms in satisfying the document request, NFA has provided a User Guide which can be accessed by clicking "Help" at the top of the filing.

Before receiving approval, all SDs seeking NFA capital model approval must complete a self-assessment evaluating the SD's capital model program and compliance with the CFTC's Capital Rules. NFA will release the self-assessment to each firm during the approval process, in the EasyFile Capital Model Submission System. Upon release, NFA will notify each SD and will communicate the due date for the self-assessment.

To assist firms in preparing for the electronic self-assessment, NFA has published a Self-Assessment Template in the EasyFile Capital Model Submission System under the Capital Model Approval Document Request in the "NFA Correspondence" folder. Additionally, NFA has provided a User Guide which can be accessed by clicking "Help" at the top of the filing.

In order to promote efficient communication with SDs subject to the CFTC's Capital Rules, NFA's EasyFile Capital Model Submission System contains a Capital Filing Contacts form that allows firms to designate one or more Capital Filing Contacts for each capital filing type¹. Once an SD designates a contact for a capital filing type, that individual will receive future communications from NFA regarding that filing.

Each SD's Chief Compliance Officer and Enforcement/Compliance Communication Contact (as designated on the Form 7-R) will continue to receive all communications related to capital filings, regardless of whether the firm designates a Capital Filing Contact.

Note: Designating an individual as a Capital Filing Contact does not grant them EasyFile Capital Model Submission System access, but only enables them to receive the automated notification that the Firm has correspondence available in the filing. Only an SD's ORS Security Manager can grant EasyFile access.

To access the Capital Filing Contacts form, authorized users should²:

1. Click Electronic Filing Systems at the top of any page on NFA's website.
2. Click the Swap Dealers heading to open a list of SD systems.
3. Click EasyFile Capital Model Submission System.
4. Log into the EasyFile Capital Model Submission System.
5. Click the Capital Filing Contacts link on the left side of the screen.
6. To add a new Capital Filing Contact, click the Add Contact button.
7. Complete the fields that appear and designate whether the individual should receive communications regarding CMA1 (the Capital Model Approval Document Request), CMF1 (the Capital Model Questionnaire) or both.
8. To edit or delete an existing Capital Filing Contact, click Edit or Delete next to the relevant entry.

¹ Filing types include CMA1, the Capital Model Approval Document Request, and CMF1, the Capital Model Questionnaire.

² Only authorized users of this system will have the capability to submit capital model documentation after NFA initiates a request. Contact your firm's ORS Security Manager to become an authorized user.