Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78910-78923]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30976]
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COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for Japan: Certain Entity-Level
Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of comparability determination for certain requirements
under the laws of Japan.
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SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding certain
parts of a joint request by the Bank of Tokyo-Mitsubishi UFJ, Ltd
(``BTMU''), Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan
Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd. that
the Commission determine that laws and regulations applicable in Japan
provide a sufficient basis for an affirmative finding of comparability
with respect to the following regulatory obligations applicable to swap
dealers (``SDs'') and major swap participants (``MSPs'') registered
with the Commission: (i) Chief compliance officer; (ii) risk
management; and (iii) swap data recordkeeping (collectively, the
``Internal Business Conduct Requirements'').
DATES: Effective Date: This determination will become effective
immediately upon publication in the Federal Register.
[[Page 78911]]
FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202 418-5977,
[email protected], Frank Fisanich, Chief Counsel, 202-418-5949,
[email protected], and Jason Shafer, Special Counsel, 202-418-5097,
[email protected], Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
On July 26, 2013, the Commission published in the Federal Register
its ``Interpretive Guidance and Policy Statement Regarding Compliance
with Certain Swap Regulations'' (the ``Guidance'').\1\ In the Guidance,
the Commission set forth its interpretation of the manner in which it
believes that section 2(i) of the Commodity Exchange Act (``CEA'')
applies Title VII's swap provisions to activities outside the U.S. and
informed the public of some of the policies that it expects to follow,
generally speaking, in applying Title VII and certain Commission
regulations in contexts covered by section 2(i). Among other matters,
the Guidance generally described the policy and procedural framework
under which the Commission would consider a substituted compliance
program with respect to Commission regulations applicable to entities
located outside the U.S. Specifically, the Commission addressed a
recognition program where compliance with a comparable regulatory
requirement of a foreign jurisdiction would serve as a reasonable
substitute for compliance with the attendant requirements of the CEA
and the Commission's regulations promulgated thereunder.
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\1\ 78 FR 45292 (July 26, 2013). The Commission originally
published proposed and further proposed guidance on July 12, 2012
and January 7, 2013, respectively. See Cross-Border Application of
Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214
(July 12, 2012) and Further Proposed Guidance Regarding Compliance
with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013).
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In addition to the Guidance, on July 22, 2013, the Commission
issued the Exemptive Order Regarding Compliance with Certain Swap
Regulations (the ``Exemptive Order'').\2\ Among other things, the
Exemptive Order provided time for the Commission to consider
substituted compliance with respect to six jurisdictions where non-U.S.
SDs are currently organized. In this regard, the Exemptive Order
generally provided non-U.S. SDs and MSPs in the six jurisdictions with
conditional relief from certain requirements of Commission regulations
(those referred to as ``Entity-Level Requirements'' in the Guidance)
until the earlier of December 21, 2013, or 30 days following the
issuance of a substituted compliance determination.\3\
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\2\ 78 FR 43785 (July 22, 2013).
\3\ The Entity-Level Requirements under the Exemptive Order
consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602,
23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the
Commission's regulations.
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On June 24, 2013, BTMU submitted a request that the Commission
determine that laws and regulations applicable in Japan provide a
sufficient basis for an affirmative finding of comparability with
respect to certain Entity-Level Requirements, including the Internal
Business Conduct Requirements.\4\ BTMU provided Commission staff with a
supplement on October 8, 2013. On October 29, 2013, the application was
further supplemented with corrections and additional materials. On
November 12, 2013, Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan
Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd.
requested that they be permitted to rely upon BTMU's submission as the
basis for their request for a substituted compliance determination
(BTMU, Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan Securities
Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd., are referred
to herein as, collectively, the ``applicants''). The following is the
Commission's analysis and determination regarding the Internal Business
Conduct Requirements, as detailed below.\5\
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\4\ For purposes of this notice, the Internal Business Conduct
Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606. The applicants subsequently
submitted a separate application for the applicable Transaction-
Level Requirements on September 20, 2013. This notice addresses only
the Entity-Level Requirements.
\5\ This notice does not address swap data repository reporting
(``SDR Reporting''). The Commission may provide a comparability
determination with respect to the SDR Reporting requirement in a
separate notice.
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II. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act\6\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework
for swaps.
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\6\ Public Law 111-203, 124 Stat. 1376 (2010).
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Section 722(d) of the Dodd-Frank Act amended the CEA by adding
section 2(i), which provides that the swap provisions of the CEA
(including any CEA rules or regulations) apply to cross-border
activities when certain conditions are met, namely, when such
activities have a ``direct and significant connection with activities
in, or effect on, commerce of the United States'' or when they
contravene Commission rules or regulations as are necessary or
appropriate to prevent evasion of the swap provisions of the CEA
enacted under Title VII of the Dodd-Frank Act.\7\ In the three years
since its enactment, the Commission has finalized 68 rules and orders
to implement Title VII of the Dodd-Frank Act. The finalized rules
include those promulgated under section 4s of the CEA, which address
registration of SDs and MSPs and other substantive requirements
applicable to SDs and MSPs. With few exceptions, the delayed compliance
dates for the Commission's regulations implementing such section 4s
requirements applicable to SDs and MSPs have passed and new SDs and
MSPs are now required to be in full compliance with such regulations
upon registration with the Commission.\8\ Notably, the requirements
under Title VII of the Dodd-Frank Act related to SDs and MSPs by their
terms apply to all registered SDs and MSPs, irrespective of where they
are located, albeit subject to the limitations of CEA section 2(i).
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\7\ 7 U.S.C. 2(i).
\8\ The compliance dates are summarized on the Compliance Dates
page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.)
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To provide guidance as to the Commission's views regarding the
scope of the cross-border application of Title VII of the Dodd-Frank
Act, the Commission set forth in the Guidance its interpretation of the
manner in which it believes that Title VII's swap provisions apply to
activities outside the U.S. pursuant to section 2(i) of the CEA. Among
other matters, the Guidance generally described the policy and
procedural framework under which the Commission would consider a
substituted compliance program with respect to Commission regulations
applicable to entities located outside the U.S. Specifically, the
Commission addressed a recognition program where compliance with a
comparable regulatory requirement of a foreign jurisdiction would serve
as a reasonable substitute for compliance with the attendant
requirements of the CEA and the Commission's regulations. With respect
to the standards forming the basis for any determination of
comparability (``comparability determination'' or ``comparability
finding''), the Commission stated:
In evaluating whether a particular category of foreign
regulatory requirement(s) is comparable and comprehensive to the
[[Page 78912]]
applicable requirement(s) under the CEA and Commission regulations,
the Commission will take into consideration all relevant factors,
including but not limited to, the comprehensiveness of those
requirement(s), the scope and objectives of the relevant regulatory
requirement(s), the comprehensiveness of the foreign regulator's
supervisory compliance program, as well as the home jurisdiction's
authority to support and enforce its oversight of the registrant. In
this context, comparable does not necessarily mean identical.
Rather, the Commission would evaluate whether the home
jurisdiction's regulatory requirement is comparable to and as
comprehensive as the corresponding U.S. regulatory
requirement(s).\9\
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\9\ 78 FR 45342-45.
Upon a comparability finding, consistent with CEA section 2(i) and
comity principles, the Commission's policy generally is that eligible
entities may comply with a substituted compliance regime, subject to
any conditions the Commission places on its finding, and subject to the
Commission's retention of its examination authority and its enforcement
authority.\10\
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\10\ See the Guidance, 78 FR 45342-44.
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In this regard, the Commission notes that a comparability
determination cannot be premised on whether an SD or MSP must disclose
comprehensive information to its regulator in its home jurisdiction,
but rather on whether information relevant to the Commission's
oversight of an SD or MSP would be directly available to the Commission
and any U.S. prudential regulator of the SD or MSP.\11\ The
Commission's direct access to the books and records required to be
maintained by an SD or MSP registered with the Commission is a core
requirement of the CEA\12\ and the Commission's regulations,\13\ and is
a condition to registration.\14\
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\11\ Under Sec. Sec. 23.203 and 23.606, all records required by
the CEA and the Commission's regulations to be maintained by a
registered SD or MSP shall be maintained in accordance with
Commission regulation 1.31 and shall be open for inspection by
representatives of the Commission, the United States Department of
Justice, or any applicable U.S. prudential regulator.
In its Final Exemptive Order Regarding Compliance with Certain
Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted
that an applicant for registration as an SD or MSP must file a Form
7-R with the National Futures Association and that Form 7-R was
being modified at that time to address existing blocking, privacy,
or secrecy laws of foreign jurisdictions that applied to the books
and records of SDs and MSPs acting in those jurisdictions. See id.
at 871-72 n. 107. The modifications to Form 7-R were a temporary
measure intended to allow SDs and MSPs to apply for registration in
a timely manner in recognition of the existence of the blocking,
privacy, and secrecy laws. In the Guidance, the Commission clarified
that the change to Form 7-R impacts the registration application
only and does not modify the Commission's authority under the CEA
and its regulations to access records held by registered SDs and
MSPs. Commission access to a registrant's books and records is a
fundamental regulatory tool necessary to properly monitor and
examine each registrant's compliance with the CEA and the
regulations adopted pursuant thereto. The Commission has maintained
an ongoing dialogue on a bilateral and multilateral basis with
foreign regulators and with registrants to address books and records
access issues and may consider appropriate measures where requested
to do so.
\12\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the
CEA.
\13\ See e.g., Sec. Sec. 23.203(b) and 23.606.
\14\ See supra note 10.
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III. Regulation of SDs and MSPs in Japan
As represented to the Commission by the applicants, swap activities
in Japan may be governed by the Banking Act of Japan, No. 59 of 1981
(``Banking Act''), covering banks and bank holding companies, and the
Financial Instruments and Exchange Act, No. 25 of 1948 (``FIEA''),
covering, among others, Financial Instrument Business Operators
(``FIBOs'') and Registered Financial Institutions (``RFIs''). The
Japanese Prime Minister delegated broad authority to implement these
laws to the Japanese Financial Services Agency (``JFSA''). Pursuant to
this authority, the JFSA has promulgated the Order for Enforcement,\15\
Cabinet Office Ordinance, \16\ Supervisory Guidelines\17\ and
Inspection Manuals.\18\ The Securities and Exchange Surveillance
Commission (``SESC'') is within the JFS and has promulgated, among
other things, the Inspection Manual for FIBOs.
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\15\ Order for Enforcement of the Banking Act and Order for
Enforcement of the Financial Instruments and Exchange Act.
\16\ Cabinet Office Ordinance on Financial Instruments Business
(``FIB Ordinance'') and Cabinet Office Ordinance on Regulation of
OTC Derivatives Transaction.
\17\ Comprehensive Guideline for Supervision of Major Banks,
etc.(``Supervisory Guideline for banks'') and Comprehensive
Guideline for Supervision of Financial Instruments Business
Operators, etc.(``Supervisory Guideline for FIBOs'').
\18\ Inspection Manual for Deposit Taking Institutions
(``Inspection Manual for banks''), consisting of the Checklist for
Business Management (Governance), Checklist for Legal Compliance,
Checklist for Customer Protection Management, Checklist for Credit
Risk Management, Checklist for Market Risk Management, Checklist for
Liquidity Risk Management, Checklist for Operational Risk
Management, etc.
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These requirements supplement the requirements of the Banking Act
and FIEA with a more proscriptive direction as to the particular
structural features or responsibilities that internal compliance
functions must maintain.
In general, banks are subject to the Banking Act, relevant laws and
regulations for banks, Supervisory Guidelines for banks, and Inspection
Manual for banks, while FIBOs are subject to the FIEA, relevant laws
and regulations for FIBOs, Supervisory Guidelines for FIBOs, and
Inspection Manual for FIBOs.
Pursuant to Article 29 of the FIEA, any person that engages in
trade activities that constitute ``Financial Instruments Business''--
which, among other things, includes over-the-counter transactions in
derivatives (``OTC derivatives'') or intermediary, brokerage (excluding
brokerage for clearing of securities) or agency services therefor\19\--
must register under the FIEA as a FIBO. Banks that conduct specified
activities in the course of trade, including OTC derivatives must
register under the FIEA as RFIs pursuant to Article 33-2 of the FIEA.
Banks registered as RFIs are required to comply with relevant laws and
regulations for FIBOs regarding specified activities. Failure to comply
with any relevant laws and regulations, Supervisory Guidelines or
Inspection Manuals would subject the applicant to potential sanctions
or corrective measures.
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\19\ See Article 2(8)(iv) of the FIEA.
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The applicants are each registered in Japan as RFIs or FIBOs under
the supervision of the JFSA. In addition, each applicant is a member of
several self-regulatory organizations, including the Japanese
Securities Dealers Association (``JSDA''). The JSDA is a ``Financial
Instruments Firms Association'' authorized under FIEA by the Prime
Minister of Japan.\20\
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\20\ Because the applicants' request and the Commissions
determinations herein are based on the comparability of Japanese
requirements applicable to banks, FIBOs, and RFIs, an SD or MSP that
is not a bank, FIBO, or RFI, or is otherwise not subject to the
requirements applicable to banks, FIBOs, and RFIs upon which the
Commission bases its determinations, may not be able to rely on the
Commission's comparability determinations herein.
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IV. Comparable and Comprehensiveness Standard
The Commission's comparability analysis will be based on a
comparison of specific foreign requirements against the specific
related CEA provisions and Commission regulations as categorized and
described in the Guidance. As explained in the Guidance, within the
framework of CEA section 2(i) and principles of international comity,
the Commission may make a comparability determination on a requirement-
by-requirement basis, rather than on the basis of the foreign regime as
a whole.\21\ In making its comparability determinations, the Commission
may include conditions that take into account timing and other issues
related
[[Page 78913]]
to coordinating the implementation of reform efforts across
jurisdictions.\22\
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\21\ 78 FR 45343.
\22\ 78 FR 45343.
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In evaluating whether a particular category of foreign regulatory
requirement(s) is comparable and comprehensive to the corollary
requirement(s) under the CEA and Commission regulations, the Commission
will take into consideration all relevant factors, including, but not
limited to:
The comprehensiveness of those requirement(s),
The scope and objectives of the relevant regulatory
requirement(s),
The comprehensiveness of the foreign regulator's
supervisory compliance program, and
The home jurisdiction's authority to support and enforce
its oversight of the registrant.\23\
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\23\ 78 FR 45343.
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In making a comparability determination, the Commission takes an
``outcome-based'' approach. An ``outcome-based'' approach means that
when evaluating whether a foreign jurisdiction's regulatory
requirements are comparable to, and as comprehensive as, the corollary
areas of the CEA and Commission regulations, the Commission ultimately
focuses on regulatory outcomes (i.e., the home jurisdiction's
requirements do not have to be identical).\24\ This approach recognizes
that foreign regulatory systems differ and their approaches vary and
may differ from how the Commission chose to address an issue, but that
the foreign jurisdiction's regulatory requirements nonetheless achieve
the regulatory outcome sought to be achieved by a certain provision of
the CEA or Commission regulation.
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\24\ 78 FR 45343. The Commission's substituted compliance
program would generally be available for SDR Reporting, as outlined
in the Guidance, only if the Commission has direct access to all of
the data elements that are reported to a foreign trade repository
pursuant to the substituted compliance program. Thus, direct access
to swap data is a threshold matter to be addressed in a
comparability evaluation for SDR Reporting. Moreover, the Commission
explains in the Guidance that, due to its technical nature, a
comparability evaluation for SDR Reporting ``will generally entail a
detailed comparison and technical analysis.'' A more particularized
analysis will generally be necessary to determine whether data
stored in a foreign trade repository provides for effective
Commission use, in furtherance of the regulatory purposes of the
Dodd-Frank Act. See 78 FR 45345.
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In doing its comparability analysis the Commission may determine
that no comparability determination can be made\25\ and that the non-
U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to
its foreign branches, or non-registrant, to the extent applicable under
the Guidance, may be required to comply with the CEA and Commission
regulations.
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\25\ A finding of comparability may not be possible for a number
of reasons, including the fact that the foreign jurisdiction has not
yet implemented or finalized particular requirements.
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The starting point in the Commission's analysis is a consideration
of the regulatory objectives of the foreign jurisdiction's regulation
of swaps and swap market participants. As stated in the Guidance,
jurisdictions may not have swap specific regulations in some areas, and
instead have regulatory or supervisory regimes that achieve comparable
and comprehensive regulation to the Dodd-Frank Act requirements, but on
a more general, entity-wide, or prudential, basis.\26\ In addition,
portions of a foreign regulatory regime may have similar regulatory
objectives, but the means by which these objectives are achieved with
respect to swaps market activities may not be clearly defined, or may
not expressly include specific regulatory elements that the Commission
concludes are critical to achieving the regulatory objectives or
outcomes required under the CEA and the Commission's regulations. In
these circumstances, the Commission will work with the regulators and
registrants in these jurisdictions to consider alternative approaches
that may result in a determination that substituted compliance
applies.\27\
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\26\ 78 FR 45343.
\27\ As explained in the Guidance, such ``approaches used will
vary depending on the circumstances relevant to each jurisdiction.
One example would include coordinating with the foreign regulators
in developing appropriate regulatory changes or new regulations,
particularly where changes or new regulations already are being
considered or proposed by the foreign regulators or legislative
bodies. As another example, the Commission may, after consultation
with the appropriate regulators and market participants, include in
its substituted compliance determination a description of the means
by which certain swaps market participants can achieve substituted
compliance within the construct of the foreign regulatory regime.
The identification of the means by which substituted compliance is
achieved would be designed to address the regulatory objectives and
outcomes of the relevant Dodd-Frank Act requirements in a manner
that does not conflict with a foreign regulatory regime and reduces
the likelihood of inconsistent regulatory obligations. For example,
the Commission may specify that [SDs] and MSPs in the jurisdiction
undertake certain recordkeeping and documentation for swap
activities that otherwise is only addressed by the foreign
regulatory regime with respect to financial activities generally. In
addition, the substituted compliance determination may include
provisions for summary compliance and risk reporting to the
Commission to allow the Commission to monitor whether the regulatory
outcomes are being achieved. By using these approaches, in the
interest of comity, the Commission would seek to achieve its
regulatory objectives with respect to the Commission's registrants
that are operating in foreign jurisdictions in a manner that works
in harmony with the regulatory interests of those jurisdictions.''
78 FR 45343-44.
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Finally, the Commission will generally rely on an applicant's
description of the laws and regulations of the foreign jurisdiction in
making its comparability determination. The Commission considers an
application to be a representation by the applicant that the laws and
regulations submitted are in full force and effect, that the
description of such laws and regulations is accurate and complete, and
that, unless otherwise noted, the scope of such laws and regulations
encompasses the swaps activities\28\ of SDs and MSPs\29\ in the
relevant jurisdictions.\30\ Further, as stated in the Guidance, the
Commission expects that an applicant would notify the Commission of any
material changes to information submitted in support of a comparability
determination (including, but not limited to, changes in the relevant
supervisory or regulatory regime) as, depending on the nature of the
change, the Commission's comparability determination may no longer be
valid.\31\
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\28\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\29\ No SD or MSP that is not legally required to comply with a
law or regulation determined to be comparable may voluntarily comply
with such law or regulation in lieu of compliance with the CEA and
the relevant Commission regulation. Each SD or MSP that seeks to
rely on a comparability determination is responsible for determining
whether it is subject to the laws and regulations found comparable.
Currently, there are no MSPs organized outside the U.S. and the
Commission therefore cautions any non-financial entity organized
outside the U.S. and applying for registration as an MSP to
carefully consider whether the laws and regulations determined to be
comparable herein are applicable to such entity.
\30\ The Commission has provided the relevant foreign
regulator(s) with opportunities to review and correct the
applicant's description of such laws and regulations on which the
Commission will base its comparability determination. The Commission
relies on the accuracy and completeness of such review and any
corrections received in making its comparability determinations. A
comparability determination based on an inaccurate description of
foreign laws and regulations may not be valid.
\31\ 78 FR 45345.
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The Guidance provided a detailed discussion of the Commission's
policy regarding the availability of substituted
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compliance\32\ for the Internal Business Conduct Requirements.\33\
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\32\ See 78 FR 45348-50. The Commission notes that registrants
and other market participants are responsible for determining
whether substituted compliance is available pursuant to the Guidance
based on the comparability determination contained herein (including
any conditions or exceptions), and its particular status and
circumstances.
\33\ This notice does not address Sec. 23.608 (Restrictions on
counterparty clearing relationships). The Commission declines to
take up the request for a comparability determination with respect
to this regulation due to the Commission's view that there are not
laws or regulations applicable in Japan to compare with the
prohibitions and requirements of Sec. 23.608. The Commission may
provide a comparability determination with respect to this
regulation at a later date in consequence of further developments in
the law and regulations applicable in Japan.
This notice also does not address capital adequacy because the
Commission has not yet finalized rules for SDs and MSPs in this
area, nor SDR Reporting. The Commission may provide a comparability
determination with respect to these requirements at a later date or
in a separate notice.
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V. Supervisory Arrangement
In the Guidance, the Commission stated that, in connection with a
determination that substituted compliance is appropriate, it would
expect to enter into an appropriate memorandum of understanding
(``MOU'') or similar arrangement\34\ with the relevant foreign
regulator(s). Although existing arrangements would indicate a foreign
regulator's ability to cooperate and share information, ``going
forward, the Commission and relevant foreign supervisor(s) would need
to establish supervisory MOUs or other arrangements that provide for
information sharing and cooperation in the context of supervising [SDs]
and MSPs.''\35\
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\34\ An MOU is one type of arrangement between or among
regulators. Supervisory arrangements could include, as appropriate,
cooperative arrangements that are memorialized and executed as
addenda to existing MOUs or, for example, as independent bilateral
arrangements, statements of intent, declarations, or letters.
\35\ 78 FR 45344.
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The Commission is in the process of developing its registration and
supervision regime for provisionally-registered SDs and MSPs. This new
initiative includes setting forth supervisory arrangements with
authorities that have joint jurisdiction over SDs and MSPs that are
registered with the Commission and subject to U.S. law. Given the
developing nature of the Commission's regime and the fact that the
Commission has not negotiated prior supervisory arrangements with
certain authorities, the negotiation of supervisory arrangements
presents a unique opportunity to develop close working relationships
between and among authorities, as well as highlight any potential
issues related to cooperation and information sharing.
Accordingly, the Commission is negotiating such a supervisory
arrangement with each applicable foreign regulator of an SD or MSP. The
Commission expects that the arrangement will establish expectations for
ongoing cooperation, address direct access to information,\36\ provide
for notification upon the occurrence of specified events, memorialize
understandings related to on-site visits,\37\ and include protections
related to the use and confidentiality of non-public information shared
pursuant to the arrangement.
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\36\ Section 4s(j)(3) and (4) of the CEA and Commission
regulation 23.606 require a registered SD or MSP to make all records
required to be maintained in accordance with Commission regulation
1.31 available promptly upon request to, among others,
representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR
23.203. In the Guidance, the Commission states that it ``reserves
this right to access records held by registered [SDs] and MSPs,
including those that are non-U.S. persons who may comply with the
Dodd-Frank recordkeeping requirement through substituted
compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461
(affirming the Commission's authority under the CEA and its
regulations to access books and records held by registered SDs and
MSPs as ``a fundamental regulatory tool necessary to properly
monitor and examine each registrant's compliance with the CEA and
the regulations adopted pursuant thereto'').
\37\ The Commission retains its examination authority, both
during the application process as well as upon and after
registration of an SD or MSP. See 78 FR 45342 (stating Commission
policy that ``eligible entities may comply with a substituted
compliance regime under certain circumstances, subject, however, to
the Commission's retention of its examination authority'') and 45344
n. 471 (stating that the ``Commission may, as it deems appropriate
and necessary, conduct an on-site examination of the applicant'').
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These arrangements will establish a roadmap for how authorities
will consult, cooperate, and share information. As with any such
arrangement, however, nothing in these arrangements will supersede
domestic laws or resolve potential conflicts of law, such as the
application of domestic secrecy or blocking laws to regulated entities.
VI. Comparability Determination and Analysis
The following section describes the requirements imposed by
specific sections of the CEA and the Commission's regulations for the
Internal Business Conduct Requirements that are the subject of this
comparability determination, and the Commission's regulatory objectives
with respect to such requirements. Immediately following a description
of the requirement(s) and regulatory objective(s) of the specific
Internal Business Conduct Requirements that the applicants submitted
for a comparability determination, the Commission provides a
description of the foreign jurisdiction's comparable laws, regulations,
or rules and whether such laws, regulations, or rules meet the
applicable regulatory objective.
The Commission's determinations in this regard and the discussion
in this section are intended to inform the public of the Commission's
views regarding whether the foreign jurisdiction's laws, regulations,
or rules may be comparable and comprehensive as those requirements in
the Dodd-Frank Act (and Commission regulations promulgated thereunder)
and therefore, may form the basis of substituted compliance. In turn,
the public (in the foreign jurisdiction, in the United States, and
elsewhere) retains its ability to present facts and circumstances that
would inform the determinations set forth in this notice.
As was stated in the Guidance, the Commission recognizes the
complex and dynamic nature of the global swap market and the need to
take an adaptable approach to cross-border issues, particularly as it
continues to work closely with foreign regulators to address potential
conflicts with respect to each country's respective regulatory regime.
In this regard, the Commission may review, modify, or expand the
determinations herein in light of comments received and future
developments.
A. Chief Compliance Officer (Sec. 3.3).
Commission Requirement: Implementing section 4s(k) of the CEA,
Commission regulation 3.3 generally sets forth the following
requirements for SDs and MSPs:
An SD or MSP must designate an individual as Chief
Compliance Officer (``CCO'');
The CCO must have the responsibility and authority to
develop the regulatory compliance policies and procedures of the SD or
MSP;
The CCO must report to the board of directors or the
senior officer of the SD or MSP;
Only the board of directors or a senior officer may remove
the CCO;
The CCO and the board of directors must meet at least once
per year;
The CCO must have the background and skills appropriate
for the responsibilities of the position;
The CCO must not be subject to disqualification from
registration under sections 8a(2) or (3) of the CEA;
Each SD and MSP must include a designation of a CCO in its
registration application;
[[Page 78915]]
The CCO must administer the regulatory compliance policies
of the SD or MSP;
The CCO must take reasonable steps to ensure compliance
with the CEA and Commission regulations, and resolve conflicts of
interest;
The CCO must establish procedures for detecting and
remediating non-compliance issues;
The CCO must annually prepare and sign an ``annual
compliance report'' containing: (i) A description of policies and
procedures reasonably designed to ensure compliance; (ii) an assessment
of the effectiveness of such policies and procedures; (iii) a
description of material non-compliance issues and the action taken;
(iv) recommendations of improvements in compliance policies; and (v) a
certification by the CCO or chief executive officer that, to the best
of such officer's knowledge and belief, the annual report is accurate
and complete under penalty of law; and
The annual compliance report must be furnished to the CFTC
within 90 days after the end of the fiscal year of the SD or MSP,
simultaneously with its annual financial condition report.
Regulatory Objective: The Commission believes that compliance by
SDs and MSPs with the CEA and the Commission's rules greatly
contributes to the protection of customers, orderly and fair markets,
and the stability and integrity of the market intermediaries registered
with the Commission. The Commission expects SDs and MSPs to strictly
comply with the CEA and the Commission's rules and to devote sufficient
resources to ensuring such compliance. Thus, through its CCO rule, the
Commission seeks to ensure firms have designated a qualified individual
as CCO that reports directly to the board of directors or the senior
officer of the firm and that has the independence, responsibility, and
authority to develop and administer compliance policies and procedures
reasonably designed to ensure compliance with the CEA and Commission
regulations, resolve conflicts of interest, remediate noncompliance
issues, and report annually to the Commission and the board or senior
officer on compliance of the firm.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as section 4s(k) of the CEA and
Commission regulation 3.3.
The Banking Act, FIEA, Order for Enforcement, Cabinet Office
Ordinance, Supervisory Guidelines and Inspection Manuals for banks and
FIBOs, collectively, require each bank and FIBO to:
Designate an individual to serve as a CCO in its
registration application as a bank/FIBO;
Provide the CCO with the responsibility and authority to
develop the regulatory compliance policies and procedures of the bank/
FIBO;
Have the CCO report to the board of directors of the bank/
FIBO;
Ensure the CCO has the background and skills appropriate
for the position;
Ensure the CCO is not disqualified from registration; \38\
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\38\ See Article 29-4 of FIEA and Article 15-4 of the Order for
Enforcement of FIEA, Article 33-5(1)(iii) of FIEA; Article 33-
3(1)(vii) of FIEA, Article 47(1)(i) of the FIB Ordinance, Article
33-3(2)(iv) of FIEA, Article 47(1)(i)(ii) of the FIB Ordinance, and
Article 4(2)(ii) of Banking Act. Pursuant to Article 33-5(1)(iii) of
FIEA and its relevant provisions, RFIs are required to have a
personnel structure sufficient to conduct RFI business in an
appropriate manner. Accordingly, if the CCO is subject to
disqualification, registration for the RFI would be refused.
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Have the CCO administer the regulatory compliance policies
of the bank/FIBO;
Have the CCO take reasonable steps to ensure compliance
and resolve conflicts of interest for the bank/FIBO;
Have the CCO detect and remediate non-compliance issues
for the bank/FIBO;
Report regulatory compliance status to the board of
directors as necessary and appropriate on behalf of the bank/FIBO; and
Submit an annual business report to JFSA which contains
compliance facts, preventative and corrective actions taken, and other
issues regarding the firm's compliance framework.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
3.3 by seeking to ensure firms have designated a qualified individual
as the compliance officer that reports directly to a sufficiently
senior function of the firm and that has the independence,
responsibility, and authority to develop and administer compliance
policies and procedures reasonably designed to ensure compliance with
the CEA and Commission regulations, resolve conflicts of interest,
remediate noncompliance issues, and report annually on compliance of
the firm.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the CCO requirements of the
Japanese standards specified above are comparable to and as
comprehensive as Sec. 3.3, with the exception of Sec. 3.3(f)
concerning certifying and furnishing an annual compliance report to the
Commission.
Notwithstanding that the Commission has not determined that the
requirements of Japan's laws and regulations are comparable to and as
comprehensive as Sec. 3.3(f), any SD or MSP to which both Sec. 3.3
and the Japanese standards specified above are applicable would
generally be deemed to be in compliance with Sec. 3.3(f) if that SD or
MSP complies with the Japanese standards specified above, subject to
certifying and furnishing the Commission with the annual report
required under the Japanese standards specified above in accordance
with Sec. 3.3(f). The Commission notes that it generally expects
registrants to submit required reports to the Commission in the English
language.
B. Risk Management Duties (Sec. Sec. 23.600--23.609)
Section 4s(j) of the CEA requires each SD and MSP to establish
internal policies and procedures designed to, among other things,
address risk management, monitor compliance with position limits,
prevent conflicts of interest, and promote diligent supervision, as
well as maintain business continuity and disaster recovery
programs.\39\ The Commission adopted regulations 23.600, 23.601,
23.602, 23.603, 23.605, and 23.606 to implement the statute.\40\ The
Commission also adopted regulation 23.609, which requires certain risk
management procedures for SDs or MSPs that are clearing members of a
derivatives clearing organization (``DCO'').\41\ Collectively, these
requirements help to establish a robust and comprehensive internal risk
management program for SDs and MSPs with respect to their swaps
activities,\42\
[[Page 78916]]
which is critical to effective systemic risk management for the overall
swaps market. In making its comparability determination with regard to
these risk management duties, the Commission will consider each
regulation individually.\43\
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\39\ 7 U.S.C. Sec. 6s(j).
\40\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR
20128 (April 3, 2012) (relating to risk management program,
monitoring of position limits, business continuity and disaster
recovery, conflicts of interest policies and procedures, and general
information availability, respectively).
\41\ See Customer Documentation Rule, 77 FR 21278. Also, SDs
must comply with Commission regulation 23.608, which prohibits SDs
providing clearing services to customers from entering into
agreements that would: (i) Disclose the identity of a customer's
original executing counterparty; (ii) limit the number of
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution
of a trade on terms that have a reasonable relationship to the best
terms available; or (v) prevent compliance with specified time
frames for acceptance of trades into clearing.
\42\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR Part 23 are limited in scope
to the swaps activities of SDs and MSPs.
\43\ As stated above, this notice does not address Sec. 23.608
(Restrictions on counterparty clearing relationships). The
Commission declines to take up the request for a comparability
determination with respect to this regulation due to the
Commission's view that there are not laws or regulations applicable
in Japan to compare with the prohibitions and requirements of Sec.
23.608. The Commission may provide a comparability determination
with respect to this regulation at a later date in consequence of
further developments in the law and regulations applicable in Japan.
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1. Risk Management Program for SDs and MSPs (Sec. 23.600)
Commission Requirement: Implementing section 4s(j)(2) of the CEA,
Commission regulation 23.600 generally requires that:
Each SD or MSP must establish and enforce a risk
management program consisting of a system of written risk management
policies and procedures designed to monitor and manage the risks
associated with the swap activities of the firm, including without
limitation, market, credit, liquidity, foreign currency, legal,
operational, and settlement risks, and furnish a copy of such policies
and procedures to the CFTC upon application for registration and upon
request;
The SD or MSP must establish a risk management unit
independent from the business trading unit;
The risk management policies and procedures of the SD or
MSP must be approved by the firm's governing body;
Risk tolerance limits and exceptions therefrom must be
reviewed and approved quarterly by senior management and annually by
the governing body;
The risk management program must have a system for
detecting breaches of risk tolerance limits and alerting supervisors
and senior management, as appropriate;
The risk management program must account for risks posed
by affiliates and be integrated at the consolidated entity level;
The risk management unit must provide senior management
and the governing body with quarterly risk exposure reports and upon
detection of any material change in the risk exposure of the SD or MSP;
Risk exposure reports must be furnished to the CFTC within
five business days following provision to senior management;
The risk management program must have a new product policy
for assessing the risks of new products prior to engaging in such
transactions;
The risk management program must have policies and
procedures providing for trading limits, monitoring of trading,
processing of trades, and separation of personnel in the trading unit
from personnel in the risk management unit; and
The risk management program must be reviewed and tested at
least annually and upon any material change in the business of the SD
or MSP.
Regulatory Objective: Through the required system of risk
management, the Commission seeks to ensure that firms are adequately
managing the risks of their swaps activities to prevent failure of the
SD or MSP, which could result in losses to counterparties doing
business with the SD or MSP, and systemic risk more generally. To this
end, the Commission believes the risk management program of an SD or
MSP must contain at least the following critical elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as section 4s(j)(2) of the CEA
and Commission regulation 23.600.
III-2-3-1-3(1) and III-3-7-1-2(1)(ii) of the Supervisory Guidelines
and Inspection Manuals for banks and III-1(1)(ii) of the Supervisory
Guideline for FIBOs generally require the board of directors of a bank/
FIBO to establish a comprehensive risk management program aligned with
the bank's/FIBO's strategic target. The risk management program
required by the Supervisory Guidelines and Inspectional Manuals must be
designed to monitor and manage risk, including without limitation,
market (including foreign currency), credit, liquidity, legal,
operational, and settlement risks.\44\
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\44\ See, e.g. Supervisory Guideline: Checklist for
Comprehensive Risk Management, Checklist for Business Management,
Checklist for Legal Compliance, Checklist for Market Risk
Management, Checklist for Credit Risk Management, Checklist for
Liquidity Risk Management, and Checklist for Operational Risk
Management.
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The review of a bank's/FIBO's overall risk management program must
take into account how frequently the risk management division reports
to the board of directors and whether reports are also filed on an as-
needed basis. Pursuant to Article 19 of the Banking Act and Article 46-
3 of the FIEA, a bank/FIBO must submit to the JFSA a business report
referring to the risk management of derivative transactions annually
within three months after the end of year period. In addition, pursuant
to Article 24 of the Banking Act and Article 56-2 of the FIEA, JFSA
requires a bank/FIBO to report to JFSA on a quarterly basis the data of
derivative transactions such as the volume and profit and loss amounts
within fifty days after the end of every quarter period.
Pursuant to the above Supervisory Guidelines and Inspection
Manuals, a bank/FIBO must arrange for the approval of new products in a
manner befitting the scale and nature of its business. III-1(1)(iv) of
the Supervisory Guidelines for FIBOs and III-2-3-1-3(5)(6) of the
Supervisory Guidelines for banks require JSFA to evaluate whether a
bank's/FIBO's risk management program established a sufficient internal
audit system. As part of this oversight, a bank/FIBO must receive an
external audit by corporate auditors at least once a year.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
23.600 by requiring a system of risk management that seeks to ensure
that firms are adequately managing the risks of their swaps activities
to prevent failure of the SD or MSP, which could result in losses to
counterparties doing business with the SD or MSP, and systemic risk
more generally. Specifically, the Commission finds that the Japanese
standards specified above comprehensively require SDs and MSPs to
establish risk management programs containing the following critical
elements:
Identification of risk categories;
Establishment of risk tolerance limits for each category
of risk and approval of such limits by senior management and the
governing body;
[[Page 78917]]
An independent risk management unit to administer a risk
management program; and
Periodic oversight of risk exposures by senior management
and the governing body.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the risk management program
requirements of Japan's laws and regulations, as specified above, are
comparable to and as comprehensive as Sec. 23.600, with the exception
of Sec. 23.600(c)(2) concerning the requirement that each SD and MSP
produce a quarterly risk exposure report and provide such report to its
senior management, governing body, and the Commission.
Notwithstanding that the Commission has not determined that the
requirements of Japan's laws and regulations are comparable to and as
comprehensive as Sec. 23.600(c)(2), any SD or MSP to which both Sec.
23.600 and the Japanese standards specified above are applicable would
generally be deemed to be in compliance with Sec. 23.600(c)(2) if that
SD or MSP complies with the Japanese standards specified above, subject
to compliance with the requirement that it produce quarterly risk
exposure reports and provide such reports to its senior management,
governing body, and the Commission in accordance with Sec.
23.600(c)(2). The Commission notes that it generally expects reports
furnished to the Commission by registrants to be in the English
language.
2. Monitoring of Position Limits (Sec. 23.601)
Commission Requirement: Implementing section 4s(j)(1) of the CEA,
Commission regulation 23.601 requires each SD or MSP to establish and
enforce written policies and procedures that are reasonably designed to
monitor for, and prevent violations of, applicable position limits
established by the Commission, a designated contract market (``DCM''),
or a swap execution facility (``SEF'').\45\ The policies and procedures
must include an early warning system and provide for escalation of
violations to senior management (including the firm's governing body).
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\45\ The setting of position limits by the Commission, a DCM, or
a SEF is subject to requirements under the CEA and Commission
regulations other than Sec. 23.601. The setting of position limits
and compliance with such limits is not subject to the Commission's
substituted compliance regime.
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Regulatory Objective: Generally, position limits are implemented to
ensure market integrity, fairness, orderliness, and accurate pricing in
the commodity markets. Commission regulation 23.601 thus seeks to
ensure that SDs and MSPs have established the necessary policies and
procedures to monitor the trading of the firm to prevent violations of
applicable position limits established by the Commission, a DCM, or a
SEF. As part of its Risk Management Program, Sec. 23.601 is intended
to ensure that established position limits are not breached by the SD
or MSP.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as section 4s(j)(1) of the CEA
and Commission regulation 23.601.
IV-2-3 of the Supervisory Guidelines for FIBOs and III-2-3-3-
2(2)(vii) and (viii) of the Supervisory Guideline for banks of the
Inspection Manuals generally require a bank/FIBO to establish internal
position limits, risk limits, and loss limits for all financial
products, including derivatives. The policies established by the bank/
FIBO must provide a system to provide ``alarm points'' to the board of
directors. Moreover, in accordance with Article 29-2 of the Business
Rules of Japan Securities Clearing Corporation (``JSCC'') with respect
to listed products, JSCC can take an appropriate action against
clearing participants (RFIs or FIBOs) if JSCC finds their position is
excessive compared with their net assets. Therefore, clearing
participants have to monitor their positions in relation to their net
assets. CCP's Business Rules, which are subject to JFSA's approval, are
legally binding requirements.
The applicants represent that the position limits set internally by
banks and FIBOs may not exceed position limits set by applicable law,
including position limits set by the Commission, SEFs, or DCMs.\46\
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\46\ See III-3-10 of the Supervisory Guideline for banks and IV-
5-2(i) of the Supervisory Guideline for FIBOs for rules regarding
management of overseas business by banks and FIBOs.
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Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
23.601 by requiring SDs and MSPs to establish necessary policies and
procedures to monitor the trading of the firm to prevent violations of
applicable position limits established by applicable laws and
regulations, including those of the Commission, a DCM, or a SEF.
Specifically, the Commission finds that the Japanese standards
specified above, while not specific to the issue of position limit
compliance, nevertheless comprehensively require SDs and MSPs to
monitor for regulatory compliance generally, which includes monitoring
for compliance with position limits set pursuant to applicable law and
the responsibility of senior management (including the board of
directors) for such compliance.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the compliance monitoring
requirements of the Japanese standards, as specified above, are
comparable to and as comprehensive as Sec. 23.601. For the avoidance
of doubt, the Commission notes that this determination may not be
relied on to relieve an SD or MSP from its obligation to strictly
comply with any applicable position limit established by the
Commission, a DCM, or a SEF.
3. Diligent Supervision (Sec. 23.602)
Commission Requirement: Commission regulation 23.602 implements
section 4s(h)(1)(B) of the CEA and requires each SD and MSP to
establish a system to diligently supervise all activities relating to
its business performed by its partners, members, officers, employees,
and agents. The system must be reasonably designed to achieve
compliance with the CEA and CFTC regulations. Commission regulation
23.602 requires that the supervisory system must specifically designate
qualified persons with authority to carry out the supervisory
responsibilities of the SD or MSP for all activities relating to its
business as an SD or MSP.
Regulatory Objective: The Commission's diligent supervision rule
seeks to ensure that SDs and MSPs strictly comply with the CEA and the
Commission's rules. To this end, through Sec. 23.602, the Commission
seeks to ensure that each SD and MSP not only establishes the necessary
policies and procedures that would lead to compliance with the CEA and
Commission regulations, but also establishes an effective system of
internal oversight and enforcement of such policies and procedures to
ensure that such policies and procedures are diligently followed.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as
[[Page 78918]]
section 4s(h)(1)(B) of the CEA and Commission regulation 23.602.
III-1-2-1-(2)(xi) and III-1-2-1-(2)(xiii) of the Supervisory
Guideline for banks, the Checklist for Business Management (Governance)
of the Bank Inspection Manual, III-1(1)(ii)C and IV-1-2-(1)(i) of the
Supervisory Guideline for FIBOs, and II-1-1-3(3) and II-2-1 of the FIBO
Inspection Manual generally require a bank/FIBO to ensure appropriate
officers and employees are in place in order to properly conduct
business, and to establish legal compliance and internal control
systems.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
23.602 because such standards seek to ensure that SDs and MSPs strictly
comply with applicable law, which would include the CEA and the
Commission's regulations.\47\
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\47\ See III-3-10 of the Supervisory Guideline for banks and IV-
5-2(i) of the Supervisory Guideline for FIBOs for rules regarding
management of overseas business by banks and FIBOs.
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Through the Supervisory Guidelines and Inspection Manuals, Japan's
laws and regulations seek to ensure that each SD and MSP not only
establishes the necessary policies and procedures that would lead to
compliance with applicable law, which would include the CEA and
Commission regulations, but also establishes an effective system of
internal oversight and enforcement of such policies and procedures to
ensure that such policies and procedures are diligently followed.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the internal supervision
requirements set forth in the Japanese standards, as specified above,
are comparable to and as comprehensive as Sec. 23.602.
4. Business Continuity and Disaster Recovery (Sec. 23.603)
Commission Requirement: To ensure the proper functioning of the
swaps markets and the prevention of systemic risk more generally,
Commission regulation 23.603 requires each SD and MSP, as part of its
risk management program, to establish a business continuity and
disaster recovery plan that includes procedures for, and the
maintenance of, back-up facilities, systems, infrastructure, personnel,
and other resources to achieve the timely recovery of data and
documentation and to resume operations generally within the next
business day after the disruption.
Regulatory Objective: Commission regulation 23.603 is intended to
ensure that any market disruption affecting SDs and MSPs, whether
caused by natural disaster or otherwise, is minimized in length and
severity. To that end, this requirement seeks to ensure that entities
adequately plan for disruptions and devote sufficient resources capable
of carrying out an appropriate plan within one business day, if
necessary.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as Commission regulation 23.603.
IV-3-1-6 of the Supervisory Guideline for FIBOs and sections III-6-
1 and III-6-2(2)(i)(iii)-(v) of the Supervisory Guideline for banks
require a bank/FIBO to establish a crisis management manual and a
business continuity and disaster recovery plan that include procedures
for, and the maintenance of, back-up facilities, systems,
infrastructure, personnel, and other resources to achieve the timely
recovery of data and documentation and to resume operations.
Pursuant to III-8-2-(2)-(v) of the Supervisory Guideline for banks,
JFSA requires banks to resume operation within the day of the event,
especially for important settlement functions. Pursuant to IV-3-1-6(2)
of the Supervisory Guideline for FIBOs, JFSA checks whether a FIBO's
business continuity plan ensures quick recovery from damage caused by
acts of terrorism, large-scale disasters, etc., as well as continuance
of the minimum necessary business operations and services for the
maintenance of the functions of the financial system.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
23.603 because such standards seek to ensure that any market disruption
affecting SDs and MSPs, whether caused by natural disaster or
otherwise, is minimized in length and severity. To that end, the
Commission finds that the Japanese standards specified above seek to
ensure that entities adequately plan for disruptions and devote
sufficient resources capable of carrying out an appropriate plan in a
timely manner.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the business continuity and
disaster recovery requirements of the Japanese standards, as specified
above, are comparable to and as comprehensive as Sec. 23.603.
5. Conflicts of Interest (Sec. 23.605)
Commission Requirement: Section 4s(j)(5) of the CEA and Commission
regulation 23.605(c) generally require each SD or MSP to establish
structural and institutional safeguards to ensure that the activities
of any person within the firm relating to research or analysis of the
price or market for any commodity or swap are separated by appropriate
informational partitions within the firm from the review, pressure, or
oversight of persons whose involvement in pricing, trading, or clearing
activities might potentially bias their judgment or supervision.
In addition, section 4s(j)(5) of the CEA and Commission regulation
23.605(d)(1) generally prohibits an SD or MSP from directly or
indirectly interfering with or attempting to influence the decision of
any clearing unit of any affiliated clearing member of a derivatives
clearing organization (DCO) to provide clearing services and activities
to a particular customer, including:
Whether to offer clearing services to a particular
customer;
Whether to accept a particular customer for clearing
derivatives;
Whether to submit a customer's transaction to a particular
DCO;
Whether to set or adjust risk tolerance levels for a
particular customer; or
Whether to set a customer's fees based on criteria other
than those generally available and applicable to other customers.
Commission regulation 23.605(d)(2) generally requires each SD or
MSP to create and maintain an appropriate informational partition
between business trading units of the SD or MSP and clearing units of
any affiliated clearing member of a DCO to reasonably ensure compliance
with the Act and the prohibitions set forth in Sec. 23.605(d)(1)
outlined above.
The Commission observes that Sec. 23.605(d) works in tandem with
Commission regulation 1.71, which requires FCMs that are clearing
members of a DCO and affiliated with an SD or MSP to create and
maintain an appropriate informational partition between business
trading units of the SD or MSP and clearing units of the FCM to
reasonably ensure compliance with the Act and the prohibitions set
forth in Sec. 1.71(d)(1), which are the same as the prohibitions set
forth in Sec. 23.605(d)(1) outlined above.
Finally, Sec. 23.605(e) requires that each SD or MSP have policies
and procedures that mandate the disclosure
[[Page 78919]]
to counterparties of material incentives or conflicts of interest
regarding the decision of a counterparty to execute a derivative on a
swap execution facility or designated contract market (DCM) or to clear
a derivative through a DCO.
Regulatory Objective: Commission regulation 23.605(c) seeks to
ensure that research provided to the general public by an SD or MSP is
unbiased and free from the influence of the interests of an SD or MSP
arising from the SD's or MSP's trading business.
In addition, the Sec. 23.605(d) (working in tandem with Sec.
1.71) seeks to ensure open access to the clearing of swaps by requiring
that access to and the provision of clearing services provided by an
affiliate of an SD or MSP are not influenced by the interests of an
SD's or MSP's trading business.
Finally, Sec. 23.605(e) seeks to ensure equal access to trading
venues and clearinghouses, as well as orderly and fair markets, by
requiring that each SD and MSP disclose to counterparties any material
incentives or conflicts of interest regarding the decision of a
counterparty to execute a derivative on a SEF or DCM, or to clear a
derivative through a DCO.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as Commission regulation 23.605.
Regulations Concerning the Handling of Analysts Reports have been
developed by the JSDA to require JSDA members to appropriately manage
the content of any unpublished analyst report that is considered to
have a material impact on investors (to include the presentation of any
conflicts) and to establish an appropriate compensation system to
ensure the independence of the opinions of analysts.
More generally, FIEA and the Financial Instruments Business
Ordinance require a FIBO/RFI to conduct business ``in good faith and
fairly to customers.'' Specifically, I.2.(3)(iv) of the Checklist for
Legal Compliance of the Bank Inspection Manual and II-1-2-1(4)(iii) of
the FIBO Inspection Manual require each bank/FIBO to establish
firewalls and take other measures to block the flow of information when
necessary. Article 70-3(1)(ii)(d) of the Financial Instruments Business
Ordinance and IV-1-3(3)(i)C of the Supervisory Guidelines for FIBOs
require a FIBO/RFI to develop a control environment wherein it can
choose or combine appropriate method(s), for example, notifying the
customer of a conflict risk to establish a system for protection of
customers.
The JFSA has informed the Commission that, in the process of its
oversight and enforcement of the foregoing Japanese standards for FIBOs
and RFIs, any SD or MSP would be subject to such standards and required
to resolve or mitigate conflicts of interests in the provision of
clearing services by a clearing member of a DCO that is an affiliate of
the SD or MSP, or the decision of a counterparty to execute a
derivative on a SEF or DCM, or clear a derivative through a DCO,
through appropriate information firewalls and disclosures.
Commission Determination: The Commission finds that the Japanese
standards specified above with respect to conflicts of interest that
may arise in producing or distributing research are generally identical
in intent to Sec. 23.605(c) because such standards seek to ensure that
research provided to the general public by an SD is unbiased and free
from the influence of the interests of an SD arising from the SD's
trading business.
With respect to conflicts of interest that may arise in the
provision of clearing services by an affiliate of an SD or MSP, the
Commission further finds that although the general conflicts of
interest prevention requirements under the Japanese standards specified
above do not require with specificity that access to and the provision
of clearing services provided by an affiliate of an SD or MSP not be
improperly influenced by the interests of an SD's or MSP's trading
business, such general requirements would require prevention and
remediation of such improper influence when recognized or discovered.
Thus such standards would ensure open access to clearing.
Finally, although not as specific as the requirements of Sec.
23.605(e) (Undue influence on counterparties), the Commission finds
that the general disclosure requirements of the Japanese standards
specified above would ensure equal access to trading venues and
clearinghouses by requiring that each SD and MSP disclose to
counterparties any material incentives or conflicts of interest
regarding the decision of a counterparty to execute a derivative on a
SEF or DCM, or to clear a derivative through a DCO.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the requirements found in Japan's
laws and regulations specified above in relation to conflicts of
interest are comparable to and as comprehensive as Sec. 23.605.
6. Availability of Information for Disclosure and Inspection (Sec.
23.606)
Commission Requirement: Commission regulation 23.606 implements
sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to
disclose to the Commission, and an SD's or MSP's U.S. prudential
regulator (if any) comprehensive information about its swap activities,
and to establish and maintain reliable internal data capture,
processing, storage, and other operational systems sufficient to
capture, process, record, store, and produce all information necessary
to satisfy its duties under the CEA and Commission regulations. Such
systems must be designed to provide such information to the Commission
and an SD's or MSP's U.S. prudential regulator within the time frames
set forth in the CEA and Commission regulations and upon request.
Regulatory Objective: Commission regulation 23.606 seeks to ensure
that each SD and MSP captures and maintains comprehensive information
about their swap activities, and is able to retrieve and disclose such
information to the Commission and its U.S. prudential regulator, if
any, as necessary for compliance with the CEA and the Commission's
regulations and for purposes of Commission oversight, as well as
oversight by the SD's or MSP's U.S. prudential regulator, if any.
The Commission observes that it would be impossible to meet the
regulatory objective of Sec. 23.606 unless the required information is
available to the Commission and any U.S. prudential regulator under the
foreign legal regime. Thus, a comparability determination with respect
to the information access provisions of Sec. 23.606 would be premised
on whether the relevant information would be available to the
Commission and any U.S. prudential regulator of the SD or MSP, not on
whether an SD or MSP must disclose comprehensive information to its
regulator in its home jurisdiction.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as Commission regulation 23.606.
Under the JFSA annual supervisory policies for banks and FIBOs for
program year 2013, a bank/FIBO is required to enhance their management
information systems through various initiatives such as implementing
BCBS ''Principles for effective risk data
[[Page 78920]]
aggregation and risk reporting,'' which enable banks/FIBOs to meet the
information requests of relevant regulators.
III-3-3(6) of Supervisory Guideline for FIBOs states that each FIBO
must maintain electronic media storage systems that can accommodate
internal audits and be responsive to client referrals and questions.
Moreover, III.1.(6) of the Checklist for Market Risk Management of the
Bank Inspection Manual requires that records be readily available for
reconciliation with trade tickets, etc.
III-3-10-2(3) (iv) of Supervisory Guideline for banks specifically
requires banks to have the personnel and systems to respond in a timely
and appropriate manner to inspections and supervision provided by
overseas regulatory authorities. In view of maintaining direct dialog
and smooth communications with the relevant overseas regulatory
authorities, this provision ensures the establishment of a reporting
system which enables timely and appropriate reporting.
Similarly, IV-5-2(i) of Supervisory Guideline for FIBOs would
ensure the availability of information to a regulator promptly upon
request. Under this provision, the JFSA assesses whether a parent
company of a FIBO ensures group-wide compliance with the relevant laws,
regulations and rules of each country in which it does business by
establishing an appropriate control environment for legal compliance in
accordance with the size of its overseas bases and the characteristics
of its business operations.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
23.606 because such standards seek to ensure that each SD and MSP
captures and stores comprehensive information about their swap
activities, and are able to retrieve and disclose such information as
necessary for compliance with applicable law and for purposes of
regulatory oversight.
In addition, the Commission finds that the Japanese standards
specified above would ensure Commission access to the required books
and records of SDs and MSPs by requiring personnel and systems
necessary to respond in a timely and appropriate manner to inspections
and supervision provided by overseas regulatory authorities.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the requirements of the Japanese
standards with respect to the availability of information for
inspection and disclosure, as specified above, are comparable to, and
as comprehensive as, Sec. 23.606.
7. Clearing Member Risk Management (Sec. 23.609)
Commission Requirement: Commission regulation 23.609 generally
requires each SD or MSP that is a clearing member of a DCO to:
Establish risk-based limits based on position size, order
size, margin requirements, or similar factors;
Screen orders for compliance with the risk-based limits;
Monitor for adherence to the risk-based limits intra-day
and overnight;
Conduct stress tests under extreme but plausible
conditions of all positions at least once per week;
Evaluate its ability to meet initial margin requirements
at least once per week;
Evaluate its ability to meet variation margin requirements
in cash at least once per week;
Evaluate its ability to liquidate positions it clears in
an orderly manner, and estimate the cost of liquidation; and
Test all lines of credit at least once per year.
Regulatory Objective: Through Commission regulation Sec. 23.609,
the Commission seeks to ensure the financial integrity of the markets
and the clearing system, to avoid systemic risk, and to protect
customer funds. Effective risk management by SDs and MSPs that are
clearing members is essential to achieving these objectives. A failure
of risk management can cause a clearing member to become insolvent and
default to a DCO. Such default can disrupt the markets and the clearing
system and harm customers.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as Commission regulation 23.609.
III-2-3-2-1-2 (9) and (10)(i) of the Supervisory Guideline for
banks and III.(8) and (9)(i) of the Checklist for Credit Risk
Management of the Inspection Manual for banks generally require a bank
to properly manage the credit risks of major counterparties to
derivatives transactions, as well as the risks associated with the
clearing of derivatives transactions with a central counterparty. More
specifically, the Supervisory Guidelines for banks require a bank to
properly manage the risks associated with cleared derivative
transactions with central counterparties (``CCPs''), including the
inherent risk of transactions with a CCP, the risk associated with
material defects of regulations or supervisory schemes to which a CCP
is subject, and the risk of loss of the bank's contribution to the
default fund of a CCP.
IV-2-4 of the Supervisory Guideline for FIBOs and I-2-(4) of the
Inspection Manual for FIBOs require FIBOs to properly manage
counterparty risk. Counterparty risk is the risk of incurring losses
due to a failure by a counterparty to fulfill its contractual
obligations.
The JFSA evaluates a FIBO on whether it properly manages
counterparty risk by developing a comprehensive control environment for
risk management, properly recognizing and evaluating the risks,
conducting internal screening when a new product or a new business is
introduced and establishing a system of checks and balances based on
the clear allocation of roles and responsibilities.
The JFSA strives to identify and keep track of the status of a
FIBO's counterparty risk and its risk management through monthly
offsite monitoring reports and hearings based thereon and, when
necessary, requiring FIBOs to submit a report based on Article 56-2(1)
of the FIEA and urge it to make improvement efforts.
The foregoing requirements apply to bank and FIBO risk management
as clearing members.
In addition, if FIBOs/RFIs are clearing members of the JSCC, in
accordance with the business rules of the JSCC, they are required to
develop an appropriate structure for management of the risk of loss.
Finally, the JFSA has represented to the Commission that, in the
process of its oversight and enforcement of the foregoing Japanese
standards for banks, FIBOs, and RFIs, any SD or MSP subject to such
standards that is a clearing member of a DCO would be required to
comply with clearing member risk management requirements comparable to
Commission regulation 23.609.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to Sec.
23.609 because such standards seek to ensure the financial integrity of
the markets and the clearing system, to avoid systemic risk, and to
protect customer funds.
The Commission notes that the Japanese standards specified above
are not as specific as Sec. 23.609 with respect to ensuring that SDs
and MSPs that are clearing members of a DCO establish detailed
procedures and limits for clearing member risk management purposes.
Nevertheless, the Commission finds that the general requirements
[[Page 78921]]
under the Japanese standards, implemented in the context of clearing
member risk management and pursuant to the representations of the JFSA,
meet the Commission's regulatory objective specified above.
Based on the foregoing and the representations above, the
Commission hereby determines that the clearing member risk management
requirements of the Japanese standards specified above are comparable
to and as comprehensive as Sec. 23.609.
C. Swap Data Recordkeeping (Sec. Sec. 23.201 and 23.203)
Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the
CEA, and Commission regulation 23.201 generally require SDs and MSPs to
retain records of each transaction, each position held, general
business records (including records related to complaints and sales and
marketing materials), records related to governance, financial records,
records of data reported to SDRs, and records of real-time reporting
data along with a record of the date and time the SD or MSP made such
reports. Transaction records must be kept in a form and manner
identifiable and searchable by transaction and counterparty.
Commission regulation 23.203, requires SDs and MSPs to maintain
records of a swap transaction until the termination, maturity,
expiration, transfer, assignment, or novation date of the transaction,
and for a period of five years after such date. Records must be
``readily accessible'' for the first 2 years of the 5 year retention
period (consistent with Sec. 1.31).
The Commission notes that the comparability determination below
with respect to Sec. Sec. 23.201 and 23.203 encompasses both swap data
recordkeeping generally and swap data recordkeeping relating to
complaints and marketing and sales materials in accordance with Sec.
23.201(b)(3) and (4).\48\
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\48\ See the Guidance for a discussion of the availability of
substituted compliance with respect to swap data recordkeeping, 78
FR 45332-33.
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Regulatory Objective: Through the Commission's regulations
requiring SDs and MSPs to keep comprehensive records of their swap
transactions and related data, the Commission seeks to ensure the
effectiveness of the internal controls of SDs and MSPs, and
transparency in the swaps market for regulators and market
participants.
The Commission's regulations require SDs and MSPs to keep swap data
in a level of detail sufficient to enable regulatory authorities to
understand an SD's or MSP's swaps business and to assess its swaps
exposure.
By requiring comprehensive records of swap data, the Commission
seeks to ensure that SDs and MSPs employ effective risk management, and
strictly comply with Commission regulations. Further, such records
facilitate effective regulatory oversight.
The Commission observes that it would be impossible to meet the
regulatory objective of Sec. Sec. 23.201 and 23.203 unless the
required information is available to the Commission and any U.S.
prudential regulator under the foreign legal regime. Thus, a
comparability determination with respect to the information access
provisions of Sec. 23.203 would be premised on whether the relevant
information would be available to the Commission and any U.S.
prudential regulator of the SD or MSP, not on whether an SD or MSP must
disclose comprehensive information to its regulator in its home
jurisdiction.
Comparable Japanese Law and Regulations: The applicants have
represented to the Commission that the following provisions of law and
regulations applicable in Japan are in full force and effect in Japan,
and comparable to and as comprehensive as sections 4s(f)(1)(B) and
4s(g)(1) of the CEA and Sec. Sec. 23.201 and 23.203.
A FIBO/RFI is required by provisions set forth in the FIEA, the OTC
Derivatives Ordinance, and the Financial Instruments Business Ordinance
to retain all records related to swaps transactions.
Articles 371, 381, 394, 396, and 436 of the Company Act require
governance records including minutes of board of directors and audit
reports of auditors to be retained for ten years. Also, Article 432,
435, and 444 of the Company Act require financial records including
financial statements, business reports, and annexed detailed statements
to be retained for five years.
Articles 12-3 and 52-71 of the Banking Act and Articles 37-7 and
156-48 of the FIEA further require each bank/FIBO to prepare and
maintain records as part of its ``complaint processing procedures.''
Specific details regarding the storage of records detailing customer
complaints are set forth in III-3-5-2-2(5)(ii) of the Supervisory
Guideline for banks, II-2.1(3-4) and III-2.1(4) of the Checklist for
Customer Protection Management of the Bank Inspection Manual, III-2-5
of the Supervisory Guideline for FIBOs, and II-1-2-1(7) of the FIBO
Inspection Manual.
Article 37 of the FIEA and Article 72 of the Financial Instruments
Business Ordinance require maintenance of records regarding marketing
and sales materials.
III-3-3(6) of Supervisory Guideline for FIBOs states that each FIBO
must maintain electronic media storage systems that can accommodate
internal audits and be responsive to client referrals and questions.
Moreover, III.1.(6) of the Checklist for Market Risk Management of the
Bank Inspection Manual requires the records be readily available for
reconciliation with trade tickets, etc.
FIEA and the Financial Instruments Business Ordinance generally
require records to be kept for a minimum of five years, but certain
records must be maintained from seven to ten years. III-1(vi) of the
Checklist for Market Risk Management of the Bank Inspection Manual
assesses whether voice recordings are maintained for all traders on a
24-hour basis and retained ``under the control of an organization
segregated from the market and back-office divisions.''
III-3-10-2(3) (iv) of Supervisory Guideline for banks specifically
requires banks to have the personnel and systems to respond in a timely
and appropriate manner to inspections and supervision provided by
overseas regulatory authorities. In view of maintaining direct dialog
and smooth communications with the relevant overseas regulatory
authorities, this provision ensures the establishment of a reporting
system which enables timely and appropriate reporting.
Similarly, IV-5-2(i) of Supervisory Guideline for FIBOs would
ensure the availability of information to a regulator promptly upon
request. Under this provision, the JFSA assesses whether a parent
company of a FIBO ensures group-wide compliance with the relevant laws,
regulations and rules of each country in which it does business by
establishing an appropriate control environment for legal compliance in
accordance with the size of its overseas bases and the characteristics
of its business operations.
Commission Determination: The Commission finds that the Japanese
standards specified above are generally identical in intent to
Sec. Sec. 23.201 and 23.203 because such standards seek to ensure the
effectiveness of the internal controls of SDs and MSPs, and
transparency in the swaps market for regulators and market
participants.
In addition, the Commission finds that the Japanese standards
specified above require SDs and MSPs to keep swap data in a level of
detail sufficient to enable regulatory authorities to understand an
SD's or MSP's swaps
[[Page 78922]]
business and to assess its swaps exposure.
Further, the Commission finds that the Japanese standards specified
above, by requiring comprehensive records of swap data, seek to ensure
that SDs and MSPs employ effective risk management, seek to ensure that
SDs and MSPs strictly comply with applicable regulatory requirements
(including the CEA and Commission regulations), and that such records
facilitate effective regulatory oversight.
Finally, the Commission finds that the Japanese standards specified
above would ensure Commission access to the required books and records
of SDs and MSPs by requiring personnel and systems necessary to respond
in a timely and appropriate manner to inspections and supervision
provided by overseas regulatory authorities.
Based on the foregoing and the representations of the applicants,
the Commission hereby determines that the Japanese requirements with
respect to swap data recordkeeping, as specified above, are comparable
to, and as comprehensive as, Sec. Sec. 23.201 and 23.203.
Issued in Washington, DC on December 20, 2013, by the
Commission.
Melissa D. Jurgens,
Secretary of the Commission.
Appendices to Comparability Determination for Japan: Certain Entity-
Level Requirements
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Chilton and
Wetjen voted in the affirmative. Commissioner O'Malia voted in the
negative.
Appendix 2--Statement of Chairman Gary Gensler and Commissioners
Chilton and Wetjen
We support the Commission's approval of broad comparability
determinations that will be used for substituted compliance
purposes. For each of the six jurisdictions that has registered swap
dealers, we carefully reviewed each regulatory provision of the
foreign jurisdictions submitted to us and compared the provision's
intended outcome to the Commission's own regulatory objectives. The
resulting comparability determinations for entity-level requirements
permit non-U.S. swap dealers to comply with regulations in their
home jurisdiction as a substitute for compliance with the relevant
Commission regulations.
These determinations reflect the Commission's commitment to
coordinating our efforts to bring transparency to the swaps market
and reduce its risks to the public. The comparability findings for
the entity-level requirements are a testament to the comparability
of these regulatory systems as we work together in building a strong
international regulatory framework.
In addition, we are pleased that the Commission was able to find
comparability with respect to swap-specific transaction-level
requirements in the European Union and Japan.
The Commission attained this benchmark by working cooperatively
with authorities in Australia, Canada, the European Union, Hong
Kong, Japan, and Switzerland to reach mutual agreement. The
Commission looks forward to continuing to collaborate with both
foreign authorities and market participants to build on this
progress in the months and years ahead.
Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia
I respectfully dissent from the Commodity Futures Trading
Commission's (``Commission'') approval of the Notices of
Comparability Determinations for Certain Requirements under the laws
of Australia, Canada, the European Union, Hong Kong, Japan, and
Switzerland (collectively, ``Notices''). While I support the narrow
comparability determinations that the Commission has made, moving
forward, the Commission must collaborate with foreign regulators to
harmonize our respective regimes consistent with the G-20 reforms.
However, I cannot support the Notices because they: (1) Are
based on the legally unsound cross-border guidance (``Guidance'');
\1\ (2) are the result of a flawed substituted compliance process;
and (3) fail to provide a clear path moving forward. If the
Commission's objective for substituted compliance is to develop a
narrow rule-by-rule approach that leaves unanswered major regulatory
gaps between our regulatory framework and foreign jurisdictions,
then I believe that the Commission has successfully achieved its
goal today.
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\1\ Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013).
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Determinations Based on Legally Unsound Guidance
As I previously stated in my dissent, the Guidance fails to
articulate a valid statutory foundation for its overbroad scope and
inconsistently applies the statute to different activities.\2\
Section 2(i) of the Commodity Exchange Act (``CEA'') states that the
Commission does not have jurisdiction over foreign activities unless
``those activities have a direct and significant connection with
activities in, or effect on, commerce of the United States * * *''
\3\ However, the Commission never properly articulated how and when
this limiting standard on the Commission's extraterritorial reach is
met, which would trigger the application of Title VII of the Dodd-
Frank Act \4\ and any Commission regulations promulgated thereunder
to swap activities that are outside of the United States. Given this
statutorily unsound interpretation of the Commission's
extraterritorial authority, the Commission often applies CEA section
2(i) inconsistently and arbitrarily to foreign activities.
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\2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
\3\ CEA section 2(j); 7 U.S.C. 2(j).
\4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
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Accordingly, because the Commission is relying on the legally
deficient Guidance to make its substituted compliance
determinations, and for the reasons discussed below, I cannot
support the Notices. The Commission should have collaborated with
foreign regulators to agree on and implement a workable regime of
substituted compliance, and then should have made determinations
pursuant to that regime.
Flawed Substituted Compliance Process
Substituted compliance should not be a case of picking a set of
foreign rules identical to our rules, determining them to be
``comparable,'' but then making no determination regarding rules
that require extensive gap analysis to assess to what extent each
jurisdiction is, or is not, comparable based on overall outcomes of
the regulatory regimes. While I support the narrow comparability
determinations that the Commission has made, I am concerned that in
a rush to provide some relief, the Commission has made substituted
compliance determinations that only afford narrow relief and fail to
address major regulatory gaps between our domestic regulatory
framework and foreign jurisdictions. I will address a few examples
below.
First, earlier this year, the OTC Derivatives Regulators Group
(``ODRG'') agreed to a number of substantive understandings to
improve the cross-border implementation of over-the-counter
derivatives reforms.\5\ The ODRG specifically agreed that a
flexible, outcomes-based approach, based on a broad category-by-
category basis, should form the basis of comparability
determinations.\6\
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\5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.
\6\ http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings.
Understanding number 2 states that ``[a] flexible, outcomes-based
approach should form the basis of final assessments regarding
equivalence or substituted compliance.''
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However, instead of following this approach, the Commission has
made its comparability determinations on a rule-by-rule basis. For
example, in Japan's Comparability Determination for Transaction-
Level Requirements, the Commission has made a positive comparability
determination for some of the detailed requirements under the swap
trading relationship documentation provisions, but not for other
requirements.\7\ This detailed approach clearly contravenes the
ODRG's understanding.
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\7\ The Commission made a positive comparability determination
for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3),
(b)(4), (c), and (d), but not for Commission regulations
23.504(b)(5) and (b)(6).
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Second, in several areas, the Commission has declined to
consider a request for a comparability determination, and has also
failed to provide an analysis regarding the extent to which the
other jurisdiction is, or
[[Page 78923]]
is not, comparable. For example, the Commission has declined to
address or provide any clarity regarding the European Union's
regulatory data reporting determination, even though the European
Union's reporting regime is set to begin on February 12, 2014.
Although the Commission has provided some limited relief with
respect to regulatory data reporting, the lack of clarity creates
unnecessary uncertainty, especially when the European Union's
reporting regime is set to begin in less than two months.
Similarly, Japan receives no consideration for its mandatory
clearing requirement, even though the Commission considers Japan's
legal framework to be comparable to the U.S. framework. While the
Commission has declined to provide even a partial comparability
determination, at least in this instance the Commission has provided
a reason: the differences in the scope of entities and products
subject to the clearing requirement.\8\ Such treatment creates
uncertainty and is contrary to increased global harmonization
efforts.
---------------------------------------------------------------------------
\8\ Yen-denominated interest rate swaps are subject to the
mandatory clearing requirement in both the U.S. and Japan.
---------------------------------------------------------------------------
Third, in the Commission's rush to meet the artificial deadline
of December 21, 2013, as established in the Exemptive Order
Regarding Compliance with Certain Swap Regulations (``Exemptive
Order''),\9\ the Commission failed to complete an important piece of
the cross-border regime, namely, supervisory memoranda of
understanding (``MOUs'') between the Commission and fellow
regulators.
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\9\ Exemptive Order Regarding Compliance With Certain Swap
Regulations, 78 FR 43785 (Jul. 22, 2013).
---------------------------------------------------------------------------
I have previously stated that these MOUs, if done right, can be
a key part of the global harmonization effort because they provide
mutually agreed-upon solutions for differences in regulatory
regimes.\10\ Accordingly, I stated that the Commission should be
able to review MOUs alongside the respective comparability
determinations and vote on them at the same time. Without these
MOUs, our fellow regulators are left wondering whether and how any
differences, such as direct access to books and records, will be
resolved.
---------------------------------------------------------------------------
\10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
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Finally, as I have consistently maintained, the substituted
compliance process should allow other regulatory bodies to engage
with the full Commission.\11\ While I am pleased that the Notices
are being voted on by the Commission, the full Commission only
gained access to the comment letters from foreign regulators on the
Commission's comparability determination draft proposals a few days
ago. This is hardly a transparent process.
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\11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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Unclear Path Forward
Looking forward to next steps, the Commission must provide
answers to several outstanding questions regarding these
comparability determinations. In doing so, the Commission must
collaborate with foreign regulators to increase global
harmonization.
First, there is uncertainty surrounding the timing and outcome
of the MOUs. Critical questions regarding information sharing,
cooperation, supervision, and enforcement will remain unanswered
until the Commission and our fellow regulators execute these MOUs.
Second, the Commission has issued time-limited no-action relief
for the swap data repository reporting requirements. These
comparability determinations will be done as separate notices.
However, the timing and process for these determinations remain
uncertain.
Third, the Commission has failed to provide clarity on the
process for addressing the comparability determinations that it
declined to undertake at this time. The Notices only state that the
Commission may address these requests in a separate notice at a
later date given further developments in the law and regulations of
other jurisdictions. To promote certainty in the financial markets,
the Commission must provide a clear path forward for market
participants and foreign regulators.
The following steps would be a better approach: (1) The
Commission should extend the Exemptive Order to allow foreign
regulators to further implement their regulatory regimes and
coordinate with them to implement a harmonized substituted
compliance process; (2) the Commission should implement a flexible,
outcomes-based approach to the substituted compliance process and
apply it similarly to all jurisdictions; and (3) the Commission
should work closely with our fellow regulators to expeditiously
implement MOUs that resolve regulatory differences and address
regulatory oversight issues.
Conclusion
While I support the narrow comparability determinations that the
Commission has made, it was my hope that the Commission would work
with foreign regulators to implement a substituted compliance
process that would increase the global harmonization effort. I am
disappointed that the Commission has failed to implement such a
process.
I do believe that in the longer term, the swaps regulations of
the major jurisdictions will converge. At this time, however, the
Commission's comparability determinations have done little to
alleviate the burden of regulatory uncertainty and duplicative
compliance with both U.S. and foreign regulations.
The G-20 process delineated and put in place the swaps market
reforms in G-20 member nations. It is then no surprise that the
Commission must learn to coordinate with foreign regulators to
minimize confusion and disruption in bringing much needed clarity to
the swaps market. For all these shortcomings, I respectfully dissent
from the Commission's approval of the Notices.
[FR Doc. 2013-30976 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 27, 2013