2024-10342
[Federal Register Volume 89, Number 101 (Thursday, May 23, 2024)]
[Rules and Regulations]
[Pages 45569-45594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10342]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AF33
Capital and Financial Reporting Requirements for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting amendments to certain of the Commission's
regulations that impose minimum capital requirements and financial
reporting obligations on swap dealers (``SDs'') and major swap
participants (``MSPs''). The Commission is adopting amendments
consistent with previously issued staff letters addressing the Tangible
Net Worth Capital Approach for calculating capital under the applicable
Commission regulation and alternative financial reporting by SDs
subject to the capital requirements of a prudential regulator. The
Commission is also adopting amendments to certain of its regulations
applicable to SDs, in areas including the required timing of certain
notifications, the process for approval of subordinated debt for
capital, and the revision of financial reporting forms to conform to
the rules. The amendments are intended to facilitate SDs' compliance
with the Commission's financial reporting obligations and minimum
capital requirements.
DATES:
Effective date: This rule is effective June 24, 2024.
Compliance date: September 30, 2024. The compliance date applies to
all financial reports with an ``as of'' reporting date of September 30,
2024 or later, to allow for sufficient time to effectuate amendments
discussed herein.
FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas Smith, Deputy Director, 202-418-5495,
[email protected]; Joshua Beale, Associate Director, 202-418-5446,
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472,
[email protected]; Maria Aguilar-Rocha, Special Counsel, 202-418-5840,
[email protected]; Andrew Pai, Attorney-Advisor, 646-746-9893,
[email protected]; Christine McKeveny, Attorney-Advisor, 646-746-3923,
[email protected]; Market Participants Division; Lihong McPhail,
Research Economist, 202-418-5722, [email protected], Office of the
Chief Economist; Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Amendments to Commission Regulations
A. CFTC Staff Letters and Other Amendments
1. Amendments to Tangible Net Worth Capital Approach--CFTC Staff
Letter No. 21-15
2. Amendments to Bank SD Financial Reporting Requirements--CFTC
Staff Letter No. 21-18
3. Amendments Regarding Financial Reporting and Other
Requirements of SDs
a. Amendments to Schedules in Financial Reporting
b. Changes to Public Disclosure Requirements
c. Changes to Form 1-FR-FCM
d. Additional Cross References To Clarify Applicable Market and
Credit Risk Charges
B. Other Amendments
1. Notice of Substantial Reduction in Capital
2. Subordinated Debt Approval
3. Statement of No Material Difference
III. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
1. Background
2. OMB Collection 3038-0024--Regulations and Forms Pertaining to
Financial Integrity of the Market Place; Margin Requirements for
SDs/MSPs
C. Section 15(b) Antitrust Laws
IV. Cost-Benefit Considerations
A. Background
B. CFTC Staff Letters and Other Amendments
1. Benefits
2. Costs
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of Swap
Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
C. Other Amendments
1. Benefits
2. Costs
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of Swaps
Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
I. Background
Section 4s(e) of the Commodity Exchange Act (``CEA'' or the
``Act'') requires the Commission to adopt minimum capital and margin
requirements for SDs and MSPs.\1\ On September 15, 2020, the Commission
issued final rules adopting such requirements under part 23 of the
Commission's regulations (the ``Final Rule'' or the ``Final
Rules'').\2\ The Final Rules became effective on November 16, 2020,
with an extended compliance date of October 6, 2021 (``2021 Compliance
Date'').\3\ The Final Rules imposed capital requirements on SDs and
MSPs that are not subject to a prudential regulator (``nonbank SDs''
and ``nonbank MSPs,'' respectively).\4\ The Final Rules included a
detailed capital model application process whereby eligible nonbank SDs
and nonbank MSPs could apply to the Commission, or a registered futures
association (``RFA'') of which they are a member, for approval.\5\ The
Final Rules also adopted a capital comparability determination process
for certain eligible foreign domiciled nonbank SDs and nonbank MSPs to
seek substituted compliance for the Commission's capital and financial
reporting requirements.\6\ Further, the Final Rules adopted detailed
financial reporting, recordkeeping and notification requirements,
including limited financial reporting requirements for SDs and MSPs
subject to the capital requirements of a prudential regulator (``bank
SDs'' and ``bank MSPs,''
[[Page 45570]]
respectively).\7\ The Final Rules also included amendments to existing
capital rules for futures commission merchants (``FCMs'') to provide
explicit additional capital requirements for proprietary positions in
swaps and security-based swaps that are not cleared by a clearing
organization.\8\ Finally, the Final Rules required that financial
reports and notices be filed with both the Commission and the NFA \9\
and explicitly recognized NFA's ability to adopt standardized forms and
processes to carry out the Commission's financial reporting and
notification requirements for SDs.\10\
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\1\ 7 U.S.C. 6s(e).
\2\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020) (the ``Final Rule'' or
the ``Final Rules''). Commission regulations referred to herein are
found at 17 CFR chapter I. Commission regulations are accessible on
the Commission's website at https://www.cftc.gov.
\3\ Id.
\4\ Id. The term ``prudential regulator'' is defined as the
Board of Governors of the Federal Reserve System (``Federal Reserve
Board''); the Office of the Comptroller of the Currency (``OCC'');
the Federal Deposit Insurance Corporation (``FDIC''); the Farm
Credit Administration; and the Federal Housing Finance Agency.
Section 1a(39) of the CEA, 7 U.S.C. 1a(39).
\5\ See generally Final Rules, 85 FR 57467. The three methods
discussed in detail in the Final Rules include the Bank-Based
Capital Approach, the Tangible Net Worth Capital Approach, and the
Net Liquid Assets Capital Approach (as defined therein). Each method
permits the use of models upon approval of the Commission or an RFA
and determines the frequency and type of financial reporting
information to be provided to the Commission by each nonbank SD and
nonbank MSP.
\6\ 17 CFR 23.106.
\7\ Final Rules, 85 FR 57463. Bank SDs, which are not subject to
the capital requirements of the Commission, are required to provide
the Commission and National Futures Association (``NFA'') with
limited financial information regarding the capital and swap
positions of the firms. 17 CFR 23.105(p).
\8\ Id.
\9\ Id. at 57515.
\10\ Id. at 57518.
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In the period leading up to the 2021 Compliance Date, Commission,
NFA, and SEC staff worked together to develop a process for collecting
financial reports and responding to market participant inquiries
regarding compliance with financial reporting and notice requirements.
The Commission also approved NFA's capital model requirements and
review process,\11\ and NFA adopted new Financial Requirements Section
18,\12\ which included capital rules largely modeled after the
Commission's Final Rules, and published new standardized financial
reporting forms FR-CSE-NLA and FR-CSE-BHC for use by nonbank SDs that
are not also registered with the SEC.\13\ Commission staff also issued
eight no-action and interpretive letters in response to inquiries from
market participants regarding compliance with various capital and
financial reporting obligations under the Final Rules.\14\
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\11\ CFTC Staff Letter No. 21-03, Jan. 12, 2021, available at
https://www.cftc.gov/csl/21-03/download.
\12\ NFA section 18.
\13\ NFA submitted these rules for Commission review under
section 17(j) of the CEA, 7 U.S.C. 21(j), on November 22, 2021, and
the rules became effective on December 21, 2021. NFA Notice to
Members I-21-45, available at https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5437.
\14\ CFTC Staff Letter No. 21-15, June 29, 2021, available at
https://www.cftc.gov/csl/21-15/download; CFTC Staff Letter No. 21-
18, Aug. 31, 2021, available at https://www.cftc.gov/csl/21-18/download; CFTC Staff Letter No. 21-20, Sept. 30, 2021, available at
https://www.cftc.gov/csl/21-20/download; CFTC Staff Letter No. 21-
21, Sept. 30, 2021, available at https://www.cftc.gov/csl/21-21/download; CFTC Staff Letter No. 21-22, Sept. 30, 2021, available at
https://www.cftc.gov/csl/21-22/download; CFTC Staff Letter No. 21-
23, Sept. 30, 2021, available at https://www.cftc.gov/csl/21-23/download; CFTC Staff Letter No. 22-01, Jan. 5, 2022, available at
https://www.cftc.gov/csl/22-01/download; CFTC Staff Letter No. 22-
02, Jan. 5, 2022, available at https://www.cftc.gov/csl/22-02/download.
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On December 15, 2023, the Commission proposed several amendments to
the capital and financial reporting requirements of SDs and MSPs that
are consistent with parts of the staff positions taken in two of the
letters issued by Commission staff prior to the 2021 Compliance Date:
CFTC Staff Letters No. 21-15 and 21-18 (``CFTC Staff Letters''),\15\
and that would make other technical and clarifying changes necessary to
effectuate the Final Rules' purpose (the ``Proposal'').\16\ CFTC Staff
Letter No. 21-15 \17\ provides the staff's interpretation of the
Tangible Net Worth Capital Approach for calculating capital under
Commission regulation 23.101.\18\ CFTC Staff Letter No. 21-18 (further
extended by CFTC Staff Letter No. 23-11) sets out staff's time-limited,
no-action position regarding alternative financial reporting by SDs
subject to the capital requirements of a prudential regulator.\19\ The
technical and clarifying amendments proposed by the Commission included
revisions to the required timing of certain notifications;
modifications to the process for approval of subordinated debt for
capital; and changes to financial reporting forms to conform to the
rules.\20\ The purpose of the amendments is to facilitate compliance by
SDs and MSPs with the Commission's financial reporting and applicable
minimum capital obligations.
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\15\ CFTC Staff Letter No. 21-18 was time-limited and set to
expire on October 6, 2023. To permit time for the Commission to
issue a proposed rulemaking and address any comments received, the
Market Participants Division extended the expiration of the letter
to the earlier of October 6, 2025 or the adoption of any revised
financial reporting requirements for bank SDs under regulation
23.105(p). CFTC Staff Letter No. 23-11, July 10, 2023, available at
https://www.cftc.gov/csl/23-11/download.
\16\ Capital and Financial Reporting Requirements for Swap
Dealers and Major Swap Participants, 89 FR 2554 (Jan. 16, 2024)
(designated above as ``the Proposal'').
\17\ CFTC Staff Letter No. 21-15.
\18\ 17 CFR 23.101.
\19\ CFTC Staff Letter No. 21-18; CFTC Staff Letter No. 23-11.
\20\ See the Proposal, 89 FR 2561-2562.
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The comment period for the Proposal ended on February 13, 2024.\21\
The Commission received four substantive comment letters.\22\ In
general, all of these letters expressed general support for the
proposed amendments.\23\ One commenter stated that it strongly supports
the Commission's proposed amendments, as they are intended to provide
technical and other clarifying changes necessary to effectuate the
Final Rule's purpose.\24\ Another commenter stated that it applauds the
Commission's efforts to provide regulatory certainty and consistency
through the codification of the CFTC Staff Letters and amendments to
the Tangible Net Worth Capital Approach for nonbank SDs.\25\
Specifically, as to the amendments consistent with parts of CFTC Staff
Letters No. 21-15 and 21-18, discussed in further detail below, one
commenter stated that such amendments enhance the transparency and
clarity of the SD capital regime and provide legal certainty and
guidance for SDs, while improving transactional efficiency by avoiding
the need for one-off staff letters.\26\ This commenter further stated
that these amendments also facilitate the implementation and
enforcement of the capital and financial reporting requirements and
promote compliance and cooperation.\27\ After considering the comments,
the Commission is adopting the Proposal subject to certain changes as
noted below.\28\
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\21\ Id. at 2555.
\22\ Letter from Stephanie Webster, Institute of International
Bankers, Chris Young, International Swaps and Derivatives
Association, and Kyle Brandon, Securities Industry and Financial
Markets Association (Feb. 13, 2024) (``IIB/ISDA/SIFMA Letter'');
Letter from Matthew J. Picardi, Shell Energy North America (U.S.)
L.P., Shell Trading Risk Management, LLC, and their affiliates (Feb.
13, 2024) (``Shell Letter''); Letter from Chris Barnard (Feb. 10,
2024) (``Barnard Letter''); and Letter from Michael Ravnitzky (Jan.
16, 2024) (``Ravnitzky Letter'').
\23\ See id.
\24\ IIB/ISDA/SIFMA Letter at 1-2.
\25\ Shell Letter at 2.
\26\ Ravnitzky Letter at 1.
\27\ Id.
\28\ Note that as of the effective date of this rulemaking, CFTC
Staff Letters No. 21-15 and 21-18 are hereby withdrawn and no longer
in effect. These letters are superseded by the rules being adopted
in this release.
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II. Amendments to Commission Regulations
A. CFTC Staff Letters and Other Amendments
1. Amendments to Tangible Net Worth Capital Approach--CFTC Staff Letter
No. 21-15
The Commission proposed amendments to certain of its part 23
regulations consistent with parts of interpretive CFTC Staff Letter No.
21-15 addressing the Tangible Net Worth Capital Approach for
calculating capital under Commission regulation 23.101.\29\ The
Commission's Market Participants Division (the ``Division'') issued
CFTC Staff Letter No. 21-15 on June 29, 2021, in response to concerns
raised by
[[Page 45571]]
nonbank SDs intending to elect the Tangible Net Worth Capital Approach
for calculating capital under Commission regulation 23.101 \30\
regarding the application of the eligibility test to different
corporate structures.\31\ In CFTC Staff Letter No. 21-15, the Division
issued its interpretation that the asset and revenue tests for
``predominantly engaged in non-financial activities'' could be assessed
at the nonbank SD's entity level or ultimate parent level and, further,
such tests could be computed under International Financial Reporting
Standards issued by the International Accounting Standards Board
(``IFRS'') in lieu of generally accepted accounting principles as
adopted in the United States (``U.S. GAAP''), if the entity was
permitted to use IFRS for financial reporting.\32\ The Division also
stated its position that supplemental position reporting for nonbank
SDs meeting these qualifications may be filed on a quarterly basis
along with the firm's financial reports, as opposed to monthly.\33\
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\29\ 17 CFR 23.101.
\30\ 17 CFR 23.101.
\31\ CFTC Staff Letter No. 21-15.
\32\ Id. at 3-6.
\33\ Id. at 5-6. Compare 17 CFR 23.105(d) with 17 CFR 23.105(l),
as the former includes monthly or quarterly periodicity as opposed
to the latter only referring to monthly.
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To ensure that the Tangible Net Worth Capital Approach may be
utilized by eligible nonbank SDs as intended in the Final Rules, the
Commission proposed amendments to definitions in Commission regulation
23.100 \34\ and in the periodicity of Commission regulation 23.105(l)
\35\ in the Proposal,\36\ which are consistent with the terms of CFTC
Staff Letter No. 21-15. Specifically, the Commission proposed to amend
the definitions in Commission regulation 23.100 of the terms
``predominantly engaged in non-financial activities'' and ``tangible
net worth'' to explicitly permit the satisfaction of both the revenue
and asset-based tests at the consolidated parent level of the nonbank
SD and to clarify that ``tangible net worth'' may be determined under
either U.S. GAAP or IFRS accounting standards.\37\ The Proposal
clarified that the tests may be satisfied either at the level of the
nonbank SD or at the level of the nonbank SD's consolidated parent
rather than seeming to exclude the consolidated parent of the nonbank
SD, as addressed in CFTC Staff Letter No. 21-15 in response to
questions raised by industry.\38\ The amendment to the definition of
``tangible net worth'' in Commission regulation 23.100 clarifies that
``tangible net worth'' may be determined under either applicable
accounting standard, U.S. GAAP or IFRS.\39\ This amendment aligns and
corrects the permitted use of IFRS in determining eligibility for the
approach with the standard permitted and utilized by the nonbank SD in
preparation of its financial statements.\40\ As discussed in the Final
Rule, the Commission is generally comfortable with both U.S. GAAP and
IFRS accounting standards in this context, as both of these accounting
standards are designed to provide a complete, consistent, and
comparable view of the financial condition of a company, especially as
both standards continue to move toward greater convergence.\41\
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\34\ 17 CFR 23.100.
\35\ 17 CFR 23.105(l).
\36\ The Proposal, 89 FR 2556-2557.
\37\ Id. See 17 CFR 23.100 for the definition of the term
``predominantly engaged in non-financial activities.''
\38\ Id.
\39\ Id. See 17 CFR 23.100 for the definition of the term
``tangible net worth.''
\40\ Id. Nonbank SDs electing the Tangible Net Worth Capital
Approach are currently permitted to use IFRS for their financial
reporting obligations under Commission regulation 23.105 (17 CFR
23.105(d) and (e)). IFRS is also permitted as an acceptable
reporting standard for all nonbank SDs provided that they otherwise
do not prepare financial statements in accordance with U.S. GAAP.
\41\ Final Rules, 85 FR 57514.
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The Commission received comments generally supporting the proposed
amendments to the definitions of the terms ``predominantly engaged in
non-financial activities'' and ``tangible net worth'' in Commission
regulation 23.100.\42\ One commenter stated that the proposed
amendments would recognize the financial strength and support of the
parent company for the nonbank SD and align the capital requirement
with the accounting standards and practices of the parent company.\43\
This commenter further stated that the proposed amendments would reduce
regulatory burden and costs for some nonbank SDs, especially those that
are predominantly engaged in non-financial activities and have a high
level of tangible net worth.\44\ Another commenter stated that the
proposed amendments are crucial to clarify and simplify the
interpretation and implementation of the ``tangible net worth'' test
for eligible nonbank SDs.\45\ The Commission agrees with the commenters
and believes, as discussed above, that the proposed amendments will
confirm its intention to permit consideration of the parent company in
the assessment of predominantly engaged in non-financial activities
under the Final Rules. This approach, as identified in the Final Rules,
permits the eligibility test to be applied at the consolidated entity
level, which does not penalize a non-financial entity from establishing
separate SD subsidiaries to provide financial services for the
corporate group, including engaging in swaps on behalf of the corporate
group.\46\ Further, the proposed amendment to allow nonbank SDs to
utilize the same accounting standard permitted for their financial
reporting comports with the purpose of the eligibility test. As such,
the Commission is adopting the amendments to the definitions as
proposed.
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\42\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
\43\ Ravnitzky Letter at 1.
\44\ Id.
\45\ Barnard Letter at 2.
\46\ Final Rules, 85 FR 57502.
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The Commission also proposed to amend Commission regulation
23.105(l) \47\ to require that each nonbank SD and nonbank MSP file
Appendix B to subpart E of part 23 (``Appendix B''),\48\ which contains
aggregate securities, commodities, and swap position information and
certain credit exposure information, with the Commission and NFA on a
quarterly or monthly basis in keeping with their routine financial
reporting, rather than a monthly basis.\49\ This amendment would align
that filing with the periodicity permitted as part of the nonbank SD's
or nonbank MSP's routine financial report filings required by
Commission regulation 23.105(d) \50\ and would clarify that the
information provided should be consistent with those financial report
filings.\51\
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\47\ 17 CFR 23.105(l).
\48\ Appendix B to subpart E of part 23.
\49\ The Proposal, 89 FR 2557. The Commission intended the swap
position and credit information in Commission regulation 23.105(l)
(17 CFR 23.105(l)) and Appendix B to be filed together with other
financial information required by Commission regulation 23.105(d)
(17 CFR 23.105(d)) as this information is supplementary to the
financial statements as a whole and completes the routine financial
reporting package. This approach is also consistent with how dually-
registered SDs with the SEC complete the SEC's Form X-17A-5 (``FOCUS
Report'') Part II. SEC Form X-17A-5 FOCUS Report Part II, available
at https://www.sec.gov/manage-filings/forms-index/form-x-17a-5-2.
\50\ 17 CFR 23.105(d). Commission regulation 23.105(d) permits
nonbank SDs electing the Tangible Net Worth Capital Approach to file
required financial reports quarterly, whereas nonbank SDs electing
either the Bank Based Capital Approach or the Net Liquid Asset
Capital Approach are required to file such information on a monthly
basis.
\51\ The Proposal, 89 FR 2557. The Commission previously
determined that nonbank SDs electing the Tangible Net Worth Capital
Approach may engage in a wide variety of businesses and not be
otherwise subject to any financial reporting. Thus, the Commission
determined in the Final Rule that such SDs need only file financial
reports quarterly and not monthly and may take a longer period of
time to file audited financial reports. Final Rules, 85 FR 57514-
57515.
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[[Page 45572]]
The Commission requested comment on the proposed amendment to
Commission regulation 23.105(l) \52\ to require that each nonbank SD
and nonbank MSP file Appendix B with the Commission and NFA on the same
quarterly or monthly basis, as applicable, that the firm files its
financial information pursuant to Commission regulation 23.105(d).\53\
In response, the Commission received comments generally supporting the
amendment.\54\ The Commission believes, as discussed above, that this
amendment will align the filing of Appendix B with the same periodicity
of nonbank SD financial reporting. As such, the Commission is adopting
the amendment as proposed.
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\52\ 17 CFR 23.105(l).
\53\ The Proposal, 89 FR 2557-2558.
\54\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
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2. Amendments to Bank SD Financial Reporting Requirements--CFTC Staff
Letter No. 21-18
The Commission proposed amendments to certain of its part 23
regulations congruous with parts of CFTC Staff Letter No. 21-18 (and
its successor, CFTC Staff Letter No. 23-11) regarding alternative
financial reporting by SDs subject to the capital requirements of a
prudential regulator.\55\ The Division issued CFTC Staff Letter No. 21-
18 \56\ on August 31, 2021, in response to concerns by several bank SDs
\57\ regarding compliance with financial reporting requirements under
Commission regulation 23.105(p).\58\ Bank SDs asserted that the
financial reporting filing deadline adopted by the Commission preceded
the financial reporting filing deadline imposed by prudential
regulators, which conflicted with the Commission's intent in the Final
Rules that the reporting requirements of bank SDs and bank MSPs be
consistent with the SEC requirements for bank security-based swap
dealers (``SBSDs'') and bank major security-based swap participants
(``MSBSPs''), to maintain equivalent financial reporting requirements
for dually-registered firms.\59\ Several bank SDs did not register as
SBSDs, and therefore are subject only to limited financial reporting
under the Commission's rules.\60\ In certain instances, the financial
reporting required by the prudential regulators for these bank SDs
permit a longer period of time and utilize a different format than that
adopted by the Commission. Some of these bank SDs are not required to
file financial reports with a prudential regulator if the bank SDs are
domiciled outside the United States and may instead be subject only to
financial reporting of a home country supervisor. Moreover, although
Appendix C to subpart E of part 23 (``Appendix C'') \61\ was intended
to capture line items on existing Federal Financial Institutions
Examination Council (``FFEIC'') \62\ Form 031 (``Call Report'')
provided to prudential regulators, line items on specific schedules
within the Call Report had either been removed, added, or otherwise
changed since the Commission adopted Appendix C.\63\
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\55\ The Proposal, 89 FR 2557-2558.
\56\ CFTC Staff Letter Staff No. 21-18.
\57\ Letter from Steven Kennedy, Institute of International
Bankers and Kyle Brandon, Securities Industry and Financial Markets
Association (Aug. 20, 2021) (the ``ISDA-SIFMA Joint Request
Letter'').
\58\ 17 CFR 23.105(p).
\59\ Commission regulation 23.105(p) requires bank SDs to report
financial information within 30 calendar days of quarter-end. 17 CFR
23.105(p)(2). The Instructions for Preparation of Consolidated
Reports of Condition and Income, Schedule RC-D, available at https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_202303_i.pdf,
however, permit a bank with more than one foreign office to submit
its FFIEC 031 forms within 35 calendar days following quarter-end.
Additionally, the SEC extended the filing deadline of FOCUS Report
Part IIC for non-U.S. SBSDs subject to a prudential regulator from
30 to 35 days following quarter end, noting that ``U.S. prudential
regulators permit certain U.S. banks to file their financial reports
35 days after the quarter end.'' 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 Determinations With Respect to Rule 18a-7, 86
FR 59208 (Oct. 26, 2021) at 59210.
\60\ 17 CFR 23.105(p).
\61\ Appendix C to subpart E of part 23.
\62\ Federal Financial Institutions Examination Council,
Consolidated Reports of Condition and Income for a Bank with
Domestic and Foreign Offices--FFIEC 031, available at https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_202203_f.pdf.
\63\ ISDA-SIFMA Joint Request Letter at 3-4.
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CFTC Staff Letter No. 21-18, as extended under CFTC Staff Letter
No. 23-11,\64\ articulates a position by the Division that it would not
recommend that the Commission engage in an enforcement action against
bank SDs providing the Commission with copies of financial reports that
are required by, and filed with, their respective prudential or home
country regulators, in lieu of complying with the substantive
requirements of Appendix C, subject to certain conditions.\65\ CFTC
Staff Letter No. 21-18 also contains a no-action position with respect
to bank SDs filing comparable Call Report schedules with the Commission
in lieu of the schedules contained in Appendix C, provided that the
comparable schedules are filed with the Commission within the timeframe
permitted by the prudential regulators for filing the schedules with
the applicable home country regulator.\66\ CFTC Staff Letter No. 21-18
further provides that the Division would not recommend enforcement
action against certain foreign-domiciled bank SDs (``Non-U.S. bank
SDs'') that do not provide financial reports to a prudential regulator
if they file with the Commission balance sheet and statement of
regulatory capital information in accordance with applicable home
country requirements in lieu of the schedules contained in Appendix C,
so long as the financial information is in English, with balances
converted to U.S. dollars, and the financial information is filed
within 15 days of the earlier of the date such financial information is
filed or required to be filed with the Non-U.S. bank SDs' applicable
home country regulator.\67\ Finally, the Division stated that it would
not recommend enforcement action against dually-registered Non-U.S.
bank SDs filing comparable SEC-required financial reports and schedules
with the Commission in lieu of the schedules contained in Appendix
C.\68\
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\64\ See supra note 15.
\65\ CFTC Staff Letter No. 21-18 at 4-5.
\66\ Id. at 4-5, Condition 1.
\67\ Id. at 5, Conditions 2-4.
\68\ Id., Condition 5. In comparison to the SEC's approach to
similarly situated bank SBSDs, the Commission's capital
comparability process adopted in Commission regulation 23.106 (17
CFR 23.106) does not extend to bank SDs.
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The Commission also proposed to amend Commission regulation
23.105(p) \69\ to add an exception to the financial reporting
requirements for Non-U.S. bank SDs that do not submit financial reports
to a prudential regulator.\70\ The amendment would permit Non-U.S. bank
SDs to file with the Commission financial reports that are submitted to
their respective home country regulator, provided the financial reports
submitted to the Commission are translated into English with balances
converted to U.S. dollars.\71\ These Non-U.S. bank SDs, however, would
continue to be required to file specific swap position information set
forth in Schedule 1 to Appendix C.\72\ Finally, these Non-U.S. bank SDs
would be required to file with the Commission such reports no later
than 90 calendar days following quarter-end.\73\ This amendment would
enable
[[Page 45573]]
the Commission to collect such reports to support its ability to
monitor the capital condition of all SDs, although the Commission does
not establish the capital or margin requirements of bank SDs.\74\
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\69\ 17 CFR 23.105(p).
\70\ The Proposal, 89 FR 2558.
\71\ Id.
\72\ Id.
\73\ Id. Note that the Commission did not propose and is not
adopting the restriction in CFTC Staff Letter No. 21-18 that Non-
U.S. bank SDs be subject to home country capital standards in a G-20
jurisdiction. CFTC Staff Letter No. 21-18 at 3-5.
\74\ Id. at 2559. Section 4s(f) of the CEA requires SDs and
MSPs, including those for which there is a prudential regulator, to
make any reports regarding transactions and positions, as well as
any reports regarding financial condition, that the Commission
adopts by rule or regulation. 7 U.S.C. 6s(f).
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The Commission requested comment on the proposed amendment to
Commission regulation 23.105(p) \75\ to add the exception discussed
above to the financial reporting requirements for Non-U.S. bank SDs
that do not submit financial reports to a prudential regulator.\76\ In
response, the Commission received comments generally supporting the
amendment.\77\ One commenter stated that it agreed that the proposed
90-day time period should permit the Non-U.S. bank SDs sufficient time
to prepare and submit the financial reports that are submitted to their
respective home country regulator, translated into English with
balances converted to U.S. dollars, along with Schedule 1 to Appendix
C.\78\ This commenter further stated that this approach allows the
Commission to monitor the capital condition of such Non-U.S. bank SDs,
although the Commission does not establish the capital or margin
requirements of bank SDs.\79\ Another commenter stated that this
amendment, and the one discussed immediately below, would simplify the
compliance and reporting process for some SDs, especially those that
are subject to the oversight of other regulators, such as prudential
regulators, the SEC, or foreign regulators.\80\ This commenter further
stated that this amendment would also avoid duplication, inconsistency,
or conflict among different reporting requirements and standards.\81\
The Commission has considered the comments, and believes, as discussed
above, that this amendment will align the financial reporting
requirements of Non-U.S. bank SDs with those of their prudential
regulators, while still maintaining the Commission's ability to
properly monitor the capital condition of all SDs, as these reports
still provide the Commission with essentially the same critical
financial data.\82\ As such, the Commission is adopting the amendment
as proposed, with the exception of the modification of the word
``approved'' to ``permitted'' with respect to the use of acceptable
accounting standards to recognize that certain regulatory authorities
may not specifically issue an official approval of such standards.
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\75\ 17 CFR 23.105(p).
\76\ The Proposal, 89 FR 2558-2559.
\77\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
\78\ IIB/ISDA/SIFMA Letter at 3.
\79\ Id.
\80\ Ravnitzky Letter at 1.
\81\ Id.
\82\ As noted in the Proposal, the Commission did not propose to
include the restriction in CFTC Staff Letter No. 21-18 that Non-U.S.
bank SDs be subject to home country capital standards in a G-20
jurisdiction. The Commission did not receive comment on this, and as
indicated, to date all registered Non-U.S. bank SDs have met this
criterion. The Proposal, 89 FR 2558.
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The Commission also proposed to add a definition of the term ``Call
Report'' to Commission regulation 23.100 and to amend Commission
regulation 23.105(p) \83\ to permit bank SDs to file the relevant
schedules under the Call Report (Schedule RC and Schedule RC-R), rather
than replicating various line items from within those reports on a
separately constructed balance sheet and statement of regulatory
capital currently maintained in Appendix C.\84\ Schedule 1 of Appendix
C, which contains relevant swap, mixed swap, and security-based swaps
position information, would remain a required schedule to be provided
by all bank SDs.\85\ This approach would permit the Commission to
collect the necessary financial information to monitor the financial
condition of bank SDs, even though it is prepared in accordance with
prudential regulators' guidance, while eliminating the necessity that
bank SDs familiarize themselves with a new reporting form and prevent
the Commission from having to routinely monitor and update its form
when prudential regulators amend their schedules.\86\ These changes are
consistent with the terms of CFTC Staff Letter No. 21-18, which have
resulted in the Commission and its staff receiving the requisite
information to meaningfully oversee its population of bank SDs since
2021.\87\ In addition, and as mentioned above, these amendments would
enable the Commission to collect such reports enabling it to continue
to monitor the capital condition of all SDs, although the Commission
does not establish the capital requirements of banks.\88\
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\83\ 17 CFR 23.105(p).
\84\ The Proposal, 89 FR 2558-2559. As adopted, Appendix C
contains three schedules: 1. Statement of Financial Condition
(balance sheet); 2. Statement of Regulatory Capital; and 3. Schedule
1. Both the Statement of Financial Condition and Statement of
Regulatory Capital schedules within Appendix C are modeled off the
FOCUS Report Part IIC as adopted by the SEC for bank SBSDs and
contain specific line item references corresponding to the Call
Report. See Final Rules, 85 FR 57566-57569. Following adoption of
these schedules, changes were made to the underlying Call Reports
making the schedules obsolete. The SEC has since proposed revisions
to the FOCUS Report Part IIC to reflect these changes. See generally
Electronic Submission of Certain Materials Under the Securities
Exchange Act of 1934; Amendments Regarding the FOCUS Report, 88 FR
23920 (Apr. 18, 2023), available at https://www.federalregister.gov/documents/2023/04/18/2023-06330/electronic-submission-of-certain-materials-under-the-securities-exchange-act-of-1934-amendments (the
``FOCUS Report Amendments'').
\85\ Id.
\86\ Id.
\87\ Id.
\88\ Id.
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The Commission requested comment on the added definition to
Commission regulation 23.100 and the proposed amendment to Commission
regulation 23.105(p) \89\ to permit bank SDs to file the relevant
schedules under the Call Report (Schedule RC and Schedule RC-R), rather
than replicating various line items from within those reports on a
separately constructed balance sheet and statement of regulatory
capital currently maintained in Appendix C.\90\ In response, the
Commission received comments generally supporting the amendment.\91\
One commenter stated that it agreed that the above-described approach,
which is consistent with the conditions in CFTC Staff Letter No. 21-18,
has resulted in the Commission and its staff receiving the requisite
information to meaningfully oversee its population of bank SDs since
2021.\92\ This commenter further stated that it supported the proposed
evergreen approach that provides for U.S. bank SDs to submit the
relevant portions of the Call Report, as updated by U.S. prudential
regulators from time to time, noting that it will avoid the need to
periodically update the Commission's forms to ensure the cross
references align with the current version of the Call Report.\93\ The
Commission agrees with commenters and believes, as discussed above,
that this amendment will align the financial reporting requirements of
bank SDs with those of their prudential regulators, while still
maintaining the Commission's ability to monitor the capital condition
of all SDs. As such, the Commission is adopting the definition of Call
Report and the amendment as proposed.
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\89\ 17 CFR 23.105(p).
\90\ The Proposal, 89 FR 2559.
\91\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
\92\ IIB/ISDA/SIFMA Letter at 4.
\93\ Id.
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The Commission also proposed to amend Commission regulation
[[Page 45574]]
23.105(p)(7) \94\ to require a bank SD or bank MSP that is also
registered with the SEC as an SBSD or MSBSP and files a quarterly Form
X-17A-5 FOCUS Report Part IIC with the SEC pursuant to 17 CFR 240.18a-
7,\95\ to file such Form X-17A-5 FOCUS Report Part IIC with the
Commission in lieu of the Call Report.\96\ Such a dual-registrant would
be required to file the form with the Commission when it files the form
with the SEC, but no later than 30 calendar days from the date the
report is made.
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\94\ 17 CFR 23.105(p)(7).
\95\ 17 CFR 240.18a-7.
\96\ The Proposal, 89 FR 2558.
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The Commission requested comment on the proposed amendment to
Commission regulation 23.105(p)(7) to require such dual-registered bank
SD or bank MSP to file Form X-17A-5 FOCUS Report Part IIC with the
Commission in lieu of the Call Report when it files the form with the
SEC, but no later than 30 calendar days from the date the report is
made.\97\ One commenter stated that the 30-day deadline is inconsistent
with the Commission's alignment of the deadline for U.S. bank SDs that
are not also SBSDs to submit the Call Report when required by the
prudential regulators.\98\ This commenter further stated that the SEC
aligned its deadline for all bank SBSDs to submit FOCUS Report Part IIC
to the same 35-day deadline \99\ and that the commenter believed that
the Commission intended to align its deadline, along with the form of
required reports, with those required by prudential regulators and the
SEC.\100\ The commenter further suggested that the Commission should
amend the rule text to reflect that intention and to make clear that
the Commission requires bank SDs that are also SBSDs to submit to the
Commission the same reports on the same day as they do to the SEC.\101\
After considering the comments, the Commission is adopting the
amendment as proposed, with the exception of replacing the 30 calendar
day requirement with 35 calendar days.
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\97\ Id. at 2558-2559.
\98\ IIB/ISDA/SIFMA Letter at 5.
\99\ Id. See SEC, Division of Trading and Markets letter on
Financial Reporting requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants (Oct. 27, 2021) 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 Determinations With Respect to
Rule 18a-7, 86 FR 59208 (Oct. 26, 2021) at 59210.
\100\ Id.
\101\ Id.
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The Commission believes providing an additional five days will not
have any negative impact on the Commission's use of bank SD financial
reporting, as the information will still be timely, and agrees with the
commenter that aligning the time period to 35 calendar days after the
report date in practical effect will allow dual-registrants to submit
the reports to the Commission on the same day as they do to the SEC,
which comports with the Commission's intent.\102\ The Commission,
however, is not adopting the specific regulatory text suggested by the
commenter, because adopting such text would eliminate any specific
timeframe other than by reference to as permitted by the SEC. Although
the Commission intends to allow dual-registrants to submit reports on
the same day, the Commission believes this approach will permit the
Commission to evaluate any potential longer reporting time periods that
may be prospectively adopted by the SEC. As such, the Commission is
adopting the amendment as proposed, with the revision discussed above.
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\102\ The Proposal, 89 FR 2560.
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3. Amendments Regarding Financial Reporting and Other Requirements of
SDs
a. Amendments to Schedules in Financial Reporting
The Commission proposed to amend the scope of Commission regulation
23.105(k) \103\ and the heading and scope of Commission regulation
23.105(l),\104\ as well as the titles of certain schedules included in
Appendix B,\105\ to further clarify that these reporting obligations
are applicable to all nonbank SDs and nonbank MSPs.\106\ Commission
regulation 23.105(k) \107\ lists both model-specific information that
nonbank SDs must report as well as a description of the same type of
exposure information as reflected in the schedules to Appendix B.\108\
Commission regulation 23.105(l),\109\ however, requires all nonbank
SDs, including those not approved to use models, to complete the
Appendix B schedules on a monthly basis.\110\ This has resulted in
several nonbank SDs filing each of the schedules to Appendix B without
having received capital model approval.\111\ Hence, in current form,
Commission regulations 23.105(k) and (l),\112\ as well as the titles of
Schedules 2-4 of Appendix B, could more explicitly indicate that all of
the information within the schedules included in Appendix B is required
of all nonbank SDs, including those not authorized to use models.\113\
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\103\ 17 CFR 23.105(k).
\104\ 17 CFR 23.105(l).
\105\ Appendix B is comprised of 4 individual schedules:
SCHEDULE 1--AGGREGATE SECURITIES, COMMODITIES AND SWAPS POSITIONS;
SCHEDULE 2--CREDIT CONCENTRATION REPORT FOR FIFTEEN LARGEST
EXPOSURES IN DERIVATIVES; SCHEDULE 3--PORTFOLIO SUMMARY OF
DERIVATIVES EXPOSURES BY INTERNAL CREDIT RATING; and SCHEDULE 4--
GEOGRAPHIC DISTRIBUTION OF DERIVATIVES EXPOSURES FOR TEN LARGEST
COUNTRIES.
\106\ The Proposal, 89 FR 2559.
\107\ 17 CFR 23.105(k).
\108\ The Proposal, 89 FR 2559.
\109\ 17 CFR 23.105(l).
\110\ The Proposal, 89 FR 2559.
\111\ Id.
\112\ 17 CFR 23.105(k) and (l).
\113\ The Proposal, 89 FR 2559. To further complicate matters,
the heading and first paragraph to Commission regulation 23.105(k)
(17 CFR 23.105(k)) both indicate that this provision only applies to
SDs approved to use internal models to calculate market risk and
credit risk for calculating capital under Commission regulation
23.102(d) (17 CFR 23.102(d)).
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The Appendix B schedules are identical to corresponding schedules
found in SEC's FOCUS Report required to be completed by both SBSDs and
certain broker dealers (``BDs'').\114\ To the extent practicable, the
Commission intends to align financial reporting requirements, including
those listed in textual form in Commission regulation 23.105(k) \115\
and in the finalized schedules part of Appendix B, with the reporting
requirements finalized by the SEC pertaining to SBSDs, MSBSPs, and
BDs.\116\ This is also consistent with the Commission's general
approach permitting dually-registered BDs and SBSDs to file SEC Form
FOCUS Report Part II in lieu of their requirements under Commission
regulations 23.105(d) and (e),\117\ and for those dually-registered
SBSDs subject to the capital rules of a prudential regulator under
Commission regulation 23.105(p).\118\
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\114\ See FOCUS Report Amendments.
\115\ 17 CFR 23.105(k).
\116\ See Final Rules, 85 FR 57519.
\117\ 17 CFR 23.105(d) and (e).
\118\ 17 CFR 23.105(p). As indicated in the Final Rule, the
Commission has a long history of permitting SEC registrants to meet
their financial statement filing obligations with the Commission by
submitting required SEC forms in lieu of the CFTC's forms, which
reduces the burden on dually-registered firms by not requiring two
separate financial reporting requirements. See Final Rules, 85 FR
57515.
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NFA has also adopted nearly identical capital and financial
reporting requirements for its member nonbank SDs and nonbank
MSPs.\119\ The finalized NFA rules mandate the use of comprehensive
standardized forms for financial reporting by member nonbank SDs and
nonbank MSPs that are not otherwise able to file an SEC Form
[[Page 45575]]
FOCUS Report Part II.\120\ These new NFA forms, FR-CSE-NLA and FR-CSE-
BHC, include each of the required schedules found in Appendix B. All
the information listed in textual form in paragraph (k)(1)(v) of
Commission regulation 23.105 \121\ can be found in specific schedules
found in Appendix B.\122\ The Commission proposed Appendix B, which is
now part of NFA's adopted forms, to be the primary mechanism for firms
to provide the required information listed in Commission regulation
23.105(k).\123\ The amendment to Commission regulation 23.105(k) \124\
clarifies that Appendix B schedules are required to be completed by all
nonbank SDs and nonbank MSPs as intended by the Final Rule, and is
consistent with that required by the SEC and NFA.\125\ Further, the
Commission's proposed amendment to Commission regulation 23.105(l)
\126\ and the headings of certain schedules in Appendix B would make
clear that these schedules must be reported at the same periodicity as
the financial reporting of each respective nonbank SD, either monthly
or quarterly as applicable, and that all of the schedules are required
for all nonbank SDs, not just those authorized to use models.\127\
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\119\ NFA section 18.
\120\ NFA section 18(e).
\121\ 17 CFR 23.105(k)(1)(v).
\122\ For example, Commission regulation 23.105(k)(1)(v)(B) (17
CFR 23.105(k)(1)(v)(B)) requires that all model-approved SDs file
the ``Current exposure (including commitments) listed by
counterparty for the 15 largest exposures,'' which is also found in
Schedule 2 to Appendix B. Similarly, the information listed in
textual form in Commission regulations 23.105(k)(1)(i)-(v) (17 CFR
23.105(k)(1)(i)-(v)) corresponds verbatim to the textual
requirements found in SEC rule 18a-7(a)(3). See 17 CFR 240.18a-
7(a)(3).
\123\ 17 CFR 23.105(k). As discussed in the Final Rule, the
Commission may (and subsequently has) approved additional procedures
developed by an RFA, which could include standard forms or
procedures necessary to carry out the Commission's filing
requirements. See Final Rules, 85 FR 57518.
\124\ 17 CFR 23.105(k).
\125\ The Proposal, 89 FR 2560.
\126\ 17 CFR 23.105(l).
\127\ The Proposal, 89 FR 2559.
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The Commission requested comment on the proposed amendments to
revise the scope of Commission regulation 23.105(k) \128\ and the
heading and scope of Commission regulation 23.105(l),\129\ as well as
the titles of certain schedules included in Appendix B.\130\ In
response, the Commission received comments generally supporting the
amendments.\131\ The Commission believes, as discussed above, that
these amendments will make clear that these reporting obligations apply
to all nonbank SDs and nonbank MSPs, as intended in the Final Rule. As
such, the Commission is adopting the amendments as proposed.
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\128\ 17 CFR 23.105(k).
\129\ 17 CFR 23.105(l).
\130\ The Proposal, 89 FR 2559-2560.
\131\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
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b. Changes to Public Disclosure Requirements
The Commission proposed to amend Commission regulation 23.105(i)
\132\ to align the public disclosure of unaudited financial information
with the periodicity permitted by routine financial filings in
Commission regulation 23.105(d),\133\ and to remove reference to a
statement in both the unaudited and audited information disclosing the
amounts of minimum regulatory capital and the amount of its minimum
regulatory capital requirement computed in accordance with Commission
regulation 23.101.\134\ Currently, paragraphs (i)(l)(ii) and (i)(2)(ii)
of Commission regulation 23.105 require a nonbank SD or nonbank MSP to
publicly disclose on its website a statement of the amount of the
nonbank SD's or nonbank MSP's regulatory capital and its minimum
capital requirement.\135\ This information is required to be disclosed
as of the nonbank SD's or nonbank MSP's fiscal year-end, and as of six
months after the firm's fiscal year-end.
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\132\ 17 CFR 23.105(i).
\133\ 17 CFR 23.105(d).
\134\ The Proposal, 89 FR 2560; 17 CFR 23.101.
\135\ 17 CFR 23.105(i)(1)(ii) and (i)(2)(ii).
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The Commission proposed to revise Commission regulation
23.105(i)(1)(i) \136\ to include the footnotes to the unaudited
Statement of Financial Condition in the required disclosures.\137\ The
Commission also proposed to revise Commission regulations
23.105(i)(1)(ii) and (i)(2)(ii) \138\ to replace the word ``statement''
with ``amounts'' to indicate that required capital information does not
need to exist in a standalone statement or form.\139\ To the extent
practicable, the Commission indicated its intention was to align its
requirements with those required of BDs and SBSDs by the SEC \140\ and
determined that the information, regardless of its format, contained in
the footnotes accompanying the financial statements should ordinarily
satisfy the requirements for disclosing minimum regulatory
capital.\141\
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\136\ 17 CFR 23.105(i)(1)(i).
\137\ The Proposal, 89 FR 2560.
\138\ 17 CFR 23.105(i)(1)(ii) and (i)(2)(ii).
\139\ The Proposal, 89 FR 2560.
\140\ See 17 CFR 240.18a-7(b).
\141\ The Proposal, 89 FR 2560.
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The Commission requested comment on the proposed amendments to
Commission regulation 23.105(i) \142\ to align the public disclosure of
unaudited financial information with the periodicity permitted by
routine financial filings in Commission regulation 23.105(d),\143\ and
to remove reference to a statement in both the unaudited and audited
information disclosing the amounts of minimum regulatory capital and
the amount of its minimum regulatory capital requirement computed in
accordance with Commission regulation 23.101.\144\ In response, the
Commission received comments generally supporting the amendments.\145\
The Commission believes, as discussed above, that these amendments will
align the periodicity of different financial reporting requirements of
nonbank SDs and create flexibility as to the format for disclosing
minimum regulatory capital. As such, the Commission is adopting the
amendments as proposed.
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\142\ 17 CFR 23.105(i).
\143\ 17 CFR 23.105(d).
\144\ The Proposal, 89 FR 2560; 17 CFR 23.101.
\145\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
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c. Changes to Form 1-FR-FCM
The Commission proposed to amend Form 1-FR-FCM to add new lines
22.A.vi through vii. to the Statement of the Computation of the Minimum
Capital Requirements schedule (``Statement of Minimum Capital
Schedule'') to include the 2 percent of uncleared swap margin capital
requirement under Commission regulation 1.17(a)(1)(i)(B)(2).\146\ The
Commission also proposed to amend Form 1-FR-FCM to add the specific
market risk charges for swaps and security-based swaps as new lines
16.D. of the Statement of Minimum Capital Schedule.\147\
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\146\ The Proposal, 89 FR 2560; 17 CFR 1.17(a)(1)(i)(B)(2).
\147\ Id.
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Commission regulation 1.10 requires all FCMs to submit a Form 1-FR-
FCM when they file for registration as an FCM and periodically
following registration.\148\ Form 1-FR-FCM includes, among other
things, the Statement of Minimum Capital Schedule as a supplementary
schedule.\149\ In the Final Rule, the Commission added a 2 percent of
uncleared swap margin capital requirement to the risk-based net capital
requirement for FCMs that are also registered as SDs (``FCM-SDs''), and
adopted specific market risk charges for
[[Page 45576]]
uncleared swaps in the FCM net capital requirements in Commission
regulation 1.17.\150\ Further, FCMs dually-registered as BDs are
permitted to file the SEC's FOCUS Report Part II in lieu of the
Commission's Form 1-FR-FCM in reporting net capital.\151\ On March 22,
2023, the SEC proposed to amend its FOCUS Report Part II to include the
Commission's net capital changes adopted for FCM-SDs, including the
addition of the 2 percent uncleared swap margin to the risk-based net
capital requirement of FCM-SDs.\152\ The Commission proposed the
amendments to Form 1-FR-FCM to more explicitly require disclosure of
the 2 percent amount and conform with the SEC's proposal as well as to
provide important information to assist the Commission in monitoring
compliance of FCM-SD with the capital requirements adopted in the Final
Rule.\153\ This information is important to the Commission in
monitoring the Final Rules, as reporting the 2 percent amount enables
the Commission to confirm that the FCM-SD is complying with its capital
requirement.\154\
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\148\ 17 CFR 1.10.
\149\ CFTC Form 1-FR-FCM at 6-8.
\150\ 17 CFR 1.17(a)(1)(i)(B)(2) and (c)(5)(iii). See generally
Final Rules, 85 FR 57473-57476 and 57562.
\151\ 17 CFR 1.10(h).
\152\ See generally FOCUS Report Amendments.
\153\ The Proposal, 89 FR 2561.
\154\ Id.
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The Commission requested comment on the proposed amendments to Form
1-FR-FCM to add new lines to the form to include the 2 percent of
uncleared swap margin capital requirement under Commission regulation
1.17(a)(1)(i)(B)(2) \155\ and to add specific disclosure of the
haircuts for swaps and security-based swaps in the computation of net
capital on the form.\156\ In response, the Commission received comments
generally supporting the amendments.\157\ The Commission believes, as
discussed above, that these amendments will ensure the collection of
information that is important to the Commission in monitoring the Final
Rules and will align the specific items within the Form 1-FR-FCM
Statement of Minimum Capital Schedule with comparable schedules within
the FOCUS Report Part II utilized by dual-registered BD or SBSDs. As
such, the Commission is adopting the amendments to the Form 1-FR-FCM as
proposed.
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\155\ 17 CFR 1.17(a)(1)(i)(B)(2).
\156\ The Proposal, 89 FR 2560-2561.
\157\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
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d. Additional Cross References To Clarify Applicable Market and Credit
Risk Charges
The Commission proposed to add new language to Commission
regulations 23.103(a)(1) and (c)(1) \158\ to clarify that the same
standardized market and credit risk charges are applicable to nonbank
SDs electing the Tangible Net Worth Capital Approach as are applicable
to all other nonbank SDs not approved to use models.\159\ Commission
regulation 23.103(b) \160\ provides that nonbank SDs electing the
Tangible Net Worth Capital Approach or Net Liquid Assets Capital
Approach are required to compute standardized market risk charges
contained in SEC Rule 18a-1 \161\ and Commission regulation 1.17,\162\
as applicable. Commission regulation 23.103(c) \163\ also provides that
a nonbank SD electing the Net Liquid Assets Capital Approach must
compute its standardized credit risk charge in accordance with SEC Rule
18a-1 \164\ or Commission regulation 1.17,\165\ as applicable, but
fails to provide a reference for nonbank SDs electing the Tangible Net
Worth Capital Approach.\166\ Because standardized credit risk charges
were intended to be the same for nonbank SDs using the Tangible Net
Worth Capital Approach or the Net Liquid Assets Capital Approach, the
Commission proposed to amend Commission regulations 23.103(a)(1) and
(c)(1) \167\ to correct this omission by directing nonbank SDs electing
the Tangible Net Worth Capital Approach to compute standardized credit
risk charges in accordance with SEC Rule 18a-1 \168\ or Commission
regulation 1.17,\169\ as applicable.\170\
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\158\ 17 CFR 23.103(a)(1) and (c)(1).
\159\ The Proposal, 89 FR 2560.
\160\ 17 CFR 23.103(b).
\161\ 17 CFR 240.18a-1.
\162\ 17 CFR 1.17.
\163\ 17 CFR 23.103(c).
\164\ 17 CFR 240.18a-1.
\165\ 17 CFR 1.17.
\166\ SDs electing to use the Tangible Net Worth Capital
Approach are required to meet a minimum capital requirement which
includes, among other things, $20 million plus the amount of the
SD's market risk exposure requirement and its credit risk exposure
requirement associated with the SD's swap and related hedge
positions that are part of the SD's swap dealing activities. 17 CFR
23.101(a)(2)(ii)(A).
\167\ 17 CFR 23.103(a)(1) and (c)(1).
\168\ 17 CFR 240.18a-1.
\169\ 17 CFR 1.17.
\170\ The Proposal, 89 FR 2561.
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Similarly, the Commission proposed to amend Commission regulation
23.102(d) \171\ to correct the applicable cross reference in order to
make it clearer that either 12 CFR part 217 or Appendix A to subpart E
of part 23 (``Appendix A'') \172\ should be utilized as applicable by
the nonbank SD depending on the respective capital approach
elected.\173\
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\171\ 17 CFR 23.102(d).
\172\ Appendix A to subpart E of part 23.
\173\ The Proposal, 89 FR 2561; Final Rules, 85 FR 57506.
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The Commission requested comment on the proposed amendments to
Commission regulations 23.103(a)(1) and (c)(1) \174\ to clarify that
the same standardized market and credit risk charges are applicable to
nonbank SDs electing the Tangible Net Worth Capital Approach as are
applicable to all other nonbank SDs not approved to use models, as well
as the amendments to Commission regulation 23.102(d) \175\ to correct
the applicable cross reference in order to make it clearer that either
12 CFR part 217 or Appendix A should be utilized as applicable by the
nonbank SD depending on the respective capital approach elected.\176\
In response, the Commission received comments generally supporting the
amendments.\177\ The Commission believes, as discussed above, that
these amendments will provide clarity on the applicable market and
credit risk charges as well as which regulatory reference (12 CFR part
217 or Appendix A) should be utilized depending on the elected capital
approach by the SD, as intended by the Final Rule. As such, the
Commission is adopting the amendments as proposed.
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\174\ 17 CFR 23.103(a)(1) and (c)(1).
\175\ 17 CFR 23.102(d).
\176\ The Proposal, 89 FR 2561.
\177\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
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B. Other Amendments
1. Notice of Substantial Reduction in Capital
The Commission proposed to amend Commission regulation 23.105(c)(4)
\178\ to add a two-business day reporting timeframe to the requirement
for a nonbank SD to file notice of a substantial reduction in
capital.\179\ Currently, Commission regulation 23.105(c)(4), which
requires nonbank SDs and nonbank MSPs to provide notice of a
substantial reduction in capital as compared to the last reported in a
financial report, does not specify a timeframe for the notice
filing.\180\
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\178\ 17 CFR 23.105(c)(4).
\179\ The Proposal, 89 FR 2561.
\180\ 17 CFR 23.105(c)(4).
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The Commission requested comment on the proposed amendment to
Commission regulation 23.105(c)(4) \181\ to add a two-business day
reporting
[[Page 45577]]
timeframe to the requirement for a nonbank SD to file notice of a
substantial reduction in capital.\182\ In response, the Commission
received comments generally supporting the amendments.\183\ One
commenter stated that the addition of a concrete reporting timeframe
will provide regulatory certainty regarding when such a filing is due
and align it with current FCM capital reduction notification timing
requirements.\184\ The Commission agrees with commenters and believes
that the amendment will align with the two-business day reporting
timeframe applied to FCMs and provide regulatory certainty as to when
the notification is required, while still making the notice timely. As
such, the Commission is adopting the amendment as proposed.
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\181\ 17 CFR 23.105(c)(4).
\182\ The Proposal, 89 FR 2561.
\183\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
\184\ Ravnitzky Letter at 2.
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2. Subordinated Debt Approval
The Commission proposed to amend Commission regulations
23.101(a)(1)(i)(B) and add 23.101(a)(1)(ii)(D) \185\ to establish that
using subordinated debt as regulatory capital is subject to the
approval of either an RFA of which the nonbank SD is a member or the
Commission.\186\ The nonbank SD capital requirements for both the Bank-
Based Capital Approach and the Net Liquid Assets Capital Approach
permit the use of subordinated debt as capital in order to align with
the permitted use of subordinated debt under the FCM net capital
requirements.\187\ The requirements for qualifying subordinated debt
were adopted by the SEC in its capital rule for SBSDs and were included
by reference by the Commission for other nonbank SDs in the Bank-Based
Capital Approach.\188\ Commission staff received questions regarding
the process for approving subordinated debt for nonbank SDs not also
registered with the SEC because the Final Rule did not articulate a
process.\189\ To address this omission, NFA adopted Financial
Requirements Rule Section 18(d).\190\ Under the existing framework, NFA
already approves subordinated loan agreements for net capital
agreements for nonbank SDs that are not dually-registered with the SEC.
Similarly, although nonbank SDs that are dually-registered with the SEC
are able to obtain SEC approval on subordinated debt,\191\ nonbank SDs
that elect either the Bank-Based Capital Approach or the Net Liquid
Assets Capital Approach but are not registered with the SEC, do not
have an approval process for the use of subordinated debt under the
Commission's rules. As discussed in the Final Rule,\192\ when adopting
the permissive use of subordinated debt in establishing minimum
regulatory capital, the Commission has long approved a process for FCMs
to obtain subordinated debt approval from their Designated Self-
Regulatory Organizations (``DSROs''), including the NFA.\193\
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\185\ 17 CFR 23.101(a)(1)(i)(B) and (a)(1)(ii)(D).
\186\ The Proposal, 89 FR 2561-2562.
\187\ 17 CFR 1.17(h).
\188\ 17 CFR 23.101(a)(1).
\189\ The Proposal, 89 FR 2561-2562.
\190\ See generally NFA Interpretative Notice 9078 (Feb. 18,
2021), available at https://www.nfa.futures.org/rulebooksql/
rules.aspx?Section=9&RuleID=9078#:~:text=In%20order%20to%20permit%20t
hese%20non-SEC%20registered%20SD,NFA%27s%20pre-
approval%20of%20the%20subordinated%20debt%20loan%20agreement.
\191\ Nonbanks SDs that are duly-registered as SBSDs typically
elect under Commission regulation 23.101(a)(1)(ii) (17 CFR
23.101(a)(1)(ii)) to maintain net capital by complying with Sec.
240.18a-1d, and are independently subject to such requirements,
including the subordinated-debt approval process, by their
registration as a SBSD with the SEC. 17 CFR 240.18a-1d.
\192\ Final Rules, 85 FR 57495.
\193\ See Miscellaneous Rule Deletions, Amendments or
Clarifications, 57 FR 20633, 20634 (May 14, 1992). The subordinated
debt approval program for FCMs administered by NFA has been in place
for over 30 years. In addition, the NFA, as the only registered
futures association under the CEA, is specifically required to adopt
capital requirements on its members, including SDs, and to implement
a program to audit and enforce the compliance with such requirements
in accordance with section 17(p)(2) of the CEA, 7 U.S.C. 21(p)(2).
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The Commission proposed to permit NFA to administer the approval
process for nonbank SDs because of the NFA's extensive history and
experience as a DSRO administering a subordinated debt approval program
for FCMs.\194\ The Commission requested comment on the proposed
amendment to Commission regulations 23.101(a)(1)(i)(B) and addition of
23.101(a)(1)(ii)(D) \195\ to establish that using subordinated debt as
regulatory capital is subject to the approval of either an RFA of which
the nonbank SD is a member or the Commission.\196\ In response, the
Commission received comments generally supporting the amendments.\197\
The Commission believes that this amendment will address the omission
discussed above and that NFA has the history, experience and resources
to adequately perform the review, approval and ongoing assessment of
nonbank SDs' permitted use of subordinated debt. As such, the
Commission is adopting the amendment as proposed.
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\194\ The Proposal, 89 FR 2562.
\195\ 17 CFR 23.101(a)(1)(i)(B) and (a)(1)(ii)(D).
\196\ The Proposal, 89 FR 2561-2562.
\197\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
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3. Statement of No Material Difference
The Commission proposed to amend Commission regulation
23.105(e)(4)(v) \198\ for nonbank SDs and nonbank MSPs to explicitly
require a statement, if applicable, that there are no material
differences between the audited annual report and the unaudited annual
report of the same date.\199\ The Commission also proposed to amend
Commission regulation 23.105(e)(6),\200\ to more explicitly require
nonbank SDs and nonbank MSPs also registered as FCMs to fully comply
with the requirements of Commission regulation 1.16.\201\ Commission
regulation 23.105(e) \202\ requires nonbank SDs and nonbank MSPs to
submit an annual audited financial report with the Commission and with
NFA.\203\ Included with the financial report is, among other things, a
reconciliation of any material differences from the unaudited financial
reports prepared as of the nonbank SD's or nonbank MSP's year-end date.
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\198\ 17 CFR 23.105(e)(4)(v).
\199\ The Proposal, 89 FR 2562.
\200\ 17 CFR 23.105(e)(6).
\201\ 17 CFR 1.16.
\202\ 17 CFR 23.105(e).
\203\ 17 CFR 23.105(e).
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For instances in which no material differences exist between the
unaudited and audited year-end financial statements, however,
Commission regulation 1.10(d)(2)(vi) \204\ requires FCMs to include a
statement indicating that no such differences exist. Currently,
Commission regulation 23.105(e) \205\ does not provide for such a
statement in this parallel provision for audits of nonbank SDs or
nonbank MSPs. The Commission proposed to amend Commission regulation
23.105(e)(4)(v) \206\ so that when nonbank SDs and nonbank MSPs file
their audited annual report, a statement that there are no material
differences between the audited annual report and the unaudited annual
report is included, if no such differences exist.\207\
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\204\ 17 CFR 1.10(d)(2)(vi).
\205\ 17 CFR 23.105(e).
\206\ 17 CFR 23.105(e)(4)(v).
\207\ The Proposal, 89 FR 2562.
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The Commission requested comment on the proposed amendment to
Commission regulation 23.105(e)(4)(v) \208\ to require nonbank SDs and
nonbank MSPs to explicitly provide a statement, if applicable, that
there are no material differences between the audited annual report and
the unaudited annual report of the same
[[Page 45578]]
date.\209\ In response, the Commission received comments generally
supporting the amendments.\210\ One commenter stated that requiring a
specific statement that no material differences exist when none are
otherwise reported will provide more complete and meaningful
information to users of the financial reports and align the filing
approach for auditors of nonbank SDs and nonbank MSPs with that of
FCMs.\211\ The Commission agrees with commenters and believes that
these amendments will enhance the reliability of the annual reports by
ensuring auditors assess the materiality of any discovered audit
differences, and that nonbank SDs and nonbank MSPs also registered as
FCMs fully comply with FCM annual report requirements. As such, the
Commission is adopting the amendments to Commission regulation
23.105(e) \212\ as proposed.
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\208\ 17 CFR 23.105(e)(4)(v).
\209\ The Proposal, 89 FR 2562.
\210\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
\211\ Barnard Letter at 2.
\212\ 17 CFR 23.105(e).
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III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RF Act'') requires that Federal
agencies consider whether the regulations they propose will have a
significant economic impact on a substantial number of small entities,
and if so, provide a regulatory flexibility analysis respecting the
impact.\213\ This rulemaking would affect the obligations of SDs, MSPs,
and FCMs. The Commission has previously determined that SDs, MSPs, and
FCMs are not small entities for purposes of the RF Act.\214\ Therefore,
the requirements of the RF Act do not apply to those entities.
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\213\ 5 U.S.C. 601 et seq.
\214\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982) (FCMs) and Registration of Swap Dealers
and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs
and MSPs).
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Accordingly, for the reasons stated above, the Commission has
determined that this rulemaking will not have a significant economic
impact on a substantial number of small entities. Therefore, the
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5
U.S.C. 605(b), that the Commission regulations being published today by
this Federal Register release will not have a significant economic
impact on a substantial number of small entities.
B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995 (``PRA'') \215\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with conducting or sponsoring any ``collection of
information'' as defined by the PRA. Under the PRA, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number from the Office of Management and Budget (``OMB''). The PRA is
intended, in part, to minimize the paperwork burden created for
individuals, businesses, and other persons as a result of the
collection of information by federal agencies, and to ensure the
greatest possible benefit and utility of information created,
collected, maintained, used, shared, and disseminated by or for the
federal government. The PRA applies to all information, regardless of
form or format, whenever the federal government is obtaining, causing
to be obtained, or soliciting information, and includes required
disclosure to third parties or the public, of facts or opinions, when
the information collection calls for answers to identical questions
posed to, or identical reporting or recordkeeping requirements imposed
on, ten or more persons.
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\215\ 44 U.S.C. 3501 et seq.
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The final rulemaking modifies an existing collection of information
previously approved by OMB and for which the Commission has received an
OMB control number: OMB control number 3038-0024, ``Regulations and
Forms Pertaining to Financial Integrity of the Market Place; Margin
Requirements for SDs/MSPs'' (OMB Collection 3038-0024).\216\ The
responses to this collection of information are mandatory. The
Commission does not believe the Final Rule as adopted imposes any other
new collections of information that require approval of OMB under the
PRA.
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\216\ For the previously approved estimates, see ICR Reference
No. 202207-3038-001, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202207-3038-001.
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The Commission did not receive any comments regarding its PRA
burden analysis in the preamble to the Proposal. The Commission is
revising collection number 3038-0024 to reflect the adoption of
amendments to parts 1 and 23 of its regulations, as discussed below.
2. OMB Collection 3038-0024--Regulations and Forms Pertaining to
Financial Integrity of the Market Place; Margin Requirements for SDs/
MSPs
As of March 2024, there are approximately 107 SDs and no MSPs
registered with the Commission that may be impacted by this rulemaking
and, in particular, the collection of information discussed below.
Commission regulation 23.105 \217\ requires that each SD and MSP
maintain certain specified records, report certain financial
information, and notify or request permission from the Commission under
certain specified circumstances, in each case, as provided in the
Commission regulation. For example, the Commission regulation requires
generally that SDs and MSPs maintain current books and records, provide
notice to the Commission of regulatory capital deficiencies and related
documentation, provide notice of certain other events specified in the
rule, and file financial reports and related materials with the
Commission (including the information in Appendices B and C, as
applicable). Commission regulation 23.105 \218\ also requires the SD or
MSP to furnish information about its custodians that hold margin for
uncleared swap transactions and the amounts of margin so held, and for
SDs approved to use models (as discussed above), provide additional
information regarding such models, as further described in Commission
regulation 23.105(k).\219\
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\217\ 17 CFR 23.105.
\218\ Id.
\219\ 17 CFR 23.105(k).
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The Commission estimates that there are 31 SD firms required to
fulfill their financial reporting, recordkeeping, and notification
obligations under Commission regulations 23.105(a)-(n) \220\ because
they are not subject to a prudential regulator, not already registered
as an FCM, and not dually-registered as a SBSD. The Commission does not
anticipate that its estimates of burden associated with these
obligations will change as a result of any of the amendments to
Commission regulation 23.105 \221\ adopted herein.
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\220\ 17 CFR 23.105(a)-(n).
\221\ 17 CFR 23.105.
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Commission regulation 23.105(p) \222\ and its accompanying Appendix
C impose quarterly financial reporting and notification obligations on
SDs subject to a prudential regulator. Approximately 55 of the 107
registered SDs are subject to a prudential regulator. The Commission
has previously estimated that these reporting and notification
[[Page 45579]]
requirements impose an ongoing burden of 33 hours annually. This
results in a total aggregate burden of 1,815 hours annually. The
Commission estimates this burden will remain unchanged by the
amendments to Commission regulation 23.105(p) \223\ adopted herein, as
the burden associated with requirements to file quarterly financial
reporting and notifications previously were based on these entities
filing their existing information contained in Call Reports along with
Schedule 1 information. Under the amendments adopted herein, these
obligations will remain the same for bank SDs, except for Non-U.S. bank
SDs who will also still file existing financial reporting information
as reported to their home country supervisor, along with Appendix C
Schedule 1 information.
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\222\ 17 CFR 23.105(p).
\223\ Id.
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C. Section 15(b) Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\224\
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\224\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
has considered the rule to determine whether it is anticompetitive and
has identified no anticompetitive effects. The Commission requested and
received no comments on whether the proposed rule is anticompetitive
and, if it is, what the anticompetitive effects are. Further, the
Commission requested and received no comments on whether there are less
anticompetitive means of achieving the relevant purposes of the Act
that would otherwise be served by adopting the rule. Finally, the
Commission requested and received no comments on whether the proposed
rule implicates any other specific public interest to be protected by
the antitrust laws. The Commission has determined that the rule is not
anticompetitive and has no anticompetitive effects, and it has not
identified any less anticompetitive means of achieving the purposes of
the Act. As such, the Commission is adopting the rule as proposed
subject to the modifications discussed herein.
IV. Cost Benefit Considerations
A. Background
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its discretionary actions before promulgating a
regulation under the CEA or issuing certain orders.\225\ Section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of five broad areas of market and public concern: (1) protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations (collectively, the ``Section 15(a) Factors''). In this
cost benefit section, the Commission discusses the costs and benefits
resulting from its discretionary determinations with respect to the
Section 15(a) Factors.\226\
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\225\ 7 U.S.C. 19(a).
\226\ The Commission notes that the costs and benefits
considered in this proposed rulemaking, and highlighted below, have
informed the policy choices described throughout this release.
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Section 4s(e) of the CEA, added by section 731 of the Dodd-Frank
Act, provides the Commission with mandatory and discretionary
rulemaking authority to adopt capital requirements for nonbank SDs and
nonbank MSPs,\227\ as well as financial reporting requirements for SDs
and MSPs.\228\ Section 4s(e) of the CEA requires the Commission to
adopt minimum capital requirements for nonbank SDs and nonbank MSPs
that are designed to help ensure their safety and soundness and are
appropriate for the risk associated with the uncleared swaps held by
such nonbank SD or nonbank MSP. In addition, section 4s(e)(2)(C) of the
CEA, requires the Commission to establish capital requirements for
nonbank SDs or nonbank MSPs that account for the risks associated with
their entire swaps portfolio and all other activities conducted.
Lastly, section 4s(e)(3)(D) of the CEA provides that the Commission,
the prudential regulators, and the SEC, must ``to the maximum extent
practicable'' establish and maintain comparable capital rules.
Accordingly, this rulemaking includes certain capital and financial
reporting requirements related to SDs and MSPs.
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\227\ Section 4s(e)(2)(B) of the CEA, 7 U.S.C. 6s(e)(2)(B).
\228\ Section 4s(f) of the CEA, 7 U.S.C. 6s(f).
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The baseline for the Commission's consideration of the costs and
benefits of this rulemaking is the existing statutory and regulatory
framework applicable to SDs and MSPs, including the capital and margin
requirements for SDs and MSPs under subpart E of part 23. The
Commission recognizes, however, that to the extent that SDs \229\ have
arranged their business in reliance on Division interpretations and no-
action positions in CFTC Staff Letters No. 21-15 and 21-18, as extended
under CFTC Staff Letter No. 23-11, the actual costs and benefits of
this rulemaking may be mitigated.
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\229\ Currently, there are no MSPs registered with the
Commission and there have not been any MSPs registered with the
Commission for several years. Thus, this section regarding the
Commission's consideration of the costs and benefits of this
proposed rulemaking will only refer to SDs that may have relied on
CFTC Staff Letters No. 21-15 and 21-18 and may benefit from the
compliance exceptions set forth herein.
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The Commission recognizes that the amendments adopted herein may
impose costs. The Commission has endeavored to assess the expected
costs and benefits of the amendments in quantitative terms, including
PRA-related costs, where possible. In situations where the Commission
is unable to quantify the costs and benefits, the Commission identifies
and considers the costs and benefits of the rules in qualitative terms.
The lack of data and information to estimate those costs and benefits
is attributable in part to the nature of the amendments, which are
tailored financial reporting requirements based on the specific
businesses and types of SDs registered with the Commission. Further,
SDs represent a wide diversity of business models catering towards
different swap counterparties, from financial end users to commercial
enterprises. As a result, the Commission expects each SD to have
developed its corporate entity in a unique manner by employing
different corporate cost structures, making it particularly difficult
to estimate the quantitative impacts of both costs and benefits on each
SD.
As previously discussed, the Commission received four substantive
comments expressing support for the Proposal.\230\ Commenters generally
noted that the proposed amendments are beneficial for market
participants and characterized them as helpful and practical
accommodations that reflect the realities of the marketplace and
facilitate compliance with the CFTC financial reporting
requirements.\231\ Several commenters elaborated on specific benefits
of the amendments, noting for instance that the proposed amendments
would reduce regulatory burden and costs for some SDs, including those
that are predominantly
[[Page 45580]]
engaged in non-financial activities and have a high level of tangible
net worth.\232\
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\230\ See IIB/ISDA/SIFMA Letter; Shell Letter; Barnard Letter;
Ravnitzky Letter.
\231\ See id.
\232\ Ravnitzky Letter at 1.
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B. CFTC Staff Letters and Other Amendments
The Commission is adopting technical amendments to its definitions
in Commission regulation 23.100 \233\ for ``predominantly engaged in
non-financial activities'' and ``tangible net worth.'' Further, the
Commission is adopting amendments to Commission regulation 23.105(p)
\234\ to add exceptions to the financial reporting requirements for
Non-U.S. bank SDs, and permitting bank SDs to file the relevant
schedules under the Call Report (Schedule RC and Schedule RC-R) instead
of as required by Appendix C. In addition, the Commission is making a
number of clarifying amendments including: (1) amending the heading and
scope provisions of Commission regulation 23.105(k) \235\ and the
titles of certain schedules included in Appendix B; (2) changing public
disclosure requirements under Commission regulation 23.105(i); \236\
(3) amending Form 1-FR-FCM to more accurately address net capital
changes; (4) adding language to Commission regulations 23.103(a) and
(c)(1) \237\ to clarify that standardized charges are the same as
applicable to all SDs not using the Bank-Based Capital Approach; and
(5) amending the cross reference in Commission regulation 23.102(d)
\238\ to make clear that either 12 CFR part 217 or Appendix A should be
utilized as applicable by the nonbank SD depending on the respective
capital approach elected.
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\233\ 17 CFR 23.100.
\234\ 17 CFR 23.105(p).
\235\ 17 CFR 23.105(k).
\236\ 17 CFR 23.105(i).
\237\ 17 CFR 23.103(a) and (c)(1).
\238\ 17 CFR 23.102(d).
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1. Benefits
The amendments to definitions of ``predominantly engaged in non-
financial activities'' and ``tangible net worth'' aligning the
regulatory text with the terms of CFTC Staff Letter No. 21-15 are
intended to ensure that the Tangible Net Worth Capital Approach can be
utilized by certain nonbank SDs as was originally intended in the Final
Rule. These amendments are expected to benefit certain nonbank SDs by
ensuring clear and effective compliance with regulatory requirements
under the Tangible Net Worth Capital Approach as amended, ultimately
reducing operational costs for such nonbank SDs. In particular, nonbank
SDs would no longer be required to calculate asset and revenue tests
separately between the entity and the ultimate parent level or compute
such tests under U.S. GAAP even if such entity was permitted to use
IFRS. Further, these amendments would allow nonbank SDs meeting such
qualifications to file their supplemental position reports at the same
time as routine financial reporting for all nonbank SDs set forth
within Commission regulation 23.105(d).\239\
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\239\ 17 CFR 23.105(d).
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Similarly, the amendments to Commission regulation 23.105(p) \240\
that are consistent with the terms of CFTC Staff Letter No. 21-18, as
extended under CFTC Staff Letter No. 23-11, are expected to benefit
bank SDs by permitting: (1) Non-U.S. bank SDs to file reports by their
home country regulators subject to certain conditions; (2) bank SDs to
file comparable Call Report schedules in accordance with, and within
the timeframe permitted by, the prudential regulators; (3) Non-U.S.
bank SDs to file balance sheet and statement of regulatory capital
information in accordance with home country requirements provided they
are in English, converted to U.S. dollars and filed within 90 calendar
days following quarter-end; and (4) dually-registered Non-U.S. bank SDs
to file comparable SEC-approved financial reports and schedules. The
Commission anticipates that these amendments will eliminate duplicative
and superfluous reporting and streamline financial reporting for both
Non-U.S. and dually-registered bank SDs.
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\240\ 17 CFR 23.105(p).
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Lastly, the amendments regarding financial reporting and
computation include: (1) amendments to the heading and scope provision
of Commission regulations 23.105(k) and (l); \241\ (2) titles of
certain schedules included in Appendix B; (3) alignment of the public
disclosure of unaudited financial information with the periodicity
permitted by routine financial filings in Commission regulation
23.105(d),\242\ and to remove reference to a statement disclosing the
amounts of minimum regulatory capital; (4) amending Form 1-FR-FCM to
add the 2 percent of uncleared swap margin capital requirement and
swaps and security-based swaps haircuts; and (5) addition of clarifying
language to Commission regulations 23.103(a)(1) and (c)(1) \243\ to
provide additional clarity to registrants that the same standardized
market and credit risk charges are applicable to nonbank SDs utilizing
the Tangible Net Worth Capital Approach as are applicable to all other
nonbank SDs if not approved to use models. These amendments are meant
to clarify what was originally intended in the Final Rule or what is
already included within the existing Commission regulations, as well as
align the schedules as currently required by the SEC and the NFA. The
Commission anticipates that these amendments will remove uncertainty
amongst SDs about the type of form and the extent of detail that they
should be reporting.
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\241\ 17 CFR 23.105(k) and (l).
\242\ 17 CFR 23.105(d).
\243\ 17 CFR 23.103(a)(1) and (c)(1).
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2. Costs
The Commission generally does not anticipate any costs associated
with the above amendments as they are intended to streamline and
clarify existing financial reporting and capital requirements. Of the
above, only the amendments to Commission regulation 23.105(l) \244\
would impose additional financial reporting requirements on nonbank SDs
and nonbank MSPs not approved to use models to file Schedules 2-4 of
Appendix B.
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\244\ 17 CFR 23.105(l).
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Currently, there are 8 nonbank SDs not approved to use models that
are not currently filing Schedules 2-4 of Appendix B, but that would be
required to do so under the amendments to Commission regulation
23.105(l).\245\ The information required under Appendix B is nearly
identical in all material respects to corresponding forms found in the
SEC Form FOCUS Report Part II, as well as the capital and financial
reporting requirements by the NFA for its member nonbank SDs and
nonbank MSPs. Thus, the Commission has determined that these nonbank
SDs already have developed policies, procedures, and systems to
aggregate, monitor, and track their swap activities and risks as is
required under Schedules 2-4 of Appendix B, which should mitigate some
of the burdens of the additional reporting and recordkeeping
requirements. Finally, the amendments to Commission regulation
23.105(k) \246\ clarify that nonbank SDs and nonbank MSPs approved to
use models may comply with the requirements to provide specific
financial information required by Commission regulation 23.105(k) \247\
by filing Appendix B. Such nonbank SDs and nonbank MSPs have already
been filing Appendix B with the Commission, and thus the Commission has
determined that the amendments to
[[Page 45581]]
Commission regulation 23.105(k) \248\ would not impose any additional
burden for such nonbank SDs and nonbank MSPs.
---------------------------------------------------------------------------
\245\ Id.
\246\ 17 CFR 23.105(k).
\247\ Id.
\248\ Id.
---------------------------------------------------------------------------
3. Section 15(a) Factors
The following is a discussion of the cost and benefit
considerations of this rulemaking, as it relates to the five broad
areas of market and public concern identified in section 15(a) of the
CEA: (1) protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of swaps markets;
(3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations.
a. Protection of Market Participants and the Public
The rules adopted herein are intended to enhance the clarity of
financial reporting and computation requirements by revising the
language of the regulations with respect to the type of forms and the
tests that SDs should be using as part of their financial reporting
process. The changes to the computation of tangible net worth are
anticipated to benefit the public by allowing investors to monitor
tangible net worth at the consolidated parent's level, and the
financial reporting requirements for both bank SDs and nonbank SDs set
out in this rulemaking should help the Commission and market
participants monitor and assess the financial condition of such SDs
more accurately and as was intended in the Final Rule. These amendments
are also intended to harmonize financial reporting requirements with
those of the prudential regulators, and the SEC, through which market
participants and the Commission can gain a clearer and more directly
comparable understanding of the financial reports received. Clarifying
rules should safeguard both market participants and the public by
improving transparency and reducing ambiguity.
b. Efficiency, Competitiveness, and Financial Integrity of Swaps
Markets
In this rulemaking, the Commission seeks to promote efficiency and
financial integrity of the swaps market by streamlining many of the
financial reporting requirements. For example, the amendments to
Commission regulation 23.105(p) \249\ permit certain bank SDs to file
with the Commission comparable Call Report schedules in accordance
with, and within the timeframe permitted by, the prudential regulators
that they currently file with the prudential regulators, or comparable
SEC-approved financial reports and schedules, as applicable. The
amendments to Commission regulation 23.105(p) \250\ would also allow
certain Non-U.S. bank SDs to file with the Commission what they
currently file with their respective home country regulators, subject
to certain conditions. In addition, the amendments to Commission
regulation 23.105(k) \251\ are meant to ensure that the information
listed in Appendix B is completed by all nonbank SDs and nonbank MSPs
as was intended, and is consistent with that required by the SEC and
NFA, and the amendments to Form 1-FR-FCM are meant to harmonize with
the SEC's requirements in its FOCUS Report Part II. Harmonizing
requirements should foster a more level playing field, ultimately
promoting trust and integrity within the market.
---------------------------------------------------------------------------
\249\ 17 CFR 23.105(p).
\250\ Id.
\251\ 17 CFR 23.105(k).
---------------------------------------------------------------------------
The Commission anticipates that these amendments will promote
greater operational efficiencies for both bank and nonbank SDs that are
already regulated, either prudentially or through comparable foreign
regulators, as they may be able to avoid creating duplicative
compliance and operational infrastructures. The amendments should allow
the Commission to monitor the financial integrity of swaps markets more
clearly and efficiently, including in the case of any default or
financial contagion.
Lastly, the Commission is amending the definition of
``predominantly engaged in non-financial activities'' as used in the
Tangible Net Worth Capital Approach by permitting entities to determine
whether they are predominantly engaged in non-financial activities at
either the parent or subsidiary level to be consistent with the
Commission's intention in the Final Rule.\252\ As discussed above, this
amendment properly calibrates the wording of the definition in
establishing eligibility for the Tangible Net Worth Capital Approach by
assessing non-financial activities at a consolidated parent level. In
doing so, it clarifies the Commission's intention to permit more
entities that are predominately engaged in non-financial activities to
be eligible for the Tangible Net Worth Capital Approach, thereby
creating greater market efficiency.
---------------------------------------------------------------------------
\252\ Final Rules, 85 FR 57502.
---------------------------------------------------------------------------
c. Price Discovery
The Commission anticipates that the amendments adopted herein may
enhance price discovery. By clarifying financial reporting and
computation requirements and harmonizing reporting practices, a more
efficient operating environment would be created for SDs, which are
important intermediaries within the swaps markets. This improved data
quality reported to regulators has the potential to enhance
supervision, leading to improved market quality. Consequently, this
could lead to a more effective and accurate price discovery process.
d. Sound Risk Management Practices
The Commission has determined that, as a result of the adopted
reporting and recordkeeping requirements, SDs may more effectively
track their trading and risk exposure in swaps and other financial
activities. To the extent that these SDs can better monitor and track
their risks, the Commission anticipates that this should help them
better manage risk within the entity.
e. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations related to the costs and benefits of the rule.
C. Other Amendments
The Commission is adopting a number of clarifying amendments
intended to align with existing Commission regulations, including: (1)
amending Commission regulation 23.105(c)(4) \253\ to add a two-business
days reporting timeframe to the requirement for nonbank SD notice
filing of a substantial reduction in capital; (2) amending Commission
regulations 23.101(a)(1)(i)(B) and 23.101(a)(1)(ii)(C) \254\ to
establish that the use of subordinated debt as regulatory capital is
subject to the approval of either an RFA of which the nonbank SD is a
member, or the Commission; and (3) amending Commission regulation
23.105(e)(4)(v) \255\ for SDs and MSPs to include an explicit
statement, if applicable, that there are no material differences
between the audited annual report and the unaudited annual report of
the same date.
---------------------------------------------------------------------------
\253\ 17 CFR 23.105(c)(4).
\254\ 17 CFR 23.101(a)(1)(i)(B) and (a)(1)(ii)(C).
\255\ 17 CFR 23.105(e)(4)(v).
---------------------------------------------------------------------------
1. Benefits
The amendments to the notice requirements in Commission regulation
23.105(c)(4) \256\ would add a two-business day requirement for nonbank
SDs filing a notice of substantial
[[Page 45582]]
reduction in capital. The Commission has determined that adding a
reporting timeframe to the notice requirement will enhance compliance
by providing regulatory certainty to nonbank SDs of when such a filing
is due.
---------------------------------------------------------------------------
\256\ 17 CFR 23.105(c)(4).
---------------------------------------------------------------------------
The amendments to Commission regulation 23.101(a)(1)(i)(B) \257\
would establish that the use of subordinated debt as regulatory capital
is subject to the approval of either an RFA of which the nonbank SD is
a member, or the Commission. The amendments should further provide
regulatory clarity by establishing the process for approving
subordinated debt for nonbank SDs, which was not explicitly articulated
in the Final Rule and had led to uncertainty among nonbank SDs.
---------------------------------------------------------------------------
\257\ 17 CFR 23.101(a)(1)(i)(B).
---------------------------------------------------------------------------
Lastly, the amendments to Commission regulation 23.105(e)(4)(v)
\258\ would require that the SDs and MSPs include an explicit
statement, if applicable, of no material differences between the
audited and the unaudited annual report of the same date. Doing so
should not only align the filing approach for auditors of SDs with that
of FCMs, but also enhance the reliability of such annual reports by
encouraging auditors to more rigorously assess the materiality of
reporting any discovered audit findings.
---------------------------------------------------------------------------
\258\ 17 CFR 23.105(e)(4)(v).
---------------------------------------------------------------------------
2. Costs
The Commission does not anticipate that compliance with the above
amendments will lead to any significant costs. The amendments to
Commission regulations 23.105(c)(4) and 23.105(e)(4)(v) \259\ are meant
to align the financial reporting requirements of SDs with that of FCMs.
Based on the Commission's experience with existing filings and
discussions with registered SDs, the Commission has determined that the
registrants will be able to file necessary information within the
timeframe provided. The amendments to Commission regulation
23.101(a)(1)(i)(B) \260\ are meant to establish a process of approving
subordinated debt for nonbank SDs, and as such they would not levy any
additional costs to the nonbank SDs.
---------------------------------------------------------------------------
\259\ 17 CFR 23.105(c)(4) and (e)(4)(v).
\260\ 17 CFR 23.101(a)(1)(i)(B).
---------------------------------------------------------------------------
3. Section 15(a) Factors
The following is a discussion of the cost and benefit
considerations of the rulemaking as it relates to the aforementioned
five broad areas of market and public concern identified in section
15(a) of the CEA.
a. Protection of Market Participants and the Public
The Commission anticipates that the amendment to Commission
regulation 23.105(c)(4) \261\ adopted herein should protect market
participants and the public against possible market disruption by
requiring that all SDs file a notice of a substantial reduction in
capital within two business days after such an incident has occurred.
Similarly, the amendments to Commission regulation 23.101(a)(1)(i)(B)
\262\ should provide market clarity on how subordinated debt is
approved for consideration as capital, and the amendments to Commission
regulation 23.105(e)(4)(v) \263\ should allow the Commission and the
public to effectively monitor cases where there are no material
differences between the audited and unaudited annual report of the same
date filed by nonbank SDs and nonbank MSPs. These amendments should
enable market participants to have better insights into SD's capital
and financial positions. This, in turn, should enhance the protection
of both market participants and the public.
---------------------------------------------------------------------------
\261\ 17 CFR 23.105(c)(4).
\262\ 17 CFR 23.101(a)(1)(i)(B).
\263\ 17 CFR 23.105(e)(4)(v).
---------------------------------------------------------------------------
b. Efficiency, Competitiveness, and Financial Integrity of Swaps
Markets
The amendments adopted herein should improve the accuracy and
completeness of nonbank SDs' and nonbank MSPs' financial reporting by
imposing a two-business day deadline for notice of substantial
reduction in capital, and an affirmative statement of no material
differences between the audited and unaudited annual financial
statement, as applicable. The establishment of a process for approving
subordinated debt should lead to increased efficiency in how such
subordinated debt is monitored. Further, these amendments are also
intended to harmonize financial reporting requirements with those of
the prudential regulators, as well as the Commission's existing
framework regarding FCMs. Harmonizing requirements should foster a more
level playing field, ultimately promoting trust and integrity within
the market.
c. Price Discovery
The Commission anticipates that the amendments adopted herein will
enhance price discovery. By improving financial reporting requirements
for nonbank SDs and nonbank MSPs, a more efficient operating
environment should be created for SDs, which are important
intermediaries within the swaps markets. This improved data quality
reported to regulators has the potential to enhance supervision,
leading to improved market quality. Consequently, this could lead to a
more effective and accurate price discovery process.
d. Sound Risk Management Practices
The Commission anticipates that the above amendments will lead to
better risk management practices among SDs and MSPs, particularly by
requiring them to monitor for potential reduction in capital and
material differences between the audited and the unaudited annual
financial statements.
e. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations related to the costs and benefits of the rule.
Note: The following appendix to this preamble pertains to a form
that does not appear in the Code of Federal Regulations.
Appendix to the Preamble--Adopted Revisions to Selected Section of Form
1-FR-FCM: Statement of the Computation of the Minimum Capital
Requirements
BILLING CODE 6351-01-P
[[Page 45583]]
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[[Page 45584]]
[GRAPHIC] [TIFF OMITTED] TR23MY24.001
[[Page 45585]]
[GRAPHIC] [TIFF OMITTED] TR23MY24.002
BILLING CODE 6351-01-C
List of Subjects in 17 CFR Part 23
Reporting and recordkeeping requirements, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21. Section 23.160 also
issued under 7 U.S.C. 2(i); Sec. 721(b), Pub. L. 111-203, 124 Stat.
1641 (2010).
0
2. Amend Sec. 23.100 by adding, in alphabetical order, a definition of
the term ``Call Report'' and revising the definitions of the terms
``Predominantly engaged in non-financial activities'' and ``Tangible
net worth'' to read as follows:
Sec. 23.100 Definitions applicable to capital requirements.
* * * * *
Call Report. This term means the Federal Financial Institutions
Examination Council Form 031 that a swap dealer or major swap
participant for which there is a prudential regulator is required to
file with its applicable prudential regulator.
* * * * *
Predominantly engaged in non-financial activities. A swap dealer is
predominantly engaged in non-financial activities if:
(1) The swap dealer's consolidated annual gross financial revenues,
or if the swap dealer is a wholly owned subsidiary, then the swap
dealer's consolidated parent's annual gross financial revenues, in
either of its two most recently completed fiscal years represents less
than 15 percent of the swap dealer's or the swap dealer's consolidated
parent's consolidated gross
[[Page 45586]]
revenue in that fiscal year (``15% revenue test''), and
(2) The consolidated total financial assets of the swap dealer, or
if the swap dealer is wholly owned subsidiary, then the consolidated
total financial assets of the swap dealer's parent, at the end of its
two most recently completed fiscal years represents less than 15
percent of the swap dealer's or the swap dealer's consolidated parent's
consolidated total assets as of the end of the fiscal year (``15% asset
test'').
(3) For purpose of computing the 15% revenue test or the 15% asset
test, a swap dealer's activities or swap dealer's parent's activities
shall be deemed financial activities if such activities are defined as
financial activities under 12 CFR 242.3 and appendix A to 12 CFR part
242, including lending, investing for others, safeguarding money or
securities for others, providing financial or investment advisory
services, underwriting or making markets in securities, providing
securities brokerage services, and engaging as principal in investing
and trading activities; provided, however, a swap dealer or a swap
dealer's consolidated parent may exclude from its financial activities
accounts receivable resulting from non-financial activities.
* * * * *
Tangible net worth. This term means the net worth of a swap dealer
or major swap participant as determined in accordance with U.S.
generally accepted accounting principles, or International Financial
Reporting Standards issued by the International Accounting Standards
Board if the swap dealer or major swap participant is permitted under
Sec. 23.105(b) to prepare and maintain books and records in accordance
with such standards, but in either case, excluding goodwill and other
intangible assets. In determining net worth, all long and short
positions in swaps, security-based swaps and related positions must be
marked to their market value. A swap dealer or major swap participant
must include in its computation of tangible net worth all liabilities
or obligations of a subsidiary or affiliate that the swap dealer or
major swap participant guarantees, endorses, or assumes either directly
or indirectly.
* * * * *
0
3. Amend Sec. 23.101 by revising paragraphs (a)(1)(i)(B),
(a)(1)(ii)(B) and (C), and adding paragraph (a)(1)(ii)(D) to read as
follows:
Sec. 23.101 Minimum financial requirements for swap dealers and
major swap participants.
(a)(1) * * *
(i) * * *
(B) An aggregate of common equity tier 1 capital, additional tier 1
capital, and tier 2 capital, all as defined under the bank holding
company regulations in 12 CFR 217.20, equal to or greater than eight
percent of the swap dealer's BHC equivalent risk-weighted assets;
provided, however, that the swap dealer must maintain a minimum of
common equity tier 1 capital equal to six point five percent of its BHC
equivalent risk-weighted assets; provided further, that any capital
that is subordinated debt under 12 CFR 217.20 and that is included in
the swap dealer's capital for purposes of this paragraph (a)(1)(i)(B)
must qualify as subordinated debt under Sec. 240.18a-1d of this title
in accordance with a qualification determination of the Commission or a
registered futures association of which the swap dealer is a member;
* * * * *
(ii) * * *
(B) A swap dealer that uses internal models to compute market risk
for its proprietary positions under Sec. 240.18a-1(d) of this title
must calculate the total market risk as the sum of the VaR measure,
stressed VaR measure, specific risk measure, comprehensive risk
measure, and incremental risk measure of the portfolio of proprietary
positions in accordance with Sec. 23.102 and appendix A to subpart E
of this part;
(C) A swap dealer may recognize as a current asset, receivables
from third-party custodians that maintain the swap dealer's initial
margin deposits associated with uncleared swap and security-based swap
transactions pursuant to the margin rules of the Commission, the
Securities and Exchange Commission, a prudential regulator, as defined
in section 1a(39) of the Act, or a foreign jurisdiction that has
received a margin Comparability Determination under Sec. 23.160; and
(D) The qualification of any subordinated debt used to meet any
capital requirements shall be as determined by the Commission or a
registered futures association of which the swap dealer is a member.
* * * * *
0
4. In Sec. 23.102, revise paragraph (d) to read as follows:
Sec. 23.102 Calculation of market risk exposure requirement and
credit risk exposure requirement using internal models.
* * * * *
(d) The Commission, or registered futures association upon
obtaining the Commission's determination that its requirements and
model approval process are comparable to the Commission's requirements
and process, may approve or deny the application, or approve or deny an
amendment to the application, in whole or in part, subject to any
conditions or limitations the Commission or registered futures
association may require, if the Commission or registered futures
association finds the approval to be appropriate in the public
interest, after determining, among other things, whether the applicant
has met the requirements of this section. A swap dealer that has
received Commission or registered futures association approval to
compute market risk exposure requirements and credit risk exposure
requirements pursuant to internal models must compute such charges in
accordance with paragraph (c) of this section.
* * * * *
0
5. In Sec. 23.103, revise paragraphs (a)(1) and (c)(1) to read as
follows:
Sec. 23.103 Calculation of market risk exposure requirement and
credit risk requirement when models are not approved.
(a) * * *
(1) Computes its regulatory capital requirements under Sec.
23.101(a)(1)(ii) or (a)(2), and
* * * * *
(c) * * *
(1) A swap dealer that computes regulatory capital under Sec.
23.101(a)(1)(ii) or (a)(2) shall compute counterparty credit risk
charges using the applicable standardized credit risk charges set forth
in Sec. 240.18a-1 of this title and Sec. 1.17 of this chapter for
such positions.
* * * * *
0
6. In Sec. 23.105, revise paragraphs (c)(2) and (4), (d)(2) through
(4), (e)(4)(v), (e)(6), (i)(1)(i) and (ii), (i)(2)(ii), (k)(1)
introductory text, (l), and (p)(2) and (7) to read as follows:
Sec. 23.105 Financial recordkeeping, reporting and notification
requirements for swap dealers and major swap participants.
* * * * *
(c) * * *
(2) A swap dealer or major swap participant who knows or should
have known that its regulatory capital at any time is less than 120
percent of its minimum regulatory capital requirement as determined
under Sec. 23.101, or less than the amounts identified in Sec.
1.12(b) of this chapter for a swap dealer or major swap participant
that is also a futures commission merchant, must provide written notice
to the Commission and to the registered futures association of which it
is a
[[Page 45587]]
member to that effect within 24 hours of such event.
* * * * *
(4) A swap dealer or major swap participant must provide written
notice within two business days to the Commission and to the registered
futures association of which it is a member of a substantial reduction
in capital as compared to that last reported in a financial report
filed with the Commission pursuant to this section. The notice shall be
provided if the swap dealer or major swap participant experiences a 30
percent or more decrease in the amount of capital that the swap dealer
or major swap participant holds in excess of its regulatory capital
requirement as computed under Sec. 23.101.
* * * * *
(d) * * *
(2) The financial reports required by this section must be prepared
in the English language and be denominated in United States dollars.
The financial reports shall include a statement of financial condition,
a statement of income/loss, a statement of changes in liabilities
subordinated to the claims of general creditors, a statement of changes
in ownership equity, a statement demonstrating compliance with and
calculation of the applicable regulatory capital requirement under
Sec. 23.101, and such further material information as may be necessary
to make the required statements not misleading. The monthly or
quarterly report and schedules must be prepared in accordance with
generally accepted accounting principles as established in the United
States; provided, however, that a swap dealer or major swap participant
that is not otherwise required to prepare financial statements in
accordance with U.S. generally accepted accounting principles, may
prepare the monthly or quarterly report and schedules required by this
section in accordance with International Financial Reporting Standards
issued by the International Accounting Standards Board.
(3) A swap dealer or major swap participant that is also registered
with the Securities and Exchange Commission as a broker or dealer,
security-based swap dealer, or a major security-based swap participant
and files a monthly Form X-17A-5 FOCUS Report Part II with the
Securities and Exchange Commission pursuant to Sec. 240.18a-7 or
240.17a-5 of this title, as applicable, must file such Form X-17A-5
FOCUS Report Part II with the Commission and with the registered
futures association in lieu of the financial reports required under
paragraphs (d)(1) and (2) of this section. The swap dealer or major
swap participant must file the form with the Commission and registered
futures association when it files the Form X-17A-5 FOCUS Report Part II
with the Securities and Exchange Commission; provided, however, that
the swap dealer or major swap participant must file the Form X-17A-5
FOCUS Report Part II with the Commission and registered futures
association no later than 17 business days after the end of each month.
(4) A swap dealer or major swap participant that is also registered
with the Commission as a futures commission merchant must file a Form
1-FR-FCM or such other form as the futures commission merchant is
permitted to file under Sec. 1.10 of this chapter, in lieu of the
monthly financial reports required under paragraphs (d)(1) and (2) of
this section.
(e) * * *
(4) * * *
(v) A reconciliation of any material differences from the unaudited
financial report prepared as of the swap dealer's or major swap
participant's year-end date under paragraph (d) of this section and the
swap dealer's or major swap participant's annual financial report
prepared under this paragraph (e) or, if no material differences exist,
a statement so indicating; and
* * * * *
(6) A swap dealer or major swap participant that is also registered
with the Commission as a futures commission merchant must file an
audited Form 1-FR-FCM or such other form as the futures commission
merchant is permitted to file under Sec. 1.10 of this chapter, and
must comply with the requirements of Sec. 1.16 of this chapter,
including filing a supplemental accountant's report on material
inadequacies concurrently with the audited annual report, in lieu of
the annual financial report required under this paragraph (e).
* * * * *
(i) * * *
(1) * * *
(i) The statement of financial condition including applicable
footnotes; and
(ii) The amounts of the swap dealer's or major swap participant's
regulatory capital and minimum regulatory capital requirement, computed
in accordance with Sec. 23.101.
* * * * *
(2) * * *
(ii) The amounts of the swap dealer's or major swap participant's
regulatory capital as of the fiscal year-end and its minimum regulatory
capital requirement, computed in accordance with Sec. 23.101.
* * * * *
(k) * * *
(1) A swap dealer that has received approval or filed an
application for provisional approval under Sec. 23.102(d) from the
Commission, or from a registered futures association of which the swap
dealer is a member, to use internal models to compute its market risk
exposure requirement and credit risk exposure requirement in computing
its regulatory capital under Sec. 23.101 must file with the Commission
and with the registered futures association of which the swap dealer is
a member the specific information contained in appendix B to subpart E
of this part and the following information within 17 business days of
the end of each month or quarter as applicable:
* * * * *
(l) Additional position and counterparty reporting requirements for
swap dealers and major swap participants not approved to use models. A
swap dealer or major swap participant which is not subject to paragraph
(k) of this section must provide the Commission and the registered
futures association of which the swap dealer or major swap participant
is a member, the additional specific information contained in appendix
B to subpart E of this part on a monthly or quarterly basis as
applicable to its required frequency of financial reporting under
paragraph (d) of this section.
* * * * *
(p) * * *
(2) Financial report and position information. (i) A swap dealer or
major swap participant that files a Call Report with its applicable
prudential regulator shall file Schedule RC--Balance Sheet and Schedule
RC--R Regulatory Capital from its Call Report filed with the prudential
regulator, and schedule 1 of appendix C to subpart E of this part, with
the Commission on a quarterly basis. The swap dealer or major swap
participant shall file the schedules with the Commission on the date
the Call Report is due to be filed with the swap dealer's or major swap
participant's prudential regulator.
(ii) A swap dealer or major swap participant domiciled in a non-
U.S. jurisdiction that is not required to file a Call Report by its
applicable prudential regulator shall file a statement of financial
condition and regulatory capital information containing comparable
financial information as required by Schedule RC--Balance
[[Page 45588]]
Sheet and Schedule RC--R Regulatory Capital of the Call Report, and
shall file schedule 1 of appendix C to subpart E of this part, with the
Commission on a quarterly basis. The statement of financial condition,
regulatory capital information, and schedule 1 of appendix C to subpart
E of this part shall be prepared and presented in accordance with the
accounting standards permitted by the swap dealer's or major swap
participant's home country regulatory authorities; provided, however,
that the schedules and information must be in the English language with
balances converted to U.S. dollars. The swap dealer or major swap
participant shall file the statement of financial condition, regulatory
capital information, and schedule 1 of appendix C to subpart E of this
part with the Commission no later than 90 calendar days after the end
of the swap dealer's or major swap participant's fiscal quarter.
* * * * *
(7) A swap dealer or major swap participant that is subject to the
capital requirements of a prudential regulator and is also registered
with the Securities and Exchange Commission as a security-based swap
dealer or a major security-based swap participant and files a quarterly
Form X-17A-5 FOCUS Report Part IIC with the Securities and Exchange
Commission pursuant to Sec. 240.18a-7 of this title, must file such
Form X-17A-5 FOCUS Report Part IIC with the Commission in lieu of the
financial reports required under paragraph (p)(2) of this section. The
swap dealer or major swap participant must file the form with the
Commission when it files the Form X-17A-5 FOCUS Report Part IIC with
the Securities and Exchange Commission; provided, however, that the
swap dealer or major swap participant must file the Form X-17A-5 FOCUS
Report Part IIC with the Commission no later than 35 calendar days from
the date the report is made.
0
7. In appendix B to subpart E of part 23, revise the schedule headings
of schedules 1, 2, 3, and 4, and republish the schedules, to read as
follows:
Appendix B to Subpart E of Part 23--Swap Dealer and Major Swap
Participant Position Information
BILLING CODE 6351-01-P
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0
8. Revise appendix C to subpart E of part 23 to read as follows:
Appendix C to Supbart E of Subpart of 23--Specific Position Information
for Swap Dealers and Major Swap Participants Subjects to the Capital
Requirements of a Prudential Regulator
[GRAPHIC] [TIFF OMITTED] TR23MY24.007
BILLING CODE 6351-01-C
Issued in Washington, DC, on May 8, 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 Capital and Financial Reporting Requirements for Swap
Dealers and Major Swap Participants--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 final rule to amend certain requirements in part
23 of the Commission's regulations to facilitate compliance by swap
dealers (SDs) and major swap participants (MSPs) with the CFTC's
financial reporting obligations and demonstrate compliance with the
minimum capital requirements. The changes are intended to address
specific issues identified during the implementation of the
Commission's 2020 final rule on capital and financial reporting
requirements for SDs and MSPs,\1\ which serve as the cornerstone of
the post-Dodd Frank Act reforms to ensure SDs and MSPs remain
sufficiently capitalized. Although the amendments do not change the
Commission's capital framework for SDs and MSPs, these amendments
serve as an important step to ensure the Commission's capital rule
is strong, comprehensive, and clear.
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\1\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
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I thank the public for their comments on the proposal and staff
in the Market Participants Division, Office of the General Counsel,
and the Office of the Chief Economist for their work on the final
rule.
Appendix 3--Statement of Commissioner Kristin N. Johnson
Today [April 29, 2024], the Commodity Futures Trading Commission
(Commission or CFTC) adopts a final rule to amend certain of the
Commission's part 23 regulations. The Commission introduces updates
that underscore the critical importance of capital and reporting
rules in maintaining the integrity and stability of swaps markets
and broader domestic and global derivatives markets. These
regulations aim to mitigate known systemic risk concerns.
These well-tailored regulations update capital requirements and
financial reporting obligations for swap dealers (SDs) and major
[[Page 45594]]
swap participants (MSPs) (Final Rule).\1\ The Final Rule ensures
compliance with the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). The Final Rule aligns with the
statutory mandate established in the Dodd-Frank Act that requires
the Commission to adopt and implement robust capital and reporting
requirements in swaps markets. The Final Rule includes several
technical corrections improved by consultation with the prudential
regulators and the Securities and Exchange Commission (SEC) on the
adoption and implementation of the Commission's capital rules.
Consequently, I support the Final Rule.\2\
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\1\ Since no MSP is currently registered with the Commission, in
this statement, I will refer to SDs only.
\2\ Kristin N. Johnson, Commissioner, CFTC, Statement Regarding
Notice of Proposed Rulemaking to Amend Capital and Financial
Reporting Requirements for Swap Dealers and Major Swap Participants
(Dec. 15, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement121523b.
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CFTC Dodd-Frank Act Capital Adequacy Reforms
The Commission introduced new capital and financial reporting
requirements for SDs in 2020, as mandated by the Dodd-Frank Act.\3\
Section 4s(e) of the CEA introduced minimum capital requirements for
SDs,\4\ and section 4s(f) of the CEA created financial reporting and
recordkeeping requirements for all SDs.\5\ Bank SDs subject to
regulation by a prudential regulator are required to comply with the
minimum capital requirements adopted by the applicable prudential
regulator, while non-bank SDs and security-based swap dealers not
subject to regulation by a prudential regulator are required to meet
the minimum capital requirements of the Commission and SEC,
respectively. Banking regulators and the SEC have adopted capital
rules for swaps and security-based swaps activities.
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\3\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
\4\ 7 U.S.C. 6s(e).
\5\ 7 U.S.C. 6s(f).
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Given the complexities of our markets, the Commission regulates
SDs that may also be regulated by prudential regulators and the SEC.
The Commission's overall capital approach permits SDs to select one
of three methods to calculate their capital requirements, as
permitted under the rule: the net liquid assets capital approach;
the bank-based capital requirements; or the tangible net worth
capital approach. The Commission's capital approach evidences the
Commission's recognition of the complexity and interconnectedness of
the derivatives markets.
Final Rule's Codification of No-Action Letters
The Commission published a Notice of Proposed Rulemaking
(Proposed Rule) on January 16, 2024.\6\ The comment period for the
proposal closed on February 13, 2024, and the Commission received 4
substantive comment letters, all of which expressed general support
for the Proposed Rule. Other than two revisions to the timing for
the submission of reports, the proposed amendments were adopted as
proposed.
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\6\ Capital and Financial Reporting Requirements for Swap
Dealers and Major Swap Participants, 89 FR 2554 (Jan. 16, 2024).
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My statement in support of the Proposed Rule details the
amendments adopted today. The Commission is primarily codifying
Interpretive Letter 21-15, which applies to commercial non-bank SDs,
and No-Action Letter (NAL) 21-18, which was extended under NAL 23-11
and applies to bank SDs, including non-U.S. bank SDs. The Final
Rule, which also addresses several other recommended amendments, is
a result of collaboration with the banking regulators and the SEC.
The Final Rule aims to harmonize processes, procedures, and forms
for financial reports and notifications.
Importantly, the amendments do not change the substantive
capital requirements, ``which serve as a cushion during times of
severe market stress to ensure our registrants' safety and
soundness, protect the financial stability of our financial system,
and prevent a run on our financial institutions.'' \7\ The
amendments buttress the financial condition reporting requirements,
as the Commission retains ``visibility and insight into the business
and financial health of our registrants and enables us to require
corrective action and prevent a failure of a single entity or group
of entities or segment of the derivatives market, which could raise
system risk concerns.'' \8\ These are important policy
considerations I mentioned in my statement supporting the Proposed
Rule.
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\7\ Johnson, supra note 2.
\8\ Id.
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Conclusion
It is the Commission's duty to ensure that the implementation of
the capital reforms under the Dodd-Frank Act is effective yet
sensible and practical, and the Final Rule does just that. I want to
thank the Market Participants Division for the excellent work
bringing forth this final rulemaking, in particular Joshua Beale,
Jennifer Bauer, Maria Aguilar-Rocha, Andrew Pai, and Christine
McKeveny.
Appendix 4--Statement of Support of Commissioner Caroline D. Pham
I support the Capital and Financial Reporting Requirements for
Swap Dealers (SD) and Major Swap Participants (MSP) Final Rule (SD
Financial Reporting Rule Amendments) because it aligns the timing of
financial reporting for entities that have a bank regulator or are
registered with the Securities and Exchange Commission (SEC). This
simplifies the filing process for these reports to minimize
unnecessary costs and administrative burdens. I would like to thank
Jennifer Bauer, Andrew Pai, Maria Aguilar-Rocha, Christine McKeveny,
Josh Beale, Tom Smith, and Amanda Olear in the Market Participants
Division for their work on the SD Financial Reporting Rule
Amendments. I truly appreciate the time staff took to discuss my
questions and concerns.
However, I believe that the Commission should have taken an
evergreen approach to SEC harmonization of the filing time period.
The Commission proposed to amend Regulation 23.105(p)(7) \1\ to
include a 30-day deadline for dually-registered non-U.S. bank swap
dealers and major swap participants to file comparable SEC-approved
financial reports and schedules with the CFTC following the date on
which the report is made.\2\ One comment letter pointed out that the
30-day deadline is inconsistent with the Commission's alignment of
the deadline for U.S. bank swap dealers and major swap participants
that are not dually registered to submit the report when required by
the prudential regulators, and that the SEC had aligned its deadline
for all bank security-based swap dealers to submit such reports to
the same 35-day deadline.\3\
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\1\ Existing Regulation 23.105(p)(7) allows swap dealers or
major swap participants that are subject to rules of a prudential
regulator and are also registered with the SEC as a security-based
swap dealer or a major security-based swap participant, and files a
quarterly Form X-17A-5 FOCUS Report Part IIC with the SEC pursuant
to 17 CFR 240.18a-7, to file such Form X-17A-5 FOCUS Report Part IIC
with the CFTC in lieu of the financial reports required under
Regulation 23.105(p)(2). The swap dealer or major swap participant
must file the form with the Commission when it files the Form X-17A-
5 FOCUS Report Part IIC with the SEC, provided, however, that the
swap dealer or major swap participant must file the Form X-17A-5
FOCUS Report Part IIC with the CFTC no later than 30 calendar days
from the date the report is made. See 17 CFR 23.105(p)(7).
\2\ See Proposed Rule, Capital and Financial Reporting
Requirements for Swap Dealers and Major Swap Participants, 89 FR
2554, 2558 (Jan. 16, 2024), https://www.govinfo.gov/content/pkg/FR-2024-01-16/pdf/2023-28649.pdf.
\3\ See Comment Letter, Institute of International Bankers
(IIB), the International Swaps and Derivatives Association (ISDA),
and the Securities Industry and Financial Markets Association
(SIFMA), Capital Requirements for Swap Dealers and Major Swap
Participants (RIN 3038-AD54), 5 (Feb. 13, 2024), https://comments.cftc.gov/Handlers/PdfHandler.ashx?id=35181.
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While the Commission agreed with the comment letter and extended
the deadline to 35 days to allow dual registrants to submit the
reports on the same day as they do with the SEC, the Commission
should have made the deadline ``on the date Form X-17A-5 FOCUS
Report Part IIC is due to be filed with the [SEC].'' \4\ This would
avoid the Commission having to do another rulemaking to harmonize if
the SEC updates its FOCUS report filing deadlines in the future.
This would have anticipated a future problem and adopted a forward-
looking solution, rather than setting up an issue we may have to
react to in the future.
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\4\ Id. at 7.
[FR Doc. 2024-10342 Filed 5-22-24; 8:45 am]
BILLING CODE 6351-01-P