I support the Commission’s issuance of the Notice of Proposed Order and Request for Comment (Notice of Proposed Order and Request for Comment) on the Application for the Capital Comparability Determination submitted on behalf of Nonbank Swap Dealers subject to Regulation by the Mexican Comisión Nacional Bancaria y de Valores (Mexican Banking and Securities Commission).  The application of the nonbank swap dealers Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V.; Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V.; and Casa de Bolsa Finamex, S.A. de C.V. (Mexican nonbank swap dealers) domiciled in Mexico and subject to regulation by the Mexican Banking and Securities Commission seeking a capital comparability determination for Mexican nonbank swap dealers is the second proposed order and request for comment to come before the Commission since it adopted its substituted compliance framework for non-U.S. domiciled nonbank swap dealers in July 2020.[1]

Today, a little over a decade after the onset of the financial crisis precipitated by events in the bespoke, bilateral, over the counter swaps market, we continue to vigilantly monitor and surveil the risk management activities among market participants.  Our efforts to coordinate and harmonize regulation with regulators around the world reinforces the adoption, implementation, and enforcement of sound prudential and capital requirements.  These requirements aim to ensure the integrity of entities operating in these markets, to ensure rapid identification and remediation of liquidity crises, and to mitigate the threat of systemic risks that may threaten the stability of domestic and global financial markets.

Capital requirements play a critical role in fostering the safety and soundness of financial markets.  As indicated in the Commodity Exchange Act, capital requirements protect market participants against concerning risks that threaten the integrity of individual market participants or potentially trigger a domino effect of cascading losses across financial markets.[2]  The Commission’s capital and financial reporting requirements are critical to ensuring the safety and soundness of our markets.[3]  Ensuring necessary levels of capital, as well as accurate and timely reporting about financial conditions, helps to protect swap dealers and the broader financial markets ecosystem from shocks, thereby ensuring resiliency.

Section 4s(e) of the CEA directs the Commission and “prudential regulators” to impose capital requirements on all swap dealers (“SDs”) and major swap participants (“MSPs”) registered with the Commission.[4]  Section 4s(e) of the CEA also directs the Commission and prudential regulators to adopt regulations imposing initial and variation margin requirements on swaps entered into by SDs and MSPs that are not cleared by a registered derivatives clearing organization.  Applying the Congressional directive, Section 4s(e) bifurcates the oversight of bank affiliated and non-bank affiliated SD and MSP.  The Commission has authority to impose capital requirements and margin requirements for uncleared swap transactions.[5]

Under Section 4s(f), the Commission may adopt rules imposing financial condition reporting obligations on all SDs and MSPs.  In accord with the same, the Commission has adopted financial reporting obligations.

I support acknowledging market participants’ compliance with the regulations of foreign jurisdictions when the requirements lead to an outcome that is comparable to the outcome of complying with the CFTC’s corresponding requirements.  Substituted compliance must not, however, be confused with deference.  To the contrary, the swap dealers that qualify for substituted compliance under regulation 23.106 must be Commission registrants.  The Proposed Order, if approved, would ensure that relevant swap dealers domiciled in Mexico remain subject to the Commission’s examination and enforcement authority over the firms.

Capital adequacy and financial reporting are pillars of risk management oversight for any business, and, for firms operating in our markets, it is of the utmost importance that rules governing these risk management tools are effectively calibrated, continuously assessed, and fit for purpose.  The Commission’s efforts in considering this proposal reflect careful and thoughtful evaluation of the comparability of relevant standards and an attempt to coordinate our efforts to bring transparency to the swaps market and reduce its risks to the public.  I look forward to reviewing the comments that the Commission will receive in response to the Notice of Proposed Order and Request for Comment and, in particular, comments exploring proposed conditions.

Finally, I appreciate our colleagues in the Market Participants Division and their continuous collaboration with our fellow regulator—the Comisión Nacional de Bancaria y de Valores.  I also want to thank my fellow Commissioners for their support in advancing this matter before the Commission. Successfully implementing comparability determinations requires collaboration between the CFTC and its partner regulators in other countries.  The economies of the United States and Mexico are closely intertwined, and increased collaboration can only be beneficial in achieving our key goals of customer protection and market integrity.