SPEECHES & TESTIMONY

Statement of CFTC Commissioner Brian Quintenz on the Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

March 26, 2019

I support the expansion of the Commission’s 2016 Margin Comparability Determination for Japan (Determination).[1]  I am pleased that the amendments to the Determination adopted by the Commission today apply an outcomes-based approach to substituted compliance and recognize the discretion of Japanese financial regulators to implement reforms consistent with the G-20 framework in a manner suited to their local markets.  Moreover, the expanded Determination is appropriately deferential to our counterparts in Japan, who have already found CFTC margin regulations to be comparable to their own.

In the past, overly narrow comparability determinations have sometimes required Commission staff to provide additional no-action relief to address relatively minor differences between regimes.  For example, after the 2016 Japan Determination was issued, swap dealers requested relief from the requirement to post and collect variation margin on a T+1 timeframe with certain counterparties.[2]  Instead of the T+1 standard, these firms requested a T+3 standard, in order to accommodate the use of Japanese Government Bonds (a very common form of collateral in Japan), which settle in two or three days.  The relief was needed in order to allow swap dealers to continue transacting with smaller Japanese counterparties.  I am pleased that under the comprehensive Determination issued today, further no-action relief will not be necessary because the Determination appropriately accounts for swap dealers’ various types of counterparties and the timing of collateral exchanges.

It is also important to note that while the Determination is deferential to the approach taken in Japan, it limits the flow of risk back to the United States.  This is because under the Commission’s Cross-Border Margin Rule, when a U.S. swap dealer enters into an uncleared swap with a Japanese swap dealer or end-user, it is required to collect initial margin and variation margin must be exchanged.  In the case of uncleared swaps between affiliated U.S. and non-U.S. swap dealers, variation margin is always required.  Moreover, the Commission will continue to work closely with the Financial Services Agency of Japan to coordinate our supervision and oversight of regulated entities that operate on a cross-border basis in both the United States and Japan.[3]

I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for their hard work in issuing today’s amended Determination.  I would also like to compliment Chairman Giancarlo for his leadership on the cross-border regulation of the global swaps market.  The Chairman has presented a vision for cross-border regulation grounded in deference and recognition that many of our global counterparts have implemented post-crisis reforms comparable to our own.  I strongly support this vision and believe it is essential to maintaining a liquid, competitive global swaps market and avoiding regulatory-driven market fragmentation.

 

[1] Comparability Determination for Japan:  Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 63376 (Sept. 15, 2016).

[2] CFTC Staff Letter No. 17-13, Commission Regulation 23.153: Time-Limited No-Action Position for the Timing of the Posting and Collection of Variation Margin from Certain Counterparties Operating in Japan (Feb. 23, 2017), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-13.pdf.

[3] Memorandum of Cooperation Related to the Supervision of Cross-Border Covered Entities (March 10, 2014), https://www.cftc.gov/idc/groups/public/%40internationalaffairs/documents/file/cftc-jfsamoc031014.pdf.