I support the Commission considering efforts to safeguard the resilience of swap dealers, including through the proposed capital comparability determination for Mexico. The proposal recognizes that strong capital requirements are essential to ensure a swap dealer’s safety and soundness, and that cross-border coordination with a like-minded regulator can promote financial stability. I commend the staff for their hard work on today’s proposal – and thank them for working closely with me and my office on changes to improve the proposal.

Lessons Learned from the 2008 Financial Crisis

One of the lessons learned from the 2008 financial crisis was the need to protect our markets from the serious risks posed by inadequate amounts of capital that could serve as a buffer against risk. Critical financial reforms introduced by the Dodd-Frank Act included minimum capital requirements for swap dealers. I note that two of the three swap dealers in Mexico that would be immediately subject to this proposed determination are affiliates of two of the largest recipients of Troubled Asset Relief Program dollars.

Dodd-Frank Act reforms led to the CFTC establishing capital requirements for nonbank swap dealers, implementing rules to keep our markets safe. Requiring firms to maintain a strong amount of high-quality capital helps to ensure their resilience – their ability to meet their financial commitments, and continue to perform their critical market making function, even when faced with stress events in the market, unexpected losses or decreases in the value of their assets. This lowers the risk in the financial system, and helps to ensure financial stability.

Our capital rules are a critical pillar of the Dodd-Frank Act’s reforms. Therefore, we must ensure that our comparability assessments are sound and do not increase risk to U.S. markets.

The CFTC’s Second Substituted Compliance Determination for Capital Requirements

The global nature of the 2008 financial crisis also highlighted the need for the CFTC to coordinate with foreign regulators, as swap activities in a foreign jurisdiction may have an impact in the United States. This is particularly relevant here as two of the three existing swap dealers are affiliates of large U.S. financial institutions.

Today’s proposal is only the second substituted compliance determination to be considered for the CFTC’s capital rules, following our proposal in July related to swap dealers in Japan. Therefore, we should proceed carefully, as what we do will establish precedent.

Substituted compliance is not an all-or-nothing proposition. The Commission can impose any terms or conditions that it deems appropriate, and can continue to require direct compliance with certain of the CFTC’s rules. That is what we are proposing to do here in certain areas.

For example, I strongly support the proposed condition for Mexican nonbank swap dealers to comply with the CFTC’s $20 million minimum capital requirement – just as we proposed to require for nonbank swap dealers in Japan. This is one of the most critical components of the CFTC’s capital requirements. It helps to ensure that each nonbank swap dealer maintains, at all times, a fixed amount of the highest quality capital to meet its financial obligations without becoming insolvent. The minimum capital requirement recognizes the significant role that swap dealers play in our markets – with extensive connections to other swap counterparties and to each other – and helps ensure their resilience.

Even with substituted compliance, the CFTC must ensure that we receive – both on a periodic, and event-driven, basis – the information necessary to identify, evaluate and address situations that may have an adverse impact on firms or financial markets. That is why I support the conditions in the proposal that would require a nonbank swap dealer in Mexico to notify the Commission of undercapitalization and other events that may indicate financial or operational issues. I look forward to public comment on whether allowing Mexican nonbank swap dealers to submit financial reports that are required to be prepared under Mexico’s rules will ensure that the Commission has access to the information needed to effectively monitor the financial health – including the capital adequacy – of these firms.

The CFTC has a duty to ensure that our comparability assessment is sound and that the foreign regulator is like-minded, not only in their rules but in their supervision, oversight, and enforcement. Therefore, a strong regulatory relationship with the Mexican Banking and Securities Commission (Comision Nacional Bancaria y de Valores) (“CNBV”) and regular continued coordination is important. I highlight, and express my appreciation for, the CNBV’s engagement with our staff. Continued engagement will enhance our ability to work together swiftly and effectively to address any significant market stress events or other circumstances that may threaten a firm’s safety and soundness.

It is a priority for me to ensure that the CFTC guards against complacency with post-crisis reforms, particularly after market stresses from the pandemic and geopolitical events. Our capital rules serve as critical pillars of Dodd-Frank Act reforms to help ensure the safety and resilience of the markets and market participants from serious risks and contagion. Substituted compliance must leave U.S. markets and our economy at no greater risk than full compliance with our rules.