Rule2024-15095
Order Granting Conditional Substituted Compliance in Connection With Certain Capital and Financial Reporting Requirements Applicable to Nonbank Swap Dealers Domiciled in the French Republic and Federal Republic of Germany and Subject to Regulation in the European Union
Primary source
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Published
July 18, 2024
Issuing agencies
Commodity Futures Trading Commission
Abstract
On June 27, 2023, the Commodity Futures Trading Commission ("Commission" or "CFTC") issued a notice and request for comment on an application submitted by the Institute of International Bankers, International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association requesting that the Commission determine that registered nonbank swap dealers organized and domiciled within the European Union 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 the European Union. The Commission also solicited public comment on a proposed comparability determination and related 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. The final order provides that a nonbank swap dealer organized and domiciled in the French Republic or the Federal Republic of Germany may satisfy the capital requirements and the financial reporting rules under the applicable provisions of the Commodity Exchange Act and Commission regulations by complying with certain specified EU laws and regulations and conditions set forth in the order.
Full Text
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<title>Federal Register, Volume 89 Issue 138 (Thursday, July 18, 2024)</title>
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[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58572-58610]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-15095]
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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 Dealers Domiciled in the French Republic and Federal
Republic of Germany and Subject to Regulation in the European Union
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: On June 27, 2023, the Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') issued a notice and request for comment on
an application submitted by the Institute of International Bankers,
International Swaps and Derivatives Association, and Securities
Industry and Financial Markets Association requesting that the
Commission determine that registered nonbank swap dealers organized and
domiciled within the European Union 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 the
European Union. The Commission also solicited public comment on a
proposed comparability determination and related 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. The
final order provides that a nonbank swap dealer organized and domiciled
in the French Republic or the Federal Republic of Germany may satisfy
the capital requirements and the financial reporting rules under the
applicable provisions of the Commodity Exchange Act and Commission
regulations by complying with certain specified EU 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, <a href="/cdn-cgi/l/email-protection#5d3c3231383c2f1d3e3b293e733a322b"><span class="__cf_email__" data-cfemail="bcddd3d0d9ddcefcdfdac8df92dbd3ca">[email protected]</span></a>; Thomas Smith, Deputy Director, 202-418-5495,
<a href="/cdn-cgi/l/email-protection#3a4e4957534e527a595c4e59145d554c"><span class="__cf_email__" data-cfemail="c4b0b7a9adb0ac84a7a2b0a7eaa3abb2">[email protected]</span></a>; Rafael Martinez, Associate Director, 202-418-5462,
<a href="/cdn-cgi/l/email-protection#31435c504345585f544b71525745521f565e47"><span class="__cf_email__" data-cfemail="5e2c333f2c2a37303b241e3d382a3d70393128">[email protected]</span></a>; Warren Gorlick, Associate Director, 202-418-5195,
<a href="/cdn-cgi/l/email-protection#6d1a0a021f01040e062d0e0b190e430a021b"><span class="__cf_email__" data-cfemail="e196868e938d88828aa182879582cf868e97">[email protected]</span></a>; Liliya Bozhanova,
[[Page 58573]]
Special Counsel, 202-418-6232, <a href="/cdn-cgi/l/email-protection#2b47494451434a45445d4a6b484d5f48054c445d"><span class="__cf_email__" data-cfemail="94f8f6fbeefcf5fafbe2f5d4f7f2e0f7baf3fbe2">[email protected]</span></a>; Joo Hong, Risk
Analyst, 202-418-6221, <a href="/cdn-cgi/l/email-protection#96fcfef9f8f1d6f5f0e2f5b8f1f9e0"><span class="__cf_email__" data-cfemail="274d4f484940674441534409404851">[email protected]</span></a>; Justin McPhee, Risk Analyst,
202-418-6223; <a href="/cdn-cgi/l/email-protection#3f55525c574f5a5a7f5c594b5c11585049"><span class="__cf_email__" data-cfemail="4b212628233b2e2e0b282d3f28652c243d">[email protected]</span></a>; Anna Semmes, Attorney-Advisor, 202-418-
5673, <a href="/cdn-cgi/l/email-protection#036270666e6e667043606577602d646c75"><span class="__cf_email__" data-cfemail="016072646c6c647241626775622f666e77">[email protected]</span></a>, 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 providing that registered nonbank swap dealers
(``SDs'') organized and domiciled in the French Republic (``France'')
and Federal Republic of Germany (``Germany'') and subject to capital
and financial reporting requirements of the European Union (``EU
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 the
relevant European Union (``EU'') 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 June 27, 2023,\3\ as modified in certain
aspects to address comments and to clarify its terms.
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\1\ 7 U.S.C. 1 et seq. The CEA may be accessed through the
Commission's website, <a href="http://www.cftc.gov">www.cftc.gov</a>.
\2\ 17 CFR Chapter I. Commission regulations may be accessed
through the Commission's website, <a href="http://www.cftc.gov">www.cftc.gov</a>.
\3\ Notice of Proposed Order and Request for Comment on an
Application for 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) (``2023 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 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
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 nonbanking 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\
[[Page 58574]]
The Commission's capital adequacy and financial reporting requirements
are designed to address and manage risks that arise from a firm's
operation as an 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 non-US 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-US 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 (17 CFR 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 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;
[[Page 58575]]
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. 17 CFR 23.101(b). 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 the 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, such
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)(i).
\25\ Notices must be filed in electronic form to the following
email address: <a href="/cdn-cgi/l/email-protection#5b160b1f1d32353a3538323a37093e2a2e32293e363e352f281b383d2f38753c342d"><span class="__cf_email__" data-cfemail="d895889c9eb1b6b9b6bbb1b9b48abda9adb1aabdb5bdb6acab98bbbeacbbf6bfb7ae">[email protected]</span></a>.
\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. 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.\27\ 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.\28\ 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). 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\ Id.
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C. Application for a Comparability Determination for EU Nonbank Swap
Dealers
On September 24, 2021, the Institute of International Bankers
(``IIB''), International Swaps and Derivatives Association (``ISDA''),
and Securities Industry and Financial Markets Association (``SIFMA'')
(collectively, the ``Applicants'') submitted an application (``EU
Application'') requesting that the Commission conduct a Comparability
Determination and issue a Comparability Order finding that compliance
by EU nonbank SDs domiciled in France or Germany with certain
designated capital requirements of the EU and certain designated
financial reporting requirements of the EU satisfies corresponding CFTC
Capital Rules and 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.\29\ There are currently four EU nonbank
SDs registered with Commission that are domiciled in France or
Germany.\30\
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\29\ Letter from Stephanie Webster, General Counsel, IIB, Steven
Kennedy, Global Head of Public Policy, ISDA, and Kyle Brandon,
Managing Director, Head of Derivatives Policy, SIFMA, dated
September 24, 2021. The EU Application is available on the
Commission's website at: <a href="https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm">https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm</a>.
\30\ BofA Securities Europe SA and Goldman Sachs Paris Inc. et
Cie (``Goldman Sachs Paris'') are nonbank SDs registered with the
Commission and domiciled in France. Citigroup Global Markets Europe
AG and Morgan Stanley Europe SE are also registered nonbank SDs and
are domiciled in Germany.
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The Applicants represented that the capital adequacy and financial
reporting requirements applicable to financial institutions licensed to
operate in a member state of the EU (``EU Member State'') are
established by EU regulations and directives. Specifically, the Capital
Requirements Regulation \31\ and the Capital Requirements Directive
\32\ set forth capital and financial reporting requirements applicable
to entities defined as ``credit institutions'' or ``investment firms''
within the EU, including EU nonbank SDs. The term ``credit
institution'' includes an entity engaged in taking deposits or other
repayable funds from the public and granting credits for its own
account (``Banking Activities'').\33\ An entity engaged in Banking
Activities is subject to the capital and financial reporting
requirements of CRR and CRD. The term ``credit institution'' also
[[Page 58576]]
includes an entity engaged in: (i) dealing for its own account; (ii)
underwriting financial instruments; or (iii) placing financial
instruments on a firm commitment basis (collectively, ``Investment
Activities''), provided that the entity also meets certain defined
financial thresholds set forth in the definition.\34\ Specifically, an
entity engaged in Investment Activities that maintains a total value of
consolidated assets equal to or in excess of EUR 30 billion is required
to be authorized as a ``credit institution'' and is subject to the
capital and financial reporting requirements of CRR and CRD.\35\
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\31\ Regulation (EU) No 575/2013 of the European Parliament and
of the Council of 26 June 2013 on prudential requirements for credit
institutions and amending Regulation (EU) No 648/2012, as amended
(``Capital Requirements Regulation'' or ``CRR'').
\32\ Directive 2013/36/EU of the European Parliament and of the
Council of 26 June 2013 on access to the activity of credit
institutions and the prudential supervision of credit institutions,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC
and 2006/49/EC, as amended (``Capital Requirements Directive'' or
``CRD'').
\33\ CRR, Article 4(1)(1) (defining the term ``credit
institution'').
\34\ Id.
\35\ Id. and CRD, Articles 8 and 8a (requiring an entity that
engages in Investment Activities and meets the financial thresholds
to submit an application for authorization as a ``credit
institution'' under the relevant provisions of the applicable
national law). CRR, Article 4(1)(1) provides that an entity carrying
out Investment Activities meets the financial threshold for
authorization as a credit institution if: (i) the total value of the
consolidated assets of the entity is equal to or in excess of EUR 30
billion; (ii) the total value of the assets of the entity is less
than EUR 30 billion, and the entity is part of a group in which the
total value of the consolidated assets of all entities in that group
that individually have total assets of less than EUR 30 billion and
that engage in Investment Activities is equal to or in excess of EUR
30 billion; or (iii) the total value of the assets of the entity is
less than EUR 30 billion, and the entity is part of a group in which
the total value of the consolidated assets of all entities in the
group that engage in Investment Activities is equal to or in excess
of EUR 30 billion, where the consolidated supervisor, in
consultation with the supervisory college, decides that the entity
must be authorized as a credit institution to address potential
risks of circumvention and potential risks for financial stability
of the EU.
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Credit institutions that qualify as ``significant supervised
entities'' are subject to the direct prudential supervision of the
European Central Bank (``ECB'').\36\ Credit institutions that are
``less significant supervised entities'' are prudentially supervised by
the applicable prudential supervisory authority in the entity's home EU
Member State (i.e., ``national competent authority'').\37\ The term
``competent authority'' is used in this Comparability Determination and
Comparability Order to refer to the ECB or the national competent
authority, as appropriate.
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\36\ See generally, Council Regulation (EU) 1024/2013 of 15
October 2013 Conferring Specific Tasks to the European Central Bank
Concerning Policies Relating to the Prudential Supervision of Credit
Institutions (``SSM Regulation'') and Regulation (EU) No 468/2014 of
the European Central Bank of 16 April 2014 Establishing the
Framework for Cooperation within the Single Supervisory Mechanism
Between the European Central Bank and the National Competent
Authorities and with National Designated Authorities (``SSM
Framework Regulation'').
The criteria for determining whether credit institutions are
considered ``significant supervised entities'' include size,
economic importance for the specific EU Member State or the EU
economy, significance of cross-border activities, and request for or
receipt of direct public financial assistance. SSM Regulation,
Article 6 and SSM Framework Regulation, Articles 39-44 and 50-62.
\37\ SSM Regulation, Article 6. Less significant entities are
supervised by their national competent authorities in close
cooperation with the ECB. With respect to the prudential supervision
of less significant entities, the ECB has the power to issue
regulations, guidelines or general instructions to the national
competent authorities. SSM Regulation, Article 6(5)(a). At any time,
the ECB can also decide to directly supervise a less significant
entity to ensure that high supervisory standards are applied
consistently. SSM Regulation, Article 6(5)(b).
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The term ``investment firm'' is defined as an entity authorized
under the Markets in Financial Instruments Directive,\38\ and whose
regular business is the provision of one or more investment services to
third parties and/or the performance of one or more investment-related
activities on a professional basis (including Investment Activities as
defined above).\39\ An investment firm that engages in Investment
Activities and maintains total consolidated assets of at least EUR 15
billion is also subject to the capital and financial reporting
requirements of CRR and CRD.\40\ The investment firm, however, is not
required to be authorized as a ``credit institution'' under the
relevant provisions of the applicable national law in the EU Member
State and is prudentially supervised by the national competent
authority.\41\ Lastly, an entity defined as an ``investment firm'' that
does not engage in Investment Activities, or that engages in Investment
Activities but does not meet the criteria of either maintaining
consolidated assets of at least EUR 15 billion or maintaining
consolidated assets of at least EUR 5 billion and meeting certain
criteria of significance and interconnectedness, is not subject to CRR
and CRD.\42\ Such an investment firm is subject to capital and
financial reporting requirements established by IFR and IFD, which EU
Member States were required to adopt and apply by June 26, 2021.\43\
The new IFR and IFD capital and financial reporting requirements are
tailored to the risks faced and posed by smaller investment firms that
operate differently from banking entities and larger investment firms.
Such smaller investment firms are also prudentially supervised by the
national competent authority.
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\38\ Directive 2014/65/EU of the European Parliament and of the
Council of 15 May 2014 on markets in financial instruments and
amending Directive 2002/92/EC and Directive 2011/61/EU (``Markets in
Financial Instruments Directive'' or ``MiFID'').
\39\ CRR, Article 4(1)(2) cross-referencing Article 4(1)(1) of
MiFID.
\40\ See Regulation (EU) 2019/2033 of the European Parliament
and of the Council of 27 November 2019 on the prudential
requirements of investment firms and amending Regulations (EU) No
1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014
(``Investment Firms Regulation'' or ``IFR''), Article 1(1) and
(1)(2) (indicating that an investment firm that engages in
Investment Activities is subject to CRR (and by cross-reference to
CRD) if any of the following applies: (i) the total value of the
consolidated assets of the investment firm is equal to or exceeds
EUR 15 billion; (ii) the total value of the consolidated assets of
the investment firm is less than EUR 15 billion, and the investment
firm is part of a group in which the total value of the consolidated
assets of all investment firms in the group that individually have
total assets of less than EUR 15 billion and that engage in
Investment Activities is equal to or exceeds EUR 15 billion; or
(iii) the total value of the consolidated assets of the investment
firm is equal to or exceeds EUR 5 billion, the investment firm
engages in Investment Activities, and the competent authority has
determined that the investment firm should be subject to CRR based
on criteria set forth in Article 5 of Directive (EU) 2019/2034). See
also, Directive (EU) 2019/2034 of the European Parliament and of the
Council of 27 November 2019 on the prudential supervision of
investment firms and amending Directives 2002/87/EC, 2009/65/EC,
2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (``Investment
Firms Directive'' or ``IFD''), Article 5 (providing that the
competent authority may decide to apply the requirements of CRR to
an investment firm whose consolidated assets are equal or exceed EUR
5 billion and that engages in Investment Activities if one or more
of the following criteria apply: (i) the investment firm engages in
Investment Activities on a scale that the failure or distress of the
investment firm could lead to systemic risk; (ii) the investment
firm is a clearing member; and/or (iii) the competent authority
considers it to be justified in light of the size, nature, scale,
and complexity of the activities of the investment firm considering
the importance of the investment firm for the economy of the EU or
of the relevant EU Member State, the significance of the investment
firm's cross-border activities, and the interconnectedness of the
investment firm with the financial system).
\41\ Although no EU nonbank SD currently registered with the
Commission falls in this category, the analysis in the Comparability
Determination would apply to such an investment firm. To capture
investment firms that are subject to the capital and financial
reporting requirements of CRR and CRD but are not required to be
authorized as ``credit institutions,'' the Commission has removed
the requirement in proposed Condition 3 that the EU nonbank SD be
``treated for the purposes of the EU capital and financial reporting
rules as an ``institution,'' as defined in [CRR].''
\42\ IFD, Article 5 (setting forth the criteria that may justify
a decision by the competent authority to apply the requirements of
CRR to an investment firm that engages in Investment Activities and
whose consolidated assets equal or exceed EUR 5 billion).
\43\ IFR, Article 66 and IFD, Article 67.
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Three of the four EU nonbank SDs currently registered with the
Commission are subject to CRR and CRD.\44\ The Application did not
include
[[Page 58577]]
an analysis of the comparability of the capital and financial reporting
rules under the IFR and IFD to the CFTC Capital Rules and CFTC
Financial Reporting Rules. As such, the Commission did not assess the
comparability of the capital and financial reporting requirements
imposed by IFR and IFD on smaller investment firms with the CFTC
Capital Rules and CFTC Financial Reporting Rules. Therefore, an EU
nonbank SD, or a future EU nonbank SD applicant, that is subject to the
IFR and IFD frameworks and seeks substituted compliance for some or all
of the CFTC Capital Rules and CFTC Financial Reporting Rules must
submit an application to the Commission in accordance with Commission
Regulation 23.106.\45\ In addition, as noted above, the three EU
nonbank SDs that are currently subject to CRR and CRD, and registered
with the Commission, are domiciled in the EU Member States of France
and Germany. The Commission's analysis therefore involved an assessment
of how certain EU directives were implemented into the national laws of
France and Germany. The Commission did not review the implementation of
the relevant EU directives in other EU Member States. Therefore, an
entity organized and domiciled in an EU Member State other than France
or Germany that seeks to register with the Commission as an SD and to
comply with some or all of the Commission's capital and financial
reporting rules via substituted compliance must submit an application
under Commission Regulation 23.106. Commission staff expects that it
will engage with such potential entities during the registration
process and use the analysis performed during this assessment in
performing a comparability assessment of the applicant's home country
capital and financial reporting requirements.
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\44\ BofA Securities Europe SA, Citigroup Global Markets Europe
AG and Morgan Stanley Europe SE have been authorized as credit
institutions. These three EU nonbank SDs also qualify as
``significant supervised entities'' subject to the direct
supervision of the ECB. At the time the Commission issued the 2023
Proposal, Goldman Sachs Paris had a pending application for
authorization as a credit institution. See Responses to Staff
Questions of May 15, 2023. Subsequent to the publication of the 2023
Proposal, however, Goldman Sachs Paris informed the Commission that
following further analysis and discussion with the relevant
authorities, it was determined that on March 31, 2024, the entity
had to start complying with the capital and financial reporting
frameworks of IFR and IFD.
\45\ 17 CFR 23.106. Because the Commission had not assessed the
capital and financial reporting frameworks established by IFR and
IFD at the time of issuance of the 2023 Proposal, an application for
substituted compliance by Goldman Sachs Paris, if one is submitted
in accordance with Commission Regulation 23.106, would be addressed
separately from this Comparability Determination.
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As noted above, three of the EU nonbank SDs currently registered
with the Commission are subject to CRR and CRD. CRR, as a regulation,
is binding in its entirety and directly applicable in all EU Member
States.\46\ CRD, as a directive, was required to be transposed into EU
Member States' national law.\47\ France implemented CRD in various
provisions of its Monetary and Financial Code (``MFC'') \48\ and
through several ministerial orders, including Ministerial Order on
Capital Buffers \49\ and Ministerial Order on Internal Control.\50\
France also adopted Ministerial Order on Distribution Restrictions \51\
and amended relevant national law provisions, including the above-
referenced ministerial orders, to implement CRD V.\52\ Germany
implemented CRD via amendments to the Banking Act (Kreditwesengesetz,
``KWG'') and its subordinate statutory instruments.\53\ In addition,
Germany adopted and published the Risk Reduction Act
(Risikoreduzierungsgesetz, ``RiG'') on December 14, 2020 to implement
CRD V, with most of the relevant changes becoming effective on December
28, 2020. CRR and CRD as implemented in French and German law are
collectively referred to hereafter as the ``EU Capital Rules'' in this
Comparability Determination and Comparability Order.
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\46\ Consolidated Version of the Treaty on the Functioning of
the European Union, OJ (C 326) 171, Oct. 26, 2012 (``TFEU''),
Article 288. Accordingly, CRR is directly applicable and binding law
in France and Germany, the two EU Member States where EU nonbank SDs
are currently organized and operating.
\47\ TFEU, Article 288 (stating that a directive is binding as
to the result to be achieved upon each EU Member State to which the
directive is addressed, and further provides, however, that each EU
Member State elects the form and method of implementing the
directive). In this connection, EU Member States were required to
implement and start applying amendments to CRD, introduced by
Directive (EU) 2019/878 of the European Parliament and of the
Council of 20 May 2019 amending Directive 2013/36/EU as regards
exempted entities, financial holding companies, mixed financial
holding companies, remuneration, supervisory measures and powers and
capital conservation measures (``CRD V'') by December 29, 2020.
\48\ In particular, MFC, Articles L.511-41 to L.511- 50-1
contain provisions relating to prudential requirements applicable to
credit institutions. In addition, MFC, Articles L.612-1 to L.612-50
relate to the role, functioning, and powers of the national
competent authority.
\49\ Arr[ecirc]t[eacute] of 3 November 2014 Relating to Capital
Buffers of Banking Services Providers and Investment Firms Other
Than Portfolio Management Companies (``Ministerial Order on Capital
Buffers'').
\50\ Arr[ecirc]t[eacute] of 3 November 2014 on Internal Control
of Companies in the Banking, Payment Services and Investment
Services Sector Subject to the Control of Autorit[eacute] de
Contr[ocirc]le Prudentiel et de R[eacute]solution (``Ministerial
Order on Internal Control'').
\51\ Arr[ecirc]t[eacute] of 25 February 2021 Relating to
Distribution Restrictions Applicable to Credit Institutions,
Financial Companies and Certain Investment Firms.
\52\ Specifically, to implement CRD V, France amended the MFC
via Ordinance No. 2020-1635 of December 21, 2020 and Decree No.
2020-1637 of December 22, 2020, with most of the relevant changes
becoming effective on December 29, 2020. France also introduced
consecutive amendments to Ministerial Order on Capital Buffers and
Ministerial Order on Internal Control, with the latest changes
effective as of August 1, 2021.
\53\ Specifically, the KWG includes, among other things,
provisions related to capital adequacy requirements, including
provisions granting power the Federal Ministry of Finance to issue
statutory instruments to provide details on capital adequacy
requirements (section 10(1)), provisions specifying the basis for
imposing higher capital requirements (section 10(3)), provisions
setting forth requirements related to capital buffers (sections 10c
to 10i) and provisions describing the powers of the competent
authority (sections 6b, 56, 60b).
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The Applicants also represented that in addition to CRR and CRD,
the Bank Recovery and Resolution Directive (``BRRD'') includes relevant
EU capital requirements.\54\ BRRD establishes a framework for recovery
and resolution of credit institutions and investment firms, and
mandates that EU Member States require such institutions to satisfy ``a
minimum requirement for own funds and eligible liabilities'' (``MREL'')
if they meet certain requirements.\55\ France implemented BRRD
primarily via amendments to the MFC.\56\ Germany transposed BRRD into
national law by the Recovery and Resolution Act (Sanierungs und
Abwicklungsgesetz, ``SAG'').\57\
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\54\ Directive 2014/59/EU of the European Parliament and of the
Council of 15 May 2014 establishing a framework for the recovery and
resolution of credit institutions and investment firms and amending
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC,
2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/
36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of
the European Parliament and of the Council (``Bank Recovery and
Resolution Directive'' or ``BRRD''). EU Application, p. 5.
\55\ EU Member States were required to transpose BRRD into
national law and start applying the implementing measures from
January 1, 2015. BRRD, Article 130. BRRD was amended by Directive
(EU) 2019/879 of the European Parliament and of the Council of 20
May 2019 amending Directive 2014/59/EU as regards loss-absorbing and
recapitalization capacity of credit institutions and investment
firms and Directive 98/26/EC (``Bank Recovery and Resolution
Directive II'' or ``BRRD II'') and EU Member States were required to
start applying national law measures implementing BRRD II by
December 28, 2020. BRRD II, Article 3. BRRD as amended by BRRD II
will be referred to as ``BRRD'' in this document, unless otherwise
stated.
\56\ Among other provisions, MFC Article L.613-44 relates in
particular to the MREL requirement and Article R.613-46-1 defines
the conditions that items and instruments need to meet to qualify as
``eligible liabilities.''
\57\ In particular, SAG, section 49(1) and (2) relate to the
MREL requirement.
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The Applicants further represent that with respect to supervisory
financial reporting, Commission Implementing Regulation (EU) 2021/451
supplements CRR with implementing technical standards (``CRR Reporting
ITS'') \58\
[[Page 58578]]
specifying, among other things, uniform formats and frequencies for the
financial reporting required under CRR.\59\ In addition, the ECB has
adopted a regulation setting forth a common minimum set of financial
information that should be reported by credit institutions subject to
CRR, including EU nonbank SDs, on the basis of the CRR Reporting ITS
(``ECB FINREP Regulation'').\60\ The Applicants also represent that
Directive 2013/34/EU \61\ contains provisions related to financial
reporting, including a mandate that entities of a certain size be
required to prepare annual audited financial statements and a
management report.\62\ CRR, CRR Reporting ITS, ECB FINREP Regulation,
relevant provisions of CRD regarding certain notice requirements as
implemented in French and German law, and the relevant provisions of
the Accounting Directive as implemented in French and German law are
collectively referred to hereafter as the ``EU Financial Reporting
Rules'' in this Comparability Determination and Comparability Order.
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\58\ Commission Implementing Regulation (EU) 2021/451 of 17
December 2020 laying down implementing technical standards for the
application of Regulation (EU) No 575/2013 of the European
Parliament and of the Council with regard to supervisory reporting
of institutions and repealing Implementing Regulation (EU) No 680/
2014.
\59\ EU Application, p. 21 and Responses to Staff Questions of
May 15, 2023.
\60\ Regulation (EU) 2015/534 of the European Central Bank of 17
March 2015 on reporting of supervisory financial information.
\61\ Directive 2013/34/EU of the European Parliament and of the
Council of 26 June 2013 on the annual financial statements,
consolidated financial statements and related reports of certain
types of undertakings, amending Directive 2006/43/EC of the European
Parliament and of the Council and repealing Council Directives 78/
660/EEC and 83/394/EEC (``Accounting Directive'').
\62\ EU Application, p. 5. Accounting Directive, Articles 4, 19
and 34.
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D. Proposed Comparability Determination and Proposed Comparability
Order for EU Nonbank Swap Dealers
On June 27, 2023, the Commission published the 2023 Proposal,
seeking comment on the EU Application and the Commission's proposed
Comparability Determination and Comparability Order.\63\ The 2023
Proposal set forth the Commission's preliminary Comparability
Determination and proposed Comparability Order providing for the
conditional availability of substituted compliance with the CFTC
Capital Rules and CFTC Financial Reporting Rules for EU nonbank SDs
regulated under CRR and CRD and domiciled in either Germany or France,
subject to EU nonbank SDs' compliance with EU laws and regulations, as
well as conditions specified in the proposed Comparability Order.\64\
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\63\ 2023 Proposal at 41774.
\64\ Id. at 41807-41810. 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 EU laws and regulations on which the proposed
Comparability Determination and proposed Comparability Order were
based. The Commission has relied on the 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.
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Based on its review of the EU Application and applicable EU laws
and regulations, the Commission preliminarily found that the EU Capital
Rules and the EU 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. The Commission, however,
noted that there were certain differences between the EU Capital Rules
and CFTC Capital Rules and certain differences between the EU Financial
Reporting Rules and the CFTC Financial Reporting Rules. As such, the
Commission proposed certain conditions to the Comparability Order. The
proposed conditions were designed to promote consistency in regulatory
outcomes, 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 EU nonbank SDs for ongoing compliance with the
Comparability Order.\65\ The Commission further stated that, in its
preliminary view, the identified differences would not be inconsistent
with providing a substituted compliance framework for EU nonbank SDs
subject to the conditions specified in the proposed Comparability
Order.\66\
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\65\ 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 EU
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.
\66\ Id. at 41807.
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The proposed Comparability Order was limited to the comparison of
the EU Capital Rules to the CFTC Capital Rules' Bank-Based Capital
Approach (``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.\67\ As noted by
the Commission in the 2023 Proposal, the Applicants had not requested,
nor has the Commission performed, a comparison of the EU Capital Rules
to the Commission's TNW Approach or NLA Approach.\68\
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\67\ Id. As described in the 2023 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 2023 Proposal at 41780-41782 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 ECB, Deutsche
Bundesbank, Bank of England, Bank of France, Bank of Japan, Banco de
Mexico, and Bank of Canada. The BCBS framework is available at
<a href="https://www.bis.org/basel_framework/index.htm">https://www.bis.org/basel_framework/index.htm</a>.
\68\ See 2023 Proposal at 41784.
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E. General Comments on the EU Application and the Commission's Proposed
Finding of Comparability Between the CFTC Capital Rules and CFTC
Financial Reporting Rules and the EU Capital Rules and EU Financial
Reporting Rules
The public comment period on the EU Application and the proposed
Comparability Determination and proposed Comparability Order ended on
October 28, 2023. The Commission received three substantive comment
letters from interested parties: Better Markets, Inc.; a joint letter
from the Applicants; and William J. Harrington.\69\ The Commission
received 16 additional non-substantive comments from one
[[Page 58579]]
individual that are not addressed in this Comparability
Determination.\70\
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\69\ Letter from Cantrell Dumas, Director of Derivatives Policy,
Better Markets Inc. (``Better Markets'') (August 28, 2023) (``Better
Markets Letter''); Letter from Stephanie Webster, General Counsel,
IIB; Steven Kennedy, Global Head of Public Policy, ISDA; Kyle L.
Brandon, Managing Director, Head of Derivatives Policy, SIFMA
(August 24, 2023) (``Applicants' Letter''); Letter from William J.
Harrington (``Harrington'') (August 28, 2023) (``Harrington 08/28/
2023 Letter''). The Commission also received a second letter from
the Applicants, dated May 22, 2024, complementing their comments to
the 2023 Proposal (``Applicants' Supplemental Letter''). The comment
letters for the 2023 Proposal are available at: <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7397&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7397&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1</a>.
\70\ The non-substantive comments are also available on the
Commission's website at: <a href="https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7397&tl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7397&tl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1</a>.
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The Applicants filed a comment letter generally expressing support
for the proposed Comparability Determination and Comparability Order,
agreeing with the Commission's overall analysis and determination of
comparability of the CFTC Capital Rules and CFTC Financial Reporting
Rules and the EU Capital and EU Financial Reporting Rules.\71\ The
Applicants also included several technical comments, further discussed
in section II. below, on the proposed conditions requiring EU nonbank
SDs to file a notice with the Commission and the NFA upon the
occurrence of certain events.
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\71\ Applicants' Letter at p. 2.
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Conversely, two commenters disagreed with the CFTC's proposed
Comparability Determination and proposed Comparability Order.\72\
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
comparable outcomes to the corresponding Commission requirements, ``is
insufficiently rigorous, leaving far too much room for inaccurate and
unwarranted comparability determinations.'' \73\
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\72\ Better Markets Letter at p. 2; Harrington 08/28/2023 Letter
at pp. 3-4 (referencing a separate submission to the Commission,
dated October 20, 2022, in connection with the Commission's Notice
of Proposed Order and Request for Comment on an Application for a
Capital Comparability Determination From the Financial Services
Agency of Japan, 87 FR 48092, (August 8, 2022), and asserting, as
further discussed below, that the Commission should condition the
Comparability Determination on a prohibition against EU nonbank SDs'
entering into swap contracts with certain specified features).
\73\ Better Markets Letter at p. 3.
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The Commission does not believe that the principles-based, holistic
assessment that it conducted on the comparability of the EU Capital
Rules and EU 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 EU Capital Rules and EU Financial
Reporting Rules are designed with the objective of ensuring overall
safety and soundness of the EU 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 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.\74\
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\74\ 85 FR 57462 at 57521.
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As stated in the 2023 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.\75\ Furthermore, as
discussed in section I.B. above, the Commission stated when adopting
Commission Regulation 23.106 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.\76\
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\75\ See 2023 Proposal at 41785.
\76\ 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.\77\ 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 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.\78\ The Commission emphasized
that in this context, ``comparable does not necessarily mean
identical.'' \79\ 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).\80\ 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.\81\
---------------------------------------------------------------------------
\77\ Interpretative Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26,
2013) (``Guidance'').
\78\ Guidance at 45343.
\79\ Id.
\80\ Id.
\81\ See e.g., Comparability Determination for the European
Union: Certain Entity-Level Requirements, 78 FR 78923 (December 27,
2013) at 78926.
---------------------------------------------------------------------------
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
[[Page 58580]]
requirements.\82\ 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.\83\
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.\84\ 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.
---------------------------------------------------------------------------
\82\ 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).
\83\ Id.
\84\ Id.
---------------------------------------------------------------------------
With respect to the EU Application, the process leading to the
Commission's Comparability Determination involved Commission staff
reviewing relevant EU laws, rules, and regulations cited in the EU
Application, including relevant French and German provisions
implementing EU laws, rules, and regulations into the national
regulatory frameworks of the two EU Member States. Staff verified the
assertions and citations contained in the EU Application regarding the
specific EU Capital Rules and EU Financial Reporting Rules to the
relevant EU laws, rules, and regulations.\85\ Where necessary, staff
obtained English language translations of French and German
implementing provisions to further confirm statements in the EU
Application or to confirm the full implementation of EU directives in
the applicable EU Member State's laws and regulatory framework.
---------------------------------------------------------------------------
\85\ Staff also reviewed various documents relevant to the
proposed Comparability Determination and proposed Comparability
Order published by the competent authorities in English and/or
French.
---------------------------------------------------------------------------
Commission staff also evaluated the comparability of the EU Capital
Rules and EU 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 EU nonbank
SDs and how such process addresses risk, including market risk and
credit risk of the EU 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 an EU nonbank SD's minimum
capital requirements; (iii) the financial reports and other financial
information submitted by an EU nonbank SD to its relevant competent
authorities, and whether such information provides the competent
authorities with the means necessary to effectively monitor the
financial condition of the EU nonbank SD; and (iv) the regulatory
notices and other communications between an EU nonbank SD and its
relevant competent authorities that address potential adverse financial
or operational issues that may impact the firm.\86\ With respect to the
ability of the relevant competent authorities to supervise and enforce
compliance with the EU Capital Rules and EU Financial Reporting Rules,
the Commission's assessment included a review of the competent
authorities' surveillance program for monitoring compliance by EU
nonbank SDs with the EU Capital Rules and EU Financial Reporting Rules,
and the disciplinary process imposed on firms that fail to comply with
such requirements.\87\ 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 EU Capital Rules and EU 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 EU laws and regulations are comparable
in purpose and effect to the CEA and Commission regulations.
---------------------------------------------------------------------------
\86\ 2023 Proposal, at 41784-41805.
\87\ Id. at 41805-41807.
---------------------------------------------------------------------------
Better Markets further asserted that even under a principles-based,
holistic approach, the EU capital and financial reporting requirements
for EU nonbank SDs do not satisfy the test for an order granting
substituted compliance because the EU's regulatory framework governing
capital and financial reporting is not comparable to the corresponding
CFTC requirements.\88\ 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 EU
framework'' and as a ``de facto admission that the regulations are not
comparable and that the [EU Application] should be denied.'' \89\
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 the EU's laws and rules in the form of conditions.\90\
---------------------------------------------------------------------------
\88\ Better Markets Letter at pp. 3-4.
\89\ Id. at pp. 2 and 4.
\90\ Id. at p. 2.
---------------------------------------------------------------------------
The Commission disagrees that the inclusion of conditions in the
Comparability Order precludes a finding of comparability with respect
to the EU Capital Rules and EU 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 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.\91\
---------------------------------------------------------------------------
\91\ 17 CFR 23.106(a)(5), which provides that in issuing a
Capital Comparability Determination, the Commission may impose any
terms and conditions it deems appropriate, including certain capital
adequacy and financial reporting requirements on swap dealers
(emphasis added). 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).
---------------------------------------------------------------------------
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.\92\ In this regard, the Commission has stated that certain
conditions included in a Comparability Order may be designed to ensure
the
[[Page 58581]]
Commission's direct access to books and records required to be
maintained by an SD registered with the Commission.\93\ Other
conditions may address areas where the foreign jurisdiction lacks
analogous requirements.\94\ 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.
---------------------------------------------------------------------------
\92\ 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.
\93\ Comparability Determination for the European Union: Certain
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at
78880.
\94\ Guidance at 45343.
---------------------------------------------------------------------------
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 2023 Proposal are clearly of the nature contemplated by
Commission Regulation 23.106(a)(5).
The Commission also does not believe that the inclusion of the
conditions in the Comparability Order reflects a ``rewriting'' of the
EU laws and regulations as asserted by Better Markets. Consistent with
the Commission's policy described above, a majority of the conditions
contained in the Comparability Order are designed to ensure that: (i)
the EU nonbank SD is eligible for substituted compliance based on the
laws and regulations of the EU and the relevant EU Member States that
were reviewed by the Commission in performing the comparability
assessment, and (ii) the Commission and NFA receive timely financial
information and notices to effectively monitor an EU nonbank SD's
compliance with the Comparability Order and to assess the ongoing
safety and soundness of the EU nonbank SD. Specifically, there are 26
conditions in the final Comparability Order. Seven conditions set forth
criteria that an EU nonbank SD must meet to be eligible for substituted
compliance pursuant to the Comparability Order.\95\ The seven
conditions ensure that only EU nonbank SDs that are within the scope
of, and comply with, the EU Capital Rules and EU Financial Reporting
Rules that were part of the Commission's comparability assessment may
apply for substituted compliance.
---------------------------------------------------------------------------
\95\ The seven criteria provide that the EU nonbank SD: (i) is
not subject to capital rules of a U.S. prudential regulator
(Condition 1); (ii) is organized and domiciled in France or Germany
(Condition 2); (iii) is licensed as a credit institution or an
investment firm in an EU Member State (Condition 3); (iv) is subject
to CRR and CRD as implemented in France or Germany, as applicable
(Condition 4); (v) satisfies at all times applicable CRR capital
ratios and leverage ratios, satisfies CRD capital conservation
buffer ratios, and maintains a liquidity risk management program as
required under CRD (Condition 5); (vi) is subject to and complies
with the EU financial reporting requirements that are part of the
Commission's comparability assessment (Condition 6); and (vii) is
subject to prudential supervision by an EU Member State's
supervisory authority with jurisdiction to enforce the requirements
of the EU Capital Rules and the EU Financial Reporting Rules
(Condition 7).
---------------------------------------------------------------------------
Ten additional conditions require EU nonbank SDs within the scope
of the Comparability Order to provide notice to the Commission and NFA
of certain defined events,\96\ and a further two conditions require EU
nonbank SDs to file with the Commission and NFA copies of certain
unaudited and audited financial reports that the firms provide to their
respective competent authorities.\97\ In addition, two additional
conditions reflect administrative matters necessary to implement the
substituted compliance framework.\98\ Lastly, five conditions impose
obligations on EU nonbank SDs that align with certain of the
Commission's requirements for nonbank SDs. The five conditions require
an EU nonbank SD to: (i) maintain a minimum of $20 million of common
equity tier 1 capital (Condition 8); (ii) prepare and keep current
financial books and records (Condition 10); (iii) 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 13);
(iv) file a monthly report listing the custodians holding margin posted
by, and collected by, the EU nonbank SD, the amount of margin held by
each custodian, and the aggregate amount of margin required to be
posted and collected by the EU nonbank SD (Condition 15); and (v)
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).
---------------------------------------------------------------------------
\96\ The ten conditions require an EU nonbank SD to provide
notice to the Commission in the event that the firm: (i) is informed
by the relevant competent authority that it failed to comply with
any component of the EU Capital Rules or EU Financial Reporting
Rules (Condition 16); (ii) fails to maintain a minimum level of
common equity tier 1 capital equal to or in excess of the equivalent
of $20 million (Condition 17); (iii) breaches its combined capital
buffer requirement and is required to file a capital conservation
plan with the relevant competent authority(Condition 18); (iv) is
required by a competent authority to maintain additional capital or
additional liquidity (Condition 19); (v) fails to meet the required
MREL requirement (Condition 20); (vi) experiences a 30 percent or
more decrease in its excess regulatory capital (Condition 21); (vii)
fails to make or keep current financial books and records (Condition
22); (viii) 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 23); (ix) changes its
fiscal year-end date (Condition 24); and (x) is subject to material
changes to the EU Capital Rules, EU Financial Reporting Rules, or
the supervisory authority of the ECB or relevant Member State
competent authority (Condition 25).
\97\ The two conditions provide that an EU nonbank SD must file
with the Commission and NFA: (i) a copy of SEC Form X-17A-5 (``FOCUS
Report'') that the EU nonbank SD files with the U.S. Securities and
Exchange Commission (``SEC'') or English language copies of certain
financial reporting templates that the EU nonbank SD is required to
submit to the relevant competent authorities pursuant to the CRR
Reporting ITS or the ECB FINREP regulation, as applicable (Condition
11); and (ii) English language copies of its annual audited
financial statements and management report that are required to be
prepared and published pursuant to the Accounting Directive as
implemented in the national laws of France and Germany (Condition
12).
\98\ One of the administrative conditions provides that an EU
nonbank SD must provide a notice to the Commission of its intent to
comply with the Comparability Order and the EU Capital Rules and EU
Financial Reporting Rules in lieu of the CFTC Capital Rules and CFTC
Financial Reporting Rules. The notice must include the EU nonbank
SD's representation that the firm is organized and domiciled in an
EU Member State, is a licensed investment firm or a credit
institution, and is subject to, and complies with, the EU Capital
Rules and the EU Financial Reporting Rules (Condition 9). The second
administrative condition provides that an EU nonbank SD must file
any documents with the Commission and NFA via electronic
transmission (Condition 26).
---------------------------------------------------------------------------
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 EU capital and financial reporting framework but
rather to ensure that the Commission and NFA receive information to
conduct ongoing monitoring of EU nonbank SDs for compliance with
relevant capital and financial reporting requirements. As discussed
above, in issuing the Comparability Order, the Commission is not ceding
its supervisory and enforcement authorities. The Comparability Order
permits EU nonbank SDs to satisfy the Commission's capital and
financial reporting requirements by complying with certain laws and/or
regulations of the EU 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 EU nonbank SDs
that operate under a Comparability Order to ensure compliance with the
Comparability Order, including its conditions. To that effect, the
notice and financial reporting conditions set forth
[[Page 58582]]
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 EU nonbank
SDs. The Commission may also initiate an enforcement action against an
EU nonbank SD that fails to comply with the conditions of the
Comparability Order.\99\
---------------------------------------------------------------------------
\99\ As the Commission stated in the 2023 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 2023
Proposal at 41777. 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 EU 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.\100\ 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].'' \101\
---------------------------------------------------------------------------
\100\ Guidance at 45343.
\101\ 17 CFR 23.106(a)(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, evidence-based
determination that those different requirements nevertheless will, in
fact, lead to comparable regulatory outcomes.\102\ 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.'' \103\ 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 requiring, at a
minimum, 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 changes to how rules are interpreted, applied, or
enforced.\104\ Finally, Better Markets stated that if the Commission
proceeds to finalize the Comparability Order, it must, at a minimum,
ensure that the conditions are robustly maintained and enforced.\105\
---------------------------------------------------------------------------
\102\ Better Markets at p. 8.
\103\ Id.
\104\ Id. at pp. 8-9.
\105\ Id. at p. 14.
---------------------------------------------------------------------------
Although the Commission disagrees that the EU Capital Rules and the
EU Financial Reporting Rules, as a whole, are materially different or
do not achieve comparable outcomes, 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 2023
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 EU Capital Rules and EU
Financial Reporting Rules remain comparable in purpose and effect with
the CFTC Capital Rules and CFTC Financial Reporting Rules. As noted
above, and discussed in more detail in sections II.D. and E. below, EU
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 EU nonbank SDs' ongoing
compliance with the conditions set forth in the final Comparability
Order. In addition, the final Comparability Order requires an EU
nonbank SD, or an entity acting on its behalf, to inform the Commission
of changes to the relevant EU Capital Rules and EU Financial Reporting
Rules so that the Commission may assess the continued effectiveness of
the Comparability Order in ensuring that the EU laws and regulations
have the comparable regulatory objectives of the CEA and Commission
regulations of ensuring the safety and soundness of nonbank SDs.\106\
Commission staff will also monitor the EU 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 EU 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
[[Page 58583]]
Comparability Determination and Comparability Order to reflect those
changes.\107\
---------------------------------------------------------------------------
\106\ Condition 25 of the final Comparability Order requires an
EU nonbank SD, or an entity acting on its behalf, to notify the
Commission of any material changes to the information submitted in
its application, including, but not limited to, proposed and final
material changes to the EU Capital Rules or EU Financial Reporting
Rules and proposed and final material changes to the ECB's or the
relevant EU Member State competent authority's supervisory authority
or supervisory regime over EU nonbank SDs. The Commission notes that
it made certain non-substantive, clarifying changes to the language
of final Condition 25 as compared to proposed Condition 25.
\107\ 2023 Proposal at 41785 (n. 135).
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Another commenter, Harrington, stated that the Commission must
condition the Comparability Order on an ``outright prohibition against
regulated entities providing [swap contracts that include a ``flip
clause''].'' \108\ 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.\109\
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.\110\ Harrington argued that each swap contract
with a flip clause generates a ``gaping credit exposure'' for EU or
other non-U.S. SDs.\111\ Harrington recognized, however, that the CFTC
margin requirements for uncleared swap transactions address his
concerns associated with the inclusion of a flip clause.\112\
Nonetheless, according to 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.\113\
---------------------------------------------------------------------------
\108\ Harrington 08/28/2023 Letter at p. 3. Harrington submitted
the Harrington 08/28/2023 Letter as a supplement to a previously
submitted comment letter, dated October 20, 2022 (``Harrington 10/
20/2022 Letter''), filed in connection with the Commission's Notice
of Proposed Order and Request for Comment on an Application for a
Capital Comparability Determination From the Financial Services
Agency of Japan, 87 FR 48092, (August 8, 2022)).
\109\ William J. Harrington, Submission to the U.S. Securities
and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at p.
8.
\110\ 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).
\111\ Harrington 08/28/2023 Letter at p. 6.
\112\ Harrington 10/20/2022 Letter at p. 3 (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, both with
and without a flip clause'').
\113\ Harrington 10/20/2022 Letter at p. 3 (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'').
---------------------------------------------------------------------------
The Commission recognizes that given some definitional differences
and differences in the activity thresholds with respect to the scope of
application of the CFTC margin requirements and non-U.S. margin
requirements, some transactions that are subject to the CFTC margin
requirements for uncleared swaps may not be subject to margin
requirements in another jurisdiction. In connection with this
Comparability Determination, however, the Commission notes that both
under the CFTC Capital Rules and the EU Capital Rules, uncollateralized
exposures from uncleared swap transactions would generate a higher
counterparty credit risk amount than the exposures resulting from
transactions under which the counterparties have posted
collateral.\114\ 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 EU Capital
Rules.
---------------------------------------------------------------------------
\114\ 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 CRR,
Articles 274-275 (similarly indicating that EU nonbank SDs are
allowed to recognize the risk-mitigating effect of collateral by
deducting the amount of collateral from the replacement cost
component of the exposure value calculation).
---------------------------------------------------------------------------
With regard to Harrington's general recommendations, also included
in his comments in connection with the adoption of the CFTC Capital
Rules, that the Commission impose additional capital charges for swap
contracts with a flip clause,\115\ the Commission notes that any change
in its approach, if deemed appropriate, would be addressed separately
from the Comparability Determination. As the Commission stated in
adopting the CFTC Capital Rules, over time the Commission may consider
adjusting the capital charges applicable to nonbank SDs that engage in
bespoke swap transactions, including contracts involving flip clauses,
as a result of its experience and as market developments may
warrant.\116\ If the Commission proceeds with adjustments to the CFTC
Capital Rules, the Commission may reconsider the comparability between
the CFTC Capital Rules and the EU Capital Rules in light of these
changes.
---------------------------------------------------------------------------
\115\ Harrington 10/20/2022 Letter at p. 24.
\116\ 85 FR 57462 at 57475. As stated in the adopting release to
the CFTC Capital Rules, the Commission considered that its rules
were appropriately calibrated to account for a wide variety of
possible uncleared swap transactions, including bespoke transactions
involving flip clauses or other unique features. See id.
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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 EU Capital Rules and the EU Financial Reporting Rules
with the corresponding CFTC Capital Rules and CFTC Financial Reporting
Rules, as described in the 2023 Proposal, further modified to address
comments received. As emphasized in the 2023 Proposal, the capital and
financial reporting regimes are complex structures comprised of a
number of interrelated regulatory components.\117\ 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.
---------------------------------------------------------------------------
\117\ See 2023 Proposal at 41785. BofA Securities Europe SA,
Citigroup Global Markets Europe AG and Morgan Stanley Europe SE
remain subject to the bank-based capital requirements established by
CRR and CRD.
---------------------------------------------------------------------------
The Commission performed the analysis by assessing the
comparability of the EU Capital Rules for EU nonbank SDs as set forth
in the EU Application and in the English language translation of
certain applicable EU laws and regulations with the Commission's Bank-
Based Approach for nonbank SDs. The Commission understands that three
of the four EU nonbank SDs addressed by the EU Application, as of the
date of the final Comparability Determination, are subject to a bank-
based capital approach under the EU Capital Rules. A fourth entity,
which at the time of issuance of the 2023 Proposal was subject to the
regulatory framework applicable to the other three entities, began
applying, as of March 31, 2024, different capital and financial
reporting requirements, applicable to smaller investment firms in the
EU.\118\ The Applicants have not described, and the Commission has not
assessed, the EU or Member State capital and financial reporting
requirements for smaller investment firms. Accordingly, when the
Commission makes its final determination herein about the comparability
of the EU Capital Rules with the CFTC Capital Rules, the determination
pertains to the comparability of the EU Capital Rules
[[Page 58584]]
with the Bank-Based Approach under the CFTC Capital Rules.
---------------------------------------------------------------------------
\118\ As noted above, Goldman Sachs Paris was required by its
applicable regulatory authority to start applying the capital and
financial reporting requirements established by IFR and IFD as of
March 31, 2024.
---------------------------------------------------------------------------
The Commission notes that any material changes to the information
submitted in the EU Application, including, but not limited to,
proposed and final material changes to the EU Capital Rules or EU
Financial Reporting Rules, as well as any proposed and final material
changes to the applicable supervisory authority or supervisory regime,
will require notification to the Commission and NFA pursuant to
Condition 25 of the final Comparability Order.\119\ Therefore, if there
are subsequent material changes to the EU Capital Rules, EU 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.\120\
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\119\ See Condition 25 of the final Comparability Order. The
Commission notes that it made certain non-substantive, clarifying
changes to the language of final Condition 25 as compared to
proposed Condition 25.
\120\ See 2023 Proposal at 41785. As stated in the 2023
Proposal, the Commission may also amend or supplement the final
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. 135). The
Commission is aware that the EU is in the process of adopting
changes to the EU Capital Rules to implement the final elements of
the Basel standards. See European Parliament, Legislative
Observatory <a href="https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2021/0342">https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2021/0342</a>(COD)&l=en. The Commission will
monitor progress on the regulatory changes and may amend or
supplement the Comparability Order, as appropriate.
---------------------------------------------------------------------------
A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and EU Capital Rules and EU Financial Reporting Rules
1. Preliminary Determination
As reflected in the 2023 Proposal and discussed above, the
Commission preliminarily determined that the overall objectives of the
EU Capital Rules and the 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.\121\ The Commission further noted that the EU
Capital Rules and CFTC Capital Rules are based on, and consistent with,
the BCBS framework, which was designed to ensure that banking entities
hold sufficient levels of capital to absorb losses and decreases in the
value of firm assets and increases in the value of firm liabilities
without the banks becoming insolvent.\122\
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\121\ See 2023 Proposal at 41786.
\122\ 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: <a href="http://www.bis.org/bcbs/charter.htm">www.bis.org/bcbs/charter.htm</a>. See 2023 Proposal at 41786.
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The Commission also preliminarily found that the EU Capital Rules
are comparable in purpose and effect to the CFTC Capital Rules given
that both regulatory approaches compute the minimum capital
requirements based on the level of a nonbank SD's on-balance sheet and
off-balance sheet exposures, with the objective and purpose of ensuring
that the nonbank SD's capital is adequate to absorb losses or decreases
in the value of firm assets or increases in the value of firm
liabilities resulting from such exposures. The Commission observed that
the EU Capital Rules and CFTC Capital Rules provide for a comparable
approach to the calculation of market risk and credit risk exposures
using standardized or internal model-based approaches.\123\ In
addition, as discussed in the 2023 Proposal, the EU Capital Rules' and
CFTC Capital Rules' requirements for identifying and measuring on-
balance sheet and off-balance sheet exposures under standardized or
internal model-based 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.\124\
---------------------------------------------------------------------------
\123\ 2023 Proposal at 41794-41795.
\124\ Id.
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Finally, the Commission preliminarily noted that the EU Capital
Rules and CFTC Capital Rules further achieve comparable outcomes and
are comparable in purpose and effect in that both sets of rules 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.\125\ As discussed in the 2023 Proposal and in section II.B.
below, both the EU 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, without the nonbank SD
becoming insolvent.\126\
---------------------------------------------------------------------------
\125\ 2023 Proposal at 41788.
\126\ Id.
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The Commission further stated that it preliminarily found the EU
Financial Reporting Rules to be comparable in purpose and effect to the
CFTC Financial Reporting Rules as both the EU and CFTC require nonbank
SDs to file 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.\127\ As discussed in the 2023 Proposal, in
addition to providing the CFTC and EU competent authorities 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 EU competent authorities with information
regarding potential changes in a nonbank SD's risk profile by
disclosing changes in account balances reported over a period of
time.\128\ 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.\129\
---------------------------------------------------------------------------
\127\ Id. at 48100.
\128\ Id.
\129\ Id.
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In assessing the comparability between the CFTC Financial Reporting
Rules and the EU 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 Commission and EU competent authorities 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 Commission
and EU authorities 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
[[Page 58585]]
in the value of firm liabilities, or cover losses from its business
activities, including the firm's swap dealing activities and
obligations to swap counterparties.\130\
---------------------------------------------------------------------------
\130\ Id.
---------------------------------------------------------------------------
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
Financial Reporting Rules and the EU Capital Rules and Financial
Reporting Rules and stated that the differences mandated denial of the
request for a comparability determination.\131\ Better Markets further
stated that the imposition of conditions to achieve comparability
between the regimes implicitly concedes that the regimes are not
comparable, and is suboptimal and undesirable, as it creates a set of
capital and reporting requirements that EU nonbank SDs must abide by
and that the CFTC must monitor.\132\
---------------------------------------------------------------------------
\131\ Better Markets Letter at p. 13.
\132\ Id.
---------------------------------------------------------------------------
As described herein and in the 2023 Proposal, Commission staff has
engaged in a detailed, comprehensive study and evaluation of the EU
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 EU framework includes a comprehensive oversight program for
monitoring EU nonbank SD's compliance with relevant EU 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 EU nonbank SDs that are subject to the laws and regulations
assessed under the Comparability Determination are eligible for
substituted compliance; (ii) the EU nonbank SDs are subject to
supervision by the relevant competent authority; and (iii) the EU
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 EU 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 EU nonbank SDs consistent with the
conduct of oversight of U.S.-domiciled nonbank SDs. In light of the
Commission's ultimate conclusion that the EU 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 Financial
Reporting Rules and the EU Capital Rules and Financial Reporting Rules
are comparable in purpose and effect, and have overall comparable
objectives, notwithstanding the identified differences. In this regard,
the Commission notes that, as described above, instead of conducting a
line-by-line assessment or comparison of the EU Capital and Financial
Reporting Rules and the CFTC Capital and Financial Reporting Rules, it
has applied in the assessment set forth in the determination and order,
a principles-based, holistic approach in assessing the comparability of
both regimes, 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 of which are described in
more detail 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 EU Capital and Financial Reporting Rules.
B. Nonbank Swap Dealer Qualifying Capital
1. Preliminary Determination
As discussed in the 2023 Proposal, the Commission preliminarily
determined that the EU 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.\133\ The Commission
explained that the EU 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 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.\134\ The Commission observed that the EU 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 EU Capital Rules
and the CFTC Capital Rules emphasizing high quality capital
instruments.\135\
---------------------------------------------------------------------------
\133\ See 2023 Proposal at 41788.
\134\ Id.
\135\ Id.
---------------------------------------------------------------------------
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.\136\ 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.\137\ 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.\138\ 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.\139\ Subordinated debt must meet
certain conditions to qualify
[[Page 58586]]
as tier 2 capital under the CFTC Capital Rules.\140\
---------------------------------------------------------------------------
\136\ 17 CFR 23.101(a)(1)(i) and 2023 Proposal at 41786-41787.
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. 12 CFR 217.20.
\137\ 12 CFR 217.20(b).
\138\ 12 CFR 217.20(c).
\139\ 12 CFR 217.20(d).
\140\ Subordinated debt must meet 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.
---------------------------------------------------------------------------
The preliminary Comparability Determination also noted that the EU
Capital Rules require an EU nonbank SD to maintain an amount of
regulatory capital (i.e., equity capital and qualifying subordinated
debt) equal to or greater than 8 percent of the EU nonbank SD's total
risk exposure, which is calculated as the sum of the firm's: (i)
capital charges for market risk; (ii) risk-weighted exposure amounts
for credit risk; (iii) capital charges for settlement risk; (iv) credit
valuation adjustment (``CVA'') risk of over-the-counter (``OTC'')
derivatives instruments; and (v) capital charges for operational risk.
The EU 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. Specifically,
the EU Capital Rules provide that an EU nonbank SD's regulatory capital
may be composed of: (i) common equity tier 1 capital instruments, which
generally include the EU nonbank SD's common equity (stock), retained
earnings, and accumulated other comprehensive income; (ii) additional
tier 1 capital instruments, which includes other forms of capital
instruments and certain long-term convertible debt instruments; and
(iii) tier 2 capital instruments, which include other reserves, hybrid
capital instruments, and certain qualifying subordinated term
debt.\141\ Capital instruments that qualify as common equity tier 1
capital under the EU Capital Rules include instruments that: (i) are
issued directly by the EU nonbank SD; (ii) are paid in full and not
funded directly or indirectly by the EU nonbank SD; and (iii) are
perpetual.\142\ In addition, the principal amount of the common equity
tier 1 capital instruments may not be reduced or repaid, except in the
liquidation of the EU nonbank SD or the repurchase of shares pursuant
to the permission of the appropriate regulatory authority.\143\
Furthermore, to qualify as additional tier 1 capital, the capital
instruments must meet certain conditions including: (i) the instruments
are issued directly by the EU nonbank SD and paid in full; (ii) the
instruments are not owned by the EU nonbank SD or its subsidiaries;
(iii) the purchase of the instruments is not funded directly or
indirectly by the EU nonbank SD; (iv) the instruments rank below tier 2
instruments in the event of the insolvency of the EU nonbank SD; (v)
the instruments are not secured or guaranteed by the EU nonbank SD or
an affiliate; (vi) the instruments are perpetual and do not include an
incentive for the EU nonbank SD to redeem them; and (vii) distributions
under the instruments are pursuant to defined terms and may be
cancelled under the full discretion of the EU nonbank SD.\144\ Lastly,
subordinated debt instruments must meet certain conditions to qualify
as tier 2 regulatory capital under the EU Capital Rules, including that
the: (i) loans are not granted by the EU nonbank SD or its
subsidiaries; (ii) claims on the principal amount of the subordinated
loans under the provisions governing the subordinated loan agreement
rank below any claim from eligible liabilities instruments (i.e.,
certain non-capital instruments), meaning that they are effectively
subordinated to claims of all non-subordinated creditors of the EU
nonbank SD; (iii) subordinated loans are not secured, or subject to a
guarantee that enhances the seniority of the claim, by the EU nonbank
SD, its subsidiaries, or affiliates; (iv) loans have an original
maturity of at least five years; and (v) provisions governing the loans
do not include any incentive for the principal amount to be repaid by
the EU nonbank SD prior to the loans' maturity.\145\
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\141\ 2023 Proposal at 41787.
\142\ Id. and CRR, Articles 26 and 28.
\143\ Id.
\144\ Id. and CRR, Article 50-52.
\145\ Id. and CRR, Article 63.
---------------------------------------------------------------------------
Based on its comparative assessment, the Commission preliminarily
found that the types and characteristics of the equity instruments that
qualify as common equity tier 1 capital and additional tier 1 capital
under the EU Capital Rules are comparable to the types and
characteristics of equity instruments comprising common equity tier 1
capital and additional tier 1 capital under the CFTC Capital
Rules.\146\ Specifically, the Commission noted that the EU Capital
Rules' common equity tier 1 capital and additional tier 1 capital, and
the CFTC Capital Rules' common equity tier 1 capital and additional
tier 1 capital are comparable in that these forms of equity capital
have similar characteristics (e.g., the equity must be in the form of
high-quality, committed, and permanent capital) and represent
contributed equity capital that generally has no priority to the
distribution of firm assets or income with respect to other
shareholders or creditors of the firm, which allows a nonbank SD to use
this equity to absorb decreases in the value of firm assets, absorb
increases in the value of firm liabilities, and cover losses from
business activities, including the firm's swap dealing activities.\147\
---------------------------------------------------------------------------
\146\ See 2023 Proposal at 41788.
\147\ Id.
---------------------------------------------------------------------------
The Commission also found subordinated debt under the EU Capital
Rules comparable to tier 2 capital under the CFTC Capital Rules.\148\
Specifically, the Commission noted that the qualifying conditions
imposed on subordinated debt instruments are comparable under the EU
Capital Rules and the CFTC Capital Rules in that they are designed to
ensure that the debt has qualities supporting its recognition by a
nonbank SD as equity for capital purposes, including by effectively
subordinating the debt lenders' claims for repayment on the debt to
other creditors of the nonbank SD and by limiting or restricting
repayment of the subordinated loans if such repayments result in the
nonbank SD's equity falling below certain defined thresholds.\149\ The
Commission preliminarily concluded that these terms and conditions
provided assurances that the subordinated debt is appropriate to be
recognized as regulatory capital available to a nonbank SD to meet its
obligations and to absorb business losses and decreases in the value of
firm assets and increases in the value of firm liabilities.\150\
---------------------------------------------------------------------------
\148\ Id.
\149\ Id.
\150\ Id.
---------------------------------------------------------------------------
2. Comment Analysis and Final Determination
The Commission did not receive comments regarding its preliminary
determination that the EU Capital Rules are comparable in purpose and
effect to the CFTC Capital Rules with regard to the types and
characteristics of a nonbank SD's equity and subordinated debt that
qualifies as regulatory capital in meeting its minimum requirements. In
conclusion, the Commission finds that the EU 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 EU 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
[[Page 58587]]
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 EU
Capital Rules.
C. Nonbank Swap Dealer Minimum Capital Requirement
1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements
As reflected in the 2023 Proposal, the CFTC Capital Rules require a
nonbank SD electing the Bank-Based Approach to maintain regulatory
capital 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 to 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; \151\ and (iv) the amount of capital
required by NFA.\152\
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\151\ 17 CFR 23.101(a)(1)(i). See also, 2023 Proposal at 41781.
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.
\152\ 17 CFR 23.101(a)(1)(i)(D). See also 2023 Proposal at
41781. Commission Regulation 23.101(a)(1)(i)(D) 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
registered with the Commission as a 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 <a href="http://nfa.futures.org">nfa.futures.org</a>.
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In comparison, the EU Capital Rules require an EU nonbank SD to
maintain a fixed amount of minimum initial capital of EUR 5 million of
common equity tier 1 capital.\153\ The EU Capital Rules, consistent
with the BCBS framework, further require each EU nonbank SD to maintain
sufficient levels of capital to satisfy the following, expressed as a
percentage of the EU nonbank SD's ``total risk exposure amount'' (i.e.,
the sum of the EU nonbank SD's risk-weighted assets and exposures): (i)
a common equity tier 1 capital ratio of 4.5 percent; (ii) a tier 1
capital ratio of 6 percent; and (iii) a total capital ratio of 8
percent. Furthermore, EU nonbank SDs must maintain a capital
conservation buffer composed of common equity tier 1 capital in an
amount equal to 2.5 percent of the firm's total risk exposure. The
common equity tier 1 capital used to meet the capital conservation
buffer must be separate and in addition to the 4.5 percent of common
equity tier 1 capital required to meet its core 8 percent capital
requirement.\154\ As explained in the 2023 Proposal, the ``total risk
exposure amount'' is calculated as the sum of the EU nonbank SD's: (i)
capital requirements for market risk; (ii) risk-weighted exposure
amounts for credit risk; (iii) capital requirements for CVA risk of OTC
derivatives; and (iv) capital requirements for operational risk.\155\
Capital charges for market risk and credit risk are computed based on
an EU nonbank SD's on-balance sheet and off-balance sheet exposures,
weighted according to risk.\156\
---------------------------------------------------------------------------
\153\ 2023 Proposal at 41793-41794.
\154\ See 2023 Proposal at 41782.
\155\ Id. at 41790.
\156\ Id.
---------------------------------------------------------------------------
2. Preliminary Determination and Comment Analysis
While noting certain differences in the minimum capital
requirements and calculation of regulatory capital between the EU
Capital Rules and the CFTC Capital Rules, the Commission preliminarily
found that the EU Capital Rules and CFTC Capital Rules achieve, subject
to the conditions in the proposed Comparability Determination and
proposed Comparability Order, 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.\157\ 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 EU
Capital Rules' requirements.
---------------------------------------------------------------------------
\157\ Id. at 41795.
---------------------------------------------------------------------------
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.\158\ Also as noted above, the EU
Capital Rules contain a requirement that an EU nonbank SD maintain a
fixed amount of minimum initial capital of EUR 5 million of common
equity tier 1 capital.\159\
---------------------------------------------------------------------------
\158\ 85 FR 57462 at 57492.
\159\ 2023 Proposal at 41793-41794.
---------------------------------------------------------------------------
The Commission, in the 2023 Proposal, recognized that the $20
million fixed-dollar minimum capital required under the CFTC Capital
Rules is substantially higher than the EUR 5 million. Therefore, the
Commission preliminarily proposed a condition to require each EU
nonbank SD to maintain, at all times, an amount of common equity tier 1
capital in EUR, as defined in Article 26 of CRR, that is equivalent to
$20 million.\160\
---------------------------------------------------------------------------
\160\ Id. The Commission also noted that the three current EU
nonbank SDs subject to the EU Capital Rules maintain common equity
tier 1 capital denominated in EUR in amounts substantially in excess
of the equivalent of $20 million based on financial filings made
with the Commission. Id. (note 261.)
---------------------------------------------------------------------------
One commenter, Better Markets, argued that the establishment in the
EU Capital Rules of a base level requirement that is substantially
lower than the CFTC Capital Rules' fixed amount minimum requirement
``demonstrates a fatal lack of
[[Page 58588]]
comparability.'' \161\ Better Markets further asserted that the
proposed condition requiring that EU nonbank SDs maintain a minimum
level common equity tier 1 capital equivalent to $20 million is
evidence, in and of itself, that the EU Capital Rules are not
comparable to the CFTC Capital Rules.\162\
---------------------------------------------------------------------------
\161\ Better Markets Letter at p. 11.
\162\ Id.
---------------------------------------------------------------------------
As noted above, the Commission recognized the material difference
in the requirement under the EU 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 condition, however, effectively addresses this
difference by providing that an EU nonbank SD may not avail itself of
substituted compliance unless it maintains a minimum amount of common
equity tier 1 capital denominated in EUR that is equivalent to $20
million. Furthermore, the imposition of conditions in a Comparability
Order, as discussed in section I.E. above, is authorized by Commission
Regulation 23.106(a)(5), which provides that the Commission may issue
terms and conditions as it deems appropriate. In addition, as further
noted in section I.E. above, the Guidance also provides that the
Commission may impose conditions as part of the substituted compliance
process to address a lack of comparable and comprehensive regulation in
a home jurisdiction.\163\ In this connection, the Commission concludes
that requiring EU nonbank SDs to maintain an amount of regulatory
capital in the form of common equity tier 1 items, as defined in
Article 26 of CRR, 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 EU Capital Rules.
---------------------------------------------------------------------------
\163\ Guidance at 45343.
---------------------------------------------------------------------------
In conclusion, the Commission finds that the EU Capital Rules and
the CFTC Capital Rules, with the imposition of the condition for EU
nonbank SDs to maintain a minimum level of common equity tier 1 capital
in an amount equivalent to at least $20 million, are comparable in
purpose and effect and achieve comparable 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 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.\164\ Risk-weighted assets are a nonbank SD's on-balance
sheet and off-balance sheet market risk and credit risk exposures,
including 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 and are consistent with the BCBS framework. 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 and
increases in the value of the firm's liabilities, and to cover
unexpected losses resulting from the firm's business activities,
including losses resulting from uncollateralized defaults from swap
counterparties, without the nonbank SD becoming insolvent.\165\
---------------------------------------------------------------------------
\164\ 17 CFR 23.101(a)(1)(i)(B).
\165\ See generally 85 FR 57462 at 57530.
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The EU Capital Rules contain capital requirements for EU nonbank
SDs that the Commission preliminarily found comparable in purpose and
effect to the requirements in prong (ii) of the CFTC Capital
Requirements.\166\ Specifically, the EU Capital Rules require an EU
nonbank SD to maintain: (i) common equity tier 1 capital equal to at
least 4.5 percent of the EU nonbank SD's total risk exposure amount;
(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 EU
nonbank SD's total risk exposure amount; 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 EU
nonbank SD's total risk exposure amount. The EU Capital Rules further
require each EU nonbank SD to maintain an additional capital
conservation buffer equal to 2.5 percent of the EU nonbank SD's total
risk exposure amount, which must be met with common equity tier 1
capital. Thus, an EU nonbank SD is effectively required to maintain
total qualifying regulatory capital in an amount equal to or in excess
of 10.5 percent of the market risk, credit risk, CVA risk, settlement
risk, and operational risk of the firm (i.e., total capital requirement
of 8 percent of risk-weighted assets and an additional 2.5 percent of
risk-weighted assets as a capital conservation buffer), which is a
higher capital ratio than the 8 percent required of nonbank SDs under
prong (ii) of the CFTC Capital Rules.\167\
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\166\ See 2023 Proposal at 41794-41795.
\167\ Id. at 41782-41783. See, also, CRR Articles 26, 28, 50-52,
61-63 and 92, and CRD, Article 129.
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The Commission also preliminarily found that the EU Capital Rules
and the CFTC Capital Rules are 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.\168\ In that regard, the Commission noted that both regimes
require a nonbank SD to use standardized approaches to compute market
risk and credit risk amounts, unless the firm is approved to use
internal models.\169\
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\168\ See 2023 Proposal at 41794.
\169\ Id.
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As the Commission observed, the standardized approaches to
calculating risk-weighted asset amounts for market risk and credit risk
under both the EU Capital Rules and the CFTC Capital Rules follow the
same structure that is now the common global standard: (i) allocating
assets to categories according to risk and assigning each 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.\170\
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\170\ Id.
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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
[[Page 58589]]
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'').\171\
The standardized market risk charges under Commission Regulation 1.17
and SEC Rule 18a-1 are calculated as a standardized or table-based
percentage of the market value or notional value of the nonbank SD's
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.\172\ 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.\173\ 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.\174\
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\171\ Id. at 41789 and paragraph (3) of the definition of the
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
\172\ See 2023 Proposal at 41789, 17 CFR 1.17(c)(5), and 17 CFR
240.18a-1(c)(1).
\173\ 17 CFR 1.17(c)(5)(iii).
\174\ 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.\175\
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\175\ 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)).
---------------------------------------------------------------------------
Comparable to the CFTC Capital Rules, the EU Capital Rules require
an EU nonbank SD to calculate its standardized risk-weighted asset
amounts for market risk by multiplying the notional or carrying amount
of net positions by risk-weighting factors, which are based on the
underlying market risk of each asset or exposure and increase as the
expected risk of the positions increases.\176\ The Commission further
explained that an EU nonbank SD is required to calculate market risk
requirements for debt instruments and equity instruments separately, by
computing each category as the sum of specific risk and general risk of
the positions.\177\ As further discussed in the 2023 Proposal, the EU
Capital Rules also require EU nonbank SDs to include in their risk-
weighted assets market risk exposures to certain foreign currency and
gold positions. Specifically, an EU nonbank SD with net positions in
foreign exchange and gold that exceed 2 percent of the firm's total
capital must calculate capital requirements for foreign exchange risk.
\178\ The capital requirement for foreign exchange risk under the
standardized approach is 8 percent of the EU nonbank SD's net positions
in foreign exchange and gold.\179\ The EU Capital Rules further require
EU nonbank SDs to include exposures to commodity positions in
calculating the firm's risk-weighted assets. The standardized
calculation of commodity risk exposures may follow one of three
approaches depending on type of position or exposure. The first is the
sum of a flat percentage rate for net positions, with netting allowed
among tightly defined sets, plus another flat percentage rate for the
gross position.\180\ The other two standardized approaches are based on
maturity-ladders, where unmatched portions of each maturity band (i.e.,
portions that do not net out to zero) are charged at a step-up rate in
comparison to the base charges for matched portions.\181\
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\176\ See 2023 Proposal at 41791.
\177\ Id. and CRR, Article 326. As indicated in Article 326 of
CRR, securitizations are treated as debt instruments for market risk
requirements.
\178\ See 2023 Proposal at 41791 and CRR, Article 351.
\179\ Id.
\180\ 2023 Proposal at 41791 and CRR, Article 360.
\181\ 2023 Proposal at 41791 and CRR, Article 359-361.
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With respect to standardized risk-weighted asset amounts for credit
risk, 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.\182\ 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.\183\ A nonbank SD with off-balance sheet exposures is
required to calculate a risk-weighted 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.\184\
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\182\ 17 CFR 23.101(a)(1)(i)(B) and paragraph (1) of the
definition of the term BHC equivalent risk-weighted assets in 17 CFR
23.100. See also 2023 Proposal at 41789.
\183\ 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)). See also discussion in 2023 Proposal at 41789.
\184\ 12 CFR 217.33. See also discussion in 2023 Proposal at
41789.
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In comparison, the Commission noted that the EU Capital Rules
require an EU nonbank SD to calculate its standardized risk-weighted
asset amounts for credit risk in a manner aligned with the Commission's
Bank-Based Approach and the BCBS framework by taking the carrying value
or notional value of each of the EU nonbank SD's on-balance sheet and
off-balance sheet exposures, making certain additional credit risk
adjustments, and then applying specific risk weights based on the type
of counterparty and the asset's credit quality.\185\ For instance, high
quality credit exposures, such as exposures to EU Member States'
central banks, carry a zero percent risk weight. Exposures to EU banks,
other investment firms, or other businesses, however, may carry risk
weights between 20 percent and 150 percent depending on the credit
ratings available for the entity or, for exposures to banks and
investment firms, for its central government.\186\ If no credit rating
is available, the EU nonbank SD must generally apply a 100 percent risk
[[Page 58590]]
weight, meaning the total accounting value of the exposure is
used.\187\
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\185\ See 2023 Proposal at 41791 and CRR, Articles 111 and
113(1).
\186\ See 2023 Proposal at 41791 and CRR, Articles 114-122.
\187\ See 2023 Proposal at 41791 and CRR, Articles 121(2) and
122(2).
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With respect to counterparty credit risk for derivatives positions,
the Commission explained that under the CFTC Capital Rules, a nonbank
SD may compute standardized credit risk exposures, using either the
current exposure method (``CEM'') or the standardized approach for
measuring counterparty credit risk (``SA-CCR'').\188\ 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.\189\ 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.\190\ In comparison, the EU
Capital Rules require an EU nonbank SD that is not approved to use
credit risk models to calculate its exposure using the SA-CCR.\191\ The
exposure amount under the SA-CCR is computed, under both the EU Capital
Rules and the Commission's Bank-Based Approach, as the sum of the
replacement cost of the contract and the potential future exposure of
the contract, multiplied by a factor of 1.4.\192\
---------------------------------------------------------------------------
\188\ 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 OTC 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 2023 Proposal at 41789.
\189\ 12 CFR 217.34.
\190\ 12 CFR 217.132(c).
\191\ See 2023 Proposal at 41791 and CRR, Articles 92(3)(f) and
273-280e. As noted in the 2023 Proposal, EU nonbank SDs with
smaller-sized derivatives business may also use a ``simplified
standardized approach to counterparty credit risk'' (CRR, Article
281) or an ``original exposure method'' (CRR, Article 282) as
simpler methods for calculating exposure values. To use either of
these alternative methods, an entity's on-and off-balance sheet
derivatives business must be equal to or less than 10 percent of the
entity's total assets and EUR 300 million or 5 percent of the
entity's total assets and EUR 100 million, respectively. CRR,
Article 273a.
\192\ CRR, Article 274(2) and 12 CFR 217.132(c). See also
discussion in 2023 Proposal at 41791.
---------------------------------------------------------------------------
EU Capital Rules also require an EU nonbank SD to include its
exposures to settlement risk in its calculation of its risk-weighted
assets.\193\ Consistent with the BCBS framework, the risk-weighted
asset amount for settlement risk for transactions settled on a
delivery-versus-payment basis is computed by multiplying the price
difference to which an EU nonbank SD is exposed as a result of an
unsettled transaction by a percentage factor that varies from 8 percent
to 100 percent based on the number of working days after the settlement
due date during which the transaction remains unsettled.\194\ The
CFTC's Bank-Based Approach provides for a similar calculation
methodology for risk-weighted asset amounts for unsettled transactions
involving securities, foreign exchange instruments, and
commodities.\195\
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\193\ 2023 Proposal at 41791 and CRR, Article 378 (indicating
that if transactions in which debt instruments, equities, foreign
currencies and commodities excluding repurchase transactions and
securities or commodities lending and securities or commodities
borrowing are unsettled after their delivery due dates, an EU
nonbank SD must calculate the price difference to which it is
exposed).
\194\ Id. The price difference to which an EU nonbank SD is
exposed is the difference between the agreed settlement price for an
instrument (i.e., a debt instrument, equity, foreign currency or
commodity) and the instrument's current market value, where the
difference could involve a loss for the firm. CRR, Article 378.
\195\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted
assets), 12 CFR 217.38 and 12 CFR 217.136.
---------------------------------------------------------------------------
Consistent with the BCBS framework, an EU nonbank SD is also
required to calculate a CVA risk-weighted asset amount for OTC
derivative instruments to reflect the current market value of the
credit risk of the counterparty to the EU nonbank SD.\196\ Risk-
weighted asset amounts for CVA risk can be calculated following similar
methodologies as those described in Subpart E of the Federal Reserve
Board's Part 217 regulations.\197\
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\196\ 2023 Proposal at 41792 and CRR, Articles 381 and 382(1).
\197\ CRR, Articles 383-384 and 12 CFR 217.132(e)(5) and (6).
Under the CFTC's Bank-Based Approach, nonbank SDs calculating their
credit risk-weighted assets using the regulations in Subpart D of
the Federal Reserve Board's Part 217 regulations do not calculate
CVA of OTC derivatives instruments.
---------------------------------------------------------------------------
As discussed in the 2023 Proposal, both the CFTC Capital Rules and
the EU Capital Rules also provide that, if approved by NFA or the
relevant competent authority, respectively, nonbank SDs may also use
internal models to calculate market and/or credit risk exposures.\198\
The Commission noted that the internal market and credit risk models
under the EU Capital Rules and the CFTC Capital Rules are based on the
BCBS framework and preliminarily found that such models must meet
comparable quantitative and qualitative requirements covering the same
risks, though with slightly different categorization, and including
comparable model risk management requirements.\199\ In this regard, the
Commission observed that both rule sets address the same types of risk,
with similar allowed methodologies and under similar controls.\200\ The
Commission also preliminarily determined that the EU Capital Rules and
the CFTC Capital Rules are comparable with respect to the requirement
that nonbank SDs account for operational risk in computing their
minimum capital requirements.\201\ In this connection, the Commission
noted that the EU Capital Rules require an EU nonbank SD to calculate
an operational risk exposure as a component of the firm's total risk
exposure amount.\202\ EU nonbank SDs may use either a standardized
approach or, if the EU nonbank has obtained regulatory permission, an
internal approach based on the firm's own measurement systems, to
calculate their risk-weighted asset amounts for operational risk. The
CFTC Capital Rules address operational risk both as a stand-alone,
separate minimum capital requirement that a nonbank SD is required to
meet under prong (iii) of the Bank-Based Approach and as a component of
the calculation of risk-weighted assets for nonbank SDs that use
subpart E of the Federal Reserve Board's part 217 regulations to
calculate their credit risk-weighted assets via internal models.\203\
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\198\ 2023 Proposal at 41789 and 41791, respectively, for
discussions of NFA and competent authority model approvals. In
discussing approval requirements for credit risk models as part of
the general overview of the EU Capital Rules, the Commission
referred generally to counterparty credit risk exposures for ``OTC
derivatives transactions.'' See 2023 Proposal at 41783 (n. 119). For
clarity, the Commission notes that the Internal Model Methodology
for counterparty credit risk set out in CRR, Articles 283-294, can
be used for the derivatives listed in Annex II of CRR, securities
financing transactions, and long settlement transactions. CRR,
Article 273.
\199\ 2023 Proposal at 41794-41795. For a discussion of the
qualitative and quantitative requirements that models must meet
under the CFTC Capital Rules and the EU Capital Rules, see 2023
Proposal at 41789-41790 and 41792-41793, respectively.
\200\ See 2023 Proposal at 41794.
\201\ Id. at 41795.
\202\ Id. and CRR, Article 92(3).
\203\ Id. and 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100
(definition of BHC equivalent risk-weighted assets).
---------------------------------------------------------------------------
The Commission did not receive comments specifically addressing the
Commission's comparative analysis of the minimum capital requirement
based
[[Page 58591]]
on risk-weighted assets. In conclusion, the Commission finds that the
EU 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 the EU Capital Rules and the CFTC
Capital rules have a comparable approach to the computation of market
risk exposure amounts and credit risk exposure amounts 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 (iii) 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
swap margin amount associated with its uncleared swap transactions to
address potential operational, legal, and liquidity risks.\204\
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\204\ 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 all
of its obligations as an 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.
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The EU Capital Rules differ from the CFTC Capital Rules in that
they do not impose a capital requirement on EU nonbank SDs based on a
percentage of the margin for uncleared swap transactions.\205\ In the
2023 Proposal, the Commission described, however, how certain EU
capital and liquidity requirements may compensate for the lack of
direct analogue to the 8 percent uncleared swap margin amount
requirement.\206\ Specifically, the Commission noted that under the EU
Capital Rules the total risk exposure amount is computed as the sum of
the EU nonbank SD's risk-weighted asset amounts for market risk, credit
risk, settlement risk, CVA risk of OTC derivatives instruments, and
operational risk.\207\ Notably, the EU Capital Rules require that EU
nonbank SDs, including firms that do not use internal models, calculate
capital charges for operational risk as a separate component of the
total risk exposure amount. The EU Capital Rules also impose separate
liquidity requirements designed to ensure that the EU nonbank SDs can
meet both short- and long-term obligations, in addition to the general
requirement to maintain processes and systems for the identification of
liquidity risk.\208\ In comparison, the Commission requires nonbank SDs
to maintain a risk management program covering liquidity risk, among
other risk categories, but does not have a distinct liquidity
requirement.\209\
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\205\ See 2023 Proposal at 41795.
\206\ Id.
\207\ Id. and CRR, Article 92(3).
\208\ Id. More specifically, the EU Capital Rules impose
separate liquidity buffers and ``stable funding'' requirements
designed to ensure that EU nonbank SDs can cover both long-term
obligations and short-term payment obligations under stressed
conditions for 30 days. CRR, Article 412-413. In addition, EU
nonbank SDs are required to maintain robust strategies, policies,
processes, and systems for the identification of liquidity risk over
an appropriate set of time horizons, including intra-day. CRD,
Article 86.
\209\ See 2023 Proposal at 41795. Specifically, Commission
Regulation 23.600(b) requires each SD to establish, document,
maintain, and enforce a system of risk management policies and
procedures designed to monitor and manage the risks related to
swaps, and any products used to hedge swaps, including futures,
options, swaps, security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives. The
elements of the SD's risk management program are required to include
the identification of risks and risk tolerance limits with respect
to applicable risks, including operational, liquidity, and legal
risk, together with a description of the risk tolerance limits set
by the SD and the underlying methodology in written policies and
procedures. 17 CFR 23.600.
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Addressing the Commission's request for comment on the
comparability between the CFTC's capital requirement based on a
percentage of the margin for uncleared swap transactions and the EU
Capital Rules' requirements with respect to operational risk and
liquidity risk, Better Markets asserted that the requirement for EU
nonbank SDs to hold qualifying regulatory capital to cover operational
risk is not comparable to the CFTC's requirement for nonbank SDs to
hold qualifying capital in an amount equal to at least 8 percent of the
nonbank SD's uncleared swap margin amount.\210\ Better Markets further
asserted that the Commission failed to provide an exhaustive analysis
substantiating that the incorporation of an operational risk charge and
the existence of separate liquidity requirements would genuinely yield
an equivalent result.\211\ Furthermore, Better Markets argued that the
Commission should have undertaken ``an examination to ascertain whether
the EU nonbank SD's operational risk charge and liquidity requirements
capital would adequately cover [its] cumulative amounts of uncleared
swaps margin.'' \212\
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\210\ Better Markets Letter at p. 10.
\211\ Id. at p. 11.
\212\ Id.
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The Applicants offered a contrasting view, stating that, although
the EU Capital Rules do not ``have a direct analogue to the 8 percent
uncleared swap margin requirement'' under the CFTC Capital Rules, they
have ``various other measures that achieve the same regulatory
objective of ensuring that a nonbank SD maintains an amount of capital
that is sufficient to cover the full range of risks an EU nonbank SD
may face.'' \213\ In support of the statement, the Applicants
discussed, among other measures, the various categories of risk charges
that an EU nonbank SD is required to include in its total risk exposure
amount, as well as the capital conservation buffer, leverage ratio
floor, and liquidity requirements that the EU Capital Rules impose on
EU nonbank SDs.\214\
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\213\ Applicants' Letter at p. 3.
\214\ Id. at pp. 2-3. As discussed in the 2023 Proposal, the EU
Capital Rules impose a 3 percent leverage ratio floor on EU nonbank
SDs as an additional element of the capital requirements.
Specifically, each EU nonbank SD is required to maintain tier 1
capital (i.e., an aggregate of common equity tier 1 capital and
additional tier 1 capital) equal to or in excess of 3 percent of the
firm's total on-balance sheet and off-balance sheet exposures,
including exposures on uncleared swaps, without regard to any risk-
weighting. See 2023 Proposal at 41783 and CRR, Articles 92(1) and
429.
---------------------------------------------------------------------------
The Commission finds that the additional categories of risk-
weighted asset amounts that EU nonbank SDs are required to include in
the total risk-weighted assets amount, as well as the various
regulatory measures seeking to ensure that EU nonbank SDs hold
sufficient capital to cover the full range of risks that they may face,
support the comparability of the EU Capital Rules and the CFTC Capital
Rules even in the absence of a separate capital requirement in the EU
Capital Rules requiring EU nonbank SDs to have qualified capital equal
to or greater than 8 percent of the amount of uncleared swap margin.
The Commission 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.\215\ 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
[[Page 58592]]
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.\216\ The Commission
understands that other jurisdictions may adopt alternative measures to
cover the same risks. As such, a strict comparison between the amounts
that an EU nonbank SD holds to account for operational risk and
liquidity risk pursuant to the EU Capital Rules and the amount of
uncleared swap margin that an EU nonbank SD would have been required to
hold pursuant to the CFTC Capital Rules is not warranted. As discussed
in section I.E. above, consistent with the approach adopted by the
Commission in Commission Regulation 23.106, the Commission's analysis
in ascertaining the comparability of a foreign jurisdiction's capital
rules to the CFTC Capital Rules is focused on determining whether the
foreign jurisdiction's rules have comparable regulatory objectives and
achieve comparable outcomes. Following this standard of review, the
Commission concludes that the various measures that the EU Capital
Rules have established to help ensure that EU nonbank SDs hold
sufficient capital to cover the full range of risks that they face have
comparable objectives and achieve comparable outcomes as the CFTC
Capital Rules.
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\215\ 85 FR 57462 at 57497.
\216\ 85 FR 57462 at 57485 and 57497.
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In conclusion, the Commission finds that the EU 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.\217\ The EU Capital
Rules address comparable risks albeit not through a requirement based
on a EU nonbank SD's uncleared swap margin amount. In this regard, EU
nonbank SDs are required to maintain a minimum level of regulatory
capital based on an aggregate of the firm's total risk-weighted asset
amounts for market risk, credit risk, and operational risk.
Accordingly, the Commission has determined that, notwithstanding the
differences in approaches, the EU 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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\217\ See 2023 Proposal at 41788 (referencing 85 FR 57462).
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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 calculation of regulatory capital, subject to the
condition that EU nonbank SDs must maintain a minimum level of
regulatory capital in the form of common equity tier 1 capital
denominated in EUR that equals or exceeds the equivalent of $20 million
U.S. dollars.\218\
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\218\ The Commission also notes that, pursuant to Article 7 of
CRR, the competent authority may exempt an entity subject to CRR
from the applicable capital requirements, provided certain
conditions are met. In such case, the relevant requirements would
apply to the entity's parent entity, on a consolidated basis. As
discussed in the 2023 Proposal, the Commission's assessment does not
cover the application of Article 7 of CRR and therefore an entity
that benefits from an exemption under Article 7 of CRR will not
qualify for substituted compliance under the final Comparability
Order. 2023 Proposal at 41793 (n. 257).
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D. Nonbank Swap Dealer Financial Reporting Requirements
1. Proposed Determination
The Commission detailed the requirements of the CFTC Financial
Reporting Rules in the 2023 Proposal.\219\ Specifically, the 2023
Proposal noted that the CFTC Financial Reporting Rules require nonbank
SDs to file with the Commission and NFA periodic unaudited and annual
audited financial reports.\220\ 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.\221\ 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 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.\222\ 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.\223\ 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.\224\
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\219\ 2023 Proposal at 41796-41797.
\220\ Id. and 17 CFR 23.105(d) and (e).
\221\ Id. and 17 CFR 23.105(d)(2).
\222\ Id. and 17 CFR 23.105(e)(4).
\223\ Id. and 17 CFR 23.105(f).
\224\ 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; \225\ (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; \226\ and (iii) for nonbank SDs
approved to use internal capital models, certain model metrics, such as
aggregate value-at-risk (``VaR''), a graph reflecting the daily intra-
month
[[Page 58593]]
VaR for each business line, and counterparty credit risk
information.\227\
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\225\ 2023 Proposal at 41800, Regulation 23.105(l), and Schedule
1 of appendix B to subpart E of part 23 (``Schedule 1''). 17 CFR
23.105(l) and 17 CFR appendix B to subpart E of part 23. 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.
\226\ 2023 Proposal 41801 and schedules 2, 3 and 4,
respectively, of appendix B to subpart E of part 23.
\227\ Id. and 17 CFR 23.105(k) and (l), and schedules 2, 3 and 4
of 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'').\228\ 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.\229\
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\228\ Id. and 17 CFR 23.105(m).
\229\ 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.\230\ 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.\231\
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\230\ Id.
\231\ Id.
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The 2023 Proposal also detailed relevant financial reporting
requirements of the EU Financial Reporting Rules.\232\ The EU Financial
Reporting Rules require an EU nonbank SD to report information to the
relevant competent authorities concerning its capital and financial
condition sufficient to provide a comprehensive view of the firm's risk
profile, including information on the firm's capital requirements,
leverage ratio, large exposures, and liquidity requirements.\233\ The
relevant competent authorities are tasked with prescribing the specific
individual financial statements that EU nonbank SDs are required to
submit. To ensure a level of consistency, the European Banking
Authority (``EBA'') \234\ has developed implementing technical
standards to specify uniform reporting templates and to determine the
frequency of reporting by EU nonbank SDs (``CRR Reporting ITS'').\235\
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\232\ 2023 Proposal at 41797-41798.
\233\ Id. and CRR Article 430(1).
\234\ Id. The EBA is a regulatory agency of the EU that is
tasked with establishing a single regulatory and supervisory
framework for the banking sector in EU Member States. CRR, Article
430(7) provides that the EBA shall develop draft implementing
technical standards to specify the uniform reporting formats and
templates, the instructions and methodology on how to use the
templates, the frequency and dates of reporting, and the
definitions.
\235\ See Commission Implementing Regulation (EU) 2021/451 of 17
December 2020 laying down implementing technical standards for the
application of Regulation (EU) No 575/2013 of the European
Parliament and of the Council with regard to supervisory reporting
of institutions and repealing Implementing Regulation (EU) No 680/
2014. See also, 2023 Proposal at 41797.
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The implementing technical standards under the CRR Reporting ITS
require an EU nonbank SD to prepare and deliver to its competent
authorities common reporting (``COREP'') on a quarterly basis.\236\
COREP requires, among other things, calculations in relation to the EU
nonbank SD's capital and capital requirements,\237\ capital ratios and
capital levels,\238\ and market risk (collectively, ``COREP
Reports'').\239\ CRR Reporting ITS also specify the contents of the
required financial reports (``FINREP'') for certain EU nonbank SDs that
report financial information on a consolidated basis. Additionally, the
ECB has adopted a regulation setting forth a common minimum set of
financial information that must be reported by credit institutions
subject to CRR to their relevant competent authorities on the basis of
the CRR Reporting ITS (``ECB FINREP Regulation'').\240\ Furthermore,
each competent authority has discretion to require institutions subject
to CRR to report additional supervisory information on the basis of the
CRR and the CRR Reporting ITS, or pursuant to relevant national
law.\241\
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\236\ Id.
\237\ CRR, Article 430; Annex I, Template Numbers 1 and 2, CRR
Reporting ITS.
\238\ CRR, Article 430; Annex I, Template Number 3, CRR
Reporting ITS.
\239\ CRR, Article 430; Annex I, Template Numbers 18-25 (as
applicable) CRR Reporting ITS.
\240\ See Regulation (EU) 2015/534 of the European Central Bank
of March 17, 2015 on reporting of supervisory financial information.
The ECB FINREP Regulation complements the CRR Reporting ITS by
imposing financial reporting requirements applying on an individual
basis to entities subject to CRR, including EU nonbank SDs, whereas
CRR, Article 430 and the CRR Reporting ITS impose financial
reporting requirements on a consolidated basis. See 2023 Proposal at
41797.
\241\ 2023 Proposal at 41797-41802.
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Under CRR Reporting ITS as complemented by the ECB FINREP
Regulation, an EU nonbank SD is required to provide, among other items,
the following to its relevant competent authorities: (i) on a quarterly
basis, a balance sheet statement (or statement of financial position)
that reflects the EU nonbank SD's financial condition; \242\ (ii) on a
quarterly basis, a statement of profit or loss; \243\ (iii) on a
quarterly basis, a breakdown of financial liabilities by product and by
counterparty sector; \244\ (iv) on a quarterly basis, a listing of
subordinated financial liabilities; \245\ and, (v) on an annual basis,
a statement of changes in equity.\246\ FINREP also requires an EU
nonbank SD subject to the CRR Reporting ITS to provide its competent
authorities with additional financial information, including a
breakdown of its loans and advances by product and type of
counterparty,\247\ as well as detailed information regarding its
derivatives trading activities,\248\ collateral, and guarantees.\249\
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\242\ CRR, Article 430; Annex III, Template Numbers 1.1, 1.2,
and 1.3 (for reporting according to International Financial
Reporting Standards (``IFRS'') and Annex IV, Template Numbers 1.1.,
1.2, and 1.3 (for reporting according to national accounting
frameworks), CRR Reporting ITS; and ECB FINREP Regulation, Articles
6, 7 and 13 (referring to Annex III and Annex IV of the CRR
Reporting ITS, as applicable).
\243\ CRR, Article 430; Annex III, Template Number 2 (for
reporting according to IFRS) and Annex IV, Template Number 2 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\244\ CRR, Article 430; Annex III, Template Number 8.1 (for
reporting according to IFRS) and Annex IV, Template Number 8.1(for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\245\ CRR, Article 430, Annex III, Template Number 8.2 (for
reporting according to IFRS) and Annex IV, Template Number 8.3 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\246\ CRR, Article 430; Annex III, Template Number 46 (for
reporting according to IFRS) and Annex IV, Template Number 46 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\247\ CRR, Article 430; Annex III, Template Numbers 5.1 and 6.1
(for reporting according to IFRS) and Annex IV, Template Numbers 5.1
and 6.1, CRR Reporting ITS; and ECB FINREP Regulation, Articles 6, 7
and 13 (referring to Annex III and Annex IV of the CRR Reporting
ITS, as applicable).
\248\ CRR, Article 430; Annex III, Template Number 10 (for
reporting according to IFRS) and Annex IV, Template Number 10 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
\249\ CRR, Article 430; Annex III, Template Number 13 (for
reporting according to IFRS) and Annex IV, Template Number 13 (for
reporting according to national accounting frameworks), CRR
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13
(referring to Annex III and Annex IV of the CRR Reporting ITS, as
applicable).
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Furthermore, with the exception of certain ``small'' entities, EU
nonbank
[[Page 58594]]
SDs are required to prepare annual audited financial statements and a
management report (together, ``annual audited financial report'')
pursuant to Article 430 of CRR and the Accounting Directive.\250\ The
annual audited financial statements must comprise, at a minimum, a
balance sheet, a profit and loss statement, and notes to the financial
statements.\251\ The auditor's audit report must include: (i) a
specification of the financial statements subject to the audit and the
financial reporting framework that was applied in their preparation;
(ii) a description of the scope of the audit, which must specify the
auditing standards used to conduct the audit; (iii) an audit opinion
stating whether the financial statements give a true and fair view in
accordance with the relevant financial reporting framework; and (iv) a
reference to any matters emphasized by the auditor that did not qualify
the audit opinion.\252\
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\250\ Accounting Directive, Articles 4, 19 and 34; French MFC,
Articles L.511-35 to L.511-38; German Commercial Code
(Handelsgesetzbuch, ``HGB''), section 316 et seq. The Accounting
Directive provides that the audit requirement is not applicable to
``small'' entities defined as firms meeting the following
requirements: (1) the firm's balance sheet is not more than EUR 4
million; (2) the firm's net turnover does not exceed more than EUR 8
million; or (3) the firm did not employ more than 50 employees
during the financial year. See Article 3(2) and Article 34 of the
Accounting Directive. The Applicants represented that the four EU
nonbank SDs currently registered with the Commission do not meet the
criteria to be classified as ``small'' entities and, therefore, are
required to prepare audited annual financial reports. EU
Application, p. 5.
\251\ Accounting Directive, Article 4(1). The audit of the
financial statements and management report is required to be
performed by one or more statutory auditors or auditors approved by
EU Member States to conduct audits of EU nonbank SDs. Id., Article
34(1). The annual audited financial report, together with the
opinion and statements of the auditor, must be published. Id.,
Article 30.
\252\ Id. Article 35.
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Furthermore, as noted in the 2023 Proposal, the SEC has issued
orders permitting an SEC-registered nonbank security-based swap dealer
domiciled in France or Germany (``EU nonbank SBSD'') to satisfy SEC
Capital requirements via substituted compliance with applicable French
and German capital and financial reporting.\253\ The French Order and
German Order conditioned substituted compliance for capital
requirements on an EU nonbank SBSD complying with specified laws and
regulations, including CRR, CRD, and BRRD, and also maintaining total
liquid assets in an amount that exceeds the EU nonbank SBSD's total
liabilities by at least $100 million and by at least $20 million after
applying certain deductions to the value of the liquid assets to
reflect market, credit, and other potential risks to the value of the
assets.\254\ The SEC's French Order and German Order granting
substituted compliance for financial reporting to EU nonbank SBSDs, as
supplemented by the SEC Order on Manner and Format of Filing Unaudited
Financial and Operational Information, also require an EU nonbank SBSD
to file an unaudited FOCUS Report with the SEC on a monthly basis.\255\
The FOCUS Report is required to include, among other statements and
schedules: (i) a statement of financial condition; (ii) a statement of
the EU nonbank SBSD's capital computation in accordance with home
country Basel-based requirements; (iii) a statement of income/loss; and
(iv) a statement of capital withdrawals.\256\ An EU nonbank SBSD is
required to file its FOCUS Report with the SEC within 35 calendar days
of the month end.\257\
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\253\ 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) (``German Order''); 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 French Republic, 86 FR
41612 (Aug. 8, 2021) (``French Order''); 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 Order on Manner and Format of Filing Unaudited
Financial and Operational Information'').
\254\ The conditioning of the German Order and French Order on
EU nonbank SBSDs maintaining a defined amount of liquid assets in an
amount that exceeds the EU nonbank SBSD's total liabilities reflects
that the SE
[…truncated; see source link]Indexed from Federal Register on July 18, 2024.
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