2024-15095
[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58572-58610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15095]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Order Granting Conditional Substituted Compliance in Connection
With Certain Capital and Financial Reporting Requirements Applicable to
Nonbank Swap Dealers Domiciled in the French Republic and Federal
Republic of Germany and Subject to Regulation in the European Union
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: On June 27, 2023, the Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') issued a notice and request for comment on
an application submitted by the Institute of International Bankers,
International Swaps and Derivatives Association, and Securities
Industry and Financial Markets Association requesting that the
Commission determine that registered nonbank swap dealers organized and
domiciled within the European Union 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 the
European Union. 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 the French Republic or the Federal Republic of Germany may satisfy
the capital requirements and the financial reporting rules under the
applicable provisions of the Commodity Exchange Act and Commission
regulations by complying with certain specified EU 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,
[[Page 58573]]
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]; Anna Semmes, Attorney-Advisor, 202-418-
5673, [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 is
issuing an order providing that registered nonbank swap dealers
(``SDs'') organized and domiciled in the French Republic (``France'')
and Federal Republic of Germany (``Germany'') and subject to capital
and financial reporting requirements of the European Union (``EU
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 the
relevant European Union (``EU'') 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 June 27, 2023,\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 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) (``2023 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 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 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\
[[Page 58574]]
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 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
(``MOU'') 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;
[[Page 58575]]
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. 17 CFR 23.101(b). There are no MSPs currently
registered with the Commission.
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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. 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.\27\ 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.\28\ 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\ Id.
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C. Application for a Comparability Determination for EU Nonbank Swap
Dealers
On September 24, 2021, the Institute of International Bankers
(``IIB''), International Swaps and Derivatives Association (``ISDA''),
and Securities Industry and Financial Markets Association (``SIFMA'')
(collectively, the ``Applicants'') submitted an application (``EU
Application'') requesting that the Commission conduct a Comparability
Determination and issue a Comparability Order finding that compliance
by EU nonbank SDs domiciled in France or Germany with certain
designated capital requirements of the EU and certain designated
financial reporting requirements of the EU 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.\29\ There are currently four EU nonbank
SDs registered with Commission that are domiciled in France or
Germany.\30\
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\29\ Letter from Stephanie Webster, General Counsel, IIB, Steven
Kennedy, Global Head of Public Policy, ISDA, and Kyle Brandon,
Managing Director, Head of Derivatives Policy, SIFMA, dated
September 24, 2021. The EU Application is available on the
Commission's website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
\30\ BofA Securities Europe SA and Goldman Sachs Paris Inc. et
Cie (``Goldman Sachs Paris'') are nonbank SDs registered with the
Commission and domiciled in France. Citigroup Global Markets Europe
AG and Morgan Stanley Europe SE are also registered nonbank SDs and
are domiciled in Germany.
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The Applicants represented that the capital adequacy and financial
reporting requirements applicable to financial institutions licensed to
operate in a member state of the EU (``EU Member State'') are
established by EU regulations and directives. Specifically, the Capital
Requirements Regulation \31\ and the Capital Requirements Directive
\32\ set forth capital and financial reporting requirements applicable
to entities defined as ``credit institutions'' or ``investment firms''
within the EU, including EU nonbank SDs. The term ``credit
institution'' includes an entity engaged in taking deposits or other
repayable funds from the public and granting credits for its own
account (``Banking Activities'').\33\ An entity engaged in Banking
Activities is subject to the capital and financial reporting
requirements of CRR and CRD. The term ``credit institution'' also
[[Page 58576]]
includes an entity engaged in: (i) dealing for its own account; (ii)
underwriting financial instruments; or (iii) placing financial
instruments on a firm commitment basis (collectively, ``Investment
Activities''), provided that the entity also meets certain defined
financial thresholds set forth in the definition.\34\ Specifically, an
entity engaged in Investment Activities that maintains a total value of
consolidated assets equal to or in excess of EUR 30 billion is required
to be authorized as a ``credit institution'' and is subject to the
capital and financial reporting requirements of CRR and CRD.\35\
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\31\ Regulation (EU) No 575/2013 of the European Parliament and
of the Council of 26 June 2013 on prudential requirements for credit
institutions and amending Regulation (EU) No 648/2012, as amended
(``Capital Requirements Regulation'' or ``CRR'').
\32\ Directive 2013/36/EU of the European Parliament and of the
Council of 26 June 2013 on access to the activity of credit
institutions and the prudential supervision of credit institutions,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC
and 2006/49/EC, as amended (``Capital Requirements Directive'' or
``CRD'').
\33\ CRR, Article 4(1)(1) (defining the term ``credit
institution'').
\34\ Id.
\35\ Id. and CRD, Articles 8 and 8a (requiring an entity that
engages in Investment Activities and meets the financial thresholds
to submit an application for authorization as a ``credit
institution'' under the relevant provisions of the applicable
national law). CRR, Article 4(1)(1) provides that an entity carrying
out Investment Activities meets the financial threshold for
authorization as a credit institution if: (i) the total value of the
consolidated assets of the entity is equal to or in excess of EUR 30
billion; (ii) the total value of the assets of the entity is less
than EUR 30 billion, and the entity is part of a group in which the
total value of the consolidated assets of all entities in that group
that individually have total assets of less than EUR 30 billion and
that engage in Investment Activities is equal to or in excess of EUR
30 billion; or (iii) the total value of the assets of the entity is
less than EUR 30 billion, and the entity is part of a group in which
the total value of the consolidated assets of all entities in the
group that engage in Investment Activities is equal to or in excess
of EUR 30 billion, where the consolidated supervisor, in
consultation with the supervisory college, decides that the entity
must be authorized as a credit institution to address potential
risks of circumvention and potential risks for financial stability
of the EU.
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Credit institutions that qualify as ``significant supervised
entities'' are subject to the direct prudential supervision of the
European Central Bank (``ECB'').\36\ Credit institutions that are
``less significant supervised entities'' are prudentially supervised by
the applicable prudential supervisory authority in the entity's home EU
Member State (i.e., ``national competent authority'').\37\ The term
``competent authority'' is used in this Comparability Determination and
Comparability Order to refer to the ECB or the national competent
authority, as appropriate.
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\36\ See generally, Council Regulation (EU) 1024/2013 of 15
October 2013 Conferring Specific Tasks to the European Central Bank
Concerning Policies Relating to the Prudential Supervision of Credit
Institutions (``SSM Regulation'') and Regulation (EU) No 468/2014 of
the European Central Bank of 16 April 2014 Establishing the
Framework for Cooperation within the Single Supervisory Mechanism
Between the European Central Bank and the National Competent
Authorities and with National Designated Authorities (``SSM
Framework Regulation'').
The criteria for determining whether credit institutions are
considered ``significant supervised entities'' include size,
economic importance for the specific EU Member State or the EU
economy, significance of cross-border activities, and request for or
receipt of direct public financial assistance. SSM Regulation,
Article 6 and SSM Framework Regulation, Articles 39-44 and 50-62.
\37\ SSM Regulation, Article 6. Less significant entities are
supervised by their national competent authorities in close
cooperation with the ECB. With respect to the prudential supervision
of less significant entities, the ECB has the power to issue
regulations, guidelines or general instructions to the national
competent authorities. SSM Regulation, Article 6(5)(a). At any time,
the ECB can also decide to directly supervise a less significant
entity to ensure that high supervisory standards are applied
consistently. SSM Regulation, Article 6(5)(b).
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The term ``investment firm'' is defined as an entity authorized
under the Markets in Financial Instruments Directive,\38\ and whose
regular business is the provision of one or more investment services to
third parties and/or the performance of one or more investment-related
activities on a professional basis (including Investment Activities as
defined above).\39\ An investment firm that engages in Investment
Activities and maintains total consolidated assets of at least EUR 15
billion is also subject to the capital and financial reporting
requirements of CRR and CRD.\40\ The investment firm, however, is not
required to be authorized as a ``credit institution'' under the
relevant provisions of the applicable national law in the EU Member
State and is prudentially supervised by the national competent
authority.\41\ Lastly, an entity defined as an ``investment firm'' that
does not engage in Investment Activities, or that engages in Investment
Activities but does not meet the criteria of either maintaining
consolidated assets of at least EUR 15 billion or maintaining
consolidated assets of at least EUR 5 billion and meeting certain
criteria of significance and interconnectedness, is not subject to CRR
and CRD.\42\ Such an investment firm is subject to capital and
financial reporting requirements established by IFR and IFD, which EU
Member States were required to adopt and apply by June 26, 2021.\43\
The new IFR and IFD capital and financial reporting requirements are
tailored to the risks faced and posed by smaller investment firms that
operate differently from banking entities and larger investment firms.
Such smaller investment firms are also prudentially supervised by the
national competent authority.
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\38\ Directive 2014/65/EU of the European Parliament and of the
Council of 15 May 2014 on markets in financial instruments and
amending Directive 2002/92/EC and Directive 2011/61/EU (``Markets in
Financial Instruments Directive'' or ``MiFID'').
\39\ CRR, Article 4(1)(2) cross-referencing Article 4(1)(1) of
MiFID.
\40\ See Regulation (EU) 2019/2033 of the European Parliament
and of the Council of 27 November 2019 on the prudential
requirements of investment firms and amending Regulations (EU) No
1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014
(``Investment Firms Regulation'' or ``IFR''), Article 1(1) and
(1)(2) (indicating that an investment firm that engages in
Investment Activities is subject to CRR (and by cross-reference to
CRD) if any of the following applies: (i) the total value of the
consolidated assets of the investment firm is equal to or exceeds
EUR 15 billion; (ii) the total value of the consolidated assets of
the investment firm is less than EUR 15 billion, and the investment
firm is part of a group in which the total value of the consolidated
assets of all investment firms in the group that individually have
total assets of less than EUR 15 billion and that engage in
Investment Activities is equal to or exceeds EUR 15 billion; or
(iii) the total value of the consolidated assets of the investment
firm is equal to or exceeds EUR 5 billion, the investment firm
engages in Investment Activities, and the competent authority has
determined that the investment firm should be subject to CRR based
on criteria set forth in Article 5 of Directive (EU) 2019/2034). See
also, Directive (EU) 2019/2034 of the European Parliament and of the
Council of 27 November 2019 on the prudential supervision of
investment firms and amending Directives 2002/87/EC, 2009/65/EC,
2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (``Investment
Firms Directive'' or ``IFD''), Article 5 (providing that the
competent authority may decide to apply the requirements of CRR to
an investment firm whose consolidated assets are equal or exceed EUR
5 billion and that engages in Investment Activities if one or more
of the following criteria apply: (i) the investment firm engages in
Investment Activities on a scale that the failure or distress of the
investment firm could lead to systemic risk; (ii) the investment
firm is a clearing member; and/or (iii) the competent authority
considers it to be justified in light of the size, nature, scale,
and complexity of the activities of the investment firm considering
the importance of the investment firm for the economy of the EU or
of the relevant EU Member State, the significance of the investment
firm's cross-border activities, and the interconnectedness of the
investment firm with the financial system).
\41\ Although no EU nonbank SD currently registered with the
Commission falls in this category, the analysis in the Comparability
Determination would apply to such an investment firm. To capture
investment firms that are subject to the capital and financial
reporting requirements of CRR and CRD but are not required to be
authorized as ``credit institutions,'' the Commission has removed
the requirement in proposed Condition 3 that the EU nonbank SD be
``treated for the purposes of the EU capital and financial reporting
rules as an ``institution,'' as defined in [CRR].''
\42\ IFD, Article 5 (setting forth the criteria that may justify
a decision by the competent authority to apply the requirements of
CRR to an investment firm that engages in Investment Activities and
whose consolidated assets equal or exceed EUR 5 billion).
\43\ IFR, Article 66 and IFD, Article 67.
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Three of the four EU nonbank SDs currently registered with the
Commission are subject to CRR and CRD.\44\ The Application did not
include
[[Page 58577]]
an analysis of the comparability of the capital and financial reporting
rules under the IFR and IFD to the CFTC Capital Rules and CFTC
Financial Reporting Rules. As such, the Commission did not assess the
comparability of the capital and financial reporting requirements
imposed by IFR and IFD on smaller investment firms with the CFTC
Capital Rules and CFTC Financial Reporting Rules. Therefore, an EU
nonbank SD, or a future EU nonbank SD applicant, that is subject to the
IFR and IFD frameworks and seeks substituted compliance for some or all
of the CFTC Capital Rules and CFTC Financial Reporting Rules must
submit an application to the Commission in accordance with Commission
Regulation 23.106.\45\ In addition, as noted above, the three EU
nonbank SDs that are currently subject to CRR and CRD, and registered
with the Commission, are domiciled in the EU Member States of France
and Germany. The Commission's analysis therefore involved an assessment
of how certain EU directives were implemented into the national laws of
France and Germany. The Commission did not review the implementation of
the relevant EU directives in other EU Member States. Therefore, an
entity organized and domiciled in an EU Member State other than France
or Germany that seeks to register with the Commission as an SD and to
comply with some or all of the Commission's capital and financial
reporting rules via substituted compliance must submit an application
under Commission Regulation 23.106. Commission staff expects that it
will engage with such potential entities during the registration
process and use the analysis performed during this assessment in
performing a comparability assessment of the applicant's home country
capital and financial reporting requirements.
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\44\ BofA Securities Europe SA, Citigroup Global Markets Europe
AG and Morgan Stanley Europe SE have been authorized as credit
institutions. These three EU nonbank SDs also qualify as
``significant supervised entities'' subject to the direct
supervision of the ECB. At the time the Commission issued the 2023
Proposal, Goldman Sachs Paris had a pending application for
authorization as a credit institution. See Responses to Staff
Questions of May 15, 2023. Subsequent to the publication of the 2023
Proposal, however, Goldman Sachs Paris informed the Commission that
following further analysis and discussion with the relevant
authorities, it was determined that on March 31, 2024, the entity
had to start complying with the capital and financial reporting
frameworks of IFR and IFD.
\45\ 17 CFR 23.106. Because the Commission had not assessed the
capital and financial reporting frameworks established by IFR and
IFD at the time of issuance of the 2023 Proposal, an application for
substituted compliance by Goldman Sachs Paris, if one is submitted
in accordance with Commission Regulation 23.106, would be addressed
separately from this Comparability Determination.
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As noted above, three of the EU nonbank SDs currently registered
with the Commission are subject to CRR and CRD. CRR, as a regulation,
is binding in its entirety and directly applicable in all EU Member
States.\46\ CRD, as a directive, was required to be transposed into EU
Member States' national law.\47\ France implemented CRD in various
provisions of its Monetary and Financial Code (``MFC'') \48\ and
through several ministerial orders, including Ministerial Order on
Capital Buffers \49\ and Ministerial Order on Internal Control.\50\
France also adopted Ministerial Order on Distribution Restrictions \51\
and amended relevant national law provisions, including the above-
referenced ministerial orders, to implement CRD V.\52\ Germany
implemented CRD via amendments to the Banking Act (Kreditwesengesetz,
``KWG'') and its subordinate statutory instruments.\53\ In addition,
Germany adopted and published the Risk Reduction Act
(Risikoreduzierungsgesetz, ``RiG'') on December 14, 2020 to implement
CRD V, with most of the relevant changes becoming effective on December
28, 2020. CRR and CRD as implemented in French and German law are
collectively referred to hereafter as the ``EU Capital Rules'' in this
Comparability Determination and Comparability Order.
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\46\ Consolidated Version of the Treaty on the Functioning of
the European Union, OJ (C 326) 171, Oct. 26, 2012 (``TFEU''),
Article 288. Accordingly, CRR is directly applicable and binding law
in France and Germany, the two EU Member States where EU nonbank SDs
are currently organized and operating.
\47\ TFEU, Article 288 (stating that a directive is binding as
to the result to be achieved upon each EU Member State to which the
directive is addressed, and further provides, however, that each EU
Member State elects the form and method of implementing the
directive). In this connection, EU Member States were required to
implement and start applying amendments to CRD, introduced by
Directive (EU) 2019/878 of the European Parliament and of the
Council of 20 May 2019 amending Directive 2013/36/EU as regards
exempted entities, financial holding companies, mixed financial
holding companies, remuneration, supervisory measures and powers and
capital conservation measures (``CRD V'') by December 29, 2020.
\48\ In particular, MFC, Articles L.511-41 to L.511- 50-1
contain provisions relating to prudential requirements applicable to
credit institutions. In addition, MFC, Articles L.612-1 to L.612-50
relate to the role, functioning, and powers of the national
competent authority.
\49\ Arr[ecirc]t[eacute] of 3 November 2014 Relating to Capital
Buffers of Banking Services Providers and Investment Firms Other
Than Portfolio Management Companies (``Ministerial Order on Capital
Buffers'').
\50\ Arr[ecirc]t[eacute] of 3 November 2014 on Internal Control
of Companies in the Banking, Payment Services and Investment
Services Sector Subject to the Control of Autorit[eacute] de
Contr[ocirc]le Prudentiel et de R[eacute]solution (``Ministerial
Order on Internal Control'').
\51\ Arr[ecirc]t[eacute] of 25 February 2021 Relating to
Distribution Restrictions Applicable to Credit Institutions,
Financial Companies and Certain Investment Firms.
\52\ Specifically, to implement CRD V, France amended the MFC
via Ordinance No. 2020-1635 of December 21, 2020 and Decree No.
2020-1637 of December 22, 2020, with most of the relevant changes
becoming effective on December 29, 2020. France also introduced
consecutive amendments to Ministerial Order on Capital Buffers and
Ministerial Order on Internal Control, with the latest changes
effective as of August 1, 2021.
\53\ Specifically, the KWG includes, among other things,
provisions related to capital adequacy requirements, including
provisions granting power the Federal Ministry of Finance to issue
statutory instruments to provide details on capital adequacy
requirements (section 10(1)), provisions specifying the basis for
imposing higher capital requirements (section 10(3)), provisions
setting forth requirements related to capital buffers (sections 10c
to 10i) and provisions describing the powers of the competent
authority (sections 6b, 56, 60b).
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The Applicants also represented that in addition to CRR and CRD,
the Bank Recovery and Resolution Directive (``BRRD'') includes relevant
EU capital requirements.\54\ BRRD establishes a framework for recovery
and resolution of credit institutions and investment firms, and
mandates that EU Member States require such institutions to satisfy ``a
minimum requirement for own funds and eligible liabilities'' (``MREL'')
if they meet certain requirements.\55\ France implemented BRRD
primarily via amendments to the MFC.\56\ Germany transposed BRRD into
national law by the Recovery and Resolution Act (Sanierungs und
Abwicklungsgesetz, ``SAG'').\57\
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\54\ Directive 2014/59/EU of the European Parliament and of the
Council of 15 May 2014 establishing a framework for the recovery and
resolution of credit institutions and investment firms and amending
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC,
2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/
36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of
the European Parliament and of the Council (``Bank Recovery and
Resolution Directive'' or ``BRRD''). EU Application, p. 5.
\55\ EU Member States were required to transpose BRRD into
national law and start applying the implementing measures from
January 1, 2015. BRRD, Article 130. BRRD was amended by Directive
(EU) 2019/879 of the European Parliament and of the Council of 20
May 2019 amending Directive 2014/59/EU as regards loss-absorbing and
recapitalization capacity of credit institutions and investment
firms and Directive 98/26/EC (``Bank Recovery and Resolution
Directive II'' or ``BRRD II'') and EU Member States were required to
start applying national law measures implementing BRRD II by
December 28, 2020. BRRD II, Article 3. BRRD as amended by BRRD II
will be referred to as ``BRRD'' in this document, unless otherwise
stated.
\56\ Among other provisions, MFC Article L.613-44 relates in
particular to the MREL requirement and Article R.613-46-1 defines
the conditions that items and instruments need to meet to qualify as
``eligible liabilities.''
\57\ In particular, SAG, section 49(1) and (2) relate to the
MREL requirement.
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The Applicants further represent that with respect to supervisory
financial reporting, Commission Implementing Regulation (EU) 2021/451
supplements CRR with implementing technical standards (``CRR Reporting
ITS'') \58\
[[Page 58578]]
specifying, among other things, uniform formats and frequencies for the
financial reporting required under CRR.\59\ In addition, the ECB has
adopted a regulation setting forth a common minimum set of financial
information that should be reported by credit institutions subject to
CRR, including EU nonbank SDs, on the basis of the CRR Reporting ITS
(``ECB FINREP Regulation'').\60\ The Applicants also represent that
Directive 2013/34/EU \61\ contains provisions related to financial
reporting, including a mandate that entities of a certain size be
required to prepare annual audited financial statements and a
management report.\62\ CRR, CRR Reporting ITS, ECB FINREP Regulation,
relevant provisions of CRD regarding certain notice requirements as
implemented in French and German law, and the relevant provisions of
the Accounting Directive as implemented in French and German law are
collectively referred to hereafter as the ``EU Financial Reporting
Rules'' in this Comparability Determination and Comparability Order.
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\58\ Commission Implementing Regulation (EU) 2021/451 of 17
December 2020 laying down implementing technical standards for the
application of Regulation (EU) No 575/2013 of the European
Parliament and of the Council with regard to supervisory reporting
of institutions and repealing Implementing Regulation (EU) No 680/
2014.
\59\ EU Application, p. 21 and Responses to Staff Questions of
May 15, 2023.
\60\ Regulation (EU) 2015/534 of the European Central Bank of 17
March 2015 on reporting of supervisory financial information.
\61\ Directive 2013/34/EU of the European Parliament and of the
Council of 26 June 2013 on the annual financial statements,
consolidated financial statements and related reports of certain
types of undertakings, amending Directive 2006/43/EC of the European
Parliament and of the Council and repealing Council Directives 78/
660/EEC and 83/394/EEC (``Accounting Directive'').
\62\ EU Application, p. 5. Accounting Directive, Articles 4, 19
and 34.
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D. Proposed Comparability Determination and Proposed Comparability
Order for EU Nonbank Swap Dealers
On June 27, 2023, the Commission published the 2023 Proposal,
seeking comment on the EU Application and the Commission's proposed
Comparability Determination and Comparability Order.\63\ The 2023
Proposal set forth the Commission's preliminary Comparability
Determination and proposed Comparability Order providing for the
conditional availability of substituted compliance with the CFTC
Capital Rules and CFTC Financial Reporting Rules for EU nonbank SDs
regulated under CRR and CRD and domiciled in either Germany or France,
subject to EU nonbank SDs' compliance with EU laws and regulations, as
well as conditions specified in the proposed Comparability Order.\64\
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\63\ 2023 Proposal at 41774.
\64\ Id. at 41807-41810. Consistent with the process specified
in section I.B. above for conducting Comparability Determinations,
the Commission provided the Applicants with an opportunity to review
for factual accuracy and completeness the Commission's description
of relevant EU laws and regulations on which the proposed
Comparability Determination and proposed Comparability Order were
based. The Commission has relied on the Applicants' review, and has
incorporated feedback and corrections received from the Applicants.
As previously noted, a Comparability Determination and Comparability
Order based on an inaccurate description of foreign laws and
regulations may not be valid.
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Based on its review of the EU Application and applicable EU laws
and regulations, the Commission preliminarily found that the EU Capital
Rules and the EU 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. The Commission, however,
noted that there were certain differences between the EU Capital Rules
and CFTC Capital Rules and certain differences between the EU Financial
Reporting Rules and the CFTC Financial Reporting Rules. As such, the
Commission proposed certain conditions to the Comparability Order. 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 EU nonbank SDs for ongoing compliance with the
Comparability Order.\65\ The Commission further stated that, in its
preliminary view, the identified differences would not be inconsistent
with providing a substituted compliance framework for EU nonbank SDs
subject to the conditions specified in the proposed Comparability
Order.\66\
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\65\ NFA is a registered futures association (``RFA'') 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
an RFA, 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 EU
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 an RFA.
\66\ Id. at 41807.
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The proposed Comparability Order was limited to the comparison of
the EU 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.\67\ As noted by
the Commission in the 2023 Proposal, the Applicants had not requested,
nor has the Commission performed, a comparison of the EU Capital Rules
to the Commission's TNW Approach or NLA Approach.\68\
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\67\ Id. As described in the 2023 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 2023 Proposal at 41780-41782 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 ECB, 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.
\68\ See 2023 Proposal at 41784.
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E. General Comments on the EU Application and the Commission's Proposed
Finding of Comparability Between the CFTC Capital Rules and CFTC
Financial Reporting Rules and the EU Capital Rules and EU Financial
Reporting Rules
The public comment period on the EU Application and the proposed
Comparability Determination and proposed Comparability Order ended on
October 28, 2023. The Commission received three substantive comment
letters from interested parties: Better Markets, Inc.; a joint letter
from the Applicants; and William J. Harrington.\69\ The Commission
received 16 additional non-substantive comments from one
[[Page 58579]]
individual that are not addressed in this Comparability
Determination.\70\
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\69\ Letter from Cantrell Dumas, Director of Derivatives Policy,
Better Markets Inc. (``Better Markets'') (August 28, 2023) (``Better
Markets 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
(August 24, 2023) (``Applicants' Letter''); Letter from William J.
Harrington (``Harrington'') (August 28, 2023) (``Harrington 08/28/
2023 Letter''). The Commission also received a second letter from
the Applicants, dated May 22, 2024, complementing their comments to
the 2023 Proposal (``Applicants' Supplemental Letter''). The comment
letters for the 2023 Proposal are available at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7397&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1.
\70\ The non-substantive comments are also available on the
Commission's website at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7397&tl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1.
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The Applicants filed a comment letter generally expressing support
for the proposed Comparability Determination and 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 EU Capital and EU Financial Reporting Rules.\71\ The
Applicants also included several technical comments, further discussed
in section II. below, on the proposed conditions requiring EU nonbank
SDs to file a notice with the Commission and the NFA upon the
occurrence of certain events.
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\71\ Applicants' Letter at p. 2.
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Conversely, two commenters disagreed with the CFTC's proposed
Comparability Determination and proposed Comparability Order.\72\
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.'' \73\
---------------------------------------------------------------------------
\72\ Better Markets Letter at p. 2; Harrington 08/28/2023 Letter
at pp. 3-4 (referencing a separate submission to the Commission,
dated October 20, 2022, in connection with the Commission's Notice
of Proposed Order and Request for Comment on an Application for a
Capital Comparability Determination From the Financial Services
Agency of Japan, 87 FR 48092, (August 8, 2022), and asserting, as
further discussed below, that the Commission should condition the
Comparability Determination on a prohibition against EU nonbank SDs'
entering into swap contracts with certain specified features).
\73\ Better Markets Letter at p. 3.
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The Commission does not believe that the principles-based, holistic
assessment that it conducted on the comparability of the EU Capital
Rules and EU 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 EU Capital Rules and EU Financial
Reporting Rules are designed with the objective of ensuring overall
safety and soundness of the EU 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 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.\74\
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\74\ 85 FR 57462 at 57521.
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As stated in the 2023 Proposal, due to the detailed and complex
nature of the capital frameworks, differences in how jurisdictions
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.\75\ Furthermore, as
discussed in section I.B. above, the Commission stated when adopting
Commission Regulation 23.106 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.\76\
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\75\ See 2023 Proposal at 41785.
\76\ 85 FR 57462 at 57521.
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The approach and standards contained 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.\77\ In the Guidance, the Commission stated
that in 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.\78\ The Commission emphasized
that in this context, ``comparable does not necessarily mean
identical.'' \79\ 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).\80\ 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.\81\
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\77\ Interpretative Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26,
2013) (``Guidance'').
\78\ Guidance at 45343.
\79\ Id.
\80\ Id.
\81\ 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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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
[[Page 58580]]
requirements.\82\ 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.\83\
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.\84\ 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.
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\82\ 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).
\83\ Id.
\84\ Id.
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With respect to the EU Application, the process leading to the
Commission's Comparability Determination involved Commission staff
reviewing relevant EU laws, rules, and regulations cited in the EU
Application, including relevant French and German provisions
implementing EU laws, rules, and regulations into the national
regulatory frameworks of the two EU Member States. Staff verified the
assertions and citations contained in the EU Application regarding the
specific EU Capital Rules and EU Financial Reporting Rules to the
relevant EU laws, rules, and regulations.\85\ Where necessary, staff
obtained English language translations of French and German
implementing provisions to further confirm statements in the EU
Application or to confirm the full implementation of EU directives in
the applicable EU Member State's laws and regulatory framework.
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\85\ Staff also reviewed various documents relevant to the
proposed Comparability Determination and proposed Comparability
Order published by the competent authorities in English and/or
French.
---------------------------------------------------------------------------
Commission staff also evaluated the comparability of the EU Capital
Rules and EU 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 EU nonbank
SDs and how such process addresses risk, including market risk and
credit risk of the EU 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 an EU nonbank SD's minimum
capital requirements; (iii) the financial reports and other financial
information submitted by an EU nonbank SD to its relevant competent
authorities, and whether such information provides the competent
authorities with the means necessary to effectively monitor the
financial condition of the EU nonbank SD; and (iv) the regulatory
notices and other communications between an EU nonbank SD and its
relevant competent authorities that address potential adverse financial
or operational issues that may impact the firm.\86\ With respect to the
ability of the relevant competent authorities to supervise and enforce
compliance with the EU Capital Rules and EU Financial Reporting Rules,
the Commission's assessment included a review of the competent
authorities' surveillance program for monitoring compliance by EU
nonbank SDs with the EU Capital Rules and EU Financial Reporting Rules,
and the disciplinary process imposed on firms that fail to comply with
such requirements.\87\ 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 EU Capital Rules and EU 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 EU laws and regulations are comparable
in purpose and effect to the CEA and Commission regulations.
---------------------------------------------------------------------------
\86\ 2023 Proposal, at 41784-41805.
\87\ Id. at 41805-41807.
---------------------------------------------------------------------------
Better Markets further asserted that even under a principles-based,
holistic approach, the EU capital and financial reporting requirements
for EU nonbank SDs do not satisfy the test for an order granting
substituted compliance because the EU's regulatory framework governing
capital and financial reporting is not comparable to the corresponding
CFTC requirements.\88\ 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 gaps in the EU
framework'' and as a ``de facto admission that the regulations are not
comparable and that the [EU Application] should be denied.'' \89\
Better Markets claimed that the Commission proposed 12 filing
requirements that must be met as a condition for the comparability
determination, and stated that the Commission was not conducting a
comparability assessment, but was engaging in a ``de facto rewriting''
of the EU's laws and rules in the form of conditions.\90\
---------------------------------------------------------------------------
\88\ Better Markets Letter at pp. 3-4.
\89\ Id. at pp. 2 and 4.
\90\ Id. at p. 2.
---------------------------------------------------------------------------
The Commission disagrees that the inclusion of conditions in the
Comparability Order precludes a finding of comparability with respect
to the EU Capital Rules and EU 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.\91\
---------------------------------------------------------------------------
\91\ 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.\92\ In this regard, the Commission has stated that certain
conditions included in a Comparability Order may be designed to ensure
the
[[Page 58581]]
Commission's direct access to books and records required to be
maintained by an SD registered with the Commission.\93\ Other
conditions may address areas where the foreign jurisdiction lacks
analogous requirements.\94\ The inclusion of conditions in a
Comparability Order was contemplated as an integral part of the
Commission's holistic, principles-based approach to conducting
comparability assessments and is not inconsistent with a grant of
substituted compliance.
---------------------------------------------------------------------------
\92\ 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.
\93\ Comparability Determination for the European Union: Certain
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at
78880.
\94\ Guidance at 45343.
---------------------------------------------------------------------------
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 2023 Proposal are clearly of the nature contemplated by
Commission Regulation 23.106(a)(5).
The Commission also does not believe that the inclusion of the
conditions in the Comparability Order reflects a ``rewriting'' of the
EU laws and regulations as asserted by Better Markets. Consistent with
the Commission's policy described above, a majority of the conditions
contained in the Comparability Order are designed to ensure that: (i)
the EU nonbank SD is eligible for substituted compliance based on the
laws and regulations of the EU and the relevant EU Member States that
were reviewed by the Commission in performing the comparability
assessment, and (ii) the Commission and NFA receive timely financial
information and notices to effectively monitor an EU nonbank SD's
compliance with the Comparability Order and to assess the ongoing
safety and soundness of the EU nonbank SD. Specifically, there are 26
conditions in the final Comparability Order. Seven conditions set forth
criteria that an EU nonbank SD must meet to be eligible for substituted
compliance pursuant to the Comparability Order.\95\ The seven
conditions ensure that only EU nonbank SDs that are within the scope
of, and comply with, the EU Capital Rules and EU Financial Reporting
Rules that were part of the Commission's comparability assessment may
apply for substituted compliance.
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\95\ The seven criteria provide that the EU nonbank SD: (i) is
not subject to capital rules of a U.S. prudential regulator
(Condition 1); (ii) is organized and domiciled in France or Germany
(Condition 2); (iii) is licensed as a credit institution or an
investment firm in an EU Member State (Condition 3); (iv) is subject
to CRR and CRD as implemented in France or Germany, as applicable
(Condition 4); (v) satisfies at all times applicable CRR capital
ratios and leverage ratios, satisfies CRD capital conservation
buffer ratios, and maintains a liquidity risk management program as
required under CRD (Condition 5); (vi) is subject to and complies
with the EU financial reporting requirements that are part of the
Commission's comparability assessment (Condition 6); and (vii) is
subject to prudential supervision by an EU Member State's
supervisory authority with jurisdiction to enforce the requirements
of the EU Capital Rules and the EU Financial Reporting Rules
(Condition 7).
---------------------------------------------------------------------------
Ten additional conditions require EU nonbank SDs within the scope
of the Comparability Order to provide notice to the Commission and NFA
of certain defined events,\96\ and a further two conditions require EU
nonbank SDs to file with the Commission and NFA copies of certain
unaudited and audited financial reports that the firms provide to their
respective competent authorities.\97\ In addition, two additional
conditions reflect administrative matters necessary to implement the
substituted compliance framework.\98\ Lastly, five conditions impose
obligations on EU nonbank SDs that align with certain of the
Commission's requirements for nonbank SDs. The five conditions require
an EU nonbank SD to: (i) maintain a minimum of $20 million of common
equity tier 1 capital (Condition 8); (ii) prepare and keep current
financial books and records (Condition 10); (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 13);
(iv) file a monthly report listing the custodians holding margin posted
by, and collected by, the EU nonbank SD, the amount of margin held by
each custodian, and the aggregate amount of margin required to be
posted and collected by the EU nonbank SD (Condition 15); 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).
---------------------------------------------------------------------------
\96\ The ten conditions require an EU nonbank SD to provide
notice to the Commission in the event that the firm: (i) is informed
by the relevant competent authority that it failed to comply with
any component of the EU Capital Rules or EU Financial Reporting
Rules (Condition 16); (ii) fails to maintain a minimum level of
common equity tier 1 capital equal to or in excess of the equivalent
of $20 million (Condition 17); (iii) breaches its combined capital
buffer requirement and is required to file a capital conservation
plan with the relevant competent authority(Condition 18); (iv) is
required by a competent authority to maintain additional capital or
additional liquidity (Condition 19); (v) fails to meet the required
MREL requirement (Condition 20); (vi) experiences a 30 percent or
more decrease in its excess regulatory capital (Condition 21); (vii)
fails to make or keep current financial books and records (Condition
22); (viii) 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 23); (ix) changes its
fiscal year-end date (Condition 24); and (x) is subject to material
changes to the EU Capital Rules, EU Financial Reporting Rules, or
the supervisory authority of the ECB or relevant Member State
competent authority (Condition 25).
\97\ The two conditions provide that an EU nonbank SD must file
with the Commission and NFA: (i) a copy of SEC Form X-17A-5 (``FOCUS
Report'') that the EU nonbank SD files with the U.S. Securities and
Exchange Commission (``SEC'') or English language copies of certain
financial reporting templates that the EU nonbank SD is required to
submit to the relevant competent authorities pursuant to the CRR
Reporting ITS or the ECB FINREP regulation, as applicable (Condition
11); and (ii) English language copies of its annual audited
financial statements and management report that are required to be
prepared and published pursuant to the Accounting Directive as
implemented in the national laws of France and Germany (Condition
12).
\98\ One of the administrative conditions provides that an EU
nonbank SD must provide a notice to the Commission of its intent to
comply with the Comparability Order and the EU Capital Rules and EU
Financial Reporting Rules in lieu of the CFTC Capital Rules and CFTC
Financial Reporting Rules. The notice must include the EU nonbank
SD's representation that the firm is organized and domiciled in an
EU Member State, is a licensed investment firm or a credit
institution, and is subject to, and complies with, the EU Capital
Rules and the EU Financial Reporting Rules (Condition 9). The second
administrative condition provides that an EU nonbank SD must file
any documents with the Commission and NFA via electronic
transmission (Condition 26).
---------------------------------------------------------------------------
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 EU capital and financial reporting framework but
rather to ensure that the Commission and NFA receive information to
conduct ongoing monitoring of EU 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 EU nonbank SDs to satisfy the Commission's capital and
financial reporting requirements by complying with certain laws and/or
regulations of the EU that have been found to be comparable to the
Commission's laws and/or regulations in purpose and effect. The
Commission and NFA, however, have a continuing obligation to conduct
ongoing oversight, including potential examination, of EU nonbank SDs
that operate under a Comparability Order to ensure compliance with the
Comparability Order, including its conditions. To that effect, the
notice and financial reporting conditions set forth
[[Page 58582]]
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 EU nonbank
SDs. The Commission may also initiate an enforcement action against an
EU nonbank SD that fails to comply with the conditions of the
Comparability Order.\99\
---------------------------------------------------------------------------
\99\ As the Commission stated in the 2023 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 2023
Proposal at 41777. 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 EU 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.\100\ 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].'' \101\
---------------------------------------------------------------------------
\100\ Guidance at 45343.
\101\ 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, evidence-based
determination that those different requirements nevertheless will, in
fact, lead to comparable regulatory outcomes.\102\ Better Markets
further 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.'' \103\ 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 requiring, at a
minimum, each Comparability Order, and each MOU with a foreign
regulatory authority, 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 changes to how rules are interpreted, applied, or
enforced.\104\ Finally, Better Markets stated that if the Commission
proceeds to finalize the Comparability Order, it must, at a minimum,
ensure that the conditions are robustly maintained and enforced.\105\
---------------------------------------------------------------------------
\102\ Better Markets at p. 8.
\103\ Id.
\104\ Id. at pp. 8-9.
\105\ Id. at p. 14.
---------------------------------------------------------------------------
Although the Commission disagrees that the EU Capital Rules and the
EU Financial Reporting Rules, as a whole, are materially different or
do not achieve comparable 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 2023
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 EU Capital Rules and EU
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, EU
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 EU nonbank SDs' ongoing
compliance with the conditions set forth in the final Comparability
Order. In addition, the final Comparability Order requires an EU
nonbank SD, or an entity acting on its behalf, to inform the Commission
of changes to the relevant EU Capital Rules and EU Financial Reporting
Rules so that the Commission may assess the continued effectiveness of
the Comparability Order in ensuring that the EU laws and regulations
have the comparable regulatory objectives of the CEA and Commission
regulations of ensuring the safety and soundness of nonbank SDs.\106\
Commission staff will also monitor the EU 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
Comparability Order. Lastly, in addition to assessing the effectiveness
of the Comparability Order as a result of revisions or proposed
revisions to the EU 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
[[Page 58583]]
Comparability Determination and Comparability Order to reflect those
changes.\107\
---------------------------------------------------------------------------
\106\ Condition 25 of the final Comparability Order requires an
EU nonbank SD, or an entity acting on its behalf, to notify the
Commission of any material changes to the information submitted in
its application, including, but not limited to, proposed and final
material changes to the EU Capital Rules or EU Financial Reporting
Rules and proposed and final material changes to the ECB's or the
relevant EU Member State competent authority's supervisory authority
or supervisory regime over EU nonbank SDs. The Commission notes that
it made certain non-substantive, clarifying changes to the language
of final Condition 25 as compared to proposed Condition 25.
\107\ 2023 Proposal at 41785 (n. 135).
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Another commenter, Harrington, stated that the Commission must
condition the Comparability Order on an ``outright prohibition against
regulated entities providing [swap contracts that include a ``flip
clause''].'' \108\ 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.\109\
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.\110\ Harrington argued that each swap contract
with a flip clause generates a ``gaping credit exposure'' for EU or
other non-U.S. SDs.\111\ Harrington recognized, however, that the CFTC
margin requirements for uncleared swap transactions address his
concerns associated with the inclusion of a flip clause.\112\
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.\113\
---------------------------------------------------------------------------
\108\ Harrington 08/28/2023 Letter at p. 3. Harrington submitted
the Harrington 08/28/2023 Letter as a supplement to a previously
submitted comment letter, dated October 20, 2022 (``Harrington 10/
20/2022 Letter''), filed in connection with the Commission's Notice
of Proposed Order and Request for Comment on an Application for a
Capital Comparability Determination From the Financial Services
Agency of Japan, 87 FR 48092, (August 8, 2022)).
\109\ William J. Harrington, Submission to the U.S. Securities
and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at p.
8.
\110\ 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).
\111\ Harrington 08/28/2023 Letter at p. 6.
\112\ 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'').
\113\ 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 EU Capital Rules, uncollateralized
exposures from uncleared swap transactions would generate a higher
counterparty credit risk amount than the exposures resulting from
transactions under which the counterparties have posted
collateral.\114\ 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 EU Capital
Rules.
---------------------------------------------------------------------------
\114\ 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 CRR,
Articles 274-275 (similarly indicating that EU nonbank SDs are
allowed to recognize the risk-mitigating effect of collateral by
deducting the amount of collateral from the replacement cost
component of the exposure value calculation).
---------------------------------------------------------------------------
With regard to Harrington's general recommendations, also included
in his comments in connection with the adoption of the CFTC Capital
Rules, that the Commission impose additional capital charges for swap
contracts with a flip clause,\115\ the Commission notes that any change
in its 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.\116\ If the Commission proceeds with adjustments to the CFTC
Capital Rules, the Commission may reconsider the comparability between
the CFTC Capital Rules and the EU Capital Rules in light of these
changes.
---------------------------------------------------------------------------
\115\ Harrington 10/20/2022 Letter at p. 24.
\116\ 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.
---------------------------------------------------------------------------
II. Final Capital and Financial Reporting Comparability Determination
and Comparability Order
The following section provides the Commission's comparative
analysis of the EU Capital Rules and the EU Financial Reporting Rules
with the corresponding CFTC Capital Rules and CFTC Financial Reporting
Rules, as described in the 2023 Proposal, further modified to address
comments received. As emphasized in the 2023 Proposal, the capital and
financial reporting regimes are complex structures comprised of a
number of interrelated regulatory components.\117\ 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.
---------------------------------------------------------------------------
\117\ See 2023 Proposal at 41785. BofA Securities Europe SA,
Citigroup Global Markets Europe AG and Morgan Stanley Europe SE
remain subject to the bank-based capital requirements established by
CRR and CRD.
---------------------------------------------------------------------------
The Commission performed the analysis by assessing the
comparability of the EU Capital Rules for EU nonbank SDs as set forth
in the EU Application and in the English language translation of
certain applicable EU laws and regulations with the Commission's Bank-
Based Approach for nonbank SDs. The Commission understands that three
of the four EU nonbank SDs addressed by the EU Application, as of the
date of the final Comparability Determination, are subject to a bank-
based capital approach under the EU Capital Rules. A fourth entity,
which at the time of issuance of the 2023 Proposal was subject to the
regulatory framework applicable to the other three entities, began
applying, as of March 31, 2024, different capital and financial
reporting requirements, applicable to smaller investment firms in the
EU.\118\ The Applicants have not described, and the Commission has not
assessed, the EU or Member State capital and financial reporting
requirements for smaller investment firms. Accordingly, when the
Commission makes its final determination herein about the comparability
of the EU Capital Rules with the CFTC Capital Rules, the determination
pertains to the comparability of the EU Capital Rules
[[Page 58584]]
with the Bank-Based Approach under the CFTC Capital Rules.
---------------------------------------------------------------------------
\118\ As noted above, Goldman Sachs Paris was required by its
applicable regulatory authority to start applying the capital and
financial reporting requirements established by IFR and IFD as of
March 31, 2024.
---------------------------------------------------------------------------
The Commission notes that any material changes to the information
submitted in the EU Application, including, but not limited to,
proposed and final material changes to the EU Capital Rules or EU
Financial Reporting Rules, as well as any proposed and final material
changes to the applicable supervisory authority or supervisory regime,
will require notification to the Commission and NFA pursuant to
Condition 25 of the final Comparability Order.\119\ Therefore, if there
are subsequent material changes to the EU Capital Rules, EU 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.\120\
---------------------------------------------------------------------------
\119\ See Condition 25 of the final Comparability Order. The
Commission notes that it made certain non-substantive, clarifying
changes to the language of final Condition 25 as compared to
proposed Condition 25.
\120\ See 2023 Proposal at 41785. As stated in the 2023
Proposal, the Commission may also amend or supplement the final
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. (n. 135). The
Commission is aware that the EU is in the process of adopting
changes to the EU Capital Rules to implement the final elements of
the Basel standards. See European Parliament, Legislative
Observatory https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2021/0342(COD)&l=en. The Commission will
monitor progress on the regulatory changes and may amend or
supplement the Comparability Order, as appropriate.
---------------------------------------------------------------------------
A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and EU Capital Rules and EU Financial Reporting Rules
1. Preliminary Determination
As reflected in the 2023 Proposal and discussed above, the
Commission preliminarily determined that the overall objectives of the
EU 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.\121\ The Commission further noted that the EU
Capital Rules and CFTC Capital Rules are 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.\122\
---------------------------------------------------------------------------
\121\ See 2023 Proposal at 41786.
\122\ The BCBS's mandate is to strengthen the regulation,
supervision and practices of banks with the purpose of enhancing
financial stability. See Basel Committee Charter available on the
Bank for International Settlement website: www.bis.org/bcbs/charter.htm. See 2023 Proposal at 41786.
---------------------------------------------------------------------------
The Commission also preliminarily found that the EU 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. The Commission observed that
the EU Capital Rules and CFTC Capital Rules provide for a comparable
approach to the calculation of market risk and credit risk exposures
using standardized or internal model-based approaches.\123\ In
addition, as discussed in the 2023 Proposal, the EU 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.\124\
---------------------------------------------------------------------------
\123\ 2023 Proposal at 41794-41795.
\124\ Id.
---------------------------------------------------------------------------
Finally, the Commission preliminarily noted that the EU 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.\125\ As discussed in the 2023 Proposal and in section II.B.
below, both the EU 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.\126\
---------------------------------------------------------------------------
\125\ 2023 Proposal at 41788.
\126\ Id.
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The Commission further stated that it preliminarily found the EU
Financial Reporting Rules to be comparable in purpose and effect to the
CFTC Financial Reporting Rules as both the EU 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.\127\ As discussed in the 2023 Proposal, in
addition to providing the CFTC and EU competent authorities 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 EU competent authorities with information
regarding potential changes in a nonbank SD's risk profile by
disclosing changes in account balances reported over a period of
time.\128\ 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.\129\
---------------------------------------------------------------------------
\127\ Id. at 48100.
\128\ Id.
\129\ Id.
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In assessing the comparability between the CFTC Financial Reporting
Rules and the EU 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 EU competent authorities 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 EU authorities 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 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
[[Page 58585]]
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.\130\
---------------------------------------------------------------------------
\130\ 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
Financial Reporting Rules and the EU Capital Rules and Financial
Reporting Rules and stated that the differences mandated denial of the
request for a comparability determination.\131\ 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 EU nonbank SDs must abide by
and that the CFTC must monitor.\132\
---------------------------------------------------------------------------
\131\ Better Markets Letter at p. 13.
\132\ Id.
---------------------------------------------------------------------------
As described herein and in the 2023 Proposal, Commission staff has
engaged in a detailed, comprehensive study and evaluation of the EU
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 EU framework includes a comprehensive oversight program for
monitoring EU nonbank SD's compliance with relevant EU 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 EU nonbank SDs that are subject to the laws and regulations
assessed under the Comparability Determination are eligible for
substituted compliance; (ii) the EU nonbank SDs are subject to
supervision by the relevant competent authority; and (iii) the EU
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 EU 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, oversight of the EU nonbank SDs consistent with the
conduct of oversight of U.S.-domiciled nonbank SDs. In light of the
Commission's ultimate conclusion that the EU 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 EU 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, as described above, instead of conducting a
line-by-line assessment or comparison of the EU Capital and Financial
Reporting Rules and the CFTC Capital and Financial Reporting Rules, it
has applied in the assessment set forth in the 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 EU Capital and Financial Reporting Rules.
B. Nonbank Swap Dealer Qualifying Capital
1. Preliminary Determination
As discussed in the 2023 Proposal, the Commission preliminarily
determined that the EU 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.\133\ The Commission
explained that the EU 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.\134\ The Commission observed that the EU 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 EU Capital Rules
and the CFTC Capital Rules emphasizing high quality capital
instruments.\135\
---------------------------------------------------------------------------
\133\ See 2023 Proposal at 41788.
\134\ Id.
\135\ Id.
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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.\136\ 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.\137\ Additional tier 1 capital is generally
composed of 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.\138\ 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.\139\ Subordinated debt must meet
certain conditions to qualify
[[Page 58586]]
as tier 2 capital under the CFTC Capital Rules.\140\
---------------------------------------------------------------------------
\136\ 17 CFR 23.101(a)(1)(i) and 2023 Proposal at 41786-41787.
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. 12 CFR 217.20.
\137\ 12 CFR 217.20(b).
\138\ 12 CFR 217.20(c).
\139\ 12 CFR 217.20(d).
\140\ 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 EU
Capital Rules require an EU nonbank SD to maintain an amount of
regulatory capital (i.e., equity capital and qualifying subordinated
debt) equal to or greater than 8 percent of the EU nonbank SD's total
risk exposure, which is calculated as the sum of the firm's: (i)
capital charges for market risk; (ii) risk-weighted exposure amounts
for credit risk; (iii) capital charges for settlement risk; (iv) credit
valuation adjustment (``CVA'') risk of over-the-counter (``OTC'')
derivatives instruments; and (v) capital charges for operational risk.
The EU Capital Rules limit the composition of regulatory capital to
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital in a manner consistent with the BCBS framework. Specifically,
the EU Capital Rules provide that an EU nonbank SD's regulatory capital
may be composed of: (i) common equity tier 1 capital instruments, which
generally include the EU nonbank SD's common equity (stock), retained
earnings, and accumulated other comprehensive income; (ii) additional
tier 1 capital instruments, which includes other forms of capital
instruments and certain long-term convertible debt instruments; and
(iii) tier 2 capital instruments, which include other reserves, hybrid
capital instruments, and certain qualifying subordinated term
debt.\141\ Capital instruments that qualify as common equity tier 1
capital under the EU Capital Rules include instruments that: (i) are
issued directly by the EU nonbank SD; (ii) are paid in full and not
funded directly or indirectly by the EU nonbank SD; and (iii) are
perpetual.\142\ In addition, the principal amount of the common equity
tier 1 capital instruments may not be reduced or repaid, except in the
liquidation of the EU nonbank SD or the repurchase of shares pursuant
to the permission of the appropriate regulatory authority.\143\
Furthermore, to qualify as additional tier 1 capital, the capital
instruments must meet certain conditions including: (i) the instruments
are issued directly by the EU nonbank SD and paid in full; (ii) the
instruments are not owned by the EU nonbank SD or its subsidiaries;
(iii) the purchase of the instruments is not funded directly or
indirectly by the EU nonbank SD; (iv) the instruments rank below tier 2
instruments in the event of the insolvency of the EU nonbank SD; (v)
the instruments are not secured or guaranteed by the EU nonbank SD or
an affiliate; (vi) the instruments are perpetual and do not include an
incentive for the EU nonbank SD to redeem them; and (vii) distributions
under the instruments are pursuant to defined terms and may be
cancelled under the full discretion of the EU nonbank SD.\144\ Lastly,
subordinated debt instruments must meet certain conditions to qualify
as tier 2 regulatory capital under the EU Capital Rules, including that
the: (i) loans are not granted by the EU nonbank SD or its
subsidiaries; (ii) claims on the principal amount of the subordinated
loans under the provisions governing the subordinated loan agreement
rank below any claim from eligible liabilities instruments (i.e.,
certain non-capital instruments), meaning that they are effectively
subordinated to claims of all non-subordinated creditors of the EU
nonbank SD; (iii) subordinated loans are not secured, or subject to a
guarantee that enhances the seniority of the claim, by the EU nonbank
SD, its subsidiaries, or affiliates; (iv) loans have an original
maturity of at least five years; and (v) provisions governing the loans
do not include any incentive for the principal amount to be repaid by
the EU nonbank SD prior to the loans' maturity.\145\
---------------------------------------------------------------------------
\141\ 2023 Proposal at 41787.
\142\ Id. and CRR, Articles 26 and 28.
\143\ Id.
\144\ Id. and CRR, Article 50-52.
\145\ Id. and CRR, Article 63.
---------------------------------------------------------------------------
Based on its comparative assessment, the Commission preliminarily
found that the types and characteristics of the equity instruments that
qualify as common equity tier 1 capital and additional tier 1 capital
under the EU 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.\146\ Specifically, the Commission noted that the EU Capital
Rules' common equity tier 1 capital and additional tier 1 capital, 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.\147\
---------------------------------------------------------------------------
\146\ See 2023 Proposal at 41788.
\147\ Id.
---------------------------------------------------------------------------
The Commission also found subordinated debt under the EU Capital
Rules comparable to tier 2 capital under the CFTC Capital Rules.\148\
Specifically, the Commission noted that the qualifying conditions
imposed on subordinated debt instruments are comparable under the EU
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 debt lenders' claims for repayment on the debt to
other creditors of the nonbank SD and by limiting or restricting
repayment of the subordinated loans if such repayments result in the
nonbank SD's equity falling below certain defined thresholds.\149\ The
Commission preliminarily concluded that these terms and conditions
provided assurances that the subordinated debt is appropriate to be
recognized as regulatory capital available to a nonbank SD to meet its
obligations and to absorb business losses and decreases in the value of
firm assets and increases in the value of firm liabilities.\150\
---------------------------------------------------------------------------
\148\ Id.
\149\ Id.
\150\ Id.
---------------------------------------------------------------------------
2. Comment Analysis and Final Determination
The Commission did not receive comments regarding its preliminary
determination that the EU Capital Rules are comparable in purpose and
effect to the CFTC Capital Rules with regard to the types and
characteristics of a nonbank SD's equity and subordinated debt that
qualifies as regulatory capital in meeting its minimum requirements. In
conclusion, the Commission finds that the EU 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 EU 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
[[Page 58587]]
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 qualifies as
regulatory capital to meet minimum capital requirements under the EU
Capital Rules.
C. Nonbank Swap Dealer Minimum Capital Requirement
1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements
As reflected in the 2023 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; \151\ and (iv) the amount of capital
required by NFA.\152\
---------------------------------------------------------------------------
\151\ 17 CFR 23.101(a)(1)(i). See also, 2023 Proposal at 41781.
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.
\152\ 17 CFR 23.101(a)(1)(i)(D). See also 2023 Proposal at
41781. Commission Regulation 23.101(a)(1)(i)(D) 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
registered with the Commission as a 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.
---------------------------------------------------------------------------
In comparison, the EU Capital Rules require an EU nonbank SD to
maintain a fixed amount of minimum initial capital of EUR 5 million of
common equity tier 1 capital.\153\ The EU Capital Rules, consistent
with the BCBS framework, further require each EU nonbank SD to maintain
sufficient levels of capital to satisfy the following, expressed as a
percentage of the EU nonbank SD's ``total risk exposure amount'' (i.e.,
the sum of the EU nonbank SD's risk-weighted assets and exposures): (i)
a common equity tier 1 capital ratio of 4.5 percent; (ii) a tier 1
capital ratio of 6 percent; and (iii) a total capital ratio of 8
percent. Furthermore, EU nonbank SDs must maintain a capital
conservation buffer composed of common equity tier 1 capital in an
amount equal to 2.5 percent of the firm's total risk exposure. The
common equity tier 1 capital used to meet the capital conservation
buffer must be separate and in addition to the 4.5 percent of common
equity tier 1 capital required to meet its core 8 percent capital
requirement.\154\ As explained in the 2023 Proposal, the ``total risk
exposure amount'' is calculated as the sum of the EU nonbank SD's: (i)
capital requirements for market risk; (ii) risk-weighted exposure
amounts for credit risk; (iii) capital requirements for CVA risk of OTC
derivatives; and (iv) capital requirements for operational risk.\155\
Capital charges for market risk and credit risk are computed based on
an EU nonbank SD's on-balance sheet and off-balance sheet exposures,
weighted according to risk.\156\
---------------------------------------------------------------------------
\153\ 2023 Proposal at 41793-41794.
\154\ See 2023 Proposal at 41782.
\155\ Id. at 41790.
\156\ Id.
---------------------------------------------------------------------------
2. Preliminary Determination and Comment Analysis
While noting certain differences in the minimum capital
requirements and calculation of regulatory capital between the EU
Capital Rules and the CFTC Capital Rules, the Commission preliminarily
found that the EU Capital Rules and CFTC Capital Rules achieve, subject
to the 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.\157\ 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 EU
Capital Rules' requirements.
---------------------------------------------------------------------------
\157\ Id. at 41795.
---------------------------------------------------------------------------
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 CFTC'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.\158\ Also as noted above, the EU
Capital Rules contain a requirement that an EU nonbank SD maintain a
fixed amount of minimum initial capital of EUR 5 million of common
equity tier 1 capital.\159\
---------------------------------------------------------------------------
\158\ 85 FR 57462 at 57492.
\159\ 2023 Proposal at 41793-41794.
---------------------------------------------------------------------------
The Commission, in the 2023 Proposal, recognized that the $20
million fixed-dollar minimum capital required under the CFTC Capital
Rules is substantially higher than the EUR 5 million. Therefore, the
Commission preliminarily proposed a condition to require each EU
nonbank SD to maintain, at all times, an amount of common equity tier 1
capital in EUR, as defined in Article 26 of CRR, that is equivalent to
$20 million.\160\
---------------------------------------------------------------------------
\160\ Id. The Commission also noted that the three current EU
nonbank SDs subject to the EU Capital Rules maintain common equity
tier 1 capital denominated in EUR in amounts substantially in excess
of the equivalent of $20 million based on financial filings made
with the Commission. Id. (note 261.)
---------------------------------------------------------------------------
One commenter, Better Markets, argued that the establishment in the
EU Capital Rules of a base level requirement that is substantially
lower than the CFTC Capital Rules' fixed amount minimum requirement
``demonstrates a fatal lack of
[[Page 58588]]
comparability.'' \161\ Better Markets further asserted that the
proposed condition requiring that EU nonbank SDs maintain a minimum
level common equity tier 1 capital equivalent to $20 million is
evidence, in and of itself, that the EU Capital Rules are not
comparable to the CFTC Capital Rules.\162\
---------------------------------------------------------------------------
\161\ Better Markets Letter at p. 11.
\162\ Id.
---------------------------------------------------------------------------
As noted above, the Commission recognized the material difference
in the requirement under the EU 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 an EU nonbank SD may not avail itself of
substituted compliance unless it maintains a minimum amount of common
equity tier 1 capital denominated in EUR that is equivalent to $20
million. Furthermore, the imposition of conditions in a Comparability
Order, as discussed in section I.E. above, is authorized by Commission
Regulation 23.106(a)(5), which provides that the Commission may issue
terms and conditions as it deems appropriate. In addition, as further
noted in section I.E. above, the Guidance also provides that the
Commission may impose conditions as part of the substituted compliance
process to address a lack of comparable and comprehensive regulation in
a home jurisdiction.\163\ In this connection, the Commission concludes
that requiring EU nonbank SDs to maintain an amount of regulatory
capital in the form of common equity tier 1 items, as defined in
Article 26 of CRR, equal to or in excess of the equivalent of $20
million will impose an equally stringent standard to the analogue
requirement under the CFTC Capital Rules and will appropriately address
the substantially lower minimum fixed amount capital requirement under
the EU Capital Rules.
---------------------------------------------------------------------------
\163\ Guidance at 45343.
---------------------------------------------------------------------------
In conclusion, the Commission finds that the EU Capital Rules and
the CFTC Capital Rules, with the imposition of the condition for EU
nonbank SDs to maintain a minimum level of common equity tier 1 capital
in an amount equivalent to at least $20 million, are comparable in
purpose and effect and achieve comparable 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.\164\ Risk-weighted assets are a nonbank SD's on-balance
sheet and off-balance sheet market risk and credit risk exposures,
including 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 and are consistent with the BCBS framework. 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 and
increases in the value of the firm's liabilities, and to cover
unexpected losses resulting from the firm's business activities,
including losses resulting from uncollateralized defaults from swap
counterparties, without the nonbank SD becoming insolvent.\165\
---------------------------------------------------------------------------
\164\ 17 CFR 23.101(a)(1)(i)(B).
\165\ See generally 85 FR 57462 at 57530.
---------------------------------------------------------------------------
The EU Capital Rules contain capital requirements for EU nonbank
SDs that the Commission preliminarily found comparable in purpose and
effect to the requirements in prong (ii) of the CFTC Capital
Requirements.\166\ Specifically, the EU Capital Rules require an EU
nonbank SD to maintain: (i) common equity tier 1 capital equal to at
least 4.5 percent of the EU nonbank SD's total risk exposure amount;
(ii) total tier 1 capital (i.e., common equity tier 1 capital plus
additional tier 1 capital) equal to at least 6 percent of the EU
nonbank SD's total risk exposure amount; and (iii) total capital (i.e.,
an aggregate amount of common equity tier 1 capital, additional tier 1
capital, and tier 2 capital) equal to at least 8 percent of the EU
nonbank SD's total risk exposure amount. The EU Capital Rules further
require each EU nonbank SD to maintain an additional capital
conservation buffer equal to 2.5 percent of the EU nonbank SD's total
risk exposure amount, which must be met with common equity tier 1
capital. Thus, an EU nonbank SD is effectively required to maintain
total qualifying regulatory capital in an amount equal to or in excess
of 10.5 percent of the market risk, credit risk, CVA risk, settlement
risk, and operational risk of the firm (i.e., total capital requirement
of 8 percent of risk-weighted assets and an additional 2.5 percent of
risk-weighted assets as a capital conservation buffer), which is a
higher capital ratio than the 8 percent required of nonbank SDs under
prong (ii) of the CFTC Capital Rules.\167\
---------------------------------------------------------------------------
\166\ See 2023 Proposal at 41794-41795.
\167\ Id. at 41782-41783. See, also, CRR Articles 26, 28, 50-52,
61-63 and 92, and CRD, Article 129.
---------------------------------------------------------------------------
The Commission also preliminarily found that the EU 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.\168\ In that regard, 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.\169\
---------------------------------------------------------------------------
\168\ See 2023 Proposal at 41794.
\169\ Id.
---------------------------------------------------------------------------
As the Commission observed, the standardized approaches to
calculating risk-weighted asset amounts for market risk and credit risk
under both the EU 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.\170\
---------------------------------------------------------------------------
\170\ Id.
---------------------------------------------------------------------------
More specifically, with respect to the calculation of standardized
risk-weighted asset amounts for market risk, the Commission explained
that the
[[Page 58589]]
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'').\171\
The standardized market risk charges under Commission Regulation 1.17
and SEC Rule 18a-1 are calculated as a standardized or table-based
percentage of the market value or notional value of the nonbank SD's
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.\172\ For
example, 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.\173\ 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.\174\
---------------------------------------------------------------------------
\171\ Id. at 41789 and paragraph (3) of the definition of the
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
\172\ See 2023 Proposal at 41789, 17 CFR 1.17(c)(5), and 17 CFR
240.18a-1(c)(1).
\173\ 17 CFR 1.17(c)(5)(iii).
\174\ 17 CFR 1.17(c)(5)(v), referencing SEC Rule 15c3-
1(c)(2)(vi) (17 CFR 240.15c3-1(c)(2)(vi)).
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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.\175\
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\175\ 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 EU Capital Rules require
an EU nonbank SD to calculate its standardized risk-weighted asset
amounts for market risk by multiplying the notional or carrying amount
of net positions by risk-weighting factors, which are based on the
underlying market risk of each asset or exposure and increase as the
expected risk of the positions increases.\176\ The Commission further
explained that an EU nonbank SD is required to calculate market risk
requirements for debt instruments and equity instruments separately, by
computing each category as the sum of specific risk and general risk of
the positions.\177\ As further discussed in the 2023 Proposal, the EU
Capital Rules also require EU nonbank SDs to include in their risk-
weighted assets market risk exposures to certain foreign currency and
gold positions. Specifically, an EU nonbank SD with net positions in
foreign exchange and gold that exceed 2 percent of the firm's total
capital must calculate capital requirements for foreign exchange risk.
\178\ The capital requirement for foreign exchange risk under the
standardized approach is 8 percent of the EU nonbank SD's net positions
in foreign exchange and gold.\179\ The EU Capital Rules further require
EU nonbank SDs to include exposures to commodity positions in
calculating the firm's risk-weighted assets. The standardized
calculation of commodity risk exposures may follow one of three
approaches depending on type of position or exposure. The first is the
sum of a flat percentage rate for net positions, with netting allowed
among tightly defined sets, plus another flat percentage rate for the
gross position.\180\ The other two standardized approaches are based on
maturity-ladders, where unmatched portions of each maturity band (i.e.,
portions that do not net out to zero) are charged at a step-up rate in
comparison to the base charges for matched portions.\181\
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\176\ See 2023 Proposal at 41791.
\177\ Id. and CRR, Article 326. As indicated in Article 326 of
CRR, securitizations are treated as debt instruments for market risk
requirements.
\178\ See 2023 Proposal at 41791 and CRR, Article 351.
\179\ Id.
\180\ 2023 Proposal at 41791 and CRR, Article 360.
\181\ 2023 Proposal at 41791 and CRR, Article 359-361.
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With respect to standardized risk-weighted asset amounts for credit
risk, 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.\182\ 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.\183\ A nonbank SD with off-balance sheet exposures is
required to calculate a risk-weighted 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.\184\
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\182\ 17 CFR 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 2023 Proposal at 41789.
\183\ 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 2023 Proposal at 41789.
\184\ 12 CFR 217.33. See also discussion in 2023 Proposal at
41789.
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In comparison, the Commission noted that the EU Capital Rules
require an EU nonbank SD to calculate its standardized risk-weighted
asset amounts for credit risk in a manner aligned with the Commission's
Bank-Based Approach and the BCBS framework by taking the carrying value
or notional value of each of the EU nonbank SD's on-balance sheet and
off-balance sheet exposures, making certain additional credit risk
adjustments, and then applying specific risk weights based on the type
of counterparty and the asset's credit quality.\185\ For instance, high
quality credit exposures, such as exposures to EU Member States'
central banks, carry a zero percent risk weight. Exposures to EU banks,
other investment firms, or other businesses, however, may carry risk
weights between 20 percent and 150 percent depending on the credit
ratings available for the entity or, for exposures to banks and
investment firms, for its central government.\186\ If no credit rating
is available, the EU nonbank SD must generally apply a 100 percent risk
[[Page 58590]]
weight, meaning the total accounting value of the exposure is
used.\187\
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\185\ See 2023 Proposal at 41791 and CRR, Articles 111 and
113(1).
\186\ See 2023 Proposal at 41791 and CRR, Articles 114-122.
\187\ See 2023 Proposal at 41791 and CRR, Articles 121(2) and
122(2).
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With respect to counterparty 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'').\188\ 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.\189\ 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.\190\ In comparison, the EU
Capital Rules require an EU nonbank SD that is not approved to use
credit risk models to calculate its exposure using the SA-CCR.\191\ The
exposure amount under the SA-CCR is computed, under both the EU Capital
Rules and the Commission's Bank-Based Approach, as the sum of the
replacement cost of the contract and the potential future exposure of
the contract, multiplied by a factor of 1.4.\192\
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\188\ 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 OTC 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 2023 Proposal at 41789.
\189\ 12 CFR 217.34.
\190\ 12 CFR 217.132(c).
\191\ See 2023 Proposal at 41791 and CRR, Articles 92(3)(f) and
273-280e. As noted in the 2023 Proposal, EU nonbank SDs with
smaller-sized derivatives business may also use a ``simplified
standardized approach to counterparty credit risk'' (CRR, Article
281) or an ``original exposure method'' (CRR, Article 282) as
simpler methods for calculating exposure values. To use either of
these alternative methods, an entity's on-and off-balance sheet
derivatives business must be equal to or less than 10 percent of the
entity's total assets and EUR 300 million or 5 percent of the
entity's total assets and EUR 100 million, respectively. CRR,
Article 273a.
\192\ CRR, Article 274(2) and 12 CFR 217.132(c). See also
discussion in 2023 Proposal at 41791.
---------------------------------------------------------------------------
EU Capital Rules also require an EU nonbank SD to include its
exposures to settlement risk in its calculation of its risk-weighted
assets.\193\ Consistent with the BCBS framework, the risk-weighted
asset amount for settlement risk for transactions settled on a
delivery-versus-payment basis is computed by multiplying the price
difference to which an EU nonbank SD is exposed as a result of an
unsettled transaction by a percentage factor that varies from 8 percent
to 100 percent based on the number of working days after the settlement
due date during which the transaction remains unsettled.\194\ The
CFTC's Bank-Based Approach provides for a similar calculation
methodology for risk-weighted asset amounts for unsettled transactions
involving securities, foreign exchange instruments, and
commodities.\195\
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\193\ 2023 Proposal at 41791 and CRR, Article 378 (indicating
that if transactions in which debt instruments, equities, foreign
currencies and commodities excluding repurchase transactions and
securities or commodities lending and securities or commodities
borrowing are unsettled after their delivery due dates, an EU
nonbank SD must calculate the price difference to which it is
exposed).
\194\ Id. The price difference to which an EU nonbank SD is
exposed is the difference between the agreed settlement price for an
instrument (i.e., a debt instrument, equity, foreign currency or
commodity) and the instrument's current market value, where the
difference could involve a loss for the firm. CRR, Article 378.
\195\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted
assets), 12 CFR 217.38 and 12 CFR 217.136.
---------------------------------------------------------------------------
Consistent with the BCBS framework, an EU nonbank SD is also
required to calculate a CVA risk-weighted asset amount for OTC
derivative instruments to reflect the current market value of the
credit risk of the counterparty to the EU nonbank SD.\196\ Risk-
weighted asset amounts for CVA risk can be calculated following similar
methodologies as those described in Subpart E of the Federal Reserve
Board's Part 217 regulations.\197\
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\196\ 2023 Proposal at 41792 and CRR, Articles 381 and 382(1).
\197\ CRR, Articles 383-384 and 12 CFR 217.132(e)(5) and (6).
Under the CFTC's Bank-Based Approach, nonbank SDs calculating their
credit risk-weighted assets using the regulations in Subpart D of
the Federal Reserve Board's Part 217 regulations do not calculate
CVA of OTC derivatives instruments.
---------------------------------------------------------------------------
As discussed in the 2023 Proposal, both the CFTC Capital Rules and
the EU Capital Rules also provide that, if approved by NFA or the
relevant competent authority, respectively, nonbank SDs may also use
internal models to calculate market and/or credit risk exposures.\198\
The Commission noted that the internal market and credit risk models
under the EU 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, though with slightly different categorization, and including
comparable model risk management requirements.\199\ In this regard, the
Commission observed that both rule sets address the same types of risk,
with similar allowed methodologies and under similar controls.\200\ The
Commission also preliminarily determined that the EU Capital Rules and
the CFTC Capital Rules are comparable with respect to the requirement
that nonbank SDs account for operational risk in computing their
minimum capital requirements.\201\ In this connection, the Commission
noted that the EU Capital Rules require an EU nonbank SD to calculate
an operational risk exposure as a component of the firm's total risk
exposure amount.\202\ EU nonbank SDs may use either a standardized
approach or, if the EU nonbank has obtained regulatory permission, an
internal approach based on the firm's own measurement systems, to
calculate their risk-weighted asset amounts for operational risk. The
CFTC Capital Rules address operational risk both as a stand-alone,
separate minimum capital requirement that a nonbank SD is required to
meet under prong (iii) of the Bank-Based Approach and as a component of
the calculation of risk-weighted assets for nonbank SDs that use
subpart E of the Federal Reserve Board's part 217 regulations to
calculate their credit risk-weighted assets via internal models.\203\
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\198\ 2023 Proposal at 41789 and 41791, respectively, for
discussions of NFA and competent authority model approvals. In
discussing approval requirements for credit risk models as part of
the general overview of the EU Capital Rules, the Commission
referred generally to counterparty credit risk exposures for ``OTC
derivatives transactions.'' See 2023 Proposal at 41783 (n. 119). For
clarity, the Commission notes that the Internal Model Methodology
for counterparty credit risk set out in CRR, Articles 283-294, can
be used for the derivatives listed in Annex II of CRR, securities
financing transactions, and long settlement transactions. CRR,
Article 273.
\199\ 2023 Proposal at 41794-41795. For a discussion of the
qualitative and quantitative requirements that models must meet
under the CFTC Capital Rules and the EU Capital Rules, see 2023
Proposal at 41789-41790 and 41792-41793, respectively.
\200\ See 2023 Proposal at 41794.
\201\ Id. at 41795.
\202\ Id. and CRR, Article 92(3).
\203\ Id. and 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100
(definition of BHC equivalent risk-weighted assets).
---------------------------------------------------------------------------
The Commission did not receive comments specifically addressing the
Commission's comparative analysis of the minimum capital requirement
based
[[Page 58591]]
on risk-weighted assets. In conclusion, the Commission finds that the
EU 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. In this
regard, the Commission finds that the EU Capital Rules and the CFTC
Capital rules have a comparable approach to the computation of market
risk exposure amounts and credit risk exposure amounts for on-balance
sheet and off-balance sheet exposures, which are intended to ensure
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
swap margin amount associated with its uncleared swap transactions to
address potential operational, legal, and liquidity risks.\204\
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\204\ 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 all
of 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. 85 FR 57462 at 57485.
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The EU Capital Rules differ from the CFTC Capital Rules in that
they do not impose a capital requirement on EU nonbank SDs based on a
percentage of the margin for uncleared swap transactions.\205\ In the
2023 Proposal, the Commission described, however, how certain EU
capital and liquidity requirements may compensate for the lack of
direct analogue to the 8 percent uncleared swap margin amount
requirement.\206\ Specifically, the Commission noted that under the EU
Capital Rules the total risk exposure amount is computed as the sum of
the EU nonbank SD's risk-weighted asset amounts for market risk, credit
risk, settlement risk, CVA risk of OTC derivatives instruments, and
operational risk.\207\ Notably, the EU Capital Rules require that EU
nonbank SDs, including firms that do not use internal models, calculate
capital charges for operational risk as a separate component of the
total risk exposure amount. The EU Capital Rules also impose separate
liquidity requirements designed to ensure that the EU nonbank SDs can
meet both short- and long-term obligations, in addition to the general
requirement to maintain processes and systems for the identification of
liquidity risk.\208\ In comparison, the Commission requires nonbank SDs
to maintain a risk management program covering liquidity risk, among
other risk categories, but does not have a distinct liquidity
requirement.\209\
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\205\ See 2023 Proposal at 41795.
\206\ Id.
\207\ Id. and CRR, Article 92(3).
\208\ Id. More specifically, the EU Capital Rules impose
separate liquidity buffers and ``stable funding'' requirements
designed to ensure that EU nonbank SDs can cover both long-term
obligations and short-term payment obligations under stressed
conditions for 30 days. CRR, Article 412-413. In addition, EU
nonbank SDs are required to maintain robust strategies, policies,
processes, and systems for the identification of liquidity risk over
an appropriate set of time horizons, including intra-day. CRD,
Article 86.
\209\ See 2023 Proposal at 41795. Specifically, Commission
Regulation 23.600(b) requires each SD to establish, document,
maintain, and enforce a system of risk management policies and
procedures designed to monitor and manage the risks related to
swaps, and any products used to hedge swaps, including futures,
options, swaps, security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives. The
elements of the SD's risk management program are required to include
the identification of risks and risk tolerance limits with respect
to applicable risks, including operational, liquidity, and legal
risk, together with a description of the risk tolerance limits set
by the SD and the underlying methodology in written policies and
procedures. 17 CFR 23.600.
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Addressing the Commission's request for comment on the
comparability between the CFTC's capital requirement based on a
percentage of the margin for uncleared swap transactions and the EU
Capital Rules' requirements with respect to operational risk and
liquidity risk, Better Markets asserted that the requirement for EU
nonbank SDs to hold qualifying regulatory capital to cover operational
risk is not comparable to the CFTC's requirement for nonbank SDs to
hold qualifying capital in an amount equal to at least 8 percent of the
nonbank SD's uncleared swap margin amount.\210\ Better Markets further
asserted that the Commission failed to provide an exhaustive analysis
substantiating that the incorporation of an operational risk charge and
the existence of separate liquidity requirements would genuinely yield
an equivalent result.\211\ Furthermore, Better Markets argued that the
Commission should have undertaken ``an examination to ascertain whether
the EU nonbank SD's operational risk charge and liquidity requirements
capital would adequately cover [its] cumulative amounts of uncleared
swaps margin.'' \212\
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\210\ Better Markets Letter at p. 10.
\211\ Id. at p. 11.
\212\ Id.
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The Applicants offered a contrasting view, stating that, although
the EU Capital Rules do not ``have a direct analogue to the 8 percent
uncleared swap margin requirement'' under the CFTC Capital Rules, they
have ``various other measures that achieve the same regulatory
objective of ensuring that a nonbank SD maintains an amount of capital
that is sufficient to cover the full range of risks an EU nonbank SD
may face.'' \213\ In support of the statement, the Applicants
discussed, among other measures, the various categories of risk charges
that an EU nonbank SD is required to include in its total risk exposure
amount, as well as the capital conservation buffer, leverage ratio
floor, and liquidity requirements that the EU Capital Rules impose on
EU nonbank SDs.\214\
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\213\ Applicants' Letter at p. 3.
\214\ Id. at pp. 2-3. As discussed in the 2023 Proposal, the EU
Capital Rules impose a 3 percent leverage ratio floor on EU nonbank
SDs as an additional element of the capital requirements.
Specifically, each EU nonbank SD is required to maintain tier 1
capital (i.e., an aggregate of common equity tier 1 capital and
additional tier 1 capital) equal to or in excess of 3 percent of the
firm's total on-balance sheet and off-balance sheet exposures,
including exposures on uncleared swaps, without regard to any risk-
weighting. See 2023 Proposal at 41783 and CRR, Articles 92(1) and
429.
---------------------------------------------------------------------------
The Commission finds that the additional categories of risk-
weighted asset amounts that EU nonbank SDs are required to include in
the total risk-weighted assets amount, as well as the various
regulatory measures seeking to ensure that EU nonbank SDs hold
sufficient capital to cover the full range of risks that they may face,
support the comparability of the EU Capital Rules and the CFTC Capital
Rules even in the absence of a separate capital requirement in the EU
Capital Rules requiring EU nonbank SDs to have qualified capital equal
to or greater than 8 percent of the amount of uncleared swap margin.
The Commission 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.\215\ 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
[[Page 58592]]
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.\216\ The Commission
understands that other jurisdictions may adopt alternative measures to
cover the same risks. As such, a strict comparison between the amounts
that an EU nonbank SD holds to account for operational risk and
liquidity risk pursuant to the EU Capital Rules and the amount of
uncleared swap margin that an EU nonbank SD would have been required to
hold pursuant to the CFTC Capital Rules is not warranted. As discussed
in section I.E. above, consistent with the approach adopted by the
Commission in Commission Regulation 23.106, the Commission's analysis
in ascertaining the comparability of a foreign jurisdiction's capital
rules to the CFTC Capital Rules is focused on determining whether the
foreign jurisdiction's rules have comparable regulatory objectives and
achieve comparable outcomes. Following this standard of review, the
Commission concludes that the various measures that the EU Capital
Rules have established to help ensure that EU nonbank SDs hold
sufficient capital to cover the full range of risks that they face have
comparable objectives and achieve comparable outcomes as the CFTC
Capital Rules.
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\215\ 85 FR 57462 at 57497.
\216\ 85 FR 57462 at 57485 and 57497.
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In conclusion, the Commission finds that the EU 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.\217\ The EU Capital
Rules address comparable risks albeit not through a requirement based
on a EU nonbank SD's uncleared swap margin amount. In this regard, EU
nonbank SDs are required to maintain a minimum level of regulatory
capital based on an aggregate of the firm's total risk-weighted asset
amounts for market risk, credit risk, and operational risk.
Accordingly, the Commission has determined that, notwithstanding the
differences in approaches, the EU Capital Rules and CFTC Capital Rules
are comparable in purpose and effect in requiring nonbank SDs to
maintain a minimum level of regulatory capital that addresses potential
market risk, credit risk, and operational risk to help ensure the
safety and soundness of the firm, and to ensure that the firm has
sufficient capital to absorb decreases in firm assets, absorb increases
in firm liabilities, and meet obligations to counterparties and
creditors, without the firm becoming insolvent.
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\217\ See 2023 Proposal at 41788 (referencing 85 FR 57462).
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3. Final Determination
Based on its analysis of comments and its holistic assessment of
the respective requirements discussed in sections 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 EU nonbank SDs must maintain a minimum level of
regulatory capital in the form of common equity tier 1 capital
denominated in EUR that equals or exceeds the equivalent of $20 million
U.S. dollars.\218\
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\218\ The Commission also notes that, pursuant to Article 7 of
CRR, the competent authority may exempt an entity subject to CRR
from the applicable capital requirements, provided certain
conditions are met. In such case, the relevant requirements would
apply to the entity's parent entity, on a consolidated basis. As
discussed in the 2023 Proposal, the Commission's assessment does not
cover the application of Article 7 of CRR and therefore an entity
that benefits from an exemption under Article 7 of CRR will not
qualify for substituted compliance under the final Comparability
Order. 2023 Proposal at 41793 (n. 257).
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D. Nonbank Swap Dealer Financial Reporting Requirements
1. Proposed Determination
The Commission detailed the requirements of the CFTC Financial
Reporting Rules in the 2023 Proposal.\219\ Specifically, the 2023
Proposal noted that the CFTC Financial Reporting Rules require nonbank
SDs to file with the Commission and NFA periodic unaudited and annual
audited financial reports.\220\ 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.\221\ 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.\222\ 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.\223\ 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.\224\
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\219\ 2023 Proposal at 41796-41797.
\220\ Id. and 17 CFR 23.105(d) and (e).
\221\ Id. and 17 CFR 23.105(d)(2).
\222\ Id. and 17 CFR 23.105(e)(4).
\223\ Id. and 17 CFR 23.105(f).
\224\ Id.
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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; \225\ (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; \226\ and (iii) for nonbank SDs
approved to use internal capital models, certain model metrics, such as
aggregate value-at-risk (``VaR''), a graph reflecting the daily intra-
month
[[Page 58593]]
VaR for each business line, and counterparty credit risk
information.\227\
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\225\ 2023 Proposal at 41800, Regulation 23.105(l), and Schedule
1 of appendix B to subpart E of part 23 (``Schedule 1''). 17 CFR
23.105(l) and 17 CFR appendix B to subpart E of part 23. 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.
\226\ 2023 Proposal 41801 and schedules 2, 3 and 4,
respectively, of appendix B to subpart E of part 23.
\227\ Id. and 17 CFR 23.105(k) and (l), and schedules 2, 3 and 4
of appendix B to subpart E of part 23.
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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'').\228\ 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 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.\229\
---------------------------------------------------------------------------
\228\ Id. and 17 CFR 23.105(m).
\229\ 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.\230\ 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.\231\
---------------------------------------------------------------------------
\230\ Id.
\231\ Id.
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The 2023 Proposal also detailed relevant financial reporting
requirements of the EU Financial Reporting Rules.\232\ The EU Financial
Reporting Rules require an EU nonbank SD to report information to the
relevant competent authorities concerning its capital and financial
condition sufficient to provide a comprehensive view of the firm's risk
profile, including information on the firm's capital requirements,
leverage ratio, large exposures, and liquidity requirements.\233\ The
relevant competent authorities are tasked with prescribing the specific
individual financial statements that EU nonbank SDs are required to
submit. To ensure a level of consistency, the European Banking
Authority (``EBA'') \234\ has developed implementing technical
standards to specify uniform reporting templates and to determine the
frequency of reporting by EU nonbank SDs (``CRR Reporting ITS'').\235\
---------------------------------------------------------------------------
\232\ 2023 Proposal at 41797-41798.
\233\ Id. and CRR Article 430(1).
\234\ Id. The EBA is a regulatory agency of the EU that is
tasked with establishing a single regulatory and supervisory
framework for the banking sector in EU Member States. CRR, Article
430(7) provides that the EBA shall develop draft implementing
technical standards to specify the uniform reporting formats and
templates, the instructions and methodology on how to use the
templates, the frequency and dates of reporting, and the
definitions.
\235\ See Commission Implementing Regulation (EU) 2021/451 of 17
December 2020 laying down implementing technical standards for the
application of Regulation (EU) No 575/2013 of the European
Parliament and of the Council with regard to supervisory reporting
of institutions and repealing Implementing Regulation (EU) No 680/
2014. See also, 2023 Proposal at 41797.
---------------------------------------------------------------------------
The implementing technical standards under the CRR Reporting ITS
require an EU nonbank SD to prepare and deliver to its competent
authorities common reporting (``COREP'') on a quarterly basis.\236\
COREP requires, among other things, calculations in relation to the EU
nonbank SD's capital and capital requirements,\237\ capital ratios and
capital levels,\238\ and market risk (collectively, ``COREP
Reports'').\239\ CRR Reporting ITS also specify the contents of the
required financial reports (``FINREP'') for certain EU nonbank SDs that
report financial information on a consolidated basis. Additionally, the
ECB has adopted a regulation setting forth a common minimum set of
financial information that must be reported by credit institutions
subject to CRR to their relevant competent authorities on the basis of
the CRR Reporting ITS (``ECB FINREP Regulation'').\240\ Furthermore,
each competent authority has discretion to require institutions subject
to CRR to report additional supervisory information on the basis of the
CRR and the CRR Reporting ITS, or pursuant to relevant national
law.\241\
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\236\ Id.
\237\ CRR, Article 430; Annex I, Template Numbers 1 and 2, CRR
Reporting ITS.
\238\ CRR, Article 430; Annex I, Template Number 3, CRR
Reporting ITS.
\239\ CRR, Article 430; Annex I, Template Numbers 18-25 (as
applicable) CRR Reporting ITS.
\240\ See Regulation (EU) 2015/534 of the European Central Bank
of March 17, 2015 on reporting of supervisory financial information.
The ECB FINREP Regulation complements the CRR Reporting ITS by
imposing financial reporting requirements applying on an individual
basis to entities subject to CRR, including EU nonbank SDs, whereas
CRR, Article 430 and the CRR Reporting ITS impose financial
reporting requirements on a consolidated basis. See 2023 Proposal at
41797.
\241\ 2023 Proposal at 41797-41802.
---------------------------------------------------------------------------
Under CRR Reporting ITS as complemented by the ECB FINREP
Regulation, an EU nonbank SD is required to provide, among other items,
the following to its relevant competent authorities: (i) on a quarterly
basis, a balance sheet statement (or statement of financial position)
that reflects the EU nonbank SD's financial condition; \242\ (ii) on a
quarterly basis, a statement of profit or loss; \243\ (iii) on a
quarterly basis, a breakdown of financial liabilities by product and by
counterparty sector; \244\ (iv) on a quarterly basis, a listing of
subordinated financial liabilities; \245\ and, (v) on an annual basis,
a statement of changes in equity.\246\ FINREP also requires an EU
nonbank SD subject to the CRR Reporting ITS to provide its competent
authorities with additional financial information, including a
breakdown of its loans and advances by product and type of
counterparty,\247\ as well as detailed information regarding its
derivatives trading activities,\248\ collateral, and guarantees.\249\
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\242\ CRR, Article 430; Annex III, Template Numbers 1.1, 1.2,
and 1.3 (for reporting according to International Financial
Reporting Standards (``IFRS'') and Annex IV, Template Numbers 1.1.,
1.2, and 1.3 (for reporting according to national accounting
frameworks), CRR Reporting ITS; and ECB FINREP Regulation, Articles
6, 7 and 13 (referring to Annex III and Annex IV of the CRR
Reporting ITS, as applicable).
\243\ CRR, Article 430; Annex III, Template Number 2 (for
reporting according to IFRS) and Annex IV, Template Number 2 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\244\ CRR, Article 430; Annex III, Template Number 8.1 (for
reporting according to IFRS) and Annex IV, Template Number 8.1(for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\245\ CRR, Article 430, Annex III, Template Number 8.2 (for
reporting according to IFRS) and Annex IV, Template Number 8.3 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\246\ CRR, Article 430; Annex III, Template Number 46 (for
reporting according to IFRS) and Annex IV, Template Number 46 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\247\ CRR, Article 430; Annex III, Template Numbers 5.1 and 6.1
(for reporting according to IFRS) and Annex IV, Template Numbers 5.1
and 6.1, CRR Reporting ITS; and ECB FINREP Regulation, Articles 6, 7
and 13 (referring to Annex III and Annex IV of the CRR Reporting
ITS, as applicable).
\248\ CRR, Article 430; Annex III, Template Number 10 (for
reporting according to IFRS) and Annex IV, Template Number 10 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\249\ CRR, Article 430; Annex III, Template Number 13 (for
reporting according to IFRS) and Annex IV, Template Number 13 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
---------------------------------------------------------------------------
Furthermore, with the exception of certain ``small'' entities, EU
nonbank
[[Page 58594]]
SDs are required to prepare annual audited financial statements and a
management report (together, ``annual audited financial report'')
pursuant to Article 430 of CRR and the Accounting Directive.\250\ The
annual audited financial statements must comprise, at a minimum, a
balance sheet, a profit and loss statement, and notes to the financial
statements.\251\ The auditor's audit report must include: (i) a
specification of the financial statements subject to the audit and the
financial reporting framework that was applied in their preparation;
(ii) a description of the scope of the audit, which must specify the
auditing standards used to conduct the audit; (iii) an audit opinion
stating whether the financial statements give a true and fair view in
accordance with the relevant financial reporting framework; and (iv) a
reference to any matters emphasized by the auditor that did not qualify
the audit opinion.\252\
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\250\ Accounting Directive, Articles 4, 19 and 34; French MFC,
Articles L.511-35 to L.511-38; German Commercial Code
(Handelsgesetzbuch, ``HGB''), section 316 et seq. The Accounting
Directive provides that the audit requirement is not applicable to
``small'' entities defined as firms meeting the following
requirements: (1) the firm's balance sheet is not more than EUR 4
million; (2) the firm's net turnover does not exceed more than EUR 8
million; or (3) the firm did not employ more than 50 employees
during the financial year. See Article 3(2) and Article 34 of the
Accounting Directive. The Applicants represented that the four EU
nonbank SDs currently registered with the Commission do not meet the
criteria to be classified as ``small'' entities and, therefore, are
required to prepare audited annual financial reports. EU
Application, p. 5.
\251\ Accounting Directive, Article 4(1). The audit of the
financial statements and management report is required to be
performed by one or more statutory auditors or auditors approved by
EU Member States to conduct audits of EU nonbank SDs. Id., Article
34(1). The annual audited financial report, together with the
opinion and statements of the auditor, must be published. Id.,
Article 30.
\252\ Id. Article 35.
---------------------------------------------------------------------------
Furthermore, as noted in the 2023 Proposal, the SEC has issued
orders permitting an SEC-registered nonbank security-based swap dealer
domiciled in France or Germany (``EU nonbank SBSD'') to satisfy SEC
Capital requirements via substituted compliance with applicable French
and German capital and financial reporting.\253\ The French Order and
German Order conditioned substituted compliance for capital
requirements on an EU nonbank SBSD complying with specified laws and
regulations, including CRR, CRD, and BRRD, and also maintaining total
liquid assets in an amount that exceeds the EU nonbank SBSD's total
liabilities by at least $100 million and by at least $20 million after
applying certain deductions to the value of the liquid assets to
reflect market, credit, and other potential risks to the value of the
assets.\254\ The SEC's French Order and German Order granting
substituted compliance for financial reporting to EU nonbank SBSDs, as
supplemented by the SEC Order on Manner and Format of Filing Unaudited
Financial and Operational Information, also require an EU nonbank SBSD
to file an unaudited FOCUS Report with the SEC on a monthly basis.\255\
The FOCUS Report is required to include, among other statements and
schedules: (i) a statement of financial condition; (ii) a statement of
the EU nonbank SBSD's capital computation in accordance with home
country Basel-based requirements; (iii) a statement of income/loss; and
(iv) a statement of capital withdrawals.\256\ An EU nonbank SBSD is
required to file its FOCUS Report with the SEC within 35 calendar days
of the month end.\257\
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\253\ 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) (``German Order''); 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 French Republic, 86 FR
41612 (Aug. 8, 2021) (``French Order''); 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 Order on Manner and Format of Filing Unaudited
Financial and Operational Information'').
\254\ The conditioning of the German Order and French Order on
EU nonbank SBSDs maintaining a defined amount of liquid assets in an
amount that exceeds the EU nonbank SBSD's total liabilities reflects
that the SEC's capital rule for nonbank SBSDs is a liquidity-based
requirement and not based on the Basel standards. 17 CFR 240.18a-
1(a)(1).
\255\ See, French Order and German Order. See also, SEC Order on
Manner and Format of Filing Unaudited Financial and Operational
Information.
\256\ See, SEC Order on Manner and Format of Filing Unaudited
Financial and Operational Information.
\257\ Id.
---------------------------------------------------------------------------
Based on its review of the EU Application and the relevant EU laws
and regulations, the Commission preliminarily determined that, subject
to the conditions specified in the 2023 Proposal and discussed below,
the EU Financial Reporting Rules are comparable to CFTC Financial
Reporting Rules in purpose and effect. The Commission noted that both
sets of rules provide the relevant EU competent authorities, the
Commission, and NFA with financial information to monitor a nonbank
SD's compliance with capital requirements, and to assess a nonbank SD's
overall safety and soundness.\258\ Specifically, the Commission
preliminarily found that the EU Financial Reporting Rules impose
reporting requirements that are comparable with respect to overall form
and content to the CFTC Financial Reporting Rules.\259\ In this regard,
both the CFTC Financial Reporting Rules and the EU 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 relevant EU competent
authorities, 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.\260\
---------------------------------------------------------------------------
\258\ 2023 Proposal at 41798.
\259\ Id.
\260\ Id.
---------------------------------------------------------------------------
The proposed conditions would ensure that the Commission and NFA
receive appropriate and timely financial information from EU nonbank
SDs to monitor the firms' compliance with EU capital requirements and
to assess the firms' overall safety and soundness. The proposed
conditions would require an EU nonbank SD to provide the Commission and
NFA with copies of the relevant templates of the FINREP reports and
COREP reports that correspond to the EU nonbank SD's statement of
financial condition, statement of income/loss, and statement of
regulatory capital, total risk exposure, and capital ratios. These
templates consist of FINREP templates 1.1 (Balance Sheet Statement:
assets), 1.2 (Balance Sheet Statement: liabilities), 1.3 (Balance Sheet
Statement: equity), 2 (Statement of profit or loss), and 10
(Derivatives--Trading and economic hedges), and COREP templates 1 (Own
Funds), 2 (Own Funds Requirements), and 3 (Capital Ratios). In
addition, the Commission proposed to require EU nonbank SDs to submit
to the Commission and NFA copies of the EU nonbank SD's annual audited
financial report.\261\
---------------------------------------------------------------------------
\261\ Id. at 41799.
---------------------------------------------------------------------------
The proposed conditions would also require the FINREP reports,
COREP reports, and annual audited financial report to be translated
into the English language.\262\ The FINREP and COREP reports also must
have balances
[[Page 58595]]
converted from euro to U.S. dollars.\263\ The Commission further
recognized that the requirement to translate balances denominated in
euro to U.S. dollars on the annual audited financial report may have an
unintended impact on the opinion expressed by the statutory auditor.
The Commission, therefore, proposed to accept the annual audited
financial report denominated in euro, but required the report to be
translated into the English language.\264\
---------------------------------------------------------------------------
\262\ Id.
\263\ Id. In the 2023 Proposal, the Commission proposed that the
translation of the annual audited financial report into the English
language would not be required to be subject to the audit of the
independent auditor. An EU nonbank SD would be required to report
the exchange rate that it used to convert balances from euro to U.S.
dollars to the Commission and NFA as part of the financial
reporting.
\264\ Id. at 41800.
---------------------------------------------------------------------------
The proposed conditions also would require an EU nonbank SD to file
with the Commission and NFA its: (i) FINREP reports and COREP reports
within 35 calendar days of the end of each month; and (ii) annual
audited financial report on the earliest of the date the report is
filed with the competent authority, the date the report is published,
or the date the report is required to be filed with the competent
authority or the date the report is required to be published pursuant
to the EU Financial Reporting Rules.\265\
---------------------------------------------------------------------------
\265\ Id. at 41799. The Commission noted that the EU Financial
Reporting Rules require EU nonbank SDs to submit the unaudited
FINREP and COREP templates to their competent authorities on a
quarterly basis, whereas the CFTC Financial Reporting Rules contain
a more frequent reporting requirement by requiring nonbank SDs that
elect the Bank-Based Approach to file unaudited financial
information with the Commission and NFA on a monthly basis. In
emphasizing the importance of financial statement reporting
requirements for the Commission's and NFA's oversight and the
Commission's experience in monitoring the financial conditions of
registrants through the receipt of monthly financial statements, the
Commission proposed to condition the Comparability Order on a more
frequent reporting submission. See id.
---------------------------------------------------------------------------
The Commission also proposed a condition to require EU 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.\266\ The
Commission explained that Schedule 1 provides the Commission and NFA
with detailed information regarding the financial positions that a
nonbank SD holds 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.\267\ The Commission proposed to require that
Schedule 1 be filed by an EU nonbank SD along with the firm's monthly
submission of selected FINREP and COREP templates.\268\ The Commission
also proposed to require that Schedule 1 be prepared in the English
language with balances reported in U.S. dollars.
---------------------------------------------------------------------------
\266\ Id. 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.
\267\ Id. at 41800.
\268\ Id.
---------------------------------------------------------------------------
The Commission further proposed that, in lieu of filing FINREP and
COREP reports, EU nonbank SDs that are registered with the SEC as EU
nonbank SBSDs could satisfy this condition by filing with the CFTC and
NFA, on a monthly basis, copies of the unaudited FOCUS Reports that the
EU nonbank SDs are required to file with the SEC pursuant to the SEC
French Order or SEC German Order, as supplemented by the SEC Order on
Manner and Format of Filing Unaudited Financial and Operational
Information. The filing of a FOCUS Report was proposed as an elective
option for the EU nonbank SD, as an alternative to the filing of
unaudited FINREP templates, COREP templates, and Schedule 1 that such
firms would otherwise be required to file with the Commission and NFA
pursuant to the proposed Comparability Order. In this connection, the
Commission noted that three of the EU nonbank SDs registered with the
SEC as EU nonbank SBSDs would be eligible to file copies of their
monthly FOCUS Report with the Commission and NFA in lieu of the FINREP
and COREP templates and Schedule 1. An EU nonbank SD electing to file
copies of its monthly FOCUS Report would be required to submit the
reports to the Commission and NFA within 35 calendar days of the end of
each month.
Proposing that EU nonbank SDs that are registered with the SEC as
EU nonbank SBSDs file the FOCUS Report in lieu of the FINREP and COREP
templates and Schedule 1 as an elective option was consistent with
Commission Regulation 23.105(d)(3), which at the time the 2023 Proposal
was issued, provided that a nonbank SD or nonbank MSP that is also
registered with the SEC as a broker or dealer, an SBSD, or a major
security-based swap participant might elect to file a FOCUS Report in
lieu of the financial reports required by the Commission. On April 30,
2024, the Commission amended Commission Regulation 23.105(d)(3) to
mandate the filing of a FOCUS Report by such dually-registered
entities, including dually-registered non-U.S. nonbank SDs, in lieu of
the Commission's financial reports.\269\ As such, the Commission is
also adopting as final a revised Condition 11 to require that EU
nonbank SDs registered as EU nonbank SBSDs comply with the requirement
to file periodic financial statements by filing a copy of the FOCUS
Report that the EU nonbank SDs are required to file with the SEC.
---------------------------------------------------------------------------
\269\ See Capital and Financial Reporting Requirements of Swap
Dealers and Major Swap Participants, 89 FR 45569 (May 23, 2024).
---------------------------------------------------------------------------
The Commission also proposed a condition to require an EU nonbank
SD to submit with each set of selected FINREP and COREP templates,
annual audited financial report, and the applicable Schedule 1, a
statement by an authorized representative or representatives of the EU
nonbank SD that, to the best knowledge and belief of the person(s), the
information contained within each FINREP and COREP template, annual
audited financial report, and Schedule 1, is true and correct,
including as it relates to the translation of the report into the
English language and the conversion of balances in the reports to U.S.
dollars.\270\ The statement by an authorized representative or
representatives of the EU nonbank SD was intended to be a substitute of
the oath or affirmation required of nonbank SDs under Commission
Regulation 23.105(f),\271\ to ensure that reports filed with the
Commission and NFA are prepared and submitted by firm personnel with
knowledge of the financial reporting of the firm who can attest to the
accuracy of the reporting, translation, and balances conversion.\272\
---------------------------------------------------------------------------
\270\ 2023 Proposal at 41800.
\271\ 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.
\272\ See 2023 Proposal at 41800.
---------------------------------------------------------------------------
The Commission further proposed a condition that would require an
EU nonbank SD to file a Margin Report with the Commission and NFA.\273\
The Commission noted that a Margin Report would assist the Commission
and NFA in their assessment of the safety and soundness of the EU
nonbank SDs by providing information regarding the firm's swap book and
the extent to which it has uncollateralized exposures
[[Page 58596]]
to counterparties or has not met its financial obligations to
counterparties. The Commission explained that this information, along
with the list of custodians holding both the firms' and counterparties'
collateral for swap transactions, would assist with identifying
potential financial impacts to the nonbank SD resulting from defaults
on its swap transactions. The Commission further proposed to require an
EU nonbank SD to file the Margin Report with the Commission and NFA
within 35 calendar days of the end of each month, which corresponds
with the proposed timeframe for the EU nonbank SD to file the selected
FINREP and COREP templates or FOCUS Report, as applicable. The
Commission also proposed to require the Margin Report to be prepared in
the English language with balances reported in U.S. dollars.
---------------------------------------------------------------------------
\273\ Id.
---------------------------------------------------------------------------
The Commission's preliminary determination did not require an EU
nonbank SD to file the model metrics and counterparty credit exposure
information required by Commission Regulations 23.105(k) and (l),\274\
in recognition that NFA's current SD risk monitoring program requires
all SDs, including EU 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.\275\ 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 before collateral and
net of collateral.\276\
---------------------------------------------------------------------------
\274\ 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).
\275\ 2023 Proposal at 41801. As previously noted, however, the
current three EU nonbank SDs will be required to include credit risk
information set forth in Schedules 2-4 of appendix B to Subpart E in
the monthly FOCUS Report that the firms will be required to file
with the Commission under Condition 11 of the final Comparability
Order. In addition, as previously noted, each EU nonbank SD will be
required to file Schedule 1 under Condition 13 of the final
Comparability Determination.
\276\ See 2023 Proposal at 41801 and NFA Financial Requirements,
section 17--Swap Dealer and Major Swap Participant Reporting
Requirements (``NFA section 17 Rule''), available here: https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=SECTION%2017&Section=7, 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 EU
Financial Reporting Rules do not contain an analogue to the CFTC's
requirements for nonbank SDs to file monthly model metric information
and counterparty exposures information, the competent authorities have
access to comparable information. More specifically, the Commission
noted that, under the EU Financial Reporting Rules, the competent
authorities have broad powers to request any information necessary for
the exercise of their functions.\277\ As such, the competent
authorities would have access to information allowing them to assess
the ongoing performance of risk models and to monitor the EU nonbank
SD's credit exposures, which may be comprised of credit exposures to
primarily other EU counterparties. In addition, the COREP reports,
which EU nonbank SDs are required to file with the competent authority
on a quarterly basis, include information regarding the EU nonbank SD's
risk exposure amounts, including risk-weighted exposure amounts for
credit risk.\278\
---------------------------------------------------------------------------
\277\ See 2023 Proposal at 41801 and CRD, Article 65(3), French
MFC, Article L.612-24, and SSM Regulation, Article 10 (indicating
that competent authorities have broad information gathering powers).
\278\ See 2023 Proposal at 41801 and CRR Reporting ITS, Annex I.
---------------------------------------------------------------------------
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.
Better Markets expressed a general disagreement with the Commission's
preliminary finding of comparability, arguing that the number and
variety of conditions regarding financial reporting are the most
compelling evidence that the requirements are not comparable.\279\ More
generally, Better Markets asserted that the 2023 Proposal did not
provide a sufficient analysis supporting the Commission's preliminary
conclusion that the EU and the U.S. financial reporting frameworks
would produce comparable outcomes.\280\
---------------------------------------------------------------------------
\279\ Better Markets Letter at p. 12.
\280\ Id. at p. 9.
---------------------------------------------------------------------------
Better Markets also noted that the proposed comparability
determination was conditioned on an EU 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).\281\ Better
Markets stated that there are material legal differences between a
statement and the oath or affirmation required by the CFTC Financial
Reporting Rules and argued that the Commission failed ``to address,
explain, or explore this explicit and significant difference.'' \282\
---------------------------------------------------------------------------
\281\ Id. at p. 12.
\282\ Id.
---------------------------------------------------------------------------
Better Markets also disagreed with the 2023 Proposal to the extent
that the Commission proposed not to require EU nonbank SDs that have
been approved by the relevant competent authority to use capital models
to file the monthly model metric information required by Commission
Regulation 23.105(k) with the Commission or NFA.\283\ 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.\284\ As noted above,
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; (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
[[Page 58597]]
each of the top ten countries to which the nonbank SD is exposed.\285\
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 EU and blindly accept the assessments
resulting from [the EU nonbank SDs'] use of internal models to
calculate risk.'' \286\
---------------------------------------------------------------------------
\283\ Id. at p. 12.
\284\ 17 CFR 23.105(k).
\285\ 17 CFR 23.105(k)(1).
\286\ Better Markets Letter at pp. 12-13.
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With respect to Better Markets' statement that the number and
variety of conditions regarding financial reporting are the most
compelling evidence that the requirements are not comparable, the
Commission disagrees that the inclusion of conditions in the
Comparability Order demonstrates that the EU Financial Reporting
Requirement are not comparable to CFTC Financial Reporting Requirements
in achieving the overall objective of ensuring the safety and soundness
of nonbank SDs. As discussed in section I.E. above, the conditions
impose obligations on EU nonbank SDs to provide information to the
Commission and NFA necessary for the effective oversight of the EU
nonbank SDs on an ongoing basis. As also discussed in section I.E.
above, Commission staff engaged in a thorough analysis of the EU
Capital Rules and EU Financial Reporting Rules, which supports the
Commission's conclusion that the respective regulatory frameworks would
produce comparable outcomes.
The Commission also does not agree that its approach is effectively
deferring model oversight to the EU authorities or that it is otherwise
``blindly accept[ing]'' the internal model-based assessments of the EU
nonbank SDs. As noted above, pursuant to NFA rules, all registered SDs,
including EU 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.\287\ Specifically, as discussed in section
II.D.1. above, the risk metrics include: (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.\288\ As part of its regulatory oversight program, NFA uses
the risk metrics information to identify firms that may pose heightened
risk and to allocate 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.
---------------------------------------------------------------------------
\287\ NFA section 17 Rule, available here: https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=SECTION%2017&Section=7, and NFA Notice I-17-10,
available here: https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4817.
\288\ See 2023 Proposal at 41801, NFA section 17 Rule, 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. The Commission also notes that
NFA, in its role of primary supervisor of nonbank SDs' risk management
practices, has identified the risk data items listed in NFA Notice I-
17-10 as the most relevant risk metrics to be collected for oversight
purposes. As such, the Commission finds 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 has the ability to request additional
information from its registrants, including EU nonbank SDs, at any
time. Finally, the Commission notes that the relevant competent
authorities, which will be conducting the initial approval and ongoing
assessment of the performance of the EU 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 competent authorities deem relevant in the conduct of such approval
and assessment. The Commission, therefore, concludes that it is not
necessary to require EU nonbank SDs relying on the final Comparability
Order to submit the model metric information and credit risk
information mandated by Commission Regulations 23.105(k) and (l).
The Commission also disagrees with Better Markets' assertion that
there is a significant difference between the proposed condition that
an EU nonbank SD provides a ``statement'' from an authorized
representative and the CFTC's requirement for nonbank SDs to provide an
``oath or affirmation'' from an authorized representative with regard
to the accuracy of the financial reporting's content. For completeness,
the Commission notes that the proposed condition requires that an
authorized representative of the EU 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 an EU
nonbank SD files erroneous information.
Finally, the Applicants addressed the Commission's request for
comment on the compliance dates for the reporting conditions that the
proposed Comparability Order would impose on EU nonbank SDs.\289\ The
Applicants requested that the Commission set the compliance date at
least six months following the issue date of the final Comparability
Order to allow EU nonbank SDs to adequately prepare for compliance with
the reporting
[[Page 58598]]
conditions imposed by the Comparability Order.\290\
---------------------------------------------------------------------------
\289\ Applicants' Letter at p. 6.
\290\ Id.
---------------------------------------------------------------------------
The Commission believes that granting an additional period of time
to allow EU nonbank SDs to develop and implement the necessary systems
and processes for compliance with the Comparability Order is
appropriate with respect to the new reporting obligations imposed on EU
nonbank SDs under the final Order. For other reporting obligations, for
which a process already exists, such as the reports that EU nonbank SDs
currently submit to the Commission and NFA pursuant to CFTC Staff
Letter 22-10,\291\ prepare pursuant to the EU Financial Reporting
Rules, and/or submit to the SEC (i.e., FOCUS Reports), 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
for EU nonbank SDs to comply with final Condition 15, which requires
the firms to file monthly Margin Reports with the Commission and NFA.
---------------------------------------------------------------------------
\291\ 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
MPD on August 17, 2022. CFTC Staff Letter No. 22-10, which extended
the expiration of CFTC Letter 21-20, provides that MPD would not
recommend an enforcement action to the Commission if a non-U.S.
nonbank SD covered by the letter, 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.
---------------------------------------------------------------------------
For purposes of clarity, the Commission also notes that EU 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 EU
nonbank SD uses to prepare general purpose financial statements in its
EU Member State. This clarification is consistent with proposed
Condition 10, which the Commission adopts subject to a minor
modification in the final Comparability Order, requiring an EU nonbank
SD to prepare and keep current ledgers and other similar records ``in
accordance with accounting principles permitted by the relevant
competent authority.'' \292\ In taking the position that EU 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 the EU 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.\293\ In this regard, the
Commission notes that EU 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.\294\ The
reports provide the Commission with appropriate information to assess
the financial and operational condition of EU nonbank SDs, as well as
the firms' compliance with the capital ratios imposed on EU nonbank SDs
under the EU Capital Rules.
---------------------------------------------------------------------------
\292\ 2023 Proposal at 48808. Proposed Condition 10 stated that
EU nonbank SDs must prepare and keep current ledgers and other
similar records ``in accordance with accounting principles required
by the relevant competent authority''. 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 EU nonbank SDs.
\293\ Furthermore, the Commission's approach to permitting EU
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. German
Order at 59812 and SEC Order on Manner and Format of Filing
Unaudited Financial and Operational Information 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 Order on
Manner and Format of Filing Unaudited Financial and Operational
Information 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. The
Commission's approach to permitting EU nonbank SDs to maintain
financial books and records, and file financial information,
prepared in accordance with local accounting standards will also
facilitate financial reporting by dually-registered EU nonbank SDs-
EU nonbank SBSDs. In such case, dually-registered entities would not
have to perform multiple calculations under different accounting
standards or submit two different FOCUS Reports.
\294\ 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 summary, the Commission adopts the final Comparability Order and
conditions substantially as proposed with respect to the comparability
of the CFTC Financial Reporting Rules and EU Financial Reporting
Requirements, subject to the amendment in Condition 10 to use the word
``permitted'' in reference to the applicable accounting standards and
the amendment in Condition 11 to mandate the filing by EU nonbank SDs
registered as EU nonbank SBSDs of a copy of the FOCUS Report that such
dually-registered EU nonbank SDs are required to file with the SEC. The
Commission also specifies, in final Conditions 11, 13, and 15, that the
conversion of balances to U.S. dollars must be done using a
commercially reasonable and observable euro/U.S. dollar spot rate as of
the date of the respective report. Finally, the Commission also grants
an additional compliance period for the new reporting obligations
imposed on EU nonbank SDs under the final Order set forth below.
E. Notice Requirements
1. Proposed Determination
The Commission noted in the 2023 Proposal that the CFTC Financial
Reporting Rules require nonbank SDs to provide the Commission and NFA
with written notice of certain defined events.\295\ 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
[[Page 58599]]
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 with the SEC under applicable SEC Rules.\296\
---------------------------------------------------------------------------
\295\ 2023 Proposal at 41802 and 17 CFR 23.105(c).
\296\ 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.\297\ Notices provide the Commission and NFA with an
opportunity to assess whether the occurrence of a notice event
indicates the existence of actual or potential financial and/or
operational issues at a nonbank SD, and, when necessary, allows the
Commission and NFA to engage with the nonbank SD in an effort to
minimize potential adverse impacts on swap counterparties and the
larger swaps market.\298\
---------------------------------------------------------------------------
\297\ Id.
\298\ See 2023 Proposal at 41802.
---------------------------------------------------------------------------
The EU capital and resolution framework, in turn, requires EU
nonbank SDs to provide certain notices to their respective competent
authorities concerning the firm's compliance with relevant laws and
regulations.\299\ Specifically, the Commission noted that the EU
Financial Reporting Rules require an EU nonbank SD to provide notice
within five business days to its relevant competent authority \300\ if
the firm fails to meet its combined capital buffer requirement, which
at a minimum consists of a capital conservation buffer of 2.5 percent
of the EU nonbank SD's total risk exposure amount.\301\ To meet its
capital buffer requirements, an EU nonbank SDs must hold common equity
tier 1 capital in addition to the minimum common equity tier 1 ratio
requirement of 4.5 percent of the firm's core capital requirement of 8
percent of the firm's total risk exposure amount.\302\ The notice to
the competent authority must be accompanied by a capital conservation
plan that sets out how the EU nonbank SD will restore its capital
levels.\303\ The capital conservation plan is required to include: (i)
estimates of income and expenditures and a forecast balance sheet; (ii)
measures to increase the capital ratios of the EU nonbank SD; (iii) a
plan and timeframe for the increase in the capital of the EU nonbank SD
with the objective of meeting fully the combined buffer requirement;
and (iv) any other information that the competent authority considers
to be necessary to assess the capital conservation plan.\304\ The
relevant competent authority is required to assess the capital
conservation plan, and may approve the plan only if it considers that
the plan would be reasonably likely to conserve or raise sufficient
capital to enable the EU nonbank SD to meet its combined capital buffer
requirement within a timeframe that the competent authority considers
to be appropriate.\305\ If the relevant competent authority does not
approve the capital conservation plan, the competent authority may
impose requirements for the EU nonbank SD to increase its capital to
specified levels within a specified time or the competent authority may
impose more restrictions on distributions.\306\ In addition, an EU
nonbank SD must immediately notify its relevant resolution authority in
situations where the firm meets the combined capital buffer
requirement, but fails to meet the combined buffer requirement when
considered in addition to the applicable MREL requirements.\307\ The EU
nonbank SD must also notify the relevant resolution authority if it
considers the firm to be failing or likely to fail.\308\
---------------------------------------------------------------------------
\299\ Id.
\300\ See 2023 Proposal at 41802. As further discussed in
section II.F.1. below, the relevant prudential competent authority
may either be the national competent authority with jurisdiction to
oversee compliance with the EU Capital Rules and the EU Financial
Reporting Rules or, for EU nonbank SDs that are authorized as credit
institutions and qualify as ``significant supervised entities,'' the
ECB. See generally SSM Regulation and SSM Framework Regulation.
\301\ 2023 Proposal at 41802 and CRD, Article 142; French MFC,
Article L.511- 41-1-A; French Ministerial Order on Capital Buffers,
Articles 61 to 64; and German KWG, sections 10i(2) to (9). The
combined capital buffer requirement is the total common equity tier
1 capital required to meet the requirement for the capital
conservation buffer required by Article 129 of CRD, extended to
include, as applicable, an institution-specific countercyclical
buffer required by Article 130 of CRD, a G-SII buffer required by
Article 131(4) of CRD, an O-SII buffer required by Article 131(5) of
CRD, and a systemic risk buffer required by Article 133 of CRD. CRD,
Article 128.
\302\ Id. The EU Financial Reporting Rules effectively require
an EU nonbank SD to provide notice if the firm's capital ratio of
common equity tier 1 capital to risk-weighted assets falls below 7
percent (assuming that the only capital buffer the EU nonbank SD is
subject to is the capital conservation buffer of 2.5 percent).
\303\ 2023 Proposal at 41802 and CRD, Article 142(1); French
Ministerial Order on Capital Buffers, Article 61; German KWG,
section 10i(6). The competent authority may extend the filing
deadline, and require the EU nonbank SD to file the capital
conservation plan within 10 days of the firm identifying that it
failed to meet the applicable capital buffer requirements.
\304\ 2023 Proposal at 41802 and CRD, Article 142(2); French
Ministerial Order on Capital Buffers, Article 62; German KWG,
section 10i(6).
\305\ 2023 Proposal at 41802 and CRD, Article 142(3); French
MFC, Article L.511- 41-1-1; French Ministerial Order on Capital
Buffers, Article 63; German KWG, section 10i(7).
\306\ 2023 Proposal at 41802 and CRD, Article 142(4); French
MFC, Article L.511- 41-1-A; French Ministerial Order on Capital
Buffers, Article 64 and French Ministerial Order on Distribution
Restrictions, Articles 2 to 9; German KWG, section 10i(8).
\307\ 2023 Proposal at 41802-41803 and BRRD, Article 16a; French
MFC, Article L.613-56 III and French Ministerial Order on
Distribution Restrictions, Articles 7 and 8; German SAG, Article
58a.
\308\ 2023 Proposal at 41803 and BRRD, Article 81(1); French
MFC, Article L.613-49; German SAG, section 138(1).
---------------------------------------------------------------------------
Furthermore, if an EU nonbank SD breaches its liquidity or MREL
requirements, the EU authorities possess wide-ranging tools to deal
with the firm's financial deterioration. Specifically, the competent
authority may impose administrative penalties or other administrative
measures, including prudential capital charges, if an EU nonbank SD's
liquidity position repeatedly or persistently falls below the liquidity
and stable funding requirements established at the national or EU
level.
Emphasizing that the requirement for a nonbank SD to file notice
with the Commission and NFA if the firm becomes undercapitalized or if
the firm experiences a decrease of excess regulatory capital below
defined levels is a central component of the Commission's and NFA's
oversight program for nonbank SDs, the Commission proposed a condition
to require EU nonbank SDs to file with the Commission and NFA copies of
notices filed under Article 142 of CRD by EU nonbank SDs alerting
competent authorities of a breach of the EU nonbank SD's combined
capital buffer.\309\ The Commission proposed to require that the notice
be filed by the EU nonbank SD within 24 hours of the filing of the
notice with the relevant competent authority.
---------------------------------------------------------------------------
\309\ See 2023 Proposal at 41803.
---------------------------------------------------------------------------
The Commission, however, preliminarily determined that the
requirement for an EU nonbank SD to provide notice of a breach of its
capital buffer requirements to its competent authority is not
sufficiently comparable in purpose and effect to the CFTC notice
provisions contained in Commission Regulation 23.105(c)(1) and
(2),\310\ which require a nonbank SD to provide notice to the
Commission and to NFA if the firm fails to meet its minimum capital
requirement or if the firm's regulatory capital falls below 120 percent
of its minimum capital requirement (``Early Warning Level'').\311\ The
Commission noted that, in its
[[Page 58600]]
preliminary view, the requirement for an EU nonbank SD to provide
notice of a breach of its capital buffer requirements does not achieve
a comparable outcome to the CFTC's Early Warning Level requirement due
to the difference in the thresholds triggering a notice requirement in
the respective rule sets.\312\ Therefore, the Commission proposed a
condition to require an EU nonbank SD to file a notice with the
Commission and NFA if the firm's capital ratio does not equal or exceed
12.6 percent.\313\ The proposed condition would further require the EU
nonbank SD to file the notice with the Commission and NFA within 24
hours of when the firm knows or should have known that its regulatory
capital was below 120 percent of its minimum capital requirement.\314\
---------------------------------------------------------------------------
\310\ 17 CFR 23.105(c)(1) and (2).
\311\ See 2023 Proposal at 41803.
\312\ Id.
\313\ Id. at 41803-41804.
\314\ Id. at 41804.
---------------------------------------------------------------------------
The Commission also noted that the EU Financial Reporting Rules
also do not contain an explicit requirement for an EU nonbank SD to
notify its competent authority if the firm fails to maintain current
books and records, experiences a decrease in regulatory capital over
levels previously reported, or fails to collect or post initial margin
with uncleared swap counterparties that exceed certain threshold
levels.\315\ The EU Financial Reporting Rules also do not require an EU
nonbank SD to provide the competent authority with advance notice of
capital withdrawals initiated by equity holders that exceed defined
amounts or percentages of the firm's excess regulatory capital.\316\
---------------------------------------------------------------------------
\315\ Id.
\316\ Id.
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To ensure that the Commission and NFA receive prompt information
concerning potential operational or financial issues that may adversely
impact the safety and soundness of an EU nonbank SD, the Commission
proposed to condition the Comparability Order to require EU nonbank SDs
to file certain notices mandated by Commission Regulation 23.105(c)
with the Commission and NFA as discussed below. Pursuant to the
proposed conditions, an EU nonbank SD would be required to file a
notice with the Commission and NFA if the firm fails to maintain
current books and records with respect to its financial condition and
financial reporting requirements.\317\ 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 EU nonbank SD's
asset, liability, income, expense, and capital accounts in accordance
with the accounting principles accepted by the relevant competent
authorities.\318\ The Commission further stated that it preliminarily
believed 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 and to ensure compliance with regulatory requirements,
including regulatory capital requirements. As such, the Commission
proposed to condition the proposed Order on an EU nonbank SD providing
the Commission and NFA with a written notice within 24 hours if the
firm fails to maintain books and records on a current basis.\319\
---------------------------------------------------------------------------
\317\ Id.
\318\ Id.
\319\ Id.
---------------------------------------------------------------------------
The Commission further proposed to condition the Comparability
Order on an EU 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 security-based swap
positions that, in the aggregate, exceeds 25 percent of the EU nonbank
SD's minimum capital requirement; (ii) counterparties fail to post
required initial margin or pay required variation margin to the EU
nonbank SD for uncleared swap and security-based swap positions that,
in the aggregate, exceeds 50 percent of the EU nonbank SD's minimum
capital requirement; (iii) an EU nonbank SD fails to post required
initial margin or pay required variation margin for uncleared swap and
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 EU nonbank SD's minimum capital
requirement; and (iv) an EU nonbank SD fails to post required initial
margin or pay required variation margin to counterparties for uncleared
swap and security-based swap positions that, in the aggregate, exceeds
50 percent of the EU 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 EU nonbank SD and the relevant competent
authority to obtain an understanding of the facts that have led to the
failure to exchange material amounts of initial margin and 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.\320\
---------------------------------------------------------------------------
\320\ Id. at 41804-41805.
---------------------------------------------------------------------------
The Commission also proposed to require that an EU nonbank SD file
any notices required under the 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.\321\
---------------------------------------------------------------------------
\321\ Id.
---------------------------------------------------------------------------
The Commission did not propose to require an EU 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 EU nonbank SD's capital levels
are monitored by the relevant competent authority. As such, the
Commission preliminarily considered that the separate reporting of the
information to the Commission would be superfluous.\322\
---------------------------------------------------------------------------
\322\ Id. at 41805.
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2. Comments and Final Determination
With respect to the proposed requirements in Condition 21 that an
EU nonbank SD file a notice with the Commission and NFA within 24 hours
of when the firm knew or should have known that its regulatory capital
fell below 120 percent of its minimum capital requirement, the
Applicants asserted that the wording of the proposed condition raises
practical challenges as it would require notification prior to the
discovery of the relevant event.\323\ The Applicants recommended that
the Commission amend the proposed condition to require notice within 24
hours of when the firm ``knew'' that its regulatory capital fell below
120 percent of the minimum capital requirement.\324\ Similarly, with
respect to proposed Condition 22, which would require an EU nonbank SD
to file a notice with the
[[Page 58601]]
Commission and NFA within 24 hours if the firm fails to make or keep
current the financial books and records, the Applicants recommended
that the Commission amend the condition to require that an EU nonbank
SD file a notice within 24 hours ``of when it knows it has failed to
make or keep current the financial books and records.'' \325\ In
addition, with respect to proposed Condition 21, the Applicants
asserted that, pursuant to the condition, an EU nonbank SD would
calculate the Early Warning Level by applying a buffer of 20 percent in
excess capital, in the form of common equity tier 1 capital, on top of
the firm's capital conservation buffer, which, at a minimum, equals 2.5
percent of the firm's total risk exposure amount and must be met in the
form of common equity tier 1 capital. In the Applicants' view, an
aggregate notification trigger of 12.6 percent of total risk exposure
amount would be too high. The Applicants recommended that the
Commission set the notification trigger at 120 percent of the minimum
total capital requirement.\326\
---------------------------------------------------------------------------
\323\ Applicants' Letter at p. 5.
\324\ Id.
\325\ Id.
\326\ Applicants' Supplemental Letter at p. 2.
---------------------------------------------------------------------------
The Early Warning Level notice requirement is a central component
of the Commission's and NFA's oversight programs. The Commission,
however, recognizes that by requiring an EU nonbank SD to provide
notice if its capital ratio falls below 120 percent of the firm's
minimum capital requirement, as defined to comprise the applicable
capital buffers, the Commission would be imposing a higher threshold
level for the notice trigger than is currently applicable to nonbank
SDs under the CFTC Capital Rules. To achieve the condition's goal of
providing the Commission and NFA with information on decreases in
capital that may indicate financial or operational challenges at the
firm, the Commission is revising proposed Condition 21 to require
instead that an EU nonbank SD provide notice to the Commission if it
experiences a 30 percent or more decrease in its excess regulatory
capital as compared to the last reported.\327\ The condition is
consistent with the requirement applicable to nonbank SDs under
Commission Regulation 23.105(c)(4).\328\ The Commission believes that
this condition, combined with the condition requiring an EU nonbank SD
to file with the Commission and NFA copies of notices filed with
relevant competent authorities of a breach of the EU nonbank SD's
combined capital buffer, will provide a timely opportunity to the
Commission and NFA to initiate conversations and fact finding with an
EU nonbank SD that may be experiencing operational or financial issues
that may adversely impact the firm's ability to meet its obligations to
market participants, including customers or swap counterparties.
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\327\ For clarity, by ``excess regulatory capital,'' the
Commission refers to the capital ratio by which the firm's capital
exceeds the core capital ratio requirement of 8 percent of the
firm's risk-weighted assets. For instance, if a firm maintains a
capital ratio of 20 percent, its excess regulatory capital would be
12 percent. In this example, 30 percent of the excess regulatory
capital would equal 3.6 percent.
\328\ 17 CFR 23.105(c)(4).
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In connection with the Applicants' general request that the
Commission set the compliance date of the Comparability Order at least
six months following the issuance of the final Order, the Commission
believes, as stated above, that granting an additional period of time
to allow EU nonbank SDs to establish and implement the necessary
processes to comply with the notice reporting obligations imposed by
the Comparability Order is appropriate with respect to certain notice
obligations. Specifically, the Commission understands that establishing
a system and process for monitoring material decreases in excess
regulatory capital as required by final Condition 21 or 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 23 may take time.\329\
Conversely, the Commission does not believe that additional time is
necessary for implementing a system and process of providing a notice
to the Commission and NFA in connection with the occurrence of events
that EU nonbank SDs currently monitor and/or report to the relevant
competent authority. The Commission is also of the view that, given the
nature of the notice obligation, EU nonbank SDs should be in a position
to comply with all other notice obligations, including those requiring
EU 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 common equity tier 1
equal or in excess of the U.S. dollar equivalent of $20 million,
immediately upon effectiveness of the Comparability Order.
Specifically, with respect to the requirement in Condition 22 that an
EU nonbank SD notify the Commission and NFA if the firm fails to make
or keep current the financial books and records, the Commission notes
that maintaining current books and records of all financial
transactions is a fundamental recordkeeping requirement for a
registered nonbank SD, and is essential to provide management with the
information necessary to ensure that transactions are timely and
accurately reported and that the firm complies with capital and other
regulatory requirements. The Commission finds that it is necessary for
a nonbank SD to maintain internal controls and procedures to
affirmatively monitor that financial books and records are being
maintained on a current basis. The Commission also notes that the
language of Condition 22 is consistent with the timing standard of
Commission Regulation 23.105(c)(3), while also granting additional time
for the notice to be translated into English.\330\ As such, the
Commission is adopting Condition 22 as proposed. The Commission,
however, is setting a compliance date of 180 calendar days after the
publication of the final Comparability Order in the Federal Register
with respect to the notice reporting obligations under final Conditions
21 and 23 of the Comparability Order.
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\329\ With regard to Condition 23, the Commission also notes,
for clarity 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. To the extent EU 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 23, MPD will discuss such inquiries
with the EU nonbank SD during the confirmation process referenced in
final Condition 9 of the Comparability Order.
\330\ 17 CFR 23.105(c)(3).
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With respect to the notice requirement in final Condition 23, the
Applicants also recommended that the Commission clarify the term
``minimum capital requirement,'' used in connection with the thresholds
triggering a notice requirement.\331\ In response, the Commission will
amend the condition to indicate that, in the context of final Condition
23, the EU nonbank SD's ``minimum capital requirement'' is the core
capital requirement under the EU Capital Rules, excluding capital
buffers.
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\331\ Applicants' Supplemental Letter at p. 2. The Applicants
indicated that, in the context of proposed Condition 23, they
understand the term ``minimum capital requirement'' to mean an
amount equal to 8 percent of the EU nonbank SD's total risk exposure
amount.
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Finally, the Applicants recommended that the Commission amend
proposed Condition 25 to require that an EU
[[Page 58602]]
nonbank SDs, or an entity acting on its behalf, notify the Commission
and NFA of ``material changes'' to the EU Capital Rules or EU Financial
Reporting Rules instead of ``proposed or final material changes'' to
the EU Capital Rules or EU Financial Reporting Rules.\332\ Separately,
the Applicants noted that the language of proposed Condition 25 is
confusing in that it differentiates between rules that are ``imposed
on'' and those that ``apply to'' EU nonbank SDs.\333\ The Commission
did not intend to distinguish between rules that are ``imposed on'' and
rules that ``apply to'' EU nonbank SDs and will use instead the defined
terms ``EU Capital Rules'' and ``EU Financial Reporting Rules'' to
address the potential for confusion. The Commission, however, believes
that it is necessary that the Commission and NFA receive an advance
notice of potential material changes to the foreign jurisdiction's
rules to allow the Commission a sufficient time to assess the potential
impact of the proposed amendments and to address potential changes to
the Comparability Determination and Comparability Order. As such, the
Commission is adopting Condition 25 as proposed with regard to the
required notice of ``proposed and final material changes'' to the EU
Capital Rules and EU Financial Reporting Rules.
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\332\ Applicants' Letter at p. 5.
\333\ Applicants' Supplemental Letter at p. 3.
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The Commission did not receive any comments with respect to the
following proposed notice conditions: (i) the EU nonbank SD files
notice with the Commission and NFA within 24 hours of being informed by
the competent authority that the firm is not in compliance with any
component of the EU Capital Rules or EU Financial Reporting Rules
(proposed Condition 16); (ii) the EU nonbank SD files notice with the
Commission and NFA within 24 hours if the firm fails to maintain
regulatory capital in the form of common equity tier 1 capital, as
defined in Article 26 of CRR, equal to or in excess of the U.S. dollar
equivalent of $20 million (proposed Condition 17); (iii) the EU nonbank
SD provides the Commission and NFA with notice within 24 hours of
filing a capital conservation plan (proposed Condition 18); (iv) the EU
nonbank SD files notice with the Commission and NFA within 24 hours of
being required by its competent authority to maintain additional
capital or additional liquidity requirements, or to restrict its
business operations, or to comply with certain other additional
requirements that the competent authority may impose pursuant to the EU
Capital Rules and the EU Financial Reporting Rules (proposed Condition
19); (v) the EU nonbank SD files a notice with the Commission and NFA
within 24 hours if it fails to maintain its MREL (proposed Condition
20); or (vi) the EU nonbank SD files notice of the competent authority
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 24).
With regard to the proposed condition requiring that the EU nonbank
SD file a notice with the Commission and NFA within 24 hours of filing
a capital conservation plan, the Commission will revise the condition
to require that the notice be filed within 24 hours of when the EU
nonbank SD breaches its combined capital buffer requirement and is
required to file a capital conservation plan. Thus, the Commission will
help ensure that the EU nonbank SD provides a timely notice within 24
hours of breaching its combined capital buffer requirement instead of
24 hours of filing the capital conservation plan, which may occur up to
five business days after the breach of the combined buffer
requirement.\334\
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\334\ The competent authority may also extend the filing
deadline, and require the EU nonbank SD to file the capital
conservation plan within 10 days of the firm identifying that it
failed to meet the applicable capital buffer requirements. 2023
Proposal at 41802 and CRD, Article 142(1); French Ministerial Order
on Capital Buffers, Article 61; German KWG, section 10i(6).
---------------------------------------------------------------------------
In conclusion, the Commission finds that the regulatory notice
provisions of the EU 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 outcomes, by providing timely notice to the relevant
competent authority, 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 EU and Commission's nonbank SD notice reporting requirements,
subject to the revisions in final Conditions 18 and 21, and the
clarifying changes to final Condition 25 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. Preliminary Determination
In the 2023 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.\335\ The 2023 Proposal
also noted that the Commission and NFA also conduct periodic
examinations as part of the supervision of nonbank SDs, including
routine onsite examinations of nonbank SDs' books, records, and
operations to ensure compliance with CFTC and NFA requirements.\336\ In
this regard, as noted in section I.E. above, section 17(p) 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.\337\
---------------------------------------------------------------------------
\335\ 2023 Proposal at 41805.
\336\ Id.
\337\ 7 U.S.C. 21(p).
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The Commission also discussed 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 by being
able 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.\338\ As discussed
in the 2023 Proposal, the Commission and NFA also have the authority to
require a nonbank SD to provide any additional financial and/or
operational information as the Commission or NFA may specify to monitor
the safety and soundness of the firm.\339\
---------------------------------------------------------------------------
\338\ Id.
\339\ Commission Regulation 23.105(h) (17 CFR 23.105(h)). See
also, 2023 Proposal at 41805.
---------------------------------------------------------------------------
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,
[[Page 58603]]
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.\340\
---------------------------------------------------------------------------
\340\ 7 U.S.C. 6s(e).
---------------------------------------------------------------------------
With respect to EU nonbank SDs, the Commission noted in the 2023
Proposal that oversight of the firm's compliance with the EU Capital
Rules and the EU Financial Reporting Rules is conducted by the ECB and
the relevant national competent authorities in EU Member States.\341\
EU nonbank SDs that are registered as credit institutions and that
qualify as ``significant supervised entities'' fall under the direct
authority of the ECB and are supervised within the Single Supervisory
Mechanism, or SSM.\342\ Within the SSM, the ECB supervises firms for
compliance with the EU Capital Rules and the EU Financial Reporting
Rules through joint supervisory teams (``JSTs''), comprised of ECB
staff and staff of the relevant national competent authorities.\343\ EU
nonbank SDs that are registered as credit institutions and that qualify
as ``less significant supervised entities,'' \344\ or EU nonbank SDs
registered as investment firms that remain subject to the CRR/CRD
framework regime, fall under the direct authority of the applicable
national competent authorities. The ECB and the French Autorit[eacute]
de Contr[ocirc]le Prudentiel et de Resolution (``ACPR'') have
supervision, audit, and investigation powers with respect to four EU
nonbank SDs currently registered with the Commission.\345\ The ECB's
and ACPR's authorities include the power to require EU nonbank SDs to:
(i) provide necessary information for the authorities to carry out
their supervisory tasks; \346\ (ii) examine the books and records of EU
nonbank SDs; (iii) obtain written and oral explanations from the EU
nonbank SD's management, staff, and other persons; \347\ and (iv)
conduct necessary inspections at the business premises of EU nonbank
SDs and other group entities.\348\ The competent authorities also
monitor the capital adequacy of EU nonbank SDs through supervisory
measures on an ongoing basis. The monitoring includes assessing the
notices and the capital conservation plan discussed in section II.E.1.
above.
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\341\ 2023 Proposal at 41805-41807.
\342\ See generally SSM Regulation and SSM Framework Regulation.
The criteria for determining whether credit institutions are
considered ``significant supervised entities'' include size,
economic importance for the specific EU Member State or the EU
economy, significance of cross-border activities, and request for or
receipt of direct public financial assistance. SSM Regulation,
Article 6 and SSM Framework Regulation, Articles 39-44 and 50-62,
and discussion of the SSM in section II.C. above.
\343\ SSM Framework Regulation, Article 3.
\344\ SSM Regulation, Article 6. Entities that qualify as ``less
significant supervised entities'' are supervised by their national
competent authorities in close cooperation with the ECB. With
respect to the prudential supervision of these entities, the ECB has
the power to issue regulations, guidelines or general instructions
to the national competent authorities. SSM Regulation, Article
6(5)(a). At any time, the ECB can also decide to directly supervise
any one of these less significant supervised entities to ensure that
high supervisory standards are applied consistently. SSM Regulation,
Article 6(5)(b).
\345\ Three of the four EU nonbank SDs currently registered with
the Commission (BofA Securities Europe S.A.; Citigroup Global
Markets Europe AG; and Morgan Stanley Europe SE) are registered as
credit institutions and qualify as ``significant supervised
entities'' subject to the direct supervision of the ECB. One entity
(Goldman Sachs Paris) is registered as an investment firm and
subject to direct supervision by the French ACPR. Anticipating that
Goldman Sachs Paris would continue to apply the CRR/CRD capital and
financial reporting framework regime but become categorized as a
``less significant supervised entity'' that would remain under ACPR
oversight, Commission staff reviewed the French law provisions
granting supervisory and enforcement powers to the ACPR. As noted
above, on March 31, 2024, Goldman Sachs Paris became subject to a
different capital and financial reporting framework. Although the
analysis included in this Comparability Determination no longer
applies to Goldman Sachs Paris, the Commission is retaining the
description of the ACPR's supervisory regime and powers in the final
Comparability Determination to facilitate the analysis of potential
future applications for substituted compliance that may involve
entities subject to direct supervision by the ACPR. Accordingly,
this section describes the supervisory powers of the ECB and the
French ACPR and refers to provisions establishing those powers. For
the avoidance of doubt, if a future EU nonbank SD applicant that is
subject to supervision by a national competent authority in an EU
Member State other than France, seeks substituted compliance for
some or all of the CFTC Capital Rules and CFTC Financial Reporting
Rules, the EU nonbank SD applicant must submit an application to the
Commission in accordance with Commission Regulation 23.106 (17 CFR
23.106) and provide, among other information, a description of the
ability of the relevant EU Member State regulatory authority to
supervise and enforce compliance with the relevant EU Member State's
capital adequacy and financial reporting requirements.
\346\ CRD, Article 65(3)(a); French MFC, Article L.612-24; and
SSM Regulation, Article 10.
\347\ CRD, Article 65(3)(b); French MFC, Article L.612-24; and
SSM Regulation, Article 11.
\348\ CRD, Article 65(3)(c); French MFC, Articles L.612-23 and
L.612-26; and SSM Regulation, Article 12.
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In addition to the tools described in section II.E.1., the relevant
competent authorities are also empowered with a variety of measures to
address an EU nonbank SD's financial deterioration. Specifically, if an
EU nonbank SD fails to meet its capital or liquidity thresholds, or if
the competent authority has evidence that the EU nonbank SD is likely
to breach its capital or liquidity thresholds in the next 12 months,
the competent authority may order an EU nonbank SD to comply with
additional requirements, including: (i) maintaining additional capital
in excess of the minimum requirements, if certain conditions are met;
(ii) requiring that the EU nonbank SD submit a plan to restore
compliance with applicable capital or liquidity thresholds; (iii)
imposing restrictions on the business or operations of the EU nonbank
SD; (iv) imposing restrictions or prohibitions on distributions or
interest payments to shareholders or holders of additional tier 1
capital instruments; (v) requiring additional or more frequent
reporting requirements; and (vi) imposing additional specific liquidity
requirements.\349\ The competent authority may also withdraw an EU
nonbank SD's authorization if the firm no longer meets its minimum
capital requirements.\350\ Although the relevant competent authorities
generally have broad discretion as to what powers they may exercise,
the EU Capital Rules and the EU Financial Reporting Rules specifically
mandate that the competent authorities require EU nonbank SDs to hold
increased capital when: (i) risks or elements of risks are not covered
by the capital requirements imposed by the EU Capital Rules; (ii) the
EU nonbank SD lacks robust governance arrangements, appropriate
resolution and recovery plans, processes to manage large exposures or
effective processes to maintain on an ongoing basis the amounts, types,
and distribution of capital needed to cover the nature and level of
risks to which it might be exposed and it is unlikely that other
supervisory measures would be sufficient to ensure that those
requirements can be met within an appropriate timeframe; (iii) the EU
nonbank SD repeatedly fails to establish or maintain an adequate level
of additional capital to cover the guidance communicated by the
relevant competent authorities; or (iv) other entity-specific
situations deemed by the relevant competent authority to raise material
supervisory concerns.\351\
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\349\ CRD, Articles 102(1) and 104(1); French MFC, Articles
L.511-41-3 and L.612-31 to L.612-33; SSM Regulation, Article 16.
\350\ CRD Article 18; MiFID, Article 8c; French MFC, Articles
L.532-6 and L.612-40; SSM Regulation, Article 14.
\351\ CRD, Article 104 and 104a; French MFC, Article L.511-41-3;
German KWG, section 6c(1); and SSM Regulation, Articles 9
(indicating that the ECB shall have all the powers and obligations
that national authorities have under EU law, unless otherwise
provided in the SSM Regulation, and that the ECB may require, by way
of instructions, that national competent authorities make use of
their powers, where the SSM Regulation does not confer such powers
to the ECB) and 16 (describing ECB's supervisory powers, including
the power to require entities subject to its authority to hold
capital in excess of the capital requirements imposed by relevant EU
law).
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[[Page 58604]]
The national competent authorities can also issue administrative
penalties and other administrative measures if an EU nonbank SD (or its
management) does not fully comply with its reporting requirements.\352\
These penalties and measures include: (i) public statements identifying
a firm or one or more of its managers as responsible for the breach;
(ii) cease-and-desist orders; (iii) temporary bans against a member of
the firm's management body or other manager; (iv) administrative
monetary penalties against the firm of up to 10 percent of the total
annual net turnover of the preceding year; (v) administrative monetary
penalties of up to twice the amount of the profits gained or losses
avoided because of the breach; or (vi) withdrawal of the firm's
authorization.\353\
---------------------------------------------------------------------------
\352\ CRD, Articles 65, 67(1)(e) to (i) and 67(2); French MFC,
Article L.612-39 and L.612-40; German KWG, sections 56(6) and (7),
60b(1) and (3).
\353\ Id.
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The ECB has the same powers to impose administrative monetary
penalties for breaches of directly applicable EU laws and
regulations.\354\ In addition, the ECB can instruct the national
competent authorities to open proceedings that may lead to the
imposition of non-monetary penalties for breaches of directly
applicable EU law and regulations, monetary and non-monetary penalties
for breaches of EU Member State laws implementing relevant directives,
and monetary and non-monetary penalties against natural persons for
breaches of relevant EU laws and regulations.\355\
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\354\ SSM Regulation, Article 18.
\355\ SSM Regulation, Article 9.
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Based on its review of the Application and its analysis of the
relevant laws and regulations, the Commission preliminarily found that
the competent authorities have the necessary powers to supervise,
investigate, and discipline EU nonbank SDs for compliance with the
applicable capital and financial reporting requirements, and to detect
and deter violations of, and ensure compliance with, the applicable
capital and financial reporting requirements in the EU.\356\
Furthermore, the Commission noted that it retains supervision,
examination, and enforcement authority over EU nonbank SDs that are
covered by the Comparability Order.\357\ Specifically, the Commission
noted that a non-U.S. nonbank SD that operates under substituted
compliance 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.\358\ The ability of the Commission to exercise
its enforcement authority over an EU nonbank SD is not conditioned upon
a finding by the competent authority of a violation of the EU Capital
Rules or EU Financial Reporting Rules. In addition, as each EU nonbank
SD is a member of NFA, the firm is subject to NFA membership rules,
examination authority, and disciplinary process.\359\
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\356\ 2023 Proposal at 41807.
\357\ 2023 Proposal at 41777.
\358\ Id. See also, 17 CFR 23.106(a)(4)(ii), which provides that
all nonbank SDs, regardless of whether they rely on a Comparability
Order or Comparability Determination, remain subject to the
Commission's examination and enforcement authority.
\359\ 7 U.S.C. 21(p).
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2. Comment Analysis and Final Determination
The Commission did not receive comments directly related to its
analysis set forth in the proposed Comparability Determination and
Comparability Order, or on its preliminary determination that the EU
competent authorities have the necessary powers to supervise,
investigate, and discipline EU nonbank SDs for non-compliance with the
applicable EU capital and financial reporting requirements. The
Commission has reviewed its preliminary Comparability Determination and
finds that the EU nonbank SDs are subject to a supervisory and
enforcement framework that is comparable to the Commission's
supervisory and enforcement framework for nonbank SDs. Specifically,
the supervisory program of the EU is comparable in purpose and effect
to 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.
As detailed in section II.F.1. above, EU nonbank SDs are subject to
direct supervision by a prudential regulator.\360\ For EU nonbank SDs
subject to ECB supervision as ``significant supervised entities,'' the
examination is conducted by JSTs comprised of staff of the ECB and
staff of the relevant national competent authority. For EU nonbank SDs
that are ``less significant supervised entities,'' the examination is
conducted by the relevant national competent authority.
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\360\ As noted above, the three current EU nonbank SDs qualify
as ``significant supervised entities'' subject to the direct
supervision of the ECB. The 2023 Proposal included an analysis of
the supervisory regime and powers of the ACPR, in its capacity as a
national competent authority with jurisdiction over Goldman Sachs
Paris. Although, the final Comparability Determination and
Comparability Order do not cover Goldman Sachs Paris, given the
change in regulatory regime applicable to the firm, the Commission
is retaining the description of the ACPR's supervisory regime and
powers in the final Comparability Determination to facilitate the
analysis of potential future applications for substituted compliance
that may involve entities subject to direct supervision by the ACPR.
See supra note 347.
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The Commission's assessment of the competent authorities'
supervisory programs included an evaluation of the authorities' ability
to supervise EU nonbank SDs based on applicable EU laws and
regulations, as discussed in section II.F.1. above. This evaluation
included an assessment of the financial reporting that EU nonbank SDs
are required to provide to the competent authority, the competent
authority's ability to conduct examinations, including onsite
inspections of EU nonbank SDs, and the competent authority's ability to
impose sanctions or take other action to address noncompliance with
applicable laws and regulations. Based upon its evaluation, the
Commission preliminarily determined that the relevant EU laws and
regulations are comparable in purpose and effect to the CEA and
Commission regulations, and that the competent authorities have
appropriate power to supervise EU nonbank SDs for compliance with
applicable EU Capital Rules and EU Financial Reporting Rules.
The Commission further determined, based on applicable EU laws and
regulations, that the competent authorities have the ability to
sanction EU nonbank SDs for failing to comply with regulatory
requirements. Specifically, as discussed in section II.F.1. above, the
competent authorities have the power to impose penalties and other
administrative measures,\361\ and may order EU nonbank SD to hold
increased capital in situations that raise supervisory concerns.\362\
The competent authority may also withdraw an EU nonbank SD's
authorization to operate if
[[Page 58605]]
the firm no longer meets its minimum capital requirements.\363\
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\361\ CRD, Articles 65, 67(1)(e) to (i) and 67(2); French MFC,
Article L.612-39 and L.612-40; German KWG, sections 56(6) and (7),
60b(1) and (3); SSM Regulation, Articles 9 and 18.
\362\ CRD, Article 104 and 104a; French MFC, Article L.511-41-3;
German KWG, section 6c(1); and SSM Regulation, Articles 9
(indicating that the ECB shall have all the powers and obligations
that national authorities have under EU law, unless otherwise
provided in the SSM Regulation, and that the ECB may require, by way
of instructions, that national competent authorities make use of
their powers, where the SSM Regulation does not confer such powers
to the ECB) and 16 (describing ECB's supervisory powers, including
the power to require entities subject to its authority to hold
capital in excess of the capital requirements imposed by relevant EU
law).
\363\ CRD Article 18; MiFID, Article 8c; French MFC, Articles
L.532-6 and L.612-40; SSM Regulation, Article 14.
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Furthermore, as discussed in this Comparability Determination, by
issuing a Comparability Order, the Commission is not ceding its
supervisory and enforcement authorities. EU 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. In
this regard, EU nonbank SDs covered by a Comparability Order are
required to directly provide the Commission with additional information
upon the Commission's request to facilitate the ongoing supervision of
such firms.\364\ 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.\365\ The ability to obtain
information directly from EU 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. EU
nonbank SDs covered by a Comparability Order remain subject to the
Commission's examination and enforcement authority with respect to all
elements of the CEA and Commission regulations, including capital and
financial reporting.\366\
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\364\ 17 CFR 23.105(h).
\365\ NFA section 17 Rule, available at NFA's website: https://www.nfa.futures.org/rulebooksql/index.aspx.
\366\ 17 CFR 23.106(a)(4)(ii).
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In addition, as detailed in section I.E. above, the conditions set
forth in the Comparability Order reflect the fact that the Commission
and NFA have a continuing obligation to conduct ongoing oversight,
including potential examination, of EU nonbank SDs to ensure compliance
with the Comparability Order and with relevant CEA requirements and
Commission regulations. Specifically, the conditions require EU 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 EU
nonbank SDs to maintain current books and records reflecting all
transactions,\367\ the conditions further require each EU nonbank SD
covered by the Comparability Order to file directly with the Commission
and NFA: (i) monthly and annual financial reports; \368\ (ii) notice
that the firm was informed by the competent authority that it is not in
compliance with the EU Capital Rules and/or EU Financial Reporting
Rules; \369\ (iii) notice that the firm has experienced a decrease of
30 percent or more in its excess regulatory capital as compared to the
last excess regulatory capital reported in filings with the Commission
and NFA; \370\ (iv) notice that the firm has breached its combined
capital buffer requirement and is required to file a capital
conservation plan with the relevant competent authority, indicating
that the firm has breached its combined capital buffer requirement;
\371\ (v) notice that the firm has failed to maintain regulatory
capital in the form of common equity tier 1 capital equal to or in
excess of the U.S. dollar equivalent of $20 million; \372\ and (vi)
notice that the firm has failed to maintain current financial books and
records.\373\ The Comparability Order further requires the Applicants
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 EU Capital Rules or EU
Financial Reporting Rules and proposed and final material changes to
the competent authority's supervisory authority or supervisory regime
over EU nonbank SDs.\374\ 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 EU nonbank SDs, will
allow the Commission and NFA to conduct ongoing oversight of such firms
to assess their overall safety and soundness.
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\367\ Condition 10 of the final Comparability Order.
\368\ Conditions 11 and 12 of the final Comparability Order.
\369\ Condition 16 of the final Comparability Order.
\370\ Condition 21 of the final Comparability Order.
\371\ Condition 18 of the final Comparability Order.
\372\ Condition 17 of the final Comparability Order.
\373\ Condition 22 of the final Comparability Order.
\374\ Condition 25 of the final Comparability Order.
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Although Commission Regulation 23.106 does not condition the
issuance of a Comparability Order on the Commission and the authority
or authorities in the relevant foreign jurisdiction having entered into
a formal MOU or similar arrangement, the Commission recognizes the
benefit that such an arrangement may provide.\375\ Specifically,
although Commission staff may engage directly with EU nonbank SDs to
obtain information regarding their financial and operational condition,
it may not be able to exchange and discuss such firm-specific
information \376\ with the relevant competent authority or reach shared
expectations on procedures for conducting on-site examinations in
France or Germany.\377\ Therefore, Commission staff will continue its
engagement with ECB staff to negotiate and finalize an MOU or similar
arrangement to facilitate the joint supervision of EU nonbank SDs.
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\375\ In an enforcement-related context, the Commission is a
signatory to the International Organization of Securities
Commission's Multilateral Memorandum of Understanding Concerning
Consultation and Cooperation and the Exchange of Information
(``MMOU'', revised May 2012). The French Autorit[eacute] des
March[eacute]s Financiers (``AMF'') (the French market conduct
regulatory authority with which the ACPR shares supervision
authority over French financial firms, including EU nonbank SDs
domiciled in France, as it regards business conduct matters), and
the German Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht (the
German financial sector regulatory authority whose staff
participates in the SSM's JSTs that conduct prudential supervision
of the two EU nonbank SDs domiciled in Germany) are signatories to
the MMOU.
\376\ The sharing of non-public information by CFTC staff would
require assurances related to the use and treatment of such
information in a manner consistent with section 8(e) of the CEA, 7
U.S.C. 12(e).
\377\ For French SDs, the Commission and the French AMF are
signatories to a supervisory MOU that covers information sharing and
examinations. Memorandum of Understanding Concerning Cooperation and
the Exchange of Information Related to the Supervision of Covered
Firms (October 26, 2023).
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III. Final Capital Comparability Determination and Comparability Order
A. Commission's Final Comparability Determination
Based on the EU Application and the Commission's review of
applicable EU laws and regulations, as well as the review of comments
submitted in response to the Commission's request for comment on the EU
Application and the proposed Comparability Determination and
Comparability Order, the Commission finds that the EU Capital Rules and
the EU Financial Reporting Rules, subject to the conditions set forth
in the Comparability Order, 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 EU Capital
Rules and CFTC Capital Rules and certain differences between the EU
Financial Reporting Rules and the CFTC Financial Reporting
[[Page 58606]]
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 rules sets are not inconsistent with
providing a substituted compliance framework for certain EU 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 EU Capital Rules to the
Bank-Based Approach contained within the CFTC Capital Rules. As noted
previously, the Applicants have not requested, and the Commission has
not performed, a comparison of the EU Capital Rules to the Commission's
NLA Approach or TNW Approach.
B. Order Providing Conditional Capital Comparability Determination for
Certain EU 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 the French
Republic (``France'') or the Federal Republic of Germany (``Germany''
and collectively with France the ``EU Member States'') 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 requirements of
the European Union (``EU'') 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 France or Germany (``EU
Member State'') and is domiciled in France or Germany, respectively
(``EU nonbank SD'');
(3) The EU nonbank SD is licensed as a ``credit institution'' or
``investment firm'' in an EU Member State;
(4) The EU nonbank SD is subject to and complies with: Regulation
(EU) No 575/2013 of the European Parliament and of the Council of 26
June 2013 on prudential requirements for credit institutions and
amending Regulation (EU) No 648/2012 (``Capital Requirements
Regulation'' or ``CRR'') and Directive 2013/36/EU of the European
Parliament and of the Council of 26 June 2013 on access to the activity
of credit institutions and the prudential supervision of credit
institutions, amending Directive 2002/87/EC and repealing Directives
2006/48/EC and 2006/49/EC (``Capital Requirements Directive'' or
``CRD'') as implemented in the national laws of France and Germany
(collectively, ``EU Capital Rules'');
(5) The EU nonbank SD satisfies at all times applicable capital
ratio and leverage ratio requirements set forth in Article 92 of CRR,
the capital conservation buffer requirements set forth in Article 129
of CRD, and applicable liquidity requirements set forth in Articles 412
and 413 of CRR, and otherwise complies with the requirements to
maintain a liquidity risk management program as required under Article
86 of CRD;
(6) The EU nonbank SD is subject to and complies with: Commission
Implementing Regulation (EU) 2021/451 of 17 December 2020 laying down
implementing technical standards for the application of Regulation (EU)
No 575/2013 of the European Parliament and of the Council with regard
to supervisory reporting of institutions and repealing Implementing
Regulation (EU) No 680/2014 (``CRR Reporting ITS''); Regulation (EU)
2015/534 of the European Central Bank of 17 March 2015 on reporting of
supervisory financial information (``ECB FINREP Regulation''); and
Directive 2013/34/EU of the European Parliament and of the Council of
26 June 2013 on the annual financial statements, consolidated financial
statements and related reports of certain types of undertakings,
amending Directive 2006/43/EC of the European Parliament and of the
Council and repealing Council Directives 78/660/EEC and 83/349/EEC
(``Accounting Directive'') as implemented in the national laws of
France and Germany (collectively and together with CRR and CRD as
implemented in the national laws of France and Germany, ``EU Financial
Reporting Rules'');
(7) The EU nonbank SD is subject to prudential supervision by an EU
Member State supervisory authority with jurisdiction to enforce the
requirements set forth by the EU Capital Rules and the EU Financial
Reporting Rules or the European Central Bank (``ECB''), as applicable
(``competent authority'');
(8) The EU nonbank SD maintains at all times an amount of
regulatory capital in the form of common equity tier 1 capital as
defined in Article 26 of CRR, equal to or in excess of the equivalent
of $20 million in United States dollars (``U.S. dollars''). The EU
nonbank SD shall use a commercially reasonable and observable euro/U.S.
dollar exchange rate to convert the value of the euro-denominated
common equity tier 1 capital to U.S. dollars;
(9) The EU nonbank SD has filed with the Commission a notice
stating its intention to comply with the EU Capital Rules and the EU
Financial Reporting Rules in lieu of the CFTC Capital Rules and the
CFTC Financial Reporting Rules. The notice of intent must include the
EU nonbank SD's representation that the firm is organized and domiciled
in an EU Member State, is a licensed investment firm or a credit
institution in an EU Member State, and is subject to, and complies
with, the EU Capital Rules and EU Financial Reporting Rules. An EU
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 EU nonbank SD may comply with the
applicable EU Capital Rules and EU Financial Reporting Rules in lieu of
the CFTC Capital Rules and CFTC 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];
(10) The EU nonbank SD prepares and keeps current ledgers and other
similar records in accordance with accounting principles permitted by
the relevant competent authority;
(11) The EU nonbank SD files with the Commission and with the
National Futures Association (``NFA'') a copy of templates 1.1 (Balance
Sheet Statement: assets), 1.2 (Balance Sheet Statement: liabilities),
1.3 (Balance Sheet Statement: equity), 2 (Statement of profit or loss),
and 10 (Derivatives--Trading and economic hedges) of the financial
reports (``FINREP'') that EU nonbank SDs are required to submit
pursuant to CRR Reporting ITS, Annex III or IV, or the ECB FINREP
Regulation, as applicable, and templates 1 (Own Funds), 2 (Own Funds
Requirements)
[[Page 58607]]
and 3 (Capital Ratios) of the common reports (``COREP'') that EU
nonbank SDs are required to submit pursuant to CRR Reporting ITS, Annex
I. The FINREP and COREP templates must be translated into the English
language and balances must be converted to U.S. dollars, using a
commercially reasonable and observable euro/U.S. dollar spot rate as of
the date of the report. The FINREP and COREP templates must be filed
with the Commission and NFA within 35 calendar days of the end of each
month. EU nonbank SDs that are registered as security-based swap
dealers (``SBSDs'') with the U.S. Securities and Exchange Commission
(``SEC'') must comply with this condition by filing with the Commission
and NFA a copy of Form X-17A-5 (``FOCUS Report'') that the EU nonbank
SD is required to file with the SEC, or its designee, pursuant to an
order granting conditional substituted compliance with respect to
Securities Exchange Act of 1934 Rule 18a-7. The copy of the FOCUS
Report must be filed with the Commission and NFA within 35 calendar
days after the end of each month in the manner, format and conditions
specified by the SEC in 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);
(12) The EU nonbank SD files with the Commission and with NFA a
copy of its annual audited financial statements and management report
(together, ``annual audited financial report'') that are required to be
prepared and published pursuant to Articles 4, 19, 30 and 34 of the
Accounting Directive as implemented in the national laws of France and
Germany. The annual audited financial report must be translated into
the English language and balances may be reported in euro. The annual
audited financial report must be filed with the Commission and NFA on
the earliest of the date the report is filed with the competent
authority, the date the report is published, or the date the report is
required to be filed with the competent authority or the date the
report is required to be published pursuant to the EU Financial
Reporting Rules.
(13) The EU 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 euro/U.S.
dollar spot rate as of the date of the report, and must be filed with
the Commission and NFA within 35 calendar days of the end of each
month. EU nonbank SDs that are registered as SBSDs must comply with
this condition by filing with the Commission and NFA a copy of the
FOCUS Report that they file with the SEC or its designee as set forth
in Condition 11;
(14) The EU nonbank SD submits with each set of FINREP and COREP
templates, annual audited financial report, and Schedule 1 of appendix
B to subpart E of part 23 of the Commission's regulations a statement
by an authorized representative or representatives of the EU nonbank SD
that to the best knowledge and belief of the representative or
representatives the information contained in the reports, including the
translation of the reports into English and conversion of balances in
the reports to U.S. dollars, is true and correct. The statement must be
prepared in the English language;
(15) The EU nonbank SD files a margin report containing the
information specified in Commission Regulation 23.105(m) (17 CFR
23.105(m)) (``Margin Report'') with the Commission and with NFA within
35 calendar days of the end of each month. The Margin Report must be in
the English language with balances reported in U.S. dollars, using a
commercially reasonable and observable euro/U.S. dollar spot rate as of
the date of the report;
(16) The EU nonbank SD files a notice with the Commission and NFA
within 24 hours of being informed by the competent authority that the
firm is not in compliance with any component of the EU Capital Rules or
EU Financial Reporting Rules. The notice must be prepared in the
English language;
(17) The EU nonbank SD files a notice within 24 hours with the
Commission and NFA if it fails to maintain regulatory capital in the
form of common equity tier 1 capital as defined in Article 26 of CRR,
equal to or in excess of the U.S. dollar equivalent of $20 million
using a commercially reasonable and observable euro/U.S. dollar
exchange rate. The notice must be prepared in the English language;
(18) The EU nonbank SD provides the Commission and NFA with notice
within 24 hours of breaching its combined capital buffer requirement
and being required to file a capital conservation plan with the
relevant competent authority pursuant to the relevant EU Member State's
provisions implementing Article 143 of CRD. The notice filed with the
Commission and NFA must be prepared in the English language;
(19) The EU nonbank SD provides the Commission and NFA with notice
within 24 hours if it is required by its competent authority to
maintain additional capital or additional liquidity requirements, or to
restrict its business operations, or to comply with other requirements
pursuant to Articles 102(1) and 104(1) of CRD as implemented in the
national laws of France or to Article 16 of Council Regulation (EU) No
1024/2013 of 15 October 2013 conferring specific tasks on the European
Central Bank concerning policies relating to the prudential supervision
of credit institutions. The notice filed with the Commission and NFA
must be prepared in the English language;
(20) The EU nonbank SD files a notice with the Commission and NFA
within 24 hours if it fails to maintain its minimum requirement for own
funds and eligible liabilities (``MREL''), if such requirement is
applicable to the EU nonbank SD pursuant to Directive 2014/59/EU of the
European Parliament and of the Council of 15 May 2014 establishing a
framework for the recovery and resolution of credit institutions and
investment firms and amending Council Directive 82/891/EEC, and
Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC,
2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/
2010 and (EU) No 648/2012, of the European Parliament and of the
Council as implemented in the national laws of France and Germany. The
notice filed with the Commission and NFA must be prepared in the
English language;
(21) The EU nonbank SD files a notice with the Commission and NFA
if it experiences a 30 percent or more decrease in its excess
regulatory capital as compared to that last reported in the financial
information filed pursuant to Condition 11. The notice must be prepared
in the English language and filed within two business days of the firm
experiencing the 30 percent or more decrease in excess regulatory
capital;
(22) The EU 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. The notice must be prepared in the English language;
(23) The EU 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
[[Page 58608]]
required initial margin or pay required variation margin to the EU
nonbank SD on uncleared swap and non-cleared security-based swap
positions that, in the aggregate, exceeds 25 percent of the EU nonbank
SD's minimum capital requirement; (ii) counterparties fail to post
required initial margin or pay required variation margin to the EU
nonbank SD for uncleared swap and non-cleared security-based swap
positions that, in the aggregate, exceeds 50 percent of the EU nonbank
SD's minimum capital requirement; (iii) the EU 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 EU nonbank
SD's minimum capital requirement; or (iv) the EU 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 EU nonbank
SD's minimum capital requirement. For purposes of the calculation, the
EU nonbank SD's minimum capital requirement is the core capital
requirement under the EU Capital Rules, excluding capital buffers. The
notice must be prepared in the English language;
(24) The EU 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 relevant competent authority. 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 EU nonbank SD's change in fiscal year-end;
(25) The EU nonbank SD or an entity acting on its behalf notifies
the Commission of any material changes to the information submitted in
the application for Comparability Determination, including, but not
limited to, proposed and final material changes to the EU Capital Rules
or EU Financial Reporting Rules and proposed and final material changes
to the ECB or the relevant EU Member State authority's supervisory
authority or supervisory regime over EU nonbank SDs. The notice must be
prepared in the English language; and
(26) Unless otherwise noted in the conditions above, the reports,
notices, and other statements required to be filed by the EU 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 15, 21, and 23, 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.
Christopher Kirkpatrick,
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 Domiciled in the French Republic and
Federal Republic of Germany and Subject to Regulation in the European
Union--Commission Voting Summary, Chairman's Statement, and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Support 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.
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\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.
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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 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
[[Page 58609]]
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.
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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.
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\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).
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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 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\
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\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.
[[Page 58610]]
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--Statement of Commissioner Caroline D. Pham
I am pleased to support the order granting conditional
substituted compliance in connection with certain capital and
financial reporting requirements applicable to nonbank swap dealers
domiciled in the French Republic and Federal Republic of Germany and
subject to regulation in the European Union (EU) (EU Final Order).
The EU Final Order, on balance, reflects an appropriate approach by
the CFTC to collaboration with non-U.S. regulators that is
consistent with IOSCO's 2020 report on Good Practices on Processes
for Deference.\1\
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\1\ IOSCO Report, ``Good Practices on Processes for Deference''
(June 2020), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD659.pdf.
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I would like to thank Amanda Olear, Thomas Smith, Rafael
Martinez, Liliya Bozhanova, Joo Hong, and Justin McPhee from the
CFTC's Market Participants Division for their truly hard work on the
EU Final Order and for addressing my concerns regarding the
conditions for notice requirements.\2\ I also thank the European
Central Bank (ECB) and Autorit[eacute] de contr[ocirc]le prudentiel
et de resolution (ACPR) for their assistance and support.
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\2\ Statement of Commissioner Caroline D. Pham in Support of
Proposed Order and Request for Comment on Comparability
Determination for EU Nonbank Swap Dealer Capital and Financial
Reporting Requirements (June 7, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement060723b.
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The CFTC's capital comparability determinations are the result
of tireless efforts spanning over a decade since the global
financial crisis. I commend the staff for working together with our
regulatory counterparts around the world to promote regulatory
cohesion and financial stability, and mitigate market fragmentation
and systemic risk.
[FR Doc. 2024-15095 Filed 7-17-24; 8:45 am]
BILLING CODE 6351-01-P