Statement of Commissioner Dan M. Berkovitz on Amendment to Comparability Determination for Japan:  Margin Requirements for Uncleared Swaps

March 26, 2019

I support today’s Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (“Amended Japan Determination”).

The Commission’s regulations governing margin requirements for uncleared swaps (“CFTC Margin Rules”) help mitigate risks posed by uncleared swaps to swap dealers, major swap participants, and the overall U.S. financial system.[1]   In this regard, the CFTC Margin Rules—and other rules around the world requiring margin for uncleared swaps—are a fundamental component of the regulatory reforms adopted in the wake of the 2008 financial crisis.

In 2016, the CFTC adopted its cross-border margin rule to permit swap dealers and major swap participants located in non-U.S. jurisdictions to comply with the CFTC’s Margin Rules by meeting the similar rules of their home jurisdiction if the Commission has deemed those rules comparable.[2]   This framework for “substituted compliance” supports the global nature of the swaps market and conforms to the directive in the Dodd-Frank Act for the Commission to consult and coordinate with international regulators to establish consistent international standards for the regulation of swaps entities and activities.[3]   The substituted compliance framework helps reduce duplicative and overlapping regulatory requirements where effective comparable regulation exists, facilitates the ability of U.S. market participants to compete in foreign jurisdictions, and is consistent with the principle of international comity.

The CFTC’s cross-border margin rule establishes an outcomes-based approach that considers a number of factors and does not require strict conformity with the CFTC Margin Rules.   As I have said before, a comparability determination should not be based solely on the home country’s written laws and regulations, but also consider the country’s broader system of regulation, including oversight and enforcement.   In addition, the nature of the other country’s relevant markets may be taken into account.   Finally, in considering these issues, the Commission should keep in mind the principle of comity: the reciprocal recognition of the legislative, executive, and judicial acts of another jurisdiction.[4]   Given all of these factors, the analysis for each determination often is unique and can change over time as circumstances change.

The Amended Japan Determination finds comparability regarding the scope of entities subject to the margin requirements and the treatment of margining for inter-affiliate transactions.  The Commission’s original determination for Japan’s margin rules, issued on September 15, 2016, did not find comparability in these areas.   Subsequently, it appeared that the absence of a finding of comparability regarding the scope of entities and inter-affiliate swaps issues was causing some confusion in applying the original determination.   The CFTC staff therefore further reviewed applicable Japanese laws and regulations and engaged heavily with the Japan Financial Services Agency (“JFSA”) to develop a more complete understanding of how the JFSA regulates and supervises margining for the scope of entities that enter into swaps and inter-affiliate swap transactions.   The in-depth analysis outlined in today’s Amended Japan Determination reflects a more holistic understanding by the Commission of the JFSA’s approach to managing the risks of swap trading for the scope of relevant entities and inter-affiliate swaps.   The analysis also notes the potential for risks from these swap activities returning to the United States is expected to be significantly mitigated.

For example, although the JFSA does not require variation margin for the same scope of entities covered by the CFTC Margin Rules, the JFSA indicated that the entities excluded tend to be smaller and have less regular involvement in the swap markets, thereby presenting less risk to the financial system.  Furthermore, as noted in the determination, if a Japanese entity that would otherwise be subject to the CFTC Margin Rules, but for substituted compliance, enters into swaps with any U.S. entity covered by the CFTC Margin Rules, then both entities are required to exchange margin per our rules.   This requirement limits the possibility of unmargined risk coming to the U.S.   Similarly, for inter-affiliate swap treatment, a more complete understanding of the JFSA’s approach to requiring Japanese affiliates to hold more capital when margin is not exchanged with other affiliates, among other things, helps offset exposures not covered when margin is not collected.

As with other jurisdictions where the legal and regulatory structure does not mirror our own, and the substituted compliance determinations are based on the overall outcome of the regulatory system, subsequent monitoring may be appropriate to confirm that our initial understanding of the regulatory structure and the expected outcomes is accurate.  Accordingly, I encourage the CFTC staff to periodically assess the implementation of this determination to confirm our expectations are accurate.

I thank the CFTC staff for their thorough work on this determination and appreciate their responsiveness to our comments and suggestions.  I would also like to thank my fellow Commissioners for their collaboration in helping us reach this positive outcome.