2024-15092

[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58470-58505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15092]

[[Page 58469]]

Vol. 89

Thursday,

No. 138

July 18, 2024

Part II

Commodity Futures Trading Commission

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17 CFR Chapter I

Order Granting Conditional Substituted Compliance in Connection With
Certain Capital and Financial Reporting Requirements Applicable to
Nonbank Swap Dealers Subject to Regulation by the Financial Services
Agency of Japan, by the United Kingdom Prudential Regulation Authority,
by the Mexican Comision Nacional Bancaria y de Valores and Banco de
Mexico, and Domiciled in the French Republic and Federal Republic of
Germany and Subject to Regulation in the European Union; Final Rule

Federal Register / Vol. 89, No. 138 / Thursday, July 18, 2024 / Rules
and Regulations

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: On August 8, 2022, the Commodity Futures Trading Commission
issued a notice and request for comment on an application submitted by
the Financial Services Agency of Japan requesting that the Commission
determine that registered nonbank swap dealers organized and domiciled
in Japan may comply with certain capital and financial reporting
requirements under the Commodity Exchange Act and Commission
regulations by being subject to, and complying with, corresponding
capital and financial reporting requirements of Japan. The Commission
also solicited public comment on a proposed comparability determination
and related order providing for the conditional availability of
substituted compliance in connection with the application.
The Commission is adopting the proposed order with certain
modifications and clarifications to address comments. The final order
provides that a nonbank swap dealer organized and domiciled in Japan
may satisfy the capital requirements under the Commodity Exchange Act
and applicable Commission regulations and the financial reporting rules
under the Commodity Exchange Act and applicable Commission regulations
by complying with certain specified Japanese laws and regulations and
conditions set forth in the order.

DATES: This determination was made by the Commission on June 24, 2024.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas Smith, Deputy Director, 202-418-5495,
[email protected]; Rafael Martinez, Associate Director, 202-418-5462,
[email protected]; Warren Gorlick, Associate Director, 202-418-5195,
[email protected]; Liliya Bozhanova, Special Counsel, 202-418-6232,
[email protected]; Joo Hong, Risk Analyst, 202-418-6221,
[email protected]; Justin McPhee, Risk Analyst, 202-418-6223;
[email protected], Market Participants Division; Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') is issuing an order providing that
registered nonbank swap dealers organized and domiciled in Japan
(``Japanese nonbank SDs'') may satisfy certain capital and financial
reporting requirements under the Commodity Exchange Act (``CEA'') \1\
and Commission regulations \2\ by being subject to, and complying with,
comparable capital and financial reporting requirements under relevant
Japanese laws and regulations, subject to certain conditions set forth
in the order below. The order is based on the proposed comparability
determination and related proposed order published by the Commission on
August 8, 2022,\3\ as modified in certain aspects to address comments
and to clarify its terms.
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\1\ 7 U.S.C. 1 et seq. The CEA may be accessed through the
Commission's website, www.cftc.gov.
\2\ 17 CFR Chapter I. Commission regulations may be accessed
through the Commission's website, www.cftc.gov.
\3\ Notice of Proposed Order and Request for Comment on an
Application for Capital Comparability Determination from the
Financial Services Agency of Japan, 87 FR 48092 (Aug. 8, 2022)
(``2022 Proposal'').
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I. Introduction

A. Regulatory Background--CFTC Capital, Margin, and Financial Reporting
Requirements for Swap Dealers and Major Swap Participants

Section 4s(e) of the CEA \4\ directs the Commission and
``prudential regulators'' \5\ to impose capital requirements on swap
dealers (``SDs'') and major swap participants (``MSPs'') registered
with the Commission.\6\ Section 4s(e) also directs the Commission and
prudential regulators to adopt regulations imposing initial and
variation margin requirements on swaps entered into by SDs and MSPs
that are not cleared by a registered derivatives clearing organization
(``uncleared swaps'').
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\4\ 7 U.S.C. 6s(e).
\5\ The term ``prudential regulators'' is defined in the CEA to
mean the Board of Governors of the Federal Reserve System (``Federal
Reserve Board''); the Office of the Comptroller of the Currency; the
Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency. 7 U.S.C.
1a(39).
\6\ Subject to certain exceptions, the term ``swap dealer'' is
generally defined as any person that: (i) holds itself out as a
dealer in swaps; (ii) makes a market in swaps; (iii) regularly
enters into swaps with counterparties as an ordinary course of
business for its own account; or (iv) engages in any activity
causing the person to be commonly known in the trade as a dealer or
market maker in swaps. 7 U.S.C. 1a(49).
The term ``major swap participant'' is generally defined as any
person who is not an SD, and: (i) subject to certain exclusions,
maintains a substantial position in swaps for any of the major swap
categories as determined by the Commission; (ii) whose outstanding
swaps create substantial counterparty exposure that could have
serious adverse effects on the financial stability of the U.S.
banking system or financial markets; or (iii) is a financial entity
that: (a) is highly leveraged relative to the amount of capital it
holds and that is not subject to capital requirements established by
an appropriate Federal banking agency; and (b) maintains a
substantial position in outstanding swaps in any major swap category
as determined by the Commission. 7 U.S.C. 1a(33).
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Section 4s(e) applies a bifurcated approach with respect to the
above Congressional directives, requiring each SD and MSP that is
subject to the regulation of a prudential regulator (``bank SD'' and
``bank MSP,'' respectively) to meet the minimum capital requirements
and uncleared swaps margin requirements adopted by the applicable
prudential regulator, and requiring each SD and MSP that is not subject
to the regulation of a prudential regulator (``nonbank SD'' and
``nonbank MSP,'' respectively) to meet the minimum capital requirements
and uncleared swaps margin requirements adopted by the Commission.\7\
Therefore, the Commission's authority to impose capital requirements
and margin requirements for uncleared swap transactions extends to
nonbank SDs and nonbank MSPs, including nonbanking subsidiaries of bank
holding companies regulated by the Federal Reserve Board.\8\
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\7\ 7 U.S.C. 6s(e)(2).
\8\ 7 U.S.C. 6s(e)(1) and (2).
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The prudential regulators implemented Section 4s(e) in 2015 by
amending existing capital requirements applicable to bank SDs and bank
MSPs to incorporate swap transactions into their respective bank
capital frameworks, and by adopting rules imposing initial and
variation margin requirements on bank SDs and bank MSPs that engage in
uncleared swap transactions.\9\ The Commission adopted final rules
imposing initial and variation margin obligations on nonbank SDs and
nonbank MSPs for uncleared swap transactions on January 6, 2016.\10\
The Commission also approved final capital requirements for nonbank SDs
and nonbank MSPs on July 24, 2020, which were published in the Federal
Register on September 15, 2020 with a

[[Page 58471]]

compliance date of October 6, 2021 (``CFTC Capital Rules'').\11\
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\9\ Margin and Capital Requirements for Covered Swap Entities,
80 FR 74840 (Nov. 30, 2015).
\10\ Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
\11\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020). On April 30, 2024, the
Commission amended the capital and financial reporting requirements
to revise certain financial reporting obligations, among other
changes. See Capital and Financial Reporting Requirements for Swap
Dealers and Major Swap Participants, 89 FR 45569 (May 23, 2024). The
amendments have limited impact on nonbank SDs covered by this order.
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Section 4s(f) of the CEA addresses SD and MSP financial reporting
requirements.\12\ Section 4s(f) authorizes the Commission to adopt
rules imposing financial condition reporting obligations on all SDs and
MSPs (i.e., nonbank SDs, nonbank MSPs, bank SDs, and bank MSPs).
Specifically, Section 4s(f)(1)(A) provides, in relevant part, that each
registered SD and MSP must make financial condition reports as required
by regulations adopted by the Commission.\13\ The Commission's
financial reporting obligations were adopted with the Commission's
nonbank SD and nonbank MSP capital requirements, and also had a
compliance date of October 6, 2021 (``CFTC Financial Reporting
Rules'').\14\
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\12\ 7 U.S.C. 6s(f).
\13\ 7 U.S.C. 6s(f)(1)(A).
\14\ 85 FR 57462.
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B. Commission Capital Comparability Determinations for Non-U.S. Nonbank
Swap Dealers and Non-U.S. Nonbank Major Swap Participants

Commission Regulation 23.106 establishes a substituted compliance
framework whereby the Commission may determine that compliance by a
non-U.S. domiciled nonbank SD or non-U.S. domiciled nonbank MSP with
its home country's capital and financial reporting requirements will
satisfy all or parts of the CFTC Capital Rules and all or parts of the
CFTC Financial Reporting Rules (such a determination referred to as a
``Comparability Determination'').\15\ The Commission's capital adequacy
and financial reporting requirements are designed to address and manage
risks that arise from a firm's operation as an SD or MSP. Given their
functions, both sets of requirements and rules must be applied on an
entity-level basis (meaning that the rules apply on a firm-wide basis,
irrespective of the type of transactions involved) to effectively
address risk to the firm as a whole. The availability of such
substituted compliance is conditioned upon the Commission issuing a
Comparability Determination finding that the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements
for non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs are comparable to
the corresponding CFTC Capital Rules and CFTC Financial Reporting
Rules. The Commission would issue a Comparability Determination in the
form of an order (``Comparability Order'').\16\
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\15\ 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides
that a request for a Comparability Determination may be submitted by
a non-U.S. nonbank SD or non-US nonbank MSP, a trade association or
other similar group on behalf of its SD or MSP members, or a foreign
regulatory authority that has direct supervisory authority over one
or more non-US nonbank SDs or non-U.S. nonbank MSPs. However,
Commission regulations also provide that any non-U.S. nonbank SD or
non-U.S. nonbank MSP that is dually-registered with the Commission
as a futures commission merchant (``FCM'') is subject to the capital
requirements of Commission Regulation 1.17 (17 CFR 1.17) and may not
petition the Commission for a Comparability Determination. 17 CFR
23.101(a)(5) and (b)(4), respectively.
Furthermore, substituted compliance is not available to non-U.S.
bank SDs and non-U.S. bank MSPs with respect to their respective
financial reporting requirements under Commission Regulation
23.105(p). Commission Regulation 23.105(p), however, permits non-
U.S. bank SDs and non-U.S. bank MSPs that do not submit financial
reports to a U.S. prudential regulator to file with the Commission a
statement of financial condition, certain regulatory capital
information, and Schedule 1 of Appendix C to Subpart E of Part 23 of
the Commission's regulations prepared and presented in accordance
with the accounting standards permitted by the non-U.S. bank SD's or
non-U.S. bank MSP's home country regulatory authorities. 17 CFR
23.105(p)(2).
\16\ 17 CFR 23.106(a)(3).
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The Commission's approach for conducting a Comparability
Determination with respect to the CFTC Capital Rules and the CFTC
Financial Reporting Rules is a principles-based, holistic approach that
focuses on assessing whether the applicable foreign jurisdiction's
capital and financial reporting requirements have comparable objectives
with, and achieve comparable outcomes to, corresponding CFTC
requirements.\17\ The Commission's assessment is not a line-by-line
evaluation or comparison of a foreign jurisdiction's regulatory
requirements with the Commission's requirements.\18\ In performing the
analysis, the Commission recognizes that jurisdictions may adopt
differing approaches to achieving regulatory objectives and outcomes,
and the Commission will focus on whether the foreign jurisdiction's
capital and financial reporting requirements are based on regulatory
objectives, and produce regulatory outcomes, that are comparable to the
Commission's in purpose and effect, and not whether they are comparable
in every aspect or contain identical elements.
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\17\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
\18\ See 85 FR 57462 at 57521.
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A person requesting a Comparability Determination is required to
submit an application to the Commission containing: (i) a description
of the objectives of the relevant foreign jurisdiction's capital
adequacy and financial reporting requirements applicable to entities
that are subject to the CFTC Capital Rules and the CFTC Financial
Reporting Rules; (ii) a description (including specific legal and
regulatory provisions) of how the relevant foreign jurisdiction's
capital adequacy and financial reporting requirements address the
elements of the CFTC Capital Rules and CFTC Financial Reporting Rules,
including, at a minimum, the methodologies for establishing and
calculating capital adequacy requirements and whether such
methodologies comport with international standards; and (iii) a
description of the ability of the relevant foreign regulatory authority
to supervise and enforce compliance with the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements.
The applicant must also submit, upon request, such other information
and documentation as the Commission deems necessary to evaluate the
comparability of the capital adequacy and financial reporting
requirements of the foreign jurisdiction.\19\
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\19\ 17 CFR 23.106(a)(2).
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The Commission will consider an application for a Comparability
Determination to be a representation by the applicant that the laws and
regulations of the foreign jurisdiction that are submitted in support
of the application are finalized and in force, 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
relevant non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs domiciled in
the foreign jurisdiction.\20\ Each non-U.S. nonbank SD or non-U.S.
nonbank MSP that seeks to rely on a Comparability Order is responsible
for determining whether it is subject to the foreign laws and
regulations found comparable in the Comparability Order. A non-U.S.
nonbank SD or non-U.S. nonbank MSP

[[Page 58472]]

that is not legally required to comply with a foreign jurisdiction's
laws and/or regulations determined to be comparable in a Comparability
Order may not voluntarily comply with such laws and/or regulations in
lieu of compliance with the CFTC Capital Rules or the CFTC Financial
Reporting Rules.
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\20\ The Commission provides the applicant with an opportunity
to review for accuracy and completeness the Commission's description
of relevant home country laws and regulations on which a proposed
Comparability Determination and a proposed Comparability Order are
based. The Commission relies on this review, and any corrections or
feedback received, as part of the comparability assessment. A
Comparability Determination and Comparability Order based on an
inaccurate description of foreign laws and regulations may not be
valid.
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The Commission may consider all relevant factors in making a
Comparability Determination, including: (i) the scope and objectives of
the relevant foreign jurisdiction's capital and financial reporting
requirements; (ii) whether the relevant foreign jurisdiction's capital
and financial reporting requirements achieve comparable outcomes to the
Commission's corresponding capital requirements and financial reporting
requirements; (iii) the ability of the relevant foreign regulatory
authority or authorities to supervise and enforce compliance with the
relevant foreign jurisdiction's capital adequacy and financial
reporting requirements; and (iv) any other facts or circumstances the
Commission deems relevant, including whether the Commission and foreign
regulatory authority or authorities have a memorandum of understanding
or similar arrangement that would facilitate supervisory
cooperation.\21\
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\21\ 17 CFR 23.106(a)(3) and 85 FR 57462 at 57520-57522.
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In performing the comparability assessment for foreign nonbank SDs,
the Commission's review will include the extent to which the foreign
jurisdiction's requirements address: (i) the process of establishing
minimum capital requirements for nonbank SDs and how such process
addresses risk, including market risk and credit risk of the nonbank
SD's on-balance sheet and off-balance sheet exposures; (ii) the types
of equity and debt instruments that qualify as regulatory capital in
meeting minimum requirements; (iii) the financial reports and other
financial information submitted by a nonbank SD to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank SD; and (iv) the regulatory
notices and other communications between a nonbank SD and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's review will include
an assessment of the foreign jurisdiction's surveillance program for
monitoring nonbank SDs' compliance with such capital adequacy and
financial reporting requirements, and the disciplinary process imposed
on firms that fail to comply with such requirements.\22\
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\22\ The Commission would conduct a similar analysis, adjusted
as appropriate to account for regulatory distinctions, in performing
a comparability assessment for foreign nonbank MSPs. Commission
Regulation 23.101(b) requires a nonbank MSP to maintain positive
tangible net worth. There are no MSPs currently registered with the
Commission. 17 CFR 23.101(b).
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Commission Regulation 23.106 further provides that the Commission
may impose any terms or conditions that it deems appropriate in issuing
a Comparability Determination.\23\ Any specific terms or conditions
with respect to capital adequacy or financial reporting requirements
will be set forth in the Commission's Comparability Order. As a general
condition to all Comparability Orders, the Commission will require
notification from the applicants of any material changes to information
submitted by the applicants in support of a comparability finding,
including, but not limited to, changes in the foreign jurisdiction's
relevant laws and regulations, as well as changes to the relevant
supervisory or regulatory regime.
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\23\ 17 CFR 23.106(a)(5).
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To rely on a Comparability Order, a nonbank SD or nonbank MSP
domiciled in the foreign jurisdiction and subject to supervision by the
relevant regulatory authority (or authorities) in the foreign
jurisdiction must file a notice with the Commission of its intent to
comply with the applicable capital adequacy and financial reporting
requirements of the foreign jurisdiction set forth in the Comparability
Order in lieu of all or parts of the CFTC Capital Rules and/or CFTC
Financial Reporting Rules.\24\ Notices must be filed electronically
with the Commission's Market Participants Division (``MPD'').\25\ The
filing of a notice by a non-U.S. nonbank SD or non-U.S. nonbank MSP
provides MPD staff with the opportunity to engage with the firm and to
obtain representations that it is subject to, and complies with, the
laws and regulations cited in the Comparability Order and that it will
comply with any listed conditions. MPD will issue a letter under
delegated authority from the Commission confirming that the non-U.S.
nonbank SD or non-U.S. nonbank MSP may comply with the foreign laws and
regulations cited in the Comparability Order in lieu of complying with
the CFTC Capital Rules and CFTC Financial Reporting Rules upon MPD's
confirmation through discussions with the non-U.S. nonbank SD or non-
U.S. nonbank MSP that the firm is subject to, and complies with, such
foreign laws and regulations, is subject to the jurisdiction of the
applicable foreign regulatory authority (or authorities), and can meet
the conditions in the Comparability Order.\26\
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\24\ 17 CFR 23.106(a)(4)(i).
\25\ Notices must be filed in electronic form to the following
email address: [email protected].
\26\ 17 CFR 23.106(a)(4)(ii) and 17 CFR 140.91(a)(11).
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Each non-U.S. nonbank SD and each non-U.S. nonbank MSP that
receives confirmation from the Commission that it may comply with a
foreign jurisdiction's capital adequacy and financial reporting
requirements will be deemed by the Commission to be in compliance with
the corresponding CFTC Capital Rules and/or CFTC Financial Reporting
Rules.\27\ A non-U.S. nonbank SD or non-U.S. nonbank MSP that receives
confirmation of substituted compliance remains subject, however, to the
Commission's examination and enforcement authority.\28\ Accordingly, if
a nonbank SD or nonbank MSP fails to comply with the foreign
jurisdiction's capital adequacy and/or financial reporting
requirements, the Commission may initiate an action for a violation of
the corresponding CFTC Capital Rules and/or CFTC Financial Reporting
Rules.\29\ In addition, a finding of a violation by a foreign
jurisdiction's regulatory authority is not a prerequisite for the
exercise of such examination and enforcement authority by the
Commission.
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\27\ 17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD
under authority delegated by the Commission. Commission Regulation
140.91(a)(11). 17 CFR 140.91(a)(11).
\28\ 17 CFR 23.106(a)(4)(ii).
\29\ Id.
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C. Japan Financial Services Agency's Application for a Comparability
Determination for Japan-Domiciled Nonbank Swap Dealers

On September 30, 2021, the Financial Services Agency of Japan
(``FSA'') submitted an application (``FSA Application'') requesting
that the Commission conduct a Comparability Determination and issue a
Comparability Order finding that compliance with certain designated
capital requirements of Japan (the ``Japanese Capital Rules'') and
certain designated financial reporting requirements of Japan (the
``Japanese Financial Reporting Rules'') by a Japanese nonbank SD
registered with

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the FSA as a Type I Financial Instruments Business Operator (``FIBO'')
satisfies corresponding CFTC Capital Rules and CFTC Financial Reporting
Rules applicable to a nonbank SD under Sections 4s(e) and (f) of the
CEA and Commission Regulations 23.101 and 23.105.\30\ There are
currently three Japanese nonbank SDs registered with the Commission,
and the FSA represented in its application that each of the three
Japanese nonbank SDs are FSA-registered and regulated FIBOs.\31\
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\30\ Letter from Yuji Yamashita, Deputy Commissioner for
International Affairs, Financial Services Agency of Japan, dated
September 30, 2021, pp. 4-5 (fn. 11). The FSA Application is
available on the Commission's website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
\31\ The three Japanese nonbank SDs currently registered with
the Commission are: BofA Securities Japan Co., Ltd.; Goldman Sachs
Japan Co., Ltd.; and Morgan Stanley MUFG Securities Co., Ltd. The
FSA's application did not request a Comparability Determination with
respect to nonbank MSPs as currently there are no MSPs registered
with the Commission and, accordingly, no nonbank MSPs domiciled in
Japan and registered with the FSA. Accordingly, the Commission's
Comparability Determination and Comparability Order do not address
nonbank MSPs.
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The FSA represented that the capital adequacy and financial
reporting requirements for swap activities in Japan are governed by the
Japanese legal framework for financial regulation, which is mainly
composed of Acts, Cabinet Orders, Ministerial Orders, and FSA
Notices.\32\ With regard to the Japanese Capital Rules and the Japanese
Financial Reporting Rules, the Financial Instruments and Exchange Act
(Act No. 25 of 1948) (``FIEA'') and its related order, Cabinet Office
Order on Financial Instruments Business (Cabinet Office Order No. 52 of
2007) (``COO''), set forth the prudential capital and financial
reporting requirements applicable to FIBOs, including the Japanese
nonbank SDs.\33\ FIEA, COO, and related FSA Notices impose mandatory
capital and reporting requirements on FIBOs, including Japanese nonbank
SDs. Comprehensive Guidelines for Supervision of Financial Instruments
Business Operators, etc. (``Supervisory Guidelines for FIBO'') also
supplement the framework.\34\ The technical requirements for FIBOs,
including Japanese nonbank SDs, to calculate capital adequacy ratios
are specified in the FSA Notice No. 59 of 2007 (``Notice on Capital'')
in accordance with Article 177(8) and Article 178(1) of the COO.
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\32\ FSA Application at p. 4.
\33\ Businesses categorized as Type I Financial Instruments
Business (Article 28(1) of the FIEA) can only be conducted by Type I
FIBOs registered under Article 29 of the FIEA. Type I Financial
Instruments Business includes market transactions of derivatives and
foreign market derivatives transactions pertaining to certain highly
liquid securities and over-the-counter transactions of derivatives.
\34\ To implement and reinforce the legal framework, the FSA has
developed and published supervisory guidelines. The supervisory
guidelines are meant for FSA staff, but are public documents, which
are expected to be followed by the applicable financial
institutions. Financial institutions are consulted in connection
with the establishment of, and any amendments to, the supervisory
guidelines. FSA staff conducts supervision and enforcement based on
the supervisory guidelines.
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D. Proposed Comparability Determination and Proposed Comparability
Order for Japan-Domiciled Nonbank Swap Dealers

On August 8, 2022, the Commission published the 2022 Proposal,
seeking comment on the FSA Application and the Commission's proposed
Comparability Determination and related Comparability Order.\35\ The
2022 Proposal set forth the Commission's preliminary Comparability
Determination and proposed Comparability Order providing that, based on
its review of the FSA Application and applicable Japanese laws and
regulations, the Commission preliminarily found that the Japanese
Capital Rules and the Japanese Financial Reporting Rules, subject to
the conditions set forth in the proposed Comparability Order, achieve
comparable outcomes and are comparable in purpose and effect to the
CFTC Capital Rules and CFTC Financial Reporting Rules.\36\ The
Commission, however, noted that there were certain differences between
the Japanese Capital Rules and CFTC Capital Rules and certain
differences between the Japanese Financial Reporting Rules and the CFTC
Financial Reporting Rules. As such, the Commission proposed certain
conditions to the Comparability Order.\37\ The proposed conditions were
designed to promote consistency in regulatory outcomes, to reflect the
scope of substituted compliance that would be available notwithstanding
the differences, and to ensure that the Commission and National Futures
Association (``NFA'') receive information to monitor Japanese nonbank
SDs for ongoing compliance with the Comparability Order.\38\ The
Commission further stated that, in its preliminary view, the identified
differences would not be inconsistent with providing a substituted
compliance framework for Japanese nonbank SDs subject to the conditions
specified in the proposed Comparability Order.\39\
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\35\ 2022 Proposal, 87 FR 48092 (Aug. 8, 2022).
\36\ See 2022 Proposal at 48092. Consistent with the process
specified in section I.B. above for conducting Comparability
Determinations, the Commission provided the FSA with an opportunity
to review for factual accuracy and completeness the Commission's
description of relevant Japanese laws and regulations on which the
proposed Comparability Determination and proposed Comparability
Order were based. The Commission has relied on FSA's review, and has
incorporated feedback and corrections received from the FSA. As
previously noted, a Comparability Determination and Comparability
Order based on an inaccurate description of foreign laws and
regulations may not be valid.
\37\ See 2022 Proposal at 48114.
\38\ NFA is a registered futures association under section 17 of
the CEA (7 U.S.C. 21). Each SD registered with the Commission is
required to be an NFA member. 17 CFR 170.16. NFA, as a registered
futures association, is also required by the CEA to adopt rules
imposing minimum capital, segregation, and other financial
requirements, as applicable, to its members, including SDs, that are
at least as stringent as the Commission's minimum capital,
segregation, and other financial requirements for such registrants,
and to implement a program to audit and enforce such requirements. 7
U.S.C. 21(p). Therefore, the Commission's proposed Comparability
Order required Japanese nonbank SDs to file certain financial
reports and notices with NFA so that it may perform oversight of
such firms as required under section 17 of the CEA. The Commission
will refer to NFA in this Comparability Determination when referring
to the requirements or obligations of a registered futures
association.
\39\ 2022 Proposal at 48114.
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The proposed Comparability Order was limited to the comparison of
the Japanese Capital Rules to the CFTC Capital Rules' Bank-Based
Capital Approach (``Bank-Based Approach'') for computing regulatory
capital for nonbank SDs, which is based on certain capital requirements
imposed by the Federal Reserve Board for bank holding companies.\40\ As
noted by the Commission in the 2022 Proposal, the FSA had not
requested, nor has the Commission performed, a comparison of the
Japanese Capital Rules to the Commission's TNW Approach or NLA
Approach.\41\
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\40\ Id. As described in the 2022 Proposal, the CFTC Capital
Rules provide nonbank SDs with three alternative capital approaches:
(i) the Tangible Net Worth Capital Approach (``TNW Approach''); (ii)
the Net Liquid Assets Capital Approach (``NLA Approach''); and (iii)
the Bank-Based Approach. See 2022 Proposal at 48095-48096, and 17
CFR 23.101. The Bank-Based Approach is consistent with the Basel
Committee on Banking Supervision's (``BCBS'') international
framework for bank capital requirements (``BCBS framework'' or
``Basel standards''). The BCBS is the primary global standard-setter
for the prudential regulation of banks and provides a forum for
cooperation on banking supervisory matters. Institutions represented
on the BCBS include the Federal Reserve Board, the European Central
Bank, Deutsche Bundesbank, Bank of England, Bank of France, Bank of
Japan, Banco de Mexico, and Bank of Canada. The BCBS framework is
available at https://www.bis.org/basel_framework/index.htm.
\41\ See 2022 Proposal at 48114.

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E. General Comments on the FSA Application and the Commission's
Proposed Finding of Comparability Between the CFTC Capital Rules and
CFTC Financial Reporting Rules and the Japanese Capital Rules and
Japanese Financial Reporting Rules

The public comment period on the FSA Application, the proposed
Comparability Determination, and the proposed Comparability Order ended
on October 7, 2022. The Commission received six comment letters from
the following interested parties: Better Markets, Inc. (``Better
Markets''); the FSA; the International Bankers Association of Japan
(``IBAJ''); a joint letter from the Institute of International Bankers
(``IIB''), the International Swaps and Derivatives Association
(``ISDA''), and the Securities Industry and Financial Markets
Association (``SIFMA''); and two letters from William J.
Harrington.\42\
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\42\ Letter From Stephen Hall, Legal Director and Securities
Specialist, Better Markets (Oct. 7, 2022) (``Better Markets
Letter''); Letter from Yuji Yamashita, Deputy Commissioner for
International Affairs, FSA (Oct. 7, 2022) (``FSA Letter''); Letter
From Philippe Avril, Chair, IBAJ (Oct. 6, 2022) (``IBAJ Letter'');
Letter From Stephanie Webster, General Counsel, IIB; Steven Kennedy,
Global Head of Public Policy, ISDA; Kyle L. Brandon, Managing
Director, Head of Derivatives Policy, SIFMA (collectively,
``Associations'') (Oct. 7, 2022) (``Associations Letter''); Letters
from William J. Harrington (``Harrington'') (Oct. 7 and Oct. 20,
2022) (``Harrington 10/7/2022 Letter'' and ``Harrington 10/20/2022
Letter'') The comment letters for the 2022 Proposal are available
at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7301.
---------------------------------------------------------------------------

Two commenters expressed support for the proposed Comparability
Determination and proposed Comparability Order, agreeing with the
Commission's overall analysis and determination of comparability of the
CFTC Capital Rules and CFTC Financial Reporting Rules and the Japanese
Capital Rules and Japanese Financial Reporting Rules.\43\ In addition,
the FSA submitted a comment letter in support of the Commission's
proposal, and recommending several technical amendments to the proposed
Comparability Determination and Comparability Order that were
corrective or typographical in nature.\44\
---------------------------------------------------------------------------

\43\ Associations Letter at p. 1; IBAJ Letter at p. 1.
\44\ FSA Letter. In particular, the FSA recommended that the
Commission add Article 47 of the FIEA to the list of relevant
provisions comprising the Japanese Capital Rules enumerated in
proposed Condition 4. FSA Letter at p. 2. The Commission has revised
final Condition 4 to that effect.
---------------------------------------------------------------------------

Conversely, two commenters disagreed with the CFTC's proposed
Comparability Determination and proposed Comparability Order.\45\
Better Markets asserted that the principles-based, holistic approach
applied by the Commission, which assesses whether the applicable
foreign jurisdiction's capital and financial requirements achieve
comparable outcomes to the corresponding Commission requirements, is
``insufficiently rigorous, leaving far too much room for inaccurate and
unwarranted comparability determinations.'' \46\
---------------------------------------------------------------------------

\45\ Better Markets Letter at p. 2; Harrington 10/20/2022 Letter
at p. 20.
\46\ Better Markets Letter at p. 2.
---------------------------------------------------------------------------

The Commission does not believe that the principles-based, holistic
assessment that it conducted on the comparability of the Japanese
Capital Rules and Japanese Financial Reporting Rules with the CFTC
Capital Rules and CFTC Financial Reporting Rules was ``insufficiently
rigorous,'' nor does the Commission believe that it left ``room for
inaccurate and unwarranted comparability determinations.'' The
principles-based, holistic approach employed in the Comparability
Determination was performed in accordance with the substituted
compliance assessment framework adopted by the Commission for capital
and financial reporting requirements for foreign nonbank SDs and set
out in Commission Regulation 23.106. Consistent with this assessment
framework, the Commission focused on whether the Japanese Capital Rules
and Japanese Financial Reporting Rules are designed with the objective
of ensuring overall safety and soundness of the Japanese nonbank SDs in
a manner that is comparable with the Commission's overall objective of
ensuring the safety and soundness of nonbank SDs.
As stated in the 2022 Proposal, due to the detailed and complex
nature of the capital frameworks, differences in how jurisdiction
approach and implement the requirements are expected, even among
jurisdictions that base their requirements on the principles and
standards set forth in the BCBS framework.\47\ Furthermore, as
discussed in Section I.B. above, when adopting Commission Regulation
23.106, the Commission stated that ``its approach to substituted
compliance is a principles-based, holistic approach that focuses on
whether the foreign regulations are designed with the objectives of
ensuring the overall safety and soundness of the [non-US nonbank SD] in
a manner that is comparable with the Commission's overall capital and
financial reporting requirements, and is not based on a line-by-line
assessment or comparison of a foreign jurisdiction's regulatory
requirements with the Commission's requirements.'' \48\
---------------------------------------------------------------------------

\47\ See 2022 Proposal at 48098.
\48\ 85 FR 57462 at 57521.
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The approach and standards set forth in Commission Regulation
23.106, with the focus on ``comparable outcomes,'' are also consistent
with the Commission's precedents of undertaking a principles-based,
holistic assessment of the comparability of foreign regulatory regimes
for purposes of substituted compliance for cross-border swap
transactions. The Commission first outlined its approach to substituted
compliance with respect to swaps requirements in 2013, when it issued
an Interpretive Guidance and Policy Statement Regarding Compliance with
Certain Swap Regulations.\49\ In the Guidance, the Commission stated
that ``[i]n evaluating whether a particular category of foreign
regulatory requirement(s) is comparable and comprehensive to the
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.'' \50\ The Commission
emphasized that in this context, ``comparable does not necessarily mean
identical.'' \51\ Rather, the Commission stated that it would evaluate
whether the home jurisdiction's regulatory requirement is comparable
to, and as comprehensive as, the corresponding U.S. regulatory
requirement(s).\52\ In conducting comparability determinations based on
the policy set forth in the Guidance, the Commission noted that the
``outcome-based'' 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.'' \53\
---------------------------------------------------------------------------

\49\ Interpretative Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26,
2013) (``Guidance'').
\50\ Guidance at 45343.
\51\ Id.
\52\ Id.
\53\ See e.g., Comparability Determination for the European
Union: Certain Entity-Level Requirements, 78 FR 78923 (December 27,
2013) at 78926.

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[[Page 58475]]

The Commission further elaborated on the required elements of
comparability in 2016, when it issued final rules to address the cross-
border application of the Commission's margin requirements for
uncleared swap transactions. Specifically, the Commission stated that
its substituted compliance approach reflects an outcome-based
assessment of the comparability of a foreign jurisdiction's margin
requirements with the Commission's corresponding requirements.\54\ The
Commission further stated that it would evaluate the objectives and
outcomes of the foreign margin requirements in light of foreign
regulator(s)' supervisory and enforcement authority.\55\ Consistent
with its previously stated position, the Commission recognized that
jurisdictions may adopt different approaches to achieving the same
outcome and, therefore, the assessment would focus on whether the
foreign jurisdiction's margin requirements are comparable to the
Commission's in purpose and effect, not whether they are comparable in
every aspect or contain identical elements.\56\ The Commission's policy
thus reflects an understanding that a line-by-line evaluation of a
foreign jurisdiction's regulatory regime is not the optimum approach to
assessing the comparability of complex structures whose individual
components may differ based on jurisdiction-specific considerations,
but which achieve the objective and outcomes set forth in the
Commission's framework.
---------------------------------------------------------------------------

\54\ Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Cross-Border Application of the Margin
Requirements, 81 FR 34817, 34836-34837 (May 31, 2016).
\55\ Id.
\56\ Id.
---------------------------------------------------------------------------

With respect to the FSA Application, the process leading to the
Comparability Determination involved Commission staff obtaining English
language translations of relevant Japanese laws, rules, and regulations
cited in the FSA Application from the FSA.\57\ Staff verified the
assertions and citations contained in the FSA Application regarding the
specific Japanese Capital Rules and Japanese Financial Reporting Rules
to the relevant English language versions of the Japanese laws, rules,
and regulations.\58\
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\57\ Commission staff received English translations on May 11,
2021.
\58\ Staff also reviewed the FSA website to confirm various
provisions of Japanese laws and regulations that were relevant to
the proposed Comparability Determination and proposed Comparability
Order.
---------------------------------------------------------------------------

Commission staff also evaluated the comparability of the Japanese
Capital Rules and Japanese Financial Reporting Rules with the CFTC
Capital Rules and CFTC Financial Reporting Rules with respect to the
following areas: (i) the process of establishing minimum capital
requirements for Japanese nonbank SDs and how such process addresses
risk, including market risk and credit risk of the Japanese nonbank
SD's on-balance sheet and off-balance sheet exposures; (ii) the types
of equity and debt instruments that qualify as regulatory capital in
meeting a Japanese nonbank SD's minimum capital requirements; (iii) the
financial reports and other financial information submitted by a
Japanese nonbank SD to the FSA, and whether such information provides
the FSA with the means necessary to effectively monitor the financial
condition of the Japanese nonbank SD; and (iv) the regulatory notices
and other communications between a Japanese nonbank SD and the FSA that
address potential adverse financial or operational issues that may
impact the firm.\59\ With respect to the ability of the FSA to
supervise and enforce compliance with the Japanese Capital Rules and
Japanese Financial Reporting Rules, the Commission's assessment
included a review of the FSA's surveillance program for monitoring
Japanese nonbank SDs compliance with Japanese Capital Rules and
Japanese Financial Reporting Rules, and the disciplinary process
imposed on firms that fail to comply with such requirements.\60\
---------------------------------------------------------------------------

\59\ 2022 Proposal at 48098-48112.
\60\ Id. at 48112-48113.
---------------------------------------------------------------------------

Contrary to the position articulated by Better Markets regarding
the nature of the comparability assessment, the Commission believes
that the principles-based, holistic assessment of the Japanese Capital
Rules and Japanese Financial Reporting Rules against the CFTC Capital
Rules and CFTC Financial Reporting Rules, as outlined above and
discussed in detail in Section II below, was sufficiently rigorous for
purposes of determining if the Japanese laws and regulations are
comparable in purpose and effect to the CEA and Commission regulations.
Better Markets further asserted that even under a principles-based,
holistic approach, the FSA capital and financial reporting requirements
for Japanese nonbank SDs do not satisfy the test for an order granting
substituted compliance because the FSA's regulatory framework governing
capital and financial reporting is not comparable to the corresponding
CFTC requirements.\61\ Better Markets cited the Commission's inclusion
of conditions in the proposed Comparability Order as demonstrating the
Commission's need ``to compensate for the acknowledged obvious gaps in
the FSA framework.'' \62\ Better Markets further stated that the
differences between the Japanese and the CFTC capital and financial
reporting regimes mandate denial of the FSA Application for a
comparability determination.\63\
---------------------------------------------------------------------------

\61\ Better Markets Letter at p. 2.
\62\ Id.
\63\ Id.
---------------------------------------------------------------------------

The Commission disagrees that the inclusion of conditions in the
Comparability Order precludes a finding of comparability with respect
to the Japanese Capital Rules and Japanese Financial Reporting Rules.
The Commission's comparability assessment process, consistent with the
holistic approach, contemplates the potential need for a Comparability
Order to contain conditions. Specifically, Commission Regulation
23.106(a)(5) states that the Commission may impose any terms and
conditions it deems appropriate in issuing a Comparability Order,
including conditions with respect to capital adequacy and financial
reporting requirements of non-U.S. nonbank SDs.\64\
---------------------------------------------------------------------------

\64\ 17 CFR 23.106(a)(5), which provides that in issuing a
Capital Comparability Determination, the Commission may impose any
terms and conditions it deems appropriate, including certain capital
adequacy and financial reporting requirements on swap dealers. . .
(Emphasis added). Commission Regulation 23.106(a)(3) establishes the
Commission's standard of review for performing a Comparability
Determination and provides that the Commission may consider all
relevant factors, including whether the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements
achieve comparable outcomes to the Commission's corresponding
capital adequacy and financial reporting requirements for SDs. 17
CFR 23.106(a)(3)(ii).
---------------------------------------------------------------------------

The process employed in this Comparability Determination is
consistent with the Commission's established approach to conducting
comparability assessments. Upon a finding of comparability, the
Commission's policy generally is that eligible entities may comply with
a substituted compliance regime subject to the conditions the
Commission places on its finding, and subject to the Commission's
retention of its examination authority and its enforcement
authority.\65\ In this regard, the Commission has stated that certain
conditions included in a Comparability Order may be designed to ensure
the

[[Page 58476]]

Commission's direct access to books and records required to be
maintained by an SD registered with the Commission.\66\ Other
conditions may address areas where the foreign jurisdiction lacks
analogous requirements.\67\ The inclusion of conditions in a
Comparability Order was contemplated as an integral part of the
Commission's holistic, principle-based approach to conducting
comparability assessments and is not inconsistent with a grant of
substituted compliance. In particular, Commission Regulation
23.106(a)(5) states the Commission's authority to impose conditions in
issuing a Comparability Determination in connection with the CFTC
Capital Rules and the CFTC Financial Reporting Rules. As further
discussed below, the conditions proposed in the 2022 Proposal are
clearly of the nature contemplated by Commission Regulation
23.106(a)(5).
---------------------------------------------------------------------------

\65\ 85 FR 57462 at 57520. See also Guidance at 45342-45344 and
Comparability Determination for the European Union: Certain
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at
78880.
\66\ Comparability Determination for the European Union: Certain
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at
78880.
\67\ Guidance at 45343.
---------------------------------------------------------------------------

The Commission also does not believe that the inclusion of the
conditions in the proposed Comparability Order demonstrates ``obvious
gaps in the FSA framework'' as asserted by Better Markets. Consistent
with the Commission's policy described above, a majority of the
conditions contained in the proposed Comparability Order are designed
to ensure that: (i) the Japanese nonbank SD is eligible for substituted
compliance based on the Japanese laws and regulations that were
reviewed by the Commission in performing the comparability assessment,
and (ii) the Commission and the NFA receive timely financial
information and notices to effectively monitor a Japanese nonbank SD's
compliance with the Comparability Order and to assess the ongoing
safety and soundness of the Japanese nonbank SD. Specifically, there
are 23 conditions in the final Comparability Order. Four conditions set
forth criteria that a Japanese nonbank SD must meet to be eligible for
substituted compliance pursuant to the Comparability Order.\68\ The
four conditions ensure that only Japanese nonbank SDs that are within
the scope of, and comply with, the Japanese Capital Rules and Japanese
Financial Reporting Rules that were part of the Commission's
comparability assessment may apply for substituted compliance. Eight
additional conditions require Japanese nonbank SDs within scope of the
Comparability Order to provide notice to the Commission and NFA of
certain defined events,\69\ and a further three conditions require
Japanese nonbank SDs to file with the Commission and NFA copies of
certain unaudited and audited financial reports that the firms provide
to the FSA.\70\ In addition, two additional conditions reflect
administrative matters necessary to implement the substituted
compliance framework.\71\ Lastly, five conditions impose obligations on
Japanese nonbank SDs that align with certain of the Commission's
requirements for nonbank SDs. The five conditions require a Japanese
nonbank SD to: (i) maintain a minimum level of capital defined as Basic
Items \72\ in an amount equivalent to at least $20 million (Condition
5); (ii) prepare and keep current financial books and records
(Condition 7); (iii) file a monthly schedule of the firm's financial
positions on Schedule 1 of appendix B to Subpart E of part 23 of the
Commission's regulations (Condition 11); (iv) file a monthly report
listing the custodians holding margin posted by, and collected by, the
Japanese nonbank SD, the amount of margin held by each custodian, and
the aggregate amount of margin required to be posted and collected by
the Japanese nonbank SD (Condition 13); and (v) submit, with each
filing of financial information, a statement by an authorized
representative that, to the best knowledge and belief of the person
making the representation, the information is true and correct
(Condition 14).\73\
---------------------------------------------------------------------------

\68\ The four criteria provide that the Japanese nonbank SD: (i)
is not subject to capital rules of a U.S. prudential regulator
(Condition 1); (ii) is organized and domiciled in Japan (Condition
2); (iii) is registered as a FIBO (Condition 3); and (iv) is subject
to the Japanese Capital Rules and Japanese Financial Reporting Rules
that are part of the Commission's comparability assessment
(Condition 4).
\69\ The eight conditions require a Japanese nonbank SD to
provide notice to the Commission in the event that the firm: (i) is
informed by the FSA that it failed to comply with any component of
the Japanese Capital Rules or Japanese Financial Reporting Rules
(Condition 15); (ii) fails to maintain regulatory capital in the
form of Basic Items of at least the equivalent of $20 million
(Condition 16); (iii) its capital adequacy ratio is below the early
warning level of 140 percent (Condition 17); (iv) its capital
adequacy ratio is below the minimum requirement of 120 percent
(Condition 18); (v) fails to make or keep current financial books
and records (Condition 19); (vi) fails to post or collect margin for
uncleared swaps and non-cleared security-based swaps with one or
more counterparties in amounts that exceed defined limits (Condition
20); (vii) changes its fiscal year-end date (Condition 21); and
(viii) is subject to material changes to the Japanese Capital Rules,
Japanese Financial Reporting Rules, or the supervisory authority of
the Japanese Commission (Condition 22).
\70\ The three conditions provide that a Japanese nonbank SD
must file with the Commission and NFA: (i) English language copies
of certain financial reporting forms that the Japanese nonbank SD is
required to submit to the FSA pursuant to Article 56-2(1) of the
FIEA (Condition 8); (ii) an English language copy of the annual
business report that the Japanese nonbank SDs is required to submit
to the FSA pursuant to Article 46-3(1) of the FIEA and Article 172
of the COO (Condition 9); and (iii) English language copies of the
Japanese nonbank SD's annual audited financial statements and
management report that are required to be prepared pursuant to
Article 435(2) of the Japanese Companies Act (Act No. 86 of 2005)
(Condition 10).
\71\ One of the administrative conditions provides that a
Japanese nonbank SD must provide a notice to the Commission of its
intent to comply with the Comparability Order and the Japanese
Capital Rules and Japanese Financial Reporting Rules in lieu of the
CFTC Capital Rules and CFTC Financial Reporting Rules. The notice
must include the Japanese nonbank SD's representation that the firm
is organized and domiciled in Japan, is a registered FIBO, and is
subject to and complies with the Japanese Capital Rules and the
Japanese Financial Reporting Rules (Condition 6). The second
administrative condition provides that a Japanese nonbank SD must
file any documents with the Commission and NFA via electronic
transmission (Condition 23). With respect to Condition 6, the
Commission also notes that the language of the proposed condition
required that a Japanese nonbank SD provide a notice of its intent
to comply with ``applicable'' Japanese Capital Rules and Japanese
Financial Reporting Rules. Given that ``Japanese Capital Rules and
Japanese Financial Reporting Rules'' is a term defined in the
Comparability Order to include laws and regulations that apply to
Japanese nonbank SDs, the word ``applicable'' is superfluous and is,
therefore, not included in final Condition 6 of the Comparability
Order.
\72\ ``Basic Items'' are analogous to common equity tier 1
capital as defined in the CFTC Capital Rules. See discussion in
section II.B.
\73\ Another condition specifies that Japanese nonbank SDs that
are registered with the U.S. Securities and Exchange Commission
(``SEC'') as security-based swap dealers (``SBSDs'') and required to
file with the SEC, or its designee, Form X-17A-5 (``FOCUS Report''),
must file a copy of such FOCUS Report with the Commission and NFA
within 35 calendar days after the end of each month (Condition 12).
A Japanese nonbank SD that files a FOCUS Report pursuant to
Condition 12 will not be required to file the reports and schedules
specified in Conditions 8 and 11. Currently, no Japanese nonbank SD
is registered as a SBSD.
---------------------------------------------------------------------------

As the substance of these conditions demonstrates, the primary
objective of a majority of the conditions is not to compensate for
regulatory gaps in the Japanese capital and financial reporting
framework, but rather to ensure that the Commission and NFA receive
information to conduct ongoing monitoring of Japanese nonbank SDs for
compliance with relevant capital and financial reporting requirements.
As discussed above, in issuing the Comparability Order, the Commission
is not ceding its supervisory and enforcement authorities. The
Comparability Order permits Japanese nonbank SDs to satisfy the
Commission's capital and financial reporting requirements by complying
with certain laws and/or regulations of Japan that have been found
comparable to the Commission's laws and/or regulations in purpose and
effect. The Commission and NFA, however, have a continuing obligation
to conduct

[[Page 58477]]

ongoing oversight, including potential examination, of Japanese nonbank
SDs to ensure compliance with the Comparability Order, including its
conditions. To that effect, the notice and financial reporting
conditions set forth in the Comparability Order provide the Commission
and NFA with information necessary to monitor for such compliance, and
to evaluate the operational condition and ongoing financial condition
of Japanese nonbank SDs. The Commission may also initiate an
enforcement action against a Japanese nonbank SD that fails to comply
with the conditions of the Comparability Order.\74\
---------------------------------------------------------------------------

\74\ As the Commission stated in the 2022 Proposal, a non-U.S.
nonbank SD that operates under a Comparability Order issued by the
Commission remains subject to the Commission's examination and
enforcement authority. Specifically, the Commission may initiate an
enforcement action against a non-U.S. nonbank SD that fails to
comply with its home-country capital adequacy and/or financial
reporting requirements cited in a Comparability Order. See 2022
Proposal at 48094-48095. See also 17 CFR 23.106(a)(4)(ii), which
provides that the Commission may examine all nonbank SDs, regardless
of whether the nonbank SDs rely on substituted compliance, and that
the Commission may initiate an enforcement action under the
Commission's capital and financial reporting regulations against a
non-U.S. nonbank SD that fails to comply with a foreign
jurisdiction's capital adequacy and financial reporting
requirements.
---------------------------------------------------------------------------

Furthermore, to the extent that a condition imposes a new
obligation on Japanese nonbank SDs, the imposition of such condition is
also consistent with Commission Regulation 23.106 and the Commission's
established policy with regard to comparability determinations. As
discussed above, the Commission contemplated that even in circumstances
where the Commission finds two regulatory regimes comparable, the
Commission may impose requirements on entities relying on substituted
compliance where the Commission determines that the home jurisdiction's
regime lacks comparable and comprehensive regulation on a specific
issue.\75\ The Commission's authority to impose such conditions is set
out in Commission Regulation 23.106(a)(5), which states that the
Commission may impose ``any terms and conditions it deems appropriate,
including certain capital adequacy and financial reporting requirements
[on SDs].'' \76\
---------------------------------------------------------------------------

\75\ Guidance at 45343.
\76\ 17 CFR 23.106(a)(5).
---------------------------------------------------------------------------

Better Markets further stated that if the Commission grants
substituted compliance with regard to materially different regulatory
requirements, it must make a well-supported comparability determination
by, at a minimum, clearly and specifically setting forth the desired
regulatory outcome and providing a detailed, evidence-based explanation
as to how the jurisdiction's different legal requirements nonetheless
lead to a comparable regulatory outcome.\77\ Better Markets also stated
that if the Commission grants the Comparability Determination and
Comparability Order, it must, at a minimum, ensure that the conditions
are applied and enforced with full force and without exception or
dilution.\78\ Better Markets asserted that ``[a] determination that a
foreign jurisdiction's nonbank SDs rules would produce comparable
regulatory outcomes is the beginning, not the end, of the CFTC's
obligation to ensure that the activities of the foreign nonbank SD
entities do not pose risks to the U.S. financial system. As time goes
on, regulatory requirements that, in theory, are expected to produce
one regulatory outcome may, in practice, produce a different one. And,
of course, the regulatory requirements may themselves be changed in a
variety of ways. Finally, the effectiveness of an authority's
supervision and enforcement program can become weakened for any number
of reasons--the CFTC cannot assume that an enforcement program that is
presently effective will continue to be effective.'' \79\ Better
Markets further asserted that to fulfill its obligation to protect the
U.S. financial system, the Commission must ensure, on an ongoing basis,
that each grant of substituted compliance remains appropriate over time
by, at a minimum, requiring each Comparability Order to impose an
obligation on the applicant, as appropriate, to: (i) periodically
apprise the Commission of the activities and results of its supervision
and enforcement programs, to ensure that they remain sufficiently
robust to deter and address violations of the law; and (ii) immediately
apprise the Commission of any material changes to the regulatory
regime, including changes to rules or interpretations of rules.\80\
---------------------------------------------------------------------------

\77\ Better Markets at p. 6.
\78\ Id. at p. 2.
\79\ Id. at p. 6.
\80\ Id.
---------------------------------------------------------------------------

Although the Commission disagrees that the Japanese Capital Rules
and the Japanese Financial Reporting Rules, as a whole, are materially
different or do not achieve comparable regulatory outcomes, the
Commission concurs that granting substituted compliance should be the
result of a well-supported comparability assessment. Consistent with
that view, the Commission believes that this final Comparability
Determination articulates the Commission's analysis in sufficient
detail and provides an appropriate explanation of how the foreign
jurisdiction's requirements are comparable in purpose and effect with
the Commission's requirements, and lead to comparable regulatory
outcomes with the Commission's requirements. Specifically, Section III
of the 2022 Proposal and Section II of the final Comparability
Determination reflect, among other observations, the Commission's
detailed analysis with respect to each of the elements for
consideration listed in Commission Regulation 23.106(a)(3).
The Commission also concurs that the availability of substituted
compliance is conditioned upon a non-US nonbank SD's ongoing compliance
with the terms and conditions of the final Comparability Order, and the
Commission's ongoing assessment that the Japanese Capital Rules and
Japanese Financial Reporting Rules remain comparable in purpose and
effect with the CFTC Capital Rules and CFTC Financial Reporting Rules.
As noted above, and discussed in more detail in Sections II.D. and E.
below, Japanese nonbank SDs are subject to notice and financial
reporting requirements under the final Comparability Order that provide
Commission and NFA staff with the ability to monitor the Japanese
nonbank SDs' ongoing compliance with the conditions set forth in the
final Comparability Order. In addition, the final Comparability Order
requires Japanese nonbank SDs or the FSA to inform the Commission of
changes to the relevant Japanese Capital Rules and Japanese Financial
Reporting Rules so that the Commission may assess the continued
effectiveness of the Comparability Order in ensuring that the Japanese
laws and regulations have the comparable regulatory objectives of the
CEA and Commission regulations of ensuring the safety and soundness of
nonbank SDs.\81\ Commission staff will also monitor the Japanese
nonbank SDs directly as part of its supervisory program and will
discuss with the firms any proposed or pending revisions to specific
laws and rules cited in the final

[[Page 58478]]

Comparability Order. Lastly, in addition to assessing the effectiveness
of the Comparability Order as a result of revisions or proposed
revisions to the Japanese laws, regulations, or supervisory regime, the
Commission further notes that future material changes to the CFTC
Capital Rules or CFTC Financial Reporting Rules, or the Commission's or
NFA's supervisory programs, may necessitate an amendment to the
Comparability Determination and Comparability Order to reflect those
changes.\82\
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\81\ Condition 22 of the final Comparability Order requires
Japanese nonbank SDs or the FSA to notify the Commission of any
material changes to the information submitted in the FSA
Application, including, but not limited to, proposed and final
material changes to the Japanese Capital Rules or Japanese Financial
Reporting Rules and proposed and final material changes to the FSA's
supervisory authority or supervisory regime over Japanese nonbank
SDs. The Commission notes that it also made certain non-substantive,
clarifying changes to the language of final Condition 22 as compared
to the proposed condition.
\82\ 2022 Proposal at 48098 (n. 72).
---------------------------------------------------------------------------

Another commenter, Harrington, stated that the Commission ``must
prevent every regulated [SD] globally from providing a swap contract
with a ``flip clause [. . .].'' \83\ Harrington further recommended
that the Commission condition the Comparability Order on specifying
that a Japanese nonbank SD that is party to a swap contract with a flip
clause must hold additional capital determined based on the required
margin and the contract market value.\84\ Alternatively, Harrington
argued that the Commission should prohibit a Japanese nonbank SD from
entering into a new swap contract with a flip clause or extending an
existing one.\85\ Harrington has elsewhere referred to a description of
a ``flip clause'' as a provision in swap contracts with structured debt
issuers that reverses or ``flips'' the priority of payment obligations
owed to the swap counterparty on the one hand and the noteholders on
the other, following a specified event of default.\86\ Based on
Harrington's description, flip clauses present a risk to the SD in
synthetic transactions where payments under a swap contract are secured
with the same collateral that would serve to cover payments under the
notes issued by a structured debt issuer. In such circumstances, an
``event of default'' by the SD would cause the SD's priority of payment
from the collateral under a swap to ``flip'' to a more junior priority
position, including for mark-to-market gains on ``in the money''
swaps.\87\
---------------------------------------------------------------------------

\83\ Harrington 10/20/2022 Letter at p. 3.
\84\ Harrington 10/20/2022 Letter at p. 23.
\85\ Id.
\86\ William J. Harrington, Submission to the U.S. Securities
and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at
p.8.
\87\ For additional information on the legal mechanics of a flip
clause, see Lehman Brothers Special Financing Inc v. Bank of America
N.A., No. 18-1079 (2nd Cir. 2020).
---------------------------------------------------------------------------

Harrington argued that no element of the CFTC Capital Rules or the
Japanese Capital Rules addresses ``the 100% self-exposure that [an SD]
incurs with each swap with flip clause.'' \88\ Harrington recognized,
however, that the CFTC margin requirements for uncleared swap
transactions address his concerns associated with the inclusion of a
flip clause.\89\ Nonetheless, according to Harrington, risks arise in
circumstances when non-U.S. margin rules exempt SDs from margin
obligations in connection with swaps with a structured debt issuer.\90\
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\88\ Harrington 10/20/2022 Letter at p. 21-22.
\89\ Harrington 10/20/2022 Letter at p.3 (noting that the
requirement for SDs to post and collect variation margin for swap
contracts with a securitization or structured debt issuer
``generates the immense benefit of inducing U.S. securitization and
structured debt issuers to forswear all swap contracts, both with
and without a flip clause'').
\90\ Harrington 10/20/2022 Letter at p.3 (arguing that ``non-
U.S. swap margin rules de facto exempt a swap provider from
collecting or posting variation margin under a new contract with
most securitization and structured debt issuers'').
---------------------------------------------------------------------------

The Commission recognizes that given some definitional differences
and differences in the activity thresholds with respect to the scope of
application of the CFTC margin requirements and non-U.S. margin
requirements, some transactions that are subject to the CFTC margin
requirements for uncleared swaps may not be subject to margin
requirements in another jurisdiction. In connection with this
Comparability Determination, however, the Commission notes that both
under the CFTC Capital Rules and the Japanese Capital Rules,
uncollateralized exposures from uncleared swap transactions would
generate a higher counterparty credit risk charge than the exposures
resulting from transactions under which the counterparties have posted
collateral.\91\ Accordingly, the Commission does not believe that the
respective sets of rules adopt a conflicting approach or lead to a
disparate outcome with respect to the capital treatment of
uncollateralized uncleared swap exposures that would warrant a finding
of non-comparability of the CFTC Capital Rules and the Japanese Capital
Rules.
---------------------------------------------------------------------------

\91\ 12 CFR 217.34 and 12 CFR 217.132 (indicating that nonbank
SDs may recognize the risk-mitigating effects of financial
collateral for collateralized derivatives contracts) and Notice on
Capital, Article 15.5. and 15-2.5 (similarly indicating that
Japanese nonbank SDs are allowed to recognize the risk-mitigating
effect of collateral by deducting the amount of collateral from the
exposure at default amount).
---------------------------------------------------------------------------

With regard to Harrington's general recommendations, also included
in a submission by Harrington in connection with the adoption of the
CFTC Capital Rules, that the Commission impose additional capital
charges for swap contracts with a flip clause,\92\ the Commission notes
that any change in its capital requirements and approach, if deemed
appropriate, would be addressed separately from the Comparability
Determination. As the Commission stated in adopting the CFTC Capital
Rules, over time the Commission may consider adjusting the capital
charges applicable to nonbank SDs that engage in bespoke swap
transactions, including contracts involving flip clauses, as a result
of its experience and as market developments may warrant.\93\ If the
Commission proceeds with adjustments to the CFTC Capital Rules, the
Commission may reconsider the comparability between the CFTC Capital
Rules and the Japanese Capital Rules in light of these changes.
---------------------------------------------------------------------------

\92\ Harrington 10/20/2022 Letter at p.24.
\93\ 85 FR 57462 at 57475. As stated in the adopting release to
the CFTC Capital Rules, the Commission considered that its rules
were appropriately calibrated to account for a wide variety of
possible uncleared swap transactions, including bespoke transactions
involving flip clauses or other unique features. See id.
---------------------------------------------------------------------------

Finally, IBAJ proposed several technical amendments to the 2022
Proposal that were corrective or clarifying in nature.\94\ As further
discussed below, several of the proposed changes have been
incorporated, as appropriate, throughout the final Comparability
Determination and Comparability Order.
---------------------------------------------------------------------------

\94\ IBAJ Letter.
---------------------------------------------------------------------------

II. Final Capital and Financial Reporting Comparability Determination
and Comparability Order

The following section provides the Commission's comparative
analysis of the Japanese Capital Rules and the Japanese Financial
Reporting Rules with the corresponding CFTC Capital Rules and CFTC
Financial Reporting Rules, as described in the 2022 Proposal, further
modified to address comments received. As emphasized in the 2022
Proposal, the capital and financial reporting regimes are complex
structures comprised of a number of interrelated regulatory
components.\95\ Differences in how jurisdictions approach and implement
these regimes are expected, even among jurisdictions that base their
requirements on the principles and standards set forth in the BCBS
framework.
---------------------------------------------------------------------------

\95\ See 2022 Proposal at 48098.
---------------------------------------------------------------------------

The Commission performed the analysis by assessing the
comparability of the Japanese Capital Rules for Japanese nonbank SDs as
set forth in the FSA Application and in the English language
translation of certain applicable Japanese laws and regulations with
the Commission's Bank-Based Approach for nonbank SDs.

[[Page 58479]]

The Commission understands that, as of the date of the final
Comparability Determination and Comparability Order, the three Japanese
nonbank SDs registered with the Commission are subject to a bank-based
capital approach under the Japanese Capital Rules. Accordingly, when
the Commission makes its final determination herein about the
comparability of the Japanese Capital Rules with the CFTC Capital
Rules, the determination pertains to the comparability of the Japanese
Capital Rules with the Bank-Based Approach under the CFTC Capital
Rules. The Commission notes that any material changes to the
information submitted in the FSA Application, including, but not
limited to, proposed and final material changes to the Japanese Capital
Rules or Japanese Financial Reporting Rules, as well as any proposed
and final material changes to the FSA's supervisory authority or
supervisory regime, will require notification to the Commission and NFA
pursuant to Condition 22 of the final Comparability Order.\96\
Therefore, if there are subsequent material changes to the Japanese
Capital Rules, Japanese Financial Reporting Rules, or the supervisory
authority or supervisory regime, the Commission will review and assess
the impact of such changes on the final Comparability Determination and
Comparability Order as they are then in effect, and may amend or
supplement the Comparability Order as appropriate.\97\
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\96\ Condition 22 of the final Comparability Order. The
Commission notes that it made certain non-substantive, clarifying
changes to the language of final Condition 22 as compared to the
proposed condition.
\97\ See 2022 Proposal at 48098. As stated in the 2022 Proposal,
the Commission may also amend or supplement the Comparability Order
to address any material changes to the CFTC Capital Rules and CFTC
Financial Reporting Rules, including rule amendments to capital
rules of the Federal Reserve Board that are incorporated into the
CFTC capital Rules' Bank-Based Approach under Commission Regulation
23.101(a)(1)(i), that are adopted after the final Comparability
Order is issued. See id. (fn. 72).
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A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and Japanese Capital Rules and Japanese Financial
Reporting Rules

1. Preliminary Determination
As reflected in the 2022 Proposal and discussed above, the
Commission preliminarily determined that the overall objectives of the
Japanese Capital Rules and the CFTC Capital Rules are comparable in
that both sets of rules are intended to ensure the safety and soundness
of nonbank SDs by establishing regulatory regimes that require nonbank
SDs to maintain a sufficient amount of qualifying regulatory capital to
absorb losses, including losses from swaps and other trading
activities, and to absorb decreases in the value of firm assets and
increases in the value of firm liabilities without the nonbank SDs
becoming insolvent.\98\ The Commission further noted that the Japanese
Capital Rules and CFTC Capital Rules are also based on, and consistent
with, the BCBS framework, which was designed to ensure that banking
entities hold sufficient levels of capital to absorb losses and
decreases in the value of firm assets and increases in the value of
firm liabilities without the banks becoming insolvent.\99\
---------------------------------------------------------------------------

\98\ See 2022 Proposal at 48099.
\99\ Id.
---------------------------------------------------------------------------

The Commission also preliminarily found that the Japanese Capital
Rules are comparable in purpose and effect to the CFTC Capital Rules
given that both regulatory approaches compute the minimum capital
requirements based on the level of a nonbank SD's on-balance sheet and
off-balance sheet exposures, with the objective and purpose of ensuring
that the nonbank SD's capital is adequate to absorb losses or decreases
in the value of firm assets or increases in the value of firm
liabilities resulting from such exposures.\100\ The Commission observed
that the Japanese Capital Rules and CFTC Capital Rules provide for a
comparable approach to the calculation of on-balance sheet and off-
balance sheet risk exposures using standardized or internal model-based
approaches.\101\ In addition, as discussed in the 2022 Proposal, the
Japanese Capital Rules' and CFTC Capital Rules' requirements for
identifying and measuring on-balance sheet and off-balance sheet
exposures under standardized or internal model-based approaches are
also consistent with the requirements set forth under the BCBS
framework for identifying and measuring on-balance sheet and off-
balance sheet exposures.\102\
---------------------------------------------------------------------------

\100\ Id.
\101\ Id.
\102\ Id.
---------------------------------------------------------------------------

Finally, the Commission preliminarily noted that the Japanese
Capital Rules and CFTC Capital Rules further achieve comparable
outcomes and are comparable in purpose and effect in that both sets of
rules limit the types of capital instruments that qualify as regulatory
capital to cover the on-balance sheet and off-balance sheet risk
exposures to high quality equity capital and qualifying subordinated
debt instruments that meet conditions designed to ensure that the
holders of the debt have effectively subordinated their claims to other
creditors of the nonbank SD.\103\ As discussed in the 2022 Proposal and
in Section II.B. below, both the Japanese Capital Rules and the CFTC
Capital Rules define high quality capital by the degree to which the
capital represents permanent capital that is contributed, or readily
available to a nonbank SD, on an unrestricted basis to absorb
unexpected losses, including losses from swaps trading and other
activities, without the nonbank SD becoming insolvent.\104\
---------------------------------------------------------------------------

\103\ Id. at 48099-48100.
\104\ Id.
---------------------------------------------------------------------------

The Commission further stated that it preliminarily found the
Japanese Financial Reporting Rules to be comparable in purpose and
effect to the CFTC Financial Reporting Rules as both the FSA and CFTC
require nonbank SDs to file periodic financial reports, including
unaudited financial reports and an annual audited financial report,
detailing their financial operations and demonstrating their compliance
with minimum capital requirements.\105\ As discussed in the 2022
Proposal, in addition to providing the CFTC and FSA with information
necessary to comprehensively assess the financial condition of a
nonbank SD on an ongoing basis, the financial reports further provide
the CFTC and FSA with information regarding potential changes in a
nonbank SD's risk profile by disclosing changes in account balances
reported over a period of time.\106\ Such changes in account balances
may indicate, among other things, that the nonbank SD has entered into
new lines of business, has increased its activity in an existing line
of business relative to other activities, or has terminated a previous
line of business.\107\
---------------------------------------------------------------------------

\105\ Id. at 48100.
\106\ Id.
\107\ Id.
---------------------------------------------------------------------------

In assessing the comparability between the CFTC Financial Reporting
Rules and the Japanese Financial Reporting Rules, the Commission noted
that the prompt and effective monitoring of the financial condition of
nonbank SDs through the receipt and review of periodic financial
reports supports the Commission and FSA in meeting their respective
objectives of ensuring the safety and soundness of nonbank SDs. In this
regard, the Commission stated that the early identification of
potential financial issues provides the Commission and FSA with an
opportunity to address such issues with the nonbank SD before they
develop to a state where the financial condition of the firm is

[[Page 58480]]

impaired such that it may no longer hold a sufficient amount of
qualifying regulatory capital to absorb decreases in the value of firm
assets, absorb increases in the value of firm liabilities, or cover
losses from its business activities, including the firm's swap dealing
activities and obligations to swap counterparties.\108\
---------------------------------------------------------------------------

\108\ Id.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
In response to the Commission's request for comment, Better Markets
identified certain differences between the CFTC Capital Rules and CFTC
Financial Reporting Rules and the Japanese Capital Rules and Japanese
Financial Reporting Rules and stated that the differences mandated
denial of the request for a comparability determination.\109\ Better
Markets further stated that the imposition of conditions to achieve
comparability between the regimes implicitly concedes that the regimes
are not comparable, and is suboptimal and undesirable, as it creates a
set of capital and reporting requirements that Japanese nonbank SDs
must abide by and that the Commission must monitor.\110\
---------------------------------------------------------------------------

\109\ Better Markets Letter at pp. 7-11. For example, Better
Markets asserts that while the CFTC requires non-bank SDs to hold
qualifying capital in an amount equal to at least 8 percent of the
nonbank SDs uncleared swap margin amount, Japan's capital rules are
based on an ``arbitrary percentage'' of a company's operating
expenses. Better Markets also asserted that while the CFTC's capital
rules require nonbank SDs to ``maintain regulatory capital in the
form of common equity tier 1 capital, additional tier 1 capital, and
tier 2 capital, Japan's capital rules require nonbank SDs to
maintain a ``capital adequacy amount'' in the form of ``Basic Items
and Supplemental Items'' and that the Japanese framework has no
dollar minimum capital requirement. These distinctions between the
CFTC Capital Rules and Financial Reporting Rules, and the Japanese
Capital and Financial Reporting Rules are discussed in detail in
sections II.C. and II.B., respectively, below.
\110\ Id.
---------------------------------------------------------------------------

As described herein and in the 2022 Proposal, Commission staff has
engaged in a detailed, comprehensive study and evaluation of the
Japanese capital and financial reporting framework and has confirmed
that its understanding of the elements and application of the framework
is accurate. The Commission has also concluded, based on its
evaluation, that the FSA has a comprehensive oversight program for
monitoring Japanese nonbank SD's compliance with relevant Japanese
Capital Rules.
Furthermore, as discussed in Section I.E. above, the conditions set
forth in the Comparability Order are generally intended to ensure that:
(i) only Japanese nonbank SDs that are subject to the laws and
regulations assessed under the Comparability Determination are eligible
for substituted compliance; (ii) the Japanese nonbank SDs are subject
to supervision by the FSA; and (iii) the Japanese nonbank SDs provide
information to the Commission and NFA that is relevant to the ongoing
supervision of their operations and financial condition. Considering
this thorough analysis and the ongoing requirement for Japanese nonbank
SDs to provide information to the Commission and NFA demonstrating
compliance with the Comparability Order, the Commission is confident
that it is capable of effectively conducting, together with NFA,
appropriately tailored oversight of the Japanese nonbank SDs. In light
of the Commission's ultimate conclusion that the Japanese capital and
financial reporting requirements are comparable based on the standards
articulated in Commission Regulation 23.106(a)(3), the Commission
believes that a failure to issue a Comparability Determination and
Comparability Order would in fact be ``suboptimal and undesirable'' as
it would impose duplicative requirements that would result in increased
costs for registrants and market participants without a commensurate
benefit from an oversight perspective.
As discussed in Sections I.B. and E. above, and detailed herein,
the Commission finds that the CFTC Capital Rules and Financial
Reporting Rules and the Japanese Capital Rules and Financial Reporting
Rules are comparable in purpose and effect, and have overall comparable
objectives, notwithstanding the identified differences. In this regard,
the Commission notes that instead of conducting a line-by-line
assessment or comparison of the Japanese Capital and Japanese Financial
Reporting Rules and the CFTC Capital and CFTC Financial Reporting
Rules, it has applied in the assessment set forth in this determination
and order, a principles-based, holistic approach in assessing the
comparability of both regimes, consistent with the standard of review
it adopted in Commission Regulation 23.106(a)(3). Based on that
principles-based, holistic assessment, the individual elements of which
are described in more detail in Sections II.B. through II.F below, the
Commission has determined that both sets of rules are designed to
ensure the safety and soundness of nonbank SDs and achieve comparable
outcomes. As such, the Commission adopts the Comparability
Determination and Comparability Order as proposed with respect to the
analysis of the regulatory objectives of the CFTC Capital Rules and
Financial Reporting Rules and the Japanese Capital and Financial
Reporting Rules.

B. Nonbank Swap Dealer Qualifying Capital

1. Preliminary Determination
As discussed in the 2022 Proposal, the Commission preliminarily
determined that the Japanese Capital Rules are comparable in purpose
and effect to CFTC Capital Rules with regard to the types and
characteristics of a nonbank SD's equity that qualifies as regulatory
capital in meeting its minimum requirements.\111\ The Commission
explained that the Japanese Capital Rules and the CFTC Capital Rules
for nonbank SDs both require a nonbank SD to maintain a quantity of
high-quality and permanent capital that, based on the firm's activities
and on-balance sheet and off-balance sheet exposures, is sufficient to
absorb losses and decreases in the value of firm assets and increases
in the value of firm liabilities without resulting in the firm becoming
insolvent.\112\ The Commission observed that the Japanese Capital Rules
and the CFTC Capital Rules permit nonbank SDs to recognize comparable
forms of equity capital and qualifying subordinated debt instruments
toward meeting minimum capital requirements, with both the Japanese
Capital Rules and the CFTC Capital Rules emphasizing high quality
capital instruments.\113\
---------------------------------------------------------------------------

\111\ See 2022 Proposal at 48101.
\112\ Id.
\113\ Id.
---------------------------------------------------------------------------

In support of its preliminary Comparability Determination, the
Commission noted that the CFTC Capital Rules require a nonbank SD
electing the Bank-Based Approach to maintain regulatory capital in the
form of common equity tier 1 capital, additional tier 1 capital, and
tier 2 capital in amounts that meet certain stated minimum requirements
set forth in Commission Regulation 23.101.\114\ Common equity tier 1
capital is generally composed of an entity's common stock instruments,
and any related surpluses, retained earnings, and accumulated other
comprehensive income, and is a more conservative or permanent form of
capital that is last in line to receive distributions in the event of
the entity's insolvency.\115\ Additional tier 1 capital is generally
composed of

[[Page 58481]]

equity instruments such as preferred stock and certain hybrid
securities that may be converted to common stock if triggering events
occur and may have a preference in distributions over common equity
tier 1 capital in the event of an insolvency.\116\ Total tier 1 capital
is composed of common equity tier 1 capital and further includes
additional tier 1 capital. Tier 2 capital includes certain types of
instruments that include both debt and equity characteristics such as
qualifying subordinated debt.\117\ Subordinated debt must meet certain
conditions to qualify as tier 2 capital under the CFTC Capital
Rules.\118\
---------------------------------------------------------------------------

\114\ 17 CFR 23.101(a)(1)(i) and 2022 Proposal at 48100. The
terms ``common equity tier 1 capital,'' ``additional tier 1
capital,'' and ``tier 2 capital'' are defined in the bank holding
company regulations of the Federal Reserve Board. See 12 CFR 217.20.
\115\ 12 CFR 217.20(b).
\116\ 12 CFR 217.20(c).
\117\ 12 CFR 217.20(d).
\118\ Subordinated debt must meet requirements set forth in SEC
Rule 18a-1d. Specifically, subordinated debt instruments must have a
term of at least one year (with the exception of approved revolving
subordinated debt agreements which may have a maturity term that is
less than one year), and contain terms that effectively subordinate
the rights of lenders to receive any payments, including accrued
interest, to other creditors of the firm. 17 CFR 23.101(a)(1)(i)(B)
and 17 CFR 240.18a-1d.
---------------------------------------------------------------------------

The preliminary Comparability Determination also noted that the
Japanese Capital Rules require each Japanese nonbank SD to maintain a
``capital adequacy amount'' (i.e., an aggregate of Basic Items and
Supplemental Items, after deducting carrying value of fixed assets,
with Basic Items representing at least 50 percent of the total capital
adequacy amount) \119\ that equals or exceeds 120 percent of the firm's
``risk equivalent amount,'' which is the sum of the firm's market risk,
credit risk, and basic risk.\120\ Basic Items are composed of the
Japanese nonbank SD's balance sheet capital, including: (i) issued and
outstanding shares; (ii) the payment for an application for new shares;
(iii) the capital surplus; (iv) the earned surplus; (v) the negative
valuation difference on available-for-sale securities; and (vi) the
firm's own treasury stock.\121\ Supplemental Items include the positive
valuation difference on available-for-sale securities and certain
subordinated debt instruments.\122\ Subordinated debt instruments also
must meet certain conditions to qualify as Supplemental Items under the
Japanese Capital Rules, including containing appropriate provisions
subordinating the rights of the lender to the payment of principal and
interest to other creditors of the Japanese nonbank SD.\123\ In
addition, any accelerated payment of the subordinated debt may only be
made on a voluntarily basis by the Japanese nonbank SD after obtaining
approval from the FSA.\124\
---------------------------------------------------------------------------

\119\ See 2022 Proposal at 48100. The phrase ``after deducting
carrying value of fixed assets'' has been added after ``Supplemental
Items'' in response to a technical comment by IBAJ. IBAJ Letter at
p. 5. As the Commission explained in the 2022 Proposal, the
deduction of the carrying value of fixed assets is a conservative
approach to the computation of a Japanese nonbank SD's capital
adequacy amount as it excludes the value of non-liquid fixed assets
from the firm's total Basic Items. See 2022 Proposal at 48101.
\120\ Article 46-6(2) of the FIEA, Article 176 of the COO and
section IV-2-1 (Preciseness of Capital Adequacy Ratio) of the
Supervisory Guidelines for FIBO.
\121\ Article 176(1)(i) through (vi) of the COO.
\122\ Article 176(1)(vii) of the COO.
\123\ Article 176(2) and (3) of the COO.
\124\ Id.
---------------------------------------------------------------------------

Based on its comparative assessment, the Commission preliminarily
found that the types and characteristics of the equity instruments
included in Basic Items under the Japanese Capital Rules are comparable
to the types and characteristics of equity instruments comprising
common equity tier 1 capital and additional tier 1 capital under the
CFTC Capital Rules.\125\ Specifically, the Commission noted that the
Japanese Capital Rules' Basic Items and the CFTC Capital Rules' common
equity tier 1 capital and additional tier 1 capital are comparable in
that these forms of equity capital have similar characteristics (e.g.,
the equity must be in the form of high-quality, committed, and
permanent capital) and represent contributed equity capital that
generally has no priority to the distribution of firm assets or income
with respect to other shareholders or creditors of the firm, which
allows a nonbank SD to use this equity to absorb decreases in the value
of firm assets, absorb increases in the value of firm liabilities, and
cover losses from business activities, including the firm's swap
dealing activities.\126\
---------------------------------------------------------------------------

\125\ See 2022 Proposal at 48101.
\126\ Id.
---------------------------------------------------------------------------

The Commission also found the Supplemental Items under the Japanese
Capital Rules to be comparable to tier 2 capital under the CFTC Capital
Rules.\127\ Specifically, the Commission noted that the qualifying
conditions imposed on subordinated debt instruments are comparable
under the Japanese Capital Rules and the CFTC Capital Rules in that
they are designed to ensure that the debt has qualities supporting its
recognition by a nonbank SD as equity for capital purposes, including
by effectively subordinating the lenders' claims for repayment on the
debt, or interest payments on the debt, to the claims of other
creditors of the nonbank SD, and by limiting or restricting repayment
or accelerated payments of the subordinated loans if such repayments or
accelerated prepayments would result in the nonbank SD's equity falling
below certain defined thresholds.\128\ The Commission preliminarily
concluded that the terms and conditions provided assurances that the
subordinated debt was appropriate to be recognized as regulatory
capital available to a nonbank SD to meet its regulatory obligations
and to absorb business losses and decreases in the value of firm assets
and increases in the value of firm liabilities.\129\
---------------------------------------------------------------------------

\127\ Id.
\128\ Id.
\129\ Id.
---------------------------------------------------------------------------

The Commission also noted that the Japanese Capital Rules differ
from the CFTC Capital Rules in that the Japanese Capital Rules require
Japanese nonbank SDs to exclude the carrying value of fixed assets from
the sum of the Basic Items and Supplemental Items in computing the
capital adequacy amount, whereas the CFTC Capital Rules do not require
a nonbank SD to exclude the carrying value of fixed assets from the
firm's common equity tier 1 capital or additional tier 1 capital.\130\
As discussed in the 2022 Proposal, the deduction of the carrying value
of fixed assets under the Japanese Capital Rules is a more conservative
standard as it imposes an obligation on Japanese nonbank SDs to meet
minimum regulatory capital requirements with capital that reflects or
represents balance sheet assets that are more liquid than fixed
assets.\131\
---------------------------------------------------------------------------

\130\ The IBAJ noted that the Japanese Capital Rules require the
carrying value of fixed assets to be deducted from both Basic Items
and Supplemental Items (and not just Basic Items as stated in the
2022 Proposal). The Commission has incorporated this clarification
into the final Comparability Determination. IBAJ Letter at p. 5.
\131\ See Article 177 of the COO for a breakdown of the fixed
assets to be deducted.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
In response to the Commission's request for comment on the
qualifying capital analysis, Better Markets objected to the
Commission's determination that the Japanese Capital Rules are
comparable to the CFTC Capital Rules with respect to the type and
characteristics of equity that qualifies as regulatory capital.\132\
Better Markets asserted that the Commission did not adequately analyze
the differences between the two regulatory regimes with respect to the
items of qualifying capital.\133\ More specifically, Better Markets
stated that Basic Items under the Japanese Capital Rules include
treasury stock, whereas, under the CFTC Capital Rules, which are based
on definitions of capital from the Federal

[[Page 58482]]

Reserve Board, common equity tier 1 capital is net of treasury
stock.\134\
---------------------------------------------------------------------------

\132\ Better Markets Letter at p. 9.
\133\ Id. at p. 8.
\134\ Id. at p. 9.
---------------------------------------------------------------------------

The Commission recognizes that the Japanese Capital Rules list
treasury stock, which represents previously issued shares of stock that
have been repurchased by the firm, as a Basic Item.\135\ In application
of the Japanese Rules of Corporate Accounting, however, treasury stock
must be deducted from the shareholders' equity component of the firms'
balance sheet.\136\ As such, consistent with the treatment received
under the CFTC Capital Rules, the treasury stock is not counted towards
the Japanese nonbank SD's Basic Items or Supplemental Items in meeting
its minimum regulatory capital requirement. Accordingly, the Commission
does not find that the CFTC Capital Rules and the Japanese Capital
Rules diverge with respect to their respective approach to exclude
treasury stock from regulatory capital.
---------------------------------------------------------------------------

\135\ Article 176 of the COO.
\136\ Article 76(2) of Rules of Corporate Accounting (Ordinance
of the Ministry of Justice No. 13 of February 7, 2006). To account
for the accurate treatment of treasury stock, the Commission has
revised final Condition 4 of the final Comparability Order to
include Article 76 of the Rules of Corporate Accounting to the list
of laws comprising the Japanese Capital Rules that a Japanese
nonbank SD must comply with under the Comparability Order.
---------------------------------------------------------------------------

In addition, upon further analysis, the Commission not only
reiterates its observations that the Japanese Capital Rules' Basic
Items present characteristics that are comparable to the
characteristics of common equity tier 1 and additional tier 1 capital,
but the Commission further concludes that, despite certain definitional
differences, the Japanese Capital Rules' Basic Items are more closely
equated to common equity tier 1 capital. In particular, the Basic
Items' categories of ``issued and outstanding shares,'' ``capital
surplus,'' and ``earned surplus,'' correspond to the CFTC Capital
Rules' common equity tier 1 categories of ``common stock and related
surpluses,'' and ``retained earnings'' as the categories represent
equity contributions and earnings that have been retained by the
nonbank SDs and represent residual ownership interest in the nonbank
SDs. Similarly, whereas the CFTC Capital Rules provide for the
inclusion of unrealized losses and gains on available-for-sale
securities in the common equity tier 1 category of ``accumulated other
comprehensive income,'' the Japanese Capital Rules require that the
positive valuation of available-for-sale securities (i.e., unrealized
gain) be excluded and the negative valuation difference (i.e.,
unrealized loss) of available-for-sale securities be included in Basic
Items, thus mandating a similar, if not more conservative, treatment
for this category of capital items. Finally, as clarified above, the
CFTC Capital Rules and the Japanese Capital Rules treat treasury stock
consistently for purposes of determining qualifying capital. More
generally, the Commission is of the view that the Japanese Capital
Rules' Basic Items are comparable to the CFTC Capital Rules' common
equity tier 1 items in that both categories represent a more
conservative, permanent form of capital that is last in line to receive
distributions in the event of the entity's insolvency.
In conclusion, the Commission finds that the Japanese Capital Rules
and the CFTC Capital Rules, are comparable in purpose and effect, and
achieve comparable regulatory outcomes, with respect to the types of
capital instruments that qualify as regulatory capital. Both the
Japanese Capital Rules and the CFTC Capital Rules limit regulatory
capital to permanent and conservative forms of capital, including
common equity, capital surpluses, retained earnings, and subordinate
debt where debt holders effectively subordinate their claims to
repayment to all other creditors of the nonbank SD in the event of the
firm's insolvency. Limiting regulatory capital to the above categories
of equity and debt instruments promotes the safety and soundness of the
nonbank SD by helping to ensure that the regulatory capital is not
withdrawn or converted to other equity instruments that may have rights
or priority with respect to payments, such as dividends or
distributions in insolvency, over other creditors, including swap
counterparties. The Commission, therefore, is adopting the
Comparability Order as proposed with respect to the types and
characteristics of equity and subordinated debt that qualify as
regulatory capital to meet minimum capital requirements under the
Japanese Capital Rules.

C. Nonbank Swap Dealer Minimum Capital Requirement

1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements
As reflected in the 2022 Proposal, the CFTC Capital Rules require a
nonbank SD electing the Bank-Based Approach to maintain regulatory
capital that satisfies each of the following criteria: (i) an amount of
common equity tier 1 capital of at least $20 million; (ii) an aggregate
amount of common equity tier 1 capital, additional tier 1 capital, and
tier 2 capital equal to or greater than 8 percent of the nonbank SD's
total risk-weighted assets, provided that common equity tier 1 capital
comprises at least 6.5 percent of the 8 percent; (iii) an aggregate of
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital in an amount equal to or in excess of 8 percent of the nonbank
SD's uncleared swap margin amount; \137\ and (iv) the amount of capital
required by NFA.\138\
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\137\ The term ``uncleared swap margin'' is defined in
Commission Regulation 23.100 to generally mean the amount of initial
margin that a nonbank SD would be required to collect from each
counterparty for each outstanding swap position of the nonbank SD.
17 CFR 23.100. A nonbank SD must include all swap positions in the
calculation of the uncleared swap margin amount, including swaps
that are exempt or excluded from the scope of the Commission's
uncleared swap margin regulations. A nonbank SD must compute the
uncleared swap margin amount in accordance with the Commission's
margin rules for uncleared swaps. 17 CFR 23.154.
\138\ 17 CFR 23.101(a)(1)(i)(D). See also 2022 Proposal at 48101
and 48104. Commission Regulation 23.101(a)(1)(i) sets forth one of
the minimum thresholds that a nonbank SD must meet as the ``the
amount of capital required by a registered futures association.'' As
previously noted, NFA is currently the only entity that is a
registered futures association. NFA has adopted the Commission's
capital requirements as its own requirements, and has not adopted
any additional or stricter minimum capital requirements. See NFA
rulebook, Financial Requirements section 18 Swap Dealer and Major
Swap Participant Financial Requirements, available at
nfa.futures.org.
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In comparison, the Japanese Capital Rules require each Japanese
nonbank SD to maintain a ``capital adequacy amount'' that equals or
exceeds 120 percent of the firm's ``risk equivalent amount.'' \139\ As
explained in the 2022 Proposal, the ``capital adequacy amount'' is
calculated as the Japanese nonbank SD's qualifying balance sheet equity
capital in the form of Basic Items and Supplemental Items, after
deducting the carrying value of fixed assets from both Basic Items and
Supplemental Items.\140\ The Commission noted that the Japanese Capital
Rules further require that at least 50 percent of the Japanese nonbank
SD's capital used to meet the 120 percent minimum requirement must be
composed of Basic Items, and any subordinated debt included in
Supplemental Items must meet regulatory requirements designed to ensure
that the debt is adequately subordinated to claims of other potential
creditors of the firm.\141\
---------------------------------------------------------------------------

\139\ See 2022 Proposal at 48103.
\140\ Id.
\141\ See 2022 Proposal at 48099 and Article 176(1)(vii) of the
COO.
---------------------------------------------------------------------------

2. Preliminary Determination and Comment Analysis
While noting certain differences in the minimum capital
requirements and

[[Page 58483]]

calculation of regulatory capital between the Japanese Capital Rules
and the CFTC Capital Rules, the Commission preliminarily found that the
Japanese Capital Rules and CFTC Capital Rules achieve, subject to the
proposed conditions in the proposed Comparability Determination and
proposed Comparability Order, comparable outcomes by requiring a
nonbank SD to maintain a minimum level of qualifying regulatory capital
and subordinated debt to absorb losses from the firm's business
activities, including its swap dealing activities, and decreases in the
value of the firm's assets and increases in the firm's liabilities
without the nonbank SD becoming insolvent.\142\ As further discussed
below, the Commission's preliminary finding of comparability was based
on a principles-based, holistic comparative analysis of the three
minimum capital requirement thresholds of the CFTC Capital Rules' Bank-
Based Approach referenced above and the respective elements of the
Japanese Capital Rules' requirements.
---------------------------------------------------------------------------

\142\ See 2022 Proposal at 48104.
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a. Fixed Amount Minimum Capital Requirement
As noted above, prong (i) of the CFTC Capital Rules requires each
nonbank SD electing the Bank-Based Approach to maintain a minimum of
$20 million of common equity tier 1 capital. The Commission's $20
million fixed-dollar minimum capital requirement is intended to ensure
that each nonbank SD maintains a level of regulatory capital, without
regard to the level of the firm's dealing and other activities,
sufficient to meet its obligations to swap market participants given
the firm's status as a CFTC-registered nonbank SD, and to help ensure
the safety and soundness of the nonbank SD.\143\ In contrast, the
Japanese Capital Rules do not impose a capital requirement on Japanese
nonbank SDs based on a minimum dollar amount.
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\143\ 85 FR 57462 at 57492.
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The Commission expressed the preliminary view that each CFTC-
registered nonbank SD should maintain a minimum level of regulatory
capital to help ensure that it satisfies its regulatory obligations and
meets its financial commitments to swap counterparties and creditors
without the firm becoming insolvent.\144\ Accordingly, the Commission
proposed to condition the Comparability Order to require each Japanese
nonbank SD to maintain, at all times, a minimum level of regulatory
capital in the form of Basic Items, as defined in Article 176 of the
COO, in an amount denominated in yen that is equivalent to, or greater
than, $20 million in U.S. dollars.\145\
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\144\ See 2022 Proposal at 48106.
\145\ Id. The Commission also proposed to allow a Japanese
nonbank SD to convert the yen-denominated amount of its Basic Items
to the U.S. dollar equivalent based on a commercially reasonable and
observed exchange rate.
---------------------------------------------------------------------------

One commenter, Better Markets, argued that the absence of a base
level requirement in the Japanese Capital Rules that is equivalent to
the CFTC Capital Rules' requirement for each nonbank SD to maintain a
minimum of $20 million of common equity tier 1 capital ``demonstrates a
fatal lack of comparability.'' \146\ Better Markets further asserted
that the Commission's proposed condition requiring that Japanese
nonbank SDs maintain a minimum level of regulatory capital of at least
$20 million inadequately compensates for the gap in the Japanese
framework.\147\ Specifically, Better Markets argued that by allowing
Japanese nonbank SD to meet the proposed minimum capital level with
Basic Items, which the Commission preliminarily found to be equivalent
to the combination of common equity tier 1 and additional tier 1
capital, instead of limiting the qualifying items to the higher form of
common equity tier 1 capital, the Commission would impose a materially
weaker capital requirement.\148\
---------------------------------------------------------------------------

\146\ Better Markets Letter at p. 9.
\147\ Id.
\148\ Id.
---------------------------------------------------------------------------

As noted above, the Commission recognized the difference between
the Japanese Capital Rules and the CFTC Capital Rules with respect to
the $20 million minimum dollar amount of regulatory capital a nonbank
SD is required to maintain. The Commission's proposed condition,
however, effectively addresses this difference by providing that a
Japanese nonbank SD may not avail itself of substituted compliance
unless it maintains a minimum of $20 million of regulatory capital in
the form of Basic Items. The imposition of the condition was consistent
with the Commission authority under Commission Regulation 23.106(a)(5).
Furthermore, as discussed in Section I.E. above, the Commission has
stated that entities relying on substituted compliance may be required
to comply with certain Commission-imposed requirements in situations
where comparable regulations in their home country jurisdiction are
deemed to be lacking.\149\
---------------------------------------------------------------------------

\149\ Guidance at 45343.
---------------------------------------------------------------------------

As discussed in Section II.B.2. above, the Commission is also of
the view that the Japanese Capital Rules' Basic Items are comparable to
the CFTC Capital Rules' common equity tier 1 items in that both
categories represent a conservative, permanent form of capital that is
last in line to receive distributions in the event of the entity's
insolvency. Specifically, the capital that may be recognized by a
nonbank SD and Japanese nonbank SD to meet its common equity tier 1
capital requirement and Basic Items requirement, respectively, is
generally limited to common stock, related common stock surpluses, and
retained earnings. As such, the Commission concludes that the
requirement for Japanese nonbank SDs to maintain an amount of
regulatory capital in the form of Basic Items equal to or in excess of
the equivalent of $20 million will impose a comparable standard to the
analogue requirement under the CFTC Capital Rules and will
appropriately address the lack of a minimum fixed amount capital
requirement under the Japanese Capital Rules.
In conclusion, the Commission finds that the Japanese Capital Rules
and the CFTC Capital Rules, with the imposition of the condition for
Japanese nonbank SDs to maintain a minimum level of Basic Items in an
amount equivalent to at least $20 million, are comparable in purpose
and effect and achieve comparable regulatory outcomes with respect to
capital requirements based on a minimum dollar amount. The requirement
for a nonbank SD with limited swap dealing or other business activities
to maintain a minimum level of regulatory capital equivalent to $20
million helps to ensure the firm's safety and soundness by allowing it
to absorb decreases in firm assets, absorb increases in firm
liabilities, and meet obligations to swap counterparties, other
creditors, and market participants, without the firm becoming
insolvent.
b. Minimum Capital Requirement Based on Risk-Weighted Assets
Prong (ii) of the CFTC Capital Rules' minimum capital requirements
described above requires each nonbank SD electing the Bank-Based
Approach to maintain an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital in an amount equal to or
greater than 8 percent of the nonbank SD's total risk-weighted assets,
with common equity tier 1 capital comprising at least 6.5 percent of
the 8 percent.\150\ Risk-weighted assets are a nonbank SD's on-balance
sheet and off-balance sheet exposures, including market risk and credit
risk exposures, and include

[[Page 58484]]

exposures associated with proprietary swap, security-based swap,
equity, and futures positions, weighted according to risk. The
requirements and capital ratios set forth in prong (ii) are based on
the Federal Reserve Board's capital requirements for bank holding
companies \151\ and are consistent with the BCBS framework.\152\ The
requirement for each nonbank SD to maintain regulatory capital in an
amount that equals or exceeds 8 percent of the firm's total risk-
weighted assets is intended to help ensure that the nonbank SD's level
of capital is sufficient to absorb decreases in the value of the firm's
assets, absorb increases in the value of the firm's liabilities, and
cover unexpected losses resulting from the firm's business activities,
including losses resulting from collateralized and uncollateralized
defaults from swap counterparties, without the nonbank SD becoming
insolvent.\153\
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\150\ 17 CFR 23.101(a)(1)(i)(B).
\151\ 12 CFR 217.10(a)(1). The minimum capital requirement for a
bank holding company under the Federal Reserve Board's rules
requires bank holding companies to satisfy their 8 percent minimum
capital ratio requirement with a minimum of 4.5 percent of common
equity tier 1 capital. The CFTC Capital Rules, however, require a
nonbank SD to meet its minimum 8 percent capital ratio with at least
6.5 percent of common equity tier 1 capital. 17 CFR
23.101(a)(1)(i)(B).
\152\ Risk-based capital requirements RBC20, Calculation of
minimum risk-based capital requirements (Version effective as of 01
January 2023), published by the BCBS and available here: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20230101&published=20201126.
\153\ See generally 85 FR 57462 at 57530.
---------------------------------------------------------------------------

The Japanese Capital Rules contain capital requirements for
Japanese nonbank SDs that the Commission preliminarily found comparable
in purpose and effect to the requirements in prong (ii) of the CFTC
Capital Requirements.\154\ Specifically, the Japanese Capital Rules
require a Japanese nonbank SD to maintain regulatory capital in an
amount equal to or in excess of 120 percent of the firm's risk ``risk
equivalent amount'' (i.e., the firm's risk-weighted assets).\155\ A
Japanese nonbank SD's ``risk equivalent amount'' is calculated as the
sum of the firm's: (i) market risk equivalent amount (i.e., the amount
equivalent to possible risks which may accrue due to fluctuations in
the prices of securities and other proprietary assets and transactions
held); \156\ (ii) counterparty risk equivalent amount (i.e., the amount
equivalent to possible risks which may accrue due to the default in
performance of contracts by the counterparties to transactions or any
other reason); \157\ and (iii) basic risk equivalent amount (i.e., the
amount equivalent to possible risk which may accrue in the ordinary
course of executing business, such as errors in business
handling).\158\
---------------------------------------------------------------------------

\154\ See 2022 Proposal at 48105.
\155\ See discussion in 2022 Proposal at 48105. The Japanese
Capital Rules require a Japanese nonbank SD to maintain a capital
adequacy amount that equals or exceeds 120 percent of its ``risk
equivalent amount.'' Article 46-6(2) of the FIEA, Article 176 of the
COO, and section IV-2-1 (Preciseness of Capital Adequacy Ratio) of
the Supervisory Guidelines for FIBO.
\156\ Article 178(1)(i) of the COO and Articles 10 through 14 of
the Notice on Capital. The ``market risk equivalent amount''
corresponds to ``market risk'' in the CFTC Capital Rules' Bank-Based
Approach and the BCBS framework.
\157\ Article 178(1)(ii) of the COO and Articles 15 through 15-7
of the Notice on Capital. The ``counterparty risk equivalent
amount'' corresponds to ``credit risk'' in the BCBS and Bank-Based
Approach frameworks.
\158\ Article 178(1)(iii) of the COO and Article 16 of the
Notice on Capital.
---------------------------------------------------------------------------

The Commission also preliminarily found that the Japanese Capital
Rules and the CFTC Capital Rules are comparable with respect to the
approaches used in the calculation of risk-weighted amounts for market
risk and credit risk in determining the nonbank SD's risk-weighted
assets.\159\ In this connection, the Commission noted that both regimes
require a nonbank SD to use standardized approaches to compute market
risk and credit risk amounts, unless the firm is approved to use
internal models.\160\
---------------------------------------------------------------------------

\159\ See 2022 Proposal at 48105.
\160\ Id.
---------------------------------------------------------------------------

As the Commission observed, the standardized approaches to
calculating risk-weighted asset amounts for market risk and credit risk
under both the Japanese Capital Rules and the CFTC Capital Rules follow
the same structure that is now the common global standard: (i)
allocating assets to categories according to risk and assigning each a
risk weight; (ii) allocating counterparties according to risk
assessments and assigning each a risk factor; (iii) calculating gross
exposures based on valuation of assets; (iv) calculating a net exposure
allowing offsets following well defined procedures and subject to clear
limitations; (v) adjusting the net exposure by the market risk weights;
and finally, (vi) for credit risk exposures, multiplying the sum of net
exposures to each counterparty by their corresponding risk factor.\161\
---------------------------------------------------------------------------

\161\ Id
---------------------------------------------------------------------------

More specifically, with respect to the calculation of standardized
risk-weighted asset amounts for market risk, the Commission explained
that the CFTC Capital Rules incorporate by reference the standardized
market risk charges set forth in Commission Regulation 1.17 for FCMs
and SEC Rule 18a-1 for nonbank security-based swap dealers
(``SBSDs'').\162\ The standardized market risk charges under Commission
Regulation 1.17 and SEC Rule 18a-1 are calculated as a percentage of
the market value or notional value of the nonbank SD's assets,
including marketable securities and derivatives positions, with the
percentages applied to the market value or notional value increasing as
the expected or anticipated risk of the positions increases.\163\ For
example, the CFTC Capital Rules require nonbank SDs to calculate
standardized market risk-weighted asset amounts for uncleared swaps
based on notional values of the swap positions multiplied by
percentages set forth in the applicable rules.\164\ In addition, market
risk-weighted asset amounts for readily marketable equity securities
are calculated by multiplying the fair market value of the securities
by 15 percent.\165\
---------------------------------------------------------------------------

\162\ See paragraph (3) of the definition of the term BHC
equivalent risk-weighted assets in 17 CFR 23.100.
\163\ 17 CFR 1.17(c)(5) and 17 CFR 240.18a-1(c)(1).
\164\ 17 CFR 1.17(c)(5)(iii).
\165\ 17 CFR 1.17(c)(5)(v), referencing SEC Rule 15c3-
1(c)(2)(vi) (17 CFR 240.15c3-1(c)(2)(vi)).
---------------------------------------------------------------------------

Under the CFTC Capital Rules, the resulting total market risk-
weighted asset amount is multiplied by a factor of 12.5 to cancel the
effect of the 8 percent multiplication factor applied to all of the
nonbank SD's risk-weighted assets under prong (ii) of the rules'
minimum capital requirements described above. As a result, a nonbank SD
is effectively required to hold qualifying regulatory capital equal to
or greater than 100 percent of the amount of its market risk exposure
amount.\166\
---------------------------------------------------------------------------

\166\ See 17 CFR 23.100 (definition of BHC equivalent risk-
weighted assets). As noted, a nonbank SD is required to maintain
qualifying capital (i.e., an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital) in an amount
that equals or exceeds 8 percent of its risk-weighted assets. The
regulations, however, require the nonbank SD to effectively maintain
qualifying capital equal to or in excess of 100 percent of its
market risk-weighted assets by requiring the nonbank SD to multiply
its market-risk weighted assets by a factor of 12.5. For example,
the market risk exposure amount for marketable equity securities
with a current fair market value of $250,000 is $37,500 (market
value of $250,000 x .15 standardized market risk factor). The
nonbank SD is required to maintain regulatory capital equal to or in
excess of full market risk exposure amount of $37,500 (risk exposure
amount of $37,500 x 8 percent regulatory capital requirement equals
$3,000; the regulatory capital requirement is then multiplied by a
factor of 12.5, which effectively requires the nonbank SD to hold
regulatory capital in an amount equal to at least 100 percent of the
market risk exposure amount ($3,000 x 12.5 factor equals $37,500)).
---------------------------------------------------------------------------

Comparable to the CFTC Capital Rules, the Japanese Capital Rules

[[Page 58485]]

require a Japanese nonbank SD to calculate its standardized market risk
equivalent amount by multiplying specified market risk weights set
forth in the Japanese Capital Rules by the notional or market value of
the relevant assets and positions.\167\ A Japanese nonbank SD is
further required to include the full value of its market risk
equivalent amount in its aggregate risk equivalent amount, which
effectively requires the Japanese nonbank SD to hold qualifying equity
capital and subordinated debt in an amount that equals or exceeds 120
percent of the market risk equivalent amount.\168\
---------------------------------------------------------------------------

\167\ See 2022 Proposal at 48103.
\168\ Id. Using the example above, if the market risk exposure
amount for the equity securities under the Japanese Capital Rules
was calculated to be $37,500, the Japanese nonbank SD would be
required to hold an amount of regulatory capital equal to or in
excess of $45,000 (market risk exposure amount of $37,500 x 120
percent).
---------------------------------------------------------------------------

With respect to standardized risk-weighted asset amounts for credit
risk from non-derivatives positions, the Commission explained that
under the CFTC Capital Rules, a nonbank SD must compute its on-balance
sheet and off-balance sheet exposures in accordance with the
standardized risk-weighting requirements adopted by the Federal Reserve
Board and set forth in Subpart D of 12 CFR 217 as if the SD itself were
a bank holding company subject to Subpart D.\169\ Standardized risk-
weighted asset amounts for credit risk are computed by multiplying the
amount of the exposure by defined counterparty credit risk factors that
range from 0 percent to 150 percent.\170\ A nonbank SD with off-balance
sheet exposures is required to calculate a risk-weighted asset amount
for credit risk by multiplying each exposure by a credit conversion
factor that ranges from 0 percent to 100 percent, depending on the type
of exposure.\171\
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\169\ 23.101(a)(1)(i)(B) and paragraph (1) of the definition of
the term BHC equivalent risk-weighted assets in 17 CFR 23.100. See
also 2022 Proposal at 48102.
\170\ 12 CFR 217.32. Lower credit risk factors are assigned to
entities with lower credit risk and higher credit risk factors are
assigned to entities with higher credit risk. For example, a credit
risk factor of 0 percent is applied to exposures to the U.S.
government, the Federal Reserve Bank, and U.S. government agencies
(12 CFR 217.32(a)(1)), and a credit risk factor of 100 percent is
assigned to an exposure to foreign sovereigns that are not members
of the Organization of Economic Co-operation and Development (12 CFR
217.32(a)(2)). See also discussion in 2022 Proposal at 48102.
\171\ 12 CFR 217.33. See also discussion in 2022 Proposal at
48102.
---------------------------------------------------------------------------

In comparison, the Commission noted that Japanese Capital Rules
require a Japanese nonbank SD to calculate its standardized
counterparty risk equivalent amount by multiplying its exposure under a
given transaction by the specific risk weight applicable to the
counterparty under the provisions of the Japanese Capital Rules.\172\
In this regard, the Japanese Capital Rules impose risk weights ranging
from 0 percent to 25 percent on exposures to governmental financial
institutions, non-governmental financial institutions, general
corporations, and individuals.\173\ For certain exposures, credit
ratings are used to determine the percentage of the counterparty credit
risk exposure and, if no credit ratings are available, the Japanese
nonbank SD generally applies a 25 percent risk weight.\174\ A Japanese
nonbank SD is required to include the full amount of the counterparty
risk equivalent amount in its aggregate risk equivalent amount.\175\ As
noted above, a Japanese nonbank SD is also required to maintain a
``capital adequacy amount'' that equals or exceeds 120 percent of the
firm's ``risk equivalent amount.'' Therefore, a Japanese nonbank SD is
effectively required to maintain an amount of qualifying capital that
is equal to or in excess of 120 percent of its credit risk equivalent
amount.
---------------------------------------------------------------------------

\172\ See 2022 Proposal at 48103-48104.
\173\ Article 15(3) of the Notice on Capital. See also
discussion in 2022 Proposal at 48104.
\174\ Id.
\175\ Id.
---------------------------------------------------------------------------

With respect to credit risk for derivatives positions, the
Commission explained that under the CFTC Capital Rules, a nonbank SD
may compute standardized credit risk exposures, using either the
current exposure method (``CEM'') or the standardized approach for
measuring counterparty credit risk (``SA-CCR'').\176\ Both CEM and SA-
CCR are non-model, rules-based approaches to calculating counterparty
credit risk exposures for derivatives positions. Credit risk exposure
under CEM is the sum of: (i) the current exposure (i.e., the positive
mark-to-market) of the derivatives contract; and (ii) the potential
future exposure, which is calculated as the product of the notional
principal amount of the derivatives contract multiplied by a standard
credit risk conversion factor set forth in the rules of the Federal
Reserve Board.\177\ Credit risk exposure under SA-CCR is defined as the
exposure at default amount of a derivatives contract, which is computed
by multiplying a factor of 1.4 by the sum of: (i) the replacement costs
of the contract (i.e., the positive mark-to market); and (ii) the
potential future exposure of the contract.\178\
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\176\ 17 CFR 217.34 and 17 CFR 23.100 (defining the term BHC
risk-weighted assets and providing that a nonbank SD that does not
have model approval may use either CEM or SA-CCR to compute its
exposures for over-the-counter derivative contracts without regard
to the status of its affiliate with respect to the use of a
calculation approach under the Federal Reserve Board's capital
rules). See also discussion in 2022 Proposal at 48102.
\177\ 12 CFR 217.34.
\178\ 12 CFR 217.132(c).
---------------------------------------------------------------------------

In comparison, the Japanese Capital Rules require a Japanese
nonbank SD that is not approved to use credit risk models to calculate
its exposure using the CEM.\179\ Under the CEM, a Japanese nonbank SD
calculates its exposures for over-the-counter derivatives using a
standardized rules-based approach, and is required to hold an amount of
qualifying capital that equals or exceeds 120 percent of the aggregate
derivatives exposures.
---------------------------------------------------------------------------

\179\ See 2022 Proposal at 48104.
---------------------------------------------------------------------------

As discussed in the 2022 Proposal, both the CFTC Capital Rules and
the Japanese Capital Rules also provide that, if approved by NFA or the
FSA, respectively, nonbank SDs may also use internal models to
calculate market and/or credit risk exposures.\180\ The Commission
noted that the internal market and credit risk models under the
Japanese Capital Rules and the CFTC Capital Rules are based on the BCBS
framework and preliminarily found that such models must meet comparable
quantitative and qualitative requirements covering the same risks,
including comparable model risk management requirements.\181\ In this
regard, the Commission observed that both rule sets address the same
types of risk, with similar allowed methodologies, calibrated to
similar risk levels and under similar controls.\182\ The Commission
also noted that the Japanese Capital Rules and the CFTC Capital Rules
contain comparable

[[Page 58486]]

requirements for the management of model risk, which depend on a series
of controls, including the independence of validation, ongoing
monitoring and audit.
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\180\ Id. at 48102-48104.
\181\ Id. For a discussion of the qualitative and quantitative
requirements that models must meet under the CFTC Capital Rules and
the Japanese Capital Rules, see 2022 Proposal at 48102-48103 and
48104, respectively. In this context, the Commission notes that, as
emphasized by IBAJ, the expected exposure method is the only
internal model allowed for purposes of calculating credit risk under
the Japanese Capital Rules. IBAJ Letter at pp. 5-6. The Commission
had erroneously indicated, in referring to credit risk models under
the Japanese Capital Rules, that internal credit risk models can
also further include estimation of the likelihood of default of
counterparties and that credit risk models may include internal
ratings based on the estimation of default probabilities, consistent
with the Basel framework and subject to the same model risk
management guidelines. 2022 Proposal at 48098 and 48104. The
Commission hereby rectifies its summary of the relevant Japanese
Capital Rules and specifies that these statements do not apply to
credit risk models under the Japanese Capital Rules. The Commission,
however, maintains its conclusion that model requirements under the
CFTC Capital Rules and the Japanese Capital Rules are comparable.
\182\ See 2022 Proposal at 48105.
---------------------------------------------------------------------------

In addition, the Japanese Capital Rules require a Japanese nonbank
SD to calculate a basic risk equivalent amount (i.e., an operational
risk exposure amount) as a component of the firm's risk equivalent
amount. The basic risk equivalent amount is computed as an amount equal
to 25 percent of the Japanese nonbank SD's defined annual operating
expenses, and is intended to provide a capital cushion to cover risks
that may occur in the course of executing ordinary business operations,
such as errors in business transactions.\183\
---------------------------------------------------------------------------

\183\ Article 178(1)(iii) of the COO and Article 16 of the
Notice on Capital. See also discussion in 2022 Proposal at 48104.
---------------------------------------------------------------------------

One commenter, Better Markets, noted that the CFTC Bank-Based
Approach requires nonbank SDs to maintain an aggregate of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital equal to
or greater than 8 percent of the non-bank SD's total risk-weighted
assets, provided that common equity tier 1 capital must comprise at
least 6.5 percent of the 8 percent of risk-weighted assets.\184\ Better
Markets stated that, in contrast, the Japanese Capital Rules require
Japanese nonbank SDs to hold capital equal to or greater than 120
percent of their risk-weighted assets, including 50 percent that must
be held in Basic Items.\185\ Better Markets further asserted that in
stating that the 120 percent of risk-weighted assets required by the
Japanese capital rules equates to an ``effective minimum capital
requirement of 9.6 percent of risk-weighted assets,'' the Commission
did not provide an analysis of how the CFTC calculated that effective
minimum and did not disclose how much of the 9.6 percent is held in
Basic Items as opposed to Supplementary Items.\186\ In Better Markets'
view, without this information and analysis, no comparability
determination can be made because U.S. nonbank SDs are required to
maintain 6.5 percent of the total 8 percent of risk-weighted assets in
the highest form of capital, namely common equity tier 1 capital.\187\
---------------------------------------------------------------------------

\184\ Better Markets Letter at p 9.
\185\ Id. at p. 10.
\186\ Id.
\187\ Id.
---------------------------------------------------------------------------

Another commenter, IBAJ, offered a contrasting view, stating that
Japanese nonbank SDs must maintain capital equal to 120 percent of
market risk, credit risk, and basic risk equivalent amounts and that
such amount of capital translated into an effective capital ratio
requirement of 9.6 percent of risk weighted assets, which is higher
than the 8 percent capital ratio required by the Basel standards or
CFTC Capital Rules.\188\ As discussed immediately below, the Commission
agrees with the IBAJ that the capital ratio required by the Japanese
Capital Rules exceeds the capital ratio required by the CFTC Capital
Rules under the Bank-Based Approach.
---------------------------------------------------------------------------

\188\ IBAJ Letter at p. 2.
---------------------------------------------------------------------------

In response to the comment asserting that the Commission did not
provide an analysis supporting the statement that the Japanese Capital
Rules impose on Japanese nonbank SDs ``an effective minimum requirement
of 9.6 percent of the risk-weighted assets,'' the Commission notes that
the 9.6 percent figure is intended to express the Japanese minimum
capital as a capital ratio in a manner consistent with the CFTC Capital
Rules for purposes of a comparison. Specifically, the Japanese Capital
Rules require a Japanese nonbank SD to maintain regulatory capital in
an amount that equals or exceeds 120 percent of the aggregate of the
firm's risk-weighted assets. In contrast, the CFTC Capital Rules
require a nonbank SD to maintain a minimum capital ratio to total risk-
weighted assets of 8 percent. Converting the Japanese Capital Rules'
requirement to an equivalent capital ratio under the CFTC Capital Rules
would result in the capital ratio of 8 percent being increased by 20
percent, effectively requiring nonbank SDs to maintain a ratio of total
regulatory capital to risk-weighted assets of 9.6 percent (i.e., 8
percent plus 20 percent of 8 percent).\189\
---------------------------------------------------------------------------

\189\ See 2022 Proposal at 48104 and fn. 125.
---------------------------------------------------------------------------

In addition, the Japanese Capital Rules' standardized approach to
calculating minimum capital requirements also results in a higher
regulatory capital requirement for counterparty credit risk. Although
the standardized credit risk weights under the Japanese Capital Rules
range from 0 to 25 percent, whereas those applicable under the CFTC
Capital Rules range from 0 to 150 percent, the Japanese Capital Rules'
requirement that Japanese nonbank SDs hold 120 percent of the firm's
risk-weighted assets would yield a higher capital requirement. For
example, for an exposure that is subject to the highest risk weight for
counterparty credit risk, the Japanese Capital Rules would require a
Japanese nonbank SD to hold capital equal to 30 percent of the exposure
amount (i.e., 25 percent risk weight multiplied by 120 percent capital
requirement), whereas the CFTC Capital Rules would require a nonbank SD
to hold capital equal to 12 percent of the exposure amount (i.e., 150
percent risk weight multiplied by 8 percent capital requirement).
Furthermore, the Commission notes that under the Japanese Capital
Rules, the total risk-weighted assets include amounts for operational
and similar risks arising from a Japanese nonbank SD's activities
(i.e., basic risk equivalent amount). These risk-weighted asset amounts
are included in the risk equivalent amount in all circumstances,
whether the nonbank SD uses a standardized approach or a model approach
to calculating risk-weighted assets.\190\ As such, the basic risk
equivalent amount increases the amount of the risk-weighted assets and
thus the amount of regulatory capital that a Japanese nonbank SD is
required to maintain. Taking these factors into account in the
computation of risk-weighted assets and regulatory capital under the
Japanese Capital Rules, the Commission believes that a nonbank SD is
generally required to maintain a higher level of regulatory capital
under the Japanese Capital Rules than it would be under the CFTC
Capital Rules.
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\190\ In contrast, the CFTC Capital Rules do not require nonbank
SDs to include an operational risk charge in the firm's risk-
weighted assets if the firm uses a standardized approach to
calculating risk-weighted asset amounts. An operational risk
component is included in the firm's risk-weighted assets only if the
firm uses a model to calculate risk-weighted asset amounts for
credit risk. See definition of BHC equivalent risk-weighted assets
in Commission Regulation 23.100 (cross referencing subparts E and D
of 12 CFR part 217). 17 CFR 23.100.
---------------------------------------------------------------------------

Moreover, to the extent the Japanese Capital Rules might require a
lesser amount of common equity tier 1 capital than the CFTC Capital
Rules, the Commission believes that the difference will be generally
offset and mitigated by the higher amount of regulatory capital
required by the Japanese Capital Rules. Accordingly, the Commission
finds that the Japanese Capital Rules and the CFTC Capital Rules are
comparable in purpose and effect with respect to the minimum amount of
capital and type of capital required by these rules.
In conclusion, the Commission finds that the Japanese Capital Rules
and the CFTC Capital Rules are comparable in purpose and effect with
respect to the computation of minimum capital requirements based on a
nonbank SD's risk-weighted assets. The Commission finds that
notwithstanding the differences discussed above, the Japanese Capital
Rules and the CFTC Capital rules have a comparable approach to the
computation of market

[[Page 58487]]

risk exposure amounts and credit risk exposure amounts for on-balance
sheet and off-balance sheet exposures, which are intended to achieve
comparable regulatory outcomes by ensuring that a nonbank SD maintains
a sufficient level of regulatory capital to absorb decreases in firm
assets, absorb increases in firm liabilities, and meet obligations to
counterparties and creditors, without the firm becoming insolvent.
c. Minimum Capital Requirement Based on the Uncleared Swap Margin
Amount
As noted above, prong (iii) of the CFTC Capital Rules' Bank-Based
Approach requires a nonbank SD to maintain regulatory capital in an
amount equal to or greater than 8 percent of the firm's total uncleared
swaps margin amount associated with its uncleared swap transactions to
address potential operational, legal, and liquidity risks.\191\
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\191\ More specifically, in establishing the requirement that a
nonbank SD must maintain a level of regulatory capital in excess of
8 percent of the uncleared swap margin amount associated with the
firm's swap transactions, the Commission stated that the intent of
the uncleared swap margin amount was to establish a method of
developing a minimum amount of capital for a nonbank SD to meet its
obligations as an SD to market participants, and to cover potential
operational risk, legal risk and liquidity risk, and not just the
risks of its trading portfolio. See 85 FR 57462 at 57485.
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The Japanese Capital Rules differ from the CFTC Capital Rules in
that they do not impose a capital requirement on Japanese nonbank SDs
based on a percentage of the margin for uncleared swap
transactions.\192\ In the 2022 Proposal, the Commission described,
however, how certain Japanese capital and liquidity requirements may
compensate for the lack of direct analogue to the 8 percent uncleared
swap margin amount requirement.\193\ Specifically, the Commission noted
that under the Japanese Capital Rules the risk equivalent amount (i.e.,
the firm's risk-weighted assets) is calculated as the sum of the market
risk equivalent amount, the counterparty risk equivalent amount, and
the basic risk equivalent amount.\194\ As discussed, the basic risk
equivalent amount is computed as an amount equal to 25 percent of the
Japanese nonbank SD's defined annual operating expenses, and is
intended to provide a capital cushion to cover risks that may accrue in
the course of executing ordinary business operations, such as errors in
business transactions.\195\ In addition, the Japanese Capital Rules
require a Japanese nonbank SD to deduct the carrying value of fixed
assets from its Basic Items and Supplemental Items in computing its
regulatory capital, which promotes a degree of liquidity into the
Japanese nonbank SD's regulatory capital by requiring assets that are
more liquid than fixed assets to support the Basic Items and
Supplemental Items that are used to meet the Japanese nonbank SD's
minimum capital requirement. As stated in the 2022 Proposal, the
Commission preliminarily determined that the inclusion of an
operational risk charge as a separate component of the risk equivalent
amount, including by Japanese nonbank SDs that do not use internal
models, and the deduction of the carrying value of fixed assets from
regulatory capital, would achieve a comparable outcome to the
Commission's requirement for nonbank SDs to hold regulatory capital in
excess of 8 percent of its uncleared swap margin amount.\196\
---------------------------------------------------------------------------

\192\ See 2022 Proposal at 48104.
\193\ Id. at 48105.
\194\ Article 178(1)(iii) of the COO and Article 16 of the
Notice on Capital. The basic risk equivalent amount is calculated as
25 percent of certain defined operating expenses incurred by the
Japanese nonbank SD over a 12-month period, and includes general
expenses, selling expenses, and financial expenses.
\195\ See 2022 Proposal at 48105.
\196\ Id.
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Focusing on the absence of a capital requirement based on a
percentage of the margin for uncleared swap transactions under the
Japanese Capital Rules, Better Markets asserted that the Japanese
Capital Rules are not only different from the CFTC Capital Rules in
form and substance, but lead to a regulatory outcome that is not
comparable.\197\ In support, Better Markets noted that, whereas the
CFTC relies on an approach that requires nonbank SDs to hold qualifying
capital in an amount equal to at least 8 percent of the nonbank SD's
uncleared swap margin amount, the Japanese Capital Rules are based on
``an arbitrary percentage of a company's operating expenses, which
would be closer in concept to liquidity needs.'' \198\
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\197\ Better Markets Letter at p. 7.
\198\ Id.
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Other commenters agreed with the Commission's preliminary
determination that the Japanese Capital Rules and CFTC Capital Rules
are comparable notwithstanding the absence in the Japanese Capital
Rules of a capital requirement based on uncleared swap margin.\199\ In
this regard, FSA asserted that the Japanese Capital Rules are largely
comparable in outcome even in the absence of the uncleared swap margin
requirement because the Japanese capital adequacy ratio takes into
account operational risk.\200\
---------------------------------------------------------------------------

\199\ Associations Letter at p. 2; FSA Letter at p. 1; IBAJ
Letter at p. 2.
\200\ FSA Letter at p. 1.
---------------------------------------------------------------------------

The Associations and IBAJ expressed the view that the Japanese
Capital Rules are comparable in purpose and effect to the Commission's
requirements for a nonbank SD to hold regulatory capital equal to or
greater than 8 percent of its uncleared swap margin amount.\201\ The
commenters explained that under the Japanese Capital Rules, liquidity
risk is covered through the deduction of the balance sheet carrying
value of fixed assets, and operational risk and legal risk are covered
by the basic risk equivalent amount, which is a simplified but
conservative approach to calculating a proxy for operational risks
under the Basel standards.\202\ Under the approach, basic risk is
incrementally added to market risk and credit risk, which further
increases the required capital amount under the Japanese Capital
Rules.\203\ The commenters further explained that the Japanese Capital
Rules' basic risk equivalent amount is computed as an amount equal to
25 percent of the Japanese nonbank SD's defined annual operating
expenses, and is intended to provide a capital cushion to cover risk
that may accrue in the course of executing ordinary business
operations, such as errors in business transactions.\204\ According to
the commenters, such amount combined with market risk, credit risk, and
the deduction of the carrying value of fixed assets will broadly
capture obligations to market participants, potential operational risk,
legal risk, and liquidity risk, as well as market risk and credit
risk.\205\ The commenters further noted that the calculation will
capture both the trading portfolio as well as non-trading assets,
whereas the CFTC's requirement to hold 8 percent of nonbank SD's
uncleared swap margin amount will not capture non-trading assets.\206\
As such, the commenters concluded that the Japanese Capital Rules'
basic risk equivalent requirement is sufficiently comparable to the
CFTC Capital Rules' uncleared swap margin requirement.\207\
---------------------------------------------------------------------------

\201\ Associations Letter at p. 2; IBAJ Letter at p. 2.
\202\ Id.
\203\ Id.
\204\ Associations Letter at p. 3; IBAJ Letter at p. 3.
\205\ Id.
\206\ Id.
\207\ Id.
---------------------------------------------------------------------------

The Commission believes that the Japanese Capital Rules' approach
to calculating the basic risk equivalent amount, which accounts for
operational risk and legal risk, and the deduction of the balance sheet
carrying value of fixed

[[Page 58488]]

assets to reflect liquidity risk, support the comparability of the
Japanese Capital Rules and the CFTC Capital Rules even in the absence
of a separate capital requirement in the Japanese Capital Rules
requiring Japanese nonbank SDs to have qualified capital equal to or
greater than 8 percent of the amount of uncleared swap margin.
In conclusion, the Commission finds that the Japanese Capital Rules
and the CFTC Capital Rules are comparable in purpose and effect with
respect to the requirement that a nonbank SD's minimum level of
regulatory capital reflects potential operational risk exposures in
addition to market risk and credit risk exposures. The Commission
emphasizes that the intent of the minimum capital requirement based on
a percentage of the nonbank SD's uncleared swap margin is to establish
a minimum capital requirement that would help ensure that the nonbank
SD meets its obligations as an SD to market participants, and to cover
potential operational risk, legal risk, and liquidity risk in addition
to the risks associated with its trading portfolio.\208\ The Commission
further notes that the minimum capital requirement based on a
percentage of the nonbank SD's uncleared swap margin amount was
conceived as a proxy, not an exact measure, for inherent risk in the
SD's positions and operations, including operational risk, legal risk,
and liquidity risk.\209\ As the Commission noted in adopting the CFTC
Capital Rules, although the amount of capital required of a nonbank SD
under the uncleared swap margin calculation is directly related to the
volume, size, complexity, and risk of the covered SD's positions, the
minimum capital requirement is intended to cover a multitude of
potential risks faced by the SD.\210\ The Commission understands that
other jurisdictions may adopt alternative measures to cover the same
risks. In this regard, the Japanese Capital Rules address comparable
risks albeit not through a requirement based on a Japanese nonbank SD's
uncleared swap margin amount. Specifically, Japanese nonbank SDs are
required to maintain a minimum level of regulatory capital based on an
aggregate of the firm's total risk-weighted asset exposure amounts for
market risk, credit risk, and operational risk. The Commission further
notes that a Japanese nonbank SD is required to maintain regulatory
capital in an amount that exceeds 120 percent of the total risk-
weighted assets, which is 20 percent higher than the CFTC Capital
Rules. Accordingly, the Commission has determined that, notwithstanding
the differences in approaches, the Japanese Capital Rules and CFTC
Capital Rules are comparable in purpose and effect, and achieve
comparable regulatory outcomes, by requiring nonbank SDs to maintain a
sufficient minimum level of regulatory capital to addresses potential
market risk, credit risk, and operational risk, and to help ensure the
safety and soundness of the firm by requiring it to hold capital to
absorb decreases in firm assets, absorb increases in firm liabilities,
and meet its obligations to counterparties and creditors, without the
firm becoming insolvent.
---------------------------------------------------------------------------

\208\ See 2022 Proposal at 48102 (referencing 85 FR 57462).
\209\ 85 FR 57462 at 57497.
\210\ 85 FR 57462 at 57485 and 57497.
---------------------------------------------------------------------------

3. Final Determination
Based on its analysis of comments and its holistic assessment of
the respective requirements discussed in Section II.C.2.a., b., and c.
above, the Commission adopts the Comparability Determination and
Comparability Order as proposed with respect to the minimum capital
requirements and calculation of regulatory capital, subject to the
condition that Japanese nonbank SDs must maintain a minimum level of
regulatory capital in the form of Basic Items that equals or exceeds
the equivalent of $20 million U.S. dollars.

D. Nonbank Swap Dealer Financial Reporting Requirements

1. Proposed Determination
The Commission detailed the requirements of the CFTC Financial
Reporting Rules in the 2022 Proposal.\211\ Specifically, the 2022
Proposal notes that the CFTC Financial Reporting Rules require nonbank
SDs to file with the Commission and NFA periodic unaudited and annual
audited financial reports.\212\ The unaudited financial reports must
include: (i) a statement of financial condition; (ii) a statement of
income/loss; (iii) a statement demonstrating compliance with, and
calculation of, the applicable regulatory minimum capital requirement;
(iv) a statement of changes in ownership equity; (v) a statement of
changes in liabilities subordinated to claims of general creditors; and
(vi) such further material information necessary to make the required
statements not misleading.\213\ The annual audited financial reports
must include the same financial statements that are required to be
included in the unaudited financial reports, and must further include:
(i) a statement of cash flows; (ii) appropriate footnote disclosures;
and (iii) a reconciliation of any material differences between the
financial statements contained in the annual audited financial reports
and the financial statements contained in the unaudited financial
reports prepared as of the nonbank SD's year-end date.\214\ In
addition, a nonbank SD must attach to each unaudited and audited
financial report an oath or affirmation that to the best knowledge and
belief of the individual making the affirmation the information
contained in the financial report is true and correct.\215\ The
individual making the oath or affirmation must be a duly authorized
officer if the nonbank SD is a corporation, or one of the persons
specified in the regulation for business organizations that are not
corporations.\216\
---------------------------------------------------------------------------

\211\ 2022 Proposal at 48106-48107.
\212\ Id. and 17 CFR 23.105(d) and (e).
\213\ Id. and 17 CFR 23.105(d)(2).
\214\ Id. and 17 CFR 23.105(e)(4).
\215\ Id. and 17 CFR 23.105(f).
\216\ Id.
---------------------------------------------------------------------------

The CFTC Financial Reporting Rules also require a nonbank SD to
file the following financial information with the Commission and NFA on
a monthly basis: (i) a schedule listing the nonbank SD's financial
positions reported at fair market value; \217\ (ii) schedules showing
the nonbank SD's counterparty credit concentration for the 15 largest
exposures in derivatives, a summary of its derivatives exposures by
internal credit ratings, and the geographic distribution of derivatives
exposures for the 10 largest countries; \218\ and (iii) for nonbank SDs
approved to use internal capital models, certain model metrics, such as
aggregate value-at-risk (``VaR'') and counterparty credit risk
information.\219\
---------------------------------------------------------------------------

\217\ Id. and 17 CFR 23.105(l) and Schedule 1 of Appendix B to
Subpart E of part 23 (``Schedule 1''). Schedule 1 includes a nonbank
SD's holding of U.S Treasury securities, U.S. government agency debt
securities, foreign debt and equity securities, money market
instruments, corporate obligations, spot commodities, and cleared
and uncleared swaps, security-based swaps, and mixed swaps in
addition to other position information.
\218\ Id. and schedules 2, 3 and 4, respectively, of Commission
Regulation 23.105(l). 17 CFR 23.105(l).
\219\ Id. and 17 CFR 23.105(k) and (l), and appendix B to
Subpart E of part 23.
---------------------------------------------------------------------------

The CFTC Financial Reporting Rules further require a nonbank SD to
provide the Commission and NFA with information regarding the
custodianship of margin for uncleared swap transactions (``Margin
Report'').\220\ The Margin Report must contain: (i) the name and
address of each custodian holding initial margin or variation margin on
behalf of the nonbank SD or

[[Page 58489]]

its swap counterparties; (ii) the amount of initial and variation
margin required by the uncleared margin rules held by each custodian on
behalf of the nonbank SD and on behalf its swap counterparties; and
(iii) the aggregate amount of initial margin that the nonbank SD is
required to collect from, or post with, swap counterparties for
uncleared swap transactions subject to the uncleared margin rules.\221\
---------------------------------------------------------------------------

\220\ Id. and 17 CFR 23.105(m).
\221\ Id.
---------------------------------------------------------------------------

A nonbank SD electing the Bank-Based Capital Approach is required
to file the unaudited financial report, Schedule 1, schedules of
counterparty credit exposures, and the Margin Report with the
Commission and NFA no later than 17 business days after the applicable
month end reporting date.\222\ A nonbank SD must file its annual report
with the Commission and NFA no later than 60 calendar days after the
end of its fiscal year.\223\
---------------------------------------------------------------------------

\222\ Id.
\223\ Id.
---------------------------------------------------------------------------

The 2022 Proposal also detailed relevant financial reporting
requirements of the Japanese Financial Reporting Rules.\224\ The
Japanese Financial Reporting Rules require a Japanese nonbank SD to
submit monthly monitoring survey reports (``Monthly Monitoring
Report'') to the FSA.\225\ The Monthly Monitoring Report must include
information on the Japanese nonbank SD's capital adequacy ratio, and
the status of the firm's business operations and accounting (including
a balance sheet and profit/loss statement), market risk, counterparty
risk, operational risk, and liquidity risk.\226\ The Monthly Monitoring
Report are typically submitted by a Japanese nonbank SD within two to
three weeks of the end of each month.\227\
---------------------------------------------------------------------------

\224\ 2022 Proposal at 48106-48110.
\225\ Id. and section II-1-4 (General Supervisory Process) of
the Supervisory Guidelines for FIBO, which directs the FSA as part
of its offsite monitoring to require FIBOs (including the Japanese
nonbank SDs) to submit a monitoring survey report regarding the
following matters: capital adequacy ratio, status of business
operations and accounting (including a balance sheet and profit and
loss statement), status of segregated management of customer assets,
market risk, counterparty risk, operational risk, and liquidity
risk. The FSA has, pursuant to Article 56-2(1) of the FIEA, ordered
the Japanese nonbank SDs to submit monthly monitoring reports to the
FSA.
\226\ Id.
\227\ The Commission noted that there are various types of
reports which are required of the Japanese nonbank SDs under
``Reporting orders'' issued by the FSA in accordance with Article
56-2(1) of the FIEA. Some of these reports are required to be
submitted on a monthly basis, whereas other reports are required to
be submitted on a quarterly basis, semi-annual basis, or annual
basis. The FSA typically does not set a specific filing deadline and
instead requests all reports to be submitted ``without delay.'' In
case of monthly reports, the normal practice is for firms to submit
such reports within two to three weeks from the prior month-end.
---------------------------------------------------------------------------

A Japanese nonbank SD is also required to submit a business report
to the Commissioner of the FSA within three months of the end of the
firm's fiscal year (``Annual Business Report'').\228\ The Annual
Business Report must include a balance sheet, profit/loss statement,
statement of changes in shareholders' equity, balance of subordinated
debt, and a statement of capital adequacy ratio.\229\ Furthermore, a
Japanese nonbank SD is required to prepare financial statements and
business reports every business year pursuant to the Japanese Companies
Act (``Annual Audited Financial Report'').\230\ The Annual Audited
Financial Report includes the firm's balance sheet, profit/loss
statement, and statement of changes in shareholders' equity, and such
statements are required to be audited by an accounting auditor.\231\
The Annual Audited Financial Report must be submitted to, and approved
by, the shareholders at a meeting within three months of the Japanese
nonbank SD's fiscal year-end.\232\
---------------------------------------------------------------------------

\228\ 2022 Proposal at 48107 and Article 46-3(1) of the FIEA and
Article 172 of the COO.
\229\ 2022 Proposal at 48107 and Appended Forms No. 12 of the
COO.
\230\ 2022 Proposal at 48107 and Japanese Companies Act (Act No.
86 of 2005).
\231\ 2022 Proposal at 48107 and Article 328(1) and (2), Article
435(2), and 436(2)(i) of the Companies Act, and Article 59 of the
Rules of Corporate Accounting (Ordinance of the Ministry of Justice
No. 13 of 2006). The audit requirement applies to a ``Large
Company,'' which is defined by Article 2(vi) of the Companies Act as
a stock company that satisfies any of the following requirements:
(i) that the amount of stated capital in the balance sheet as of the
end of the firm's most recent business year is JPY 500 million or
more; or (ii) that the total sum of the liabilities section of the
balance sheet as of the end of the firm's most recent business year
is JPY 20 billion or more. The FSA has represented that each of the
current CFTC-registered Japanese nonbank SDs is a Large Company
under the Companies Act, and is subject to the audit requirement for
its financial statements. FSA Application p. 18.
\232\ Id.
---------------------------------------------------------------------------

Based on its review of the FSA Application and the relevant
Japanese laws and regulations, the Commission preliminarily determined
that, subject to the conditions specified in the 2022 Proposal and
discussed below, the Japanese Financial Reporting Rules are comparable
to CFTC Financial Reporting Rules in purpose and effect.\233\ The
Commission noted that both sets of rules provide the FSA and the
Commission with financial information necessary to monitor a nonbank
SD's compliance with capital requirements and to assess a nonbank SD's
overall safety and soundness. Specifically, both CFTC Financial
Reporting Rules and the Japanese Financial Reporting Rules require a
nonbank SD to file statements of financial condition, statements of
profit and loss, and statements of regulatory capital that,
collectively, provide information for the FSA, Commission, and NFA to
assess a nonbank SD's overall ability to absorb decreases in the value
of firm assets, absorb increases in the value of firm liabilities, and
cover losses from business activities, including swap dealing
activities, without the firm becoming insolvent.\234\
---------------------------------------------------------------------------

\233\ See 2022 Proposal at 48106-48110.
\234\ Id.
---------------------------------------------------------------------------

The proposed conditions in the proposed Comparability Order were
intended to ensure that the Commission and NFA receive appropriate and
timely financial information from Japanese nonbank SDs in order to
monitor the firms' compliance with FSA capital requirements and to
assess the firms' overall safety and soundness. The proposed conditions
would require a Japanese nonbank SD to provide the Commission and NFA
with copies of its Monthly Monitoring Report, Annual Business Report,
and Annual Audited Financial Report.\235\ The proposed conditions would
also require the Monthly Monitoring Report, Annual Business Report, and
Annual Audited Financial Report to be translated into the English
language.\236\ The Monthly Monitoring Report and the Annual Business
Report also must have balances converted from yen to U.S. dollars. The
Commission further recognized that the requirement to translate
balances denominated in yen to U.S. dollars on the audited financial
statements may have an unintended impact on the opinion expressed by
the public accountant on the financial statements. The Commission,
therefore, proposed to accept the Annual Audited Financial Report
denominated in yen, but required the report to be translated into the
English language.\237\
---------------------------------------------------------------------------

\235\ See 2022 Proposal at 48107 and Article 46-3(1) of the
FIEA, Article 172 of the COO, and Appended Forms No. 12 of the COO.
\236\ In the 2022 Proposal, the Commission proposed that the
translation of audited financial statements into the English
language would not be required to be subject to the audit of the
public accountants. A Japanese nonbank SD would be required to
report the exchange rate that it used to convert balances from yen
to U.S. dollars to the Commission and NFA as part of the financial
reporting.
\237\ See 2022 Proposal at 48108.
---------------------------------------------------------------------------

The proposed conditions also would require a Japanese nonbank SD to
file with the Commission and NFA its: (i) Monthly Monitoring Reports
within 15 business days of the earlier of the date

[[Page 58490]]

the report is filed with the FSA or 35 calendar days after the month-
end reporting date; \238\ (ii) Annual Business Report within 15
business days of the earlier of the date the report is filed with the
FSA or the date that the report is required to be filed with the FSA;
\239\ and (iii) Annual Audited Financial Report within 15 business days
of the approval of the report at the Japanese nonbank SD's shareholder
meeting.\240\ The Commission stated that, in its preliminary view, the
proposed filing dates provided sufficient time for the respective
reports to be translated into the English language with balances
converted from yen to U.S. dollars, as applicable.\241\
---------------------------------------------------------------------------

\238\ 2022 Proposal at 48108 and proposed Condition 8. As noted,
the FSA does not set a specific filing date for Monthly Monitoring
Reports, electing to instead require firms to file such reports
``without delay.'' The Commission proposed to establish a due date
that is no later than 35 calendar days from the reporting date to
set a definitive filing date that also provides Japanese nonbank SDs
with sufficient time to translate the reports into English and
convert balances to U.S. dollars.
\239\ 2022 Proposal at 48108 and proposed Condition 9.
\240\ 2022 Proposal at 48108 and proposed Condition 10.
\241\ See 2022 Proposal at 48108.
---------------------------------------------------------------------------

The Commission also proposed a condition to require Japanese
nonbank SDs to file with the Commission and NFA, on a monthly basis,
Schedule 1 showing the aggregate securities, commodities, and swap
positions of the firm at fair market value as of the reporting
date.\242\ The Commission explained that Schedule 1 provides the
Commission and NFA with detailed information regarding the fair market
value of the nonbank SD's financial positions as of the end of each
month, including the firm's swaps positions, which allows the
Commission and NFA to monitor the types of investments and other
activities that the firm engages in and would assist the Commission and
NFA in monitoring the safety and soundness of the firm.\243\ The
Commission proposed to require that Schedule 1 be filed by a Japanese
nonbank SD along with the firm's Monthly Monitoring Report. The
Commission also proposed to require that Schedule 1 be prepared in the
English language with balances reported in U.S. dollars.
---------------------------------------------------------------------------

\242\ See id. In response to a comment by the IBAJ, the
Commission confirms that its intent was to require that Schedule 1
of Appendix B to Subpart E of part 23 be filed at the same time as
the Monthly Monitoring Report, consistent with Condition (11) of the
Order. IBAJ Letter at p. 6.
\243\ See 2022 Proposal at 48108.
---------------------------------------------------------------------------

The Commission also proposed a condition to require a Japanese
nonbank SD to submit a statement by an authorized representative or
representatives of the Japanese nonbank SD that, to the best knowledge
and belief of the person(s), the information contained within each
Monthly Monitoring Report, Schedule 1, Annual Business Report, and
Annual Audited Financial Report, is true and correct, including as it
relates to the translation of the report into the English language and
the conversion of balances to U.S. dollars.\244\ The statement by an
authorized representative or representatives of the Japanese nonbank SD
was intended to be the equivalent of the oath or affirmation required
of nonbank SDs under Commission Regulation 23.105(f),\245\ to ensure
that reports filed with the Commission and NFA were prepared and
submitted by firm personnel with knowledge of the financial reporting
of the firm who can attest to the accuracy of the reporting and
translation.\246\
---------------------------------------------------------------------------

\244\ Id. at 48108-48109 and proposed Condition 12.
\245\ 17 CFR 23.105(f). Commission Regulation 23.105(f) requires
a nonbank SD to attach to each unaudited and audited financial
report an oath or affirmation that to the best knowledge and belief
of the individual making the affirmation the information contained
in the financial report is true and correct. The individual making
the oath or affirmation must be a duly authorized officer if the
nonbank SD is a corporation, or one of the persons specified in the
regulation for business organizations that are not corporations.
\246\ See 2022 Proposal at 48109.
---------------------------------------------------------------------------

The Commission further proposed a condition that would require a
Japanese nonbank SD to file a Margin Report with the Commission and NFA
on a monthly basis.\247\ The Commission noted that a Margin Report
would assist the Commission and NFA in their assessment of the safety
and soundness of the Japanese nonbank SDs by providing information
regarding the firm's swaps book and the extent to which it has
uncollateralized swap exposures to counterparties or has not met its
margin obligations to swap counterparties. The Commission explained
that this information, along with the list of custodians holding both
the firm's and counterparties' swaps collateral, would assist with
identifying potential financial impacts to the nonbank SD resulting
from defaults on its swap transactions.
---------------------------------------------------------------------------

\247\ Id.
---------------------------------------------------------------------------

In the Commission's preliminary view, its proposed approach of
requiring Japanese nonbank SDs to provide the Commission and NFA with
copies of the Monthly Monitoring Reports, Annual Business Reports, and
Annual Audited Financial Reports that the firms currently file with the
FSA or otherwise prepare struck an appropriate balance of ensuring that
the Commission and NFA receive the financial reporting necessary for
the effective monitoring of the financial condition of the nonbank SDs,
while also recognizing the appropriateness of providing substituted
compliance based on the existing FSA financial reporting requirements
and regulatory structure.\248\
---------------------------------------------------------------------------

\248\ Id.
---------------------------------------------------------------------------

The Commission's preliminary determination did not require a
Japanese nonbank SD to file the model metrics and counterparty credit
exposure information required by Commission Regulations 23.105(k) and
(l),\249\ respectively, in recognition that NFA's current SD risk
monitoring program requires all SDs, including Japanese nonbank SDs, to
file with NFA on a monthly basis certain risk metrics that are
comparable with the risk metrics contained in Commission Regulation
23.105(k) and (l) and address the market risk and credit risk of the
SD's positions.\250\ Specifically, the Commission noted that NFA's
monthly risk metric information includes: (i) VaR for interest rates,
credit, foreign exchange, equities, commodities, and total VaR; (ii)
total stressed VaR; (iii) interest rate, credit spread, foreign
exchange market, and commodity sensitivities; (iv) total swaps current
exposure both before and after offsetting against collateral held by
the firm; and (v) a list of the 15 largest swaps counterparty current
exposures.\251\
---------------------------------------------------------------------------

\249\ Commission Regulation 23.105(k) requires a nonbank SD that
has obtained approval from the Commission or NFA to use internal
capital models to submit to the Commission and NFA each month
information regarding its risk exposures, including VaR, and
requires certain credit risk exposure information from model and
non-model approved firms. 17 CFR 23.105(k). Commission Regulation
23.105(l) requires each nonbank SD to provide information to the
Commission and NFA regarding its counterparty credit concentration
for the 15 largest exposures in derivatives, a summary of its
derivatives exposures by internal credit ratings, and the geographic
distribution of derivatives exposures for the 10 largest countries
in Schedules 2, 3, and 4, respectively. 17 CFR 23.105(l).
\250\ 2022 Proposal at 48109.
\251\ See 2022 Proposal at 48109 and NFA Financial Requirements,
section 17--Swap Dealer and Major Swap Participant Reporting
Requirements, and Notice to Members--Monthly Risk Data Reporting for
Swap Dealers (May 30, 2017) (``NFA Notice I-17-10''), available
here: https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4817.
---------------------------------------------------------------------------

Furthermore, the Commission recognized that although the Japanese
Financial Reporting Rules do not contain an analogue to the CFTC's
requirements for nonbank SDs to file monthly model metric information
and counterparty exposure information, the FSA has access to comparable

[[Page 58491]]

information.\252\ More specifically, the Commission noted that the FSA
would perform the initial approval and ongoing assessment of the
performance of a Japanese nonbank SD's models as part of its oversight
function and may be better positioned to monitor a Japanese nonbank
SD's model metrics and performance and to assess the Japanese nonbank
SD's credit exposures as part of the FSA's overall monitoring of the
financial condition of the firm.\253\ As such, the FSA would have
access to information allowing it to assess the ongoing performance of
risk models and to monitor the Japanese nonbank SD's credit exposures,
which may be comprised of credit exposures to primarily Japanese
counterparties.
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\252\ Under the Japanese Financial Reporting Rules, the FSA has
broad powers to request any information necessary for the exercise
of its functions. FSA Application at p. 16 (referencing Article 56-2
of the FIEA) and discussion in 2022 Proposal at 48113.
\253\ See 2022 Proposal at 48109.
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2. Comment Analysis and Final Determination
The Commission received comments regarding the comparability of
financial reporting and specific comments addressing several of the
financial reporting issues on which the Commission solicited feedback.
Regarding the scope of the financial information that a Japanese
nonbank SD should be required to file, Better Markets stated that the
2022 Proposal does not adequately support the Commission's preliminary
conclusion that the content of the Monthly Monitoring Reports, Annual
Business Reports, and Annual Audited Financial Reports required
pursuant to the Japanese Capital Rules are comparable with the
requirements of the CFTC Financial Reporting Rules.\254\ In contrast,
FSA stated that the Commission should limit the request of financial
information to the extent consistent and sufficient with the purpose of
the Commission's capital requirements to efficiently and effectively
achieve its supervisory and monitoring objectives.\255\ IBAJ stated
that the Commission should limit the financial information required to
be filed to the types of financial information required of nonbank SDs
under Commission Regulation 23.105.\256\ IBAJ further stated that,
consistent with the types of schedules and data nonbank SDs are
required to file under Commission Regulation 23.105, the Commission
should require Japanese nonbank SDs to file the following information
from the Monthly Monitoring Report: (i) Form 1-1 Capital Ratio Summary;
(ii) Form 1-2 Capital Ratio: Deductible Assets; (iii) Form 1-3 Market
Risk; (iv) Form 1-4 Counterparty Risk; (v) Form 2-1 Monthly Financial
Statement (1); and (vi) Form 2-2 Monthly Financial Statement (2). IBAJ
also stated that other financial information contained within the
Monthly Monitoring Report should not be required as the information is
either not submitted by nonbank SDs under Commission Regulation 23.105,
such as client assets segregation status and transaction volume, or the
information is similar to the information contained in the quarterly
risk exposure report and monthly risk data report that Japanese nonbank
SDs already provide to the Commission and NFA.\257\ IBAJ also asserted
that limiting the scope of information to the six items noted above
from the Monthly Monitoring Report would be consistent with the
financial information that Commission staff has required from Japanese
nonbank SDs under CFTC Staff Letter 22-10.\258\
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\254\ Better Markets Letter at p. 10.
\255\ FSA Letter at p. 2.
\256\ IBAJ Letter at p. 4.
\257\ Id.
\258\ Id. and CFTC Staff Letter No. 22-10, Extension of Time-
Limited No-Action Position for Foreign Based Nonbank Swap Dealers
domiciled in Japan, Mexico, the United Kingdom, and the European
Union, issued by the Market Participants Division on August 17,
2022. CFTC Staff Letter No. 22-10, which extended the expiration of
CFTC Staff Letter 21-20, provides that the Market Participants
Division (``MPD'') would not recommend an enforcement action to the
Commission if a non-U.S. nonbank SD covered by the letter (``covered
nonbank SDs''), subject to certain conditions, complied with their
respective home-country capital and financial reporting requirements
in lieu of the Commission's capital and financial reporting
requirements set forth in Commission Regulations 23.100 through
23.106, pending the Commission's determination of whether the
capital and financial reporting requirements of certain foreign
jurisdictions are comparable to the Commission's corresponding
requirements. The relevant conditions include that a covered nonbank
SD domiciled in Japan must: (i) be registered as a Type I FIBO with
the FSA; (ii) submit to MPD financial information required by the
FSA within 15 days of submitting such information to the FSA; and
(iii) submit to the Commission a statement of financial condition,
statement of income/loss, and statement of regulatory capital to the
extent that such financial information is not required by the FSA.
---------------------------------------------------------------------------

The Commission has reviewed the comments and believes that the
Japanese Financial Reporting Requirements, subject to the conditions
below, are comparable to the CFTC Financial Reporting Requirements in
purpose and effect in that both the Japanese rules and the CFTC
regulations provide information necessary for the monitoring of the
financial condition of a nonbank SD. In response to the comments, the
Commission is modifying the conditions in the final Comparability Order
to list specific schedules of the Monthly Monitoring Report that each
Japanese nonbank SD is required to file with the Commission and NFA.
Specifically, the Commission agrees that the Comparability Order should
specify the required information that a Japanese nonbank SD must submit
to the Commission and NFA from its Monthly Monitoring Report to be
consistent with the types of capital and general financial statement
information that a nonbank SD is required to file under Commission
Regulation 23.105. This modification would ensure that the Commission
receives the relevant financial information necessary to monitor the
general financial condition and capital compliance of a Japanese
nonbank SD, while eliminating the requirement for Japanese nonbank SDs
to provide other information contained in the Monthly Monitoring Report
that is specific to certain requirements in Japan and beyond the
overall financial condition and capital compliance of the firm.
Therefore, consistent with the statement above, the Commission is
modifying Condition 8 of the Comparability Order to provide that a
Japanese nonbank SD must file Form 1-1 Capital Ratio Summary (``Form 1-
1''), Form 1-2 Capital Ratio: Deductible Assets (``Form 1-2''), Form 1-
3 Market Risk (``Form 1-3''), Form 1-4 Counterparty Risk (``Form 1-
4''), Form 2-1 Monthly Financial Statement (1) (``Form 2-1''), and Form
2-2 Financial Statement (2) (``Form 2-2'') of the Monthly Monitoring
Report with the Commission and with NFA on a monthly basis. Final
Condition 8 will continue to require a Japanese nonbank SD to file such
forms translated into the English language with balances converted to
U.S. dollars,\259\ and, as further discussed below, will require that
such forms be filed with the Commission and NFA within 35 calendar days
after the end of each month.
---------------------------------------------------------------------------

\259\ The condition will also specify that Japanese nonbank SDs
must use a commercially reasonable and observable yen/U.S. dollar
spot rate as of the date of the reports.
---------------------------------------------------------------------------

The Commission finds that the financial information provided by
Japanese nonbank SDs in the specified forms of the Monthly Monitoring
Report, the Annual Business Report, and the Annual Audited Financial
Report is comparable to the unaudited and audited financial information
provided by nonbank SDs under the relevant provisions of Commission
Regulation 23.105(d) and (e), respectively. With respect to Better
Markets' comment regarding the

[[Page 58492]]

sufficiency of the support for a finding of comparability of the
financial reporting requirements, the Commission believes that the
description of the reporting forms' content demonstrates the similarity
between the required information. In this regard, Form 2-1 and Form 2-2
of the Monthly Monitoring Report present a Japanese nonbank SD's
statement of financial condition and statement of profit/loss,
respectively. Form 2-1 and Form 2-2 provide information that is
necessary for the monitoring of the financial condition of a Japanese
nonbank SD and are comparable to the statement of financial condition
and statement of profit/loss required by the Commission of nonbank SDs
under Commission Regulation 23.105(d)(2).
Form 1-1, Form 1-2, Form 1-3, and Form 1-4 detail the calculation
of a Japanese nonbank SD's capital ratio. Form 1-3 and Form 1-4 provide
details concerning a Japanese nonbank SD's calculation of market risk
and counterparty credit risk, respectively, that is incorporated into
the firm's calculation of its risk-weighted assets. Form 1-3 details
market risk by asset class (e.g., equity, interest rate, foreign
exchange, commodity, and crypto assets) and contract type (e.g., spot
transactions or forward transactions). Form 1-4 details counterparty
credit risk by transaction type (e.g., foreign exchange, interest
rates, and equity). Form 1-2 details the deductions that a Japanese
nonbank SD must take in computing its Basic and Supplemental capital to
reflect illiquid assets (e.g., fixed assets). Form 1-1 summarizes the
Japanese nonbank SD's capital calculation of its Basic and Supplemental
Items and further contains the firm's overall capital ratio to
demonstrate compliance with the Japanese Capital Rules. Forms 1-1
through 1-4 of the Monthly Monitoring Report require a Japanese nonbank
SD to file financial information regarding its capital ratio that is
comparable to the capital ratio reporting requirements under Commission
Regulation 23.105(d)(2), which requires a nonbank SD to submit a
statement of its capital requirement calculation and the firm's
compliance with such capital requirement.
The Commission is also adopting Conditions 9 and 10 of the proposed
Comparability Order substantially as proposed.\260\ Final Conditions 9
and 10 require a Japanese nonbank SD to file a copy of its Annual
Business Report and Annual Audited Financial Report, respectively, with
the Commission and NFA. The Annual Business Report and Annual Audited
Financial Report are comparable to the annual audited financial report
that each nonbank SD is required to file with the Commission and NFA
pursuant to Commission Regulation 23.105(e). Specifically, information
included in the Annual Business Report and Annual Audited Financial
Reports includes the Japanese nonbank SD's statements of financial
condition, statement of income or loss, a statement demonstrating the
firm's capital levels and its compliance with the Japanese Capital
Rules, a statement of changes in ownership equity and a statement of
subordinated debt. This information is comparable to the audited
financial information required by the Commission from nonbank SDs under
Commission Regulation 23.105(e) and detailed above.
---------------------------------------------------------------------------

\260\ Subject to the specification in final Condition 9 that the
conversion of balances to U.S. dollars must be done using a
commercially reasonable and observable yen/U.S. dollar spot rate as
of the date of the report.
---------------------------------------------------------------------------

The Annual Business Report and Annual Audited Financial Report must
be translated into English, and balances in the Annual Business Report
must be converted into U.S. dollars.\261\ The Annual Business Report is
required to be filed with the Commission and NFA within 15 business
days of the earlier of the date that the report is filed, or is
required to be filed, with the FSA, and the Annual Audited Financial
Report is required to be filed with the Commission and NFA within 15
business days of the approval of the report at the shareholders'
meeting.
---------------------------------------------------------------------------

\261\ As noted above, the 2022 Proposal included a proposal to
permit balances in the Annual Audited Financial Report to be
presented in yen to avoid raising potential issues with respect to
the audit opinion expressed on the financial statements by the
accountant engaged to conduct the audit of the Japanese nonbank SD's
financial statements. See 2022 Proposal at 48108 and proposed
Condition 10 at 48115. As previously stated herein, the Commission
is adopting Condition 10 in the final Comparability Order as
proposed.
---------------------------------------------------------------------------

For purposes of clarity, the Commission notes that Japanese nonbank
SDs may present the financial information required to be provided to
the Commission and NFA under the final Comparability Order in
accordance with generally accepted accounting principles that the
Japanese nonbank SD uses to prepare general purpose financial
statements in Japan. This clarification is consistent with proposed
Condition 7, which the Commission adopts subject to a minor
modification in the final Comparability Order, requiring that the
Japanese nonbank SD prepares and keeps current ledgers and other
similar records ``in accordance with accounting principles permitted by
the [FSA].'' \262\
---------------------------------------------------------------------------

\262\ 2022 Proposal at 48114. Proposed Condition 7 stated that
Japanese nonbank SDs must prepare and keep current ledgers and other
similar records ``in accordance with accounting principles required
by the [FSA]''. To promote consistency across the Comparability
Determinations the Commission is adopting with respect to several
other jurisdictions and to reflect the fact that certain
jurisdictions may not issue a formal approval of the accounting
standards used by nonbank SDs, the Commission is replacing the
adjective ``required'' with the adjective ``permitted'' in the
reference to the accounting standards to be used by Japanese nonbank
SDs.
---------------------------------------------------------------------------

In taking the position that Japanese nonbank SDs may provide
financial reporting prepared in accordance with the accounting
standards applicable in their home jurisdiction, the Commission
considered the nature of the financial reporting information required
from nonbank SDs for purposes of monitoring their overall financial
condition and compliance with capital requirements. Specifically, the
Commission notes that the requirements for how nonbank SDs calculate
their risk-weighted assets and capital ratio, in both Japan and the
U.S., follow a rules-based approach consistent with the Basel
standards, and, consequently, the Commission does not anticipate that a
variation in the applicable accounting standards would materially
impact this calculation.\263\ In this regard, the

[[Page 58493]]

Commission notes that Japanese nonbank SDs currently submit financial
reports, including a statement of financial condition and a statement
of regulatory capital, pursuant to CFTC Staff Letter 22-10.\264\ The
reports provide the Commission with appropriate information to assess
the financial and operational condition of Japanese nonbank SDs, as
well as the firms' compliance with the capital ratios imposed on
Japanese nonbank SDs under the Japanese Capital Rules.
---------------------------------------------------------------------------

\263\ Furthermore, the Commission's approach to permitting
Japanese nonbank SDs to maintain financial books and records, and to
file financial reports and other financial information, prepared in
accordance with local accounting standards is consistent with the
SEC's final comparability determinations for non-U.S. SBSDs. See
Amended and Restated Order Granting Conditional Substituted
Compliance in Connection with Certain Requirements Applicable to
Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap
Participants Subject to Regulation in the Federal Republic of
Germany; Amended Orders Addressing Non-U.S. Security-Based Swap
Entities Subject to Regulation in the French Republic or the United
Kingdom; and Order Extending the Time to Meet Certain Conditions
Relating to Capital and Margin, 86 FR 59797 (Oct. 28, 2021) at 59812
and Order Specifying the Manner and Format of Filing Unaudited
Financial and Operational Information by Security-Based Swap Dealers
and Major Security-Based Swap Participants that are not U.S. Persons
and are Relying on Substituted Compliance with Respect to Rule 18a-
7, 86 FR 59208 (Oct. 26, 2021) (``SEC Manner and Format Order'') at
59219. Specifically, the SEC stated that the use of local reporting
requirements will avoid non-U.S. SBSDs ``having to perform and
present two Basel capital calculations (one pursuant to local
requirements and one pursuant to U.S. requirements).'' SEC Manner
and Format Order at 59219. The SEC noted, in this regard, that the
Basel standards are international standards that have been adopted
in the U.S. and in jurisdictions where substituted compliance is
available for capital under the SEC comparability determinations and
that, therefore, requirements for how firms calculate capital
pursuant to the Basel standards generally should be similar. Id. In
addition, if a Japanese nonbank SD becomes registered with the SEC
as an SBSD and is required to file a FOCUS Report, the Commission's
approach to permitting Japanese nonbank SDs to maintain financial
books and records, and file financial information, prepared in
accordance with local accounting standards would facilitate
financial reporting by such dually-registered entities. In such
case, dually-registered entities would not have to perform multiple
calculations under different accounting standards or submit two
different FOCUS Reports.
\264\ CFTC Staff Letter No. 22-10, Extension of Time-Limited No-
Action Position for Foreign Based Nonbank Swap Dealers domiciled in
Japan, Mexico, the United Kingdom, and the European Union, August
17, 2022.
---------------------------------------------------------------------------

In addition, the Commission is adding a condition in the final
Comparability Order to specify that Japanese nonbank SDs that are
registered with the SEC as an SBSD and required to file a FOCUS Report
with the SEC or its designee, must file a copy of the FOCUS Report with
the Commission and NFA within 35 calendar days after the end of each
month. Currently, no Japanese nonbank SD is registered as an SBSD. The
Commission, however, is including the condition in anticipation of
potential future dual registrants. Under final Condition 12, a Japanese
nonbank SD that files a copy of the FOCUS Report will not be required
to file the financial reports and schedules specified in final
Conditions 8 and 11 of the Comparability Order. Final Condition 12 is
also consistent with Commission Regulation 23.105(d)(3), which mandates
the filing of a FOCUS Report by dual registrants.\265\
---------------------------------------------------------------------------

\265\ 17 CFR 23.105(d)(3).
---------------------------------------------------------------------------

One commenter, Better Markets, disagreed with the 2022 Proposal to
the extent that the Commission proposed not to require Japanese nonbank
SDs that have been approved by the FSA to use capital models to file
the monthly model metric information required by Commission Regulation
23.105(k) with the Commission or NFA.\266\ Commission Regulation
23.105(k) requires nonbank SDs that have been approved by the
Commission or NFA to use models to compute market risk or credit risk
for computing capital requirements to file certain information with the
Commission and NFA on a monthly basis.\267\ The information required to
be filed includes: (i) for nonbank SDs approved to use market risk
models, a listing of any products that the nonbank SD excludes from the
approved market risk model and the amount of the standardized market
risk charge taken on such products; (ii) a graph reflecting, for each
business line of the nonbank SD, the daily intra-month VaR; (iii) the
aggregate VaR for the nonbank SD; and (iv) certain credit risk
information for swaps, mixed swaps and security-based swaps, including:
(a) overall current exposure, (b) current exposure listed by
counterparty for the 15 largest exposures, (c) the 10 largest
commitments listed by counterparty, (d) maximum potential exposure
listed by counterparty for the 15 largest exposures, (e) aggregate
maximum potential exposure, (f) a summary report reflecting the SD's
current and maximum potential exposures by credit rating category, and
(g) a summary report reflecting current exposure for each of the top
ten countries to which the nonbank SD is exposed.\268\ Better Markets
stated that by not requiring the information contained in Commission
Regulation 23.105(k), the Commission was proposing to ``take a back
seat to the FSA and blindly accept [Japanese nonbank SDs'] assessments
resulting from their use of internal models to calculate risk,'' and
that such an approach undercuts the comparability of the financial
reporting and risk assessment of both regimes.\269\
---------------------------------------------------------------------------

\266\ Better Markets Letter at p. 11.
\267\ 17 CFR 23.105(k).
\268\ 17 CFR 23.105(k)(1).
\269\ Better Markets Letter at p. 11.
---------------------------------------------------------------------------

The Commission does not agree that its approach is effectively
deferring model oversight to the FSA or that it is otherwise ``blindly
accept[ing]'' the internal model-based assessments of the Japanese
nonbank SDs. As noted above, pursuant to NFA rules, all registered SDs,
including Japanese nonbank SDs, are required to submit to NFA, on a
monthly basis, a list of specified risk metrics related to the SD's
market risk and credit risk exposures.\270\ As part of its regulatory
oversight program, NFA uses the risk metrics information to identify
firms that may pose heightened risk and allocates appropriate oversight
resources. NFA also may request additional information from a nonbank
SD to the extent it determines that information in the risk metrics or
other financial filings warrants a need for additional follow-up.
Furthermore, Commission staff has access to the collected risks metrics
information and participates in NFA's risk monitoring function by
regularly exchanging information and discussing potential risks with
NFA staff.
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\270\ NFA Rulebook, Financial Requirements, section 17 Swap
Dealer and Major Swap Participant Reporting Requirements, available
here: https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=SECTION%2017&Section=7, and NFA Notice I-17-10.
---------------------------------------------------------------------------

As the list of specified risk metrics discussed above indicates,
although the information collected by NFA is not identical to the
information required under Commission Regulation 23.105(k), there is a
significant overlap in the data items. Working with industry
participants, NFA identified the risk data items listed in NFA Notice
I-17-10 as relevant risk metrics to be collected for oversight
purposes, noting that most SDs use these or similar metrics as part of
their own risk management program. The Commission believes that the
information required pursuant to NFA Notice I-17-10 would provide the
Commission and NFA with key data allowing them to monitor nonbank SDs'
risk exposures. In addition, the Commission and NFA have the ability to
request additional information from its registrants, including Japanese
nonbank SDs, at any time.\271\ Finally, the Commission notes that the
FSA, which will be conducting the initial approval and ongoing
assessment of the performance of the Japanese nonbank SDs' internal
models, under a regulatory framework that the Commission finds
comparable to the CFTC Capital Rules, will have access to additional
information that the FSA deems relevant in the conduct of such approval
and assessment. The Commission, therefore, concludes that it is not
necessary to require Japanese nonbank SDs relying on the final
Comparability Order to submit the model metric information mandated by
Commission Regulation 23.105(k).
---------------------------------------------------------------------------

\271\ 17 CFR 23.105(h), which provides that the Commission or
NFA may, by written notice, require any SD to file financial
operational information at such time as may be specified by the
Commission or NFA.
---------------------------------------------------------------------------

Better Markets also noted that the proposed Comparability
Determination was conditioned on a Japanese nonbank SD submitting a
statement by an authorized representative that to the best knowledge
and belief of the person the information contained in reports submitted
to the Commission is true and correct, in lieu of the oath or
affirmation required by Commission Regulation 23.105(f).\272\ Better
Markets stated that there are significant legal differences between a
statement and the oath or affirmation required by the CFTC Financial
Reporting Rules, further highlighting the differences between the

[[Page 58494]]

regulatory reporting requirements of the U.S. and those of Japan.\273\
---------------------------------------------------------------------------

\272\ Better Markets Letter at p.10.
\273\ Id.
---------------------------------------------------------------------------

For completeness, the Commission notes that the proposed condition
requires that an authorized representative of the Japanese nonbank SD
provide a statement that, to the best of the knowledge and belief of
the representative, the information contained in the financial reports
filed with the Commission and NFA is true and correct, including the
applicable translation of the reports to the English language and the
conversion of balances to U.S. dollars. The proposed condition was
based on current Commission Regulation 23.105(f), which provides that a
nonbank SD must attach to each unaudited and annual audited financial
report filed with the Commission and NFA an oath or affirmation that to
the best knowledge and belief of the individual making the oath or
affirmation the information in the financial reports is true and
correct. Similar to the intent of Commission Regulation 23.105(f), the
purpose of the proposed condition is to obtain a formal attestation
from a representative with the appropriate knowledge and authority that
the information provided in the requisite financial reports is accurate
and properly translated. The Commission's choice of language in using
the term ``statement'' was not intended to make a legal distinction
between this term and the terms ``oath'' or ``affirmation,'' but rather
to select a generic term that is universally understood across
jurisdictions to reflect the above-referenced purpose. In practice, the
Commission does not believe that there is a material legal difference
between the language of the proposed condition and the required oath or
affirmation required under Commission Regulation 23.105(f). Instead,
the Commission is of the view that the proposed condition would have
the same legal effect as Commission Regulation 23.105(f) of providing
the Commission with a stronger basis to take legal action if a Japanese
nonbank SD files erroneous information.
Commenters also addressed the Commission's request for comment on
the proposed filing dates for the reports and information specified
above and the compliance dates for any new reporting obligations that
the Comparability Order would impose on Japanese nonbank SDs. IBAJ
stated that the proposed filing of reports and information with the
Commission and NFA within 15 days of the date when the filing is made
with the FSA is sufficient.\274\ Other commenters requested that the
Commission set the compliance date at least six months following the
issue date of the Comparability Order to adequately prepare for
compliance with the reporting conditions imposed by the Order.
---------------------------------------------------------------------------

\274\ IBAJ Letter at p. 6.
---------------------------------------------------------------------------

The Commission believes that granting an additional period of time
to allow Japanese nonbank SDs to develop and implement the necessary
systems and processes for compliance with the Comparability Order is
appropriate with respect to new reporting obligations imposed on
Japanese nonbank SDs under the final Order. For other reporting
obligations, for which a process already exists, such as the reports
that Japanese nonbank SDs currently submit to the Commission and NFA
pursuant to CFTC Staff Letter 22-10 and/or prepare pursuant to the
Japanese Financial Reporting Rules, additional time for compliance does
not appear necessary. Accordingly, the Commission is setting a
compliance date of 180 calendar days from the date of publication of
the final Comparability Order in the Federal Register, to comply with
final Conditions 11 and 13, which require Japanese nonbank SDs to file
Schedule 1 and the Margin Report with the Commission and NFA.
In an effort to align, where appropriate, the filing deadlines for
financial reporting obligations imposed by the Comparability Order on
Japanese nonbank SDs with the filing deadlines that the Commission
proposed for nonbank SDs domiciled in several other jurisdictions, the
Commission is also setting the filing deadline in final Condition 8 to
35 calendar days after the end of each month.\275\ The filing deadline
will apply to the selected forms of the Monthly Monitoring Report, as
well as to Schedule 1 and the Margin Report, which pursuant to final
Conditions 11 and 13 must be filed with the selected forms of the
Monthly Monitoring Report.
---------------------------------------------------------------------------

\275\ See Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Domiciled in the French Republic and
Federal Republic of Germany and Subject to Capital and Financial
Reporting Requirements of the European Union, 88 FR 41774 (June 27,
2023) and Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Capital and Financial
Reporting Requirements of the United Kingdom and Regulated by the
United Kingdom Prudential Regulation Authority, 89 FR 8026 (Feb. 5,
2024).
---------------------------------------------------------------------------

In summary, the Commission is adopting the Comparability Order and
conditions as proposed with respect to the comparability of the CFTC
Financial Reporting Requirements and Japanese Financial Reporting
Requirements, subject to the adjustments to the required content of the
Monthly Monitoring Report, the filing deadlines discussed above, the
minor change in the language of final Condition 7 to specify that
Japanese nonbank SDs must keep current ledgers or similar records in
accordance with accounting principles ``permitted'' by the FSA, and the
specifications in final Conditions 8, 9, 11, and 13 that the conversion
of balances to U.S. dollars must be done using a commercially
reasonable and observable yen/U.S. dollar spot rate as of the date of
the respective report. The Commission also grants an additional
compliance period for the new reporting obligations imposed on Japanese
nonbank SDs as set forth in the final Comparability Order below.

E. Notice Requirements

1. Proposed Determination
The Commission noted in the 2022 Proposal that the CFTC Financial
Reporting Rules require nonbank SDs to provide the Commission and NFA
with written notice of certain defined events.\276\ Commission
Regulation 23.105(c) requires a nonbank SD to file written notice with
the Commission and NFA of the following events: (i) the nonbank SD's
regulatory capital is less than the minimum amount required; (ii) the
nonbank SD's regulatory capital is less than 120 percent of the minimum
amount required; (iii) the nonbank SD fails to make or to keep current
required financial books and records; (iv) the nonbank SD experiences a
reduction in the level of its excess regulatory capital of 30 percent
or more from the amount last reported in a financial report filed with
the Commission; (v) the nonbank SD plans to distribute capital to
equity holders in an amount in excess of 30 percent of the firm's
excess regulatory capital; (vi) the nonbank SD fails to post to, or
collect from, a counterparty (or group of counterparties under common
ownership or control) required initial and variation margin, and the
aggregate amount of such margin equals or exceeds 25 percent of the
nonbank SD's minimum capital requirement; (vii) the nonbank SD fails to
post to, or collect from, swap counterparties required initial and
variation margin, and the aggregate amount of such margin equals or
exceeds 50 percent of the nonbank SD's minimum capital requirement; and
(viii) the nonbank SD is registered with the SEC as an SBSD and files a
notice

[[Page 58495]]

with the SEC under applicable SEC Rules.\277\
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\276\ 2022 Proposal at 48110. See, also, 17 CFR 23.105(c).
\277\ 17 CFR 23.105(c).
---------------------------------------------------------------------------

The notices are part of the Commission's overall program of helping
to ensure the safety and soundness of nonbank SDs and the swaps markets
in general.\278\ Notices provide the Commission and NFA with an
opportunity to assess whether there is an actual or potential financial
and/or operational issue at a nonbank SD. In situations where there is
an underlying issue, Commission and NFA staff engage with the nonbank
SD in an effort to minimize potential adverse impacts on the firm, swap
counterparties, and the larger swaps market.\279\
---------------------------------------------------------------------------

\278\ Id.
\279\ See 2022 Proposal at 48110.
---------------------------------------------------------------------------

The 2022 Proposal also noted the that the Japanese Financial
Reporting Rules include notice requirements for Japanese nonbank SDs,
although in a more limited manner than the Commission's notice
requirements. The Japanese Financial Reporting Rules require a Japanese
nonbank SD to provide immediate notice to the FSA if the firm's capital
adequacy ratio falls below 140 percent (i.e., ``Japanese Early Warning
Notice'').\280\ The Japanese Early Warning Notice must be accompanied
by a Plan Regarding Specific Voluntary Measures to Be Taken in Order to
Maintain the Capital Adequacy Ratio, which includes the concrete
measures that the Japanese nonbank SD will take to maintain a capital
adequacy ratio above 140 percent.\281\ The FSA also has the authority
to examine the future outlook of the Japanese nonbank SD's capital
adequacy ratio through hearings and to urge the firm to make voluntary
improvement efforts.\282\
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\280\ Id., citing Article 179 of the COO.
\281\ Id.
\282\ Id. citing section IV-2-2 (Supervisory Response to Cases
of Financial Instruments Business Operators' Capital Adequacy Ratio
Falling Below Prescribed Level) (1) of the Supervisory Guidelines
for FIBO.
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A Japanese nonbank SD is also required to file immediate notice
with the FSA if the firm's capital adequacy ratio falls below the 120
percent minimum requirement.\283\ The notification must include the
Japanese nonbank SD's Plan Regarding Specific Voluntary Measures to Be
Taken in Order to Improve the Capital Adequacy Ratio.\284\ The FSA will
review the plan and, when necessary, identify the specific method by
which a Japanese nonbank SD must bring its capital adequacy ratio back
above the prescribed minimum level and the estimated date of the
recovery. In situations where the Japanese nonbank SD fails to maintain
the minimum level of regulatory capital, the FSA will also examine
other aspects of the firm's operations, including the status of
segregated management of customer assets and fund-raising. If the FSA
finds it to be necessary and appropriate in the public interest or for
the protection of investors, the Commissioner of the FSA may order a
change of business methods, order assets to be deposited, or issue
orders with respect to matters that are otherwise necessary from a
supervisory perspective.\285\
---------------------------------------------------------------------------

\283\ 2022 Proposal at 48110, citing Article 179 of COO.
\284\ Id.
\285\ 2022 Proposal at 48110-48111. Article 53(1) of the FIEA.
Section IV-2-2 (Supervisory Response to Cases of Financial
Instruments Business Operators' Capital Adequacy Ratio Falling Below
Prescribed Level) (3) of the Supervisory Guidelines for FIBO
indicates four examples of the order: (i) to draft and implement
measures (including the drafting of specifics and the implementation
schedule) to bring the capital adequacy ratio back above the legally
prescribed level and maintain the ratio above that level on a
permanent basis; (ii) to implement measures to ensure the protection
of investors in preparation for an unexpected event, through
appropriate management of securities and cash and careful management
of fund-raising; (iii) to avoid activities that could lead to
wasteful use of corporate assets; and (iv) to compile the
projections of the balance sheet and fund-raising status on a daily
basis and the projection of the capital adequacy ratio in ways to
reflect the specific measures to be implemented, in order to bring
the capital adequacy ratio back above the legally prescribed level.
---------------------------------------------------------------------------

If a Japanese nonbank SD's capital adequacy ratio falls below 100
percent, the Commissioner of the FSA may order the suspension of all or
part of the firm's business activities for a period not to exceed three
months if the FSA deems such action to be necessary and appropriate for
the public interest or for the protection of investors.\286\ If the
Japanese nonbank SDs capital adequacy ratio does not exceed 100
percent, and the FSA determines that the firm's capital adequacy ratio
status is not likely to recover, the Commissioner of the FSA may
rescind the registration of the firm.\287\
---------------------------------------------------------------------------

\286\ 2022 Proposal at 48111. Article 53(2) of the FIEA.
\287\ Id. Article 53(3) of the FIEA.
---------------------------------------------------------------------------

Furthermore, in addition to the above measures, the FSA may order a
Japanese nonbank SD to change its business methods or to otherwise take
measures that are necessary for improving its business operations or
the state of its assets if the FSA finds such action necessary and
appropriate in the public interest or for the protection of
investors.\288\ Finally, the Prime Minister of Japan may rescind the
registration of a Japanese nonbank SD, or order the suspension of all
or a part of its business activities for a period of no longer than six
months, if the Japanese nonbank SD violates a disposition by a
government agency,\289\ or is likely to become insolvent due to the
state of its business and assets.\290\
---------------------------------------------------------------------------

\288\ Id. Article 51 of the FIEA.
\289\ Id. Article 52(1)(vii) of the FIEA.
\290\ Id. Article 52(1)(viii) of the FIEA.
---------------------------------------------------------------------------

Based on its review of the FSA Application and the relevant
Japanese laws and regulations, the Commission preliminarily determined
that the Japanese Financial Reporting Rules and the CFTC Financial
Reporting Rules were comparable in purpose and effect with respect to
the requirements in Commission Regulation 23.105(c)(1) and (2) for
nonbank SDs to provide notice if the firm fails to maintain the minimum
level of regulatory capital or falls below 120 percent of the minimum
level of regulatory capital. Therefore, the Commission proposed to
condition the Comparability Order on a Japanese nonbank SD providing
the Commission and NFA with written notice within 24 hours of the firm
filing notice with the FSA, pursuant to Article 179(3) of the COO, that
its capital adequacy ratio had fallen below 140 percent or 120
percent.\291\ The Commission noted that upon receipt of a notice,
Commission staff and NFA staff would engage with the FSA and the
Japanese nonbank SD to obtain an understanding of the facts that led to
the filing of the notice and would discuss with the FSA its plan for
any ongoing monitoring of the Japanese nonbank SD. Accordingly, the
Commission stated that its proposal would not require the Japanese
nonbank SD to file copies of its recovery plan that it filed with the
FSA with the Commission or NFA. The Commission stated that to the
extent it needed further information from the Japanese nonbank SD, the
Commission expected to request such information as part of its
interaction with the Japanese nonbank SD and from its discussions with
the FSA.\292\ The Commission believed that its proposed conditions
would ensure that the Commission and NFA received the appropriate
information covered by Commission Regulation 23.105(c)(1) and (2),
while also removing the obligation for the Japanese nonbank SD to file
separate and duplicative notices with the Commission/NFA and the FSA.
---------------------------------------------------------------------------

\291\ Id.
\292\ See 2022 Proposal at 48112.
---------------------------------------------------------------------------

The Commission, however, also acknowledged that the notice
provisions of the Japanese Financial Reporting Rules differ in certain
respects from the CFTC Financial Reporting Rules.\293\

[[Page 58496]]

Specifically, unlike the CFTC Financial Reporting Rules, the Japanese
Financial Reporting Rules do not contain explicit requirements for a
Japanese nonbank SD to notify the FSA if the firm fails to make or keep
current books and records required by the FSA, experiences a specified
decrease in its capital adequacy ratio when compared to levels
previously reported, or fails to collect or post required initial
margin and/or variation margin for uncleared swap and non-cleared
security-based swap transactions with counterparties that exceed
certain threshold levels.\294\ The Japanese Financial Reporting Rules
also do not require a Japanese nonbank SD to provide the FSA with
advance notice of capital withdrawals initiated by equity holders that
exceed defined amounts or percentages of the firm's excess regulatory
capital.\295\
---------------------------------------------------------------------------

\293\ Id.
\294\ See 17 CFR 23.105(c)(3), (4), and (7).
\295\ See 17 CFR 23.105(c)(5) (requiring a nonbank SD to provide
written notice to the Commission and NFA two business days prior to
the withdrawal of capital by action of the equity holders if the
amount of the withdrawal exceeds 30 percent of the nonbank SD's
excess regulatory capital). See 2022 Proposal at 48111.
---------------------------------------------------------------------------

To address these differences and to ensure that the Commission and
NFA receive appropriate notices of events that may have potential
adverse impacts on registered SDs, the Commission proposed to condition
the Comparability Order to require Japanese nonbank SDs to file certain
additional notices directly with the Commission and NFA. In this
regard, the Commission stated that the maintenance of current books and
records is a fundamental and essential component of operating as a
registered nonbank SD, and that the failure to comply with such a
requirement may indicate an inability of the firm to promptly and
accurately record transactions ensuring compliance with regulatory
requirements, including regulatory capital requirements.\296\ As such,
the Commission proposed to condition the proposed Comparability Order
on a Japanese nonbank SD providing the Commission and NFA with a
written notice within 24 hours if the firm fails to make or to keep
current books and records required by the FSA.\297\ The Commission
stated that, in this context, books and records would include current
ledgers or other similar records which show or summarize, with
appropriate references to supporting documents, each transaction
affecting the Japanese nonbank SD's asset, liability, income, expense,
and capital accounts in accordance with the accounting principles
permitted by the FSA.\298\
---------------------------------------------------------------------------

\296\ 2022 Proposal at 48111.
\297\ Id. at 48111-48112. See also, proposed Condition 18 at
48115.
\298\ Id. at 48111. For comparison, see Commission Regulation
23.105(b) (similarly defining the term ``current books and records''
as used in the context of Commission's requirements). 17 CFR
23.105(b).
---------------------------------------------------------------------------

The Commission further proposed to condition the Comparability
Order on a Japanese nonbank SD filing a notice with the Commission and
NFA if: (i) a single counterparty, or group of counterparties under
common ownership or control, fails to post required initial margin or
pay required variation margin on uncleared swap and non-cleared
security-based swap positions that, in the aggregate, exceeds 25
percent of the Japanese nonbank SD's minimum capital requirement; (ii)
counterparties fail to post required initial margin or pay required
variation margin to the Japanese nonbank SD for uncleared swap and non-
cleared security-based swap positions that, in the aggregate, exceeds
50 percent of the Japanese nonbank SD's minimum capital requirement;
(iii) a Japanese nonbank SD fails to post required initial margin or
pay required variation margin for uncleared swap and non-cleared
security-based swap positions to a single counterparty or group of
counterparties under common ownership and control that, in the
aggregate, exceeds 25 percent of the Japanese nonbank SD's minimum
capital requirement; and (iv) a Japanese nonbank SD fails to post
required initial margin or pay required variation margin to
counterparties for uncleared swap and non-cleared security-based swap
positions that, in the aggregate, exceed 50 percent of the Japanese
nonbank SD's minimum capital requirement. The Commission proposed to
require this notice so that, in the event that such a notice is filed,
the Commission and NFA may commence communication with the Japanese
nonbank SD and the FSA to obtain an understanding of the facts that led
to the failure to exchange material amounts of initial margin or
variation margin in accordance with the applicable margin rules, and to
assess whether there is a concern regarding the financial condition of
the firm that may impair its ability to meet its financial obligations
to customers, counterparties, creditors, and general market
participants, or otherwise adversely impact the firm's safety and
soundness.\299\
---------------------------------------------------------------------------

\299\ Id. See also, proposed Condition 19 at 48115.
---------------------------------------------------------------------------

The Commission also proposed to require that a Japanese nonbank SD
file any notices required under the proposed Comparability Order with
the Commission and NFA in English and, where applicable, with any
balances reported in U.S. dollars. The Commission stated that each
notice required by the proposed Comparability Order had to be filed in
accordance with instructions issued by the Commission or NFA.\300\
---------------------------------------------------------------------------

\300\ Id.
---------------------------------------------------------------------------

The Commission did not propose to require a Japanese nonbank SD to
file notices with the Commission concerning withdrawals of capital or
changes in capital levels as such information would be reflected in the
financial statement reporting filed with the Commission and NFA as
conditions of the order, and because the Japanese nonbank SD's capital
levels are also monitored by the FSA. As such, the Commission
preliminarily considered that the separate reporting of the information
to the Commission would be superfluous.\301\
---------------------------------------------------------------------------

\301\ Id.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
The Commission received several comments with respect to the notice
provisions. IBAJ noted, with respect to the proposed requirement in
proposed Condition 18 that a Japanese nonbank SD file notice with the
Commission and NFA within 24 hours of the firm failing to make or keep
current the financial books and records required by the FSA, that it is
practically challenging for a firm to submit a notification prior to
the discovery of the relevant failure.\302\ IBAJ recommended that the
condition require a notice ``following the discovery'' by the Japanese
nonbank SD of its failure to maintain current financial books and
records.\303\
---------------------------------------------------------------------------

\302\ IBAJ Letter at p. 7.
\303\ Id.
---------------------------------------------------------------------------

Maintaining current books and records of all financial transactions
is a fundamental recordkeeping requirement for a registered nonbank SD,
and is essential in order to provide management with the information
necessary to ensure that financial transactions are timely and
accurately reported and that the firm is in compliance with capital and
other regulatory requirements. The Commission believes that it is
necessary for a nonbank SD to maintain internal controls and procedures
to affirmatively monitor that books and records are being maintained on
a current basis. Therefore, the Commission is adopting Condition 18
(renumbered as final Condition 19) as proposed.\304\ For

[[Page 58497]]

further clarification of this condition, the Commission also confirms
that the requirement for Japanese nonbank SDs to file a notice with the
Commission if the firm fails to maintain current books and records will
apply with respect to books and records addressing the Japanese nonbank
SD's financial condition and financial reporting requirements.
---------------------------------------------------------------------------

\304\ The Commission also notes that final Condition 19 is
consistent with Commission Regulation 23.105(c)(3), which requires
nonbank SDs subject to the Commission's notice requirements to file
notice within 24 hours if the firm does not maintain current books
and records. 17 CFR 23.105(c)(3).
---------------------------------------------------------------------------

IBAJ also recommended a technical edit to the proposed condition
requiring Japanese nonbank SDs to file a notice in case of a failure to
exchange material amounts of initial margin or variation margin.
Specifically, IBAJ suggested that the phrase ``to the Japanese nonbank
SD'' be added after the phrase ``a single counterparty, or group of
counterparties under common ownership or control, fails to post
required initial margin or pay required variation margin'' in prong (i)
of proposed Condition 19.\305\ The Commission considers this edit
appropriate as it reflects the intent of the Condition as set forth in
the 2022 Proposal, and has revised proposed Condition 19 (renumbered as
Condition 20 of the final Order) by adding the phrase ``to the Japanese
nonbank SD.'' Separately, for purposes of clarity, the Commission notes
that, in proposing a notice condition based on thresholds of
``required'' margin, the Commission's intent was to set the notice
trigger by reference to margin amounts that are legally required to be
exchanged under the applicable margin requirements. To determine the
applicable margin requirements, the Commission will consider the
framework set forth in Commission Regulation 23.160.\306\ To the extent
Japanese nonbank SDs intending to rely on the Comparability Order have
inquiries regarding the scope of uncleared swap margin transactions to
be monitored for purposes of complying with final Condition 20, MPD
will discuss such inquiries with the Japanese nonbank SD during the
confirmation process referenced in final Condition 6 of the
Comparability Order.
---------------------------------------------------------------------------

\305\ IBAJ Letter at p. 7.
\306\ Commission Regulation 23.160 governs the cross-border
application of the CFTC margin requirements for uncleared swaps
depending on the category of entities involved in the transactions
and the availability of substituted compliance. 17 CFR 23.160.
---------------------------------------------------------------------------

Finally, IBAJ requested that the Commission clarify the meaning of
the term ``minimum capital requirement'' in proposed Condition 19.\307\
The Commission notes that the concept of ``minimum capital
requirement'' refers to the minimum amount of capital that a Japanese
nonbank SD is required to hold pursuant to the Japanese Capital Rules.
The Commission understands that this amount corresponds to the Japanese
nonbank SD's required ``capital adequacy amount'' (i.e., 120 percent of
the Japanese nonbank SD's risk equivalent amount). To more accurately
reflect the intent of the condition, however, the Commission will set
forth the notice requirement in proposed Condition 19 (renumbered as
final Condition 20) by reference to the Japanese nonbank SD's risk
equivalent amount. By using the Japanese nonbank SD's risk equivalent
amount as a threshold reference, the Commission will more closely align
the condition with Commission Regulation 23.105(c)(7).
---------------------------------------------------------------------------

\307\ Id. at p. 8 (asking whether ``minimum capital
requirement'' in this context meant the amount calculated by
multiplying the risk equivalent amount and 120 percent under the
Japanese Capital Rules).
---------------------------------------------------------------------------

As discussed in Section II.E.1. above, the notice provisions are
central part of the Commission's and NFA's oversight of nonbank SDs. To
ensure that the Commission and NFA receive appropriate and timely
notice of potential capital issues with Japanese nonbank SDs, the
Commission is adopting proposed Conditions 16 and 17, which require a
Japanese nonbank SD to file notice with the Commission and NFA within
24 hours of filing notice with the FSA that the firm's capital adequacy
requirement has fallen below 140 percent and 120 percent,
respectively.\308\
---------------------------------------------------------------------------

\308\ Proposed Conditions 16 and 17 have been renumbered as
Conditions 17 and 18, respectively, in the final Comparability
Order.
---------------------------------------------------------------------------

Furthermore, the Commission did not receive any comments with
respect to the following proposed notice conditions: (i) the Japanese
nonbank SD files notice with the Commission and NFA within 24 hours of
being informed by the FSA that the firm is not in compliance with any
component of the Japanese Capital Rules or Japanese Financial Reporting
Rules (proposed Condition 14); (ii) the Japanese nonbank SD files
notice with the Commission and NFA within 24 hours if the firm fails to
maintain regulatory capital in the form of Basic Items, as defined in
Article 176 of the COO, equal to or in excess of the U.S. dollar
equivalent of $20 million (proposed Condition 15); or (iii) the
Japanese nonbank SD files notice of the FSA approving a change in the
firm's fiscal year-end date, which must be filed with the Commission
and NFA at least 15 business days prior to the effective date of the
change (proposed Condition 20). The Commission, having considered the
2022 Proposal, is adopting the above conditions as proposed.\309\
---------------------------------------------------------------------------

\309\ The Commission is renumbering proposed Conditions 14, 15,
19, and 20 as Conditions 15, 16, 20, and 21, respectively, in the
final Comparability Order.
---------------------------------------------------------------------------

Commenters also requested that the Commission set the compliance
date at least six months following the issue date of the Comparability
Order to allow Japanese nonbank SDs to adequately prepare for
compliance with the notice reporting obligations imposed by the
Comparability Order.\310\ Similar to its position with regard to the
financial reporting obligations, the Commission believes that granting
an additional period of time to allow Japanese nonbank SDs to establish
and implement the necessary processes to comply with the notice
requirements imposed by the Comparability Order is appropriate with
respect to certain notice obligations. Specifically, the Commission
understands that establishing a process for monitoring failures to
collect or post initial margin or variation margin for uncleared swap
transactions that exceed specified thresholds for purposes of complying
with final Condition 20 may take time. Conversely, the Commission does
not believe that additional time is necessary for implementing a
process of providing a notice to the Commission and NFA in connection
with the occurrence of events that Japanese nonbank SDs currently
monitor and/or report to the FSA. The Commission is also of the view
that, given the nature of the notice obligation, Japanese nonbank SDs
should be in a position to comply with all other notice obligations,
including those requiring Japanese nonbanks SDs to provide notice to
the Commission and NFA if they fail to make or keep current financial
books and records, or if they fail to maintain regulatory capital in
the form of Basic Items equal to, or in excess of, the U.S. dollar
equivalent of $20 million, immediately upon effectiveness of the
Comparability Order. Accordingly, the Commission is setting a
compliance date of 180 calendar days after the publication of the
Comparability Order in the Federal Register with respect to the notice
reporting obligations under final Condition 20 of the Comparability
Order. Commenters did not address any other aspects of the proposed
Comparability Determination or Comparability Order concerning the

[[Page 58498]]

comparability of the Japanese and CFTC nonbank SD notice requirements.
---------------------------------------------------------------------------

\310\ IBAJ Letter at p. 4 and Associations Letter at p. 4.
---------------------------------------------------------------------------

In conclusion, the Commission finds that the regulatory notice
provisions of Japanese Financial Reporting Rules and the CFTC Financial
Reporting Rules, after consideration of the conditions imposed in the
final Comparability Order, are comparable in purpose and effect, and
achieve comparable regulatory outcomes, by providing timely notice to
the FSA, and to the Commission and NFA, of specified events at a
nonbank SD that may potentially indicate an ongoing issue with the
safety and soundness of the firm and/or its ability to meet its
obligations to swap counterparties, creditors, or other market
participants without the firm becoming insolvent. As such, the
Commission adopts the final Comparability Order and conditions as
proposed with respect to the Commission's analysis of comparability of
the Japanese and Commission's nonbank SD notice reporting requirements,
subject to the technical edits in Condition 20 discussed above. The
Commission is also adopting a compliance date for certain notice
reporting requirements as discussed above in the final Comparability
Order.

F. Supervision and Enforcement

1. Proposed Determination
In the 2022 Proposal, the Commission discussed the oversight of
nonbank SDs, noting that the Commission and NFA conduct ongoing
supervision of nonbank SDs to assess their compliance with the CEA,
Commission regulations, and NFA rules by reviewing financial reports,
notices, risk exposure reports, and other filings that nonbank SDs are
required to file with the Commission and NFA.\311\ As discussed, the
Commission and NFA also conduct periodic examinations as part of their
supervision of nonbank SDs, including routine onsite examinations of
nonbank SDs' books, records, and operations to ensure compliance with
CFTC and NFA requirements.\312\
---------------------------------------------------------------------------

\311\ See 2022 Proposal at 48112.
\312\ See id. Section 17(p)(2) of the CEA requires NFA as a
registered futures association to establish minimum capital and
financial requirements for nonbank SDs and to implement a program to
audit and enforce compliance with such requirements. 7 U.S.C.
21(p)(2). Section 17(p)(2) further provides that NFA's capital and
financial requirements may not be less stringent than the capital
and financial requirements imposed by the Commission.
---------------------------------------------------------------------------

The Commission also referred to the financial reports and notices
required under the CFTC Financial Reporting Rules, noting that the
reports and notices provide the Commission and NFA with information
necessary to ensure the nonbank SD's compliance with minimum capital
requirements; assess the firm's overall safety and soundness and
ability to meet its financial obligations to customers, counterparties,
creditors, and general market participants; and identify potential
issues at a nonbank SD that may impact the firm's ability to maintain
compliance with the CEA and Commission regulations.\313\ As discussed
in the 2022 Proposal, the Commission and NFA also have the authority to
require a nonbank SD to provide any additional financial and/or
operational information as they may specify to monitor the safety and
soundness of the firm.\314\
---------------------------------------------------------------------------

\313\ See 2022 Proposal at 48112-48113.
\314\ 17 CFR 23.105(h). See also 2022 Proposal at 48112-48113.
---------------------------------------------------------------------------

The Commission further noted that it has authority to take
disciplinary actions against a nonbank SD for failing to comply with
the CEA and Commission regulations. In this regard, Section 4b-1(a) of
the CEA provides the Commission with exclusive authority to enforce the
capital requirements imposed on nonbank SDs adopted under Section 4s(e)
of the CEA.\315\ NFA also may take disciplinary actions against nonbank
SDs for failure to comply with NFA rules.\316\
---------------------------------------------------------------------------

\315\ Id. at 48113.
\316\ NFA is required by the CEA to maintain rules providing
that its member and persons associated with its members, including
nonbank SDs, shall be appropriately disciplined by expulsion,
suspension, fine, censure, or being suspended or barred from being
associated with all members, or any other fitting penalty, for any
violation of its rules. 7 U.S.C. 21(b)(8); see also Commission
Regulation 170.6 (17 CFR 170.6), which requires, among other things,
a registered futures association to take vigorous action against
members that engage in activities in violation of the association's
rules and to impose discipline that is fair and has a reasonable
basis in fact.
---------------------------------------------------------------------------

With respect to the FSA's authority to supervise Japanese nonbank
SDs and carry out enforcement actions, the Commission stated that the
FSA has supervision, audit, and investigation authority with respect to
Japanese nonbank SDs, including the authority to require such firms to
provide all necessary information for the FSA to carry out its
supervisory responsibilities.\317\ Specifically, as discussed in the
2022 Proposal, the FSA has the authority to require Japanese nonbank
SDs to submit documents to the FSA and to conduct onsite inspections at
the business offices of the Japanese nonbank SDs.\318\
---------------------------------------------------------------------------

\317\ FSA Application, p. 16.
\318\ Article 56-2 of the FIEA. See 2022 Proposal at 48113.
---------------------------------------------------------------------------

The Commission noted that the FSA also monitors the capital
adequacy ratios of Japanese nonbank SDs through supervisory measures on
an ongoing basis, referring to the system of notice requirements,
discussed in Section E.1. above, that obligate Japanese nonbank SDs to
provide notice to the FSA if certain triggering conditions are met. The
Commission also discussed the FSA's authority to address actual cases
of a Japanese nonbank SD's failure to maintain its required capital
adequacy ratio. Specifically, as discussed, a Japanese nonbank SD is
required to submit a notification and an action plan to the FSA if the
Japanese nonbank SD's capital adequacy ratio falls below 120
percent.\319\ The FSA will review the plan and, when necessary,
identify the specific method by which the Japanese nonbank SD is
required to bring its capital adequacy ratio back above the prescribed
minimum level. The FSA also may order a Japanese nonbank SD to change
its business methods, order assets to be deposited, or issue orders
with respect to matters that are otherwise necessary from a supervisory
perspective, if the FSA finds it in the public interest or for the
protection of customers to take such actions.\320\ Furthermore, a
Japanese nonbank SD may have all or parts of its business suspended for
a period of up to six months or have its registration revoked if the
firm violates certain laws or regulations in connection with the
financial instruments business or services,\321\ or if the firm is
likely to become insolvent.\322\ Finally, a Japanese nonbank SD is
subject to fines and other possible actions if it fails to submit
documents that are required by law to be filed with the FSA.\323\ Based
on its analysis of the FSA's supervisory regime, the Commission
preliminarily found that the FSA has the necessary powers and ability
to supervise and enforce Japanese nonbank SDs' compliance with Japanese
capital adequacy and financial reporting requirements.
---------------------------------------------------------------------------

\319\ Article 53(2) of the FIEA.
\320\ Id.
\321\ Article 52(1)(vii) of the FIEA.
\322\ Article 52(1)(viii) of the FIEA.
\323\ Article 198-6 of the FIEA. See 2022 Proposal at 48113.
---------------------------------------------------------------------------

The Commission also cited its long history of regulatory
cooperation with the FSA, noting that the Commission and the FSA have
entered into a Memorandum of Cooperation (``MOC'') with regard to the
cooperation and the exchange of information in the supervision and
oversight of regulated entities that operate on a cross-border basis in
both the U.S. and Japan (``Cross-Border Covered Entities''), including

[[Page 58499]]

nonbank SDs registered with the Commission and FIBOs registered with
the FSA.\324\ As discussed in the 2022 Proposal, pursuant to the MOC,
the Commission and FSA have expressed an intent to consult regularly,
as appropriate, regarding: (i) general supervisory issues, including
regulatory, oversight, or other related developments; (ii) issues
relevant to the operations, activities, and regulation of Cross-Border
Covered Entities; and (iii) any other areas of mutual supervisory
interest, and to meet periodically to discuss their respective
functions and regulatory oversight programs.\325\ The MOC further
provides for the Commission and FSA to inform each other of certain
events, including any material events that could adversely impact the
financial or operational stability of a Cross-Border Covered Entity,
and provides a procedure for the Commission or FSA to conduct on-site
examinations in, respectively, Japan or the U.S.\326\ The Commission
stated that, pursuant to the terms of the MOC, it intends to
communicate and consult with the FSA regarding the supervision of the
financial and operational condition of Japanese nonbank SDs.\327\
---------------------------------------------------------------------------

\324\ Memorandum of Cooperation Related to the Supervision of
Cross-Border Covered Entities (Mar. 10, 2014), available here:
https://www.cftc.gov/idc/groups/public/%40internationalaffairs/documents/file/cftc-jfsamoc031014.pdf. In addition, both the
Commission and the FSA are signatories to the IOSCO Multilateral
Memorandum of Understanding Concerning Consultation and Cooperation
and the Exchange of Information (revised May 2012), which covers
primarily information sharing in the context of enforcement matters.
See 2022 Proposal at 48111-48112.
\325\ MOC, paragraphs 19 and 26.
\326\ MOC, paragraph 22 and 29. Event-triggered notification in
paragraph 22 of the MOC includes any known adverse material change
in the ownership, operating environment, operations, financial
resources, management, or systems and controls of a Cross-Border
Covered Entity, and the failure of a Cross-Border Covered Entity to
satisfy any of its requirements for continued authorization or
registration where that failure could have a material adverse effect
in the jurisdiction of the Commission or FSA.
\327\ See 2022 Proposal at 48113.
---------------------------------------------------------------------------

Finally, in addition to preliminarily finding that the FSA has the
necessary powers and authorities to conduct supervisory programs, the
Commission also noted that it retains examination authority and
enforcement authority over Japanese nonbank SDs.\328\ The ability of
the Commission to exercise its enforcement authority over Japanese
nonbank SD is not conditioned upon a finding by the FSA of a violation
of the Japanese Capital Rules or Japanese Financial Reporting Rules. In
addition, as each Japanese nonbank SD is a member of NFA, the firm is
subject to NFA membership rules, examination authority, and
disciplinary process.\329\
---------------------------------------------------------------------------

\328\ 2022 Proposal at 48094-48095. In discussing the
comparability framework, the Commission noted that a non-U.S.
nonbank SD that has received confirmation of its ability to operate
under a Comparability Order remains subject to the Commission's
examination authority and may be subject to a Commission enforcement
action if the firm fails to comply with a foreign jurisdiction's
capital adequacy or financial reporting requirements.
\329\ 7 U.S.C. 21(p).
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
In response to the Commission's request for comment, Better Markets
stated that to ensure that the Commission fulfills its obligation to
protect the U.S. financial system, it must ensure, on an ongoing basis,
that each grant of substituted compliance remains appropriate over time
by, at least, requiring that each order granting substituted
compliance, and each memorandum of understanding with a foreign
regulatory authority, impose an obligation that the applicant, as
appropriate: (1) periodically apprise the Commission of the activities
and results of its supervision and enforcement programs, to ensure that
they remain sufficiently robust to deter and address violations of the
law; and (2) immediately apprise the Commission of any material changes
to the regulatory regime, whether explicit (i.e., rules changes) or
implicit (i.e., changes in how a rule is interpreted, applied, or
enforced).\330\
---------------------------------------------------------------------------

\330\ Better Markets Letter at pp. 6-7.
---------------------------------------------------------------------------

As discussed above, the Commission has entered into an MOC with the
FSA, which sets forth a comprehensive framework for cooperation, timely
communications, and exchange of information between the agencies. In
addition, the 2022 Proposal includes a proposed condition requiring the
FSA to notify the Commission of any material changes to the information
submitted in the FSA Application, including, but not limited to,
proposed and final material changes to the Japanese Capital Rules or
Japanese Financial Reporting Rules and proposed and final material
changes to the FSA's supervisory authority or supervisory regime over
Japanese nonbank SDs. The Commission has included this condition in its
final Comparability Order and further expanded it to require that a
Japanese nonbank SD relying on the Comparability Order provide such
notice.\331\ As such, the Commission believes that the comment
concerning the nature and extent of cooperation and communication
between the CFTC and the FSA with respect to the supervision and
oversight of Japanese nonbank SDs is adequately addressed.
---------------------------------------------------------------------------

\331\ Condition 22 of the final Comparability Order. Final
Condition 22 requires that the ``Japanese nonbank SD or the [FSA]''
provide a notice of material changes to the information submitted in
the FSA Application. Although the FSA is the applicant, the
Commission believes that Japanese nonbank SDs who rely on the
Comparability Order and are responsible for complying with the terms
of the Order must also have an obligation to inform the Commission
and NFA of material changes to the information submitted in the FSA
Application. Japanese nonbank SDs may act individually or in
coordination with the FSA to ensure that the Commission and NFA
receive a timely notice.
---------------------------------------------------------------------------

Furthermore, in issuing a Comparability Order, the Commission is
not ceding its supervisory and enforcement authority. Japanese nonbank
SDs that are subject to a Comparability Order are registered with the
Commission as SDs and are members of NFA, and, as such, are subject to
the CEA, Commission regulations, and NFA membership rules and
requirements. Japanese nonbank SDs covered by the Comparability Order
also remain subject to the Commission's examination authority with
respect to all elements of the CEA and Commission regulations,
including capital and financial reporting.\332\ Therefore, the
Commission and NFA have an ongoing obligation to conduct oversight,
including potential examination, of Japanese nonbank SDs. In this
regard, Japanese nonbank SDs covered by a Comparability Order are not
only required to provide the Commission and NFA with information
pursuant to the conditions in the order, they are also required to
directly provide the Commission and NFA with additional information
upon the Commission's and/or NFA's request in order to facilitate the
ongoing supervision of such firms.\333\ Further, Section 17 of NFA's SD
Financial Requirements rule provides that each SD member of NFA must
file the financial, operational, risk management and other information
required by NFA in the form and manner prescribed by NFA.\334\ The
ability to obtain information directly from Japanese nonbank SDs
ensures that the Commission and NFA have access to the information
necessary to monitor the financial condition of such firms and to
assess the firms' compliance with applicable capital and financial
reporting requirements.
---------------------------------------------------------------------------

\332\ 17 CFR 23.106(a)(4)(ii).
\333\ 17 CFR 23.105(h).
\334\ NFA Financial Requirements, Section 17. Swap Dealer and
Major Swap Participant Reporting Requirements, available at NFA's
website: https://www.nfa.futures.org/rulebooksql/index.aspx.
---------------------------------------------------------------------------

In addition, as detailed in Section I.E. above, the conditions set
forth in the Comparability Order reflect that the

[[Page 58500]]

Commission and NFA have a continuing obligation to conduct ongoing
oversight, including potential examination, of Japanese nonbank SDs to
ensure compliance with the Comparability Order. Specifically, as part
of this oversight, the conditions require Japanese nonbank SDs to file
directly with the Commission and NFA financial reports and notices that
are comparable to the financial reports and notices filed by nonbank
SDs domiciled in the U.S. In addition to requiring Japanese nonbank SDs
to maintain current books and records reflecting all transactions,\335\
the conditions further require each Japanese nonbank SD covered by the
Comparability Order to file directly with the Commission and NFA: (i)
notice that the firm was informed by the FSA that it is not in
compliance with any component of the Japanese Capital Rules or Japanese
Financial Reporting Rules; \336\ (ii) monthly and annual financial
reports; \337\ (iii) notice that the firm's capital adequacy ratio has
fallen below 140 percent or 120 percent; \338\ (iv) notice that the
firm has failed to maintain regulatory capital in the form of Basic
Items in amount equal to or in excess of the equivalent of $20 million;
\339\ and (v) notice that the firm has failed to make or keep current
financial books and records required by the FSA.\340\ The Comparability
Order further requires a Japanese nonbank SD or the FSA to provide
notice to the Commission of any material changes to the information
submitted in the application, including, but not limited to, proposed
and final material changes to the Japanese Capital Rules or Japanese
Financial Reporting Rules and proposed and final material changes to
the FSA's supervisory authority or supervisory regime over Japanese
nonbank SDs.\341\ The financial information and notices required to be
filed directly with the Commission and NFA under the Comparability
Order, and through the Commission's and NFA's direct authority to
obtain additional information from Japanese nonbank SDs, will allow the
Commission and NFA to conduct ongoing oversight of such firms to assess
their overall safety and soundness.
---------------------------------------------------------------------------

\335\ Condition 7 of the final Comparability Order.
\336\ Condition 15 of the final Comparability Order.
\337\ Conditions 8, 9 and 10 of the final Comparability Order.
\338\ Conditions 17 and 18 of the final Comparability Order.
\339\ Condition 16 of the final Comparability Order.
\340\ Condition 19 of the final Comparability Order.
\341\ Condition 22 of the final Comparability Order.
---------------------------------------------------------------------------

In conclusion, the Commission finds that the FSA maintains a
supervisory program over Japanese nonbank SDs that is comparable to the
Commission's supervisory program over nonbank SDs. The FSA's
supervisory program is comparable in purpose and effect to the
Commission's supervisory program in that both programs are designed to
monitor the safety and soundness of nonbank SDs through a combination
of periodic financial reporting, notice reporting, and examination.
Also, as noted above, the Commission and NFA will continue to conduct
oversight of Japanese nonbank SDs through conditions in the
Comparability Order imposing obligations on the firms to provide
financial reporting and notices directly to the Commission and NFA.
In addition, the Commission finds that the FSA and Commission have
comparable and sufficient enforcement authority over nonbank SDs. As
discussed in Section II.F.1. above, the FSA and the Commission may
sanction nonbank SDs for noncompliance with capital and financial
reporting requirements by imposing fines or, if necessary, revoking the
firms' registration. Furthermore, as discussed above, NFA may also take
disciplinary action against a nonbank SD for failure to comply with its
rules, including nonbank SD capital and financial reporting
requirements. Accordingly, the Commission is adopting the Comparability
Order as proposed with respect to the Commission's analysis concerning
the comparability of the supervisory programs and enforcement
authorities of the Commission, NFA, and FSA with respect to nonbank SD
capital and financial reporting.

III. Final Capital Comparability Determination and Comparability Order

A. Commission's Final Comparability Determination

Based on the FSA's Application and the Commission's review of
applicable Japanese laws and regulations, as well as the review of
comments submitted in response to the Commission's request for comment
on the FSA Application and the proposed Comparability Determination and
Comparability Order, the Commission finds that the Japanese Capital
Rules and the Japanese Financial Reporting Rules, subject to the
conditions set forth in the Comparability Order below, achieve
comparable outcomes and are comparable in purpose and effect to the
CFTC Capital Rules and CFTC Financial Reporting Rules. In reaching this
conclusion, the Commission recognizes that there are certain
differences between the Japanese Capital Rules and CFTC Capital Rules
and certain differences between the Japanese Financial Reporting Rules
and the CFTC Financial Reporting Rules. The Comparability Order below
is subject to conditions that are necessary to promote consistency in
regulatory outcomes, or to reflect the scope of substituted compliance
that would be available notwithstanding certain differences. In the
Commission's view, the differences between the two rule sets are not
inconsistent with providing a substituted compliance framework for
Japanese nonbank SDs subject to the conditions specified in the Order
below.
Furthermore, the Comparability Determination and Comparability
Order are limited to the comparison of the Japanese Capital Rules to
the Bank-Based Approach under the CFTC Capital Rules. As noted
previously, the FSA has not requested, and the Commission has not
performed, a comparison of the Japanese Capital Rules to the
Commission's NLA Approach or TNW Approach.

B. Order Providing Conditional Capital Comparability Determination for
Japanese Nonbank Swap Dealers

It is hereby determined and ordered, pursuant to Commodity Futures
Trading Commission (``CFTC'' or ``Commission'') Regulation 23.106 (17
CFR 23.106) under the Commodity Exchange Act (``CEA'') (7 U.S.C. 1 et
seq.) that a swap dealer (``SD'') organized and domiciled in Japan and
subject to the Commission's capital and financial reporting
requirements under Sections 4s(e) and (f) of the CEA (7 U.S.C. 6s(e)
and (f)) may satisfy the capital requirements under Section 4s(e) of
the CEA and Commission Regulation 23.101(a)(1)(i) (17 CFR
23.101(a)(1)(i)) (``CFTC Capital Rules''), and the financial reporting
rules under Section 4s(f) of the CEA and Commission Regulation 23.105
(17 CFR 23.105) (``CFTC Financial Reporting Rules''), by complying with
certain specified Japanese laws and regulations cited below and
otherwise complying with the following conditions, as amended or
superseded from time to time:
(1) The SD is not subject to regulation by a prudential regulator
defined in Section 1a(39) of the CEA (7 U.S.C. 1a(39));
(2) The SD is organized under the laws of Japan and is domiciled in
Japan (a ``Japanese nonbank SD'');
(3) The Japanese nonbank SD is registered as a Type I Financial
Instruments Business Operator (``FIBO'') with the Japan Financial
Services Agency;

[[Page 58501]]

(4) The Japanese nonbank SD is subject to and complies with:
Articles 28(1), 29, 46-3, 46-6(2), 47, 52(1), 53(1) through (3), 56-2,
and 198-6 of the Financial Instruments and Exchange Act (Act No. 25 of
1948); Section II-1-4 (General Supervisory Processes), Section IV-2-1
(Preciseness of Capital Adequacy Ratio), and Section IV-2-2
(Supervisory Response to Cases of Financial Instruments Business
Operators' Capital Adequacy Ratio Falling Below Prescribed Level) of
the Comprehensive Guidelines for Supervision of Financial Instruments
Business Operators; Articles 172, 176, 177(8), 178(1), 179(3), and
Appended Forms No. 12 of the Cabinet Office Order on Financial
Instruments Business (Cabinet Office Order No. 52 of 2007); Articles 1
through 17 of the Financial Services Agency Notice No. 59 of 2007;
Articles 2(vi), 328(1) and (2), 435(2), and 436(2)(i) of the Japanese
Companies Act (Act No. 86 of 2005); and Articles 59 and 76 of the Rules
of Corporate Accounting (Ordinance of the Ministry of Justice No. 13 of
2006) (collectively, the ``Japanese Capital Rules and Japanese
Financial Reporting Rules'');
(5) The Japanese nonbank SD maintains at all times an amount of
regulatory capital in the form of Basic Items, as defined in Article
176 of the Cabinet Office Order No. 52 of 2007, equal to or in excess
of the equivalent of $20 million in United States dollars (``U.S.
dollars''). The Japanese nonbank SD shall use a commercially reasonable
and observed yen/U.S. dollar exchange rate to convert the value of the
yen-denominated Basic Items to U.S. dollars;
(6) The Japanese nonbank SD has filed with the Commission a notice
stating its intention to comply with the Japanese Capital Rules and
Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules
and the CFTC Financial Reporting Rules. The notice of intent must
include the Japanese nonbank SD's representation that the firm is
organized and domiciled in Japan; is a registered FIBO; and is subject
to, and complies with, the Japanese Capital Rules and Japanese
Financial Reporting Rules. The Japanese nonbank SD may not rely on this
Comparability Order until it receives confirmation from Commission
staff, acting pursuant to authority delegated by the Commission under
Commission Regulation 140.91(a)(11) (17 CFR 140.91(a)(11)), that the
Japanese nonbank SD may comply with the Japanese Capital Rules and
Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules
and CFTC Financial Reporting Rules. Each notice filed pursuant to this
condition must be prepared in the English language and submitted to the
Commission via email to the following address:
[email protected];
(7) The Japanese nonbank SD prepares and keeps current ledgers and
other similar records in accordance with accounting principles
permitted by the Financial Services Agency;
(8) The Japanese nonbank SD files with the Commission and with the
National Futures Association (``NFA'') a copy of Forms 1-1 Capital
Ratio Summary, 1-2 Capital Ratio: Deductible Assets, 1-3 Market Risk,
1-4 Counterparty Risk, 2-1 Monthly Financial Statement (1), and 2-2
Monthly Financial Statement (2) of its Monthly Monitoring Report that
is required to be filed with the Financial Services Agency pursuant to
Article 56-2(1) of the Financial Instruments and Exchange Act. The
selected forms of the Monthly Monitoring Report must be translated into
the English language and balances must be converted to U.S. dollars,
using a commercially reasonable and observable yen/U.S. dollar spot
rate as of the date of the reports. The selected forms of the Monthly
Monitoring Report must be filed with the Commission and NFA within 35
calendar days after the end of each month;
(9) The Japanese nonbank SD files with the Commission and with NFA
a copy of its Annual Business Report that is required to be filed with
the Financial Services Agency in accordance with Article 46-3(1) of the
Financial Instruments and Exchange Act and Article 172 of the Cabinet
Office Order on Financial Instruments Business. The Annual Business
Report must be translated into the English language and balances must
be converted to U.S. dollars, using a commercially reasonable and
observable yen/U.S. dollar spot rate as of the date of the report. The
Annual Business Report must be filed with the Commission and NFA within
15 business days of the earlier of the date the Annual Business Report
is filed with the Financial Services Agency or the date that the Annual
Business Report is required to be filed with the Financial Services
Agency;
(10) The Japanese nonbank SD files with the Commission and with NFA
a copy of its Annual Audited Financial Report that is required to be
prepared pursuant to Article 435(2) of the Japanese Companies Act (Act
No. 86 of 2005). The Annual Audited Financial Report must be translated
into the English language and balances may be reported in yen. The
Annual Audited Financial Report must be filed with the Commission and
NFA within 15 business days of approval of the report at the
shareholders' meeting of the Japanese nonbank SD;
(11) The Japanese nonbank SD files Schedule 1 of appendix B to
Subpart E of Part 23 of the Commission's regulations (17 CFR 23 Subpart
E--appendix B) with the Commission and NFA on a monthly basis. Schedule
1 must be prepared in the English language with balances reported in
U.S. dollars, using a commercially reasonable and observable yen/U.S.
dollar spot rate as of the date of the report, and must be filed with
the Commission and NFA with the selected forms of the Japanese nonbank
SD's Monthly Monitoring Report required under Condition (8) of this
Comparability Order;
(12) A Japanese nonbank SD that is a registered securities-based
swap dealer with the U.S. Securities and Exchange Commission (``SEC'')
and is required to file a monthly Form X-17A-5 (``FOCUS Report'') with
the SEC, or its designee, must file a copy of the FOCUS Report with the
Commission and NFA within 35 calendar days after the end of each month.
A Japanese nonbank SD that files a FOCUS Report with the Commission and
NFA pursuant to this Condition is not required to file the financial
reports and schedules specified in Conditions 8 and 11 of this
Comparability Order;
(13) The Japanese nonbank SD files a margin report containing the
information specified in Commission Regulation 23.105(m) (17 CFR
23.105(m)) with the Commission and with NFA on a monthly basis
(``Margin Report''). The Margin Report must be prepared in the English
language with balances reported in U.S. dollars, using a commercially
reasonable and observable yen/U.S. dollar spot rate as of the date of
the report, and must be filed with the Commission and NFA with the
selected forms of the Japanese nonbank SD's Monthly Monitoring Report;
(14) The Japanese nonbank SD submits with the specified forms of
the Monthly Monitoring Report set forth in Condition 8, Schedule 1 of
appendix B to Subpart E of Part 23 specified in Condition 11, the
Margin Report specified in Condition 13, the Annual Business Report
specified in Condition 9, and the Annual Audited Financial Report
specified in Condition 10, a statement by an authorized representative
or representatives of the Japanese nonbank SD that to the best
knowledge and belief of the representative or representatives the
information contained in the applicable

[[Page 58502]]

forms, schedules, and reports, including as applicable the translation
of the forms, schedules, and reports into the English language and
conversion of balances to U.S. dollars, is true and correct. The
statement must be prepared in the English language;
(15) The Japanese nonbank SD files a notice with the Commission and
NFA within 24 hours of being informed by the Financial Services Agency
that the firm is not in compliance with any component of the Japanese
Capital Rules or Japanese Financial Reporting Rules. The notice must be
prepared in the English language;
(16) The Japanese nonbank SD files a notice with the Commission and
NFA within 24 hours if it fails to maintain regulatory capital in the
form of Basic Items, as defined in Article 176 of the Cabinet Office
Order No. 52 of 2007, equal to or in excess of the U.S. dollar
equivalent of $20 million using a commercially reasonable and observed
yen/U.S. dollar exchange rate. The notice must be prepared in the
English language;
(17) The Japanese nonbank SD provides the Commission and NFA with
notice within 24 hours of filing a notice with the Financial Services
Agency pursuant to Article 179 of the Cabinet Office Order on Financial
Instruments Business that the firm's capital adequacy ratio has fallen
below the early warning level of 140 percent. The notice filed with the
Commission and NFA must be prepared in the English language;
(18) A Japanese nonbank SD provides the Commission and NFA with
notice within 24 hours of filing a notice with the Financial Services
Agency pursuant to Article 179 of the Cabinet Office Order on Financial
Instruments Business that the firm's capital adequacy ratio has fallen
below 120 percent. The notice filed with the Commission and NFA must be
prepared in the English language;
(19) The Japanese nonbank SD files a notice with the Commission and
NFA within 24 hours if it fails to make or keep current the financial
books and records required by the Financial Services Agency. The notice
must be prepared in the English language;
(20) The Japanese nonbank SD files a notice with the Commission and
NFA within 24 hours of the occurrence of any of the following: (i) a
single counterparty, or group of counterparties under common ownership
or control, fails to post required initial margin or pay required
variation margin to the Japanese nonbank SD on uncleared swap and non-
cleared security-based swap positions that, in the aggregate, exceeds
25 percent of the Japanese nonbank SD's risk equivalent amount; (ii)
counterparties fail to post required initial margin or pay required
variation margin to the Japanese nonbank SD for uncleared swap and non-
cleared security-based swap positions that, in the aggregate, exceeds
50 percent of the Japanese nonbank SD's risk equivalent amount; (iii)
the Japanese nonbank SD fails to post required initial margin or pay
required variation margin for uncleared swap and non-cleared security-
based swap positions to a single counterparty or group of
counterparties under common ownership and control that, in the
aggregate, exceeds 25 percent of the Japanese nonbank SD's risk
equivalent amount; or (iv) the Japanese nonbank SD fails to post
required initial margin or pay required variation margin to
counterparties for uncleared swap and non-cleared security-based swap
positions that, in the aggregate, exceeds 50 percent of the Japanese
nonbank SD's risk equivalent amount. The notice must be prepared in the
English language;
(21) The Japanese nonbank SD files a notice with the Commission and
NFA of a change in its fiscal year-end approved or permitted to go into
effect by the Financial Services Agency. The notice required by this
paragraph will satisfy the requirement for a nonbank SD to obtain the
approval of NFA for a change in fiscal year-end under Commission
Regulation 23.105(g) (17 CFR 23.105(g)). The notice of change in fiscal
year-end must be prepared in the English language and filed with the
Commission and NFA at least 15 business days prior to the effective
date of the Japanese nonbank SD's change in fiscal year-end;
(22) The Japanese nonbank SD or the Financial Services Agency
notifies the Commission of any material changes to the information
submitted in the application, including, but not limited to, proposed
and final material changes to the Japanese Capital Rules or Japanese
Financial Reporting Rules and proposed and final material changes to
the Financial Services Agency's supervisory authority or supervisory
regime over Japanese nonbank SDs. The notice must be prepared in the
English language; and
(23) Unless otherwise noted in the conditions above, the reports,
notices, and other statements required to be filed by the Japanese
nonbank SD with the Commission and NFA pursuant to the conditions of
this Comparability Order must be submitted electronically to the
Commission and NFA in accordance with instructions provided by the
Commission or NFA.
It is also hereby determined and ordered that this Comparability
Order becomes effective upon its publication in the Federal Register,
with the exception of Conditions 11, 13, and 20, which will become
effective 180 calendar days after publication of the Comparability
Order in the Federal Register.

Issued in Washington, DC, on July 3, 2024, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

Note: The following appendices will not appear in the Code of
Federal Regulations.

Appendices to Order Granting Conditional Substituted Compliance in
Connection with Certain Capital and Financial Reporting Requirements
Applicable to Nonbank Swap Dealers Subject to Regulation by the
Financial Services Agency of Japan--Voting Summary and Chairman's and
Commissioners' Statements

Appendix 1--Voting Summary

On this matter, Chairman Behnam and Commissioners Johnson, and
Goldsmith Romero, and Mersinger voted in the affirmative.
Commissioner Pham voted to concur. No Commissioner voted in the
negative.

Appendix 2--Supporting Statement of Chairman Rostin Behnam

I support the Commission's approval of four comparability
determinations and related orders finding that the capital and
financial reporting requirements in Japan, Mexico, the European
Union (France and Germany), and the United Kingdom (for swap dealers
(SDs) designated for prudential supervision by the UK Prudential
Regulation Authority (PRA)) are comparable to the Commission's
capital and financial reporting requirements applicable to nonbank
SDs. These are the first comparability determinations that the
Commission has finalized for applications filed following the July
2020 adoption of its regulatory framework for substituted compliance
for non-U.S. domiciled nonbank SDs.\1\ There are currently 15 non-
U.S. nonbank SDs that are eligible to comply with these conditional
orders: three in Japan; three in Mexico; two in Germany and one in
France for the EU; and six in the UK that are PRA-designated.
---------------------------------------------------------------------------

\1\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020). The Commission issued
the final rule on July 24, 2020.
---------------------------------------------------------------------------

As part of the process leading to the Commission's final
comparability determinations and orders, Commission staff engaged in
a thorough analysis of each foreign jurisdictions' capital and
financial reporting frameworks and considered the public comments
received on the proposed determinations and orders. Based on those
reviews, the Commission has determined that

[[Page 58503]]

the respective foreign jurisdictions' rules are comparable in
purpose and effect, and achieve comparable outcomes, to the CFTC's
capital and financial reporting rules. Specifically, the Commission
considered the scope and objectives of the foreign regulators'
capital adequacy and financial reporting requirements; the ability
of those regulators to supervise and enforce compliance with their
respective capital and financial reporting requirements; and other
facts or circumstances the Commission deemed relevant for each of
the applications.
In certain instances, the Commission found that a foreign
jurisdiction's rules impose stricter standards. In limited
circumstances, where the Commission concluded that a foreign
jurisdiction lacks comparable and comprehensive requirements on a
specific issue, the Commission included a targeted condition
designed to impose an equally stringent standard. The Commission has
issued the final orders consistent with its authority to issue a
comparability determination with the conditions it deems
appropriate. These conditions aim to ensure that the orders only
apply to nonbank SDs that are eligible for substituted compliance in
these respective jurisdictions and that those non-U.S. nonbank SDs
comply with the foreign country's capital and financial reporting
requirements as well as certain additional capital, financial
reporting, recordkeeping, and regulatory notice requirements. This
approach acknowledges that jurisdictions may adopt unique approaches
to achieving comparable outcomes. As a result, the Commission has
focused on whether the applicable foreign jurisdiction's capital and
financial reporting requirements achieve comparable outcomes to the
corresponding Commission requirements for nonbank SDs, not whether
they are comparable in every aspect or contain identical elements.
With these comparability determinations, the Commission fully
retains its enforcement and examination authority as well as its
ability to obtain financial and event specific reporting to maintain
direct oversight of nonbank SDs located in these four jurisdictions.
The avoidance of duplicative requirements without a commensurate
benefit to the Commission's oversight function reflects the
Commission's approach to recognizing the global nature of the swap
markets with dually-registered SDs that operate in multiple
jurisdictions, which mandate prudent capital and financial reporting
requirements. This is, however, an added benefit and not the
Commission's sole justification for issuing these comparability
determinations.
The comparability orders will become effective upon their
publication in the Federal Register. For several order conditions,
the Commission is granting an additional compliance period of 180
calendar days. To rely on a comparability order, an eligible non-
U.S. nonbank SD must notify the Commission of its intention to
satisfy the Commission's capital and financial requirements by
substituted compliance and receive a Commission confirmation before
relying on a determination.
I appreciate the hard work and dedication of the staff in the
Market Participants Division over the past several years to propose
and finalize these four determinations. I also thank the staff in
the Office of the General Counsel and the Office of International
Affairs for their support on these matters.

Appendix 3--Statement of Commissioner Kristin N. Johnson

I support the Commodity Futures Trading Commission's (Commission
or CFTC) issuance of four final capital and financial reporting
comparability determinations and related orders (together, Final
Comparability Determinations) for non-U.S. nonbank swap dealers
(foreign nonbank SDs) and non-U.S. nonbank major swap participants
(foreign nonbank MSPs) organized and domiciled in the United Kingdom
(UK), the European Union (specifically, France and Germany), Mexico,
and Japan.\1\
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\1\ Though the Final Comparability Determinations will apply to
foreign nonbank MSPs in the relevant jurisdictions, there are no
such MSPs currently registered with the Commission at this time. I
will refer only to SDs herein.
---------------------------------------------------------------------------

The Final Comparability Determinations allow eligible foreign
nonbank SDs to satisfy certain capital and financial reporting
requirements under the Commodity Exchange Act (CEA) and Commission
regulations if they: (1) are subject to, and comply with, comparable
capital and financial reporting requirements under the laws and
regulations applicable in their home countries and (2) comply with
the conditions enumerated in the applicable Final Comparability
Determination. Under this conditional substituted compliance
framework, foreign nonbank SDs in the relevant jurisdictions that
comply with these conditions are deemed to be in compliance with the
Commission's capital and financial reporting requirements.
Well-calibrated capital requirements create a cushion to absorb
unexpected losses in times of market stress, and well-calibrated
financial reporting requirements provide the Commission with
information to monitor the business operations and financial
condition of registered SDs. These tools are critical to managing
systemic risk and fostering the stability of U.S. derivatives
markets and the U.S. financial system. The Commission's substituted
compliance framework addresses the need to promote sound global
derivatives regulation while mitigating potentially duplicative
cross-border regulatory requirements for non-U.S. market
participants operating in our markets. Where the Commission permits
substituted compliance, it must retain sufficient oversight,
examination, and enforcement authority to ensure compliance with the
foreign jurisdiction's laws and the conditions to substituted
compliance.
Crucially, while these Final Comparability Determinations permit
foreign nonbank SDs to comply with home country regulations in lieu
of compliance with Commission regulations, the Commission is also
imposing important guardrails to ensure continuous supervision of
the operations and financial condition of the foreign SD.

Background

For an example of the detrimental consequences of failing to
adequately capitalize nonbank swap market participants, one need
look no further than the 2008 global financial crisis. According to
the U.S. Government Accountability Office, the crisis, which
threatened the stability of the U.S. financial system and the health
of the U.S. economy, may have led to $10 trillion in losses,
including large declines in employment and household wealth, reduced
tax revenues from lower economic activity, and lost economic
output.\2\ In response to the crisis, in 2010, the U.S. Congress
passed the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act), which amended the CEA to create a new
regulatory framework for swaps.
---------------------------------------------------------------------------

\2\ United States Government Accountability Office, Financial
Regulatory Reform: Financial Crisis Losses and Potential Impacts of
the Dodd-Frank Act (Jan. 2013), https://fraser.stlouisfed.org/title/gao-reports-testimonies-6136/financial-regulatory-reform-622249.
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As amended, Section 4s(e) of the CEA directs the Commission and
prudential regulators to impose minimum capital requirements on SDs
registered with the Commission. Section 4s(e) adopts separate
approaches for the imposition of minimum capital requirements on
bank and nonbank SDs. For bank SDs, prudential regulators are
authorized to set the minimum capital requirements. For nonbank SDs,
the Commission is authorized to set those requirements. The amended
CEA also sets out financial reporting requirements for SDs. Under
Section 4s(f) of the CEA, registered SDs are required to make
financial condition reports and other reports regarding transactions
and positions as mandated by Commission regulations.
In 2020, the Commission adopted regulations implementing both
the capital and financial reporting requirements for SDs, which were
amended in 2024 (the Capital and Financial Reporting Rules).\3\ The
Capital and Financial Reporting Rules set minimum capital levels
that nonbank SDs must maintain and financial reporting requirements
that nonbank SDs must comply with, including filing periodic
unaudited financial statements and an annual audited financial
report.\4\
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\3\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
\4\ The reporting requirements imposed on bank SD and bank MSPs
were ``more limited'' ``as the financial condition of these entities
will be predominantly supervised by the applicable prudential
regulator and subject to its capital and financial reporting
requirements.'' Id. at 57513. In May 2024, the Commission adopted
amendments to the Capital and Financial Reporting Rules that
codified two previously-issued staff letters providing interpretive
guidance and no-action relief and made other technical amendments.
89 FR 45569 (May 23, 2024).
---------------------------------------------------------------------------

Like the U.S., many other nations adopted their own regulatory
regimes to govern swaps markets in the aftermath of the financial
crisis. Since then, regulators from around the world have endeavored
to improve the resilience of swaps markets and establish a global
set of standards on critical risk

[[Page 58504]]

management issues, such as capital and financial reporting
requirements. These efforts led to the development of the Principles
for Financial Market Infrastructures, to which many jurisdictions,
including our own, look for guidance.\5\
---------------------------------------------------------------------------

\5\ Principles for Financial Market Infrastructures, Bank for
International Settlements and International Organization of
Securities Commissions (Apr. 2012), https://www.bis.org/cpmi/publ/d101a.pdf.
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The Dodd-Frank Act amendments specifically address the cross-
border application of the CFTC's swaps regime. Section 2(i) of the
CEA establishes that the CEA's swaps provisions apply to foreign
swaps activities that have a ``direct and significant'' connection
to, or effect on, U.S. markets. In line with Section 2(i) of the
CEA, the Capital and Financial Reporting Rules set out a substituted
compliance framework in Commission Regulation 23.106 for foreign
nonbank SDs seeking to comply with the Commission's capital and
financial reporting requirements.
The substituted compliance framework consists of comparability
determinations that afford ``due consideration [to] international
comity principles'' while being ``consistent with . . . the
Commission's interest in focusing its authority on potential
significant risks to the U.S. financial system.'' \6\ The
determinations involve an assessment of the home-country
requirements that is a principles-based, holistic approach, focusing
on whether the applicable home-country requirements have comparable
objectives and achieve comparable outcomes to the Commission's
Capital and Financial Reporting Rules.
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\6\ Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to Swap Dealers and Major Swap
Participants, 85 FR 56924, 56924 (Sept. 14, 2020).
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Today's Final Comparability Determinations

The Final Comparability Determinations will apply to 15 foreign
nonbank SDs currently registered with the Commission and subject to
oversight by the UK Prudential Regulation Authority, the European
Central Bank, the Mexican Comisi[oacute]n Nacional Bancaria y de
Valores, and the Financial Services Agency of Japan. I commend staff
for their hard work on the Final Comparability Determinations,
including their work to thoroughly and thoughtfully analyze and
address comments.
Importantly, while the Final Comparability Determinations permit
foreign nonbank SDs in the relevant jurisdictions to comply with
home country regulations in lieu of compliance with Commission
regulations, there are numerous protections in place to ensure the
Commission's ability to supervise on an ongoing basis the adequacy
of the foreign nonbank SDs' compliance. The Final Comparability
Determinations all include key conditions with which the foreign
nonbank SDs must comply. For example, each of the Final
Comparability Determinations requires that the foreign nonbank SDs
provide monthly and annual financial reports to the Commission--and
the Commission can request additional information as required to
facilitate ongoing supervision. Each Final Comparability
Determination also requires the foreign nonbank SDs to notify the
Commission if adverse events occur, such as a significant decrease
in excess regulatory capital, a significant failure of a
counterparty to post required margin, or non-compliance with certain
capital or financial reporting requirements. Finally, in recognition
of the fact that a country's capital standards and financial
reporting requirements may change over time, the Final Comparability
Determinations require the foreign nonbank SDs to provide notice of
material changes to the home country capital or financial reporting
frameworks.
Moreover, the foreign nonbank SDs subject to these
determinations are registered with the Commission and are members of
the National Futures Association (NFA). Therefore, these entities
are subject to the CEA, Commission regulations, and NFA membership
rules, and each entity remains subject to Commission supervisory,
examination and enforcement authority. As noted in the Final
Comparability Determinations, if a foreign SD fails to comply with
its home country's capital and financial reporting requirements, the
Commission may initiate an action for a violation of the
Commission's Capital and Financial Reporting Rules.
As I have previously noted,\7\ it is important to recognize
foreign market participants' compliance with the laws and
regulations of their regulators when the requirements lead to an
outcome that is comparable to the outcome of complying with the
CFTC's corresponding requirements. Respect for partner regulators in
foreign jurisdictions advances the Commission as a global standard
setter for sound derivatives regulation and enhances market
stability.
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\7\ Kristin N. Johnson, Commissioner, CFTC, Combatting Systemic
Risk and Fostering Integrity of the Global Financial System Through
Rigorous Standards and International Comity (Jan. 24, 2024), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement012424;
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of
Notice and Order on EU Capital Comparability Determination (June 7,
2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement060723c; Kristin N. Johnson, Commissioner, CFTC,
Statement in Support of Proposed Order and Request for Comment on
Mexican Capital Comparability Determination (Nov. 10, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement111022c;
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of
Proposed Order on Japanese Capital Comparability Determination (July
27, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072722c.
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I thank the staff in the Market Participants Division for their
hard work on these matters, particularly Amanda Olear, Tom Smith,
and Lily Bozhanova.

Appendix 4--Concurring Statement of Commissioner Caroline D. Pham

I respectfully concur with the order granting conditional
substituted compliance in connection with certain capital and
financial reporting requirements applicable to nonbank swap dealers
subject to regulation by the Financial Services Agency of Japan
(JFSA) (Japan Final Order) because I believe the order imposes a
condition relating to financial reporting that exceeds the scope of
CFTC Regulation 23.105.
I would like to thank Amanda Olear, Thomas Smith, Rafael
Martinez, Warren Gorlick, Liliya Bozhanova, Joo Hong, and Justin
McPhee from the CFTC's Market Participants Division for their truly
hard work on the Japan Final Order and for addressing some of my
concerns. I commend the staff for their tireless efforts for over a
decade to finalize the CFTC's capital comparability determinations.
I would also like to thank the JFSA for their assistance and
support.
I have repeatedly stated the need for a pragmatic, outcomes-
based approach to the CFTC's capital comparability determinations,
based on recognition of the Basel Committee for Banking Supervision
(BCBS) Framework for International Bank Based Capital Standards,\1\
that mitigates market fragmentation while promoting financial
stability. However, the Japan Final Order overreaches on its
conditions relating to financial reporting requirements.
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\1\ Concurring Statement of Commissioner Caroline D. Pham
Regarding Proposed Swap Dealer Capital and Financial Reporting
Comparability Determination (July 27, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072722; Bank for
International Settlements Basel Committee on Banking Supervision,
The Basel Framework, https://www.bis.org/baselframework/BaselFramework.pdf.
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The International Bankers Association of Japan (IBAJ) requested
that the CFTC limit the financial information required to be filed
by Japanese nonbank swap dealers with the CFTC and National Futures
Association (NFA) to the types of financial information required of
U.S. nonbank swap dealers under CFTC Regulation 23.105.\2\ By
requiring the filing of the full home regulator report, the CFTC and
NFA will receive information from Japanese nonbank swap dealers that
exceeds the scope of Regulation 23.105. For example, IBAJ stated
that the out-of-scope information the CFTC and NFA would receive
includes information on client assets segregation status, mutual
fund and deemed securities transaction volumes, the status of the
deemed securities, and other various asset management business
status reports that do not relate to swap dealing activity.\3\
Accordingly, the CFTC is not entitled to that information. By way of
another example, the CFTC does not receive information regarding the
consumer banking activity of bank swap dealers.
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\2\ International Bankers Association of Japan, Letter Re: Japan
Swap Dealer Capital Comparability Determination, 87 FR 48092 (August
8, 2022), (Oct. 6, 2022), 3-4.
\3\ Id.
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Instead of taking the common-sense approach of requiring the
same information in Regulation 23.105 that is applicable to U.S.
entities, the CFTC is requiring more information from Japanese
nonbank swap dealers. The CFTC's justification for exceeding the
scope of Regulation 23.105 in the Japan Final Order is so that the
CFTC can see the totality of the home regulator report to better
determine whether there is extraneous information that is not
necessary and can be eliminated.

[[Page 58505]]

Mere curiosity is not a sufficient justification to contravene
principles of international comity and respect for other sovereign
nations that is the foundation of the global financial system. Not
only did the IBAJ identify the specific extraneous information that
is outside the scope of the CFTC's regulations, but also, I do not
understand why the CFTC would set ourselves up to have to amend the
Japan Final Order to address this overreach in the future.
Regrettably, this is not the only time that the CFTC appears to
take a less deferential approach to Japanese law and, therefore, a
more punitive approach to Japanese entities in contrast to other
jurisdictions. I question the inequity that is inherent in the
CFTC's view of Japan, which has certain banking and financial
services laws that are stricter than the United States. Japan is a
member of the G7, and its regulators are members of the Financial
Stability Board (FSB), BCBS, International Organization of
Securities Commissions (IOSCO), and many other international fora
dedicated to safeguarding the global financial system. The CFTC has
entered into multiple Memorandum of Understanding (MOU) with the
JFSA. It goes without saying that Japan protects Japanese citizens
and their assets. The Commission must show the same respect for
Japanese laws that it provides to other jurisdictions, particularly
because Japan is a key international partner and ally to the United
States.
On May 25, 2024, the G7 Finance Ministers and Central Bank
Governors' Communiqu[eacute] stated: ``We also reiterate our strong
commitment to a free, fair, and rules-based multilateral system.
Building on the legacy of the Japanese G7 Presidency, we will
advance our cooperation to enhance global economic resilience and
economic security and protect our economies from systemic shocks and
vulnerabilities.'' \4\ I urge the Commission to honor this
commitment by the United States.
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\4\ G7 Finance Ministers and Central Bank Governors'
Communiqu[eacute], Stresa, 23-25 May 2024, https://www.consilium.europa.eu/media/muhnmsh1/stresa-communique-25-may-2024.pdf.

[FR Doc. 2024-15092 Filed 7-17-24; 8:45 am]
BILLING CODE 6351-01-P

2024-15092

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