Rule2026-09693
Order Granting Conditional Substituted Compliance in Connection With Certain Capital and Financial Reporting Requirements Applicable to a Nonbank Swap Dealer Domiciled in the French Republic and Subject to the European Union's Investment Firms Regulation and Investment Firms Directive
Primary source
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Published
May 14, 2026
Issuing agencies
Commodity Futures Trading Commission
Abstract
The Commodity Futures Trading Commission ("Commission" or "CFTC") is issuing an order regarding an application submitted by Goldman Sachs Paris Inc. et Cie requesting that the Commission determine that the capital and financial reporting laws and regulations of the European Union applicable to a CFTC-registered swap dealer, which is organized and domiciled in the French Republic and subject to the Investment Firms Regulation (EU) 2019/2033 ("IFR") and Investment Firms Directive (EU) 2019/2034 ("IFD") legislative package, provide sufficient bases for an affirmative finding of comparability with respect to the Commission's swap dealer capital and financial reporting requirements adopted under the Commodity Exchange Act. The order provides that a nonbank swap dealer organized and domiciled in the French Republic and subject to the IFR and IFD legislative package 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 European Union laws and regulations and conditions set forth in the order.
Full Text
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[Federal Register Volume 91, Number 93 (Thursday, May 14, 2026)]
[Rules and Regulations]
[Pages 27792-27825]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-09693]
[[Page 27791]]
Vol. 91
Thursday,
No. 93
May 14, 2026
Part VIII
Commodity Futures Trading Commission
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17 CFR Ch. I
Order Granting Conditional Substituted Compliance in Connection With
Certain Capital and Financial Reporting Requirements Applicable to a
Nonbank Swap Dealer Domiciled in the French Republic and Subject to the
European Union's Investment Firms Regulation and Investment Firms
Directive; Final Rule
Federal Register / Vol. 91, No. 93 / Thursday, May 14, 2026 / Rules
and Regulations
[[Page 27792]]
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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
a Nonbank Swap Dealer Domiciled in the French Republic and Subject to
the European Union's Investment Firms Regulation and Investment Firms
Directive
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is issuing an order regarding an application submitted by
Goldman Sachs Paris Inc. et Cie requesting that the Commission
determine that the capital and financial reporting laws and regulations
of the European Union applicable to a CFTC-registered swap dealer,
which is organized and domiciled in the French Republic and subject to
the Investment Firms Regulation (EU) 2019/2033 (``IFR'') and Investment
Firms Directive (EU) 2019/2034 (``IFD'') legislative package, provide
sufficient bases for an affirmative finding of comparability with
respect to the Commission's swap dealer capital and financial reporting
requirements adopted under the Commodity Exchange Act. The order
provides that a nonbank swap dealer organized and domiciled in the
French Republic and subject to the IFR and IFD legislative package 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 European
Union laws and regulations and conditions set forth in the order.
DATES: This determination was made and issued by the Commission on May
12, 2026.
FOR FURTHER INFORMATION CONTACT: Thomas Smith, Acting Director, 202-
418-5495, <a href="/cdn-cgi/l/email-protection#d1a5a2bcb8a5b991b2b7a5b2ffb6bea7"><span class="__cf_email__" data-cfemail="047077696d706c44676270672a636b72">[email protected]</span></a>; Liliya Bozhanova, Associate Director, 202-
418-6232, <a href="/cdn-cgi/l/email-protection#573b35382d3f3639382136173431233479303821"><span class="__cf_email__" data-cfemail="c2aea0adb8aaa3acadb4a382a1a4b6a1eca5adb4">[email protected]</span></a>; Christine McKeveny, Attorney-Advisor,
646-746-3923, <a href="/cdn-cgi/l/email-protection#ddbeb0beb6b8abb8b3a49dbebba9bef3bab2ab"><span class="__cf_email__" data-cfemail="10737d737b7566757e6950737664733e777f66">[email protected]</span></a>; Jennifer M. Narvaez, Attorney-
Advisor, 202-418-5742, <a href="/cdn-cgi/l/email-protection#86ece8e7f4f0e7e3fcc6e5e0f2e5a8e1e9f0"><span class="__cf_email__" data-cfemail="781216190a0e191d02381b1e0c1b561f170e">[email protected]</span></a>; Rafael Martinez, Associate
Director, 202-418-5462, <a href="/cdn-cgi/l/email-protection#1a68777b686e73747f605a797c6e79347d756c"><span class="__cf_email__" data-cfemail="186a75796a6c71767d62587b7e6c7b367f776e">[email protected]</span></a>; Thomas Littlefield, Senior
Financial Risk Analyst, 202-418-5405, <a href="/cdn-cgi/l/email-protection#87f3ebeef3f3ebe2e1eee2ebe3c7e4e1f3e4a9e0e8f1"><span class="__cf_email__" data-cfemail="add9c1c4d9d9c1c8cbc4c8c1c9edcecbd9ce83cac2db">[email protected]</span></a>; Lihong
McPhail, Research Economist, 202-418-5722, <a href="/cdn-cgi/l/email-protection#412d2c22312920282d01222735226f262e37"><span class="__cf_email__" data-cfemail="2a4647495a424b43466a494c5e49044d455c">[email protected]</span></a>, Market
Participants Division; Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION: Sections 4s(e) \1\ and 4s(f) \2\ of the
Commodity Exchange Act (``CEA'') direct the Commodity Futures Trading
Commission (``Commission'' or ``CFTC'') to impose capital requirements
and financial reporting obligations on each swap dealer and major swap
participant that is not subject to regulation by a prudential regulator
(``nonbank SD'' and ``nonbank MSP'', respectively). Commission
Regulation 23.106 \3\ establishes a substituted compliance framework
whereby the Commission may determine that compliance by a foreign
nonbank SD or foreign nonbank MSP with its home country's capital and
financial reporting requirements will satisfy all or parts of the
Commission's capital and financial reporting requirements.
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\1\ 7 U.S.C. 6s(e).
\2\ 7 U.S.C. 6s(f).
\3\ 17 CFR 23.106. Commission regulations referred to in this
release are found at 17 CFR chapter I, and are accessible on the
Commission's website: <a href="https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm">https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm</a>.
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On July 18, 2024, the Commission issued four comparability
determinations and related comparability orders granting substituted
compliance in connection with the CFTC's capital and financial
reporting requirements to CFTC-registered nonbank SDs organized and
domiciled in Japan, Mexico, the European Union (France and Germany),
and the United Kingdom, subject to certain conditions set forth in each
order.\4\ In preparing each of the comparability determinations and
related comparability orders, the Commission reviewed, analyzed, and
assessed the regulatory requirements of each relevant foreign
jurisdiction. Additionally, each of the comparability determinations
and related comparability orders, including the 2024 EU Comparability
Order, was issued after discussions with market participants and
foreign regulators, and after reviewing and incorporating relevant
comments received from the public. The Commission, therefore, has
gained an understanding of the capital and financial reporting
requirements of each relevant jurisdiction, including the European
Union (``EU'').
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\4\ See Order Granting Conditional Substituted Compliance in
Connection With Certain Capital and Financial Reporting Requirements
Applicable to Nonbank Swap Dealers Subject to Regulation by the
Financial Services Agency of Japan, 89 FR 58470 (July 18, 2024);
Order Granting Conditional Substituted Compliance in Connection With
Certain Capital and Financial Reporting Requirements Applicable to
Nonbank Swap Dealer Subject to Regulation by the Mexican Comision
Nacional Bancaria y de Valores and Banco de Mexico, 89 FR 58505
(July 18, 2024); 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, 89 FR 58572 (July 18, 2024) (the
``2024 EU Comparability Order''); and Order Granting Conditional
Substituted Compliance in Connection With Certain Capital and
Financial Reporting Requirements Applicable to Nonbank Swap Dealers
Subject to Regulation by the United Kingdom Prudential Regulation
Authority, 89 FR 58535 (July 18, 2024).
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On September 3, 2024, Goldman Sachs Paris Inc. et Cie (``Goldman
Sachs Paris'' or ``Applicant'') submitted an application (the ``EU IFR/
IFD Application''),\5\ requesting that the Commission determine that a
registered nonbank swap dealer (``nonbank SD'') \6\ organized and
domiciled within the EU (specifically, the French Republic
(``France'')) may satisfy certain capital and financial reporting
requirements under the CEA \7\ by being subject to, and complying with,
comparable capital and financial reporting requirements established
under the EU Investment Firms Regulation (``IFR'') \8\ and Investment
Firms Directive (``IFD'').\9\ Although the Applicant is subject to a
similar regulatory regime and is domiciled in the same jurisdiction as
some of the nonbank SDs included in the 2024 EU Comparability Order, it
cannot rely on the 2024 EU Comparability Order because of the scope of
the order.\10\ The Commission is
[[Page 27793]]
issuing an order under which such nonbank SD (``EU IFR/IFD nonbank
SD'') organized and domiciled in France will be able, subject to
defined conditions, to comply with certain CFTC nonbank SD capital and
financial reporting requirements in the manner set forth in the order
discussed below.\11\
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\5\ See Letter dated September 3, 2024, submitted on behalf of
Goldman Sachs Paris. The EU IFR/IFD 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>.
\6\ As discussed in Section I.A. immediately below, the
Commission has the authority to impose capital requirements on
registered swap dealers that are not subject to regulation by a U.S.
prudential regulator (i.e., nonbank SDs).
\7\ 7 U.S.C. 1 et seq. The CEA may be accessed through the
Commission's website at <a href="https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm">https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm</a>.
\8\ 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'').
\9\ 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'').
\10\ The 2024 EU Comparability Order only conducted an analysis
on nonbank SDs that are subject to the capital and financial
reporting requirements established under the Capital Requirements
Regulation and the Capital Requirements Directive and, therefore,
does not encompass nonbank SDs that are subject to IFR and IFD.
\11\ As further discussed below, Goldman Sachs Paris is
currently the only CFTC-registered nonbank SD organized and
domiciled in France that is subject to the capital and financial
reporting requirements established under IFR and IFD.
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I. Introduction
A. Regulatory Background--Swap Dealer and Major Swap Participant
Capital and Financial Reporting Requirements
Section 4s(e) of the CEA \12\ directs the Commission and
``prudential regulators'' \13\ to impose capital requirements on all
swap dealers (``SDs'') and major swap participants (``MSPs'')
registered with the Commission.\14\ Sections 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 CFTC-registered derivatives clearing
organization (``uncleared swaps'').
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\12\ 7 U.S.C. 6s(e). The CEA may be found at 7 U.S.C. 1 et seq.,
and may be accessed through the Commission's website, <a href="https://www.cftc.gov">https://www.cftc.gov</a>.
\13\ 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. See 7 U.S.C.
1a(39).
\14\ Subject to certain exceptions, the term ``swap dealer'' is
generally defined in the CEA 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 in the CEA 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 regulation by a prudential regulator (``bank SDs'' and
``bank MSPs,'' 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 regulation by a prudential regulator (``nonbank SD'' and ``nonbank
MSP,'' respectively) to meet the minimum capital requirements and
uncleared swaps margin requirements adopted by the Commission.\15\
Therefore, the Commission's authority to impose capital and margin
requirements extends to nonbank SDs and nonbank MSPs, including
nonbanking subsidiaries of bank holding companies regulated by the
Federal Reserve Board.\16\
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\15\ 7 U.S.C. 6s(e)(2).
\16\ 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.\17\ 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.\18\
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'').\19\
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\17\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840 (Nov. 30, 2015).
\18\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
\19\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
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Section 4s(f) of the CEA addresses SD and MSP financial reporting
requirements.\20\ Section 4s(f) of the CEA 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) of the CEA provides, in
relevant part, that each registered SD and MSP must make financial
condition reports as required by regulations adopted by the
Commission.\21\ The Commission's financial reporting obligations were
adopted with the Commission's nonbank SD and nonbank MSP capital
requirements, and have a compliance date of October 6, 2021 (``CFTC
Financial Reporting Rules'').\22\
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\20\ 7 U.S.C. 6s(f).
\21\ 7 U.S.C. 6s(f)(1)(A).
\22\ See 85 FR 57462.
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B. Commission 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'').\23\ 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
determination 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
[[Page 27794]]
Capital Rules and CFTC Financial Reporting Rules.\24\ The Commission
will issue a Comparability Determination in the form of an order
(``Comparability Order'').\25\
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\23\ 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides
that a request for a Comparability Determination may be submitted by
a non-U.S. nonbank SD or a non-U.S. nonbank MSP, a trade association
or other similar group on behalf of its nonbank SD or nonbank MSP
members, or a foreign regulatory authority that has direct
supervisory authority over one or more non-U.S. nonbank SDs or non-
U.S. nonbank MSPs. However, Commission regulations 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)(3),
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).
\24\ 17 CFR 23.106(a)(3). See also 85 FR 57462 at 57521.
\25\ 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. It
is not a line-by-line evaluation or comparison of a foreign
jurisdiction's regulatory requirements with the Commission's
requirements,\26\ but focuses on whether the applicable foreign
jurisdiction's capital and financial reporting requirements achieve
comparable outcomes to the corresponding CFTC requirements.\27\ In
performing the analysis, the Commission recognizes that jurisdictions
may adopt differing approaches to achieving regulatory objectives and
comparable 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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\26\ 85 FR 57462 at 57521.
\27\ Id.
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The approach and standards set forth 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. In 2013, the Commission issued an Interpretive Guidance
and Policy Statement Regarding Compliance with Certain Swap
Regulations, establishing that it would assess foreign regulatory
systems holistically.\28\ In the Guidance, the Commission stated that,
when evaluating foreign regimes, it will take into consideration all
relevant factors, including: (i) the scope and objectives of the
foreign rules; (ii) the comprehensiveness of requirements; and (iii)
the strength of supervisory and enforcement programs.\29\ A foreign
regime, therefore, does not need to be identical to the CFTC
requirements to be deemed comparable.
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\28\ Interpretative Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26,
2013) (``Guidance'').
\29\ Guidance at 45343.
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In 2016, the Commission issued final rules to address the cross-
border application of the Commission's margin requirements for
uncleared swap transactions, which reaffirmed its outcome based method
when assessing comparability of foreign margin rules.\30\ The
Commission recognized that jurisdictions may adopt different approaches
to achieving the same outcome and, therefore, focused 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.\31\ The Commission's policy
thus reflects an understanding that a line-by-line evaluation of a
foreign jurisdiction's regulatory regime is not the optimum approach to
assessing the comparability of complex structures whose individual
components may differ based on jurisdiction-specific considerations,
but which achieve the objective and outcomes set forth in the
Commission's framework.
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\30\ 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).
\31\ Id.
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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 any 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 that the Commission deems necessary to evaluate the
comparability of the capital adequacy and financial reporting
requirements of the foreign jurisdiction.\32\
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\32\ 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.\33\ 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 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 and the CFTC Financial Reporting Rules.
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\33\ 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 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
[[Page 27795]]
would facilitate supervisory cooperation.\34\
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\34\ 17 CFR 23.106(a)(3), 85 FR 57462 at 57520-57522.
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In performing the comparability assessment for foreign nonbank SDs,
the Commission's review will include the extent to which the foreign
jurisdiction's requirements address: (i) the process of establishing
minimum capital requirements for nonbank SDs and how such process
addresses risk, including market risk and credit risk of the nonbank
SD's on-balance sheet and off-balance sheet exposures; (ii) the types
of equity and debt instruments that qualify as regulatory capital in
meeting minimum requirements; (iii) the financial reports and other
financial information submitted by a nonbank SD to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank SD; and (iv) the regulatory
notices and other communications between a nonbank SD and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's assessment will
include a review 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.\35\
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\35\ The Commission would conduct a similar analysis, adjusted
as appropriate to account for regulatory distinctions, in performing
a comparability assessment for foreign nonbank MSPs. Commission
Regulation 23.101(b) requires a nonbank MSP to maintain positive
tangible net worth. There are no MSPs currently registered with the
Commission. 17 CFR 23.101(b).
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Commission Regulation 23.106 further provides that the Commission
may impose terms and conditions it deems appropriate in issuing a
Comparability Determination.\36\ Any specific terms or conditions with
respect to capital adequacy or financial reporting requirements will be
set forth in the Commission's Comparability Order. Consistent with the
Commission's holistic, principles-based approach to conducting
comparability assessments, certain conditions included in a
Comparability Order may be designed to ensure the Commission's direct
access to books and records required to be maintained by a nonbank SD
registered with the Commission, whereas other conditions may address
areas where the foreign jurisdiction lacks analogous requirements to
those set forth in Commission regulations.\37\ As a general condition
to all Comparability Orders, the Commission will require notification
from 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 relevant foreign jurisdiction's supervisory
or regulatory regime.
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\36\ 17 CFR 23.106(a)(5).
\37\ See e.g., Guidance at 45343 and Comparability Determination
for the European Union: Certain Transaction Level Requirements, 78
FR 78878 (December 27, 2013) at 78880.
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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 in lieu of all or parts of the
CFTC Capital Rules and/or CFTC Financial Reporting Rules.\38\ Notices
must be filed electronically with the Commission's Market Participants
Division (``MPD'').\39\ 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 the CFTC Capital Rules and the 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.\40\
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\38\ 17 CFR 23.106(a)(4)(i).
\39\ Notices must be filed in electronic form to the following
email address: <a href="/cdn-cgi/l/email-protection#cd809d898ba4a3aca3aea4aca19fa8bcb8a4bfa8a0a8a3b9be8daeabb9aee3aaa2bb"><span class="__cf_email__" data-cfemail="1c514c585a75727d727f757d704e796d69756e79717972686f5c7f7a687f327b736a">[email protected]</span></a>.
\40\ 17 CFR 23.106(a)(4)(ii); 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 in compliance with the Commission's
corresponding CFTC Capital Rules and/or CFTC Financial Reporting
Rules.\41\ 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.\42\ 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.\43\
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\41\ 17 CFR 23.106(a)(4)(ii); 17 CFR 140.91(a)(11).
\42\ 17 CFR 23.106(a)(4)(ii).
\43\ Id.
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C. Application for a Comparability Determination for an EU IFR/IFD
Nonbank Swap Dealer Organized and Domiciled in France
The Applicant 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. In this regard, the
Capital Requirements Regulation \44\ and the Capital Requirements
Directive \45\ set forth capital and financial reporting requirements
applicable to entities defined as ``credit institutions'' or
``investment firms'' within the EU. The term ``credit institution''
includes an entity engaged in taking deposits or other repayable funds
from the public and lending its own funds and taking on the full
financial risk of such lending activity (``Banking Activities'').\46\
An entity engaged in Banking Activities is subject to the capital and
financial reporting requirements of CRR and CRD.
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\44\ 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'').
\45\ 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'').
\46\ CRR, Article 4(1)(1) (defining the term ``credit
institution'').
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The term ``credit institution'' also 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
[[Page 27796]]
the entity also meets certain defined financial thresholds set forth in
the definition.\47\ 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.\48\
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\47\ Id.
\48\ 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'').\49\ 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'').\50\
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\49\ 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.
\50\ 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,\51\ 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).\52\ An investment firm that engages in Investment
Activities and maintains total consolidated assets of at least EUR 15
billion is subject to the capital and financial reporting requirements
of CRR and CRD.\53\ 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.
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\51\ 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 2'').
\52\ CRR, Article 4(1)(2) cross-referencing Article 4(1)(1) of
MiFID 2.
\53\ 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).
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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.\54\ Such an investment firm is subject to capital and
financial reporting requirements established by IFR and IFD (``IFR/IFD
Framework'') and is subject to prudential supervision by the national
competent authority.\55\
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\54\ 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).
\55\ IFR Article 1 and IFD Article 2. The national competent
authority may exempt firms that qualify as ``small and non-
interconnected'' as set forth in Article 12(1) of IFR from some of
the requirements of the IFR/IFD Framework. IFR Article 6. This
Comparability Determination does not address small and non-
interconnected firms as none of the EU-domiciled, CFTC-registered
nonbank SDs falls into this category.
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The IFR/IFD Framework was developed to replace bank-centric CRR and
CRD rules that did not address the diverse business models of smaller
investment firms. The IFR/IFD Framework is designed to better reflect
the nature, size and complexity of investment firms' activities
compared to the CRR and CRD framework.\56\ The IFR/IFD Framework also
provides simpler and more bespoke capital requirements for investment
firms (``EU Investment Firms Capital Rules'') \57\ and proportionate
corresponding regulatory reporting requirements.\58\
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\56\ Prudential rules for investment firms issued by the
European Commission and available at <a href="https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/financial-markets/prudential-rules-investment-firms_en#framework">https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/financial-markets/prudential-rules-investment-firms_en#framework</a>.
\57\ IFR Recital (10) (stating that the specific prudential
regime for investment firms which, by virtue of their size and
interconnectedness with other financial and economic actors, are not
considered to be systemic should address the specific business
practices of different types of investment firms), IFD Recital 2
(stating that the existing prudential regimes under the CRR and CRD
are largely based on successive iterations of the international
regulatory standards set for large banking groups that only
partially address the specific risks inherent to the diverse
activities of a large number of investment firms).
\58\ IFR, Recital (29) (stating that a proportionate regulatory
reporting framework should be developed in conjunction with the new
prudential regime and should be carefully tailored to the business
of investment firms and the requirements of the prudential
framework).
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IFR, as a regulation, is binding in its entirety and directly
applicable in all
[[Page 27797]]
EU Member States.\59\ IFD, as a directive, was required to be
transposed into EU Member States' national law.\60\ EU Member States
were required to adopt and apply IFR and IFD by June 26, 2021.\61\
France implemented IFD by Ordinance No. 2021-796 of 23 June 2021 and
Decree No. 2021-941 of 15 July 2021.\62\
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\59\ Consolidated Version of the Treaty on the Functioning of
the European Union, OJ (C 326) 171, Oct. 26, 2012 (``TFEU''),
Article 288. Accordingly, IFR is directly applicable and binding law
in France, the EU Member State where the EU IFR/IFD nonbank SD is
organized and operating.
\60\ 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 providing, 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 IFD by June 26, 2021, with limited
exceptions.
\61\ IFR Article 66 and IFD Article 67.
\62\ Ordinance No. 2021-796 of 23 June 2021 transposing
Directive (EU) 2021 of the European Parliament and of the Council of
27 November 2019 on the prudential supervision of investment firms
and Decree No. 2021-941 of 15 July 2021 transposing Directive (EU)
2021 of the European Parliament and of the Council of 27 November
2019 on the prudential supervision of investment firms.
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With respect to financial reporting, IFR and IFD are complemented
by implementing technical standards for supervisory reporting under
IFR.\63\ In addition, Directive 2013/34/EU \64\ also contains relevant
provisions, including a mandate that entities of a certain size be
required to prepare annual audited financial statements and a
management report.\65\ The relevant provisions of the Accounting
Directive are implemented in Articles L.511-35, L.511-37, and L.511-38
of the French Monetary and Financial Code (``French MFC'') and,
together with the financial reporting requirements established by the
IFR/IFD Framework and the Reporting ITS, are referred to in this
Comparability Determination as the ``EU Investment Firms Financial
Reporting Rules.''
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\63\ Commission Implementing Regulation (EU) 2021/2284 laying
down implementing technical standards for the application of
Regulation (EU) 2019/2033 of the European Parliament and of the
Council with regard to supervisory reporting and disclosures of
investment firms, December 10, 2021 (``Reporting ITS''), available
here: <a href="https://eur-lex.europa.eu/eli/reg_impl/2021/2284/oj/eng">https://eur-lex.europa.eu/eli/reg_impl/2021/2284/oj/eng</a>
(Implementing regulation--2021/2284-EN-EUR-Lex).
\64\ 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'').
\65\ Accounting Directive, Article 4 (providing the minimum
requirements and schedules to be included in the annual financial
statements: the balance sheet, the statement of profit and loss, and
notes to the financial statements), Article 34 (stating that Member
States must ensure that the financial statements of firms are, when
required, audited by approved auditors), and Article 19 (stating
that the management report must include a fair review of the
development and performance of the firm's business and of its
positions, together with a description of the principal risks).
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On September 3, 2024, the Applicant submitted the EU IFR/IFD
Application requesting that the Commission conduct a Comparability
Determination and issue a Comparability Order finding that compliance
by Goldman Sachs Paris with the EU capital and the EU financial
reporting requirements established pursuant to the IFR/IFD Framework
and applicable to CFTC-registered nonbank SDs licensed as investment
firms in France are comparable in purpose and effect with corresponding
CFTC Capital Rules and CFTC Financial Reporting Rules applicable to a
registered nonbank SD under Sections 4s(e) and 4s(f) of the CEA and
Commission Regulations 23.101 and 23.105.\66\ Goldman Sachs Paris is
currently the only CFTC-registered nonbank SD organized and domiciled
in France that is a licensed investment firm subject to the
requirements established under the IFR/IFD Framework.\67\
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\66\ The EU IFR/IFD Application.
\67\ The Commission previously issued a Comparability Order on
June 24, 2024 to nonbank SDs organized and domiciled in France that
are licensed as credit institutions or investment firms and subject
to, among other conditions, the capital and financial reporting
requirements of CRR and CRD. 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, 89 FR 58572 (July 18, 2024).
There are currently no MSPs registered with the Commission and the
Applicant has not requested that the Commission issue a
Comparability Order with respect to EU nonbank MSPs. Accordingly,
the Commission's Comparability Determination and Comparability Order
do not address EU nonbank MSPs.
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Given that Goldman Sachs Paris is the only EU IFR/IFD nonbank SD
that is currently registered with the Commission and subject to the
IFR/IFD Framework, the Commission's analysis involved an assessment of
how the relevant IFD framework was implemented into the national laws
of France.\68\ The Commission did not review how other EU Member States
adopted and implemented the relevant IFD framework into their
respective national laws. The Commission's review of the applicable
supervisory framework was also limited to the supervisory authority and
practices of the Autorit[eacute] de contr[ocirc]le prudentiel et de
resolution (``ACPR''), the French authority responsible for the
prudential supervision of Goldman Sachs Paris.\69\ Therefore, an entity
organized and domiciled in an EU Member State other than France that
seeks to register with the Commission as a nonbank SD and to comply
with the Commission's capital and financial reporting rules via
substituted compliance with the IFR/IFD Framework must submit an
application under Commission Regulation 23.106.
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\68\ Goldman Sachs Paris was initially subject to the capital
and financial reporting requirements of the CRR and CRD, however, at
the direction of its national competent authority, the firm was
informed that it would be subject to the IFR/IFD Framework effective
March 31, 2024.
\69\ The ACPR (referred to in this Comparability Determination
as the ``competent authority'' or the ``relevant regulatory
authority'') is an independent ``administrative authority''
responsible for the oversight of the banking and insurance sectors
in France, which includes the prudential supervision of investment
firms. See The ACPR at a Glance, available at the ACPR's website
here: <a href="https://acpr.banque-france.fr/en/lacpr/about-us">https://acpr.banque-france.fr/en/lacpr/about-us</a>.
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II. General Overview of Commission and EU IFR/IFD Nonbank Swap Dealer
Capital Rules
A. General Overview of the CFTC Nonbank Swap Dealer Capital Rules
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 Capital Approach (``Bank-Based
Approach'').\70\
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\70\ 17 CFR 23.101.
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(i) Tangible Net Worth Approach
Nonbank SDs that are ``predominantly engaged in non-financial
activities'' may elect the TNW Approach.\71\ The TNW Approach requires
a nonbank SD to maintain a level of ``tangible net worth'' \72\ equal
to or greater than the higher of: (i) $20 million plus the amount of
the nonbank SD's ``market risk exposure requirement'' \73\ and
[[Page 27798]]
``credit risk exposure requirement'' \74\ associated with the nonbank
SD's swap and related hedge positions that are part of the nonbank SD's
swap dealing activities; (ii) 8 percent of the nonbank SD's ``uncleared
swap margin'' amount; \75\ or (iii) the amount of capital required by a
registered futures association of which the nonbank SD is a member.\76\
The TNW Approach is intended to ensure the safety and soundness of a
qualifying nonbank SD by requiring the firm to maintain a minimum level
of tangible net worth that is based on the nonbank SD's swap dealing
activities to provide a sufficient level of capital to absorb losses
resulting from its swap dealing and other business activities.
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\71\ 17 CFR 23.101(a)(2). The term ``predominantly engaged in
non-financial activities'' is defined in Commission Regulation
23.100 and generally provides that: (i) the nonbank SD's, or its
parent entity's, annual gross financial revenues for either of the
previous two completed fiscal years represents less than 15 percent
of the nonbank SD's, or the nonbank SD's parent's, annual gross
revenues for all operations (i.e., commercial and financial) for
such years, and (ii) the nonbank SD's, or its parent entity's, total
financial assets at the end of its two most recently completed
fiscal years represents less than 15 percent of the nonbank SD's, or
its parent's, total consolidated financial and nonfinancial assets
as of the end of such years. 17 CFR 23.100.
\72\ The term ``tangible net worth'' is defined in Commission
Regulation 23.100 and generally means the net worth (i.e., assets
less liabilities) of a nonbank SD, computed in accordance with
applicable accounting principles, with assets further reduced by a
nonbank SD's recorded goodwill and other intangible assets. 17 CFR
23.100.
\73\ The terms ``market risk exposure'' and ``market risk
exposure requirement'' are defined in Commission Regulation 23.100
and generally mean the risk of loss in a financial position or
portfolio of financial positions resulting from movements in market
prices and other factors. 17 CFR 23.100. Market risk exposure is the
sum of: (i) general market risks including changes in the market
value of a particular asset that results from broad market
movements, which may include an additive for changes in market value
under stressed conditions; (ii) specific risk, which includes risks
that affect the market value of a specific instrument but do not
materially alter broad market conditions; (iii) incremental risk,
which means the risk of loss on a position that could result from
the failure of an obligor to make timely payments of principal and
interest; and (iv) comprehensive risk, which is the measure of all
material price risks of one or more portfolios of correlation
trading positions.
\74\ The term ``credit risk exposure requirement'' is defined in
Commission Regulation 23.100 and generally reflects the amount at
risk if a counterparty defaults before the final settlement of a
swap transaction's cash flows. 17 CFR 23.100.
\75\ 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. See 17 CFR 23.154.
\76\ The National Futures Association (``NFA'') is currently the
only entity that is a registered futures association. The Commission
will refer to NFA in this document when referring to the
requirements or obligations of a registered futures association.
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The TNW approach requires a nonbank SD to compute its market risk
exposure requirement and credit risk exposure requirement using
standardized capital charges contained in Securities and Exchange
Commission (``SEC'') Rule 18a-1 \77\ that are applicable to entities
registered with the SEC as security-based swap dealers (``SBSDs'') or
standardized capital charges set forth in Commission Regulation 1.17
applicable to entities registered as FCMs or entities dually registered
as an FCM and nonbank SD.\78\ Nonbank SDs that have received Commission
or NFA approval pursuant to Commission Regulation 23.102 may use
internal models to compute market risk and/or credit risk exposures in
calculating their capital requirements in lieu of applying the SEC and
CFTC standardized capital charges.\79\
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\77\ 17 CFR 240.18a-1.
\78\ 17 CFR 23.101(a)(2)(ii)(A).
\79\ Id.
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(ii) Net Liquid Asset Approach
A nonbank SD that elects the NLA Approach is required to maintain
``net capital'' in an amount that equals or exceeds the greater of: (i)
$20 million; (ii) 2 percent of the nonbank SD's uncleared swap margin
amount; or (iii) the amount of capital required by NFA.\80\ The NLA
Approach is intended to ensure the safety and soundness of a nonbank SD
by requiring the firm to maintain at all times at least one dollar of
highly liquid assets to cover each dollar of the nonbank SD's
liabilities.
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\80\ 17 CFR 23.101(a)(1)(ii)(A). ``Net capital'' consists of a
nonbank SD's highly liquid assets (subject to haircuts) less the
firm's liabilities, excluding certain qualified subordinated debt.
17 CFR 240.18a-1 (calculation of ``net capital.'')
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A nonbank SD is required to reduce the value of its highly liquid
assets by the market risk exposure requirement and/or the credit risk
exposure requirement in computing its net capital.\81\ A nonbank SD
that does not have Commission or NFA approval to use internal models
must compute its market risk exposure requirement and/or credit risk
exposure requirement using standardized capital charges contained in
SEC Rule 18a-1 as modified by the Commission's rule.\82\
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\81\ 17 CFR 240.18a-1(c) and (d).
\82\ 17 CFR 23.101(a)(1)(ii). Commission modifications, for
example, provide that a nonbank SD may recognize initial margin
posted by a counterparty with a third-party custodian for its swap
transactions with the nonbank SD in accordance with Commission
Regulation 23.157(b) as funds held by the nonbank SD in computing
any undermargined capital charges when computing its adjusted net
capital notwithstanding SEC Rule 18a-1(c)(ix)(C) which requires a
security-based swap dealer to exclude initial margin posted by its
counterparty with third-party custodians in computing undermargined
capital charges unless certain conditions are met, including that
the dealer, custodian, and counterparty have executed a legally
binding agreement that provides the dealer with the right to access
the collateral in the event of the default of the counterparty. 17
CFR 23.101(a)(1)(ii)(C).
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A nonbank SD that has obtained Commission or NFA approval may use
internal market risk and/or credit risk models to compute its market
risk exposure requirement and/or credit risk exposure requirement in
lieu of applying the standardized capital charges.\83\ A nonbank SD
that is approved to use models to compute its market risk exposure
requirement or credit risk exposure requirement is further required to
maintain a minimum of $100 million of ``tentative net capital.'' \84\
The Commission's NLA Approach is consistent with the SEC's capital rule
for SBSDs and is based on the Commission's capital rule for FCMs and
the SEC's capital rule for securities broker-dealers (``BDs''). The
quantitative and qualitative requirements for NLA Approach internal
market and credit risk models are also consistent with the quantitative
and qualitative requirements under the Commission's Bank-Based Approach
as described below.
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\83\ 17 CFR 23.102.
\84\ 17 CFR 23.101(a)(1)(ii)(A)(1). The term ``tentative net
capital'' is defined in Commission Regulation 23.101(a)(1)(ii)(A)(1)
by reference to SEC Rule 18a-1 and generally means a nonbank SD's
net capital prior to deducting market risk and credit risk capital
charges.
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(iii) Bank-Based Approach
The Commission's Bank-Based Approach for computing regulatory
capital for nonbank SDs is based on certain capital requirements
imposed by the Federal Reserve Board for bank holding companies.\85\
The Bank-Based Approach also is consistent with the Basel Committee on
Banking Supervision's (``BCBS'') international framework for bank
capital requirements (``BCBS framework'' or ``Basel standards'').\86\
The Bank-Based Approach requires a nonbank SD to maintain regulatory
capital equal to or in excess of each of the following requirements:
(i) $20 million of common equity tier 1 capital; (ii) an aggregate of
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital (including qualifying subordinated debt) equal to or greater
than 8 percent of the nonbank SD's risk-weighted assets (provided that
common equity tier 1 capital comprises at least 6.5 percent of the 8
percent minimum requirement); (iii) an aggregate 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 uncleared swap margin
amount; and (iv) an amount of capital required by NFA.\87\ The Bank-
Based Approach is intended to ensure the safety and soundness of a
nonbank SD by requiring the firm to maintain at all times qualifying
capital
[[Page 27799]]
in an amount sufficient 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.
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\85\ 17 CFR 23.101(a)(1)(i).
\86\ The BCBS is the primary global standard-setter for the
prudential regulation of banks and provides a forum for cooperation
on banking supervisory matters. Institutions represented on the BCBS
include the Federal Reserve Board, the European Central Bank,
Deutsche Bundesbank, Bank of England, Bank of France, Bank of Japan,
Banco de Mexico, and Bank of Canada. The BCBS framework is available
at <a href="https://www.bis.org/basel_framework/">https://www.bis.org/basel_framework/</a>.
\87\ 17 CFR 23.101(a)(1)(i).
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The terms used in the Commission's Bank-Based Approach are defined
by reference to regulations of the Federal Reserve Board.\88\ The term
``common equity tier 1 capital'' is defined for purposes of the CFTC
Capital Rules to generally mean the sum of a nonbank SD's common stock
instruments and any related surpluses, retained earnings, and
accumulated other comprehensive income.\89\ The term ``additional tier
1 capital'' is defined to include equity instruments that are
subordinated to claims of general creditors and subordinated debt
holders, but contain certain provisions that are not available to
common stock, such as the right of nonbank SD to call the instruments
for redemption or to convert the instruments to other forms of
equity.\90\ The term ``tier 2 capital'' is defined to include certain
types of instruments that include both debt and equity characteristics
(e.g., certain perpetual preferred stock instruments and subordinated
term debt instruments).\91\ Subordinated debt also must meet certain
requirements to qualify as tier 2 capital, including that the term of
the subordinated debt instrument is 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 the debt
instrument is an effective subordination of the rights of the lender to
receive any payment, including accrued interest, to other
creditors.\92\ Common equity tier 1 capital, additional tier 1 capital,
and tier 2 capital are unencumbered and generally long-term or
permanent forms of capital that help ensure that a nonbank SD will be
able to absorb losses resulting from its operations and maintain
confidence in the nonbank SD as a going concern. In addition, in
setting an equity ratio requirement, this limits the amount of asset
growth and leverage a nonbank SD can incur, as a nonbank SD must fund
its asset growth with a certain percentage of regulatory capital.
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\88\ Id. Commission Regulation 23.101(a)(1)(i) references
Federal Reserve Board Rule 217.20 for purposes of defining the terms
used in establishing the minimum capital requirements under the
Bank-Based Approach. 17 CFR 23.101(a)(1)(i) and 12 CFR 217.20.
\89\ 12 CFR 217.20(b).
\90\ 12 CFR 217.20(c).
\91\ 12 CFR 217.20(d).
\92\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d (17 CFR 240.18a-1d). 17 CFR 23.101(a)(1)(i)(B)
provides that the subordinated debt used by a nonbank SD to meet its
minimum capital requirement under the Bank-Based Approach must
satisfy the conditions for subordinated debt under SEC Rule 18a-1d.
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A nonbank SD must also compute its risk-weighted assets using
standardized charges or, if approved, internal models. The process of
risk-weighting assets involves adjusting the notional or carrying value
of each asset based on the inherent risk of the asset. Less risky
assets are adjusted to lower values (i.e., they have less risk weight)
than more risky assets. As a result, nonbank SDs are required to hold
lower levels of regulatory capital for less risky assets and higher
levels of regulatory capital for riskier assets.
Nonbank SDs not approved to use internal models to risk-weight
their assets must compute market risk capital charges using the
standardized charges contained in Commission Regulation 1.17 and SEC
Rule 18a-1, and must compute their credit risk charges using the
standardized capital charges set forth in regulations of the Federal
Reserve Board for bank holding companies in Subpart D of 12 CFR part
217.\93\
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\93\ 17 CFR 23.101(a)(1)(i)(B), 17 CFR 23.100 (providing the
definition of the term BHC risk-weighted assets).
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Standardized market risk charges are computed under Commission
Regulation 1.17 and SEC Rule 18a-1 by multiplying, as appropriate to
the specific asset schedule, the notional value or market value of the
nonbank SD's proprietary financial positions (such as swaps, security-
based swaps, futures, equities, and U.S. Treasuries) by fixed
percentages set forth in the Regulation or Rule.\94\ Standardized
credit risk charges require the nonbank SD to multiply on-balance sheet
and off-balance sheet exposures (such as receivables from
counterparties, debt instruments, and exposures from derivatives) by
predefined percentages set forth in the applicable Federal Reserve
Board regulations contained in Subpart D of 12 CFR part 217.
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\94\ 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).
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A nonbank SD also may apply to the Commission or NFA for approval
to use internal models to compute market risk exposure and/or credit
risk exposure for purposes of determining its total risk-weighted
assets.\95\ Nonbank SDs approved to use models for the calculation of
credit risk or market risk, or both, must follow the model requirements
set forth in Federal Reserve Board regulations for bank holding
companies (Subpart E and F, respectively, of 12 CFR part 217). Credit
risk and market risk capital charges computed with internal models
require the estimation of potential losses, with a certain degree of
likelihood, within a specified time period, of a portfolio of assets.
Internal models allow for consideration of potential co-movement of
prices across assets in the portfolio, leading to offsets of gains and
losses. Internal credit risk models can also further include an
estimation of the likelihood of default of counterparties.
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\95\ 17 CFR 23.102.
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B. General Overview of Capital Rules for EU IFR/IFD Nonbank Swap
Dealers
The Applicant stated that the aim of IFR and IFD is to apply
tailored prudential requirements and supervisory measures to the risk
profile and business model of investment firms to ensure that such
investment firms operate on a sound financial basis and are managed in
an orderly manner, including in the best interest of their clients,
while ensuring financial stability.\96\ The Applicant further stated
that the EU Investment Firms Capital Rules require each EU IFR/IFD
nonbank SD to hold a sufficient amount of equity capital and qualifying
subordinated debt, based on the firm's size, complexity, and
activities, to absorb potential losses that the firm may incur if the
firm were to experience financial distress.\97\ In that regard, the EU
Investment Firms Capital Rules impose capital requirements that are
specific to firms which are not systemic by virtue of their size and
interconnectedness with other financial and economic actors.\98\ The
capital requirements for such firms are intended to be proportionate to
the size, activities, and degree of interconnectedness of the firm and
are calculated according to certain metrics which have been designed as
proxies for the risks associated with the firm, its counterparties, and
creditor obligations.\99\
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\96\ EU IFR/IFD Application at 2. IFR Recital (10) and IFD
Recital (4) (stating that the requirements of the CRR and CRD are
designed to address risk faced by credit institutions (i.e., banks)
through economic cycles and to protect depositors from possible
failure, and that the risks faced and posed by most investment firms
are substantially different and such differences should be clearly
reflected in the prudential framework for investment firms).
\97\ EU IFR/IFD Application at 3; IFR Recitals (14)-(16) and
(23)-(26) (stating minimum capital requirements for investment
firms).
\98\ IFR Recitals (9)-(16).
\99\ EU IFR/IFD Application at 3; IFR Recitals (14)-(16) and
(23)-(26).
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The EU Investment Firms Capital Rules require EU IFR/IFD nonbank
SDs to maintain regulatory capital in the form of common equity tier 1
capital, additional tier 1 capital, and tier 2
[[Page 27800]]
capital \100\ in an amount that equals or exceeds the highest of the EU
IFR/IFD nonbank SD's ``permanent minimum requirement'' (``PMR''),
``fixed overheads requirement'' (``FOR''), and the sum of the firm's
``K-factor requirements'' (``KFR'').\101\ The resulting total minimum
capital requirement (``total own funds requirement'' or ``TOFR'') may
also be supplemented with additional requirements imposed by the EU
IFR/IFD nonbank SD's relevant regulatory authority.\102\ Common equity
tier 1 capital must comprise at least 56 percent of the EU IFR/IFD
nonbank SD's TOFR and tier 1 capital must comprise at least 75 percent
of TOFR.\103\
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\100\ IFR Articles 9 and 11. As further discussed below, the EU
Investment Firms Capital Rules incorporate the CRR for definitions
of the categories of instruments that qualify as regulatory capital.
\101\ IFR Article 11(1).
\102\ IFR Article 11(3); IFD Articles 40-41.
\103\ IFR Article 9.
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Under the EU Investment Firms Capital Rules, common equity tier 1
capital is composed of common equity capital instruments, retained
earnings, accumulated other comprehensive income, and other
unrestricted reserves of the EU IFR/IFD nonbank SD.\104\ Additional
tier 1 capital is composed of capital instruments other than common
equity and retained earnings (i.e., common equity tier 1 capital), and
includes certain convertible debt securities and preferred stock.\105\
Tier 2 capital instruments, which provide an additional layer of
supplementary capital, includes other reserves, hybrid capital
instruments, and certain subordinated debt.\106\
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\104\ IFR Article 9. Common Equity Tier 1 capital is defined in
accordance with Chapter 2 of Title I of Part Two of CRR.
\105\ IFR Article 9. Additional Tier 1 capital is defined in
accordance with Chapter 3 of Title I of Part Two of CRR.
\106\ IFR Article 9. Tier 2 capital is defined in accordance
with Chapter 4 of Title I of Part Two of CRR.
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To qualify as tier 2 regulatory capital, capital instruments and
subordinated debt must meet certain conditions including that: (i) the
capital instruments are issued by the EU IFR/IFD nonbank SD and are
fully paid-up; (ii) the capital instruments are not purchased by the EU
IFR/IFD nonbank SD or its subsidiaries; (iii) the claims on the
principal amount of the capital instruments rank below any claim from
instruments that are ``eligible liabilities,'' \107\ meaning that they
are effectively subordinated to claims of all non-subordinated
creditors of the EU IFR/IFD nonbank SD; (iii) the capital instruments
have an original maturity of at least five years; and (iv) the
provisions governing the capital instruments do not include any
incentive for the principal amount to be repaid by the EU IFR/IFD
nonbank SD prior to the capital instruments' respective maturity.\108\
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\107\ ``Eligible liabilities'' are non-capital instruments,
including instruments that are directly issued by the EU IFR/IFD
nonbank SD and fully paid up with remaining maturities of at least a
year. CRR, Articles 72a and 72b. In addition, the liabilities cannot
be owned, secured, or guaranteed, by the EU IFR/IFD nonbank SD
itself, and the EU IFR/IFD nonbank SD cannot have either directly or
indirectly funded their purchase. CRR, Article 72b.
\108\ IFR Article 9 and CRR Article 63.
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As noted above, the amount of regulatory capital that an EU IFR/IFD
nonbank SD is required to hold is the highest of the firm's PMR, FOR,
or KFR. The PMR for an EU IFR/IFD nonbank SD is 750,000 euros
(``EUR'').\109\ The FOR is an amount equal to one quarter of the firm's
relevant expenditures (calculated by taking the firm's total
expenditures before distribution of profits and deducting certain
expenses) in the previous year.\110\ As described in more detail below,
the KFR is a mixture of activity-based and exposure-based capital
requirements, including capital charges related to net position risk in
trading positions (``K-NPR''), the value of the firm's daily trading
flow (``K-DTF''), and the risk of trading counterparty default
(including counterparties to over the counter (``OTC'') derivatives)
(``K-TCD'').\111\
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\109\ IFD Article 9.
\110\ IFR Article 13. Expenses that may be deducted include
staff bonuses and other compensation, to the extent the expenses
depend on the net profit of the investment firm in the respective
year.
\111\ IFR Article 15.
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The Applicant represented that while the PMR, which is effectively
the floor of an investment firm's minimum capital requirements, is
relatively modest at EUR 750,000, in practice, an EU IFR/IFD nonbank
SD's minimum capital requirement is likely to be greater--either the
FOR or, more likely, the KFR.\112\ The EU Investment Firms Capital
Rules set forth three broad risk categories of ``K-factors'' that, as
applicable and relevant to an individual EU IFR/IFD, are to be included
in the calculation of total KFR: \113\
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\112\ EU IFR/IFD Application at 6.
\113\ IFR Article 15.
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(1) ``Risk-to-client'' K-factors, which covers risks carried by an
investment firm during its services, actions, or responsibilities,
which could negatively impact clients. These relate to assets under
management (``K-AUM''),\114\ client money held (``K-CMH''),\115\ assets
safeguarded and administered (``K-ASA''),\116\ and client orders
handled (``K-COH''); \117\
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\114\ K-AUM is calculated on the first business day of each
month as the rolling average of the value of the monthly assets
under management measured on the last business day of each of the
previous 15 months converted into the entities' functional currency
at that time, excluding the three most recent monthly values. IFR
Article 17(1).
\115\ K-CMH is calculated on the first business day of each
month as the rolling average of the value of total daily money held
measured at the end of each business day for the previous nine
months, excluding the three most recent months. IFR Article 18(1).
\116\ K-ASA is calculated on the first business day of each
month as the rolling average of the value of the total daily assets
safeguarded and administered measured at the end of each business
day for the previous nine months, excluding the three most recent
months. IFR Article 19(1).
\117\ K-COH is calculated on the first business day of each
month as the rolling average of the value of the total daily client
orders handled, measured throughout each business day over the
previous six months, excluding the three most recent months. IFR
Article 20(1).
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(2) ``Risk-to-market'' K-factors, which apply capital requirements
against the impact an investment firm could have on the markets in
which it operates, and on the counterparties with which it trades. This
relates to net position risk (``K-NPR'') \118\ or, where permitted by
the relevant regulatory authority for specific types of investment
firms that deal on own account through clearing members, to the total
margins required by an investment firm's clearing member (``K-CMG'');
\119\ and
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\118\ K-NPR is calculated by using one of the permitted
approaches to calculating market risk under CRR. IFR Article 22
(cross-referencing CRR with respect to the calculation methodologies
for K-NPR) and Article 57 (setting out transitional provisions
regarding the calculation methodologies applicable under CRR to
market risk in the period before the methodologies referred to in
IFR Article 22 become effective).
\119\ K-CMG is calculated as the third highest amount of total
margin required on a daily basis by a clearing member carrying the
account and clearing the positions of the EU IFR/IFD nonbank SD at a
qualified central counterparty (``QCCP'') over the preceding three
months, multiplied by a factor of 1.3. IFR Article 23(2). A ``QCCP''
is defined as a central counterparty that has been authorized or
recognized by an appropriate regulatory authority.
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(3) ``Risk-to-firm'' K-factors, which are intended to capture an
investment firm's exposure to the default of its trading counterparties
(``K-TCD''),\120\ concentration risk in an investment firm's large
exposures to specific
[[Page 27801]]
counterparties (``K-CON''),\121\ and operational risks from an
investment firm's daily trading flow (``K-DTF'').\122\
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\120\ K-TCD is calculated by multiplying the exposure value, a
risk factor ranging from 1.6 percent to 8 percent depending on the
counterparty type, the credit valuation adjustment (``CVA''), and a
factor of 1.2. IFR, Article 26. The exposure value equals the
replacement cost plus the potential future exposure (for derivatives
contracts) minus the value of eligible collateral, as determined in
accordance with IFR Articles 28-30. IFR Article 27. The CVA is an
adjustment to the mid-market valuation of the portfolio of
transactions with a counterparty to reflect the current market value
of the credit risk of the counterparty and is determined in
accordance with IFR Article 32.
\121\ K-CON is calculated as an aggregate amount of a capital
add-on requirement computed for each client or group of connected
clients to whom the EU IFR/IFD nonbank SD has exposures exceeding
certain thresholds specified in IFR Article 39. Article 39 of IFR
sets out the circumstances that trigger a client-level add-on and
the scope of exposures to be assessed; the add-ons for all affected
clients/connected groups are then aggregated to produce the firms'
K-CON amount.
\122\ K-DTF is calculated on the first business day of each
month as the rolling average of the value of the total daily trading
flow for the investment firm's trades, executed for its own account
or on behalf of clients, measured each business day over the
previous nine months, excluding the three most recent months. The
DTF is measured as the sum of the absolute value of buy and sell for
both cash trades and derivatives transactions. For cash trades, the
value is the amount paid or received on each trade. For derivatives,
the value of the trade is the notional amount of the contract. IFR
Article 33.
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In computing its TOFR based on K-factors, an EU IFR/IFD nonbank SD
would apply a K-factor coefficient calibration to the K-factors as
follows: (i) K-AUM 0.02%; (ii) K-CMH (on segregated accounts) 0.4%;
(iii) K-CMH (non-segregated accounts) 0.5%; (iv) K-ASA 0.04%; (v) K-COH
cash trades 0.1%; (vi) K-COH derivatives 0.01%; (vii) K-DTF cash trades
0.1%; and (viii) K-DTF derivatives 0.01%.\123\ There is no coefficient
calibration applied to the K-factor for K-NPR and K-CON.\124\ The
coefficients set forth in IFR were designed to reflect the inherent
risk of each metric, based on historical data and benchmarking. In
addition, the European Banking Authority (``EBA'') \125\ developed
regulatory technical standards, adopted by the European Commission in
the form of delegated regulations, to further specify certain elements
of the K-factors calculation, including adjustments to K-DTF
coefficients in stressed market conditions.\126\
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\123\ For example, if an EU IFR/IFD nonbank SD held customer
funds on behalf of its clients that are required to be segregated as
part of its Investment Activities, the firm would calculate its K-
CMH as the rolling average of the value of total daily money held
for customers at the end of each business day for the previous nine
months (excluding the most recent three months) multiplied by a
coefficient factor of .4%. Assuming that the EU IFR/IFD nonbank SD
was holding 500 million EUR of customer funds, the K-CMH would be
2,000,000 EUR (500,000,000 x .004).
\124\ IFR Article 15.
\125\ The EBA is an independent EU authority that contributes to
the stability and effectiveness of the European financial system
through clear, consistent, transparent and fair regulation.
\126\ Commission Delegated Regulation (EU) 2022/76 of 22
September 2021 supplementing Regulation (EU) 2019/2033 of the
European Parliament and of the Council with regard to regulatory
technical standards specifying adjustments to the K-factor ``daily
trading flow'' (K-DTF) coefficients (September 22, 2021). See also
Commission Delegated Regulation (EU); Commission Delegated
Regulation (EU) 2022/25 of 22 September 2021 supplementing
Regulation (EU) 2019/2033 of the European Parliament and of the
Council with regard to regulatory technical standards specifying the
methods for measuring the K-factors referred to in Article 15 of
that Regulation (September 22, 2021) and Commission Delegated
Regulation (EU) 2022/244 of 24 September 2021 supplementing
Regulation (EU) 2019/2033 of the European Parliament and the Council
with regard to regulatory technical standards specifying the amount
of total margin for calculation of the K-factor ``clear margin
given'' (K-CMG) (September 24, 2021). A list of implementing and
delegated acts for IFR is available at the European Commission's
website: <a href="https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/investment-firms-regulation_en">https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/investment-firms-regulation_en</a>.
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The K-factor requirements that are potentially most relevant to
investment firms, including EU IFR/IFD nonbank SDs, engaging in swap
dealing activities include K-NPR, K-CMG, and K-TCD. The K-factor
requirement for net position risk, K-NPR, is intended to capture market
risk in an EU IFR/IFD nonbank SD's trading book, including positions in
debt instruments, equity instruments, and collective investment
undertakings.\127\ K-NPR also applies to positions that are not in the
trading book but create foreign exchange or commodities risk.\128\
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\127\ IFR Article 21(3). In addition, the term ``trading book''
is defined as all positions in financial instruments and commodities
held by an institution either with trading intent or to hedge
positions held with trading intent. IFR Article 4(54). The term
``positions held with trading intent'' is, in turn, defined as: (i)
proprietary positions and positions arising from client servicing
and market making; (ii) positions held to be resold in the short
term; or (iii) positions intended to benefit from actual or expected
short-term price differences between buying and selling prices or
from other price or interest rate variations. IFR Article 4(55).
\128\ IFR Article 21(4).
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The K-NPR is calculated using the methodologies for determining
risk-based capital amounts for market risk under the CRR.\129\ For the
purpose of calculating K-NPR, an EU IFR/IFD nonbank SD can either apply
a standardized approach to market risk, or, if approved by the relevant
regulatory authority, use an internal model.\130\ Following the
effective date of certain amendments to CRR, planned for January 1,
2027, the current model approach will be replaced by an alternative
standardized approach and an alternative internal model approach,
further discussed below.\131\
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\129\ IFR Articles 22 and 57. As noted, the CRR sets forth the
calculating methodologies for the risk-based capital requirements
for market risk applicable to larger and interconnected nonbank SDs
that are considered as ``credit institutions'' (i.e., treated as
banks) for prudential requirements purposes. For reference, the
Commission has considered the capital requirements for market risk
under CRR in connection with its assessment of the capital
requirements applicable to larger and interconnected nonbank SDs
domiciled in the EU and subject to the CRR/CRD framework. The
Commission has found the capital requirements applicable to nonbank
SDs under CRR/CRD comparable to the capital requirements under the
CFTC Capital Rules. See 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, 89 FR 58572 (July 18, 2024).
\130\ IFR Articles 22 and 57 and CRR (as amended by Regulation
(EU) 2019/630), Part Three, Title IV.
\131\ IFR Articles 22 and 57. The standardized approach for
market risk is set out in Chapters 2, 3 and 4 of Title IV of Part
Three of CRR. The alternative standardized approach and the
alternative internal model approach for market risk are set out in
Chapter 1a and Chapter 1b, respectively, of Title IV of Part Three
of CRR. The effective date of the provisions setting forth the
alternative standardized approach and alternative internal model
approach was postponed from June 26, 2026 (originally planned as set
forth in IFR Article 57) to January 1, 2027. See European
Commission's announcement of June 12, 2025, available here: <a href="https://finance.ec.europa.eu/news/commission-proposes-postpone-one-additional-year-market-risk-prudential-requirements-under-basel-iii-2025-06-12_en">https://finance.ec.europa.eu/news/commission-proposes-postpone-one-additional-year-market-risk-prudential-requirements-under-basel-iii-2025-06-12_en</a>.
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Standardized market risk charges are generally calculated by
multiplying the notional or carrying amount of net positions or of
adjusted net positions by risk-weighting factors, which are based on
the underlying market risk of each asset or exposure. The sum of the
calculated amounts comprises the portion of the risk exposure amount
attributable to market risk.\132\
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\132\ CRR, Part Three, Title IV, Chapter 2.
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Standardized calculation of market risk exposures under the EU
Investment Firms Capital Rules may follow one of three approaches. 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.\133\ 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.\134\
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\133\ CRR, Part Three, Title IV, Chapter 4, Article 360.
\134\ CRR, Part Three, Title IV, Chapter 4, Articles 359 and
361.
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The EU Investment Firms Capital Rules address the risk of
derivatives positions by generally treating them as exposures on their
underlying assets,\135\ with options being delta-adjusted.\136\
Positions in gold are subject to the same treatment as foreign exchange
risk.\137\ The standardized schedules of the EU Investment Firms
Capital Rules provide a narrowly defined asset classification
[[Page 27802]]
to assign risk-weighting factors, trading off more generous offsets
within narrower sets of positions to which they apply. For instance,
the maturity-based method for calculating market risk charges on debt
instruments required by EU Investment Firms Capital Rules permits
netting across maturity bands at increased capital charges.\138\ EU
IFR/IFD nonbank SDs may also apply to the relevant regulatory authority
for permission to use an internal model to compute their market risk
exposure (K-NPR).\139\ The EU IFR/IFD Capital Rules set forth
quantitative and qualitative requirements that models must meet to
receive approval.\140\ Quantitative and qualitative requirements
address, among other issues, governance, validation, monitoring, and
review. Modeled market risk charges generally require the estimation of
potential losses, with a certain degree of likelihood, within a
specified period, of a portfolio of assets. Models allow for
consideration of potential co-movement of prices across assets in the
portfolio, leading to offsets of gains and losses.\141\
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\135\ CRR, Part Three, Title II, Chapter 6, Section 5, Articles
276-278.
\136\ CRR, Part Three, Title IV, Chapter 2, Section 1, Articles
328-330.
\137\ CRR, Part Three, Title IV, Chapter 4, Articles 357-358.
\138\ CRR, Part Three, Title IV, Chapter 2, Section 2,
Subsection 2.
\139\ For EU IFR/IFD nonbank SDs domiciled in France, such as
Goldman Sachs Paris, the relevant regulatory authority is the ACPR.
\140\ IFR Article 22 and CRR, Articles 365-367 (as amended by
Regulation (EU) 2019/630).
\141\ The EU IFR/IFD Capital Rules require EU IFR/IFD nonbank
SDs with internal model approval for market risk to use a VaR model
with a 99 percent, one-tailed confidence interval with: (i) price
change equivalent to 10 business-day movement in rates and prices;
(ii) effective historical observation periods of at least one year;
and (iii) at least monthly data set updates. CRR, Article 365(1).
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As noted above, following the effective date of certain amendments
to CRR, planned for January 1, 2027, the current market risk model
approach will be replaced. In addition to the existing standardized
approach, the calculation methodologies for capital requirement for
market risk will include an alternative standardized approach and an
alternative model approach. The alternative standardized approach uses
a sensitivities-based method that includes a residual risk add-on and a
default risk charge.\142\ The sensitivities-based method aggregates
shocked factor losses across calibrated risk weights, buckets, and
three correlation scenarios, and takes the most conservative
result.\143\ The alternative models approach incorporates an aggregate
modellable risk charge, an expected-shortfall component, a stressed
expected shortfall charge for non-modellable risk factors, a default
risk charge, and a profit and loss (P&L) attribution add-on, but
derives these charges from validated internal models subject to P&L
attribution and back-testing and therefore depends on firm-specific
model estimation subject to supervisory approval.\144\
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\142\ IFR Article 22(b) (cross-referencing CRR, Part III, Title
IV, Chapter 1a, Article 325c-325ay).
\143\ Id. CRR Articles 325d-325h.
\144\ IFR Article 22(b) (cross-referencing CRR, Part III, Title
IV, Chapter 1b, Articles 325az-325bp).
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The EU IFR/IFD nonbank SD may also apply to the relevant regulatory
authority for permission to use K-CMG, instead of K-NPR, to calculate
its market risk requirement for specified positions, where clearing and
settlement take place under the responsibility of a clearing member of
a central clearing counterparty (``CCP'').\145\ To calculate K-CMG, an
EU IFR/IFD nonbank SD needs to record its total margin required, as
calculated by applying the margin model of the relevant clearing member
or CCP, as applicable, on a daily basis for the previous three months,
and using the third highest amount (the ``total margin''). The total
margin amount is then multiplied by a coefficient calibration factor of
1.3 to determine the firm's minimum total own funds requirement under
K-CMG.\146\
---------------------------------------------------------------------------
\145\ IFR Article 23.
\146\ Id.
---------------------------------------------------------------------------
EU IFR/IFD nonbank SDs' positions are also subject to charges for
credit risk. More specifically, the trading counterparty default K-
factor requirement, K-TCD, is designed to capture the risk of EU IFR/
IFD nonbank SD's exposure to the default of its trading counterparties
in respect to certain types of transactions that are recorded in the
trading book of the EU IFR/IFD nonbank SD that trades in its own name,
including OTC derivative contracts.\147\ The capital requirements for
K-TCD are calculated by using a formula that takes into account the
transaction's exposure value, the risk factor that applies to the
counterparty type, and the CVA.\148\ The exposure value is determined
by using replacement cost and potential future exposure, and takes into
consideration collateral held against the exposure.\149\ The risk
factor is either 1.6 percent for counterparties that are central
governments, central banks, public sector entities, credit institutions
or investment firms, or 8 percent for other counterparties.\150\ The
CVA, which is 1 or 1.5 depending on the transaction, makes an
adjustment to the mid-market valuation of the portfolio of transactions
with a counterparty to reflect the current market value of the credit
risk of the counterparty to the EU IFR/IFD nonbank SD.\151\ As
reflected in the calculation formula, the capital requirements for K-
TCD are determined using a simplified application of the requirements
for counterparty credit risk under CRR.\152\ An EU IFR/IFD nonbank SD
may also ask permission from the relevant competent authority to apply
the standardized approach for measuring counterparty credit risk (``SA-
CCR'') to calculate the capital requirements for credit risk.\153\
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\147\ But excluding derivative contracts directly or indirectly
cleared through a CCP (provided various conditions are met),
exchange-traded derivative contracts and derivatives contracts held
for hedging a position of the firm resulting from an activity
outside of the trading book. Furthermore, transactions with central
government and central banks, where the underlying exposures receive
a 0 percent risk weight under Article 114 of CRR, multilateral
development banks listed in Article 117(2) of CRR and international
organizations listed in Article 118 of CRR need not to be included
when calculating K-TCD.
\148\ IFR Article 26.
\149\ IFR Articles 26 and 27.
\150\ IFR Article 26.
\151\ IFR Articles 26 and 32.
\152\ European Commission, Proposal for a Regulation of the
European Parliament and of the Council on the prudential
requirements of investment firms and amending Regulations (EU) No
575/2013, (EU) No 600/2014 and (EU)_No 1093/2010, (Dec. 20, 2017) at
p. 5 (``IFR Proposal'') at 13. For reference, the Commission has
considered the capital requirements for counterparty risk under CRR
in connection with its assessment of the capital requirements
applicable to larger and interconnected nonbank SDs domiciled in the
EU and subject to the CRR/CRD framework. The Commission has found
the capital requirements applicable to nonbank SDs under CRR/CRD
comparable to the capital requirements under the CFTC Capital Rules.
See 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,
89 FR 58572 (July 18, 2024).
\153\ IFR Article 25(4) (cross-referencing CRR, Part Three,
Title II (Capital Requirements for Credit Risk), Chapter 6
(Counterparty Credit Risk), Sections 3 (Standardised Approach for
Counterparty Credit risk), 4 (Simplified Standardised Approach for
Counterparty Credit Risk), or 5 (Original Exposure Method)). Of the
three methods cross-referenced in IFR Article 25(4), only SA-CCR is
available to the EU IFR/IFD nonbank SD discussed in this
Comparability Determination. CRR Article 237a (setting forth
conditions for using simplified methods for calculating the exposure
value depending on whether the size of the firm's on- and off-
balance sheet derivatives business exceeds certain thresholds). As
further discussed below, SA-CCR is a non-model, rule-based approach
to calculating counterparty credit risk established by the BCBS
framework and available under both the CFTC Capital Rules and CRR.
---------------------------------------------------------------------------
Furthermore, in addition to the minimum capital requirement
established by the PMR, FOR, or K-factors, the EU Investment Firms
Capital Rules also impose separate liquidity requirements on EU IFR/IFD
nonbank SDs to address liquidity risk. Specifically, under the EU
Investment Firms Capital Rules' ``minimum liquidity requirement,'' an
EU IFR/IFD
[[Page 27803]]
nonbank SD is required to hold a minimum amount of high quality liquid
assets generally equivalent to at least one third of the firm's fixed
overheads requirement or FOR after applying appropriate haircuts to
account for market risk.\154\ The EU IFR/IFD Capital Rules' liquidity
requirements are intended to help ensure that EU IFR/IFD nonbank SDs
can fund the initial stages of a wind-down process, if wind-down
becomes necessary. The objective of the ``minimum liquidity
requirement'' is to ensure that investment firms can function in an
orderly manner over time, without the need to set aside liquidity
specifically for times of stress.\155\
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\154\ IFR Article 43 and IFR Recital 28.
\155\ IFR Recital 28. IFR Recital 28 provides that investment
firms should have internal procedures to monitor and manage
liquidity requirements. IFR Recital 28 further provides that
investment firms should hold a minimum of one third of their FOR in
high quality, liquid assets at all times.
---------------------------------------------------------------------------
In addition, under the internal capital adequacy and risk
assessment (``ICARA'') process requirements, an EU IFR/IFD nonbank SD
is required to implement sound, effective, and comprehensive
arrangements, strategies, and processes to assess and maintain on an
ongoing basis the amounts, types, and distribution of capital and
liquid assets that it considers adequate to cover the nature and level
of risk which the firm may pose to others and to which the firm itself
is or might be exposed.\156\ The arrangements, strategies, and
processes must be appropriate to the nature, scale and complexity of
the activities of the EU IFR/IFD nonbank SD and subject to regular
internal review.\157\ An EU IFR/IFD nonbank SD determines through the
ICARA process any additional capital and liquidity requirements it meet
in addition to the minimum requirements.
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\156\ IFD Article 24; French MFC Article L. 533-2-2 and Order of
November 3, 2014, on the prudential supervision and risk assessment
process for banking service providers and investment firms other
than portfolio management companies.
\157\ IFD Article 24.
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III. Commission Analysis of the Comparability of the EU Investment
Firms Capital and the EU Investment Firms Financial Reporting Rules
With the CFTC Capital Rules and CFTC Financial Reporting Rules
The following section provides a comparison and analysis of the
regulatory requirements of the EU Investment Firms Capital Rules and EU
Investment Firms Financial Reporting Rules with the CFTC Capital Rules
and CFTC Financial Reporting Rules. Immediately following a description
of the requirement(s) of the CFTC Capital Rules and CFTC Financial
Reporting Rules for which a comparability determination was requested
by the Applicant, the Commission provides a description of the EU's
comparable laws, regulations, and rules. The Commission then provides a
discussion of the comparability of, or differences between, the EU
Investment Firms Capital Rules and the EU Investment Firms Reporting
Rules with the corresponding CFTC Capital Rules and CFTC Financial
Reporting Rules, including any material differences between the
respective rules.
The Commission understands that EU IFR/IFD nonbank SDs, as of the
date of this determination, are subject to risk-based capital
requirements, which contain elements of the BCBS international
framework for banking institutions while aiming to better align the
applicable requirements to the EU IFR/IFD nonbank SDs' business model.
As such, the Commission performed this Comparability Determination by
primarily assessing the comparability of the EU Investment Firms
Capital Rules with the Commission's Bank-Based Approach. For clarity,
the Commission did not assess the comparability of the EU Investment
Firms Capital Rules to the Commission's TNW Approach or NLA Approach.
The capital and financial reporting regimes are complex structures
comprised of interrelated regulatory components. Differences in how
jurisdictions approach and implement these regimes are expected, even
among jurisdictions that base their requirements on international
principles and standards such as the those set forth in the BCBS
international framework. Therefore, the Commission's comparability
determination involves an assessment of the relevant requirements of
the foreign jurisdiction and how those requirements, viewed in the
aggregate, lead to an outcome that is comparable to the CFTC's
corresponding requirements. Consistent with this approach, the
Commission has grouped the CFTC's capital and financial reporting rules
into key categories that help focus the analysis on whether the foreign
jurisdiction's capital and financial reporting requirements are
comparable to the Commission's in purpose and effect, and not whether
the foreign jurisdiction's requirements meet every aspect or contain
identical elements.
The key categories of the EU Investment Firms Capital Rules and EU
Investment Firms Reporting Rules reviewed by the Commission and
discussed below include: (i) the quality of the equity and debt
instruments that qualify as regulatory capital, and the extent to which
the regulatory capital represents committed and permanent capital that
would be available to absorb unexpected losses or counterparty
defaults; (ii) the process of establishing minimum capital requirements
for an EU IFR/IFD nonbank SD and how such process addresses market risk
and credit risk of the firm's on-balance sheet and off-balance sheet
exposures; (iii) the financial reports and other financial information
submitted by an EU IFR/IFD nonbank SD to its regulatory authority to
effectively monitor the financial condition of the firm; and (iv) the
regulatory notices and other communications between an EU IFR/IFD
nonbank SD and the relevant regulatory authority that detail potential
adverse financial or operational issues that may impact the firm.
A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and EU Investment Firms Capital Rules and the EU
Financial Reporting Rules
1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules
The regulatory objectives of the CFTC Capital Rules and the CFTC
Financial Reporting Rules are to further the Congressional mandate to
ensure the safety and soundness of nonbank SDs to mitigate the greater
risk to nonbank SDs and the financial system arising from the use of
swaps that are not cleared.\158\ A primary function of the nonbank SD's
capital is to protect the solvency of the firm from decreases in the
value of firm assets, increases in the value of firm liabilities, and
firm losses, including losses resulting from counterparty defaults and
margin collateral failures, by requiring the firm to maintain an
appropriate level of quality capital, including qualifying subordinated
debt, to absorb such losses without becoming insolvent. With respect to
swap positions, capital and margin perform complementary risk
mitigation functions by protecting nonbank SDs, containing the amount
of risk in the financial system as a whole, and reducing the potential
for contagion arising from uncleared swaps.
---------------------------------------------------------------------------
\158\ 7 U.S.C. 6s(e)(3)(A).
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The objective of the CFTC Financial Reporting Rules is to provide
the Commission with the means to monitor and assess a nonbank SD's
financial condition, including the nonbank SD's compliance with minimum
capital requirements. The CFTC Financial Reporting Rules are designed
to provide
[[Page 27804]]
the Commission and NFA, which, along with the Commission, oversees
nonbank SDs' compliance with Commission regulations, with a
comprehensive view of the financial health and activities of the
nonbank SD. The Commission's rules require nonbank SDs to file
financial information, including periodic unaudited and annual audited
financial statements, specific financial position information, and
notices of certain events that may indicate a potential financial or
operational issue that may adversely impact the firm's ability to meet
its obligations to counterparties and other creditors in the swaps
market, or impact the firm's solvency.\159\
---------------------------------------------------------------------------
\159\ 17 CFR 23.105.
---------------------------------------------------------------------------
2. Regulatory Objective of the EU Investment Firms Capital Rules and
the EU Investment Firms Reporting Rules
The regulatory objective of the EU Investment Firms Capital Rules
is to ensure the safety and soundness of EU IFR/IFD nonbank SDs in
order to protect counterparties and customers and the derivatives and
financial markets more generally.\160\ The EU Investment Firms Capital
Rules are designed to preserve the financial stability and solvency of
an EU IFR/IFD nonbank SD by requiring the firm to maintain sufficient
equity and qualifying subordinated debt based on the EU IFR/IFD nonbank
SD's activities and specific business practices.\161\ The purpose of
the EU Investment Firms Capital Rules is to impose prudential
requirements that are calibrated in a manner proportionate to the type
of investment firm, the best interests of the clients of that type of
firm, and the promotion of the smooth and orderly functioning of the
markets in which that type of firm operates.\162\ The EU Investment
Firms Capital Rules are also designed to ensure that EU IFR/IFD nonbank
SDs have sufficient liquidity to meet their financial obligations to
counterparties and other creditors in a distress scenario by requiring
each firm to hold a minimum amount of high quality liquid assets based
on the firm's FOR.\163\
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\160\ IFR Recital 10, which provides that prudential
requirements should be calibrated in a manner proportionate to the
type of investment firm, the best interest of the clients of that
type of investment firm and the promotion of the smooth and orderly
functioning of the markets in which that type of investment firm
operates. See also Prudential Rules for Investment Firms,
Publication of the European Commission, <a href="https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/financial-markets/prudential-rules-investment-firms_en">https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/financial-markets/prudential-rules-investment-firms_en</a>.
\161\ Id.
\162\ Id.
\163\ IFR Recital 28, which provides that investment firms
should have internal procedures to monitor and manage liquidity
requirements and help ensure that the firms can function in an
orderly manner over time, without the need to set aside liquidity
specifically for times of stress, and Article 43, which requires an
investment firm to hold an amount of liquid assets equivalent to at
least one third of its FOR.
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With respect to financial reporting, the objective of the EU
Investment Firms Reporting Rules is to enable the relevant regulatory
authority to assess the financial condition and safety and soundness of
EU IFR/IFD nonbank SDs.\164\ The EU Investment Firms Reporting Rules
aim to achieve this objective by requiring an EU IFR/IFD nonbank SD to
provide financial reports and other capital information to its relevant
regulatory authority on a regular basis.\165\ The financial reporting
by an EU IFR/IFD nonbank SD provides the relevant regulatory authority
with information necessary to effectively monitor the EU IFR/IFD
nonbank SD's overall financial condition and its ability to meet its
regulatory obligations as a nonbank SD.
---------------------------------------------------------------------------
\164\ IFR Article 54, which requires investment firms to provide
appropriate regulatory authorities with quarterly and annual
financial reporting regarding the firm's balance sheet, revenue,
capital, and liquidity. In France, the ACPR is the French regulatory
authority with prudential supervision authority over French
financial firms, including Goldman Sachs Paris.
\165\ Id.
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In addition, the Applicant represented that the ACPR has the power
to require the EU IFR/IFD nonbank SD to provide all necessary
information in order for the authorities to carry out their supervisory
tasks; \166\ examine the books and records of the EU IFR/IFD nonbank
SD; obtain written and oral explanations from the EU IFR/IFD nonbank
SD's management, staff, and other persons; \167\ conduct all necessary
inspections at the business premises of the EU IFR/IFD nonbank SD and
other group entities; \168\ and the power to impose sanctions on firms
that breach their regulatory obligations, including the requirements
imposed under the EU Investment Firms Capital and Reporting Framework,
such as public censure, financial penalties, and ultimately the
cancellation of the EU IFR/IFD nonbank SD's permission to carry on
regulated activities in the EU.\169\
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\166\ French MFC, Article L.612-24.
\167\ French MFC, Article L.612-24.
\168\ French MFC, Articles L.612-23 and L.612-26.
\169\ IFD Article 18 and seq.
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3. Commission Analysis
The Commission has reviewed the EU IFR/IFD Application and the
relevant EU laws and regulations, and has determined that the overall
objectives of the EU Investment Firms Capital Rules and CFTC Capital
Rules are comparable in that both sets of rules are intended to ensure
the safety and soundness of nonbank SDs by establishing a regulatory
regime that requires 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 firm becoming insolvent. While the EU Investment Firms
Capital Rules impose prudential requirements tailored to the risks that
investment firms, including EU IFR/IFD nonbank SDs, pose to market
participants and the general market, both the EU Investment Firms
Capital Rules and the CFTC Capital Rules are consistent with or have
elements that are similar to the standards in the international bank
capital framework adopted by the BCBS, which is also designed with the
objective of requiring banking entities to hold sufficient levels of
qualifying regulatory capital to absorb losses and decreases in the
value of assets and increases in the value of liabilities without the
banks becoming insolvent. The levels of regulatory capital that a
nonbank SD is required to hold are based on the risks associated with
the nonbank SD's on-balance sheet and off-balance sheet exposures under
both the EU Investment Firms Capital Rules and CFTC Capital Rules. The
EU Investment Firms Capital Rules and CFTC Capital Rules also provide
for the comparable calculation of the market risk exposures using
standardized or model-based approaches that are also consistent with
the BCBS framework, including provisions requiring a robust model risk
management program. Both sets of rules also provide for the calculation
of credit risk charges. While the EU Investment Firms Capital Rules
differ from the CFTC Capital Rule in that they do not permit the use of
credit risk models, both sets of rules provide for the computation of
credit risk charges through comparable standardized approaches based on
the standardized treatment of counterparty credit risk established by
the BCBS Framework.\170\
---------------------------------------------------------------------------
\170\ 17 CFR 23.103 and IFR Article 26.
---------------------------------------------------------------------------
In contrast with the CFTC Capital Rules, which do not have a
distinct liquidity requirement, the EU Investment Firms Capital Rules
impose specific liquidity requirements on EU IFR/IFD nonbank SDs. The
EU Investment Firms Capital Rules, therefore, provide an additional
layer of protection to help ensure that firms are capable of meeting
their obligations to
[[Page 27805]]
counterparties, including during periods of stressed market
conditions.\171\
---------------------------------------------------------------------------
\171\ IFR Recital 28 and Article 43.
---------------------------------------------------------------------------
The EU Investment Firms Capital Rules and CFTC Capital Rules are
also comparable in that both sets of rules limit the capital
instruments that may qualify as regulatory capital to high quality
equity capital and qualifying subordinated debt that satisfy specified
conditions. High quality capital is determined by the degree to which
the capital is permanently contributed or readily available on an
unrestricted basis to the nonbank SD to absorb unexpected losses,
including losses from swaps trading and other activities, without the
nonbank SD becoming insolvent.
With respect to financial reporting, both the EU Investment Firms
Reporting Rules and the CFTC Financial Reporting Rules require nonbank
SDs to file periodic financial reports, including periodic unaudited
and annual audited financial reports, with the relevant regulatory
authority, and further require nonbank SDs to file regulatory notices
if certain defined conditions are met or limits breached. These
financial reports and notices provide regulators, including the ACPR,
Commission, and NFA with information necessary to comprehensively
assess the financial condition and safety and soundness of the nonbank
SDs, and to monitor their ongoing compliance with applicable minimum
capital requirements. The monitoring of nonbank SDs by the appropriate
regulators helps ensure that nonbank SDs do not disrupt the swaps
market in general, and the financial markets more broadly, by failing
to have capital to absorb losses to prevent the firm from becoming
insolvent during a time of market stress.
Having compared the objectives of the EU Investment Firms Capital
and Reporting Framework to the objectives of the Commission's capital
and financial reporting requirements, and having considered those
objectives in the broader context of the prudential oversight of EU
IFR/IFD nonbank SDs' capital requirements, the Commission finds that
the objectives of the EU Investment Firms Capital Rules and the EU
Investment Firms Reporting Rules are comparable to the objectives of
the CFTC Capital Rules and CFTC Financial Reporting Rules.
B. Nonbank Swap Dealer Qualifying Capital
1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach
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.\172\ Common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital are composed of certain
defined forms of equity of the nonbank SD, including common stock,
retained earnings, and qualifying subordinated debt.\173\ The
Commission's requirement for a nonbank SD to maintain a minimum amount
of defined qualifying capital and subordinated debt is intended to
ensure that the firm maintains a sufficient amount of regulatory
capital to absorb decreases in the value of firm assets and increases
in the value of firm liabilities, and to cover losses resulting from
the business activities, including the firm's swap dealing activities.
---------------------------------------------------------------------------
\172\ 17 CFR 23.101(a)(1)(i).
\173\ The terms ``common equity tier 1 capital,'' ``additional
tier 1 capital,'' and ``tier 2 capital'' are defined in the bank
holding company regulations of the Federal Reserve Board. See 12 CFR
217.20.
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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. Common equity tier 1
capital is a more conservative or permanent form of capital than
additional tier 1 and tier 2 capital and is last in line to receive
distributions in the event of the entity's insolvency.\174\ 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.\175\ Total tier 1 capital is composed of common equity tier
1 capital and further includes additional tier 1 capital.\176\ Tier 2
capital includes certain types of instruments that include both debt
and equity characteristics such as qualifying subordinated debt.\177\
---------------------------------------------------------------------------
\174\ 12 CFR 217.20.
\175\ Id.
\176\ Id.
\177\ Id.
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Subordinated debt must meet certain conditions to qualify as tier 2
capital under the CFTC Capital Rules. Specifically, subordinated debt
instruments must have a term of at least one year (except for 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.\178\
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\178\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d (17 CFR 240.18a-1d). 17 CFR 23.101(a)(1)(i)(B)
(providing that the subordinated debt used by a nonbank SD to meet
its minimum capital requirement under the Bank-Based Approach must
satisfy the conditions for subordinated debt under SEC Rule 18a-1d).
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2. EU Investment Firms Capital Rules: Qualifying Capital
The EU Investment Firms Capital Rules require an EU IFR/IFD nonbank
SD to maintain regulatory capital in amounts that meet certain stated
minimum requirements. An EU IFR/IFD nonbank SD's regulatory capital may
be composed of: (i) common equity tier 1 capital, which generally
include the EU IFR/IFD nonbank SD's common equity, retained earnings,
and other comprehensive income; \179\ (ii) additional tier 1
instruments, which include other capital instruments and certain long-
term convertible debt instruments; \180\ and (iii) tier 2 capital,
which includes certain other reserves, hybrid capital instruments, and
certain qualifying subordinated debt.\181\
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\179\ IFR Article 9. Common equity tier 1 capital is defined in
accordance with Chapter 2 of Title I of Part Two of CRR.
\180\ Id. Additional tier 1 capital is defined in accordance
with Chapter 3 of Title I of Part Two of CRR.
\181\ Id. Tier 2 capital is defined in accordance with Chapter 4
of Title I of Part Two of CRR.
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Subordinated debt instruments must meet certain conditions to
qualify as tier 2 capital under the EU Investment Firms Capital Rules,
including that the: (i) loans are not granted by the EU IFR/IFD 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 IFR/IFD nonbank SD; (iii) subordinated loans are not secured, or
subject to a guarantee that enhances the seniority of the claim by the
EU IFR/IFD 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
[[Page 27806]]
repaid by the EU IFR/IFD nonbank SD prior to the loans' maturity.\182\
---------------------------------------------------------------------------
\182\ IFR Article 9, CRR Article 63.
---------------------------------------------------------------------------
The EU Investment Firms Capital Rules also impose different ratios
for the various components of regulatory capital that an EU IFR/IFD
nonbank SD must hold. Specifically, common equity tier 1 capital must
comprise at least 56 percent of the EU IFR/IFD nonbank SD's total
minimum capital requirement and tier 1 capital must comprise at least
75 percent of the total minimum capital requirement.\183\
---------------------------------------------------------------------------
\183\ IFR Article 9.
---------------------------------------------------------------------------
Common equity tier 1 capital, additional tier 1 capital, and tier 2
capital are permitted to be included in an EU IFR/IFD nonbank SD's
regulatory capital and used to meet the firm's minimum capital
requirement due to their characteristics of being permanent forms of
capital that are subordinate to the claims of other creditors, which
ensures that an EU IFR/IFD nonbank SD will have this regulatory capital
to absorb decreases in the value of the firm's assets and increases in
the value of the firm's liabilities, and to cover losses from business
activities, including swap dealing activities.
3. Commission Analysis
The Commission has reviewed the EU IFR/IFD Application and the
relevant EU laws and regulations, and has determined that the EU
Investment Firms Capital Rules are comparable in purpose and effect to
the CFTC Capital Rule with regard to the type and characteristics of a
nonbank SD's equity that qualifies as regulatory capital in meeting its
minimum requirements. The EU Investment Firms 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
assets and increases in the value of the firm's liabilities without
resulting in the firm becoming insolvent. Equity instruments that
qualify as common equity tier 1 capital and additional tier 1 capital
under the EU Investment Firms Capital Rules and the CFTC Capital Rules
have similar characteristics (e.g., the equity must be in the form of
high-quality, committed, and permanent capital) and the equity
instruments generally have no priority in distribution of firm assets
or income with respect to other shareholders or creditors of the firm,
which makes the equity available to a nonbank SD to absorb unexpected
losses, including counterparty defaults.\184\
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\184\ Compare 12 CFR 217.20(b) (defining capital instruments
that qualify as common equity tier 1 capital under the rules of the
Federal Reserve Board) and 12 CFR 217.20(c) (defining capital
instruments that qualify as additional tier 1 capital under the
rules of the Federal Reserve Board) with IFR Article 9 (referring to
definitions of capital instruments in Chapter 2 of Title I of Part
Two of CRR), CRR, Articles 26 and 28 (defining items and capital
instruments that qualify as common equity tier 1 capital), and CRR,
Article 52 (defining capital instruments that qualify as additional
tier 1 capital).
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In addition, the Commission has determined that the conditions
imposed on subordinated debt instruments under the EU Investment Firms
Capital Rules and the CFTC Capital Rules are comparable and designed to
ensure that the subordinated debt has qualities that support its
recognition by a nonbank SD as equity for capital purposes. In both
sets of rules, the conditions include a requirement that the debt
holders have effectively subordinated their claims for repayment of the
debt to the claims of other creditors of the nonbank SD.\185\
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\185\ Compare 17 CFR 240.18a-1d with IFR Article 9 and CRR,
Article 63(d).
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Having reviewed the EU IFR/IFD Application and the relevant EU laws
and regulations, the Commission has determined that the EU Investment
Firms Capital Rules and CFTC Capital Rules impose comparable
requirements on EU IFR/IFD nonbank SDs with respect to the types and
characteristics of equity capital that must be used to meet minimum
regulatory capital requirements.
C. Nonbank Swap Dealer Minimum Capital Requirement
1. CFTC Capital Rules: Nonbank Swap Dealer Minimum Capital Requirement
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 of regulatory capital; (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; and (iv) the amount of capital
required by NFA.\186\
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\186\ 17 CFR 23.101(a)(1)(i). 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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Prong (i) above requires each nonbank SD electing the Bank-Based
Approach to maintain a minimum of $20 million of common equity tier 1
capital to operate as a nonbank SD. The requirement that each nonbank
SD electing the CFTC Bank-Based Approach maintain a minimum of $20
million of common equity tier 1 capital is also consistent with the
minimum capital requirement for nonbank SDs electing the NLA Approach
and the TNW Approach.\187\ 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.\188\
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\187\ Nonbank SDs electing the NLA Approach are subject to a
minimum capital requirement that includes a fixed minimum dollar
amount of net capital of $20 million. 17 CFR 23.101(a)(1)(ii)(A)(1).
Nonbank SDs electing the TNW Approach are required to maintain
levels of tangible net worth that equals or exceeds $20 million plus
the amount of the nonbank SDs' market risk and credit risk
associated with the firms' dealing activities. 17 CFR
23.101(a)(2)(ii)(A).
\188\ 85 FR 57462 at 57492.
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Prong (ii) above is a minimum capital requirement that is based on
the Federal Reserve Board's capital requirements for bank holding
companies and is consistent with the BCBS framework for banking
institutions. As noted above, a nonbank SD under prong (ii) must
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.
Risk-weighted assets are a nonbank SD's on-balance sheet and off-
balance sheet exposures, including proprietary swap, security-based
swap, equity, and futures positions, weighted according to risk. The
Bank-Based Approach requires each nonbank SD to maintain regulatory
capital in an amount that equals or exceeds 8 percent of the firm's
total risk-weighted assets 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 business activities, including
uncollateralized defaults from swap counterparties, without the nonbank
SD becoming insolvent.
[[Page 27807]]
A nonbank SD must compute its risk-weighted assets amounts for
market and credit risk using a standardized approach, unless the
nonbank SD has been approved by the Commission or NFA to use internal
models.\189\ With respect to the calculation of standardized risk-
weighted asset amounts for market risk, the Commission incorporated by
reference the standardized market risk charges set forth in Commission
Regulation 1.17 for FCMs and SEC Rule 18a-1 for nonbank SBSDs.\190\ 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 increase.\191\ 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.\192\ 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.\193\ The resulting total market risk-weighted 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 CFTC Capital 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.\194\
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\189\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
\190\ See paragraph (3) of the definition of the term BHC
equivalent risk-weighted assets in 17 CFR 23.100.
\191\ 17 CFR 1.17(c)(5) and 17 CFR 240.18a-1(c)(1).
\192\ 17 CFR 1.17(c)(5)(iii).
\193\ 17 CFR 1.17(c)(5)(v), referencing SEC Rule 15c3-
1(c)(2)(vi) (17 CFR 240.15c3-1(c)(2)(vi)).
\194\ 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 12.5. For example, the market
risk exposure amount for marketable equity securities with a current
fair market value of $250,000 is $37,500 (market value of $250,000 x
.15 standardized market risk factor). The nonbank SD is required to
maintain regulatory capital equal to or in excess of full market
risk exposure amount of $37,500 (risk exposure amount of $37,500 x 8
percent regulatory capital requirement equals $3,000; the regulatory
capital requirement is then multiplied by a factor of 12.5, which
effectively requires the nonbank SD to hold regulatory capital in an
amount equal to at least 100 percent of the market risk exposure
amount ($3,000 x 12.5 factor equals $37,500)).
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With respect to standardized risk-weighted asset amounts for credit
risk, 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.\195\ Standardized risk-weighted 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.\196\ 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.\197\
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\195\ 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.
\196\ 17 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 for Economic Co-operation and Development (12
CFR 217.32(a)(2)).
\197\ 17 CFR 217.33.
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With respect to counterparty credit risk for derivatives positions,
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'').\198\ Both
CEM and SA-CCR are non-model, rules-based approaches to calculating
counterparty credit risk exposures for derivatives positions. Credit
risk exposure under the 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 derivative contract multiplied
by a standard credit risk conversion factor set forth in the rules of
the Federal Reserve Board.\199\ 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.\200\
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\198\ 17 CFR 217.34. See also Commission Regulation 23.100 (17
CFR 23.100) defining the term BHC risk-weighted assets, which
provides that a nonbank SD that does not have model approval may use
either CEM or SA-CCR to compute its exposures for over-the-counter
derivative contracts with regard to the status of its affiliate
entities with respect to the use of a calculation approach under the
Federal Reserve Board's capital rules.
\199\ 12 CFR 217.34.
\200\ 12 CFR 217.132(c).
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A nonbank SD also may obtain the approval of the Commission or NFA
to use internal models to compute market risk and/or credit risk
exposures. A nonbank SD seeking approval to use a model is required to
submit an application to the Commission or NFA.\201\ The application is
required to include, among other things, a list of the categories of
positions that the nonbank SD holds in its proprietary accounts and a
brief description of the methods that the nonbank SD will use to
calculate market risk and/or credit risk exposures for such positions.
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\201\ 17 CFR 23.102(c).
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A nonbank SD approved by the Commission or NFA to use models to
compute risk-weighted amounts for market risk is required to comply
with Subpart F of the Federal Reserve Board's Part 217 regulations
(``Subpart F'').\202\ Subpart F is based on models that are consistent
with the BCBS Basel 2.5 capital framework.\203\ The Commission's
qualitative and quantitative requirements for capital models also are
comparable to the SEC's existing capital model requirements for broker-
dealers in securities and SBSDs,\204\ which are also broadly based on
the BCBS Basel 2.5 capital framework.
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\202\ See paragraph (4) of the definition of BHC equivalent
risk-weighted assets in 17 CFR 23.100.
\203\ Compare 17 CFR 23.100 (providing for a nonbank SD that is
approved to use internal models to calculate market and credit risk
to calculate its risk-weighted assets using Subparts E and F of 12
CFR part 217), Subpart F of 12 CFR, 17 CFR 23.101(a)(1)(ii)
(providing for an SD that elects the NLA Approach to calculate its
net capital in accordance with Rule 18a-1), and 17 CFR 23.102(a),
with Basel Committee on Banking Supervision, Revisions to the Basel
II Market Risk Framework (2011), <a href="https://www.bis.org/publ/bcbs193.pdf">https://www.bis.org/publ/bcbs193.pdf</a> (describing the revised internal model approach under
Basel 2.5).
\204\ The SEC internal model requirements for SBSDs are listed
in 17 CFR 240.18a-1(d).
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A nonbank SD approved to use internal models to compute risk-
weighted amounts for credit risk is required to perform such
computation in accordance with Subpart E of the Federal Reserve Board's
Part 217 regulations,\205\ as if the nonbank SD
[[Page 27808]]
were itself a bank holding company subject to Subpart E.\206\ The
internal credit risk modeling requirements are also based on the Basel
2.5 capital framework and the Basel 3 capital framework. A nonbank SD
that computes its credit risk charges using internal models must
multiply the resulting capital requirement by a factor of 12.5.\207\
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\205\ 12 CFR 217 Subpart E.
\206\ See 85 FR 57462 at 57496.
\207\ 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv), and
217.132(d)(9)(iii).
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In adopting the final Bank-Based Approach rules, the Commission
also noted that in choosing an alternative calculation, the nonbank SD
must adopt the entirety of the alternative. As such, if the nonbank SD
is calculating its risk-weighted assets using the regulations in
Subpart E of 12 CFR 217, the nonbank SD must include charges reflecting
all categories of risk-weighted assets applicable under these
regulations, which include among other things, charges for operational
risk, CVA of OTC derivatives contracts, and unsettled transactions
involving securities, foreign exchange instruments, and commodities
that have a risk of delayed settlement or delivery.\208\ The capital
charge for operational risk and CVA of OTC derivatives contracts
calculated in accordance with Subpart E of 12 CFR 217 must also be
multiplied by a factor of 12.5.\209\
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\208\ Settlement risk for OTC derivatives contracts is addressed
as part of the counterparty-credit risk calculation methodology
described in 12 CFR 217.132.
\209\ 12 CFR 217.162(c) (operational risk) and 217.132(e)(4)
(CVA of OTC derivative contracts).
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Under the Basel 2.5 capital framework, nonbank SDs have flexibility
in developing their models, but must follow certain minimum standards.
Internal market risk and credit risk models must follow a Value at Risk
(``VaR'') structure to compute, on a daily basis, a 99th percentile,
one-tailed confidence interval for the potential losses resulting from
an instantaneous price shock equivalent to a 10-day movement in prices
(unless a different timeframe is specifically indicated). The
simulation of this price shock must be based on a historical
observation period of minimum length of one year, but there is
flexibility on the method used to render simulations, such as variance-
covariance matrices, historical simulations, or Monte Carlo.
The Commission and the Basel standards for internal models also
have requirements on the selection of appropriate risk factors as well
as on data quality and update frequency.\210\ One specific concern is
that models must capture the non-linear price characteristics of
options positions, including but not limited to, relevant volatilities
at different maturities.\211\ In addition, BCBS standards for market
risk models include a series of additive components for risks for which
the broad VaR is ill-suited or that may need targeted calculation.
These include the calculation of a Stressed VaR measure (with the same
specifications as the VaR, but calibrated to historical data from a
continuous 12-month period of significant financial stress relevant to
the firm's portfolio); a Specific Risk measure (which includes the
effect of a specific instrument); an Incremental Risk measure (which
addresses changes in the credit rating of a specific obligor which may
appear as a reference in an asset); and a Comprehensive Risk measure
(which addresses risk of correlation trading positions).
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\210\ See 17 CFR Appendix A to Subpart E of Part 23(i)(2)(iii),
and Basel Committee on Banking Supervision, Revisions to the Basel
II Market Risk Framework (2011), paragraph 718(Lxxvi)(e), available
at: <a href="https://www.bis.org/publ/bcbs193.pdf">https://www.bis.org/publ/bcbs193.pdf</a>.
\211\ The Commission's requirement is set forth in paragraph
(i)(2)(iv)(A) of Appendix A to Subpart E of 17 CFR part 23. See also
Basel Committee on Banking Supervision, Revisions to the Basel II
Market Risk Framework (2011), paragraph 718(Lxxvi)(h), available at:
<a href="https://www.bis.org/publ/bcbs193.pdf">https://www.bis.org/publ/bcbs193.pdf</a>.
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Finally, prong (iii) of the CFTC Capital Rules' Bank-Based Approach
is a minimum capital requirement that is based on the amount of initial
margin for uncleared swap transactions entered into by the nonbank SD
and is computed on a counterparty-by-counterparty basis. The
requirement for a nonbank SD to maintain minimum capital equal to or
greater than 8 percent of the firm's uncleared swap margin provides a
capital floor based on a measure of the risk and volume of the swap
positions, and the number of counterparties and the complexity of
operations, of the nonbank SD. The intent of the minimum capital
requirement based on a percentage of the nonbank SD's uncleared swap
margin was to establish a minimum capital requirement that would help
ensure that the nonbank SD meets all of 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.
2. The EU Investment Firms Capital Rules: EU IFR/IFD Nonbank Swap
Dealer Minimum Capital Requirements
The EU Investment Firms Capital Rules impose risk-based capital
requirements on an EU IFR/IFD nonbank SD that, consistent with the BCBS
framework, require the firm to hold sufficient amounts of qualifying
equity capital and subordinated debt based on the EU IFR/IFD nonbank
SD's activities, to absorb decreases in the value of the firm's assets,
increases in the value of the firm's liabilities, and to cover losses
resulting from business activities, including possible counterparty
defaults without becoming insolvent. The EU Investment Firms Capital
Rules require each EU IFR/IFD nonbank SD to maintain sufficient levels
of common equity tier 1 capital, additional tier 1 capital, and tier 2
capital to meet its minimum capital requirement, which is the highest
of the firm's permanent minimum requirement or PMR, fixed overheads
requirement or FOR, or the sum of the firm's K-factor requirements or
KFR. The EU IFR/IFD nonbank SD is required to hold sufficient capital
to satisfy the following capital ratios, expressed as a percentage of
the nonbank SD's minimum capital requirement: (i) common equity tier 1
capital ratio of 56 percent; (ii) common equity tier 1 and additional
tier 1 capital ratio of 75 percent; and (iii) total capital ratio of
100 percent.\212\
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\212\ IFR Article 9.
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Under the EU Investment Firms Capital Rules, the minimum capital
requirement of an EU IFR/IFD nonbank SD is determined as the highest of
the firm's PMR, FOR, or KFR. As represented by the Applicant, while the
PMR, which is set at EUR 750,000 for EU IFR/IFD nonbank SDs subject to
this Comparability Determination such as the Applicant, is relatively
modest, in practice, an EU IFR/IFD nonbank SD's minimum capital
requirement is likely to be greater--either the FOR or, more likely,
the KFR.\213\ As noted above, the KFR is a mixture of activity and
exposure-based capital requirement that incorporates, among other risk
categories, market risk (K-NPR) and credit risk (K-TCD).
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\213\ IFR and IFD provide for different levels of PMR depending
on the activities in which the firm engages. For investment firms
that engage in swap dealing, the PMR is EUR 750, 000. IFR Article 14
and IFD Article 9.
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An EU IFR/IFD nonbank SD's market risk is captured by the K-factor
for net position risk, K-NPR. K-NPR applies to positions in the EU IFR/
IFD nonbank SD's trading book, as well as to positions not in the
trading book that give rise to foreign exchange or commodities risk. An
EU IFR/IFD nonbank SD is required to compute market risk amounts using
the methodologies set forth in the IFR, which, in turn, refers to CRR
for the
[[Page 27809]]
calculation approaches.\214\ Currently, to calculate market risk
charges, an EU IFR/IFD nonbank SD can either apply a standardized
approach or, if approved by the relevant regulatory authority, a market
risk model.\215\ As discussed in Section III.C.3.b below, following the
effective date of certain amendments to CRR, planned for January 1,
2027, the current model approach would be replaced by an alternative
standardized approach and an alternative market risk model.\216\
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\214\ IFR Article 22.
\215\ IFR Article 57 and CRR (as amended by Regulation (EU)
2019/630), Part Three, Title IV.
\216\ IFR Articles 22 and 57. The standardized approach is set
out in Chapters 2, 3 and 4 of Title IV of Part Three of CRR. The
alternative standardized approach and the alternative internal model
approach are set out in Chapter 1a and Chapter 1b, respectively, of
Title IV of Part Three of CRR. The applicability of the alternative
standardized approach and the alternative internal model approach,
initially planned for June 26, 2026, was postponed to January 1,
2027. See European Commission's announcement of June 12, 2025,
available here: <a href="https://finance.ec.europa.eu/news/commission-proposes-postpone-one-additional-year-market-risk-prudential-requirements-under-basel-iii-2025-06-12_en">https://finance.ec.europa.eu/news/commission-proposes-postpone-one-additional-year-market-risk-prudential-requirements-under-basel-iii-2025-06-12_en</a>.
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EU IFR/IFD nonbank SDs calculate standardized market risk charges
generally by multiplying the notional or carrying amount of net
positions or of adjusted 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 increase. Market risk
requirements for debt instruments and equity instruments are calculated
separately under the standardized approach, and are each calculated as
the sum of specific risk and general risk of the positions.\217\
Securitizations are treated as debt instruments for market risk
requirements,\218\ whereas derivative positions are generally treated
as exposures on their underlying assets,\219\ with options being delta-
adjusted.\220\
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\217\ CRR (as amended by Regulation (EU) 2019/630) Article 326.
See also id., Articles 334-340 (provisions related to debt
instruments) and 341-343 (provisions related to equities).
\218\ CRR (as amended by Regulation (EU) 2019/630) Article 326.
\219\ CRR (as amended by Regulation (EU) 2019/630) Articles 328-
330.
\220\ CRR (as amended by Regulation (EU) 2019/630) Article 329.
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The EU Investment Firms Capital Rules also require EU IFR/IFD
nonbank SDs to include in their risk-based capital requirements for
market risk, exposures to certain foreign currency and gold positions.
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.\221\ The capital requirement
for foreign exchange risk under the standardized approach is 8 percent
of the EU IFR/IFD nonbank SD's net positions in foreign exchange and
gold.\222\ The EU Investment Firms Capital Rules further require EU
IFR/IFD nonbank SDs to include exposures to commodity positions in
calculating the firm's risk-based capital requirements for market risk.
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.\223\ 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.\224\
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\221\ CRR (as amended by Regulation (EU) 2019/630) Article 351.
\222\ Id.
\223\ CRR (as amended by Regulation (EU) 2019/630) Article 360.
\224\ CRR (as amended by Regulation (EU) 2019/630) Articles 359-
361.
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An EU IFR/IFD nonbank SD may also apply to the relevant regulatory
authority for approval to use an internal model to calculate one or
more of the following market risk categories: (i) general risk of
equity instruments, (ii) specific risk of equity instruments, (iii)
general risk of debt instruments, (iv) specific risk of debt
instruments, (v) foreign exchange risk, or (vi) commodities risk,\225\
along with interest rate on derivatives.\226\ An EU IFR/IFD nonbank SD
approved to use models must also obtain approval from the relevant
authority to implement a material change to the model or make a
material extension to the use of the model.\227\ The EU Investment
Firms Capital Rules' model-based methodology is based on the BCBS Basel
2.5 standard.\228\ Accordingly, the EU Investment Firms Capital Rules
incorporate relevant aspects of the BCBS framework \229\ in terms of
requiring firms with model approval to use a VaR model with a 99
percent, one-tailed confidence level with (i) price changes equivalent
to a ten business-day movement in rates and prices, (ii) effective
historical observation periods of at least one year and (iii) at least
monthly data set updates,\230\ as well as a requirement to calculate a
``stressed'' VaR.\231\
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\225\ CRR (as amended by Regulation (EU) 2019/630) Articles
363(1).
\226\ CRR (as amended by Regulation (EU) 2019/630) Articles
331(1), using sensitivity models.
\227\ CRR (as amended by Regulation (EU) 2019/630) Articles
363(3).
\228\ Compare CRR (as amended by Regulation (EU) 2019/630)
Article 362-377, with Revisions to the Basel 2 Market Risk
Framework.
\229\ The BCBS framework for measuring risk-weighted assets, and
the controls around such measurements, are updated from time to
time. These standards for measurement and controls are accepted and
applied to financial risk modeling beyond banking entities. It has
been the experience that EU and CFTC requirements are updated timely
to reflect such updates to the BCBS framework, thus maintaining a
common core of methodologies and control practices. The Commission
expects that this convergence will continue.
\230\ CRR (as amended by Regulation (EU) 2019/630) Article
365(1).
\231\ Id., Article 365(2). See also CFTC Capital Final Rule
Release, 85 FR 57462 at n.332 (citing the BCBS' Revisions to the
Basel 2 Market Risk Framework for an explanation of the
implementation of the stressed VaR requirement).
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To obtain a permission for the use of a market risk model, an EU
IFR/IFD nonbank SD must demonstrate to the satisfaction of the relevant
regulatory authority that it meets certain conditions.\232\ The
conditions include specified model elements and controls including risk
and stressed risk calculations,\233\ back-testing and multiplication
factors,\234\ risk measurement requirements,\235\ governance and
qualitative requirements,\236\ internal validation,\237\ and specific
requirements by risk categories.\238\
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\232\ CRR (as amended by Regulation (EU) 2019/630) Part Three,
Title IV, Chapter 5.
\233\ CRR (as amended by Regulation (EU) 2019/630) Articles 364-
365.
\234\ Id., Article 366.
\235\ Id., Article 367.
\236\ Id., Article 368.
\237\ Id., Article 369.
\238\ Id., Part Three, Title IV, Chapter 5, Section 3.
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An EU IFR/IFD nonbank SD may apply to the relevant regulatory
authority for permission to use K-CMG, instead of K-NPR, to compute
market risk charges for specified positions, where clearing and
settlement take place under the responsibility of a clearing member of
a CCP.\239\ To obtain permission to use K-CMG, the EU IFR/IFD nonbank
SD must demonstrate that the margin requirements resulting from the
clearing models are sufficient to cover losses that may result from at
least 99 percent of the exposures movements over an appropriate time
horizon with at least a two-business days' holding period.\240\ The K-
CMG market risk charge is determined by applying the margin model of
the relevant clearing member or CCP, as applicable, to the cleared
positions of the EU IFR/IFD nonbank SD for each day of the previous
[[Page 27810]]
three months. The K-CMG market risk charge is then set equal to the
third highest cleared margin amount over such three-month period,
multiplied by a factor of 1.3.\241\
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\239\ IFR Recital 21, Article 4(32), and Article 23.
\240\ Id.
\241\ IFR Article 23.
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As noted in Section III.C.2 above, following the effective date of
certain amendments to CRR, planned for January 1, 2027, the current
market risk model approach will be replaced. Following the changes, the
calculation methodologies for capital requirement for market risk will
include an alternative standardized approach and an alternative model
approach, in addition to the existing standardized approach discussed
above. The alternative standardized approach uses a sensitivities-based
method that includes a residual risk add-on and a default risk
charge.\242\ The method aggregates shocked factor losses across
calibrated risk weights, buckets, and three correlation scenarios, and
takes the most conservative result.\243\ The alternative models
approach incorporates an aggregate modellable risk charge, an expected-
shortfall component, a stressed expected shortfall charge for non-
modellable risk factors, a default risk charge, and a P&L attribution
add-on, but derives these charges from validated internal models
subject to P&L attribution and back-testing and therefore depends on
bank-specific model estimation subject to supervisory approval.\244\
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\242\ IFR Article 22(b) (cross-referencing CRR, Part Three,
Title IV, Chapter 1a, Article 325c et seq.).
\243\ Id.
\244\ IFR Article 22(b) (cross-referencing CRR, Part III, Title
IV, Chapter 1b).
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With respect to credit risk, the trading counterparty default K-
factor requirement, K-TCD, is designed to capture the risk of an EU
IFR/IFD nonbank SD to the default of its trading counterparty with
respect to certain transactions, including OTC derivative
contracts.\245\ K-TCD takes into account the exposure value of the
transaction, the risk factor that applies to the counterparty type, and
the CVA.\246\ The exposure value is determined using replacement cost
and potential future exposure, and taking into consideration collateral
held against the exposure.\247\ The counterparty risk factor is either
1.6 percent for central governments, central banks, public sector
entities, credit institutions and investment firms, or 8 percent for
other counterparties.\248\ The CVA, which is either 1 or 1.5 depending
on the transaction, represents an adjustment to the mid-market
valuation of the portfolio of transactions with a counterparty to
reflect the current market value of the credit risk of the counterparty
to the EU IFR/IFD nonbank SD.\249\ An EU IFR/IFD nonbank SD may also
ask permission from the relevant competent authority to apply SA-CCR to
calculate the capital requirements for credit risk.\250\
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\245\ However, derivative contracts directly or indirectly
cleared through a CCP (provided various conditions are met),
exchange-traded derivative contracts, and derivative contracts held
for hedging a position of the firm resulting from an activity
outside the trading book are excluded K-TCD calculation.
Furthermore, transactions with central government and central banks,
where the underlying exposures receive a 0 percent risk weight under
Article 114 of CRR, multilateral development banks listed in Article
117(2) of CRR, and international organizations listed in Article 118
of CRR are not required to be included when calculating K-TCD. IFR
Article 25.
\246\ IFR Article 26.
\247\ IFR Article 27.
\248\ IFR Article 26.
\249\ IFR Article 32.
\250\ IFR Article 25(4). SA-CCR is a non-model, rule-based
approach to calculating counterparty credit risk established by the
BCBS framework and available under both the CFTC Capital Rules and
CRR.
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The EU IFR/IFD Capital Rules' KFR also incorporates other risk
categories, such as operational risk. In particular, the K-factor
requirement for daily trading flow, K-DTF, is designed to capture the
operational risks relating to the value of trading activity a firm
conducts throughout each business day.\251\ In addition, the capital
charges for client money held (K-CMH) and safeguarded assets (K-ASA)
seek to capture the operational, legal and other risks associated with
holding margin provided by customers (where held as client assets).
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\251\ IFR Recitals 22 and 26.
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Furthermore, the EU Investment Firms Capital Rules impose separate
liquidity requirements on an EU IFR/IFD nonbank SD to address liquidity
risk. Specifically, an EU IFR/IFD nonbank SD must meet the IFR's
``minimum liquidity requirement,'' which requires that the EU IFR/IFD
nonbank SD hold a minimum amount of high quality liquid assets based on
the firm's FOR.\252\ The EU Investment Firms Capital Rules' liquidity
requirements are intended to help ensure that EU IFR/IFD nonbank SDs
can fund the primary stages of a wind-down process, if wind-down
becomes necessary. The aim of the ``minimum liquidity requirement'' is
to ensure that investment firms can function in an orderly manner over
time, without the need to set aside liquidity specifically for times of
stress.\253\
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\252\ IFR Article 43.
\253\ IFR Recital 28.
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In addition, an EU IFR/IFD nonbank SD is required to have in place
sound, effective and comprehensive arrangements, strategies and
processes to assess and maintain, on an ongoing basis, the amounts,
types and distribution of internal capital and liquid assets that they
consider adequate to cover the nature and level of risks which they may
pose to others and to which the investment firms themselves are or
might be exposed.\254\ An EU IFR/IFD nonbank SD has to determine,
through the internal capital adequacy and risk assessment (ICARA)
process, any supplementary capital and liquid assets requirements, in
addition to the minimum regulatory capital requirement and the liquid
assets requirement, that may be necessary to manage risks that could
result in a material harm.
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\254\ IFD Article 24, French MFC Article L. 533-2-2 and Order of
November 3, 2014, on the prudential supervision and risk assessment
process for banking service providers and investment firms other
than portfolio management companies.
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3. Commission Analysis
The Commission has reviewed the EU IFR/IFD Application and the
relevant EU laws and regulations and has determined that the EU
Investment Firms Capital Rules are comparable in purpose and effect to
the CFTC Capital Rules with regard to the establishment of the nonbank
SD's minimum capital requirement and the calculation of the nonbank
SD's amount of regulatory capital to meet that requirement.
Although there are differences between the EU Investment Firms
Capital Rules and the CFTC Capital Rules, as discussed below, the
Commission believes that the EU Investment Firms Capital Rules and the
CFTC Capital Rules are aligned in their objectives to ensure the safety
and soundness of a nonbank SD and, subject to the conditions discussed
below, will achieve comparable outcomes by requiring the firm to
maintain a minimum level of qualifying regulatory capital, including
subordinated debt, to absorb losses from the firm's business
activities, including swap dealing activities, and decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities, without the nonbank SD becoming insolvent. The
Commission's finding of comparability is based on a comparative
analysis of the three minimum capital requirements thresholds of the
CFTC Capital Rules' Bank-Based Approach (i.e., the three prongs recited
in Section III.C.1. above) and the respective elements of the EU
Investment Firms Capital Rules' requirements, as discussed below.
[[Page 27811]]
a. Fixed Amount Minimum Capital Requirement
CFTC Capital Rules and the EU Investment Firms Capital Rules both
require nonbank SDs to hold a fixed minimum amount of regulatory
capital that is not directly activity-based and risk-based. 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.\255\ The EU Investment Firms Capital Rules also contain a
requirement that an EU IFR/IFD nonbank SD maintain a fixed amount of
minimum initial capital of EUR 750,000.\256\
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\255\ 85 FR 57462 at 57492.
\256\ IFR Article 14 and IFD Article 9.
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The Commission recognizes that the $20 million fixed-dollar minimum
capital required under the CFTC Capital Rules is substantially higher
than the EUR 750,000 minimum base capital required under the EU IFR/IFD
Capital Rules and the Commission believes that the $20 million
represents a more appropriate level of minimum capital to help ensure
the safety and soundness of the nonbank SD that is engaging in
uncleared swap transactions. Accordingly, the Commission is requiring
each EU IFR/IFD nonbank SD to maintain, at all times, a minimum level
of $20 million regulatory capital in the form of common equity tier 1
items as defined in Article 26 of CRR.\257\ The condition requires each
EU IFR/IFD nonbank SD to maintain an amount of common equity tier 1
capital denominated in euro that is equivalent to the $20 million in
U.S. dollars.\258\ An EU IFR/IFD nonbank SD may convert the euro-
denominated common equity tier 1 capital amount to the U.S. dollar
equivalent based on a commercially reasonable and observable exchange
rate.
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\257\ Condition 8 of the Comparability Order. The Commission
notes that the requirement that EU IFR/IFD nonbank SDs maintain a
minimum level of the equivalent of $20 million of common equity tier
1 capital is consistent with the conditions set forth in the
comparability orders for Japan, Mexico, the EU (for nonbank SDs
domiciled in France or Germany and subject to the capital
requirements established under CRR and CRD), and the UK (for PRA-
designated UK nonbank SDs). See Order Granting Conditional
Substituted Compliance in Connection With Certain Capital and
Financial Reporting Requirements Applicable to Nonbank Swap Dealers
Subject to Regulation by the Financial Services Agency of Japan, 89
FR 58470 (July 18, 2024); Order Granting Conditional Substituted
Compliance in Connection With Certain Capital and Financial
Reporting Requirements Applicable to Nonbank Swap Dealer Subject to
Regulation by the Mexican Comision Nacional Bancaria y de Valores
and Banco de Mexico, 89 FR 58505 (July 18, 2024); 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, 89 FR
58572 (July 18, 2024); and Order Granting Conditional Substituted
Compliance in Connection With Certain Capital and Financial
Reporting Requirements Applicable to Nonbank Swap Dealers Subject to
Regulation by the United Kingdom Prudential Regulation Authority, 89
FR 58535 (July 18, 2024).
\258\ Goldman Sach Paris, the only EU IFR/IFD nonbank SD
currently registered with the Commission, maintains common equity
tier 1 capital in euros in excess of the equivalent of $20 million
based on financial filings made with the Commission. Therefore, the
Commission does not anticipate that the condition would have any
material impact on an EU IFR/IFD nonbank SD registered with the
Commission.
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b. Minimum Risk-Based Capital Requirements
Prong (ii) of the CFTC Capital Rules' Bank-Based Approach requires
each nonbank SD 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.\259\ 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 international bank
capital adequacy 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.
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\259\ 17 CFR 23.101(a)(1)(B).
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The EU Investment Firms Capital Rules contain capital requirements
for EU IFR/IFD nonbank SDs that the Commission believes are comparable
to the requirements contained in prong (ii) of the CFTC Capital Rules.
Although the aim of the IFR/IFD Framework is to establish capital
requirements that are better aligned to the investment firms' risk
profile and business activities than the BCBS-based bank capital
requirements, the EU Investment Firms Capital Rules retain certain key
elements of the BCBS framework, including as it relates to the quality
of regulatory capital, the calculation of market risk, and the
treatment of counterparty credit risk.
The EU Investment Firms Capital Rules are comparable to the Bank-
Based Approach as they require firms to hold sufficient regulatory
capital to meet capital requirements that take into consideration the
risks of the firm's activities and positions. The CFTC Capital Rules
require a nonbank SD to maintain qualifying equity capital and
qualifying subordinated debt in an amount that equals or exceeds 8
percent of the nonbank SD's risk-weighted assets. The EU Investment
Firms Capital Rules impose a comparable approach, requiring an EU IFR/
IFD nonbank SD to maintain qualifying equity capital and qualifying
subordinated debt in an amount that equals or exceeds the highest of
the firm's PMR, FOR, or KFR. The KFR, which establishes the controlling
minimum capital requirement for Goldman Sachs Paris, and is anticipated
to be the controlling requirement for potential future EU IFR/IFD
nonbank SDs that engage in swap dealing activities, is a mixture of an
activity-based and exposure-based capital requirement that incorporates
market and credit risk, among other risk categories.
The calculation of market risk charges is comparable under the EU
Investment Firms Capital Rules and the CFTC Capital Rules. Both regimes
require a nonbank SD to use standardized approaches to compute market
risk, unless the firms are approved to use internal models. The
standardized approaches follow the same structure that is now the
common global standard: allocating assets to categories according to
risk and assigning each a risk weight; calculating gross exposures
based on valuation of assets; calculating a net exposure allowing
offsets following well defined procedures and subject to clear
limitations; and adjusting the net exposure by the market risk weights.
The standardized risk
[[Page 27812]]
weights contained in the EU Investment Firms Capital Rules and the CFTC
Capital Rules result in comparable risk charges for comparable
exposures. Both sets of rules require a nonbank SD to effectively
maintain qualifying capital equal to or in excess of 100 percent of its
market risk-weighted assets. The CFTC Capital Rules achieve this result
by requiring the nonbank SD to multiply its market risk-weighted assets
by a factor of 12.5.\260\ The EU Investment Firms Capital Rules achieve
the same result by adding K-NPR directly to the KFR requirement.
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\260\ For example, the market risk exposure amount for
marketable equity securities with a current fair market value of
$250,000 is $37,500 (market value of $250,000 x .15 standardized
market risk factor). The nonbank SD is required to maintain
regulatory capital equal to or in excess of full market risk
exposure amount of $37,500 (risk exposure amount of $37,500 x 8
percent regulatory capital requirement equals $3,000; the regulatory
capital requirement is then multiplied by a factor of 12.5, which
effectively requires the nonbank SD to hold regulatory capital in an
amount equal to at least 100 percent of the market risk exposure
amount ($3,000 x 12.5 factor equals $37,500)).
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Market risk models under the CFTC Capital Rules and the EU
Investment Firms Capital Rules are based on the BCBS framework and
contain comparable quantitative and qualitative requirements, which
produce comparable market charges for comparable exposures. In that
regard, both the CFTC Capital Rules and the EU Investment Firms Capital
Rules aim to ensure that a nonbank SD holds sufficient capital to cover
potential losses due to adverse market movements, particularly under
stressed market conditions. The CFTC Capital Rules and the EU
Investment Firms Capital Rules' requirement for net positions risk (K-
NPR), consistent with the Basel 2.5 framework, both employ a Value-at-
Risk (VaR) methodology with the following features: one-tailed 99
percent confidence level, 10-business-day price change horizon,
historical observation period of at least one year, and monthly data
updates (at minimum), as well as a stress VaR methodology which
requires using data from a historical stress period. The requirements
are designed to capture the tail risks of a firm's trading book during
an extreme but plausible stress event.
The Commission believes that the CFTC Capital Rules and the EU
Investment Firms Capital Rules are comparable in purpose and effect
because they contain the same core elements: methodologies to
distinguish and measure business activities, classification and
measurement of risks arising from those activities, assignment of the
appropriate corresponding capital requirement, and policies and
procedures for risk management (including setting and reviewing risk
tolerances and mitigation of breaches). Each framework places
governance at the center of effective risk management.
As noted in Section III.C.2 above, following the effective date of
certain amendments to CRR, planned for January 1, 2027, the current
market risk model approach will be replaced. Following the changes, the
calculation methodologies for capital requirement for market risk will
include an alternative standardized approach and an alternative model
approach, in addition to the existing standardized approach.\261\ The
general approach of basing the minimum capital requirement on risk-
weighted assets, however, will be maintained.
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\261\ IFR Article 22. The addition of the alternative
standardized approach and an alternative model approach is
consistent with revisions to the BCBS framework and is part of the
finalization of the Basel III reforms. The implementation of the
Basel III standards is in progress and remains subject to changes
both in the EU and the U.S.
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The new approaches--the alternative standardized approach and the
alternative internal models approach--share the same regulatory purpose
and produce broadly comparable effects for trading-book capital. The
alternative standardized approach uses a sensitivities-based method
that includes a residual risk add-on and a default risk charge.\262\
The method aggregates shocked factor losses across calibrated risk
weights, buckets, and three correlation scenarios, and takes the most
conservative result.\263\ The alternative models approach incorporates
an aggregate modellable risk charge, a stressed expected-shortfall
component (including a charge for non-modellable risk factors), a
default risk charge, and a P&L attribution add-on, but derives these
charges from validated internal P&L models subject to P&L attribution
and back-testing and therefore depends on bank-specific model
estimation subject to supervisory approval.\264\ Despite differences in
methodology, complexity, and data requirements, both new approaches
target the same core risk drivers--market sensitivities, residual/non-
modellable exposures, and default risk--and seek to deliver comparable
levels of protection against trading-book losses.
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\262\ IFR Article 22(b) (cross-referencing CRR, Part III, Title
IV, Chapter 1a).
\263\ Id.
\264\ IFR Article 22(c) (cross-referencing CRR, Part III, Title
IV, Chapter 1b).
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The EU Investment Firms Capital Rules and the CFTC Capital Rules
also contain comparable requirements for the management of model risk,
which depend on a series of controls, including the independence of
validation, ongoing monitoring, and audit. The ongoing monitoring
includes frequent tests, such as stress testing, back-testing, and
benchmarking.
Notwithstanding the expected replacement of the current internal
models approach with new approaches to calculating market risk under
the EU Investment Firms Capital Rules, both the CFTC Capital Rules and
the EU Investment Firms Capital Rules will continue to incorporate
approaches to risk-weighted assets that rely on statistical processes
to measure market price risk, account for default risk and non-
modellable risk factors, and empower the relevant regulatory authority
to ensure any remaining material risks are captured. Although
statistical techniques will evolve, both regulatory regimes will
continue to require rigorous model development, validation, and ongoing
monitoring, thereby reducing differences in outcomes. For these
reasons, the Commission believes that the EU Investment Firms Capital
Rules' approach to calculating capital requirements for market risk, as
administered by the relevant regulatory authority, will remain aligned
with the CFTC Capital Rules as it regards the calculation of capital
requirements for market risk. The Commission does not expect that the
forthcoming changes designed to implement the Basel III standards in
the EU Investment Firms Capital Rules will impact the Commission's
conclusion. Given the coordination mechanisms established by the BCBS,
the Commission expects that the CFTC Capital Rules and the EU
Investment Firms Capital Rules will continue to incorporate consistent,
similarly calibrated, approaches to market risk.\265\
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\265\ The Commission's conclusion applies also to the
Commission's Comparability Determination regarding larger nonbank
SDs domiciled in the EU that are subject to the capital requirements
established by the CRR/CRD framework. See 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, 89 FR 58572 (July 18,
2024).
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Separately, the EU Investment Firms Capital Rules' K-factor
approach offers an alternative method for computing market risk capital
requirements for certain approved positions that are subject to
clearing, based on cleared margin requirements (K-CMG).\266\ To
[[Page 27813]]
compute K-CMG, an EU IFR/IFD nonbank SD must select the third-highest
daily amount of margin required by the clearing member of a qualified
CCP over the preceding three months and apply a 1.3x multiplier. The
margin requirements resulting from the clearing member model must be
sufficient to cover losses that may result from at least 99 percent of
the exposures movements over an appropriate time horizon with at least
a two-business day holding period. The Commission notes that no EU IFR/
IFD nonbank SD currently registered with the Commission has elected to
use K-CMG.\267\
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\266\ Subject to conditions, the relevant regulatory authority
may permit specific types of firms that use the services of clearing
members to calculate capital requirements for market risk using K-
CMG. IFR Recital 21 and Article 23. Among other conditions, to
obtain regulatory approval to use K-CMG, an EU IFR/IFD nonbank SD
must demonstrate that the choice of calculating market risk
requirements with K-CMG is justified by the nature of the main
activities of the firm, which would generally be trading activities
subject to clearing and margining under the responsibility of a
clearing member of a CCP. IFR Article 23(1)(d).
\267\ If an EU IFR/IFD nonbank SD obtains approval from the
relevant regulatory authority and elects to use K-CMG, the
Commission would assess the impact of such change with respect to
the firm's reliance on the Comparability Order, taking into
consideration the nature of the firm's activities. The Commission
considers that a firm's election to use K-CMG is a material change
to the information submitted in connection with the EU IFR/IFD
Application that would necessitate a notice to the Commission under
Condition 24 of this Comparability Order.
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Both the EU Investment Firms Capital Rules and the CFTC Capital
Rules also provide for the calculation of counterparty credit risk
charges for derivatives positions. Counterparty credit risk captures a
nonbank SD's exposure to the risk of default by trading counterparties,
particularly when the value of the firm's derivative portfolio is
increasing. Both the CFTC Capital Rules' approach to calculating
counterparty credit risk and the EU Investment Firms Capital Rules'
trading counterparty default K-fact (K-TCD) are based on the
Standardized Approach to Counterparty Credit Risk (SA-CCR),\268\ as
developed under the BCBS framework. Both approaches use a formula that
considers the transaction's exposure value calculated as the sum of the
replacement cost and the potential future exposure, a risk factor/
weight based on the type of counterparty, and an adjustment for
collateral. Both the CFTC Capital Rules and the EU Investment Firms
Capital Rules also include a CVA component where applicable.
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\268\ As reflected in the calculation
[…truncated; see source link]Indexed from Federal Register on May 14, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.