Approval letter issued to the National Futures Association with regard to Swap Dealer captial model requirements and review program.

CFTC LETTER NO. 21-03OTHER WRITTEN COMMUNICATIONS JANUARY 12, 2021

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: [phone]

www.cftc.gov

Market Participants	Joshua B. Sterling
Division	Director

Thomas W. Sexton, III

President and Chief Executive Officer

National Futures Association

300 S. Riverside Plaza, #1800

Chicago, IL 60606-6615

Re: Swap Dealer Capital Model Determination Letter

Dear Mr. Sexton:

The Market Participants Division (the "MPD") of the Commodity Futures Trading Commission (the "Commission") has received on December 3, 2020 a complete package of materials from the National Futures Association (the "NFA") documenting the program for review and issuing a determination of swap dealer capital model approval as permitted under Commission regulation 23.102.1 Commission regulation 23.102(a) generally permits a swap dealer to apply to the Commission or to the registered futures association of which it is a member to obtain approval to use internal models for purposes of making model computations for capital under the Commission's rules. In the latter case, the Commission must first determine that the NFA's model requirements and review process are comparable to those of the Commission in order for the NFA's review and approval to be sufficient as an alternative means of compliance.2 This letter is to inform you that MPD staff has reviewed, and has no further comments or questions with regard to, the NFA's initial documentation of the proposed swap dealer capital model requirements and review process.

The MPD has reviewed the NFA's materials submitted to date which document the model requirements and review process, including the "First Day Letters" and "Initial Questionnaires." In addition, the MPD has met with the NFA's model review staff on several occasions to discuss the NFA's proposed capital model review program and the proposed implementation of this program. The MPD has reviewed the submitted materials and evaluated the NFA's proposed

1. Commission regulations are found at 17 CFR Ch. 1.
2. See 17 CFR 23.102(a).

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Swap Dealer Capital Model Determination

program against the Commission's own requirements and processes required under Commission regulation 23.102, noting no material differences.3

Accordingly, pursuant to authority delegated to the MPD by the Commission,4 the MPD has determined at this time that the NFA's swap dealer capital model requirements and model review process are comparable to those of the Commission and, as such, model approval by the NFA is hereby permitted to be accepted as an alternative means of compliance under Commission regulation 23.102.

The MPD expects routine discussions regarding implementation of the capital model program to continue as a matter of normal oversight. Any anticipated material changes to the processes or requirements related to the NFA swap dealer capital model approval program must be communicated to MPD staff prior to their implementation. MPD staff will review the anticipated changes for purposes of ensuring that the NFA model approval program remains comparable to the Commission's program.

If you have questions regarding this letter, please contact Thomas Smith, Deputy Director, at 202-418-5495, Rafael Martinez, Senior Financial Risk Analyst, at 202-418-5462, or Josh Beale, Associate Director, 202-418-5446.

Sincerely,

______________________________

Joshua B. Sterling Director

Market Participants Division

1. For more detail, please refer to the attached SD Capital Model Determination summary document.
2. See 17 CFR 140.91(a)(11).

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Swap Dealer Capital Model Determination

Swap Dealer Capital Model Determination

Summary:Commodity Futures Trading Commission (the "Commission") Regulation 23.102 requires that a Swap Dealer ("SD") applying for capital model approval provide to the Commission or a registered futures association5 a description of critical model components, and directs the SD to different requirements depending on its elected capital approach.6 SDs electing to comply with capital requirements using the "bank-based approach" are directed to submit information required under subpart E or F of 12 CFR 217, while SDs electing the "net liquid assets approach" are directed to file information required under Appendix A to subpart E of 17 CFR Part 23.7

Each of these requirements include, but are not limited to, generally (i) a list of categories of positions that the SD holds in its proprietary accounts and a brief description of the methods the SD would use to calculate market risk and credit risk charges; (ii) a description of the mathematical models to be used to price positions and to compute market risk and credit risk;

1. a description of how the SD would calculate current exposure and potential future exposure
   for its credit risk charges, and (iv) a description of how the SD would determine internal credit risk-weights of counterparties, if applicable.8 In addition, an application is further required to be supplemented by other information relating to the internal risk management control system,
   mathematical models and financial position of the SD that the Commission or a registered futures association may request to complete its review.9

The Commission has approved the NFA Compliance Rule 2-49, which automatically incorporates into the NFA's rules all of the model requirements discussed above.10 In addition, the NFA submitted to the Commission additional model process documents which further outline the design and operation of the NFA's SD capital model program, including a high-level model process overview, initial first-day request letter to be sent to firms, and several model-specific and operational questionnaires. The following table outlines the major model application components required by the rules and where such requirements have been identified in the NFA's provided program.

1. The National Futures Association (NFA) is the only registered futures association under the Commodity Exchange Act.
2. See 17 CFR 23.102.
3. See 17 CFR 23.102(c).
4. See Paragraph (a) of Appendix A to Subpart E of 17 CFR Part 23.
5. See Paragraph (b) of Appendix A to Subpart E of 17 CFR Part 23.
6. See NFA Compliance Rule 2-49available at:https://www.nfa.futures.org/rulebook/rules.aspx?Section=4&RuleID=RULE%202-49.

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Swap Dealer Capital Model Determination

SD Capital Model Determination

Model Component	CFTC Ref.	NFA Ref.
		(Doc. or Questionnaire
		Title11)
Model Development and
Implementation
Development	Appendix A (a)(3)	VaR, SVaR, Credit, Specific,
		Comprehensive, Incremental,
		Market, Model Dev.
Model Testing	Appendix A (i)(2)(iv)(A),	VaR, SVaR, Credit, Specific,
	Appendix A (k)(2)(iii)	Incremental, Comprehensive,
		Model Dev.
P&L Methodology	23.100 (definitions)	FDL, VaR, Credit
Model Changes	Appendix A (f)	FDL
Data Assessment	Appendix A (m)(2)(iii),	VaR, SVaR, Specific,
	Appendix A (m)(2)(ii),	Comprehensive, Incremental,
	Appendix A (k)(3), Appendix	Model Dev., Model Risk
	A (i)(1)(ii)(B)
Systems Integration	Appendix A (i)(1)(i)	VaR
Ongoing Monitoring	Appendix A (i)(1)(ii)(B)	Model Risk, Model Dev.
Validation
Benchmarking	Appendix A (m)(1)(ii)(B)	FDL, Comprehensive, SVaR,
		Credit
Outcomes/Backtesting	Appendix A (i)(1)(ii)(C)	FDL, Specific
Stress Period for SVaR	Appendix A (j)(1)(iii)	FDL, SVaR
Stress Test for	Appendix A (m)(3)(ii)	FDL, Comprehensive
Comprehensive Risk
Risk Management
Governance	23.600 (e)(2)	Model Risk
Audit	23.600 (e)(2)	Model Risk
Documentation	23.600 (e)(3)	Model Risk

11 NFA reference documents: First Day Request Letter ("FDL"); Model Development Questionnaire ("Model Dev."); Model Risk Management Questionnaire ("Model Risk"); VaR Risk Questionnaire ("VaR"); Stressed VaR Risk Questionnaire ("SVaR"); Market Risk Questionnaire ("Market"); Credit Risk Questionnaire ("Credit"); Incremental Risk Questionnaire ("Incremental"); Comprehensive Risk Questionnaire ("Comprehensive"); Specific Risk Questionnaire ("Specific").