I support the Notice of Proposed Rulemaking on Capital and Financial Reporting Requirements for Swap Dealers and Major Swap Participants (Proposal) because it addresses issues left outstanding from implementing a rule by offering pragmatic solutions that not only rectify the problem at hand, but do so without imposing unnecessary burdens or complications. I would like to thank Andrew Pai, Maria Aguilar-Rocha, Josh Beale, Tom Smith, and Amanda Olear in the Market Participants Division for their work on the Proposal. I greatly appreciate the time staff took to discuss my questions and concerns.

It is important to remember that most of the CFTC’s provisionally-registered swap dealers are subject to three or more regulatory regimes.[1] Of the CFTC’s 106 currently provisionally registered swap dealers, most are also registered with and supervised by another agency or authority, such as a prudential, functional, or market regulator. This awareness must inform the Commission’s approach when considering any rule impacting swap dealers.[2] Otherwise, we risk missing the nuances associated with the complex interplay or conflict that arises between the various regulations.

Capital, the subject of today’s Proposal, is one area in which the CFTC’s provisionally-registered swap dealers are subject to multiple regulatory regimes. By this point, we know that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandated the Commission establish capital requirements for swap dealers and major swap participants,[3] and that the Commission adopted capital requirements for nonbank swap dealers and major swap participants,[4] as well as financial reporting requirements for bank swap dealers and major swap participants, together with nonbank swap dealers and major swap participants.[5]

Therefore, when considering solutions to challenges that have arisen while implementing the capital rules, we must remember that we are not a prudential banking regulator like the Fed, OCC, or FDIC, nor are we a primarily disclosures-based market regulator like the SEC.[6] Today’s proposal offers a pragmatic solution to challenges faced by our market participants that respects the differences among the financial regulators.

The extent of capitalization and reach of financial reporting were decided years ago and are not the subject of today’s Proposal. Rather, today we consider, primarily, fixing issues that arose when implementing the capital and financial reporting rules,[7] and secondarily, miscellaneous technical changes to make the rules more workable.

I support the entire Proposal, but will focus my comments on the codification of: (1) CFTC Staff Interpretative Letter No. 21-15 for commercial swap dealers and major swap participants electing the Tangible Net Worth Capital Approach;[8] and (2) the time-limited, no-action relief in CFTC Letter No. 21-18[9] regarding financial reporting requirements for bank swap dealers and major swap participants.[10]

Before I begin, I want to draw attention to a bigger issue relating to capital for the coming year. The broad impacts of the Basel III Endgame are being widely reported and discussed,[11] including impact to CFTC swap dealers and major swap participants.[12] I am deeply concerned about this issue for our markets, which is why I expect that under my sponsorship, the Global Markets Advisory Committee (GMAC) will work on offering actionable recommendations for the Commission in this area. I encourage everyone to watch the presentation made on the subject at the recent November 6^th meeting via the meeting’s archived webcast,[13] and look forward to working with the GMAC and all of you on the issue in 2024.

A.           Codifying CFTC Letter No. 21-15

Nonbank swap dealers and major swap participants can elect one of three approaches to calculating their regulatory capital.[14] One option allows certain qualifying nonbank swap dealers and major swap participants to use a regulatory capital approach that is based on the firm’s tangible net worth.[15] Generally, these nonbank swap dealers and major swap participants have to be “predominantly engaged in non-financial activities” and maintain positive tangible net worth according to U.S. generally accepted accounting practices (GAAP) at all times.[16]

When the rules were being implemented, nonbank swap dealers identified three problems: (1) the rule’s preamble expanded the definition of “predominantly engaged in financial activities” to permit these nonbank swap dealers and major swap participants to meet the regulation’s tangible net worth test directly or through its ultimate consolidated parent entity, but the text of Regulation 23.100 was unclear about it; (2) Regulation 23.105(b) allowed books and records to be maintained in accordance with International Financial Reporting Standards (IFRS) but the “tangible net worth” definition in Regulation 23.100 only referenced U.S. GAAP; and (3) there was an inconsistency in the timelines of certain financial reports required by Regulation 23.105(l).[17]

To fix these issues, the Commission is proposing to adopt the remedies provided in Letter No. 21-15: revise the definitions of “tangible net worth” and “predominantly engaged in non-financial activities” and Regulation 23.105 to clarify the test can be applied at the parent or entity level, as well as using U.S. GAAP or IFRS; and amend Regulation 23.105(l) to clarify that position and other related exposure reporting must be made at the same frequency as financial reporting, which in this instance is quarterly.

B.           Codifying CFTC Letter No. 21-18

Bank swap dealers and major swap participants must file unaudited quarterly financial information with the CFTC within 30 calendar days of the end of their fiscal quarter.[18] The information should be submitted via the specific forms in Appendix C to Subpart E of Part 23. The Commission intended that these forms would be identical to those filed by banks with their prudential regulator. However, when the capital and financial reporting rules were being implemented, it became evident that there were some differences in the forms, as well as with the timelines for filing.

Therefore, CFTC Letter No. 21-18 let bank swap dealers and major swap participants provide home country regulator reports and comparable schedules on the prudential regulators’ timeline; foreign bank swap dealers and major swap participants provide home country regulator balance sheets and statements of regulatory capital information as long as they are in English, USD, and within 15 days of filing with home country regulator; and SEC dually-registered foreign bank swap dealers and major swap participants file comparable SEC approved financial reports and schedules.

To fix these issues, the Commission is proposing to adopt the remedies provided in CFTC Letter No. 21-18: amend Regulation 23.105(p) to allow foreign bank swap dealers and major swap participants to file the applicable financial reporting within 90 days of the end of the financial reporting period; accept balance sheet and regulatory capital schedules under prudential regulator reports for U.S. bank swap dealers and major swap participants; and to accept the filing of such schedules at the same time as filed with prudential regulators. For foreign swap dealers, the Commission is proposing to permit the filing of a balance sheet and statement of regulatory capital schedules in the format provided to their home country regulator, as long as they are in English and converted to USD, and filed no later than 90 days following the reporting period end date.

I support this rule because codifying well-tailored relief helps provide market certainty while avoiding imposing unnecessary burdens and creating compliance complications. I also support this rule because the Commission does so while also continuing to respect the differences between our rules and those of the other regulators overseeing swap dealers on capital. It is a laudable achievement. I again commend staff in the Market Participants Division for their hard work on this rule, and look forward to reviewing the comments.

[3]  Section 731 of the Dodd-Frank Act added a new Section 4s to the Commodity Exchange Act (CEA) to require the CFTC adopt rules establishing minimum initial margin, variation margin and capital requirements for swap dealers and major swap participants. Under CEA Section 4s(e), the CFTC is required to adopt capital requirements for swap dealers and major swap participants that are not subject to the capital rules of the prudential regulators, which include nonbank subsidiaries of bank holding companies.

[4]  I.e., swap dealers and major swap participants that are not subject to the capital requirements of a prudential regulator, as opposed to swap dealers and major swap participants for which there is a prudential regulator.

[5]  I.e., swap dealers and major swap participants that are not subject to the capital requirements of a prudential regulator, along with the swap dealers and major swap participants for which there is a prudential regulator. See Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020).

[6]  Concurring Statement of Commissioner Caroline D. Pham Regarding the CFTC Request for Information on Climate-Related Financial Risk (June 2, 2022). I reiterate the importance of keeping our focus on our markets, products, and purpose to avoid the risk of diluting our limited resources and potentially straying from our core expertise and responsibilities into areas already tasked to others.

[7]  During that time, staff worked to develop processes, procedures, and forms to accept the financial reports and notifications required by the capital and financial reporting rules. In so doing, CFTC staff received several compliance related questions, and as a result, issued eight staff letters, all available at the Commission’s website, www.cftc.gov: CFTC Letter Numbers 21-15 (June 29, 2021); 21-18 (Aug. 31, 2021); 21-20 (Sept. 30, 2021); 21-21 (Sept. 30, 2021); 21-22 (Sept. 30, 2021); 21-23 (Sept. 30, 2021); 22-01 (Jan. 5, 2022); 22-02 (Jan. 5, 2022).

[8]  CFTC Letter No. 21-15 (June 29, 2021), https://www.cftc.gov/csl/21-15/download.

[9]  Staff extended the relief in CFTC Letter No. 21-18 until the earlier of October 6, 2025 or the adoption of any revised financial reporting requirements for bank swap dealers and major swap participants under Regulation 23.105(p). CFTC Letter No. 23-11 (July 10, 2023), available at https://www.cftc.gov/csl/23-11/download.

[10]  CFTC Letter No. 21-18 (Aug. 31, 2021), https://www.cftc.gov/csl/21-18/download. Bank swap dealers and major swap participants have limited financial reporting obligations, recognizing that prudential regulators have an obligation to impose their capital requirements and are primarily responsible for monitoring bank swap dealer and major swap participant capital under the CEA. 7 U.S.C. 6s(e)(2)(i).

[11]  Recent coverage has focused on what the Federal Reserve Board supports and could look to do. Victoria Guida, “Fed’s Waller: Support for Final Basel Rule ‘a Possibility’” PoliticoPro (Nov. 28, 2023).

[12]  Luke Clancy, “US Basel Endgame Hits Clearing with Op Risk Capital Charges” Risk.net (Sept. 25, 2023), https://www.risk.net/regulation/7957815/us-basel-endgame-hits-clearing-with-op-risk-capital-charges.

[13]  The CFTC maintains the archived webcast at: https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.

[14]  17 CFR 23.101.

[15]  17 CFR 23.101(a)(2).

[16]  Id.

[17]  CFTC Letter No. 21-15.

[18]  17 CFR 23.105(p)(2). The required financial information consists of a statement of financial condition, a statement of regulatory capital, and a schedule of the aggregate positions in security-based swaps, mixed swaps, swaps, and other derivatives.