2024-15093
[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58505-58535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15093]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Order Granting Conditional Substituted Compliance in Connection
With Certain Capital and Financial Reporting Requirements Applicable to
Nonbank Swap Dealer Subject to Regulation by the Mexican Comision
Nacional Bancaria y de Valores and Banco de Mexico
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: On December 13, 2022, the Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') published in the Federal Register a notice
and request for comment on an application submitted by 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. requesting
that the Commission determine that CFTC-registered nonbank swap dealers
organized and domiciled in Mexico may comply with certain capital and
financial reporting requirements under the Commodity Exchange Act and
Commission regulations by being subject to, and complying with,
corresponding capital and financial reporting requirements of Mexico.
The Commission also solicited public comment on a proposed order
providing for the conditional availability of substituted compliance in
connection with the application. The Commission is adopting the
proposed order with certain modifications and clarifications to address
comments received. The final order provides that a nonbank swap dealer
organized and domiciled in Mexico may satisfy the capital requirements
and financial reporting rules under the applicable provisions of the
Commodity Exchange Act and Commission regulations by complying with
certain specified Mexican laws and regulations and conditions set forth
in the order.
DATES: This determination was made by the Commission on June 24, 2024.
FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas Smith, Deputy Director, 202-418-5495,
[email protected]; Rafael Martinez, Associate Director, 202-418-5462,
[email protected]; Warren Gorlick, Associate Director, 202-418-5195,
[email protected]; Liliya Bozhanova, Special Counsel, 202-418-6232,
[email protected]; Justin McPhee, Risk Analyst, 202-418-6223,
[email protected], Market Participants Division; Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission is
issuing an order finding that registered nonbank swap dealers organized
and domiciled in Mexico (``Mexican nonbank SDs'') may satisfy certain
capital and financial reporting requirements under the Commodity
Exchange Act (``CEA'') \1\ and Commission regulations \2\ by being
subject to, and complying with, comparable capital and financial
reporting requirements under relevant Mexican laws and regulations,
subject to certain conditions set forth in the order below. The order
is based on the proposed comparability determination and related
proposed order published by the Commission on December 13, 2022 in the
Federal Register, as modified in certain aspects to address comments
and to clarify its terms.\3\
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\1\ 7 U.S.C. 1 et seq. The CEA may be accessed through the
Commission's website, www.cftc.gov.
\2\ 17 CFR chapter I. Commission regulations may be accessed
through the Commission's website, www.cftc.gov.
\3\ Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican
Comision Nacional Bancaria y de Valores, 87 FR 76374 (Dec. 13, 2022)
(``2022 Proposal'').
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I. Introduction
A. Regulatory Background--CFTC Capital, Margin, and Financial Reporting
Requirements for Swap Dealers and Major Swap Participants
Section 4s(e) of the CEA \4\ directs the Commission and
``prudential regulators'' \5\ to impose capital requirements on swap
dealers (``SDs'') and major swap participants (``MSPs'') registered
with the Commission.\6\ Section 4s(e) 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
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derivatives clearing organization (``uncleared swaps'').
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\4\ 7 U.S.C. 6s(e).
\5\ The term ``prudential regulators'' is defined in the CEA to
mean the Board of Governors of the Federal Reserve System (``Federal
Reserve Board''); the Office of the Comptroller of the Currency; the
Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency. 7 U.S.C.
1a(39).
\6\ Subject to certain exceptions, the term ``swap dealer'' is
generally defined as any person that: (i) holds itself out as a
dealer in swaps; (ii) makes a market in swaps; (iii) regularly
enters into swaps with counterparties as an ordinary course of
business for its own account; or (iv) engages in any activity
causing the person to be commonly known in the trade as a dealer or
market maker in swaps. 7 U.S.C. 1a(49).
The term ``major swap participant'' is generally defined as any
person who is not an SD, and: (i) subject to certain exclusions,
maintains a substantial position in swaps for any of the major swap
categories as determined by the Commission; (ii) whose outstanding
swaps create substantial counterparty exposure that could have
serious adverse effects on the financial stability of the U.S.
banking system or financial markets; or (iii) is a financial entity
that: (a) is highly leveraged relative to the amount of capital it
holds and that is not subject to capital requirements established by
an appropriate Federal banking agency; and (b) maintains a
substantial position in outstanding swaps in any major swap category
as determined by the Commission. 7 U.S.C. 1a(33).
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Section 4s(e) applies a bifurcated approach with respect to the
above Congressional directives, requiring each SD and MSP that is
subject to the regulation of a prudential regulator (``bank SD'' and
``bank MSP,'' respectively) to meet the minimum capital requirements
and uncleared swaps margin requirements adopted by the applicable
prudential regulator, and requiring each SD and MSP that is not subject
to the regulation of a prudential regulator (``nonbank SD'' and
``nonbank MSP,'' respectively) to meet the minimum capital requirements
and uncleared swaps margin requirements adopted by the Commission.\7\
Therefore, the Commission's authority to impose capital requirements
and margin requirements for uncleared swap transactions extends to
nonbank SDs and nonbank MSPs, including nonbank subsidiaries of bank
holding companies regulated by the Federal Reserve Board.\8\
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\7\ 7 U.S.C. 6s(e)(2).
\8\ 7 U.S.C. 6s(e)(1) and (2).
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The prudential regulators implemented section 4s(e) in 2015 by
amending existing capital requirements applicable to bank SDs and bank
MSPs to incorporate swap transactions into their respective bank
capital frameworks, and by adopting rules imposing initial and
variation margin requirements on bank SDs and bank MSPs that engage in
uncleared swap transactions.\9\ The Commission adopted final rules
imposing initial and variation margin obligations on nonbank SDs and
nonbank MSPs for uncleared swap transactions on January 6, 2016.\10\
The Commission also approved final capital requirements for nonbank SDs
and nonbank MSPs on July 24, 2020, which were published in the Federal
Register on September 15, 2020 with a compliance date of October 6,
2021 (``CFTC Capital Rules'').\11\
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\9\ Margin and Capital Requirements for Covered Swap Entities,
80 FR 74840 (Nov. 30, 2015).
\10\ Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
\11\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020). On April 30, 2024, the
Commission amended the capital and financial reporting requirements
to revise certain financial reporting obligations, among other
changes. See Capital and Financial Reporting Requirements for Swap
Dealers and Major Swap Participants, 89 FR 45569 (May 23, 2024). The
amendments have limited impact on nonbank SDs covered by this order.
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Section 4s(f) of the CEA addresses SD and MSP financial reporting
requirements.\12\ Section 4s(f) authorizes the Commission to adopt
rules imposing financial condition reporting obligations on all SDs and
MSPs (i.e., nonbank SDs, nonbank MSPs, bank SDs, and bank MSPs).
Specifically, section 4s(f)(1)(A) provides, in relevant part, that each
registered SD and MSP must make financial condition reports as required
by regulations adopted by the Commission.\13\ The Commission's
financial reporting obligations were adopted with the Commission's
nonbank SD and nonbank MSP capital requirements, and also had a
compliance date of October 6, 2021 (``CFTC Financial Reporting
Rules'').\14\
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\12\ 7 U.S.C. 6s(f).
\13\ 7 U.S.C. 6s(f)(1)(A).
\14\ 85 FR 57462.
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B. Commission Capital Comparability Determinations for Non-U.S. Nonbank
Swap Dealers and Non-U.S. Nonbank Major Swap Participants
Commission Regulation 23.106 establishes a substituted compliance
framework whereby the Commission may determine that compliance by a
non-U.S. domiciled nonbank SD or non-U.S. domiciled nonbank MSP with
its home country's capital and financial reporting requirements will
satisfy all or parts of the CFTC Capital Rules and all or parts of the
CFTC Financial Reporting Rules (such a determination referred to as a
``Comparability Determination'').\15\ The Commission's capital adequacy
and financial reporting requirements are designed to address and manage
risks that arise from a firm's operation as a SD or MSP. Given their
functions, both sets of requirements and rules must be applied on an
entity-level basis (meaning that the rules apply on a firm-wide basis,
irrespective of the type of transactions involved) to effectively
address risk to the firm as a whole. The availability of such
substituted compliance is conditioned upon the Commission issuing a
Comparability Determination finding that the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements
for non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs are comparable to
the corresponding CFTC Capital Rules and CFTC Financial Reporting
Rules. The Commission would issue a Comparability Determination in the
form of an order (``Comparability Order'').\16\
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\15\ 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides
that a request for a Comparability Determination may be submitted by
a non-U.S. nonbank SD or a non-U.S. nonbank MSP, a trade association
or other similar group on behalf of its SD or MSP members, or a
foreign regulatory authority that has direct supervisory authority
over one or more non-U.S. nonbank SDs or non-U.S. nonbank MSPs.
However, Commission regulations also provide that any non-U.S.
nonbank SD or non-U.S. nonbank MSP that is dually-registered with
the Commission as a futures commission merchant (``FCM'') is subject
to the capital requirements of Commission Regulation 1.17 and may
not petition the Commission for a Comparability Determination. 17
CFR 23.101(a)(5) and (b)(4), respectively. Furthermore, substituted
compliance is not available to non-U.S. bank SDs and non-U.S. bank
MSPs with respect to their respective financial reporting
requirements under Commission Regulation 23.105(p). Commission
Regulation 23.105(p), however, permits non-U.S. bank SDs and non-
U.S. bank MSPs that do not submit financial reports to a U.S.
prudential regulator to file with the Commission a statement of
financial condition, certain regulatory capital information, and
Schedule 1 of appendix C to subpart E of part 23 of the Commission's
regulations prepared and presented in accordance with the accounting
standards permitted by the non-U.S. bank SD's or non-U.S. bank MSP's
home country regulatory authorities. 17 CFR 23.105(p)(2).
\16\ 17 CFR 23.106(a)(3).
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The Commission's approach for conducting a Comparability
Determination with respect to the CFTC Capital Rules and the CFTC
Financial Reporting Rules is a principles-based, holistic approach that
focuses on assessing whether the applicable foreign jurisdiction's
capital and financial reporting requirements have comparable objectives
with, and achieve comparable outcomes to, corresponding CFTC
requirements.\17\ The Commission's assessment is not a line-by-line
evaluation or comparison of a foreign jurisdiction's regulatory
requirements with the Commission's requirements.\18\ In performing the
analysis, the Commission recognizes that jurisdictions may adopt
differing approaches to achieving regulatory objectives and outcomes,
and the Commission will focus on whether the foreign jurisdiction's
capital and financial reporting requirements are based on regulatory
objectives, and produce regulatory outcomes, that are comparable to the
Commission's in purpose and effect, and not whether they are comparable
in every aspect or contain identical elements.
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\17\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
\18\ See 85 FR 57462 at 57521.
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A person requesting a Comparability Determination is required to
submit an application to the Commission containing: (i) a description
of the objectives of the relevant foreign jurisdiction's capital
adequacy and financial reporting requirements applicable to entities
that are subject to the CFTC Capital Rules and the CFTC Financial
Reporting Rules; (ii) a description (including specific legal and
regulatory provisions) of how the relevant foreign jurisdiction's
capital adequacy and financial reporting requirements address the
elements of the CFTC Capital Rules and CFTC Financial Reporting Rules,
including, at a minimum, the methodologies for
[[Page 58507]]
establishing and calculating capital adequacy requirements and whether
such methodologies comport with international standards; and (iii) a
description of the ability of the relevant foreign regulatory authority
to supervise and enforce compliance with the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements.
The applicant must also submit, upon request, such other information
and documentation as the Commission deems necessary to evaluate the
comparability of the capital adequacy and financial reporting
requirements of the foreign jurisdiction.\19\
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\19\ 17 CFR 23.106(a)(2).
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The Commission will consider an application for a Comparability
Determination to be a representation by the applicant that the laws and
regulations of the foreign jurisdiction that are submitted in support
of the application are finalized and in force, that the description of
such laws and regulations is accurate and complete, and that, unless
otherwise noted, the scope of such laws and regulations encompasses the
relevant non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs domiciled in
the foreign jurisdiction.\20\ Each non-U.S. nonbank SD or non-U.S.
nonbank MSP that seeks to rely on a Comparability Order is responsible
for determining whether it is subject to the foreign laws and
regulations found comparable in the Comparability Order. A non-U.S.
nonbank SD or non-U.S. nonbank MSP that is not legally required to
comply with a foreign jurisdiction's laws and/or regulations determined
to be comparable in a Comparability Order may not voluntarily comply
with such laws and/or regulations in lieu of compliance with the CFTC
Capital Rules or the CFTC Financial Reporting Rules.
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\20\ The Commission provides the applicant with an opportunity
to review for accuracy and completeness the Commission's description
of relevant home country laws and regulations on which a proposed
Comparability Determination and a proposed Comparability Order are
based. The Commission relies on this review, and any corrections or
feedback received, as part of the comparability assessment. A
Comparability Determination and Comparability Order based on an
inaccurate description of foreign laws and regulations may not be
valid.
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The Commission may consider all relevant factors in making a
Comparability Determination, including: (i) the scope and objectives of
the relevant foreign jurisdiction's capital and financial reporting
requirements; (ii) whether the relevant foreign jurisdiction's capital
and financial reporting requirements achieve comparable outcomes to the
Commission's corresponding capital requirements and financial reporting
requirements; (iii) the ability of the relevant foreign regulatory
authority or authorities to supervise and enforce compliance with the
relevant foreign jurisdiction's capital adequacy and financial
reporting requirements; and (iv) any other facts or circumstances the
Commission deems relevant, including whether the Commission and foreign
regulatory authority or authorities have a memorandum of understanding
(``MOU'') or similar arrangement that would facilitate supervisory
cooperation.\21\
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\21\ 17 CFR 23.106(a)(3) and 85 FR 57462 at 57520-57522.
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In performing the comparability assessment for foreign nonbank SDs,
the Commission's review will include the extent to which the foreign
jurisdiction's requirements address: (i) the process of establishing
minimum capital requirements for nonbank SDs and how such process
addresses risk, including market risk and credit risk of the nonbank
SD's on-balance sheet and off-balance sheet exposures; (ii) the types
of equity and debt instruments that qualify as regulatory capital in
meeting minimum requirements; (iii) the financial reports and other
financial information submitted by a nonbank SD to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank SD; and (iv) the regulatory
notices and other communications between a nonbank SD and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's review will include
an assessment of the foreign jurisdiction's surveillance program for
monitoring nonbank SDs' compliance with such capital adequacy and
financial reporting requirements, and the disciplinary process imposed
on firms that fail to comply with such requirements.\22\
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\22\ The Commission would conduct a similar analysis, adjusted
as appropriate to account for regulatory distinctions, in performing
a comparability assessment for foreign nonbank MSPs. Commission
Regulation 23.101(b) requires a nonbank MSP to maintain positive
tangible net worth. There are no MSPs currently registered with the
Commission.
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Commission Regulation 23.106 further provides that the Commission
may impose any terms or conditions that it deems appropriate in issuing
a Comparability Determination.\23\ Any specific terms or conditions
with respect to capital adequacy or financial reporting requirements
will be set forth in the Commission's Comparability Order. As a general
condition to all Comparability Orders, the Commission will require
notification from the applicants of any material changes to information
submitted by the applicants in support of a comparability finding,
including, but not limited to, changes in the foreign jurisdiction's
relevant laws and regulations, as well as changes to the relevant
supervisory or regulatory regime.
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\23\ 17 CFR 23.106(a)(5).
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To rely on a Comparability Order, a nonbank SD or nonbank MSP
domiciled in the foreign jurisdiction and subject to supervision by the
relevant regulatory authority (or authorities) in the foreign
jurisdiction must file a notice with the Commission of its intent to
comply with the applicable capital adequacy and financial reporting
requirements of the foreign jurisdiction set forth in the Comparability
Order in lieu of all or parts of the CFTC Capital Rules and/or CFTC
Financial Reporting Rules.\24\ Notices must be filed electronically
with the Commission's Market Participants Division (``MPD'').\25\ The
filing of a notice by a non-U.S. nonbank SD or non-U.S. nonbank MSP
provides MPD staff with the opportunity to engage with the firm and to
obtain representations that it is subject to, and complies with, the
laws and regulations cited in the Comparability Order and that it will
comply with any listed conditions. MPD will issue a letter under
delegated authority from the Commission confirming that the non-U.S.
nonbank SD or non-U.S. nonbank MSP may comply with foreign laws and
regulations cited in the Comparability Order in lieu of complying with
the CFTC Capital Rules and CFTC Financial Reporting Rules upon MPD's
confirmation through discussions with the non-U.S. nonbank SD or non-
U.S. nonbank MSP that the firm is subject to and complies with the
applicable foreign laws and regulations, is subject to the jurisdiction
of the applicable foreign regulatory authority (or authorities), and
can meet the conditions in the Comparability Order.\26\
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\24\ 17 CFR 23.106(a)(4).
\25\ Notices must be filed in electronic form to the following
email address: [email protected].
\26\ 17 CFR 23.106(a)(4)(ii) and 17 CFR 140.91(a)(11).
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Each non-U.S. nonbank SD and each non-U.S. nonbank MSP that
receives confirmation from the Commission that it may comply with a
foreign jurisdiction's capital adequacy and financial reporting
requirements will be deemed by the Commission to be in compliance with
the corresponding CFTC Capital Rules and/or CFTC Financial Reporting
Rules.\27\ A non-U.S. nonbank SD or non-U.S. nonbank MSP that receives
confirmation of substituted compliance remains subject, however, to the
Commission's examination and enforcement authority.\28\ Accordingly, if
a nonbank SD or nonbank MSP fails to comply with the foreign
jurisdiction's capital adequacy and/or financial reporting
requirements, the Commission may initiate an action for a violation of
the corresponding CFTC Capital Rules and/or CFTC Financial Reporting
Rules.\29\ In addition, a finding of a violation by a foreign
jurisdiction's regulatory authority is not a prerequisite for the
exercise of such examination and enforcement authority by the
Commission.
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\27\ 17 CFR 23.106(a)(4)(ii). As noted above, confirmation will
be issued by MPD under authority delegated by the Commission.
Commission Regulation 140.91(a)(11). 17 CFR 140.91(a)(11).
\28\ 17 CFR 23.106(a)(4)(ii).
\29\ Id.
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C. Mexico Application for a Comparability Determination for Mexico-
Domiciled Nonbank Swap Dealers
On September 29, 2021, 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. (the ``Applicants'') submitted an
application (the ``Mexico Application'') requesting that the Commission
conduct a Comparability Determination and issue a Comparability Order
finding that compliance with certain designated capital requirements of
Mexico (the ``Mexican Capital Rules'') and certain designated financial
reporting requirements of Mexico (the ``Mexican Financial Reporting
Rules'') by a Mexican nonbank SD registered with the Mexican Comision
Nacional Bancaria y de Valores (Mexican Banking and Securities
Commission) (``Mexican Commission'') \30\ as a broker-dealer satisfies
corresponding CFTC Capital Rules and the CFTC Financial Reporting Rules
applicable to a nonbank SD under sections 4s(e) and(f) of the CEA and
Commission Regulations 23.101 and 23.105.\31\
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\30\ The Applicants represented that the Mexican Commission is a
governmental agency that is part of the Ministry of Finance, and has
independent technical and executive powers. The Applicants further
represented that the Mexican Commission is in charge of the
supervision and regulation of financial entities, such as Mexican
nonbank SDs, with the purpose of ensuring their stability and sound
performance, as well as maintaining a safe and sound financial
system. The Mexico Application provides that: (i) the scope of the
Mexican Commission's authority includes inspection, supervision,
prevention, and correction powers; (ii) the primary financial
entities regulated by the Mexican Commission are commercial banks,
national development banks, regulated multiple purpose financial
institutions, and broker-dealers, such as Mexican nonbank SDs; and
(iii) the Mexican Commission is also in charge of granting and
revoking broker-dealer licenses in Mexico. Mexico Application, p. 4
(fn. 10).
\31\ The Mexico Application was submitted by Colin D. Lloyd,
Cleary Gottlieb Steen & Hamilton LLP, on behalf of the Applicants.
Mexico Application at p. 1. The Mexico Application is available on
the Commission's website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
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The Applicants represented that the Securities Market Law (Ley del
Mercado de Valores, the ``Law'') \32\ and the General Provisions
Applicable to Broker-Dealers (Disposiciones de Caracter General
Aplicables a las Casa de Bolsa, the ``General Provisions'') \33\ issued
by the Mexican Commission contain the Mexican Capital Rules and the
Mexican Financial Reporting Rules that apply to broker-dealers,\34\
including Mexican nonbank SDs.\35\ The Law and General Provisions
impose mandatory capital and liquidity requirements that address
quantifiable discretionary risks (credit risk, liquidity risk, and
market risk), quantifiable non-discretionary risks (legal risk,
operational risk, and technological risk), and non-quantifiable
risks.\36\ The Applicants currently are the only Mexican nonbank SDs
registered with the Commission as SDs, and they represent that they are
licensed with the Mexican Commission as broker-dealers subject to the
Mexican Capital Rules and Mexican Financial Reporting Rules.
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\32\ Published in the Federal Official Gazette (Diario Oficial
de la Federacion) on December 30, 2005, as amended.
\33\ Published in the Federal Official Gazette on September 6,
2004, as amended.
\34\ The Applicants represented that pursuant to the provisions
set forth in Article 113 of the Law, broker-dealers, such as Mexican
nonbank SDs, among other entities, are the only financial
institutions that may conduct securities intermediation
transactions. Under Article 2 of the Law, securities intermediation
is defined as the customary and professional performance of any of
the following activities in Mexico: (i) actions for the purpose of
facilitating the contact between the supply and demand of
securities; (ii) the execution of transactions with securities for
the account of third parties as commission agent, attorney-in-fact,
or in any other capacity, participating in the relevant legal
transactions either personally or on behalf of third parties; and
(iii) the negotiation of securities on an intermediary's own account
with the general public or with other intermediaries acting on their
own account or on behalf of third parties. The organization and
operation of broker-dealers, such as Mexican nonbank SDs, is
governed by the Law and General Provisions. Mexico Application at p.
4 (fn. 11).
\35\ Mexico Application at p. 4.
\36\ Id.
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D. Proposed Comparability Determination and Proposed Comparability
Order for Mexico-Domiciled Nonbank Swap Dealers
On December 13, 2022, the Commission published the 2022 Proposal,
seeking comment on the Mexico Application and the Commission's proposed
Comparability Determination and related Comparability Order.\37\ The
2022 Proposal set forth the Commission's preliminary Comparability
Determination and proposed Comparability Order providing that, based on
its review of the Mexico Application and applicable Mexican laws and
regulations, the Commission preliminarily found that the Mexican
Capital Rules and the Mexican Financial Reporting Rules, subject to the
conditions set forth in the proposed Comparability Order, achieve
comparable outcomes and are comparable in purpose and effect to the
CFTC Capital Rules and CFTC Financial Reporting Rules.\38\ The
Commission, however, noted that there were certain differences between
the Mexican Capital Rules and CFTC Capital Rules and certain
differences between the Mexican Financial Reporting Rules and the CFTC
Financial Reporting Rules. As such, the Commission included conditions
in the proposed Comparability Order.\39\ The proposed conditions were
designed to promote consistency in regulatory outcomes and to reflect
the scope of substituted compliance that would be available
notwithstanding the differences, and to ensure that the Commission and
National Futures Association (``NFA'') receive information to monitor
Mexican nonbank SDs for ongoing compliance with the Comparability
Order.\40\ The
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Commission further stated that the identified differences would not be
inconsistent with providing a substituted compliance framework for
Mexican nonbank SDs subject to the conditions specified in the proposed
Comparability Order.\41\
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\37\ 2022 Proposal, 87 FR 76374 (Dec. 13, 2022).
\38\ Id. at 76398. Consistent with the process specified in
Section I.B. above for conducting Comparability Determinations, the
Commission provided the Applicants with an opportunity to review for
factual accuracy and completeness the Commission's description of
relevant Mexican laws and regulations on which the proposed
Comparability Determination and proposed Comparability Order were
based. The Commission has relied on Applicants' review, and has
incorporated feedback and corrections received from the Applicants.
As previously noted, a Comparability Determination and Comparability
Order based on an inaccurate description of foreign laws and
regulations may not be valid.
\39\ See 2022 Proposal at 76398.
\40\ NFA is a registered futures association (``RFA'') under
section 17 of the CEA (7 U.S.C. 21). Each SD registered with the
Commission is required to be an NFA member. 17 CFR 170.16. NFA, as
an RFA, is also required by the CEA to adopt rules imposing minimum
capital, segregation, and other financial requirements, as
applicable, to its members, including SDs, that are at least as
stringent as the Commission's minimum capital, segregation, and
other financial requirements for such registrants, and to implement
a program to audit and enforce such requirements. 7 U.S.C. 21(p).
Therefore, the Commission's proposed Comparability Order required
Mexican nonbank SDs to file certain financial reports and notices
with NFA so that it may perform oversight of such firms as required
under Section 17 of the CEA. The Commission will refer to NFA in
this Comparability Determination when referring to the requirements
or obligations of an RFA.
\41\ Id.
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The proposed Comparability Order was limited to the comparison of
the Mexican Capital Rules to the Bank-Based Approach under the CFTC
Capital Rules (``Bank-Based Approach'') for computing regulatory
capital for nonbank SDs, which is based on certain capital requirements
imposed by the Federal Reserve Board for bank holding companies.\42\ As
noted by the Commission in the 2022 Proposal, the Applicants had not
requested, nor has the Commission performed, a comparison of the
Mexican Capital Rules to the Commission's TNW Approach or NLA
Approach.\43\
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\42\ Id. As described in the 2022 Proposal, the CFTC Capital
Rules provide nonbank SDs with three alternative capital approaches:
(i) the Tangible Net Worth Capital Approach (``TNW Approach''); (ii)
the Net Liquid Assets Capital Approach (``NLA Approach''); and (iii)
the Bank-Based Approach. See 2022 Proposal at 76377 and 17 CFR
23.101. The Bank-Based Approach is consistent with the Basel
Committee on Banking Supervision's (``BCBS'') international
framework for bank capital requirements (``BCBS framework'' or
``Basel standards''). The BCBS is the primary global standard-setter
for the prudential regulation of banks and provides a forum for
cooperation on banking supervisory matters. Institutions represented
on the BCBS include the Federal Reserve Board, the European Central
Bank, Deutsche Bundesbank, Bank of England, Bank of France, Bank of
Japan, Banco de Mexico, and Bank of Canada. The BCBS framework is
available at: https://www.bis.org/basel_framework/index.htm.
\43\ Id.
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E. General Comments on the Mexico Application and the Commission's
Proposed Finding of Comparability Between the CFTC Capital Rules and
CFTC Financial Reporting Rules and the Mexican Capital Rules and
Mexican Financial Reporting Rules
The public comment period on the Mexico Application and the
proposed Comparability Determination and Comparability Order ended on
February 13, 2023. The Commission received three substantive comments
letters addressing the proposal from the following interested parties:
Better Markets, Inc. (``Better Markets''); William J. Harrington
(``Harrington''); and a joint letter from the International Swaps and
Derivatives Association (``ISDA'') and the Securities Industry and
Financial Markets Association (``SIFMA'').\44\
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\44\ Letter from Dennis M. Kelleher, President and CEO, and
Cantrell Dumas, Director of Derivatives Policy, Better Markets (Feb.
13, 2023) (``Better Markets Letter''); Letter from William J.
Harrington, Croatan Institute (Feb. 13, 2023) (``Harrington
Letter''); and Letter from Steven Kennedy, Global Head of Public
Policy, ISDA, and Kyle L. Brandon, Managing Director, Head of
Derivatives Policy, SIFMA (together, the ``Associations'') (Feb. 13,
2023) (``Associations Letter''). The Commission received an
additional comment submission that did not provide any substantive
comment on the 2022 Proposal. All comment letters for the 2022
Proposal are available at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7341 (the public comment file).
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The Associations expressed support for the proposed Comparability
Determination and proposed Comparability Order, agreeing with the
Commission's overall analysis and determination of comparability of the
Commission's Capital and Financial Reporting Rules and the Mexican
Capital and Financial Reporting Rules.\45\ Conversely, two commenters
disagreed with the CFTC's proposed Comparability Determination and
proposed Comparability Order.\46\ Better Markets asserted that the
principles-based, holistic approach applied by the Commission, which
assesses whether the applicable foreign jurisdiction's capital and
financial requirements achieve a comparable outcome to the
corresponding CFTC's requirements, is ``insufficiently rigorous,
leaving far too much room for inaccurate and unwarranted comparability
determinations.'' \47\
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\45\ Associations Letter at p. 2.
\46\ Better Markets Letter at p. 2; Harrington Letter at p. 11.
\47\ Better Markets Letter at p. 2.
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The Commission does not believe that the principles-based, holistic
assessment that it conducted on the comparability of the Mexican
Capital Rules and Mexican Financial Reporting Rules with the CFTC
Capital Rules and CFTC Financial Reporting Rules was ``insufficiently
rigorous,'' nor does the Commission believe that it left ``room for
inaccurate and unwarranted comparability determinations.'' The
principles-based, holistic approach employed in the Comparability
Determination was performed in accordance with the substituted
compliance assessment framework adopted by the Commission for capital
and financial reporting requirements for foreign nonbank SDs and set
out in Commission Regulation 23.106. Consistent with this assessment
framework, the Commission focused on whether the Mexican Capital Rules
and Mexican Financial Reporting Rules are designed with the objective
of ensuring overall safety and soundness of the Mexican nonbank SDs in
a manner that is comparable with the Commission's overall objective of
ensuring the safety and soundness of nonbank SDs.
As stated in the 2022 Proposal, due to the detailed and complex
nature of the capital frameworks, differences in how jurisdictions
approach and implement the requirements are expected, even among
jurisdictions that base their requirements on the principles and
standards set forth in the BCBS framework.\48\ Furthermore, as
discussed in section I.B. above, when adopting Commission Regulation
23.106, the Commission stated that its approach to substituted
compliance is a principles-based, holistic approach that focuses on
whether the foreign regulations are designed with the objectives of
ensuring the overall safety and soundness of the non-US nonbank SD in a
manner that is comparable with the Commission's overall capital and
financial reporting requirements, and is not based on a line-by-line
assessment or comparison of a foreign jurisdiction's regulatory
requirements with the Commission's requirements.\49\
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\48\ See 2022 Proposal at 76381.
\49\ 85 FR 57462 at 57521.
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The approach and standards contained in Commission Regulation
23.106, with the focus on ``comparable outcomes,'' are also consistent
with the Commission's precedents of undertaking a principles-based,
holistic assessment of the comparability of foreign regulatory regimes
for purposes of substituted compliance for cross-border swap
transactions. The Commission first outlined its approach to substituted
compliance with respect to swaps requirements in 2013, when it issued
an Interpretive Guidance and Policy Statement Regarding Compliance with
Certain Swap Regulations.\50\ In the Guidance, the Commission stated
that in evaluating whether a particular category of foreign regulatory
requirement(s) is comparable and comprehensive to the applicable
requirement(s) under the CEA and Commission regulations, the Commission
will take into consideration all relevant factors, including but not
limited to, the comprehensiveness of those requirement(s), the scope
and
[[Page 58510]]
objectives of the relevant regulatory requirement(s), the
comprehensiveness of the foreign regulator's supervisory compliance
program, as well as the home jurisdiction's authority to support and
enforce its oversight of the registrant.\51\ The Commission emphasized
that in this context, ``comparable does not necessarily mean
identical.'' \52\ Rather, the Commission stated that it would evaluate
whether the home jurisdiction's regulatory requirement is comparable
to, and as comprehensive as, the corresponding U.S. regulatory
requirement(s).\53\ In conducting comparability determinations based on
the policy set forth in the Guidance, the Commission noted that the
``outcome-based'' approach recognizes that foreign regulatory systems
differ and their approaches vary and may differ from how the Commission
chose to address an issue, but that the foreign jurisdiction's
regulatory requirements nonetheless achieve the regulatory outcome
sought to be achieved by a certain provision of the CEA or Commission
regulation.\54\
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\50\ Interpretative Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26,
2013) (``Guidance'').
\51\ Guidance at 45343.
\52\ Id.
\53\ Id.
\54\ See e.g., Comparability Determination for the European
Union: Certain Entity-Level Requirements, 78 FR 78923 (December 27,
2013) at 78926.
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The Commission further elaborated on the required elements of
comparability in 2016, when it issued final rules to address the cross-
border application of the Commission's margin requirements for
uncleared swap transactions. Specifically, the Commission stated that
its substituted compliance approach reflects an outcome-based
assessment of the comparability of a foreign jurisdiction's margin
requirements with the Commission's corresponding requirements.\55\ The
Commission further stated that it would evaluate the objectives and
outcomes of the foreign margin requirements in light of foreign
regulator(s)' supervisory and enforcement authority.\56\ Consistent
with its previously stated position, the Commission recognized that
jurisdictions may adopt different approaches to achieving the same
outcome and, therefore, the assessment would focus on whether the
foreign jurisdiction's margin requirements are comparable to the
Commission's in purpose and effect, not whether they are comparable in
every aspect or contain identical elements.\57\ The Commission's policy
thus reflects an understanding that a line-by-line evaluation of a
foreign jurisdiction's regulatory regime is not the optimum approach to
assessing the comparability of complex structures whose individual
components may differ based on jurisdiction-specific considerations,
but which achieve the objective and outcomes set forth in the
Commission's framework.
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\55\ Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Cross-Border Application of the Margin
Requirements, 81 FR 34817, 34836-34837 (May 31, 2016).
\56\ Id.
\57\ Id.
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With respect to the Mexico Application, the process leading to the
Commission's Comparability Determination involved Commission staff
obtaining English language translations of relevant Mexican laws,
rules, and regulations cited in the Mexico Application. Staff verified
the assertions and citations contained in the Mexico Application
regarding the specific Mexican Capital Rules and Mexican Financial
Reporting Rules to the relevant English language versions of the
Mexican laws, rules, and regulations.\58\ Commission staff also
evaluated the comparability of the Mexican Capital Rules and Mexican
Financial Reporting Rules with the CFTC Capital Rules and CFTC
Financial Reporting Rules with respect to the following areas: (i) the
process of establishing minimum capital requirements for Mexican
nonbank SDs and how such process addresses risk, including market risk
and credit risk of the Mexican nonbank SD's on-balance sheet and off-
balance sheet exposures; (ii) the types of equity and debt instruments
that qualify as regulatory capital in meeting a Mexican nonbank SD's
minimum capital requirements; (iii) the financial reports and other
financial information submitted by a Mexican nonbank SD to the Mexican
Commission, and whether such information provides the Mexican
Commission with the means necessary to effectively monitor the
financial condition of the Mexican nonbank SD; and (iv) the regulatory
notices and other communications between a Mexican nonbank SD and the
Mexican Commission that address potential adverse financial or
operational issues that may impact the firm.\59\ With respect to the
ability of the Mexican Commission to supervise and enforce compliance
with the Mexican Capital Rules and Mexican Financial Reporting Rules,
the Commission's assessment included a review of the Mexican
Commission's surveillance program for monitoring compliance by Mexican
nonbank SDs with the Mexican Capital Rules and Mexican Financial
Reporting Rules, and the disciplinary process imposed on firms that
fail to comply with such requirements.\60\
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\58\ Staff also reviewed the Mexican Commission's website to
confirm various provisions of Mexican laws and regulations that were
relevant to the proposed Comparability Determination and proposed
Comparability Order.
\59\ 2022 Proposal at 76381.
\60\ Id.
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Contrary to the position articulated by Better Markets regarding
the nature of the comparability assessment, the Commission believes
that the principles-based, holistic assessment of the Mexican Capital
Rules and Mexican Financial Reporting Rules against the CFTC Capital
Rules and CFTC Financial Reporting Rules, as outlined above and
discussed in detail in section II below, was sufficiently rigorous for
purposes of determining if the Mexican laws and regulations are
comparable in purpose and effect to the CEA and Commission regulations.
Better Markets further asserted that even under a principles-based,
holistic approach, the Mexican capital and financial reporting
requirements for Mexican nonbank SDs do not satisfy the test for an
order granting substituted compliance as the Mexican Commission's
regulatory framework governing capital and financial reporting is not
comparable to the corresponding CFTC requirements.\61\ Better Markets
cited the Commission's inclusion of conditions in the proposed
Comparability Order as demonstrating the Commission's need ``to
compensate for the acknowledged gaps in the Mexican Commission's
framework.'' \62\ Better Markets claimed that the Commission proposed
12 filing requirements that must be met as a condition for the
comparability determination, and stated that the Commission was not
conducting a comparability assessment, but was engaging in a ``de facto
rewriting'' of Mexico's laws and rules in the form of conditions.\63\
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\61\ Better Markets Letter at p. 3.
\62\ Id.
\63\ Id. at p. 2.
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The Commission disagrees that the inclusion of conditions in the
Comparability Order precludes a finding of comparability with respect
to the Mexican Capital Rules and Mexican Financial Reporting Rules. The
Commission's comparability assessment process, consistent with the
holistic approach, contemplates the potential need for a Comparability
Order to contain conditions. Specifically, Commission Regulation
23.106(a)(5) states that the Commission may impose
[[Page 58511]]
any terms and conditions it deems appropriate in issuing a
Comparability Order, including conditions with respect to capital
adequacy and financial reporting requirements of non-U.S. nonbank
SDs.\64\
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\64\ 17 CFR 23.106(a)(5). Commission Regulation 23.106(a)(3)
establishes the Commission's standard of review for performing a
Comparability Determination and provides that the Commission may
consider all relevant factors, including whether the relevant
foreign jurisdiction's capital adequacy and financial reporting
requirements achieve comparable outcomes to the Commission's
corresponding capital adequacy and financial reporting requirements
for SDs. 17 CFR 23.106(a)(3)(ii).
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The process employed in this Comparability Determination is
consistent with the Commission's established approach to conducting
comparability assessments. Upon a finding of comparability, the
Commission's policy generally is that eligible entities may comply with
a substituted compliance regime subject to the conditions the
Commission places on its finding, and subject to the Commission's
retention of its examination authority and its enforcement
authority.\65\ In this regard, the Commission has stated that certain
conditions included in a Comparability Order may be designed to ensure
the Commission's direct access to books and records required to be
maintained by an SD registered with the Commission.\66\ Other
conditions may address areas where the foreign jurisdiction lacks
analogous requirements.\67\ The inclusion of conditions in a
Comparability Order was contemplated as an integral part of the
Commission's holistic, principles-based approach to conducting
comparability assessments and is not inconsistent with a grant of
substituted compliance.
---------------------------------------------------------------------------
\65\ 85 FR 57462 at 57520. See also Guidance at 45342-45344 and
Comparability Determination for the European Union: Certain
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at
78880.
\66\ Comparability Determination for the European Union: Certain
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at
78880.
\67\ Guidance at 45343.
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In particular, Commission Regulation 23.106(a)(5) states the
Commission's authority to impose conditions in issuing a Comparability
Determination in connection with the CFTC Capital Rules and the CFTC
Financial Reporting Rules. As further discussed below, the conditions
proposed in the 2022 Proposal are clearly of the nature contemplated by
Commission Regulation 23.106(a)(5).
The Commission also does not believe that the inclusion of
conditions in the proposed Comparability Order reflects a ``rewriting''
of the Mexican laws and regulations as asserted by Better Markets.
Consistent with the Commission's policy described above, a majority of
the conditions contained in the proposed Comparability Order are
designed to ensure that: (i) the Mexican nonbank SD is eligible for
substituted compliance based on the Mexican laws and regulations that
were reviewed by the Commission in performing the comparability
assessment, and (ii) the Commission and the NFA receive timely
financial information and notices to effectively monitor a Mexican
nonbank SD's compliance with the Comparability Order and to assess the
ongoing safety and soundness of the Mexican nonbank SD. Specifically,
there are 23 conditions in the final Comparability Order. Four
conditions set forth criteria that a Mexican nonbank SD must meet to be
eligible for substituted compliance pursuant to the Comparability
Order.\68\ The four conditions ensure that only Mexican nonbank SDs
that are within the scope of, and comply with, the Mexican Capital
Rules and Mexican Financial Reporting Rules that were part of the
Commission's comparability assessment may apply for substituted
compliance.
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\68\ The four criteria provide that the Mexican nonbank SD: (i)
is not subject to capital rules of a U.S. prudential regulator
(Condition 1); (ii) is organized and domiciled in Mexico (Condition
2); (iii) is licensed by the Mexican Commission as a broker-dealer
(i.e., casa de bolsa) (Condition 3); and (iv) is subject to the
Mexican Capital Rules and the Mexican Financial Reporting Rules that
are part of the Commission's comparability assessment (Condition 4).
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Eight additional conditions require Mexican nonbank SDs within the
scope of the Comparability Order to provide notice to the Commission
and NFA of certain defined events,\69\ and a further two conditions
require Mexican nonbank SDs to file with the Commission and NFA copies
of certain unaudited and audited financial reports that the firms
provide to their applicable authorities.\70\ In addition, two
additional conditions reflect administrative matters necessary to
implement the substituted compliance framework.\71\ Lastly, six
conditions impose obligations on Mexican nonbank SDs that align with
certain of the Commission's requirements for nonbank SDs. The six
conditions require a Mexican nonbank SD to: (i) maintain a minimum
amount of fundamental capital equal to or in excess the equivalent of
$20 million (Condition 5); (ii) provide notice if it seeks the approval
of the Mexican Commission to use internal models to compute market risk
and/or credit risk and refrain from using internal models to compute
regulatory capital without the authorization of the Commission
(Condition 7); (iii) prepare and keep current financial books and
records (Condition 8); (iv) file a monthly schedule of the firm's
financial positions on Schedule 1 of appendix B to Subpart E of part 23
of the Commission's regulations (Condition 11); (v) file a monthly
report listing the custodians holding margin posted by, and collected
by, the Mexican nonbank SD, the amount of margin held by each
custodian, and the aggregate amount of margin required to be posted and
collected by the Mexican nonbank SD
[[Page 58512]]
(Condition 13); and (vi) submit, with each filing of financial
information, a statement by an authorized representative that, to the
best knowledge and belief of the person making the representation, the
information is true and correct (Condition 14).\72\
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\69\ The eight conditions require a Mexican nonbank SD to
provide notice to the Commission in the event that the firm: (i) is
informed by the Mexican Commission that it failed to comply with any
component of the Mexican Capital Rules or Mexican Financial
Reporting Rules (Condition 15); (ii) it breaches its capital
conservation buffer requirement (Condition 16); (iii) fails to
maintain regulatory capital in the form of fundamental capital of at
least the equivalent of $20 million (Condition 17); (iv) experiences
a 30 percent or more decrease in its excess regulatory capital as
compared to that the excess regulatory capital last reported
(Condition 18); (v) fails to make or keep current financial books
and records (Condition 19); (vi) fails to post or collect margin for
uncleared swaps and non-cleared security-based swaps with one or
more counterparties in amounts that exceed defined limits (Condition
20); (vii) changes its fiscal year end date (Condition 21); and
(viii) is subject to material changes to the Mexican Capital Rules,
Mexican Financial Reporting Rules, or the supervisory authority of
the Mexican Commission (Condition 22).
\70\ The two conditions provide that a Mexican nonbank SD must
file with the Commission and NFA: (i) English language copies of
certain financial reporting templates that the Mexican nonbank SD is
required to submit to the relevant Mexican authorities pursuant to
Article 203 of the General Provisions and Article 202 and Exhibit 9
of the General Provisions, as applicable (Condition 9), and (ii)
English language copies of its annual audited financial statements
and management report that are required to be prepared and published
pursuant to Article 203 of the General Provisions (Condition 10).
\71\ One of the administrative conditions provides that a
Mexican nonbank SD must provide a notice to the Commission of its
intent to comply with the Comparability Order and the Mexican
Capital Rules and Mexican Financial Reporting Rules in lieu of the
CFTC Capital Rules and CFTC Financial Reporting Rules. The notice
must include the Mexican nonbank SD's representation that the firm
is organized and domiciled in Mexico, is licensed by the Mexican
Commission as a casa de bolsa, and is subject to, and complies with,
the Mexican Capital Rules and the Mexican Financial Reporting Rules
(Condition 6). A second administrative condition provides that a
Mexican nonbank SD must file any documents with the Commission and
NFA via electronic transmission (Condition 23). With respect to
Condition 6, the Commission also notes that the language of the
proposed condition required that a Mexican nonbank SD provide a
notice of its intent to comply with ``applicable'' Mexican Capital
Rules and Mexican Financial Reporting Rules. Given that ``Mexican
Capital Rules'' and ``Mexican Financial Reporting Rules'' are terms
defined in the Comparability Order to include laws and regulations
that apply to Mexican nonbank SDs, the word ``applicable'' is
superfluous and is, therefore, not included in the final
Comparability Order.
\72\ Another condition specifies that Mexican nonbank SDs that
are registered with the U.S. Securities and Exchange Commission
(``SEC'') as security-based swap dealers (``SBSDs'') and required to
file with the SEC, or its designee, Form X-17A-5 (``FOCUS Report''),
must file a copy of such FOCUS Report with the Commission and NFA
within 35 calendar days after the end of each month (Condition 12).
A Mexican nonbank SD that files a FOCUS Report pursuant to Condition
12 will not be required to file the reports and schedules specified
in Conditions 9 and 11. Currently, no Mexican nonbank SD is
registered as a SBSD.
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As the substance of these conditions demonstrates, the primary
objective of a majority of the conditions is not to compensate for
regulatory gaps in the Mexican capital and financial reporting
framework, but rather to ensure that the Commission and NFA receive
information to conduct ongoing monitoring of Mexican nonbank SDs for
compliance with relevant capital and financial reporting requirements.
As discussed above, in issuing a Comparability Order, the Commission is
not ceding its supervisory and enforcement authorities. The
Comparability Order permits Mexican nonbank SDs to satisfy the
Commission's capital and financial reporting requirements by complying
with certain laws and/or regulations of Mexico that have been found to
be comparable to the Commission's laws and/or regulations in purpose
and effect. The Commission and NFA, however, have a continuing
obligation to conduct ongoing oversight, including potential
examination, of Mexican nonbank SDs to ensure compliance with the
Comparability Order, including its conditions. To that effect, the
notice and financial reporting conditions set forth in the
Comparability Order provide the Commission and NFA with information
necessary to monitor for such compliance and to evaluate the
operational condition and ongoing financial condition of Mexican
nonbank SDs. The Commission may also initiate an enforcement action
against a Mexican nonbank SD that fails to comply with the conditions
of the Comparability Order.\73\
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\73\ As the Commission stated in the 2022 Proposal, a non-U.S.
nonbank SD that operates under a Comparability Order issued by the
Commission remains subject to the Commission's examination and
enforcement authority. Specifically, the Commission may initiate an
enforcement action against a non-U.S. nonbank SD that fails to
comply with its home-country capital adequacy and/or financial
reporting requirements cited in a Comparability Order. See 2022
Proposal at 76376-76377. See also 17 CFR 23.106(a)(4)(ii), which
provides that the Commission may examine all nonbank SDs, regardless
of whether the nonbank SDs rely on substituted compliance, and that
the Commission may initiate an enforcement action under the
Commission's capital and financial reporting regulations against a
non-U.S. nonbank SD that fails to comply with a foreign
jurisdiction's capital adequacy and financial reporting
requirements.
---------------------------------------------------------------------------
Furthermore, to the extent that a condition imposes a new
obligation on Mexican nonbank SDs, the imposition of such condition is
also consistent with Commission Regulation 23.106 and the Commission's
established policy with regard to comparability determinations. As
discussed above, the Commission contemplated that even in circumstances
where the Commission finds two regulatory regimes comparable, the
Commission may impose requirements on entities relying on substituted
compliance where the Commission determines that the home jurisdiction's
regime lacks comparable and comprehensive regulation on a specific
issue.\74\ The Commission's authority to impose such conditions is set
out in Commission Regulation 23.106(a)(5), which states that the
Commission may impose ``any terms and conditions it deems appropriate,
including certain capital adequacy and financial reporting requirements
[on SDs].'' \75\
---------------------------------------------------------------------------
\74\ Guidance at 45343.
\75\ 17 CFR 23.106(5).
---------------------------------------------------------------------------
Better Markets further stated that, if the Commission grants
substituted compliance with regard to materially different regulatory
requirements, it must make a well-supported comparability determination
by, at a minimum, clearly and specifically setting forth the desired
regulatory outcome and providing a detailed, evidence-based explanation
as to how the jurisdiction's different legal requirements nonetheless
lead to a comparable regulatory outcome.\76\ Better Markets further
asserted that ``[a] determination that a foreign jurisdiction's nonbank
SDs rules would produce comparable regulatory outcomes is the
beginning, not the end, of the CFTC's obligation to ensure that the
activities of the foreign nonbank SD entities do not pose risks to the
U.S. financial system. As time goes on, regulatory requirements that,
in theory, are expected to produce one regulatory outcome may, in
practice, produce a different one. And, of course, the regulatory
requirements may themselves be changed in a variety of ways. Finally,
the effectiveness of an authority's supervision and enforcement program
can become weakened for any number of reasons--the CFTC cannot assume
that an enforcement program that is presently effective will continue
to be effective.'' \77\ Better Markets further asserted that to fulfill
its obligation to protect the U.S. financial system, the Commission
must ensure, on an ongoing basis, that each grant of substituted
compliance remains appropriate over time by, at a minimum, requiring
each Comparability Order, and each MOU with a foreign regulatory
authority, to impose an obligation on the applicant, as appropriate,
to: (i) periodically apprise the Commission of the activities and
results of its supervision and enforcement programs, to ensure that
they remain sufficiently robust to deter and address violations of the
law; and (ii) immediately apprise the Commission of any material
changes to the regulatory regime, including changes to rules or
interpretations of rules.\78\
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\76\ Better Markets Letter at pp. 7-8.
\77\ Id. at p. 8.
\78\ Id.
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Although the Commission disagrees that the Mexican Capital Rules
and the Mexican Financial Reporting Rules, as a whole, are materially
different or do not achieve comparable regulatory outcomes when
compared to the CFTC Capital Rules and CFTC Financial Reporting Rules,
the Commission concurs that granting substituted compliance should be
the result of a well-supported comparability assessment. Consistent
with that view, the Commission believes that this final Comparability
Determination articulates the Commission's analysis in sufficient
detail and provides an appropriate explanation of how the foreign
jurisdiction's requirements are comparable in purpose and effect with
the Commission's requirements, and lead to comparable regulatory
outcomes with the Commission's requirements. Specifically, section III
of the 2022 Proposal and section II of the final Comparability
Determination reflect, among other observations, the Commission's
detailed analysis with respect to each of the elements for
consideration listed in Commission Regulation 23.106(a)(3).
The Commission also concurs that the availability of substituted
compliance is conditioned upon a non-US nonbank SD's ongoing compliance
with the terms and conditions of the final Comparability Order, and the
Commission's ongoing assessment that the Mexican Capital Rules and
Mexican Financial Reporting Rules remain comparable in purpose and
effect with the CFTC Capital Rules and CFTC
[[Page 58513]]
Financial Reporting Rules. As noted above, and discussed in more detail
in sections II.D. and E. below, Mexican nonbank SDs are subject to
notice and financial reporting requirements under the final
Comparability Order that provide Commission and NFA staff with the
ability to monitor the Mexican nonbank SDs' ongoing compliance with the
conditions set forth in the final Comparability Order. In addition, the
final Comparability Order requires the Applicants to inform the
Commission of changes to the relevant Mexican Capital Rules and Mexican
Financial Reporting Rules so that the Commission may assess the
continued effectiveness of the Comparability Order in ensuring that the
Mexican laws and regulations have the comparable regulatory objectives
of the CEA and Commission regulations of ensuring the safety and
soundness of nonbank SDs.\79\ Commission staff will also monitor the
Mexican nonbank SDs directly as part of its supervisory program and
will discuss with the firms any proposed or pending revisions to
specific laws and rules cited in the final Comparability Order. Lastly,
in addition to assessing the effectiveness of the Comparability Order
as a result of revisions or proposed revisions to the Mexican laws,
regulations, or supervisory regime, the Commission further notes that
future material changes to the CFTC Capital Rules or CFTC Financial
Reporting Rules, or the Commission's or NFA's supervisory programs, may
necessitate an amendment to the Comparability Determination and
Comparability Order to reflect those changes.\80\
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\79\ Condition 22 of the final Comparability Order requires the
Applicants to notify the Commission of any material changes to the
information submitted in their application, including, but not
limited to, proposed and final material changes to the Mexican
Capital Rules or Mexican Financial Reporting Rules and proposed and
final material changes to the Mexican Commission's supervisory
authority or supervisory regime over Mexican nonbank SDs. The
Commission notes that it made certain non-substantive, clarifying
changes to the language of final Condition 22 as compared to the
proposed condition.
\80\ 2022 Proposal at 76381 (n. 91).
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Another commenter, Harrington, stated that the Commission ``must
prevent every regulated [SD] globally from providing a non-margined
swap contract with a flip clause [. . .].'' \81\ Harrington has
elsewhere referred to a description of a ``flip clause'' as a provision
in swap contracts with structured debt issuers that reverses or
``flips'' the priority of payment obligations owed to the swap
counterparty on the one hand, and the noteholders on the other,
following a specified event of default.\82\ Based on Harrington's
description, flip clauses present a risk to the SD in synthetic
transactions where payments under a swap contract are secured with the
same collateral that would serve to cover payments under the notes
issued by a structured debt issuer. In such circumstances, an ``event
of default'' by the SD would cause the SD's priority of payment from
the collateral under a swap to ``flip'' to a more junior priority
position, including for mark-to-market gains on ``in the money''
swaps.\83\ Harrington argued that ``[each] flip clause exposes a
derivative contract provider to the maximum loss of 100% of contract
value of each swap-contract-with-flip-clause.'' \84\ Harrington
recognized, however, that the CFTC margin requirements for uncleared
swap transactions address his concerns associated with the inclusion of
a flip clause.\85\ Nonetheless, according to the Harrington, risks
arise in circumstances when non-U.S. margin rules exempt SDs from
margin obligations in connection with swaps with a structured debt
issuer.\86\
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\81\ Harrington Letter at p. 4.
\82\ William J. Harrington, Submission to the U.S. Securities
and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at
p.8.
\83\ For additional information on the legal mechanics of a flip
clause, see Lehman Brothers Special Financing Inc v. Bank of America
N.A., No. 18-1079 (2nd Cir. 2020).
\84\ Harrington Letter at p. 11.
\85\ Harrington Letter at p. 4 (noting that the requirement for
SDs to post and collect variation margin for swap contracts with a
securitization or structured debt issuer ``generates the immense
benefit of inducing U.S. securitization and structured debt issuers
to forswear all swap contracts'').
\86\ Id. (arguing that ``non-U.S. swap margin rules de facto
exempt a swap provider from collecting or posting variation margin
under a new contract with most securitization and structured debt
issuers'').
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The Commission recognizes that given regulatory differences, some
transactions that are subject to the CFTC margin requirements for
uncleared swaps may not be subject to regulatory margin requirements in
another jurisdiction. In connection with this Comparability
Determination, however, the Commission notes that both under the CFTC
Capital Rules and the Mexican Capital Rules, uncollateralized exposures
from uncleared swap transactions would generate a higher counterparty
credit risk exposure amount than the exposures resulting from
transactions under which the counterparties have posted collateral.\87\
Accordingly, the Commission does not believe that the respective sets
of rules adopt a conflicting approach or lead to a disparate outcome
with respect to the capital treatment of uncollateralized uncleared
swap exposures that would warrant a finding of non-comparability of the
CFTC Capital Rules and the Mexican Capital Rules.
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\87\ 12 CFR 217.34 and 12 CFR 217.132 (indicating that nonbank
SDs may recognize the risk-mitigating effects of financial
collateral for collateralized derivatives contracts) and Article 160
of the General Provisions (similarly indicating that Mexican nonbank
SDs are allowed to recognize the risk-mitigating effect of
collateral by deducting the amount of collateral from the exposure
amount).
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II. Final Capital and Financial Reporting Comparability Determination
and Comparability Order
The following section provides the Commission's comparative
analysis of the Mexican Capital Rules and the Mexican Financial
Reporting Rules with the corresponding CFTC Capital Rules and CFTC
Financial Reporting Rules, as described in the 2022 Proposal, further
modified to address comments received. As emphasized in the 2022
Proposal, the capital and financial reporting regimes are complex
structures comprised of a number of interrelated regulatory
components.\88\ Differences in how jurisdictions approach and implement
these regimes are expected, even among jurisdictions that base their
requirements on the principles and standards set forth in the BCBS
framework.
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\88\ 2022 Proposal at 76381.
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The Commission performed the analysis by assessing the
comparability of the Mexican Capital Rules for Mexican nonbank SDs, as
set forth in the Mexico Application and in the English language
translation of certain applicable Mexican laws and regulations, with
the Commission's Bank-Based Approach for nonbank SDs. The Commission
understands that, as of the date of the final Comparability
Determination, the Applicants are subject to a bank-based capital
approach under the Mexican Capital Rules. Accordingly, when the
Commission makes its final determination herein about the comparability
of the Mexican Capital Rules with the CFTC Capital Rules, the
determination pertains to the comparability of the Mexican Capital
Rules with the Bank-Based Approach under the CFTC Capital Rules. The
Commission notes that any material changes to the information submitted
in the Mexico Application, including, but not limited to, proposed and
final material changes to the Mexican Capital Rules or Mexican
Financial Reporting Rules, as well as any proposed and final material
changes to the Mexican Commission's supervisory authority or
supervisory regime will require notification to the Commission and NFA
pursuant to Condition 22 of the final
[[Page 58514]]
Comparability Order.\89\ Therefore, if there are subsequent material
changes to the Mexican Capital Rules, Mexican Financial Reporting
Rules, or the supervisory authority or supervisory regime, the
Commission will review and assess the impact of such changes on the
final Comparability Determination and Comparability Order as they are
then in effect, and may amend or supplement the Comparability Order as
appropriate.\90\
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\89\ Condition 22 of the final Comparability Order. The
Commission notes that it made certain non-substantive changes to the
language of final Condition 22 as compared to the proposed
condition.
\90\ See 2022 Proposal at 76381. As stated in the 2022 Proposal,
the Commission may also amend or supplement the Comparability Order
to address any material changes to the CFTC Capital Rules and CFTC
Financial Reporting Rules, including rule amendments to capital
rules of the Federal Reserve Board that are incorporated into the
CFTC Capital Rules' Bank-Based Approach under Commission Regulation
23.101(a)(1)(i), that are adopted after the final Comparability
Order is issued. See id., (n. 91).
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A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and Mexican Capital Rules and Mexican Financial
Reporting Rules
1. Preliminary Determination
As reflected in the 2022 Proposal and discussed above, the
Commission preliminarily determined that the overall objectives of the
Mexican Capital Rules and CFTC Capital Rules are comparable in that
both sets of rules are intended to ensure the safety and soundness of
nonbank SDs by establishing regulatory regimes that require nonbank SDs
to maintain a sufficient amount of qualifying regulatory capital to
absorb losses, including losses from swaps and other trading
activities, and to absorb decreases in the value of firm assets and
increases in the value of firm liabilities without the nonbank SDs
becoming insolvent.\91\ The Commission further noted that the Mexican
Capital Rules and CFTC Capital Rules are also based on, and consistent
with, the BCBS framework, which was designed to ensure that banking
entities hold sufficient levels of capital to absorb losses, decreases
in the value of firm assets, and increases in the value of firm
liabilities without the banks becoming insolvent.\92\
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\91\ See 2022 Proposal at 76382.
\92\ The BCBS's mandate is to strengthen the regulation,
supervision and practices of banks with the purpose of enhancing
financial stability. See Basel Committee Charter available on the
Bank for International Settlement website: www.bis.org/bcbs/charter.htm. See also 2022 Proposal at 76382.
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The Commission observed that Mexican Capital Rules and CFTC Capital
Rules provide for a comparable approach to the calculation of on-
balance sheet and off-balance sheet risk exposures using non-model,
standardized approaches.\93\ In addition, as discussed in the 2022
Proposal, the Mexican Capital Rules' and CFTC Capital Rules'
requirements for identifying and measuring on-balance sheet and off-
balance sheet exposures under the standardized approaches are also
consistent with the requirements set forth under the BCBS framework for
identifying and measuring on-balance sheet and off-balance sheet
exposures.\94\
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\93\ See 2022 Proposal at 76382.
\94\ Id.
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Finally, the Commission preliminarily found that the Mexican
Capital Rules and CFTC Capital Rules achieve comparable outcomes and
are comparable in purpose and effect in that both limit the types of
capital instruments that qualify as regulatory capital to cover the on-
balance sheet and off-balance sheet risk exposures to high quality
equity capital and qualifying subordinated debt instruments that meet
conditions designed to ensure that the holders of the debt have
effectively subordinated their claims to other creditors of the nonbank
SD.\95\ As discussed in the 2022 Proposal and in section II.B. below,
both the Mexican Capital Rules and the CFTC Capital Rules define high
quality capital by the degree to which the capital represents permanent
capital that is contributed, or readily available to a nonbank SD, on
an unrestricted basis to absorb unexpected losses, including losses
from swaps trading and other activities, decreases in the value of firm
assets, and increases in the value of firm liabilities without the
nonbank SD becoming insolvent.\96\
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\95\ Id.
\96\ Id.
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The Commission further stated that it preliminarily found the
Mexican Financial Reporting Rules to be comparable in purpose and
effect to the CFTC Financial Reporting Rules as both sets of rules
require nonbank SDs to provide the Mexican Commission and the Banco de
Mexico (``Mexican Central Bank''), as applicable, and the CFTC,
respectively, with periodic financial reports, including unaudited
financial reports and an annual audited financial report, detailing
their financial operations and demonstrating their compliance with
minimum capital requirements.\97\ As discussed in the 2022 Proposal, in
addition to providing the CFTC and Mexican Commission with information
necessary to comprehensively assess the financial condition of a
nonbank SD on an ongoing basis, the financial reports further provide
the CFTC and Mexican Commission with information regarding potential
changes in a nonbank SD's risk profile by disclosing changes in account
balances reported over a period of time.\98\ Such changes in account
balances may indicate, among other things, that the nonbank SD has
entered into new lines of business, has increased its activity in an
existing line of business relative to other activities, or has
terminated a previous line of business.\99\
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\97\ Id.
\98\ Id.
\99\ Id.
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In assessing the comparability between the CFTC Financial Reporting
Rules and the Mexican Financial Reporting Rules, the Commission noted
that the prompt and effective monitoring of the financial condition of
nonbank SDs through the receipt and review of periodic financial
reports supports the CFTC and the Mexican Commission in meeting their
respective objectives of ensuring the safety and soundness of nonbank
SDs. In this regard, the Commission stated that the early
identification of potential financial issues provides the CFTC and the
Mexican Commission with an opportunity to address such issues with the
nonbank SD before they develop to a state where the financial condition
of the firm is impaired such that it may no longer hold a sufficient
amount of qualifying regulatory capital to absorb decreases in the
value of firm assets, absorb increases in the value of firm
liabilities, or to cover losses from the firm's business activities,
including the firm's swap dealing activities and obligations to swap
counterparties.\100\
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\100\ Id. at 76383.
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2. Comment Analysis and Final Determination
In response to the Commission's request for comment, Better Markets
identified certain differences between the CFTC Capital Rules and CFTC
Financial Reporting Rules and the Mexican Capital Rules and Mexican
Financial Reporting Rules and stated that the differences mandated
denial of the request for a comparability determination.\101\ Better
Markets further
[[Page 58515]]
stated that the imposition of conditions to achieve comparability
between the regimes is a de facto admission that the regulations are
not comparable and that the request should be denied.\102\ Better
Markets observed that the conditions added another set of capital and
reporting requirements that Mexican nonbank SDs will have to abide by
in addition to the Mexican laws and rules, requiring the CFTC to
monitor compliance with all of the conditions, exacerbating the
complexity of the administration of the capital and financial reporting
rules.\103\
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\101\ Better Markets Letter at pp. 8-13. Better Markets asserted
that the Mexican capital rules are different from the Commission's
capital rules with respect to the definition and types of capital
permitted to meet regulatory requirements; the approaches to
ensuring adequate levels of capital; and, the minimum dollar amount
of regulatory capital required. Better Markets also stated that the
reporting requirements are different as demonstrated by the number
of conditions included in the 2022 Proposal that would require
Mexican nonbank SDs to file additional reports with the Commission.
Better Markets comments are addressed in the appropriate sections
below.
\102\ Id. at p. 2.
\103\ Id. at p. 13.
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As described herein and in the 2022 Proposal, Commission staff has
engaged in a detailed, comprehensive study and evaluation of the
Mexican capital and financial reporting framework and has confirmed
that its understanding of the elements and application of the framework
is accurate. The Commission has also concluded, based on its
evaluation, that the Mexican Commission has a comprehensive oversight
program for monitoring Mexican nonbank SD's compliance with relevant
Mexican Capital Rules.
Furthermore, as discussed in section I.E. above, the conditions set
forth in the Comparability Order are generally intended to ensure that:
(i) only Mexican nonbank SDs that are subject to the laws and
regulations assessed under the Comparability Determination are eligible
for substituted compliance; (ii) the Mexican nonbank SDs are subject to
supervision by the Mexican Commission; and (iii) the Mexican nonbank
SDs provide information to the Commission and NFA that is relevant to
the ongoing supervision of their operations and financial condition.
Considering this thorough analysis and the ongoing requirement for
Mexican nonbank SDs to provide information to the Commission and NFA
demonstrating compliance with the Comparability Order, the Commission
is confident that it is capable of effectively conducting, together
with NFA, oversight of the Mexican nonbank SDs in a manner consistent
with the conduct of oversight of U.S.-domiciled nonbank SDs. In light
of the Commission's ultimate conclusion that the Mexican capital and
financial reporting requirements are comparable based on the standards
articulated in Commission Regulation 23.106(a)(3), the Commission
believes that a failure to issue a Comparability Determination and
Comparability Order would in fact be ``suboptimal and undesirable'' as
it would impose duplicative requirements that would result in increased
costs for registrants and market participants without a commensurate
benefit from an oversight perspective.
As discussed in sections I.B. and E. above, and detailed herein,
the Commission finds that the CFTC Capital Rules and CFTC Financial
Reporting Rules and the Mexican Capital Rules and Mexican Financial
Reporting Rules are comparable in purpose and effect, and have overall
comparative objectives, notwithstanding the identified differences. In
this regard, the Commission notes that instead of conducting a line-by-
line assessment or comparison of the Mexican Capital and Mexican
Financial Reporting Rules and the CFTC Capital and CFTC Financial
Reporting Rules, it has applied in the assessment set forth in this
determination and order, a principles-based, holistic approach in
assessing the comparability of the rules, consistent with the standard
of review it adopted in Commission Regulation 23.106(a)(3). Based on
that principles-based, holistic assessment, the individual elements
which are described in more detail below in sections II.B through II.F.
below, the Commission has determined that both sets of rules are
designed to ensure the safety and soundness of nonbank SDs and achieve
comparable outcomes. As such, the Commission adopts the Comparability
Determination and Comparability Order as proposed with respect to the
analysis of the regulatory objectives of the CFTC Capital Rules and
Financial Reporting Rules and the Mexican Capital and Financial
Reporting Rules.
B. Nonbank Swap Dealer Qualifying Capital
1. Preliminary Determination
As discussed in the 2022 Proposal, the Commission preliminarily
determined that the Mexican Capital Rules are comparable in purpose and
effect to CFTC Capital Rules with regard to the types and
characteristics of a nonbank SD's equity that qualifies as regulatory
capital in meeting its minimum requirements.\104\ The Commission
explained that the Mexican Capital Rules and the CFTC Capital Rules for
nonbank SDs both require a nonbank SD to maintain a quantity of high-
quality and permanent capital, all defined in a manner that is
consistent with the BCBS framework, that based on the firm's activities
and on-balance sheet and off-balance sheet exposures, is sufficient to
absorb losses and decreases in the value of firm assets and increases
in the value of firm liabilities without resulting in the firm becoming
insolvent.\105\ The Commission observed that the Mexican Capital Rules
and the CFTC Capital Rules permit nonbank SDs to recognize comparable
forms of equity capital and qualifying subordinated debt instruments
toward meeting minimum capital requirements, with both the Mexican
Capital Rules and the CFTC Capital Rules emphasizing high quality
capital instruments.
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\104\ See 2022 Proposal at 76384.
\105\ Id.
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In support of its preliminary Comparability Determination, the
Commission noted that the CFTC Capital Rules require a nonbank SD
electing the Bank-Based Approach to maintain regulatory capital in the
form of common equity tier 1 capital, additional tier 1 capital, and
tier 2 capital in amounts that meet certain stated minimum requirements
set forth in Commission Regulation 23.101.\106\ Common equity tier 1
capital is generally composed of an entity's common stock instruments,
and any related surpluses, retained earnings, and accumulated other
comprehensive income, and is a more conservative or permanent form of
capital that is last in line to receive distributions in the event of
the entity's insolvency.\107\ Additional tier 1 capital is generally
composed of equity instruments such as preferred stock and certain
hybrid securities that may be converted to common stock if triggering
events occur and may have a preference in distributions over common
equity tier 1 capital in the event of an insolvency.\108\ Total tier 1
capital is composed of common equity tier 1 capital and further
includes additional tier 1 capital. Tier 2 capital includes certain
types of instruments that include both debt and equity characteristics
such as qualifying subordinated debt.\109\ Subordinated debt must meet
certain conditions to qualify as tier 2 capital under the CFTC Capital
Rules.\110\
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\106\ Id. at 76383 (citing to Commission Regulation
23.101(a)(1)(i)). The terms ``common equity tier 1 capital,''
``additional tier 1 capital,'' and ``tier 2 capital'' are defined in
the bank holding company regulations of the Federal Reserve Board.
See 12 CFR 217.20.
\107\ 12 CFR 217.20(b).
\108\ 12 CFR 217.20(c).
\109\ 12 CFR 217.20(d).
\110\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d. Specifically, subordinated debt instruments must
have a term of at least one year (with the exception of approved
revolving subordinated debt agreements which may have a maturity
term that is less than one year), and contain terms that effectively
subordinate the rights of lenders to receive any payments, including
accrued interest, to other creditors of the firm. 17 CFR
23.101(a)(1)(i)(B) and 17 CFR 240.18a-1d.
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[[Page 58516]]
The preliminary Comparability Determination also noted that the
Mexican Capital Rules limit the composition of regulatory capital to
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital in a manner consistent with the BCBS framework.\111\ As the
Commission observed, the Mexican Capital Rules provide that: (i) common
equity tier 1 capital may generally be composed of retained earnings
and common equity instruments; (ii) additional tier 1 capital may
include other capital instruments and certain long-term convertible
debt instruments; and (iii) tier 2 capital may include certain
qualifying subordinated debt instruments.\112\
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\111\ See 2022 Proposal at 76383 and Article 162 of the General
Provisions. As discussed in the 2022 Proposal, the Mexican Capital
Rules employ different terminology to refer to the components of
total capital than the CFTC Capital Rules and the BCBS framework.
For example, the Mexican Capital Rules refer to total capital as
``net capital,'' common equity tier 1 capital as ``fundamental
capital,'' and the 8 percent requirement is described as a
``capitalization index'' requirement. 2022 Proposal at 76379 (n.
67). Where appropriate, this Comparability Determination uses the
same terminology that is used in the CFTC Capital Rules and in the
BCBS framework, for ease of reference.
\112\ See 2022 Proposal at 76383.
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Based on its comparative assessment, the Commission preliminarily
found that equity instruments that qualify as common equity tier 1
capital and additional tier 1 capital under the Mexican Capital Rules
and the CFTC Capital Rules have similar characteristics (e.g., the
equity must be in the form of high-quality, committed, and permanent
capital) and the equity instruments generally have no priority to the
distribution of firm assets or income with respect to other
shareholders or creditors of the firm, which makes this equity
available to a nonbank SD to absorb unexpected losses, including
counterparty defaults.\113\
---------------------------------------------------------------------------
\113\ Id.
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The Commission also found that instruments that qualify as tier 2
capital under the Mexican Capital Rules and the CFTC Capital Rules have
similar characteristics. Specifically, the Commission noted that the
qualifying conditions imposed on subordinated debt instruments under
the Mexican Capital Rules and the CFTC Capital Rules are comparable in
that they are designed to ensure that the subordinated debt has
qualities that support its recognition by a nonbank SD as equity for
capital purposes.\114\ The proposed conditions include, in the case of
the CFTC Capital Rules, regulatory requirements that effectively
subordinate the claims of debt holders to interest and repayment of the
debt to the claims of other creditors of the nonbank SD, and, in the
case of the Mexican Capital Rules, regulatory requirements that provide
Mexican nonbank SDs with the right to cancel scheduled interest
payments and to convert the debt to common equity of the firm.\115\
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\114\ Id.
\115\ Id., (referencing 17 CFR 240.18a-1d and Articles 162 and
162 Bis of the General Provisions).
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2. Comment Analysis and Final Determination
The Commission did not receive comments regarding its preliminary
determination that the Mexican Capital Rules are comparable in purpose
and effect to the CFTC Rules with respect to the types of and
characteristics of a nonbank SD's equity and subordinated debt that
qualifies as regulatory capital to meet minimum regulatory capital
requirements. Therefore, the Commission finds that the Mexican Capital
Rules and the CFTC Capital Rules, are comparable in purpose and effect,
and achieve comparable regulatory outcomes, with respect to the types
of capital instruments that qualify as regulatory capital. Both the
Mexican Capital Rules and the CFTC Capital Rules limit regulatory
capital to permanent and conservative forms of capital, including
common equity, capital surpluses, retained earnings, and subordinate
debt where debt holders effectively subordinate their claims to
repayment to all other creditors of the nonbank SD in the event of the
firm's insolvency. Limiting regulatory capital to the above categories
of equity and debt instruments promotes the safety and soundness of the
nonbank SD by helping to ensure that the regulatory capital is not
withdrawn or converted to other equity instruments that may have rights
or priority with respect to payments, such as dividends or
distributions in insolvency, over other creditors, including swap
counterparties. The Commission, therefore, is adopting the
Comparability Order as proposed with respect to the types and
characteristics of equity and subordinated debt that qualifies as
regulatory capital to meet minimum capital requirements under the
Mexican Capital Rules.
C. Nonbank Swap Dealer Minimum Capital Requirement
1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements
As reflected in the 2022 Proposal, the CFTC Capital Rules require a
nonbank SD electing the Bank-Based Approach to maintain regulatory
capital in an amount that satisfies each of the following criteria: (i)
an amount of common equity tier 1 capital of at least $20 million; (ii)
an aggregate amount of common equity tier 1 capital, additional tier 1
capital, and tier 2 capital equal or greater than 8 percent of the
nonbank SD's total risk-weighted assets, provided that common equity
tier 1 capital comprises at least 6.5 percent of the 8 percent; (iii)
an aggregate of common equity tier 1 capital, additional tier 1
capital, and tier 2 capital in an amount equal to or in excess of 8
percent of the nonbank SD's uncleared swap margin amount; \116\ and
(iv) the amount of capital required by NFA.\117\
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\116\ The term ``uncleared swap margin'' is defined in
Commission Regulation 23.100 to generally mean the amount of initial
margin that a nonbank SD would be required to collect from each
counterparty for each outstanding swap position of the nonbank SD.
17 CFR 23.100. A nonbank SD must include all swap positions in the
calculation of the uncleared swap margin amount, including swaps
that are exempt or excluded from the scope of the Commission's
uncleared swap margin regulations. A nonbank SD must compute the
uncleared swap margin amount in accordance with the Commission's
margin rules for uncleared swaps. 17 CFR 23.154.
\117\ 17 CFR 23.101(a)(1)(i). See also 2022 Proposal at 76388.
Commission Regulation 23.101(a)(1)(i) sets forth one of the minimum
thresholds that a nonbank SD must meet as the ``the amount of
capital required by a registered futures association.'' As
previously noted, NFA is currently the only entity that is a
registered futures association. NFA has adopted the Commission's
capital requirements as its own requirements, and has not adopted
any additional or stricter minimum capital requirements. See, NFA
rulebook, Financial Requirements Section 18 Swap Dealer and Major
Swap Participant Financial Requirements, available at
nfa.futures.org.
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In comparison, the Mexican Capital Rules require each Mexican
nonbank SD to maintain qualifying regulatory capital to satisfy the
following capital ratios, expressed as a percentage of the firm's total
risk-weighted assets: (i) common equity tier 1 capital equal to at
least 4.5 percent of the firm's risk-weighted assets; (ii) total tier 1
capital (i.e., common equity tier 1 capital plus additional tier 1
capital) equal to at least 6 percent of the firm's risk-weighted
assets; (iii) total capital (i.e., an aggregate amount of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital) equal to
at least 8 percent of the firm's risk-weighted assets; and (iv) an
additional capital conservation buffer of 2.5 percent of the firm's
risk-
[[Page 58517]]
weighted asset that must be met with common equity tier 1 capital.\118\
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\118\ 2022 Proposal at 76386 and Articles 172 and 173 of the Law
and Article 162 of the General Provisions.
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2. Preliminary Determination and Comment Analysis
While noting certain differences in the minimum capital
requirements and calculation of regulatory capital between the Mexican
Capital Rules and the CFTC Capital Rules, the Commission preliminarily
found that the Mexican Capital Rules and CFTC Capital Rules, subject to
the proposed conditions in the 2022 proposed Comparability
Determination and proposed Comparability Order, achieve comparable
outcomes by requiring a nonbank SD to maintain a minimum level of
qualifying regulatory capital and subordinated debt to absorb losses
from the firm's business activities, including its swap dealing
activities, and decreases in the value of the firm's assets and
increases in the firm's liabilities without the nonbank SD becoming
insolvent.\119\ As further discussed below, the Commission's
preliminary finding of comparability was based on a principles-based,
holistic comparative analysis of the three minimum capital requirement
thresholds of the CFTC Capital Rules' Bank-Based Approach referenced
above and the respective elements of the Mexican Capital Rules'
requirements.
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\119\ See 2022 Proposal at 76388.
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a. Fixed Amount Minimum Capital Requirement
As noted above, prong (i) of the CFTC Capital Rules requires each
nonbank SD electing the Bank-Based Approach to maintain a minimum of
$20 million of common equity tier 1 capital. The CFTC's $20 million
fixed-dollar minimum capital requirement is intended to ensure that
each nonbank SD maintains a level of regulatory capital, without regard
to the level of the firm's dealing and other activities, sufficient to
meet its obligations to swap market participants given the firm's
status as a CFTC-registered nonbank SD, and to help ensure the safety
and soundness of the nonbank SD.\120\
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\120\ 85 FR 57492.
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In comparison, the Commission observed that the Mexican Capital
Rules contain a requirement that each Mexican nonbank SD maintain a
fixed amount of minimum paid-in capital that is based on the services
or activities performed by the firm.\121\ The minimum paid-in capital
requirement is a fixed value of capital that is indexed annually to
``Unidades de Inversion'' (Inflation Indexed Units) (``UDIs''). Mexican
nonbank SDs that performed the broadest array of activities as of the
year ending December 31, 2021 were subject to a minimum paid-in capital
requirement that equaled approximately MXN $90,000,000 (or USD
$4,300,000).\122\
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\121\ See 2022 Proposal at 76388, citing Article 10 of the
General Provisions. The Commission also noted that, in addition to
the minimum paid-in-capital requirement, Mexican Central Bank also
imposes limits on a Mexican nonbank SD's overall leverage. See 2022
Proposal at 76387 and Section C.B1 of Circular 115/2002, issued by
the Mexican Central Bank on November 11, 2002, as amended.
\122\ Considering an exchange rate per USD of MXN $20.7882 as
published by the Mexican Central Bank in the Federal Official
Gazette (Diario Oficial de la Federacion) on July 12, 2022. See 2022
Proposal at 76388.
---------------------------------------------------------------------------
Although the Mexican Capital Rules and the CFTC Capital Rules both
require nonbank SDs to hold a minimum amount of regulatory capital that
is not based on the risk-weighted assets of the firms, the Commission
recognized that the $20 million of common equity tier 1 capital
required under the CFTC Capital Rules is materially higher than the
estimated $4.3 million of minimum paid-in capital required under the
Mexican Capital Rules. In the Commission's view, the $20 million
represented a more appropriate level of minimum capital to help ensure
the safety and soundness of the nonbank SD that is engaging in
uncleared swap transactions.\123\ As such, the Commission proposed to
condition the Comparability Order to require each Mexican nonbank SD to
maintain, at all times, a minimum amount of peso-denominated
fundamental capital equal to or in excess of the equivalent of $20
million.\124\ The Commission proposed that a Mexican nonbank SD might
convert the peso-denominated amount of this minimum capital requirement
to the U.S. dollar equivalent based on a commercially reasonable and
observed exchange rate.\125\
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\123\ See 2022 Proposal at 76388.
\124\ Id. The Commission proposed that the minimum fixed amount
of capital be held in fundamental capital, given that the Commission
had preliminarily found that fundamental capital, as defined in
Articles 162 and 162 Bis of the General Provisions, is comparable to
common equity tier 1 capital required under the CFTC Capital Rules.
\125\ Id.
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One commenter, Better Markets, asserted that the difference between
the CFTC Capital Rules $20 million minimum common equity tier 1 capital
requirement and the Mexican Capital Rules minimum paid-in capital
requirement of approximately $4.3 million ``demonstrates a fatal lack
of comparability'' between the CFTC Capital Rules and the Mexican
Capital Rules.\126\ As noted above, the Commission recognized the
difference in the requirement under the Mexican Capital Rules and the
CFTC Capital Rules with respect to the $20 million minimum dollar
amount of regulatory capital a nonbank SD is required to maintain. The
Commission's proposed a condition, however, effectively addresses this
difference by providing that a Mexican nonbank SD may not avail itself
of substituted compliance unless it maintains an amount of fundamental
capital denominated in pesos that is equal to or in excess of the
equivalent of $20 million. The imposition of the condition was
consistent with the Commission authority under Commission Regulation
23.106(a)(5). Furthermore, as discussed in section I.E. above, the
Commission has stated that entities relying on substituted compliance
may be required to comply with certain Commission imposed requirements
in situations where comparable regulation in their home jurisdiction
are deemed to be lacking.\127\ Therefore, the Commission believes that
the requirement for Mexican nonbank SDs to maintain an amount of
regulatory capital in the form of fundamental capital, as defined in
Article 162 and Article 162 Bis of the General Provisions, equal to or
in excess of the equivalent of $20 million will impose an equally
stringent standard to the analogue requirement under the CFTC Capital
Rules and will appropriately address the substantially lower minimum
fixed amount capital requirement under the Mexican Capital Rules. The
Commission proposed that the minimum fixed amount of capital be held in
fundamental capital, given that the Commission had preliminarily found
that fundamental capital, as defined in Articles 162 and 162 Bis of the
General Provisions, is comparable to common equity tier 1 capital
required under the CFTC Capital Rules.\128\
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\126\ Better Markets Letter at p. 11.
\127\ Guidance at 45343.
\128\ 2022 Proposal at 76388.
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In conclusion, the Commission finds that the Mexican Capital Rules
and the CFTC Capital Rules, with the imposition of the condition for
Mexican nonbank SDs to maintain a minimum level of fundamental capital
in an amount equivalent to at least $20 million, are comparable in
purpose and effect and achieve comparable regulatory outcomes with
respect to capital requirements based on a minimum dollar amount. The
requirement for a nonbank SD with limited swap dealing or other
business activities to maintain
[[Page 58518]]
a minimum level of regulatory capital equivalent to $20 million helps
to ensure the firm's safety and soundness by allowing it to absorb
decreases in firm assets, absorb increases in firm liabilities, and
meet obligations to swap counterparties, other creditors, and market
participants, without the firm becoming insolvent.
b. Minimum Capital Requirement Based on Risk-Weighted Assets
Prong (ii) of the CFTC Capital Rules' minimum capital requirements
described above requires each nonbank SD electing the Bank-Based
Approach to maintain an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital in an amount equal to or
greater than 8 percent of the nonbank SD's total risk-weighted assets,
with common equity tier 1 capital comprising at least 6.5 percent of
the 8 percent.\129\ Risk-weighted assets are a nonbank SD's on-balance
sheet and off-balance sheet exposures, including market risk and credit
risk exposures, and include exposures associated with proprietary swap,
security-based swap, equity, and futures positions, weighted according
to risk. The requirements and capital ratios set forth in prong (ii)
are based on the Federal Reserve Board's capital requirements for bank
holding companies \130\ and are consistent with the BCBS
framework.\131\ The requirement for each nonbank SD to maintain
regulatory capital in an amount that equals or exceeds 8 percent of the
firm's total risk-weighted assets is intended to help ensure that the
nonbank SD's level of capital is sufficient to absorb decreases in the
value of the firm's assets, absorb increases in the value of the firm's
liabilities, and cover unexpected losses resulting from the firm's
business activities, including losses resulting from collateralized and
uncollateralized defaults from swap counterparties, without the nonbank
SD becoming insolvent.\132\
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\129\ 17 CFR 23.101(a)(1)(i)(B).
\130\ 12 CFR 217.10(a)(1). The minimum capital requirement for a
bank holding company under the Federal Reserve Board's rules
requires bank holding companies to satisfy their 8 percent minimum
capital ratio requirement with a minimum of 4.5 percent of common
equity tier 1 capital. The CFTC Capital Rules, however, require a
nonbank SD to meet its minimum 8 percent capital ratio with at least
6.5 percent of common equity tier 1 capital. 17 CFR
23.101(a)(1)(i)(B).
\131\ Risk-based capital requirements RBC20, Calculation of
minimum risk-based capital requirements (Version effective as of 01
January 2023), published by the BCBS and available here: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20230101&published=20201126.
\132\ See generally 85 FR 57461 at 57530.
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The Mexican Capital Rules contain capital requirements for Mexican
nonbank SDs that the Commission preliminarily found comparable in
purpose and effect to the requirements in prong (ii) of the CFTC
Capital Requirements.\133\ Specifically, the Mexican Capital Rules
require each Mexican nonbank SD to maintain: (i) common equity tier 1
capital equal to at least 4.5 percent of the Mexican nonbank SD's risk-
weighted assets; (ii) total tier 1 capital (i.e., common equity tier 1
capital plus additional tier 1 capital) equal to at least 6 percent of
the Mexican nonbank SD's risk-weighted assets; and (iii) total capital
(i.e., an aggregate amount of common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital) equal to at least 8 percent of the
Mexican nonbanks SD's risk-weighted assets.\134\ In addition, the
Mexican Capital Rules require each Mexican nonbank SD to maintain an
additional capital conservation buffer \135\ equal to 2.5 percent of
the Mexican nonbank SD's risk-weighted assets, which must be met with
common equity tier 1 capital.\136\ Thus, a Mexican nonbank SD is
effectively required to maintain total qualifying regulatory capital
equal to or greater than 10.5 percent of the firm's risk-weighted
assets, which is a higher capital ratio than the 8 percent required of
nonbank SDs under prong (iii) of the CFTC Capital Rules.\137\
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\133\ See 2022 Proposal at 76388.
\134\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions.
\135\ Mexico Application, p. 5.
\136\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions.
\137\ As noted above, the total capital requirement is the sum
of the capital requirement equal to 8 percent of the firm's risk-
weighted assets, plus the capital conservation buffer of 2.5 percent
of the firm's risk-weighted assets. Articles 162 and 162 Bis of the
General Provisions. See 2022 Proposal at 76388-76389.
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The Commission also preliminarily found that the Mexican Capital
Rules and the CFTC Capital Rules to be comparable with respect to the
approaches used in the calculation of risk-weighted amounts for market
risk and credit risk in determining the nonbank SD's risk-weighted
assets.\138\ The Commission also noted that Mexican nonbank SDs are not
currently authorized by the Mexican Commission to use models to compute
market risk or credit risk exposures.\139\ Therefore, Mexican nonbank
SDs must compute risk-weighted assets using standardized market risk
and credit risk amounts set forth in the Mexican Capital Rules, which
generally results in calculated risk-weighted asset amounts that are
higher than model-based amounts.\140\
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\138\ 2022 Proposal at 76389.
\139\ As discussed in the 2022 Proposal, the Mexican Capital
Rules do not permit Mexican nonbank SDs to use internal models to
compute credit risk exposure amounts. Article 150 Bis of the General
Provisions. Also, although the Mexican Capital Rules permit a
Mexican nonbank SD to calculate market risk exposure amounts using
internal models that comply with the guidelines issued by the
Mexican Commission, the Applicants represented that, as of the
filing date of the Application, no Mexican nonbank SD was approved
to use internal models nor had any Mexican nonbank SD filed a model
approval application with the Mexican Commission. See 2022 Proposal
at 76380.
\140\ For clarity, the Commission notes that it has not reviewed
or evaluated the use of internal models to compute market or credit
risk exposure amounts under the Mexican Capital Rules. Therefore, a
Mexican nonbank SD that obtains the approval of the Mexican
Commission to use models to compute market risk or credit risk
exposure amounts and seeks to use such models in lieu of the
standardized charges under the Commission's Comparability Order, may
do so only after the Commission has reviewed and evaluated the use
of the subject models for purpose of comparison to the corresponding
CFTC requirements. The request to use internal market or credit risk
models in lieu of standardized risk-weighting requirements may
require the Commission to amend the Comparability Order. See 2022
Proposal at 76380 and 76389.
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As the Commission observed, the standardized approaches under the
Mexican Capital Rules and CFTC Capital Rules for calculating risk-
weighted asset amounts for market risk and credit risk are both
consistent with the approach under the BCBS framework and follow the
same structure that is now the common global standard: (i) allocating
assets to categories according to risk and assigning each category a
risk weight; (ii) allocating counterparties according to risk
assessments and assigning each a risk factor; (iii) calculating gross
exposures based on valuation of assets; (iv) calculating a net exposure
allowing offsets following well defined procedures and subject to clear
limitations; (v) adjusting the net exposure by the market risk weights;
and finally, (vi) for credit risk exposures, multiplying the sum of net
exposures to each counterparty by their corresponding risk factor.\141\
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\141\ See 2022 Proposal at 76389.
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More specifically, with respect to the calculation of standardized
risk-weighted asset amounts for market risk, the Commission explained
that the CFTC Capital Rules incorporate by reference the standardized
market risk charges set forth in Commission Regulation 1.17 for FCMs
and SEC Rule 18a-1 for nonbank security-based swap dealers
(``SBSDs'').\142\ The standardized market risk charges under Commission
[[Page 58519]]
Regulation 1.17 and SEC Rule 18a-1 are calculated as a percentage of
the market value or notional value of the nonbank SD's assets,
including marketable securities and derivatives positions, with the
percentages applied to the market value or notional value increasing as
the expected or anticipated risk of the positions increases.\143\ For
example, CFTC Capital Rules require nonbank SDs to calculate
standardized market risk-weighted asset amounts for uncleared swaps
based on notional values of the swap positions multiplied by
percentages set forth in the applicable rules.\144\ In addition, market
risk-weighted asset amounts for readily marketable equity securities
are calculated by multiplying the fair market value of the securities
by 15 percent.\145\
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\142\ See paragraph (3) of the definition of the term BHC
equivalent risk-weighted assets in 17 CFR 23.100.
\143\ 17 CFR 1.17(c)(5) and 17 CFR 240.18a-1(c)(1).
\144\ 17 CFR 1.17(c)(5)(iii).
\145\ 17 CFR 1.17(c)(5)(v), referencing SEC Rule 15c3-
1(c)(2)(vi) (17 CFR 240.15c3-1(c)(2)(vi)).
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Under the CFTC Capital Rules, the resulting total market risk-
weighted asset amount is multiplied by a factor of 12.5 to cancel the
effect of the 8 percent multiplication factor applied to all of the
nonbank SD's risk-weighted assets under prong (ii) of the rules'
minimum capital requirements described above. As a result, a nonbank SD
is effectively required to hold qualifying regulatory capital equal to
or greater than 100 percent of the amount of its market risk exposure
amount.\146\
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\146\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted
assets). As noted, a nonbank SD is required to maintain qualifying
capital (i.e., an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital) in an amount that
equals or exceeds 8 percent of its risk-weighted assets. The
regulations, however, require the nonbank SD to effectively maintain
qualifying capital equal to or in excess of 100 percent of its
market risk-weighted assets by requiring the nonbank SD to multiply
its market-risk weighted assets by a factor of 12.5. For example,
the market risk exposure amount for marketable equity securities
with a current fair market value of $250,000 is $37,500 (market
value of $250,000 x .15 standardized market risk factor). The
nonbank SD is required to maintain regulatory capital equal to or in
excess of full market risk exposure amount of $37,500 (risk exposure
amount of $37,500 x 8 percent regulatory capital requirement equals
$3,000; the regulatory capital requirement is then multiplied by a
factor of 12.5, which effectively requires the nonbank SD to hold
regulatory capital in an amount equal to at least 100 percent of the
market risk exposure amount ($3,000 x 12.5 factor equals $37,500)).
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Comparable to the CFTC Capital Rules, the Mexican Capital Rules
require a Mexican nonbank SD to calculate its risk-weighted asset
amounts for market risk based on standardized risk-weighting
requirements published by the Mexican Commission, which include market
risk-weighted amounts for interest rate, foreign exchange, precious
metals, and equity price risks.\147\ For derivatives positions, a
Mexican nonbank SD is required to calculate the risk-weighted asset
amounts for market risk by using standardized risk weights based on the
nature of the instrument underlying the derivatives position.\148\ The
market risk-weighted asset amounts are based on cumulative calculations
for individual derivatives positions with limited recognition of
offsets.\149\ The resulting total market risk-weighted asset amount,
including market risk amount for derivative positions, is multiplied by
a factor of 12.5 to adjust the 8 percent multiplication factor applied
to all of the Mexican nonbank SD's risk-weighted assets, which
effectively requires a Mexican nonbank SD to hold qualifying regulatory
capital equal to or greater than 100 percent of the firm's market risk
exposure amount.\150\
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\147\ See 2022 Proposal at 76386 and Article 150 Bis of the
General Provisions. The Mexican Capital Rules do not have market
risk charges specific to commodity risk as Mexican nonbank SDs are
not permitted to engage in physical commodity transactions. See id.
\148\ See 2022 Proposal at 76386 and Article 151 of the General
Provisions.
\149\ See 2022 Proposal at 76386 and Article 152 of the General
Provisions.
\150\ Id.
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With respect to standardized risk-weighted asset amounts for credit
risk from non-derivatives positions, the Commission explained that
under the CFTC Capital Rules, a nonbank SD must compute its on-balance
sheet and off-balance sheet exposures in accordance with the
standardized risk-weighting requirements adopted by the Federal Reserve
Board and set forth in subpart D of 12 CFR 217 as if the SD itself were
a bank holding company subject to subpart D.\151\ Standardized risk-
weighted asset amounts for credit risk are computed by multiplying the
amount of the exposure by defined counterparty credit risk factors that
range from 0 percent to 150 percent.\152\ A nonbank SD with off-balance
sheet exposures is required to calculate a risk-weighted asset amount
for credit risk by multiplying each exposure by a credit conversion
factor that ranges from 0 percent to 100 percent, depending on the type
of exposure.\153\
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\151\ Commission Regulation 23.101(a)(1)(i)(B) and paragraph (1)
of the definition of the term BHC equivalent risk-weighted assets in
Commission Regulation 23.100. See also 2022 Proposal at 76385.
\152\ 12 CFR 217.32. Lower credit risk factors are assigned to
entities with lower credit risk and higher credit risk factors are
assigned to entities with higher credit risk. For example, a credit
risk factor of 0 percent is applied to exposures to the U.S.
government, the Federal Reserve Bank, and U.S. government agencies
(12 CFR 217.32(a)(1)), and a credit risk factor of 100 percent is
assigned to an exposure to foreign sovereigns that are not members
of the Organization of Economic Co-operation and Development (12 CFR
217.32(a)(2)).
\153\ 12 CFR 217.33. See also discussion in 2022 Proposal at
76385.
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With respect to credit risk exposures for derivatives positions,
the Commission explained that under the CFTC Capital Rules, a nonbank
SD may compute standardized counterparty credit risk exposures using
either the current exposure method (``CEM'') or the standardized
approach for measuring counterparty credit risk (``SA-CCR'').\154\ Both
CEM and SA-CCR are non-model, rules-based approaches to calculating
counterparty credit risk exposures for derivatives positions. Credit
risk exposure under CEM is the sum of: (i) the current exposure (i.e.,
the positive mark-to-market) of the derivatives contract; and (ii) the
potential future exposure, which is calculated as the product of the
notional principal amount of the derivatives contract multiplied by a
standard credit risk conversion factor set forth in the rules of the
Federal Reserve Board.\155\ Credit risk exposure under SA-CCR is
defined as the exposure at default amount of a derivatives contract,
which is computed by multiplying a factor of 1.4 by the sum of: (i) the
replacement costs of the contract (i.e., the positive mark-to market);
and (ii) the potential future exposure of the contract.\156\
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\154\ 17 CFR 217.34 and 17 CFR 23.100 (defining the term BHC
risk-weighted assets and providing that a nonbank SD that does not
have model approval may use either CEM or SA-CCR to compute its
exposures for over-the-counter derivative contracts without regard
to the status of its affiliate with respect to the use of a
calculation approach under the Federal Reserve Board's capital
rules). See also discussion in 2022 Proposal at 76385.
\155\ 12 CFR 217.34.
\156\ 12 CFR 217.132(c).
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In comparison, the Commission noted that Mexican Capital Rules also
require a Mexican nonbank SD to calculate risk-weighted amounts for
credit risk, for both non-derivative and derivative positions, under a
standardized approach by taking the accounting value of each of its on-
balance sheet and off-balance sheet positions, determining a conversion
value to credit risk determined pursuant to Mexican regulation, and
then applying a specific risk weight based on the type of issuer or
counterparty, as applicable, and the assets' credit quality.\157\ The
resulting credit risk-weighted asset amount is also multiplied by a
factor of 12.5 to adjust
[[Page 58520]]
the 8 percent multiplication factor applied to all of the firm's risk-
weighted assets, which effectively requires the Mexican nonbank SD to
hold regulatory capital equal to or greater than 100 percent of the
firm's total credit risk exposure.\158\
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\157\ See 2022 Proposal at 76386-76387 and Articles 159, 160,
and 161 of the General Provisions. Mexican nonbank SDs are required
to use a standardized approach to computing all credit risk
exposures as the Mexican Capital Rules do not authorize the use of
internal credit risk models. Mexico Application at p. 11.
\158\ 2022 Proposal at 76387.
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The Commission also noted certain differences between the Mexican
Capital Rules and the CFTC Capital Rules with respect to a nonbank SD's
computation of its market risk exposures and credit risk exposures that
are included in the firm's risk-weighted assets. As noted above, the
CFTC Capital Rules and Mexican Capital Rules both require a nonbank SD
to maintain regulatory capital equal to or greater than 100 percent of
the firm's market risk exposure amount.\159\ The Mexican Capital Rules,
however, also require a Mexican nonbank SD to maintain regulatory
capital equal to or greater than 100 percent of its credit risk
exposure amount.\160\ The CFTC Capital Rules impose such requirement
with respect to the credit risk exposure amount only to nonbank SDs
using internal models to compute their risk-weighted asset amounts for
credit risk.\161\ The difference in approaches to computing risk-
weighted assets would generally result in a nonbank SD having a larger
amount of risk-weighted assets, and a higher minimum capital
requirement based on risk-weighted assets, under the Mexican Capital
Rules as compared to the CFTC Capital Rules.\162\
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\159\ The CFTC Capital Rules and the Mexican Capital Rules both
require a nonbank SD to maintain regulatory capital equal to or in
excess of 8 percent of the firm's total risk-weighted assets. Both
sets of rules further require that the nonbank SD multiply its total
market risk exposure amount by a factor of 12.5 and add the
resultant amount to its total risk-weighted assets, which has the
effect of requiring the nonbank SD to hold regulatory capital equal
to or greater than 100 percent of its market risk exposure amount.
\160\ The Mexican Capital Rules require a Mexican nonbank SD to
multiply its total credit risk exposure amount by a factor of 12.5
and to add the resultant amount to its total credit risk-weighted
assets, which has the effect of requiring the Mexican nonbank SD to
hold regulatory capital equal to or greater than 100 percent of its
credit risk exposure amount.
\161\ A nonbank SD that computes its credit risk exposures using
internal models must multiply the resulting capital requirement by a
factor of 12.5. 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv), and
217.132(d)(9)(iii).
\162\ See 2022 Proposal at 76389.
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As further discussed in section III.C.1.c. below, the Commission
also recognized that under the Mexican Capital Rules Mexican nonbank
SDs are required to account for operational risk, in addition to market
risk and credit risk, in computing their minimum capital
requirements.\163\
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\163\ See 2022 Proposal at 76387.
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The Commission did not receive comments specifically addressing the
Commission's comparative analysis of the minimum capital requirement
based on risk-weighted assets. In conclusion, the Commission finds that
the Mexican Capital Rules and the CFTC Capital Rules are comparable in
purpose and effect with respect to the computation of minimum capital
requirements based on a nonbank SD's risk-weighted assets. In this
regard, the Commission finds that notwithstanding the differences
discussed above, the Mexican Capital Rules and the CFTC Capital rules
have a comparable approach to the computation of risk-weighted asset
amounts for market risk and credit risk for on-balance sheet and off-
balance sheet exposures, which are intended to ensure that a nonbank SD
maintains a sufficient level of regulatory capital to absorb decreases
in firm assets, absorb increases in firm liabilities, and meet
obligations to counterparties and creditors, without the firm becoming
insolvent.
c. Minimum Capital Requirement Based on the Uncleared Swap Margin
Amount
As noted above, prong (ii) of the CFTC Capital Rules' Bank-Based
Approach requires a nonbank SD to maintain regulatory capital in an
amount equal to or greater than 8 percent of the firm's total uncleared
swaps margin amount associated with its uncleared swap transactions to
address potential operational, legal, and liquidity risks.\164\ The
Commission stated that the intent of the requirement was to establish a
method of developing a minimum amount of required capital for a nonbank
SD to meet its obligations as a SD to market participants, and to cover
potential operational, legal, and liquidity risks.\165\
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\164\ More specifically, in establishing the requirement that a
nonbank SD must maintain a level of regulatory capital in excess of
8 percent of the uncleared swap margin amount associated with the
firm's swap transactions, the Commission stated that the intent of
the uncleared swap margin amount was to establish a method of
developing a minimum amount of capital for a nonbank SD to meet its
obligations as a SD to market participants, and to cover potential
operational risk, legal risk and liquidity risk, and not just the
risks of its trading portfolio. 85 FR 57462 at 57485.
\165\ See id.
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The Mexican Capital Rules differ from the CFTC Capital Rules in
that they do not impose a capital requirement on Mexican nonbank SDs
based on a percentage of the margin for uncleared swap transactions. In
the 2022 Proposal, the Commission described, however, how certain
Mexican capital and liquidity requirements may compensate for the lack
of direct analogue to the 8 percent uncleared swap margin amount
requirement.\166\ Specifically, the Commission noted that the Mexican
Capital Rules require a Mexican nonbank SD to account for operational
risk in computing their minimum capital requirements.\167\ In this
connection, the Mexican Capital Rules require a Mexican nonbank SD to
calculate an operational risk exposure amount equal to 15 percent of a
Mexican nonbank SD's average annual net positive income for the last
three years, on a rolling basis.\168\ The Mexican nonbank SD is then
required to multiply the operational risk exposure amount by a factor
of 12.5 and add the resultant amount to the total operational risk-
weighted assets, which has the effect of requiring the Mexican nonbank
SD to hold regulatory capital equal to or greater than 100 percent of
its operational risk exposure amount.\169\
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\166\ See 2022 Proposal at 76389-76390.
\167\ 2022 Proposal at 76387 and Article 161 Bis of the General
Provisions.
\168\ The amount of the operational risk exposure is also
subject to a floor equal to 5 percent and a ceiling equal to 15
percent of the monthly average sum of market and credit risk
exposure amounts, calculated over the prior 36 months, also on a
rolling basis. Article 161 Bis 3 of the General Provisions.
\169\ See 2022 Proposal at 76387 and Article 161 Bis 5 of the
General Provisions.
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In addition, the Mexican Capital Rules require Mexican nonbank SDs
to meet quantitative liquidity requirements, whereby a Mexican nonbank
SD must hold or invest at least 20 percent of the firm's total capital
in liquid assets comprised of: (i) bank deposits; (ii) highly liquid
debt securities registered in Mexico; (iii) shares of debt investment
funds; (iv) reserve funds created to maintain funds available to cover
contingencies; and (v) high and low marketability shares subject to
market value discounts of 20 and 25 percent, respectively.\170\
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\170\ See 2022 Proposal at 76390 and Article 146 of the General
Provisions.
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Addressing the Commission's request for comment regarding the
comparability in purpose and effect between the requirement under the
Mexican Capital Rules for a Mexican nonbank SD to account for
operational risk by holding qualifying capital in an amount equal to 15
percent of its average annual net positive income from the last three
years and the CFTC's capital requirement based on a nonbank SD's
uncleared swap margin amount, one commenter, Better Markets stated that
the requirements are not
[[Page 58521]]
comparable.\171\ In this connection, Better Markets asserted that the
inclusion of operational risk as an additional risk exposure element in
the calculation of the nonbank SD's total risk-weighted assets, the
Mexican approach does not specifically address potential operational
risks for uncleared swaps. More specifically, Better Markets argued
that the approach mandated by the Mexican Capital Rules, which
addresses the nonbank SD's total operational risk in the calculation of
risk-weighted assets, provides for a lower capital amount to cover
uncleared swaps margin.\172\
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\171\ Better Markets Letter at pp. 10-11.
\172\ Id. at 10.
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In contrast, the Associations Letter stated that the Mexican
Capital Rules set out minimum capital level requirements that are
sound, reflect similar regulatory concerns, and lead to comparable
regulatory outcomes as the CFTC's Capital Rules, even if the Mexican
Capital Rules do not include a stand-alone requirement based on the
uncleared swap margin associated with an SD's swap transactions.\173\
The Associations added that although Mexico's capital framework does
not have a direct analogue to the 8 percent uncleared swap margin
requirement, it has various other measures that achieve the same
regulatory objective of ensuring that an SD maintains an amount of
capital that is sufficient to cover the full range of risks a Mexican
SD may face. The Associations explained that Mexico's capital framework
requires that a Mexican SD calculate risk weighted assets incorporating
risk exposure amounts composed of market, credit and equity exposures,
and operational risk. The Associations further stated that Mexican SDs
are subject to liquidity requirements that are designed to ensure that
an SD has sufficient liquid assets to meet its ongoing obligations and
that Mexican SDs are subject to leverage limitations that, similar to
the uncleared swap margin requirement, are based principally on volume
and counterparties without regard to risk-weighting. Lastly, as noted
by the Associations, Mexican SDs must conduct regular stress tests to
ensure that they have sufficient resources to withstand adverse
economic scenarios.\174\ Based on its holistic assessment, the
Commission believes that the requirement to include an operational
risk-weighted asset amount in the Mexican nonbank SD's total risk-
weighted assets, as well as the various regulatory measures seeking to
ensure that Mexican nonbank SDs hold sufficient capital to cover the
full range of risks that they may face, support the comparability of
the Mexican Capital Rules and the CFTC Capital Rules even in the
absence of a separate, stand-alone capital requirement that Mexican
nonbank SDs must have qualified capital equal to or greater than 8
percent of the amount of uncleared swap margin.
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\173\ Associations Letter at pp. 2-3.
\174\ Id.
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In conclusion, the Commission finds that the Mexican Capital Rules
and the CFTC Capital Rules are comparable in purpose and effect with
respect to the requirement that a nonbank SD's minimum level of
regulatory capital reflects potential operational risk exposures in
addition to market risk and credit risk exposures. The Commission
emphasizes that the intent of the minimum capital requirement based on
a percentage of the nonbank SD's uncleared swap margin is to establish
a minimum capital requirement that would help ensure that the nonbank
SD meets its obligations as an SD to market participants, and to cover
potential operational risk, legal risk, and liquidity risk in addition
to the risks associated with its trading portfolio.\175\ The Commission
further notes that the minimum capital requirement based on a
percentage of the nonbank SD's uncleared swap margin amount was
conceived as a proxy, not an exact measure, for inherent risk in the
SD's positions and operations, including operational risk, legal risk,
and liquidity risk.\176\ As the Commission noted in adopting the CFTC
Capital Rules, although the amount of capital required of a nonbank SD
under the uncleared swap margin calculation is directly related to the
volume, size, complexity, and risk of the covered SD's positions, the
minimum capital requirement is intended to cover a multitude of
potential risks faced by the SD.\177\ The Commission understands that
other jurisdictions may adopt alternative measures to cover the same
risks. In this regard, the Mexican Capital Rules address comparable
risks albeit not through a requirement based on a Mexican nonbank SD's
uncleared swap margin amount. Specifically, Mexican nonbank SDs are
required to maintain a minimum level of regulatory capital based on an
aggregate of the firm's total risk-weighted asset exposure amounts for
market risk, credit risk, and operational risk exposures. The
Commission finds that, notwithstanding the differences in approaches,
the Mexican Capital Rules and CFTC Capital Rules are comparable in
purpose and effect in requiring nonbank SDs to maintain a minimum level
of regulatory capital that addresses potential market risk, credit
risk, and operational risk to help ensure the safety and soundness of
the firm, and to ensure that the firm has sufficient capital to absorb
decreases in firm assets, absorb increases in firm liabilities, and
meet obligations to counterparties and creditors, without the firm
becoming insolvent.
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\175\ See 2022 Proposal at 76384-76385 (referencing 85 FR 57462
at 57492).
\176\ 85 FR 57462 at 57497.
\177\ 85 FR 57462 at 57485 and 57497.
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3. Final Determination
Based on its analysis of comments and its holistic assessment of
the respective requirements discussed in sections II.C.2.a., b., and c.
above, the Commission adopts the Comparability Determination and
Comparability Order as proposed with respect to the minimum capital
requirements and the calculation of regulatory capital, subject to the
condition that Mexican nonbank SDs must maintain a minimum level of
regulatory capital in the form of fundamental capital that equals or
exceeds the equivalent of $20 million U.S. dollars.
D. Nonbank Swap Dealer Financial Reporting Requirements
1. Proposed Determination
The Commission detailed the requirements of the CFTC Financial
Reporting Rules in the 2022 Proposal.\178\ Specifically, the 2022
Proposal notes that the CFTC Financial Reporting Rules require nonbank
SDs to file with the Commission and NFA periodic unaudited and annual
audited financial reports.\179\ The unaudited financial reports must
include: (i) a statement of financial condition; (ii) a statement of
income/loss; (iii) a statement demonstrating compliance with, and
calculation of, the applicable regulatory minimum capital requirement;
(iv) a statement of changes in ownership equity; (v) a statement of
changes in liabilities subordinated to claims of general creditors; and
(vi) such further material information necessary to make the required
statements not misleading.\180\ The annual audited financial reports
must include the same financial statements that are required to be
included in the unaudited financial reports, and must further include:
(i) a statement of cash flows; (ii) appropriate footnote disclosures;
and (iii) a reconciliation of any material
[[Page 58522]]
differences between the financial statements contained in the annual
audited financial reports and the financial statements contained in the
unaudited financial reports prepared as of the nonbank SD's year end
date.\181\ In addition, a nonbank SD must attach to each unaudited and
audited financial report an oath or affirmation that to the best
knowledge and belief of the individual making the affirmation the
information contained in the financial report is true and correct.\182\
The individual making the oath or affirmation must be a duly authorized
officer if the nonbank SD is a corporation, or one of the persons
specified in the regulation for business organizations that are not
corporations.\183\
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\178\ 2022 Proposal at 76391-76392.
\179\ Id. and 17 CFR 23.105(d) and (e).
\180\ Id. and 17 CFR 23.105(d)(2).
\181\ Id. and 17 CFR 23.105(e)(4).
\182\ Id. and 17 CFR 23.105(f).
\183\ Id.
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The CFTC Financial Reporting Rules also require a nonbank SD to
file the following financial information with the Commission and NFA on
a monthly basis: (i) a schedule listing the nonbank SD's financial
positions reported at fair market value; \184\ (ii) schedules showing
the nonbank SD's counterparty credit concentration for the 15 largest
exposures in derivatives, a summary of its derivatives exposures by
internal credit ratings, and the geographic distribution of derivatives
exposures for the 10 largest countries; \185\ and, (iii) for nonbank
SDs approved to use internal capital models, certain model metrics,
such as aggregate value-at-risk (``VaR'') and counterparty credit risk
information.\186\
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\184\ Id. and 17 CFR 23.105(l) and Schedule 1 of appendix B to
subpart E of part 23 (``Schedule 1''). Schedule 1 includes a nonbank
SD's holding of U.S Treasury securities, U.S. government agency debt
securities, foreign debt and equity securities, money market
instruments, corporate obligations, spot commodities, and cleared
and uncleared swaps, security-based swaps, and mixed swaps in
addition to other position information.
\185\ Id. and 17 CFR 23.105(l) and schedules 2, 3 and 4,
respectively, of appendix B to subpart E of part 23.
\186\ Id. and 17 CFR 23.105(k) and (l), and appendix B to
subpart E of part 23.
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The CFTC Financial Reporting Rules further require a nonbank SD to
provide the Commission and NFA with information regarding the
custodianship of margin for uncleared swap transactions (``Margin
Report'').\187\ The Margin Report must contain: (i) the name and
address of each custodian holding initial margin or variation margin on
behalf of the nonbank SD or its swap counterparties; (ii) the amount of
initial and variation margin required by the uncleared margin rules
held by each custodian on behalf of the nonbank SD and on behalf its
swap counterparties; and (iii) the aggregate amount of initial margin
that the nonbank SD is required to collect from, or post with, swap
counterparties for uncleared swap transactions subject to the uncleared
margin rules.\188\
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\187\ Id. and 17 CFR 23.105(m).
\188\ Id.
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A nonbank SD electing the Bank-Based Capital Approach is required
to file the unaudited financial report, Schedule 1, schedules of
counterparty credit exposures, and the Margin Report with the
Commission and NFA no later than 17 business days after the applicable
month-end reporting date.\189\ A nonbank SD must file its annual report
with the Commission and NFA no later than 60 calendar days after the
end of its fiscal year.\190\
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\189\ 17 CFR 23.105(k), (l), and (m).
\190\ 17 CFR 23.105(e)(1).
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The 2022 Proposal also detailed relevant financial reporting
requirements of the Mexican Financial Reporting Rules.\191\ The Mexican
Financial Reporting Rules require a Mexican nonbank SD to submit to the
Mexican Commission quarterly consolidated financial reports.\192\ The
reports must contain a balance sheet, a statement of income/loss, a
statement of changes in equity, a statement of cash flows, and a
statement showing the firm's compliance with minimum capital
requirements.\193\ The quarterly consolidated financial reports must be
for the quarters ending March, June, and September of each year, and
must be filed with the Mexican Commission within the month following
the last day of each quarter.\194\
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\191\ 2022 Proposal at 76392.
\192\ Id. and Article 203 of the General Provisions.
\193\ Id. and Article 180 of the General Provisions.
\194\ Id. and Article 203 of the General Provisions.
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A Mexican nonbank SD is also required to submit an annual
consolidated financial report.\195\ The annual report must contain the
same statements that are required to be included in the quarterly
consolidated financial report and must further include appropriate
footnote disclosures relating to, among other topics, nominal amounts
of derivatives contracts by type of instrument and by underlying
valuation results, as well as the results obtained in the assessment of
the adequacy of the firm's regulatory capital in relation to credit,
market, and operational risk requirements.\196\ The annual consolidated
financial report must be filed within 90 calendar days of the Mexican
nonbank SD's fiscal year end, and must contain an audit report issued
by an independent external auditor.\197\
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\195\ Id.
\196\ Id. and Article 180 of the General Provisions.
\197\ Id. and Article 203 of the General Provisions.
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In addition to the above consolidated financial reports, a Mexican
nonbank SD must provide the Mexican Commission, on a monthly basis,
with a balance sheet and income statement, along with additional
financial information.\198\ Such reports are due within 20 days
following the end of the respective month.\199\ On a quarterly basis, a
Mexican nonbank SD also must provide the Mexican Commission with
additional financial information regarding deferred income taxes,
consolidation with respect to balance sheet and income statements,
stockholders equity statements, and cash flow statements.\200\
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\198\ Id. and Article 202 of the General Provisions.
\199\ Id.
\200\ Id. and Exhibit 9 of the General Provisions.
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A Mexican nonbank SD licensed to enter into derivatives
transactions for its own account is also required to file with the
Mexican Central Bank, during May of each year, a written communication
issued by the Mexican nonbank SD's internal audit committee evidencing
compliance in the performance of its derivatives transactions with each
and all applicable legal provisions and, when required by the Mexican
Central Bank, a Mexican nonbank SD also must provide the Mexican
Central Bank with all the information related to the derivatives
transactions performed by the firm.\201\ Furthermore, a Mexican nonbank
SD licensed to perform derivatives transactions is required to file a
report with the Mexican Central Bank on a daily basis containing all
the derivatives transactions performed by the Mexican nonbank SD.\202\
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\201\ Id. and Provision 3.1.3 of the Rule 4/2012 issued by the
Mexican Central Bank.
\202\ Id., and Mexico Application at p. 19.
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Based on its review of the Mexico Application and the relevant
Mexican laws and regulations, the Commission preliminarily determined
that, subject to the conditions specified in the 2022 Proposal and
discussed below, the Mexican Financial Reporting Rules are comparable
to the CFTC Financial Reporting Rules in purpose and effect.\203\ The
Commission noted that both rule sets provide the Mexican Commission and
Mexican Central Bank, as applicable, and the Commission and NFA,
respectively, with financial information to monitor a nonbank SD's
compliance with capital requirements and to assess a nonbank SD's
overall safety and soundness. Specifically, both the CFTC Financial
Reporting Rules and the Mexican Financial Reporting Rules
[[Page 58523]]
require nonbank SDs to file statements of financial condition,
statements of profit and loss, and statements of regulatory capital
that collectively provide information for the Mexican Commission, CFTC,
and NFA to assess a nonbank SD's overall ability to absorb decreases in
the value of firm assets, absorb increases in the value of firm
liabilities, and cover losses from business activities, including swap
dealing activities, without the firm becoming insolvent.\204\
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\203\ 2022 Proposal at 76392.
\204\ Id.
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The proposed conditions in the proposed Comparability Order were
intended to ensure that the Commission and NFA receive appropriate and
timely financial information from Mexican nonbank SDs to monitor the
firms' compliance with the Mexican Commission's capital requirements
and to assess the firms' overall safety and soundness. The proposed
conditions would require a Mexican nonbank SD to provide the Commission
and NFA with copies of the monthly financial information, including a
copy of its balance sheet and income statement, that the firm files
with the Mexican Commission pursuant to Article 202 and Exhibit 9 of
the General Provisions, as well as copies of the quarterly consolidated
reports and annual audited financial reports that the firm files with
the Mexican Commission pursuant to Article 203 of the General
Provisions.\205\ In addition, the Commission proposed a condition to
require a Mexican nonbank SD to provide as part of its monthly filing,
a statement of regulatory capital.\206\ The proposed conditions would
also require the annual audited and the unaudited monthly and quarterly
financial reports to be translated into the English language.\207\ The
unaudited monthly and quarterly financial reports also must have
balances converted from Mexican pesos to U.S. dollars.\208\ Although
the unaudited monthly and quarterly financial reports must have
balances converted from Mexican pesos to U.S. dollars, the Commission
stated that it would permit the annual audited financial report to be
presented in either U.S. dollars or Mexican pesos to avoid potential
negative impacts that such conversion may have on the firm's annual
audit and the audit opinion expressed by the external auditor.\209\ The
proposed conditions also would require a Mexican nonbank SD to file
with the Commission and NFA the requisite information and financial
reports within 15 business days of the earlier of the date the reports
are filed with the Mexican Commission or the date the reports are
required to be filed with the Mexican Commission.\210\ The Commission
stated that, in its preliminary view, the proposed filing dates
provided sufficient time for the respective reports to be translated
into the English language with balances converted from Mexican pesos to
U.S. dollars, as applicable.\211\
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\205\ 2022 Proposal at 76393.
\206\ Id.
\207\ Id.
\208\ Id.
\209\ Id.
\210\ Id.
\211\ Id. and proposed Conditions 9 and 10.
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In the Commission's preliminary view, its approach of requiring
Mexican nonbank SDs to provide the Commission and NFA with copies of
the monthly financial information, and the quarterly and annual
financial reports, that the firms file with the Mexican Commission
struck an appropriate balance of ensuring that the Commission receives
the financial reporting necessary for the effective monitoring of the
financial condition of the nonbank SDs, while also recognizing the
propriety of providing substituted compliance based on the existing
Mexican financial reporting requirements and regulatory structure.\212\
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\212\ Id. at 76393.
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The Commission also proposed a condition to require Mexican nonbank
SDs to file with the Commission and NFA, on a monthly basis, Schedule 1
showing the aggregate securities, commodities, and swap positions of
the firm at fair market value as of the reporting date.\213\ The
Commission explained that Schedule 1 provides the Commission and NFA
with detailed information regarding the fair market value of nonbank
SD's financial positions as of the end of each month, including the
firm's swaps positions, which allows the Commission and NFA to monitor
the types of investments and other activities that the firm engages in
and would assist the Commission and NFA in monitoring the safety and
soundness of the firm.\214\ The Commission proposed to require that
Schedule 1 be filed by a Mexican nonbank SD along with the firm's
monthly financial information filed pursuant to Article 202 and Exhibit
9 of the General Provisions.\215\ The Commission also proposed to
require that Schedule 1 be prepared in the English language with
balances reported in U.S. dollars.
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\213\ Id. and proposed Condition 11.
\214\ Id.
\215\ Id.
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The Commission also proposed a condition to require a Mexican
nonbank SD to submit a statement by an authorized representative or
representatives of the Mexican nonbank SD that, to the best knowledge
and belief of the person(s), the information contained within the
monthly financial information, the quarterly financial report, and the
audited annual report, is true and correct, including as it relates to
the translation of the reports into the English language and the
conversion of balances to U.S. dollars.\216\ The statement by an
authorized representative or representatives of the Mexican nonbank SD
was intended to be the equivalent of the oath or affirmation required
of nonbank SDs under Commission Regulation 23.105(f),\217\ to ensure
that reports filed with the Commission and NFA were prepared and
submitted by firm personnel with knowledge of the financial reporting
of the firm who can attest to the accuracy of the reporting and
translation.\218\
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\216\ Id. and proposed Condition 12.
\217\ 17 CFR 23.105(f). Commission Regulation 23.105(f) requires
a nonbank SD to attach to each unaudited and audited financial
report an oath or affirmation that to the best knowledge and belief
of the individual making the affirmation the information contained
in the financial report is true and correct. The individual making
the oath or affirmation must be a duly authorized officer if the
nonbank SD is a corporation, or one of the persons specified in the
regulation for business organizations that are not corporations.
\218\ 2022 Proposal at 76393.
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The Commission further proposed a condition that would require a
Mexican nonbank SD to file a Margin Report with the Commission and NFA
on a monthly basis.\219\ The Commission noted that a Margin Report
would assist the Commission and NFA in their assessment of the safety
and soundness of the Mexican nonbank SDs by providing information
regarding the firm's swaps book and the extent to which it has
uncollateralized swap exposures to counterparties or has not met its
margin obligations to swap counterparties. The Commission explained
that this information, along with the list of custodians holding both
the firm's and counterparties' swaps collateral, would assist with
identifying potential financial impacts to the nonbank SD resulting
from defaults on its swap transactions.\220\
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\219\ Id. and proposed Condition 13.
\220\ 2022 Proposal at 76394.
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[[Page 58524]]
2. Comment Analysis and Final Determination
The Commission received comments regarding the comparability of
financial reporting and specific comments addressing several of the
financial reporting issues on which the Commission solicited feedback.
Better Markets expressed a general disagreement with the Commission's
preliminary finding of comparability, arguing that the number and
variety of conditions regarding financial reporting are the most
compelling evidence that the requirements are not comparable.\221\ More
specifically, Better Markets asserted that the 2022 Proposal did not
provide a sufficient analysis supporting the Commission's preliminary
finding of comparability between the various reports required under the
Mexican Financial Reporting Rules and their U.S. counterparts.\222\ In
support of its statement, Better Markets noted that the Commission did
not provide its basis for determining that the financial reports
submitted by Mexican nonbank SDs would be useful to the Commission in
monitoring the firms' financial condition.\223\ In this regard, Better
Markets stated that the Commission did not mention or describe whether
the Mexican nonbank SDs must comply with the U.S. Generally Accepted
Accounting Principles (GAAP), the International Financial Reporting
Standards (IFRS), or another accounting standard adopted by Mexican
authorities and that without knowing this important information, it is
impossible to comment on whether the financial reports would be useful
to the Commission.\224\
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\221\ Better Markets Letter at p. 12.
\222\ Id.
\223\ Id.
\224\ Id.
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Better Markets also noted that the proposed comparability
determination was conditioned on a Mexican nonbank SD submitting a
statement by an authorized representative that, to the best knowledge
and belief of the person, the information contained in reports
submitted to the Commission is true and correct, in lieu of the oath or
affirmation required by Commission Regulation 23.105(f).\225\ Better
Markets stated that there are material legal differences between a
statement and the oath or affirmation required by the CFTC Financial
Reporting Rules, further highlighting the differences between the
regulatory reporting requirements of the U.S. and those of Mexico.\226\
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\225\ Id.
\226\ Id.
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As discussed in section I.E. above, the Commission does not believe
that the inclusion of conditions in the Comparability Order
demonstrates that the Mexican Financial Reporting Requirement are not
comparable to CFTC Financial Reporting Requirements in achieving the
overall objectives of ensuring the safety and soundness and effective
monitoring of nonbank SDs. In addition, with respect to the comment
related to the proposed Comparability Order's conditions regarding
applicable accounting standards, the Commission notes that, as
discussed in the 2022 Proposal, the quarterly and annual financial
reports submitted by Mexican nonbank SDs will be prepared in accordance
with the Accounting Criteria for Broker-Dealers.\227\ For purposes of
clarity, the Commission confirms that Mexican nonbank SDs may present
the financial information required to be provided to the Commission and
NFA under the final Comparability Order in accordance with generally
accepted accounting principles that the Mexican nonbank SD uses to
prepare general purpose financial statements in Mexico. This
clarification is consistent with proposed Condition 8, which the
Commission adopts subject to a minor modification in the final
Comparability Order, requiring that the Mexican nonbank SD prepares and
keeps current ledgers and other similar records ``in accordance with
accounting principles permitted by the Mexican Commission.'' \228\ In
taking the position that Mexican nonbank SDs may provide financial
reporting prepared in accordance with the accounting standards
applicable in their home jurisdiction, the Commission considered the
nature of the financial reporting information that the Commission
requires from nonbank SDs for purposes of monitoring their overall
financial condition and compliance with capital requirements.
Specifically, the Commission notes that calculating a firm's risk-
weighted assets and capital ratio follows a rules-based approach
consistent with the Basel standards and, consequently, the Commission
does not anticipate that a variation in the applicable accounting
standards would materially impact this calculation.\229\ In this
regard, the Commission notes that Mexican nonbank SDs currently submit
financial reports, including a statement of financial condition and a
statement of regulatory capital, pursuant to CFTC Staff Letter 22-
10.\230\ The reports provide the Commission with appropriate
information to assess the
[[Page 58525]]
financial and operational condition of Mexican nonbank SDs, as well as
the firms' compliance with the capital ratios imposed on Mexican
nonbank SDs under the Mexican Capital Rules.
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\227\ See 2022 Proposal at 76392.
\228\ 2022 Proposal at 76399. Proposed Condition 8 stated that
Mexican nonbank SDs must prepare and keep current ledgers and other
similar records ``in accordance with accounting principles required
by the Mexican Commission.'' To promote consistency across the
Comparability Determinations the Commission is adopting with respect
to several other jurisdictions and to reflect the fact that certain
jurisdictions may not issue a formal approval of the accounting
standards used by nonbank SDs, the Commission is replacing the
adjective ``required'' with the adjective ``permitted'' to refer to
the accounting standards to be used by Mexican nonbank SDs.
\229\ Furthermore, the Commission's approach to permitting
Mexican nonbank SDs to maintain financial books and records, and to
file financial reports and other financial information, prepared in
accordance with local accounting standards is consistent with the
SEC's final comparability determinations for non-U.S. SBSDs. See
Amended and Restated Order Granting Conditional Substituted
Compliance in Connection with Certain Requirements Applicable to
Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap
Participants Subject to Regulation in the Federal Republic of
Germany; Amended Orders Addressing Non-U.S. Security-Based Swap
Entities Subject to Regulation in the French Republic or the United
Kingdom; and Order Extending the Time to Meet Certain Conditions
Relating to Capital and Margin, 86 FR 59797 (Oct. 28, 2021) at 59812
and Order Specifying the Manner and Format of Filing Unaudited
Financial and Operational Information by Security-Based Swap Dealers
and Major Security-Based Swap Participants that are not U.S. Persons
and are Relying on Substituted Compliance with Respect to Rule 18a-
7, 86 FR 59208 (Oct. 26, 2021) (``SEC Manner and Format Order'') at
59219. Specifically, the SEC stated that the use of local reporting
requirements will avoid non-U.S. SBSDs ``having to perform and
present two Basel capital calculations (one pursuant to local
requirements and one pursuant to U.S. requirements).'' SEC Manner
and Format Order at 59219. The SEC noted, in this regard, that the
Basel standards are international standards that have been adopted
in the U.S. and in jurisdictions where substituted compliance is
available for capital under the SEC comparability determinations and
that, therefore, requirements for how firms calculate capital
pursuant to the Basel standards generally should be similar. Id. In
addition, if a Mexican nonbank SD becomes registered with the SEC as
an SBSD and is required to file an unaudited SEC Form X-17A-5 Part
II (``FOCUS Report''), the Commission's approach to permitting
Mexican nonbank SDs to maintain financial books and records, and to
file financial information, prepared in accordance with local
accounting standards would facilitate financial reporting by such
dually-registered entity. In such case, dually registered entities
would not have to perform multiple calculations under different
accounting standards or submit two different FOCUS Reports.
\230\ CFTC Staff Letter No. 22-10, Extension of Time-Limited No-
Action Position for Foreign Based Nonbank Swap Dealers domiciled in
Japan, Mexico, the United Kingdom, and the European Union, issued by
MPD on August 17, 2022. CFTC Staff Letter No. 22-10, which extended
the expiration of CFTC Letter 21-20, provides that MPD would not
recommend an enforcement action to the Commission if a non-U.S.
nonbank SD covered by the letter, subject to certain conditions,
complied with their respective home-country capital and financial
reporting requirements in lieu of the Commission's capital and
financial reporting requirements set forth in Commission Regulations
23.100 through 23.106, pending the Commission's determination of
whether the capital and financial reporting requirements of certain
foreign jurisdictions are comparable to the Commission's
corresponding requirements.
---------------------------------------------------------------------------
With respect to the comment related to the requirement for Mexican
nonbank SDs to submit a statement from an authorized representative,
the Commission notes, for completeness, that the proposed condition
requires that an authorized representative of the Mexican nonbank SD
provide a statement that, to the best of the knowledge and belief of
the representative, the information contained in the financial reports
filed with the Commission and NFA is true and correct, including the
applicable translation of the reports to the English language and the
conversion of balances to U.S. dollars. The proposed condition was
based on current Commission Regulation 23.105(f), which provides that a
nonbank SD must attach to each unaudited and annual audited financial
report filed with the Commission and NFA an oath or affirmation that to
the best knowledge and belief of the individual making the oath or
affirmation the information in the financial reports is true and
correct. Similar to the intent of Commission Regulation 23.105(f), the
purpose of the proposed condition is to obtain a formal attestation
from a representative with the appropriate knowledge and authority that
the information provided in the requisite financial reports is accurate
and properly translated. The Commission's choice of language in using
the term ``statement'' was not intended to make a legal distinction
between this term and the terms ``oath'' or ``affirmation,'' but rather
to select a generic term that is universally understood across
jurisdictions to reflect the above-referenced purpose. In practice, the
Commission does not believe that there is a material legal difference
between the language of the proposed condition and the required oath or
affirmation required under Commission Regulation 23.105(f). Instead,
the Commission is of the view that the proposed condition would have
the same legal effect as Commission Regulation 23.105(f) of providing
the Commission with a stronger basis to take legal action if a Mexican
nonbank SD files erroneous information.
Finally, the Associations addressed the Commission's request for
comment on the compliance dates for the reporting conditions that the
proposed Comparability Order would impose on Mexican nonbank SDs.\231\
The Associations requested that the Commission set the compliance date
at least six months following the issue date of the final Comparability
Order to allow Mexican nonbank SDs to adequately prepare for compliance
with the reporting conditions imposed by the Comparability Order.\232\
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\231\ Associations Letter at p. 4.
\232\ Id.
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The Commission believes that granting an additional period of time
to allow Mexican nonbank SDs to develop and implement the necessary
systems and processes for compliance with the Comparability Order is
appropriate with respect to new reporting obligations imposed on
Mexican nonbank SDs under the final Order. For other reporting
obligations, for which a process already exists, such as the reports
that Mexican nonbank SDs currently submit to the Commission and NFA
pursuant to CFTC Staff Letter 22-10 and/or prepare pursuant to the
Mexican Financial Reporting Rules, additional time for compliance does
not appear necessary. Accordingly, the Commission is setting a
compliance date of 180 calendar days after publication of the final
Comparability Order in the Federal Register for Mexican nonbank SDs to
file Schedule 1 and the Margin Report with the Commission and NFA under
Conditions 11 and 13, respectively.
In an effort to align, where appropriate, the filing deadlines for
financial reporting obligations imposed by the Comparability Order on
Mexican nonbank SDs with the filing deadlines that the Commission
proposed for nonbank SDs domiciled in several other jurisdictions, the
Commission is also setting the filing deadline in final Condition 9 for
the monthly financial information to 35 calendar days after the end of
each month.\233\ The filing deadline will apply to the monthly
financial information filed with the Mexican Commission pursuant to
Article 202 and Exhibit 9 of the General Provisions Applicable to
Broker-Dealers, as well as to Schedule 1 and the Margin Report, which
pursuant to final Conditions 11 and 13 must be filed with the monthly
financial information.
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\233\ See Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Domiciled in the French Republic and
Federal Republic of Germany and Subject to Capital and Financial
Reporting Requirements of the European Union, 88 FR 41774 (June 27,
2023) and Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Capital and Financial
Reporting Requirements of the United Kingdom and Regulated by the
United Kingdom Prudential Regulation Authority, 89 FR 8026 (Feb. 5,
2024).
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In summary, the Commission adopts the final Comparability Order and
conditions substantially as proposed with respect to the comparability
of the CFTC Financial Reporting Rules and Mexican Financial Reporting
Requirements. The Commission also specifies, in final Conditions 9, 11,
and 13, that the conversion of balances to U.S. dollars must be done
using a commercially reasonable and observable Mexican peso/U.S. dollar
spot rate as of the date of the respective report. Finally, the
Commission grants an additional compliance period for the new reporting
obligations imposed on Mexican nonbank SDs under the final Order set
forth below.
E. Notice Requirements
1. Preliminary Determination
The Commission noted in the 2022 Proposal that the CFTC Financial
Reporting Rules require nonbank SDs to provide the Commission and NFA
with written notice of certain defined events.\234\ Commission
Regulation 23.105(c) requires a nonbank SD to file written notice with
the Commission and NFA of the following events: (i) the nonbank SD's
regulatory capital is less than the minimum amount required; (ii) the
nonbank SD's regulatory capital is less than 120 percent of the minimum
amount required; (iii) the nonbank SD fails to make or to keep current
required financial books and records; (iv) the nonbank SD experiences a
reduction in the level of its excess regulatory capital of 30 percent
or more from the amount last reported in a financial report filed with
the Commission; (v) the nonbank SD plans to distribute capital to
equity holders in an amount in excess of 30 percent of the firm's
excess regulatory capital; (vi) the nonbank SD fails to post to, or
collect from, a counterparty (or group of counterparties under common
ownership or control) required initial and variation margin a
counterparty, and the aggregate amount of such margin equals or exceeds
25 percent of the nonbank SD's minimum capital requirement; (vii) the
nonbank SD fails to post to, or collect from, swap counterparties
required initial and variation margin, and the aggregate amount of such
margin equals or exceeds 50 percent of the nonbank SD's minimum capital
requirement; and (viii) the nonbank SD is registered with the SEC as an
SBSD and files a notice with the SEC under applicable SEC Rules.\235\
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\234\ 2022 Proposal at 76395 and 17 CFR 23.105(c).
\235\ 17 CFR 23.105(c).
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[[Page 58526]]
The notices are part of the Commission's overall program of helping
to ensure the safety and soundness of nonbank SDs and the swaps markets
in general.\236\ Notices provide the Commission and NFA with an
opportunity to assess whether there is an actual or potential financial
and/or operational issue at a nonbank SD. In situations where there is
an underlying issue, Commission and NFA staff engage with the nonbank
SD in an effort to minimize potential adverse impacts on the firm, swap
counterparties, and the larger swaps market.\237\
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\236\ Id.
\237\ See 2022 Proposal at 76395.
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With respect to Mexican nonbank SDs, the Commission noted that the
Mexican Financial Reporting Rules do not include explicit, predefined
notice provisions that require the firms to file prompt notice with the
Mexican Commission, or other relevant Mexican regulatory authority, in
a manner that is comparable to the notice provisions set forth in
Commission Regulation 23.105(c).\238\ Therefore, the Commission
proposed to condition the Comparability Order to require Mexican
nonbank SDs to file certain notices mandated by Commission Regulation
23.105(c) with the Commission and NFA.\239\ Specifically, the
Commission proposed to require a Mexican nonbank SD to file notice with
the Commission and NFA, within the timeframes set forth in the proposed
conditions, if the firm: (i) fails to make or keep current the books
and records required by the Mexican Commission; (ii) is informed by the
Mexican Commission that the firm is not in compliance with any
component of the Mexican Capital Rules or Mexican Financial Reporting
Rules; (iii) maintains regulatory capital at a level that is below 120
percent of the minimum capital requirement set by the Mexican Capital
Rules; (iv) experiences a 30 percent or more decrease in its excess
regulatory capital as compared to the excess capital last reported in
its financial forms filed with the Mexican Commission pursuant to
Article 202 and Exhibit 9 of the General Provisions; (v) fails to post
or collect initial margin or variation margin required under Mexican
law and/or regulations or CFTC margin rules to be exchanged for
uncleared swaps and non-cleared security-based swaps in amounts that
exceed defined thresholds; and (vi) has received the approval of the
Mexican Commission to a change in the firm's fiscal year end date.\240\
The notices would have to be translated into English prior to being
filed with the Commission and NFA.\241\
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\238\ Id.
\239\ Id.
\240\ The Commission noted that it was aware of the Mexican
Commission's intent to issue final rules addressing the margin
requirements for uncleared swaps. See 2022 Proposal at 76396 (n.
237). As further noted in the 2022 Proposal, however, Mexican
nonbank SDs are currently subject to the CFTC margin requirements
for uncleared swap transactions as set forth in Commission
Regulation 23.160 for cross-border transactions. Id. Commission
Regulation 23.160 governs the cross-border application of the CFTC
margin requirements for uncleared swaps depending on the category of
entities involved in the transactions and the availability of
substituted compliance.
\241\ Id. at 76396.
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The Commission proposed these conditions so that it and NFA would
be alerted to the occurrence of any of the defined events in a prompt
manner, which would allow the Commission and NFA to communicate with
the impacted Mexican nonbank SD to assess the seriousness of the matter
and the effectiveness of any actions that the Mexican nonbank SD may
have taken to remediate the matter. As previously noted, the notices
provide the Commission with ``early warning'' of potential adverse
financial and operational issues at a nonbank SD. The receipt of
``early warning'' notices are an important component of the
Commission's and NFA's programs for effectively overseeing the safety
and soundness of nonbank SDs.
2. Comment Analysis and Final Determination
Better Markets stated that the proposed notice provisions in the
proposed Comparability Determination and proposed Comparability Order
represent regulatory gaps between the Mexican Financial Reporting Rules
and the CFTC Financial Reporting Rules.\242\ The Commission recognized
that the Mexican Financial Reporting Rules do not include regulatory
notices in a manner comparable to the CFTC Financial Reporting Rules.
To address the lack of regulatory notices under the Mexican Financial
Reporting Rules, the Commission included proposed conditions in the
proposed Comparability Order that are consistent with the notice
provisions imposed by the Commission on nonbank SDs under Commission
Regulation 23.105(c). The proposed notice conditions are intended to
ensure that the Commission and NFA receive necessary information to
conduct ongoing monitoring of Mexican nonbank SDs for compliance with
relevant capital and financial reporting requirements.
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\242\ Better Markets Letter at p. 12.
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As discussed in section I.E. above, in issuing a Comparability
Order, the Commission is not ceding its supervisory and enforcement
authorities. The Comparability Order permits Mexican nonbank SDs to
satisfy the Commission's capital and financial reporting requirements
by complying with certain laws and/or regulations of Mexico that have
been found to be comparable to the Commission's laws and/or regulations
in purpose and effect. The Commission and NFA, however, have a
continuing obligation to conduct ongoing oversight, including potential
examination, of Mexican nonbank SDs to ensure compliance with the
Comparability Order, including its conditions. To that effect, the
notice conditions set forth in the Comparability Order provide the
Commission and NFA with information necessary to monitor for Mexican
nonbank SDs for compliance with the Comparability Order and to evaluate
the firms' operational and financial conditions.
Furthermore, to the extent that the notice conditions impose new
obligations on Mexican nonbank SDs beyond what is currently in Mexican
laws or regulations, the imposition of such conditions is consistent
with Commission Regulation 23.106 and the Commission's established
policy with regard to comparability determinations. As discussed in
section I.E. above, the Commission contemplated that even in
circumstances where the Commission finds two regulatory regimes
comparable, the Commission may impose requirements on entities relying
on substituted compliance where the Commission determines that the home
jurisdiction's regime lacks comparable and comprehensive regulation on
a specific issue.\243\ The Commission's authority to impose such
conditions is also evident from the language of Commission Regulation
23.106(a)(5), which states that the Commission may impose ``any terms
and conditions it deems appropriate, including certain capital adequacy
and financial reporting requirements [on SDs].'' \244\ Therefore, the
Commission believes that the imposition of conditions in the
Comparability Order to require Mexican nonbank SDs to file notices of
certain events with the Commission and NFA in a manner consistent with
requirements imposed by the Commission on nonbank SDs under Commission
Regulation 23.105(c)
[[Page 58527]]
appropriately addresses the fact that the Mexican Financial Reporting
Rules do not include comparable regulatory requirements.
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\243\ Guidance at 45343.
\244\ 17 CFR 23.106(5).
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The Associations recommended in their joint comment letter that
with respect to the proposed conditions to require that Mexican nonbank
SDs provide notice if the firm experiences a 30 percent or more
decrease in excess regulatory capital or if the firm fails to make or
keep current books and records, that the Commission require a Mexican
nonbank SD to file a notice within a defined period of time of when the
firm ``knows'' or becomes ``aware of'' the reportable event instead of
when the firm ``experiences'' or ``should have known'' of the
reportable event.\245\ In support of the recommendation, the
Associations noted that it was practically challenging for a firm to
submit a notification prior to the discovery of the relevant
failure.\246\
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\245\ Associations Letter at p. 4.
\246\ Id.
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With regard to the proposed requirement that a Mexican nonbank SD
notify the Commission and NFA if the firm ``experiences'' a 30 percent
or more decrease in its excess regulatory capital, the Commission
believes that it is appropriate to impose the condition as proposed to
ensure consistency with Commission Regulation 23.105(c)(4).\247\ In
this regard, a nonbank SD will be expected to maintain diligent
recordkeeping allowing it to become aware of substantial reductions in
capital in a timely manner and to establish procedures for the timely
provision of the requisite notification. As to the proposed requirement
in Condition 17 (renumbered Condition 19 in the final Comparability
Order) that a Mexican nonbank SD notify the Commission and NFA within
24 hours of when it ``knows or should have known that it has failed to
make or keep current the books and records required by the Mexican
Commission,'' the Commission will align the language of the condition
with the timing standard of Commission Regulation 23.105(c)(3), while
also granting additional time for the notice to be translated into
English. As such, the Commission will require the notice to be provided
within 24 hours ``if [the firm] fails to make or keep'' current the
books and records. Although the Commission is adjusting the language in
Condition 19 of the final Comparability Order, the Commission
emphasizes that this condition imposes a requirement to provide a
prompt notice upon the occurrence of the reportable event. Maintaining
current books and records of all financial transactions is a
fundamental recordkeeping requirement for a registered nonbank SD, and
is essential to provide management with the information necessary to
ensure that transactions are timely and accurately reported and that
the firm complies with capital and other regulatory requirements. The
Commission believes that it is necessary for a nonbank SD to maintain
internal controls and procedures to affirmatively monitor that books
and records are being maintained on a current basis. For further
clarification of this condition, the Commission confirms that the
notice requirement will apply with respect to books and records
addressing the Mexican nonbank SD's financial condition and financial
reporting requirements, and has revised the condition to so specify.
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\247\ 17 CFR 23.105(c)(4). For clarity, by ``excess regulatory
capital,'' the Commission refers to the capital ratio by which the
firm's capital exceeds the core capital ratio requirement of 8
percent of the firm's risk-weighted assets. For instance, if a firm
maintains a capital ratio of 20 percent, its excess regulatory
capital would be 12 percent. In this example, 30 percent of the
excess regulatory capital would equal 3.6 percent.
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Separately, to promote consistency across the Comparability
Determinations the Commission is adopting with respect to other
jurisdictions, the Commission will revise the proposed early warning
notice condition requiring a Mexican nonbank SD to provide a notice to
the Commission and NFA if its regulatory capital falls below 120
percent of the minimum capital requirement.\248\ Instead of requiring a
notice if the Mexican nonbank SD's capital falls below 120 percent of
the minimum capital requirement, the Commission will require that the
Mexican nonbank SD provide a notice to the Commission and NFA if it
breaches its capital conservation buffer requirement.\249\ The notice
must be prepared in the English language. The Commission believes that
this condition, combined with the condition requiring that a Mexican
nonbank SD provide notice to the Commission and NFA if it experiences
30 percent or more decrease in its excess regulatory capital, would
provide a timely opportunity to the Commission and NFA to initiate
conversations and fact finding with a Mexican nonbank SD that may be
experiencing operational or financial issues that may adversely impact
the firm's ability to meet its obligations to market participants,
including customers or swap counterparties. Given that Mexican nonbank
SDs are subject to the requirement to maintain a capital conservation
buffer pursuant to the Mexican Capital Rules, the condition requiring
notice in case of a breach of the buffer requirement will not have a
material operational impact on Mexican nonbank SDs.
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\248\ 17 CFR 23.105(c)(2).
\249\ As noted in Section II.C.2.b., Mexican nonbank SDs are
required to maintain a capital conservation buffer of 2.5 percent of
the Mexican nonbank SD's risk-weighted assets that must be met with
fundamental capital. Articles 172 and 173 of the Law and Articles
162 and 162 Bis of the General Provisions.
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The Associations also requested that the Commission set the
compliance date at least six months following the issue date of the
Comparability Order to adequately prepare for compliance with the
notice reporting obligations imposed by the Comparability Order.\250\
Similar to its position with regard to the financial reporting
obligations, the Commission believes that it is appropriate to grant an
additional period of time to allow Mexican nonbank SDs to establish and
implement the necessary systems and processes to comply with the newly
imposed notice reporting obligations that require monitoring of
thresholds for which Mexican nonbank SDs do not have an established
process. Accordingly, the Commission is setting a compliance date of
180 calendar days after publication of the final Comparability Order in
the Federal Register with respect to the notice obligations under final
Conditions 18 and 20 of the Comparability Order. Given the nature of
the remaining notice obligation, the Commission believes that Mexican
nonbank SDs should be in a position to comply with all other notice
obligations, including those requiring Mexican nonbanks SDs to provide
notice to the Commission and NFA if they fail to make or keep current
financial books and records, or if they fail to maintain regulatory
capital equal to, or in excess of, the U.S. dollar equivalent of $20
million, immediately upon effectiveness of the Comparability Order.
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\250\ Associations Letter at p. 4.
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With regard to Condition 20, which requires a Mexican nonbank SD to
provide notice if it fails to post or collect initial or variation
margin exceeding certain thresholds, the Commission notes, for clarity,
that in proposing a notice condition based on thresholds of
``required'' margin, the Commission's intent was to set the notice
trigger by reference to margin amounts that are legally required to be
exchanged under the applicable margin requirements. To determine the
applicable margin requirements, the Commission will consider the
[[Page 58528]]
framework set forth in Commission Regulation 23.160.\251\ To the extent
Mexican nonbank SDs intending to rely on the Comparability Order have
inquiries regarding the scope of uncleared swap margin transactions to
be monitored for purposes of complying with final Condition 20, MPD
will discuss such inquiries with the Mexican nonbank SD during the
confirmation process referenced in final Condition 6 of the
Comparability Order.
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\251\ 17 CFR 23.160.
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The Commission did not receive any comments with respect to the
following proposed notice conditions: (i) the Mexican nonbank SD files
notice with the Commission and NFA within 24 hours of being informed by
the Mexican Commission that the firm is not in compliance with any
component of the Mexican Capital Rules or Mexican Financial Reporting
Rules (proposed Condition 14); (ii) the Mexican nonbank SD provides
notice to the Commission and NFA if it initiates the process of seeking
the approval of the Mexican Commission to use internal models to
compute market risk and/or credit risk (proposed Condition 7); or (iii)
the Mexican nonbank SD files notice of the Mexican Commission approving
a change in the firm's fiscal year-end date, which must be filed with
the Commission and NFA at least 15 business days prior to the effective
date of the change (proposed Condition 19).
The Commission, having considered the 2022 Proposal, is adopting
the above conditions as proposed.\252\ The Commission is also revising
the final conditions by adding Condition 17 to the Comparability Order,
which requires a Mexican nonbank SD to file notice with the Commission
and NFA within 24 hours if the firm fails to maintain regulatory
capital in the form of fundamental capital, as defined by Article 162
and Article 162 Bis of the General Provisions, equal to or in excess of
the equivalent of $20 million. The requirement to provide such notice
will impose a consistent condition and obligation on non-U.S. nonbank
SDs across the non-U.S. jurisdictions that are the subject to
Commission Comparability Orders, and will provide the Commission and
NFA with information to monitor the financial condition of non-bank
SDs.
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\252\ The Commission is renumbering proposed Conditions 14, 18,
and 19 as Conditions 15, 20, and 21, respectively, in the final
Comparability Order.
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The Commission is also adopting a compliance date for certain
notice requirements as discussed above in the final Comparability
Order.
F. Supervision and Enforcement
1. Preliminary Determination
The 2022 Proposal contained a discussion of the Commission's and
NFA's ongoing supervision of nonbank SDs to assess their compliance
with the CEA, Commission regulations, and NFA rules by reviewing
financial reports, risk exposure reports, and other filings submitted
by nonbank SDs with the Commission and NFA.\253\ As discussed, the
Commission and NFA also conduct periodic examinations as part of their
supervision of nonbank SDs, including routine on-site examinations of
nonbank SDs' books, records, and operations to ensure compliance with
CFTC and NFA requirements.\254\
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\253\ 2022 Proposal at 76396.
\254\ Section 17(p)(2) of the CEA (7 U.S.C. 21(p)(2)) requires
NFA as a registered futures association to establish minimum capital
and financial requirements for non-bank SDs and to implement a
program to audit and enforce compliance with such requirements.
Section 17(p)(2) further provides that NFA's capital and financial
requirements may not be less stringent than the capital and
financial requirements imposed by the Commission. See 2022 Proposal
at 76396.
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The Commission also referred to the financial reports and notices
required under the CFTC Financial Reporting Rules, noting that the
reports and notices provide the Commission and NFA with information
necessary to ensure the nonbank SD's compliance with minimum capital
requirements; assess the firm's overall safety and soundness and
ability to meet its financial obligations to customers, counterparties,
creditors, and general market participants; and identify potential
issues at a nonbank SD that may impact the firm's ability to maintain
compliance with the CEA, Commission regulations, and NFA
requirements.\255\ As discussed, the Commission and NFA also have the
authority to require a nonbank SD to provide any additional financial
and/or operational information as the Commission or NFA may specify to
monitor the safety and soundness of the firm.\256\
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\255\ See 2022 Proposal at 76396.
\256\ 17 CFR 23.105(h). See also 2022 Proposal at 76396.
Regulation 23.105(h) provides that the Commission or NFA may, by
written notice, require a nonbank SD to file financial or
operational information on a daily basis or other basis with the
Commission and/or NFA.
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The Commission further noted that it has authority to take
disciplinary actions against a nonbank SD for failing to comply with
the CEA and Commission regulations. In this regard, section 4b-1(a) of
the CEA \257\ provides the Commission with exclusive authority to
enforce the capital requirements imposed on nonbank SDs adopted under
section 4s(e) of the CEA.\258\
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\257\ 7 U.S.C. 6b-1(a).
\258\ 7 U.S.C. 6s(e).
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With respect to the Mexican authorities' power to supervise Mexican
nonbank SDs and to carry out enforcement actions, the Commission noted
that the Mexican Commission has supervisory, inspection, and
surveillance powers, which include the authority to require a Mexican
nonbank SD to provide the Mexican Commission with all necessary
information and documentation to verify the Mexican nonbank SD's
compliance with the Mexican Law and General Provisions.\259\ In
addition, as noted in section II.D.1. above, the Mexican Central Bank
requires a Mexican nonbank SD licensed to enter into derivatives
transactions for its own account to file, with the Mexican Central
Bank, an annual written communication issued by the Mexican nonbank
SD's internal audit committee evidencing compliance in the performance
of its derivatives transactions with each and all applicable legal
provisions.\260\ When required by the Mexican Central Bank, a Mexican
nonbank SD also must provide the Mexican Central Bank with all the
information related to the derivatives transactions performed by the
firm.\261\ Furthermore, the Mexican Commission also has the authority
to require a Mexican nonbank SD to adopt any necessary measures to
correct irregular activities, and the Mexican Commission has the
authority to conduct all necessary on-site inspections of a Mexican
nonbank SD.\262\ The Commission also explained that the Mexican
Commission uses information provided through the mandatory financial
reporting and annual stress test assessments that Mexican nonbank SDs
are required to conduct, to monitor Mexican nonbank SDs' compliance
with the Mexican
[[Page 58529]]
Capital Rules and to assess the firm's overall safety, soundness, and
ability to meet financial obligations to customers, counterparties, and
creditors.\263\ As discussed in the proposed Comparability
Determination, the Mexican Commission also uses financial reporting
from Mexican nonbank SDs as a component of its risk-based methodology
in setting the frequency and scope of its examinations of Mexican
nonbank SDs.\264\ The Mexican Commission generally conducts an
examination, including on-site visits, of each firm at least once every
two years. The Mexican Commission will also conduct an examination of a
firm, including an on-site visit, to the extent that its daily, routine
surveillance indicates a need for an immediate review.\265\
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\259\ 2022 Proposal at 76396 and Article 350 of the Law,
Articles 5 and 19 of the Mexican Commission Law and the Supervision
Regulations of the Mexican Commission.
\260\ Provision 3.1.3. of the Rule 4/2012 issued by the Mexican
Central Bank. See also 2022 Proposal at 76392.
\261\ Id.
\262\ Pursuant to Article 358 of the Law, the Mexican Commission
and the Mexican Central Bank are authorized to provide foreign
financial authorities with information that they deem appropriate
within the scope of their competence, such as documents, records,
declarations and other evidence that the authorities have in their
possession by virtue of having obtained the information in the
exercise of their powers and duties, provided that there is an
agreement with the relevant foreign financial authorities for the
exchange of information, in consideration of the principle of
reciprocity. See 2022 Proposal at 76396.
\263\ Id.
\264\ Id.
\265\ Id.
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As noted in the proposed Comparability Determination, the Mexican
Commission may also impose fines against Mexican nonbank SDs for
failing to comply with relevant Mexican laws and regulations \266\ and
may order a Mexican nonbank SD that fails to comply with the applicable
regulatory capital ratios, including the 2.5 percent common equity tier
1 capital buffer, to take corrective measures.\267\ The Mexican
Commission may also revoke a Mexican nonbank SD's license to operate as
a broker-dealer if the firm fails to comply with the above corrective
measures or if the firm reports losses that reduce its capital to a
level below the minimum required.\268\
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\266\ Id. Fines may range from approximately $130,000 to
$432,000 for failing to maintain sufficient regulatory capital in
relation to the risks in the Mexican nonbank SD's operations and
from approximately $43,000 to $432,000 if a Mexican nonbank SD for
failing to comply with applicable information or documentation
requirements made by the Mexican Commission or to provide the
required periodic informational filings. Article 392 paragraphs I,
subparagraph (a) and paragraph III, subparagraph (v), of the Law.
\267\ Corrective measures may include the following: (i) a
prohibition on entering into transactions whose execution would
cause a total capital ratio to be less than 8 percent of the risk-
weighted assets; (ii) a requirement that the Mexican nonbank SD
submit for the approval of the Mexican Commission a recovery capital
plan; (iii) a suspension of the payment of dividends; (iv) a
suspension of the programs of acquisition of shares of the capital
stock of the Mexican nonbank SD; (v) a suspension of payments of
compensation, extraordinary bonuses, or other remuneration in
addition to the salary of the chief executive officer (``CEO'') and
officials of the two hierarchical levels below the CEO, as well as a
requirement to refrain from granting new compensation in the future
for the CEO and officials; (vi) an engagement with external auditors
or other specialized third parties to carry out special audits on
specific issues; and (vii) a limitation on the execution of new
transactions that may cause an increase in risk-weighted assets and/
or cause greater impairment in the Mexican nonbank SD's regulatory
capital ratios. See 2022 Proposal at 76396 and Article 153 of the
Law.
\268\ Id.
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Based on its review of the Application and its analysis of the
relevant laws and regulations, the Commission preliminarily found that
the Mexican Commission has the necessary powers to supervise,
investigate, and discipline entities for compliance with its capital,
financial and reporting requirements, and to detect and deter
violations of, and ensure compliance with, the applicable capital and
financial reporting requirements in Mexico.\269\ Furthermore, the
Commission also noted that it retains supervision, examination, and
enforcement authority over Mexican nonbank SDs that are covered by a
Comparability Order.\270\ Specifically, the Commission noted that a
non-U.S. nonbank SD that operates under substituted compliance remains
subject to the Commission's examination authority and may be subject to
a Commission enforcement action if the firm fails to comply with a
foreign jurisdiction's capital adequacy or financial reporting
requirements.\271\ The ability of the Commission to exercise its
enforcement authority over a Mexican nonbank SD is not conditioned upon
a finding by the Mexican Commission of a violation of the Mexican
Capital Rules or Mexican Financial Reporting Rules. In addition, as
each Mexican nonbank SDs is a member of NFA, the firm is subject to NFA
membership rules, examination authority, and disciplinary process.\272\
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\269\ 2022 Proposal at 76397-76398.
\270\ 2022 Proposal at 76377.
\271\ Id. See also, 17 CFR 23.106(a)(4)(ii), which provides that
all nonbank SDs, regardless of whether they rely on a Comparability
Order or Comparability Determination, remain subject to the
Commission's examination and enforcement authority.
\272\ 7 U.S.C. 21(p).
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2. Comment Analysis and Final Determination
In response to the request for comment, Better Markets asserted
that while the 2022 Proposal states that the Mexican Commission has the
necessary powers to supervise, investigate, and discipline Mexican
nonbank SDs for compliance with applicable capital, financial, and
reporting requirements, the Commission does not provide details
regarding the demonstrated past effectiveness of the Mexican
Commission's supervision and enforcement of Mexican nonbank SDs.\273\
The Commission does not believe that Commission Regulation 23.106
requires the Commission to perform an assessment of the historical
effectiveness of the foreign jurisdictions' supervision and enforcement
programs.
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\273\ Better Markets Letter at p. 13, citing 2022 Proposal at
76397.
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The Commission's evaluation of the laws and regulations granting
the Mexican authorities' supervisory and enforcement authority, as
discussed in section II.F.1. above, is consistent with the standard of
review articulated in Commission Regulation 23.106(a)(3). Specifically,
Commission Regulation 23.106(a)(3) provides that the Commission may
consider all relevant factors in performing the comparability
assessment, including the ability of the relevant regulatory authority
to supervise and enforce compliance with the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements.
The Commission's assessment of the Mexican Commission's supervisory
program included an evaluation of the Mexican Commission's ability to
supervise Mexican nonbank SDs based on current Mexican laws and
regulations, as discussed in section II.F.1. above. This evaluation
included an assessment of the financial reporting that Mexican nonbank
SDs are required to provide to the Mexican Commission, the authority of
the Mexican Commission to conduct examinations, including onsite
inspections of Mexican nonbank SDs, and the authority of the Mexican
Commission to impose sanctions or take other action to address
noncompliance with applicable laws and regulations. Based upon its
evaluation, the Commission preliminarily determined that Mexican laws
and regulations are comparable in purpose and effect to the CEA and
Commission regulations, and that the Mexican Commission has appropriate
authority to supervise Mexican nonbank SDs for compliance with
applicable Mexican Capital Rules and Mexican Financial Reporting Rules.
The Commission further determined, based on applicable Mexican laws and
regulations, that the Mexican Commission has the ability to sanction
Mexican nonbank SDs for failing to comply with regulatory requirements.
Specifically, as discussed in section II.F.1. above, the Mexican
Commission has the authority to impose fines \274\ and may order a
Mexican nonbank SD that fails to comply with the applicable regulatory
capital ratios to take corrective measures, including the suspension of
payment of compensation to senior officials and a limitation on the
execution of new transactions that
[[Page 58530]]
may cause an increase in risk-weighted assets.\275\ The Mexican
Commission may also revoke a Mexican nonbank SD's license to operate as
a broker-dealer if the firm fails to comply with the above corrective
measures or if the firm reports losses that reduce its capital to a
level below the minimum required.\276\
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\274\ Article 392 paragraphs I, subparagraph (a) and paragraph
III, subparagraph (v), of the Law.
\275\ Article 153 of the Law.
\276\ Id.
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Better Markets further stated that an information sharing agreement
is necessary for the Commission to communicate and consult with the
Mexican Commission to facilitate cooperation and information sharing
regarding the supervision of Mexican nonbank SDs.\277\ Better Markets
further stated that the proposed Comparability Order does not contain a
draft of the terms and conditions of an information sharing agreement,
include a discussion of the timing of entering into an information
sharing agreement, or condition the Comparability Order on the
Commission entering into an information sharing agreement with the
Mexican Commission.\278\ Better Markets further asserted that given
that enforcement is a critical component of any comparability
determination, any comparability determination must be conditioned upon
first executing an appropriate information sharing agreement.\279\
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\277\ Better Markets Letter p. 13.
\278\ Id.
\279\ Id.
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The substituted compliance framework set forth in Commission
Regulation 23.106 allows a Mexican nonbank SD to satisfy the
Commission's capital and financial reporting rules by complying with
Mexican capital and financial reporting rules that the Commission has
found comparable in purpose and effect and has specified in the
Comparability Order, subject to conditions that are also specified in
the Comparability Order. Commission Regulation 23.106 does not
precondition the Commission's ability to issue a Comparability Order on
the Commission and the authority or authorities in the relevant foreign
jurisdiction entering into a formal MOU or similar arrangement.
As discussed in this Comparability Determination, by issuing a
Comparability Order, the Commission is not ceding its supervision and
enforcement authorities. Mexican nonbank SDs that are subject to a
Comparability Order are registered with the Commission as SDs and are
members of NFA, and, as such, are subject to the CEA, Commission
regulations, and NFA membership rules and requirements. Mexican nonbank
SDs covered by a Comparability Order also remain subject to the
Commission's examination and enforcement authority with respect to all
elements of the CEA and Commission regulations, including capital and
financial reporting.\280\ In this regard, Mexican nonbank SDs are
required to directly provide the Commission with additional information
upon the Commission's request to facilitate the ongoing supervision of
such firms.\281\ Furthermore, section 17 of NFA's SD Financial
Requirements rule provides that each SD member of NFA must file the
financial, operational, risk management and other information required
by NFA in the form and manner prescribed by NFA.\282\ The ability to
obtain information directly from Mexican nonbank SDs ensures that the
Commission and NFA have access to the information necessary to monitor
the financial condition of such firms and to assess the firms'
compliance with applicable capital and financial reporting
requirements.
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\280\ 17 CFR 23.106(a)(4)(ii).
\281\ 17 CFR 23.105(h).
\282\ NFA Financial Requirements, Section 17. Swap Dealer and
Major Swap Participant Reporting Requirements, available at NFA's
website: https://www.nfa.futures.org/rulebooksql/index.aspx.
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In addition, as detailed in section I.E. above, the conditions set
forth in the Comparability Order reflect that the Commission and NFA
have a continuing obligation to conduct ongoing oversight, including
potential examination, of Mexican nonbank SDs to ensure compliance with
the Comparability Order. Specifically, as part of this oversight, the
conditions require Mexican nonbank SDs to file directly with the
Commission and NFA financial reports and notices that are comparable to
the financial reports and notices filed by nonbank SDs domiciled in the
U.S. In addition to requiring Mexican nonbank SDs to maintain current
books and records reflecting all transactions,\283\ the conditions
further require each Mexican nonbank SD covered by the Comparability
Order to file directly with the Commission and NFA: (i) notice that the
firm was informed by the Mexican Commission that it is not in
compliance with any component of the Mexican Capital Rules or Mexican
Financial Reporting Rules; \284\ (ii) monthly, quarterly, and annual
financial reports; \285\ (iii) notice that the firm has experienced a
decrease of 30 percent or more in its excess regulatory capital as
compared to the last excess regulatory capital reported in filings with
the Commission and NFA; \286\ (iv) notice that the firm has breached
its capital conservation buffer; \287\ (v) notice that the firm has
failed to maintain regulatory capital in the form of fundamental
capital in amount equal to or in excess of the equivalent of $20
million; \288\ and (vi) notice that the firm has failed to make or keep
current financial books and records required by the Mexican
Commission.\289\ The Comparability Order further requires the
Applicants to provide notice to the Commission of any material changes
to the information submitted in the application, including, but not
limited to, proposed and final material changes to the Mexican Capital
Rules or Mexican Financial Reporting Rules and proposed and final
material changes to the Mexican Commission's supervisory authority or
supervisory regime over Mexican nonbank SDs.\290\ The financial
information and notices required to be filed directly with the
Commission and NFA under the Comparability Order, and through the
Commission's and NFA's direct authority to obtain additional
information from Mexican nonbank SDs, will allow the Commission and NFA
to conduct ongoing oversight of such firms to assess their overall
safety and soundness.
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\283\ Condition 8 of the final Comparability Order.
\284\ Condition 15 of the final Comparability Order.
\285\ Conditions 9 and 10 of the final Comparability Order.
\286\ Condition 18 of the final Comparability Order.
\287\ Condition 16 of the final Comparability Order.
\288\ Condition 17 of the final Comparability Order.
\289\ Condition 19 of the final Comparability Order.
\290\ Condition 22 of the final Comparability Order.
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Although Commission Regulation 23.106 does not condition the
issuance of a Comparability Order on the Commission and the authority
or authorities in the relevant foreign jurisdiction having entered into
a formal MOU or similar arrangement, the Commission recognizes the
benefit that such an arrangement may provide.\291\ Specifically,
although Commission staff may engage directly with Mexican nonbank SDs
to obtain information regarding their financial and operational
condition, it may not be able to exchange and discuss such firm-
specific information \292\ with the relevant
[[Page 58531]]
authorities or reach shared expectations on procedures for conducting
on-site examinations in Mexico. Therefore, Commission staff will
continue its engagement with staff of the Mexican authorities to
negotiate and finalize an MOU or similar arrangement to facilitate the
joint supervision of Mexican nonbank SDs.
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\291\ In an enforcement-related context, both the Commission and
the Mexican Commission are signatories to the International
Organization of Securities Commission's Multilateral Memorandum of
Understanding Concerning Consultation and Cooperation and the
Exchange of Information (revised May 2012).
\292\ The sharing of non-public information by CFTC staff would
require assurances related to the use and treatment of such
information in a manner consistent with section 8(e) of the CEA, 7
U.S.C. 12(e).
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Based on the analysis set out above, the Commission finds that the
Mexican Commission and the Mexican Central Bank maintain supervisory
programs over Mexican nonbank SDs that are comparable to the
Commission's supervisory program over nonbank SDs. The Mexican
authorities' supervisory programs are comparable in purpose and effect
to the Commission's supervisory program in that the respective programs
are designed to monitor the safety and soundness of nonbank SDs through
a combination of periodic financial reporting and examinations. Also,
as noted above, the Commission and NFA will receive notices from
Mexican nonbank SDs that are comparable to the notices received from
nonbank SDs. The Commission and NFA will use the above information to
assess compliance with the Comparability Order and the financial
condition of Mexican nonbank SDs.
In addition, the Commission finds that the Mexican Commission has
sufficient enforcement authority over nonbank SDs, comparable to the
CFTC's enforcement authority. As discussed in section II.F.1. above,
the Mexican Commission and the CFTC may sanction nonbank SDs for
noncompliance with capital and financial reporting requirements by
imposing fines or, if necessary, revoking the firms' registration.
Furthermore, as discussed above, NFA may also take disciplinary action
against a nonbank SD for failure to comply with its rules, including
nonbank SD capital and financial reporting requirements. Accordingly,
the Commission is adopting the Comparability Order as proposed with
respect to the Commission's analysis concerning the comparability of
the supervisory programs and enforcement authorities of the Commission,
NFA, and the Mexican authorities with respect to nonbank SD capital and
financial reporting.
III. Final Comparability Determination and Comparability Order
A. Commission's Final Comparability Determination
Based on the Mexico Application and the Commission's review of
applicable Mexican laws and regulations, as well as the review of
comments submitted in response to the Commission's request for comment
on the Mexico Application and the proposed Comparability Determination
and Comparability Order, the Commission finds that the Mexican Capital
Rules and the Mexican Financial Reporting Rules, subject to the
conditions set forth in the Comparability Order below, achieve
comparable outcomes and are comparable in purpose and effect to the
CFTC Capital Rules and CFTC Financial Reporting Rules. In reaching this
conclusion, the Commission recognizes that there are certain
differences between the Mexican Capital Rules and CFTC Capital Rules
and certain differences between the Mexican Financial Reporting Rules
and the CFTC Financial Reporting Rules. The Comparability Order below
is subject to conditions that are necessary to promote consistency in
regulatory outcomes, or to reflect the scope of substituted compliance
that would be available notwithstanding certain differences. In the
Commission's view, the differences between the two rule sets would not
be inconsistent with providing a substituted compliance framework for
Mexican nonbank SDs subject to the conditions specified in the proposed
Order below.
Furthermore, the Comparability Determination and Comparability
Order are limited to the comparison of the Mexican Capital Rules to the
Bank-Based Approach under the CFTC Capital Rules. As noted previously,
the Applicants have not requested, and the Commission has not
performed, a comparison of the Mexican Capital Rules to the
Commission's NLA Approach or TNW Approach.
B. Order Providing Conditional Capital Comparability Determination for
Mexican Nonbank Swap Dealers
It is hereby determined and ordered, pursuant to Commodity Futures
Trading Commission (``CFTC'' or ``Commission'') Regulation 23.106 (17
CFR 23.106) under the Commodity Exchange Act (``CEA'') (7 U.S.C. 1 et
seq.) that a swap dealer (``SD'') organized and domiciled in Mexico and
subject to the Commission's capital and financial reporting
requirements under sections 4s(e) and (f) of the CEA (7 U.S.C. 6s(e)
and (f)) may satisfy the capital requirements under section 4s(e) of
the CEA and Commission Regulation 23.101(a)(1)(i) (17 CFR
23.101(a)(1)(i)) (``CFTC Capital Rules''), and the financial reporting
rules under section 4s(f) of the CEA and Commission Regulation 23.105
(17 CFR 23.105) (``CFTC Financial Reporting Rules''), by complying with
certain specified Mexican laws and regulations cited below and
otherwise complying with the following conditions, as amended or
superseded from time to time:
(1) The SD is not subject to regulation by a prudential regulator
defined in section 1a(39) of the CEA (7 U.S.C. 1a(39));
(2) The SD is organized under the laws of Mexico and is domiciled
in Mexico (a ``Mexican nonbank SD'');
(3) The Mexican nonbank SD is a licensed casa de bolsa (broker-
dealer) with the Mexican Comision Nacional Bancaria y de Valores
(Mexican Banking and Securities Commission) (the ``Mexican
Commission'');
(4) The Mexican nonbank SD is subject to and complies with:
Articles 2, 113, 153, 172, 173, 228, 350, 358, and 392 of the Ley del
Mercado de Valores (Securities Market Law) (referred to as ``the
Law''); Articles 5 and 19 of the Mexican Commission Law, the
Supervision Regulations of the Mexican Commission; Articles 10, 137,
144, 146, 150 through 158 Bis, 159, 160, 161, 161 Bis through 161 Bis
5, 162, 162 Bis, 162 Bis 1, 163, 163 Bis, 169, 169 Bis, 175, 176, 179,
180, 201, 202, 203, 204 Bis 1, 204 Bis 2, 204 Bis 3, 204 Bis 7 through
Bis 21, 214, 216, 217, Exhibits 5 and 9 of the Disposiciones de
Caracter General Aplicables a las Casa De Bolsa (``General Provisions
Applicable to Broker-Dealers''); section C.B1 of Circular 115/2002,
issued by Banco de Mexico (the ``Mexican Central Bank''); and Provision
3.1.3 of Rule 4/2012, issued by the Mexican Central Bank (collectively,
the ``Mexican Capital Rules'' and ``Mexican Financial Reporting
Rules,'');
(5) The Mexican nonbank SD maintains at all times fundamental
capital, as defined in Article 162 and Article 162 Bis of the General
Provisions Applicable to Broker-Dealers, equal to or in excess of the
equivalent of $20 million in United States dollars (``U.S. dollars'').
The Mexican nonbank SD shall use a commercially reasonable and observed
peso/U.S. dollar exchange rate to convert the value of the peso-
denominated fundamental capital to U.S. dollars;
(6) The Mexican nonbank SD has filed with the Commission a notice
stating its intention to comply with the Mexican Capital Rules and
Mexican Financial Reporting Rules in lieu of the CFTC Capital Rules and
CFTC Financial Reporting Rules. The notice of intent must include the
Mexican nonbank SD's representations that the firm is organized and
domiciled in Mexico; is a licensed casa de bolsa with the Mexican
Commission; and is subject to, and complies with, the Mexican Capital
Rules and Mexican Financial Reporting
[[Page 58532]]
Rules. The Mexican nonbank SD may not rely on this Comparability Order
until it receives confirmation from Commission staff, acting pursuant
to authority delegated by the Commission under Commission Regulation
140.91(a)(11) (17 CFR 140.91(a)(11)), that the Mexican nonbank SD may
comply with the Mexican Capital Rules and Mexican Financial Reporting
Rules in lieu of the CFTC Capital Rules and CFTC Financial Reporting
Rules. Each notice filed pursuant to this condition must be prepared in
the English language and submitted to the Commission via email to the
following address: [email protected];
(7) The Mexican nonbank SD shall provide notice to the Commission
and National Futures Association (``NFA'') if at any time it initiates
the process of seeking the approval of the Mexican Commission to use
internal models to compute market risk and/or credit risk. The Mexican
nonbank SD shall not use internal models to compute its regulatory
capital under the terms of this Comparability Order without the
authorization of the Commission or NFA;
(8) The Mexican nonbank SD prepares and keeps current ledgers and
other similar records in accordance with accounting principles
permitted by the Mexican Commission;
(9) The Mexican nonbank SD files with the Commission and with NFA a
copy of its quarterly financial report filed with the Mexican
Commission pursuant to Article 203 of the General Provisions Applicable
to Broker-Dealers and a copy of the monthly financial information,
including the monthly balance sheet and income statement, filed with
the Mexican Commission pursuant to Article 202 and Exhibit 9 of the
General Provisions Applicable to Broker-Dealers. The Mexican nonbank SD
must also include with the monthly information provided to the
Commission and NFA a statement of regulatory capital as of each month
end. The quarterly financial report and monthly financial information
must be translated into the English language and balances must be
converted to U.S. dollars, using a commercially reasonable and
observable Mexican peso/U.S. dollar spot rate as of the date of the
report. The quarterly financial report must be filed with the
Commission and NFA within 15 business days of the earlier of the date
the quarterly financial report is filed with the Mexican Commission or
the date that the financial report is required to be filed with the
Mexican Commission. The monthly financial information must be filed
with the Commission and NFA within 35 calendar days after the end of
each month;
(10) The Mexican nonbank SD files with the Commission and with NFA
a copy of its audited annual financial report that is required to be
filed with the Mexican Commission in accordance with Article 203 of the
General Provisions Applicable to Broker-Dealers. The audited annual
report must be translated into the English language. The audited annual
report must be filed with the Commission and NFA within 15 business
days of the earlier of the date the audited annual report is filed with
the Mexican Commission or the date that the audited annual report is
required to be filed with the Mexican Commission;
(11) The Mexican nonbank SD files Schedule 1 of appendix B to
subpart E of part 23 of the Commission's regulations (17 CFR part 23
subpart E--appendix B) with the Commission and NFA on a monthly basis.
Schedule 1 must be prepared in the English language with balances
reported in U.S. dollars, using a commercially reasonable and
observable Mexican peso/U.S. dollar spot rate as of the date of the
report, and must be filed with the Commission and NFA together with the
financial information set forth in Condition (9);
(12) A Mexican nonbank SD that is a registered securities-based
swap dealer with the U.S. Securities and Exchange Commission (``SEC'')
and is required to file a monthly Form X-17A-5 (``FOCUS Report'') with
the SEC, or its designee, must file a copy of the FOCUS Report with the
Commission and NFA within 35 calendar days after the end of each month.
A Mexican nonbank SD that files a FOCUS Report with the Commission and
NFA pursuant to this condition is not required to file the financial
reports and schedules specified in Conditions 9 and 11 of this
Comparability Order;
(13) The Mexican nonbank SD files a margin report containing the
information specified in Commission Regulation 23.105(m) (17 CFR
23.105(m)) with the Commission and with NFA on a monthly basis
(``Margin Report''). The Margin Report must be filed together with the
monthly financial information required by Article 202 and Exhibit 9 of
the General Provisions Applicable to Broker-Dealers (Condition 9). The
margin report must be in the English language and balances reported in
U.S. dollars, using a commercially reasonable and observable Mexican
peso/U.S. dollar spot rate as of the date of the report;
(14) The Mexican nonbank SD must submit with the monthly financial
information, the quarterly financial report, and the audited annual
report required under Conditions (9)-(12) of this Comparability Order a
statement by an authorized representative or representatives of the
Mexican nonbank SD that to the best knowledge and belief of the
representative or representatives the information contained in the
reports, including the translation of the reports into the English
language and the conversion of balances into the reports to U.S.
dollars (as applicable), is true and correct. The statement must be
prepared in the English language;
(15) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of being informed by the Mexican Commission that
the firm is not in compliance with any component of the Mexican Capital
Rules or Mexican Financial Reporting Rules. The notice must be prepared
in the English language;
(16) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of when the firm breaches the capital conservation
buffer, which the Mexican nonbank SD is required to maintain pursuant
to Article 162 of the General Provisions Applicable to Broker-Dealers.
The notice must be prepared in the English language;
(17) The Mexican nonbank SD files a notice within 24 hours with the
Commission and NFA it fails to maintain regulatory capital in the form
of fundamental capital, as defined in Article 162 and Article 162 Bis
of the General Provisions Applicable to Broker-Dealers, equal to or in
excess of the U.S. dollar equivalent of $20 million using a
commercially reasonable and observable peso/U.S. dollar exchange rate.
The notice must be prepared in the English language;
(18) The Mexican nonbank SD files a notice with the Commission and
NFA if it experiences a 30 percent or more decrease in its excess
regulatory capital as compared to that last reported in the financial
information filed with the Mexican Commission pursuant to Article 202
and Exhibit 9 of the General Provisions Applicable to Broker-Dealers.
The notice must be prepared in the English language and filed within
two business days of the firm experiencing the 30 percent or more
decrease in excess regulatory capital;
(19) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours if it fails to make or keep current the financial
books and records required by the Mexican
[[Page 58533]]
Commission. The notice must be prepared in the English language;
(20) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of the occurrence of any of the following: (i) a
single counterparty, or group of counterparties under common ownership
or control, fails to post required initial margin or pay required
variation margin to the Mexican nonbank SD on uncleared swap and
security-based swap positions that, in the aggregate, exceeds 25
percent of the Mexican nonbank SD's minimum capital requirement; (ii)
counterparties fail to post required initial margin or pay required
variation margin to the Mexican nonbank SD for uncleared swap and
security-based swap positions that, in the aggregate, exceeds 50
percent of the Mexican nonbank SD's minimum capital requirement; (iii)
a Mexican nonbank SD fails to post required initial margin or pay
required variation margin for uncleared swap and security-based swap
positions to a single counterparty or group of counterparties under
common ownership and control that, in the aggregate, exceeds 25 percent
of the Mexican nonbank SD's minimum capital requirement; and (iv) the
Mexican nonbank SD fails to post required initial margin or pay
required variation margin to counterparties for uncleared swap and
security-based swap positions that, in the aggregate, exceeds 50
percent of the Mexican nonbank SD's minimum capital requirement. For
purposes of the calculation, the Mexican nonbank SD's minimum capital
requirement is the core capital requirement under the Mexican Capital
Rules, excluding capital buffers. The notice must be prepared in the
English language;
(21) The Mexican nonbank SD files a notice with the Commission and
NFA of a change in its fiscal year end approved or permitted to go into
effect by the Mexican Commission. The notice required by this condition
will satisfy the requirement for a nonbank SD to obtain the approval of
NFA for a change in fiscal year end under Commission Regulation
23.105(g) (17 CFR 23.105(g)). The notice of change in fiscal year end
must be prepared in the English language and filed with the Commission
and NFA at least 15 business days prior to the effective date of the
Mexican nonbank SD's change in fiscal year end;
(22) The Applicants notify the Commission of any material changes
to the information submitted in their application, including, but not
limited to, proposed and final material changes to the Mexican Capital
Rules or Mexican Financial Reporting Rules and proposed and final
material changes to the Mexican Commission's supervisory authority or
supervisory regime over Mexican nonbank SDs. The notice must be
prepared in the English language; and
(23) Unless otherwise noted in the conditions above, the reports,
notices, and other statements required to be filed by Mexican nonbank
SD with the Commission or NFA pursuant to the conditions of this
Comparability Order must be submitted electronically to the Commission
and NFA in accordance with instructions provided by the Commission or
NFA.
It is also hereby determined and ordered that this Comparability
Order becomes effective upon its publication in the Federal Register,
with the exception of Conditions 11, 13, 18, and 20, which will become
effective 180 calendar days after publication of the Comparability
Order in the Federal Register.
Issued in Washington, DC, on July 3, 2024, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Order Granting Conditional Substituted Compliance in
Connection with Certain Capital and Financial Reporting Requirements
Applicable to Nonbank Swap Dealer Subject to Regulation by the Mexican
Comision Nacional Bancaria y de Valores and Banco de Mexico--Commission
Voting Summary, Chairman's Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
I support the Commission's approval of four comparability
determinations and related orders finding that the capital and
financial reporting requirements in Japan, Mexico, the European
Union (France and Germany), and the United Kingdom (for swap dealers
(SDs) designated for prudential supervision by the UK Prudential
Regulation Authority (PRA)) are comparable to the Commission's
capital and financial reporting requirements applicable to nonbank
SDs. These are the first comparability determinations that the
Commission has finalized for applications filed following the July
2020 adoption of its regulatory framework for substituted compliance
for non-U.S. domiciled nonbank SDs.\1\ There are currently 15 non-
U.S. nonbank SDs that are eligible to comply with these conditional
orders: three in Japan; three in Mexico; two in Germany and one in
France for the EU; and six in the UK that are PRA-designated.
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\1\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020). The Commission issued
the final rule on July 24, 2020.
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As part of the process leading to the Commission's final
comparability determinations and orders, Commission staff engaged in
a thorough analysis of each foreign jurisdictions' capital and
financial reporting frameworks and considered the public comments
received on the proposed determinations and orders. Based on those
reviews, the Commission has determined that the respective foreign
jurisdictions' rules are comparable in purpose and effect, and
achieve comparable outcomes, to the CFTC's capital and financial
reporting rules. Specifically, the Commission considered the scope
and objectives of the foreign regulators' capital adequacy and
financial reporting requirements; the ability of those regulators to
supervise and enforce compliance with their respective capital and
financial reporting requirements; and other facts or circumstances
the Commission deemed relevant for each of the applications.
In certain instances, the Commission found that a foreign
jurisdiction's rules impose stricter standards. In limited
circumstances, where the Commission concluded that a foreign
jurisdiction lacks comparable and comprehensive requirements on a
specific issue, the Commission included a targeted condition
designed to impose an equally stringent standard. The Commission has
issued the final orders consistent with its authority to issue a
comparability determination with the conditions it deems
appropriate. These conditions aim to ensure that the orders only
apply to nonbank SDs that are eligible for substituted compliance in
these respective jurisdictions and that those non-U.S. nonbank SDs
comply with the foreign country's capital and financial reporting
requirements as well as certain additional capital, financial
reporting, recordkeeping, and regulatory notice requirements. This
approach acknowledges that jurisdictions may adopt unique approaches
to achieving comparable outcomes. As a result, the Commission has
focused on whether the applicable foreign jurisdiction's capital and
financial reporting requirements achieve comparable outcomes to the
corresponding Commission requirements for nonbank SDs, not whether
they are comparable in every aspect or contain identical elements.
With these comparability determinations, the Commission fully
retains its enforcement and examination authority as well as its
ability to obtain financial and event specific reporting to maintain
direct oversight of nonbank SDs located in these four jurisdictions.
The avoidance of duplicative requirements without a commensurate
benefit to the Commission's oversight function reflects the
Commission's approach
[[Page 58534]]
to recognizing the global nature of the swap markets with dually-
registered SDs that operate in multiple jurisdictions, which mandate
prudent capital and financial reporting requirements. This is,
however, an added benefit and not the Commission's sole
justification for issuing these comparability determinations.
The comparability orders will become effective upon their
publication in the Federal Register. For several order conditions,
the Commission is granting an additional compliance period of 180
calendar days. To rely on a comparability order, an eligible non-
U.S. nonbank SD must notify the Commission of its intention to
satisfy the Commission's capital and financial requirements by
substituted compliance and receive a Commission confirmation before
relying on a determination.
I appreciate the hard work and dedication of the staff in the
Market Participants Division over the past several years to propose
and finalize these four determinations. I also thank the staff in
the Office of the General Counsel and the Office of International
Affairs for their support on these matters.
Appendix 3--Statement of Commissioner Kristin N. Johnson
I support the Commodity Futures Trading Commission's (Commission
or CFTC) issuance of four final capital and financial reporting
comparability determinations and related orders (together, Final
Comparability Determinations) for non-U.S. nonbank swap dealers
(foreign nonbank SDs) and non-U.S. nonbank major swap participants
(foreign nonbank MSPs) organized and domiciled in the United Kingdom
(UK), the European Union (specifically, France and Germany), Mexico,
and Japan.\1\
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\1\ Though the Final Comparability Determinations will apply to
foreign nonbank MSPs in the relevant jurisdictions, there are no
such MSPs currently registered with the Commission at this time. I
will refer only to SDs herein.
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The Final Comparability Determinations allow eligible foreign
nonbank SDs to satisfy certain capital and financial reporting
requirements under the Commodity Exchange Act (CEA) and Commission
regulations if they: (1) are subject to, and comply with, comparable
capital and financial reporting requirements under the laws and
regulations applicable in their home countries and (2) comply with
the conditions enumerated in the applicable Final Comparability
Determination. Under this conditional substituted compliance
framework, foreign nonbank SDs in the relevant jurisdictions that
comply with these conditions are deemed to be in compliance with the
Commission's capital and financial reporting requirements.
Well-calibrated capital requirements create a cushion to absorb
unexpected losses in times of market stress, and well-calibrated
financial reporting requirements provide the Commission with
information to monitor the business operations and financial
condition of registered SDs. These tools are critical to managing
systemic risk and fostering the stability of U.S. derivatives
markets and the U.S. financial system. The Commission's substituted
compliance framework addresses the need to promote sound global
derivatives regulation while mitigating potentially duplicative
cross-border regulatory requirements for non-U.S. market
participants operating in our markets. Where the Commission permits
substituted compliance, it must retain sufficient oversight,
examination, and enforcement authority to ensure compliance with the
foreign jurisdiction's laws and the conditions to substituted
compliance.
Crucially, while these Final Comparability Determinations permit
foreign nonbank SDs to comply with home country regulations in lieu
of compliance with Commission regulations, the Commission is also
imposing important guardrails to ensure continuous supervision of
the operations and financial condition of the foreign SD.
Background
For an example of the detrimental consequences of failing to
adequately capitalize nonbank swap market participants, one need
look no further than the 2008 global financial crisis. According to
the U.S. Government Accountability Office, the crisis, which
threatened the stability of the U.S. financial system and the health
of the U.S. economy, may have led to $10 trillion in losses,
including large declines in employment and household wealth, reduced
tax revenues from lower economic activity, and lost economic
output.\2\ In response to the crisis, in 2010, the U.S. Congress
passed the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act), which amended the CEA to create a new
regulatory framework for swaps.
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\2\ United States Government Accountability Office, Financial
Regulatory Reform: Financial Crisis Losses and Potential Impacts of
the Dodd-Frank Act (Jan. 2013), https://fraser.stlouisfed.org/title/gao-reports-testimonies-6136/financial-regulatory-reform-622249.
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As amended, section 4s(e) of the CEA directs the Commission and
prudential regulators to impose minimum capital requirements on SDs
registered with the Commission. Section 4s(e) adopts separate
approaches for the imposition of minimum capital requirements on
bank and nonbank SDs. For bank SDs, prudential regulators are
authorized to set the minimum capital requirements. For nonbank SDs,
the Commission is authorized to set those requirements. The amended
CEA also sets out financial reporting requirements for SDs. Under
section 4s(f) of the CEA, registered SDs are required to make
financial condition reports and other reports regarding transactions
and positions as mandated by Commission regulations.
In 2020, the Commission adopted regulations implementing both
the capital and financial reporting requirements for SDs, which were
amended in 2024 (the Capital and Financial Reporting Rules).\3\ The
Capital and Financial Reporting Rules set minimum capital levels
that nonbank SDs must maintain and financial reporting requirements
that nonbank SDs must comply with, including filing periodic
unaudited financial statements and an annual audited financial
report.\4\
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\3\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
\4\ The reporting requirements imposed on bank SD and bank MSPs
were ``more limited'' ``as the financial condition of these entities
will be predominantly supervised by the applicable prudential
regulator and subject to its capital and financial reporting
requirements.'' Id. at 57513. In May 2024, the Commission adopted
amendments to the Capital and Financial Reporting Rules that
codified two previously-issued staff letters providing interpretive
guidance and no-action relief and made other technical amendments.
89 FR 45569 (May 23, 2024).
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Like the U.S., many other nations adopted their own regulatory
regimes to govern swaps markets in the aftermath of the financial
crisis. Since then, regulators from around the world have endeavored
to improve the resilience of swaps markets and establish a global
set of standards on critical risk management issues, such as capital
and financial reporting requirements. These efforts led to the
development of the Principles for Financial Market Infrastructures,
to which many jurisdictions, including our own, look for
guidance.\5\
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\5\ Principles for Financial Market Infrastructures, Bank for
International Settlements and International Organization of
Securities Commissions (Apr. 2012), https://www.bis.org/cpmi/publ/d101a.pdf.
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The Dodd-Frank Act amendments specifically address the cross-
border application of the CFTC's swaps regime. Section 2(i) of the
CEA establishes that the CEA's swaps provisions apply to foreign
swaps activities that have a ``direct and significant'' connection
to, or effect on, U.S. markets. In line with section 2(i) of the
CEA, the Capital and Financial Reporting Rules set out a substituted
compliance framework in Commission Regulation 23.106 for foreign
nonbank SDs seeking to comply with the Commission's capital and
financial reporting requirements.
The substituted compliance framework consists of comparability
determinations that afford ``due consideration [to] international
comity principles'' while being ``consistent with . . . the
Commission's interest in focusing its authority on potential
significant risks to the U.S. financial system.'' \6\ The
determinations involve an assessment of the home-country
requirements that is a principles-based, holistic approach, focusing
on whether the applicable home-country requirements have comparable
objectives and achieve comparable outcomes to the Commission's
Capital and Financial Reporting Rules.
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\6\ Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to Swap Dealers and Major Swap
Participants, 85 FR 56924, 56924 (Sept. 14, 2020).
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Today's Final Comparability Determinations
The Final Comparability Determinations will apply to 15 foreign
nonbank SDs currently registered with the Commission and subject to
oversight by the UK Prudential Regulation Authority, the European
Central Bank, the Mexican Comisi[oacute]n Nacional Bancaria y de
Valores, and the Financial Services Agency of Japan. I commend staff
for their hard work on the Final
[[Page 58535]]
Comparability Determinations, including their work to thoroughly and
thoughtfully analyze and address comments.
Importantly, while the Final Comparability Determinations permit
foreign nonbank SDs in the relevant jurisdictions to comply with
home country regulations in lieu of compliance with Commission
regulations, there are numerous protections in place to ensure the
Commission's ability to supervise on an ongoing basis the adequacy
of the foreign nonbank SDs' compliance. The Final Comparability
Determinations all include key conditions with which the foreign
nonbank SDs must comply. For example, each of the Final
Comparability Determinations requires that the foreign nonbank SDs
provide monthly and annual financial reports to the Commission--and
the Commission can request additional information as required to
facilitate ongoing supervision. Each Final Comparability
Determination also requires the foreign nonbank SDs to notify the
Commission if adverse events occur, such as a significant decrease
in excess regulatory capital, a significant failure of a
counterparty to post required margin, or non-compliance with certain
capital or financial reporting requirements. Finally, in recognition
of the fact that a country's capital standards and financial
reporting requirements may change over time, the Final Comparability
Determinations require the foreign nonbank SDs to provide notice of
material changes to the home country capital or financial reporting
frameworks.
Moreover, the foreign nonbank SDs subject to these
determinations are registered with the Commission and are members of
the National Futures Association (NFA). Therefore, these entities
are subject to the CEA, Commission regulations, and NFA membership
rules, and each entity remains subject to Commission supervisory,
examination and enforcement authority. As noted in the Final
Comparability Determinations, if a foreign SD fails to comply with
its home country's capital and financial reporting requirements, the
Commission may initiate an action for a violation of the
Commission's Capital and Financial Reporting Rules.
As I have previously noted,\7\ it is important to recognize
foreign market participants' compliance with the laws and
regulations of their regulators when the requirements lead to an
outcome that is comparable to the outcome of complying with the
CFTC's corresponding requirements. Respect for partner regulators in
foreign jurisdictions advances the Commission as a global standard
setter for sound derivatives regulation and enhances market
stability.
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\7\ Kristin N. Johnson, Commissioner, CFTC, Combatting Systemic
Risk and Fostering Integrity of the Global Financial System Through
Rigorous Standards and International Comity (Jan. 24, 2024), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement012424;
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of
Notice and Order on EU Capital Comparability Determination (June 7,
2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement060723c; Kristin N. Johnson, Commissioner, CFTC,
Statement in Support of Proposed Order and Request for Comment on
Mexican Capital Comparability Determination (Nov. 10, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement111022c;
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of
Proposed Order on Japanese Capital Comparability Determination (July
27, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072722c.
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I thank the staff in the Market Participants Division for their
hard work on these matters, particularly Amanda Olear, Tom Smith,
and Lily Bozhanova.
Appendix 4--Statement of Commissioner Caroline D. Pham
I am pleased to support the order granting conditional
substituted compliance in connection with certain capital and
financial reporting requirements applicable to nonbank swap dealers
subject to regulation by the Mexico Comision Nacional Bancaria y de
Valores (CNBV) and Banco de Mexico (Mexico Final Order). The Mexico
Final Order, on balance, reflects an appropriate approach by the
CFTC to collaboration with non-U.S. regulators that is consistent
with IOSCO's 2020 report on Good Practices on Processes for
Deference.\1\
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\1\ IOSCO Report, ``Good Practices on Processes for Deference''
(June 2020), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD659.pdf.
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I would like to thank Amanda Olear, Thomas Smith, Rafael
Martinez, Warren Gorlick, Lilya Bozhanova, and Justin McPhee from
the CFTC's Market Participants Division for their truly hard work on
the Mexico Final Order and for addressing my concerns regarding the
conditions for notice requirements.\2\ I also thank the CNBV and
Banco de Mexico for their assistance and support.
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\2\ Concurring Statement of Commissioner Caroline D. Pham
Regarding Proposed Order and Request for Comment on an Application
for a Capital Comparability Determination (Nov. 10, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement111022.
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The CFTC's capital comparability determinations are the result
of tireless efforts spanning over a decade since the global
financial crisis. I commend the staff for working together with our
regulatory counterparts around the world to promote regulatory
cohesion and financial stability, and mitigate market fragmentation
and systemic risk.
[FR Doc. 2024-15093 Filed 7-17-24; 8:45 am]
BILLING CODE 6351-01-P