[Federal Register Volume 84, Number 62 (Monday, April 1, 2019)]
[Rules and Regulations]
[Pages 12074-12081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06152]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Amendment to Comparability Determination for Japan: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notification of Amendment to Comparability Determination for 
Margin Requirements for Uncleared Swaps under the Laws of Japan.

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SUMMARY: The following is an amendment (this ``Amendment'') to the 
Comparability Determination for Japan: Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants of the 
Commodity Futures Trading Commission (``Commission'' or ``CFTC'') 
published on September 15, 2016 (the ``Japan Determination''). This 
Amendment amends the Japan Determination by: Making a positive 
determination of comparability with respect to the scope of entities 
subject to margin requirements, and making a positive determination of 
comparability with respect to the treatment of inter-affiliate 
transactions. All other findings and determinations contained in the 
Japan Determination remain unchanged and in full force and effect.

DATES: This Amendment to the Japan Determination is effective April 1, 
2019.

FOR FURTHER INFORMATION CONTACT: Matthew B. Kulkin, Director, 202-418-
5213, [email protected], or Frank N. Fisanich, Chief Counsel, 202-418-
5949, [email protected], Division of Swap Dealer and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    On September 15, 2016, the Commission published the Japan 
Determination,\1\ which provided the

[[Page 12075]]

analysis and determination of the Commission regarding a request by the 
Japan Financial Services Agency (``JFSA'') that the Commission 
determine that laws and regulations applicable in Japan provide a 
sufficient basis for an affirmative finding of comparability with 
respect to margin requirements for uncleared swaps applicable to 
certain swap dealers (``SDs'') and major swap participants (``MSPs'') 
registered with the Commission. Although discussed in the Japan 
Determination, the Commission did not make a finding regarding whether 
the scope of entities subject to the JFSA's margin requirements for 
non-cleared OTC derivatives was comparable in outcome to the scope of 
entities subject to the Commission's margin requirements for uncleared 
swaps. As discussed below, the Commission now finds that it is. 
Further, the Japan Determination found the JFSA's margin requirements 
for non-cleared OTC derivatives between affiliates not comparable in 
outcome to the Commission's margin requirements for uncleared swaps 
between affiliates. As discussed below, the Commission has reconsidered 
this finding and now finds that such requirements are comparable in 
outcome to the Commission's own.
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    \1\ See Comparability Determination for Japan: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 63376 (Sept. 15, 2016).
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II. Regulatory Background

    Pursuant to section 4s(e) of the CEA,\2\ the Commission is required 
to promulgate margin requirements for uncleared swaps applicable to 
each SD and MSP for which there is no U.S. Prudential Regulator 
(collectively, ``Covered Swap Entities'' or ``CSEs'').\3\ The 
Commission published final margin requirements for such CSEs in January 
2016 (the ``CFTC Margin Rule'').\4\
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    \2\ 7 U.S.C. 1 et. seq.
    \3\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
U.S. Prudential Regulator must meet the margin requirements for 
uncleared swaps established by the applicable U.S. Prudential 
Regulator. 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining 
the term ``Prudential Regulator'' to include the Board of Governors 
of the Federal Reserve System; the Office of the Comptroller of the 
Currency; the Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency). The U.S. 
Prudential Regulators published final margin requirements in 
November 2015. See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015).
    \4\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC 
Margin Rule, which became effective April 1, 2016, is codified in 
part 23 of the Commission's regulations. See Sec. Sec.  23.150-
23.159, 161. The Commission's regulations are found in Chapter 17 of 
the Code of Federal Regulations, 17 CFR 1 et. seq.
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    Subsequently, on May 31, 2016, the Commission published in the 
Federal Register its final rule with respect to the cross-border 
application of the CFTC Margin Rule (hereinafter, the ``Cross-Border 
Margin Rule'').\5\ The Cross-Border Margin Rule sets out the 
circumstances under which a CSE is allowed to satisfy the requirements 
under the CFTC Margin Rule by complying with comparable foreign margin 
requirements (``substituted compliance''); offers certain CSEs a 
limited exclusion from the Commission's margin requirements; and 
outlined a framework for assessing whether a foreign jurisdiction's 
margin requirements are comparable in outcome to the CFTC Margin Rule 
(``comparability determinations''). The Commission stated that 
substituted compliance helps preserve the benefits of an integrated, 
global swap market by reducing the degree to which market participants 
will be subject to multiple sets of regulations. Further, substituted 
compliance builds on international efforts to develop a global margin 
framework.\6\
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    \5\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016). The Cross-Border Margin 
Rule, which became effective August 1, 2016, is codified in part 23 
of the Commission's regulations. See Sec.  23.160.
    \6\ In October 2011, the Basel Committee on Banking Supervision 
(``BCBS'') and the International Organization of Securities 
Commissions (``IOSCO''), in consultation with the Committee on 
Payment and Settlement Systems and the Committee on Global Financial 
Systems, formed a Working Group on Margining Requirements to develop 
international standards for margin requirements for uncleared swaps. 
Representatives of 26 regulatory authorities participated, including 
the Commission. In September 2013, the WGMR published a final report 
articulating eight key principles for non-cleared derivatives margin 
rules. These principles represent the minimum standards approved by 
BCBS and IOSCO and their recommendations to the regulatory 
authorities in member jurisdictions. See BCBS/IOSCO, Margin 
requirements for non-centrally cleared derivatives (updated March 
2015) (``BCBS/IOSCO Framework''), available at http://www.bis.org/bcbs/publ/d317.pdf.
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    On June 17, 2016, the JFSA submitted a request that the Commission 
determine that laws and regulations applicable in Japan provide a 
sufficient basis for an affirmative finding of comparability with 
respect to the CFTC Margin Rule. In due course, the Commission 
published the Japan Determination on September 15, 2017.

III. Margin Requirements for Swaps Activities in Japan

    As represented to the Commission by the JFSA, margin requirements 
for swap activities in Japan are governed by the Financial Instruments 
and Exchange Act, No. 25 of 1948 (the ``Japan FIEA''), covering 
Financial Instrument Business Operators (``FIBOs'') and Registered 
Financial Institutions (``RFIs''), which include regulated banks, 
cooperatives, insurance companies, pension funds, and investment 
funds.\7\ The Japanese Prime Minister delegated broad authority to 
implement these laws to the JFSA. Pursuant to this authority, the JFSA 
has promulgated the FIB Ordinance,\8\ Supervisory Guidelines,\9\ and 
Public Notifications.\10\ These requirements supplement the 
requirements of the Japan FIEA with more detailed direction with 
respect to margin requirements.\11\
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    \7\ The Commission has provided the JFSA with opportunities to 
review and comment on the Commission's description of the JFSA's 
laws and regulations on which the Japan Determination and this 
Amendment are based. The Commission relies on the accuracy and 
completeness of such review and any corrections received in making 
its comparability determinations. A comparability determination, 
including any amendments made thereto, based on an inaccurate 
description of foreign laws and regulations may not be valid.
    \8\ Cabinet Office Ordinance on Financial Instruments Business 
(Cabinet Office Ordinance No. 52 of August 6, 2007), including 
supplementary provisions (``FIB Ordinance'').
    \9\ Comprehensive Guideline for Supervision of Major Banks, 
etc., Comprehensive Guidelines for Supervision of Regional Financial 
Institutions, Comprehensive Guideline for Supervision of Cooperative 
Financial Institutions, Comprehensive Guideline for Supervision of 
Financial Instruments Business Operators, etc., Comprehensive 
Guidelines for Supervision of Insurance Companies, and Comprehensive 
Guidelines for Supervision of Trust Companies, etc. (together, 
``Supervisory Guideline'').
    \10\ JFSA Public Notification No.15 of March 31, 2016 (``JFSA 
Public Notice No. 15''); JFSA Public Notification No.16 of March 31, 
2016 (``JFSA Public Notice No. 16''); and JFSA Public Notification 
No.17 of March 31, 2016 (``JFSA Public Notice No. 17'').
    \11\ Collectively, the Japan FIEA, FIB Ordinance, Supervisory 
Guideline, and JFSA Public Notifications are referred to herein as 
the ``JFSA's margin rules,'' ``JFSA's margin regime,'' ``JFSA's 
margin requirements'' or the ``laws of Japan.''
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    In Japan, the JFSA's margin rules apply to ``non-cleared OTC 
derivatives,'' which are defined to mean:

    OTC derivatives except for those cases where Financial 
Instruments Clearing Organizations (including an Interoperable 
Clearing Organization in cases where the Financial Instruments 
Clearing Organization conducts Interoperable Financial Instruments 
Obligation Assumption Business; hereinafter the same shall apply in 
paragraph (11), item (i)(c)1.) or a Foreign Financial Instruments 
Clearing Organization meets the obligation pertaining to OTC 
derivatives or cases designated by Commissioner of the Financial 
Services Agency prescribed in Article 1-18-2 of the Order for 
Enforcement of the [FIEA].\12\
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    \12\ See Cabinet Order No. 321 of 1965; Article 123(1)(xxi)-5 of 
the FIB Ordinance; and Article 2(22) of FIEA.

    As represented by the applicant, however, Japan has separate 
definitions of ``OTC Derivatives'' and ``OTC

[[Page 12076]]

Commodity Derivatives.'' \13\ Japan also has separate margin rules for 
OTC Commodity Derivatives that are administered by the Japan Ministry 
of Economy, Trade, and Industry (METI) and the Japan Ministry of 
Agriculture, Forestry, and Fisheries (MAFF). METI/MAFF finalized their 
margin requirements for non-cleared OTC Commodity Derivatives on August 
1, 2016.\14\ While the margin rules for non-cleared OTC Derivatives and 
OTC Commodity Derivatives are separate, the METI/MAFF non-cleared OTC 
Commodity Derivative rules incorporate by reference the corresponding 
JFSA margin rules,\15\ and thus, for all purposes material to the 
determinations below, the METI/MAFF rules and JFSA margin rules are 
identical. Accordingly, for ease of reference, the discussion below 
refers only to the JFSA and the JFSA margin rules, but such discussion 
is equally applicable to METI/MAFF and the METI/MAFF non-cleared OTC 
Commodity Derivative margin rules. Further, CSEs may rely on the 
determinations set forth below regarding non-cleared OTC Derivatives 
subject to the JFSA margin rules equally with respect to non-cleared 
OTC Commodity Derivatives subject to the METI/MAFF margin rules.
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    \13\ Article 2, Paragraph 14 of the Commodity Derivatives Act 
(Act No. 239 of August 5, 1950) defines OTC commodity derivatives.
    \14\ See Ministry of Agriculture, Forestry and Fisheries/
Ministry of Economy, Trade and Industry Public Notification No. 2 of 
August 1, 2016; Ordinance for Enforcement of the Commodity 
Derivatives Act (Ordinance of the Ministry of Agriculture, Forestry 
and Fisheries and the Ministry of Economy, Trade and Industry No. 3 
of February 22, 2005); Supplementary Provisions of Ordinance for 
Enforcement of the Commodity Derivatives Act No. 3 of February 22, 
2005; and Basic Supervision Guidelines of Commodity Derivatives 
Business Operators, etc.
    \15\ See id.
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IV. Amendments to the Japan Determination

A. Entities Subject to Margin Requirements

    The following amends and restates the entirety of the discussion 
with respect to entities subject to margin requirements as it appeared 
in the Japan Determination.\16\
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    \16\ See Japan Determination 81 FR at 63380-81.
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    The scope of entities subject to the JFSA's margin requirements and 
how it compares to the scope of entities subject to the CFTC Margin 
Rule was discussed in the Japan Determination, but the Commission made 
no determination of comparability or non-comparability.\17\ Instead, 
the Commission noted certain differences with respect to the scope of 
application of the two regimes, noted the possibility that the CFTC 
Margin Rule and the JFSA's margin rules may not apply to every 
uncleared swap that a CSE may enter into with a Japanese counterparty, 
and reminded CSEs that substituted compliance is only available to a 
CSE where it and its transaction are subject to both the CFTC Margin 
Rule and the JFSA's margin requirements.\18\
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    \17\ See id.
    \18\ Or the METI/MAFF margin rules, as discussed above.
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    Subsequent to publication of the Japan Determination, Commission 
staff was made aware that the lack of a comparability determination 
with respect to the scope of entities subject to the CFTC Margin Rule 
and the JFSA's margin requirements was causing some confusion as to the 
scope of substituted compliance available under the Japan 
Determination. Specifically, the Japan Determination spoke only to the 
comparability of certain requirements under the Japan FIEA and the FIB 
Ordinance but did not determine whether margin requirements under the 
JFSA Supervisory Guidelines could be considered in making a substituted 
compliance determination with respect to Japanese entities that fall 
under certain thresholds. To avoid any such confusion going forward, 
the Commission is addressing the comparability of the scope of entities 
subject to the jurisdictions' respective margin requirements, including 
the JFSA Supervisory Guidelines.
    The CFTC Margin Rule and Cross-Border Margin Rule apply only to 
CSEs, i.e., SDs and MSPs registered with the Commission for which there 
is not a U.S. Prudential Regulator. Thus, only such CSEs may rely on 
the determinations herein for substituted compliance, while CSEs for 
which there is a U.S. Prudential Regulator must look to the 
determinations of the U.S. Prudential Regulators. The Commission has 
consulted with the U.S. Prudential Regulators in making these 
determinations.
    CSEs are not required to collect and/or post margin with every 
uncleared swap counterparty. The initial margin obligations of CSEs 
under the CFTC Margin Rule apply only to uncleared swaps with 
counterparties that meet the definition of ``covered counterparty'' in 
Sec.  23.151.\19\ Such definition provides that a ``covered 
counterparty'' is a counterparty to a swap with a CSE that is either a 
financial end user \20\ that exceeds a certain threshold of swap 
activity (``material swaps exposure'') \21\ or another SD or MSP.\22\ 
On the other hand, the variation margin obligations of CSEs under the 
CFTC Margin Rule apply more broadly. Such obligations apply to 
counterparties that are SDs or MSPs and all financial end users, not 
just those with ``material swaps exposure.'' \23\ Thus, importantly for 
comparison with the non-cleared OTC derivative margin requirements of 
Japan, under the CFTC Margin Rule, CSEs must exchange variation margin 
with any counterparty that falls within the definition of ``financial 
end user'' without regard to the size of such counterparty's 
involvement in the swap market or the risk it may present to the CSE.
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    \19\ See Sec.  23.152.
    \20\ See definition of ``Financial end user'' in Sec.  23.151. 
In general, the definition covers entities involved in regulated 
financial activity, including banks, brokers, intermediaries, 
advisers, asset managers, collective investment vehicles, and 
insurers.
    \21\ See Sec.  23.150, which defines the initial margin 
threshold for financial end users as ``material swaps exposure.'' 
Material swaps exposure for a financial end user means that the 
entity and its margin affiliates have an average daily aggregate 
notional amount of uncleared swaps, uncleared security-based swaps, 
foreign exchange forwards, and foreign exchange swaps with all 
counterparties for June, July and August of the previous calendar 
year that exceeds $8 billion, where such amount is calculated only 
for business days. An entity counts the average daily aggregate 
notional amount of an uncleared swap, an uncleared security-based 
swap, a foreign exchange forward, or a foreign exchange swap between 
the entity and a margin affiliate only one time. For purposes of the 
calculation, an entity does not count a swap that is exempt pursuant 
to Sec.  23.150(b) or a security-based swap that qualifies for an 
exemption under section 3C(g)(10) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations or that 
satisfies the criteria in section 3C(g)(1) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78-c3(g)(4)) and implementing 
regulations.
    \22\ See definition of ``swap entity'' in Sec.  23.150.
    \23\ See Sec.  23.153.
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    Pursuant to Article 29 of the Japan FIEA, any person that engages 
in trade activities that constitute ``Financial Instruments 
Business''--which, among other things, includes over-the-counter 
transactions in derivatives (``OTC derivatives'') \24\--must register 
as a FIBO. Banks that conduct specified activities in the course of 
trade, including OTC derivatives, must register under the FIEA as RFIs 
pursuant to Article 33-2 of the FIEA. Banks registered as RFIs are 
required to comply with relevant laws and regulations for FIBOs 
regarding specified activities, including transacting in OTC 
derivatives. Failure to comply with any relevant laws and regulations, 
Supervisory Guidelines, or Public Notifications would subject the 
applicant to potential sanctions or corrective measures.
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    \24\ See Article 2(8)(iv) of the FIEA.
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    The JFSA margin requirements generally apply to Type I FIBOs and

[[Page 12077]]

RFIs (``JFSA Covered Entities''), and JFSA Covered Entities must comply 
with such requirements when transacting with each other as well as with 
foreign financial entities that enter into non-centrally cleared OTC 
derivatives ``as a business'' in a foreign jurisdiction where the legal 
validity of close-out netting is appropriately confirmed.\25\ These 
entities are collectively referred to hereinafter as ``JFSA Covered 
Counterparties.'' All current CSEs established under the laws of Japan 
are registered in Japan as Type I FIBOs under the supervision of the 
JFSA, and are thus JFSA Covered Entities.
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    \25\ See FIB Ordinance, Article 123(10)(i)(a) and Article 
123(11)(i)(a). However, foreign governments, foreign central banks, 
multilateral development banks, and the Bank for International 
Settlements are excluded. See id.
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    Similar to the CFTC Margin Rule's ``material swaps exposure'' 
threshold for application of the initial margin requirements, the FIB 
Ordinance requires initial margin with JFSA Covered Counterparties only 
when both counterparties meet or exceed a certain threshold of non-
cleared OTC derivatives activity (the ``JFSA Initial Margin 
Threshold'').\26\ But, dissimilar to the CFTC Margin Rule's requirement 
that CSEs exchange variation margin with all swap entity and 
``financial end user'' counterparties regardless of the level of 
activity in uncleared swaps, the JFSA margin requirements only require 
JFSA Covered Entities to exchange variation margin with JFSA Covered 
Counterparties when both counterparties exceed a minimum trading volume 
threshold (the ``JFSA Variation Margin Threshold'').\27\ The JFSA 
represents such minimum threshold is expected to exclude only those 
market participants that present so little risk, at an individual firm 
level, that the considerable costs associated with compliance are not 
warranted.
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    \26\ See FIB Ordinance, Article 123(11)(iv). In general, the 
threshold for initial margin is whether the average month[hyphen]end 
aggregate notional amount of non[hyphen]cleared OTC derivatives, 
non[hyphen]cleared OTC commodity derivatives, and 
physically[hyphen]settled FX forwards and FX swaps of a consolidated 
group (excluding inter-affiliate transactions) for March, April, and 
May one year before the year in which calculation is required 
exceeds JPY 1.1 trillion. As of the date of this determination, JPY 
1.1 trillion is equivalent to approximately USD 10 billion.
    \27\ In general, a JFSA Covered Entity has exceeded the JFSA 
Variation Margin Threshold if the average total amount of the 
notional principal of its OTC derivatives for a one[hyphen]year 
period from April two years before the year in which calculation is 
required (or one year if calculated in December) exceeds JPY 300 
billion (approximately $2.7 billion).
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    Finally, non-centrally cleared OTC derivatives with JFSA Covered 
Counterparties below the JFSA Variation Margin Threshold and with 
counterparties that are not JFSA Covered Counterparties (together, 
``Supervised Counterparties'') are only subject to the JFSA Supervisory 
Guidelines, which require the establishment of an appropriate risk 
management system in accordance with relevant margin requirements under 
the JFSA FIEA, but with considerable latitude to tailor such 
requirements based on the risk profiles and individual circumstances of 
the Supervised Counterparties.\28\
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    \28\ See JFSA Supervisory Guidelines at IV-2-4(4)(i).
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    Despite the definitional differences and differences in activity 
thresholds with respect to the scope of application of the CFTC Margin 
Rule and the JFSA's margin requirements, the Commission notes that in 
transactions between counterparties with the highest levels activity in 
uncleared swaps (and thus presumably present the most risk), both the 
CFTC Margin Rule and the JFSA margin requirements require both initial 
and variation margin. CSEs that exceed the JFSA Initial Margin 
Threshold transacting with JFSA Covered Counterparties that also exceed 
the JFSA Initial Margin Threshold would be required to collect and post 
initial and variation margin in amounts and with frequencies found 
comparable to the same requirements under the CFTC Margin Rule pursuant 
to the Japan Determination.\29\ Although the ``material swaps 
exposure'' threshold under the CFTC Margin Rule (denominated in USD) is 
currently lower than the JFSA Initial Margin Threshold (denominated in 
JPY), the Commission recognizes that both are of relatively similar 
magnitudes and differences between the two are largely due to 
fluctuating JPY/USD exchange rates. Given that the initial margin 
thresholds serve the same purpose and are of relatively similar 
magnitudes, the Commission has concluded that the JFSA Initial Margin 
Threshold is comparable in purpose and effect to the CFTC ``material 
swaps exposure'' threshold. The Commission also notes that if a CSE/
JFSA Covered Entity enters into an uncleared swap with a CSE that is a 
U.S. person, then it will be required to exchange variation margin and 
post initial margin in accordance with the CFTC Margin Rule because 
substituted compliance for variation margin and the collection of 
initial margin is not available.\30\ This requirement significantly 
limits the extent to which differences between the JFSA Initial Margin 
Threshold and the CFTC ``material swaps exposure'' threshold could 
negatively impact systemic risk in the United States.
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    \29\ See Japan Determination, 81 FR at 63385-87.
    \30\ See Cross-Border Margin Rule, 81 FR at 34829.
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    With respect to uncleared swaps between CSEs and Supervised 
Counterparties that would be subject to the CFTC Margin Rule but not 
subject to the JFSA margin requirements other than the more flexible 
JFSA Supervisory Guidelines, the Commission recognizes that the JFSA 
has determined that Supervised Counterparties have so little activity 
in the relevant uncleared derivatives that they do not present risk 
that warrants the considerable costs associated with compliance to the 
full extent of the JFSA margin requirements.
    The Commission also notes that application of the CFTC Margin Rule 
to these Supervised Counterparties would place CSEs otherwise eligible 
for substituted compliance that are seeking to transact business in 
Japan with Supervised Counterparties at a competitive disadvantage 
relative to other firms subject only to the JFSA Supervisory 
Guidelines.
    With these factors in mind, the Commission has concluded that with 
respect to the margin requirements for uncleared swaps between CSEs and 
Supervised Counterparties, the JFSA Supervisory Guidelines are 
comparable in purpose and outcome to the CFTC Margin Rule.
    Accordingly, the Commission finds that the scope of entities 
subject to non-cleared OTC derivatives margin requirements under the 
laws of Japan is comparable in outcome to the scope of entities subject 
to the CFTC Margin Rule for purposes of Sec.  23.160. A CSE that is a 
JFSA Covered Entity and eligible for substituted compliance under Sec.  
23.160 may therefore classify counterparties in accordance with the 
margin requirements of the JFSA FIEA, FIB Ordinance, and JFSA 
Supervisory Guidelines with respect to determining whether initial or 
variation margin must be exchanged, or whether only the risk management 
requirements of the JFSA Supervisory Guidelines will apply. Where only 
the JFSA Supervisory Guidelines will apply to non-cleared OTC 
derivatives with a counterparty, a CSE that is a JFSA Covered Entity 
and eligible for substituted compliance under Sec.  23.160 may comply 
with any relevant aspect of the CFTC Margin Rule by complying with the 
JFSA Supervisory Guidelines.

B. Treatment of Inter-Affiliate Derivative Transactions

    The Japan Determination was the first comparability determination 
regarding uncleared swap margin requirements

[[Page 12078]]

issued by the Commission following the establishment of its substituted 
compliance framework in May, 2016.\31\ In the two years since issuing 
the Japan Determination, the Commission has issued one other 
determination for the European Union (``EU''),\32\ and is issuing a 
third for the requirements of the Australia Prudential Regulatory 
Authority concurrently with this Amendment (the ``Australia 
Determination''). The Commission has found the margin requirements for 
uncleared swaps between affiliates applicable in both the EU and 
Australia comparable in outcome to the Commission's requirements, 
despite marked differences between the approach of the Commission and 
the approach of those jurisdictions.\33\ In addition, Commission staff 
is currently analyzing the comparability of the uncleared swap margin 
requirements of a number of additional jurisdictions. Based on our 
additional experience, the Commission is now weighing certain relevant 
factors in its determination differently than when it first made the 
Japan Determination, but still using an outcomes-based approach.\34\ In 
the Japan Determination, the Commission concluded that the lack of a 
margin requirement for inter-affiliate transactions meant that the 
outcomes of the two jurisdictions' rules were not comparable. In doing 
so, the Commission acknowledged the JFSA's general oversight of the 
risk management practices of JFSA Covered Entities but did not believe 
that this factor was sufficient to address the differences between the 
two jurisdictions' margin regimes.\35\ The Commission has reconsidered 
the effect of this factor in light of a more complete understanding of 
the JFSA's oversight practices, and other relevant facts and 
circumstances, in conducting its assessment of whether the Japanese 
margin regime achieves an outcome that is comparable to that of the 
CFTC Margin Rule.
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    \31\ See Cross-Border Margin Rule.
    \32\ See Comparability Determination for the European Union: 
Margin Requirements for Uncleared Swaps for Swap Dealers and Major 
Swap Participants, 82 FR 48394 (Oct. 18, 2017) (hereinafter, the 
``EU Determination'').
    \33\ See e.g., the EU Determination, 82 FR at 48399-01.
    \34\ See Sec.  23.160(c)(3).
    \35\ See Japan Determination, 81 FR at 63382.
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    The Commission notes that the BCBS/IOSCO Framework recognizes that 
the treatment of inter-affiliate derivative transactions will vary 
between jurisdictions. Thus, the BCBS/IOSCO Framework does not set 
standards with respect to the treatment of inter-affiliate 
transactions. Rather, it recommends that regulators in each 
jurisdiction review their own legal frameworks and market conditions 
and put in place margin requirements applicable to inter-affiliate 
transactions as appropriate.\36\ In determining comparability, 
considerations of comity are particularly relevant under this type of 
international framework.\37\
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    \36\ See BCBS/IOSCO Framework, Element 6: Treatment of 
transactions with affiliates.
    \37\ As discussed above, the CFTC and the JFSA participated in 
the BCBS/IOSCO WGMR.
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    The following amends and restates the entirety of the discussion 
and determination of the Commission with respect to Commission 
requirements for treatment of inter-affiliate transactions as it 
appeared in the Japan Determination.
1. Commission Requirements for Inter-Affiliate Transactions
    The Commission determined through its CFTC Margin Rule to provide 
rules for swaps between ``margin affiliates.'' The definition of 
``margin affiliates'' provides that a company is a margin affiliate of 
another company if: (1) Either company consolidates the other on a 
financial statement prepared in accordance with U.S. Generally Accepted 
Accounting Principles, the International Financial Reporting Standards, 
or other similar standards; (2) both companies are consolidated with a 
third company on a financial statement prepared in accordance with such 
principles or standards; or (3) for a company that is not subject to 
such principles or standards, if consolidation as described in 
paragraph (1) or (2) would have occurred if such principles or 
standards had applied.\38\
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    \38\ See Sec.  23.151.
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    With respect to swaps between margin affiliates, the CFTC Margin 
Rule, with one exception explained below, provides that a CSE is not 
required to collect initial margin \39\ from a margin affiliate 
provided that the CSE meets the following conditions: (i) The swaps are 
subject to a centralized risk management program that is reasonably 
designed to monitor and to manage the risks associated with the inter-
affiliate swaps; and (ii) the CSE exchanges variation margin with the 
margin affiliate.\40\
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    \39\ ``Initial margin'' is margin exchanged to protect against a 
potential future exposure and is defined in Sec.  23.151 to mean the 
collateral, as calculated in accordance with Sec.  23.154 that is 
collected or posted in connection with one or more uncleared swaps.
    \40\ See Sec.  23.159(a).
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    In an exception to the foregoing general rule, the CFTC Margin Rule 
does require CSEs to collect initial margin from non-U.S. affiliates 
that are financial end users that are not subject to comparable initial 
margin collection requirements on their own outward-facing swaps with 
financial end users.\41\ This provision is an anti-evasion measure that 
is designed to prevent the potential use of affiliates to avoid 
collecting initial margin from third parties. For example, suppose an 
unregistered non-U.S. affiliate of a CSE enters into a swap with a 
financial end user and does not collect initial margin equivalent to 
that which would have been required if such affiliate were subject to 
the CFTC Margin Rule. Suppose further that the affiliate then enters 
into a swap with the CSE. Effectively, the risk of the swap with the 
third party would have been passed to the CSE without any initial 
margin. The rule would require this affiliate to post initial margin 
with the CSE. The rule would further require that the CSE collect 
initial margin even if the affiliate routed the trade through one or 
more other affiliates.\42\
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    \41\ See Sec.  23.159(c).
    \42\ See id.
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    The Commission stated in the CFTC Margin Rule that its inter-
affiliate initial margin requirement is consistent with its goal of 
harmonizing its margin rules as much as possible with the BCBS/IOSCO 
Framework.\43\ Such Framework, for example, states that the exchange of 
initial and variation margin by affiliated parties ``is not customary'' 
and that initial margin in particular ``would likely create additional 
liquidity demands.'' \44\ With an understanding that many authorities, 
such as those in Europe and Japan, were not expected to require initial 
margin for inter-affiliate swaps, the Commission recognized that 
requiring the posting and collection of initial margin for inter-
affiliate swaps generally would be likely to put CSEs at a competitive 
disadvantage to firms in other jurisdictions.\45\
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    \43\ See CFTC Margin Rule, 81 FR at 674.
    \44\ See BCBS/IOSCO Framework, Element 6: Treatment of 
transactions with affiliates.
    \45\ See CFTC Margin Rule, 81 FR at 674.
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    Unlike the general rule for initial margin, however, the CFTC 
Margin Rule does require CSEs to exchange variation margin with margin 
affiliates that are SDs, MSPs, or financial end users (as is also 
required under the U.S. Prudential Regulators' rules).\46\ The 
Commission believes that marking open positions to market each day and 
requiring the posting or collection of variation margin reduces the 
risks of inter-affiliate swaps.
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    \46\ See Sec.  23.159(b), Prudential Regulators' Margin Rule, 80 
FR at 74909.

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[[Page 12079]]

2. Requirements for Inter-Affiliate OTC Derivatives Under the Laws of 
Japan
    Under Article 123(10) and (11) of Japan's FIB Ordinance, the JFSA's 
margin requirements do not apply to OTC derivative transactions between 
counterparties that are ``Parent Companies of the FIBOs conducting the 
transactions, Subsidiary Companies or Subsidiary Companies of the 
Parent Companies (excluding the FIBOs), or an entity equivalent to 
these under the laws and regulations of a foreign state.'' These terms 
are defined in the Ministry of Finance of Japan's Ordinance on 
Terminology, Forms, and Preparation Methods of Consolidated Financial 
Statements,\47\ and the Commission recognizes that such are generally 
defined in keeping with the Commission's definition of ``margin 
affiliate'' for purposes of the CFTC Margin Rule, discussed above.
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    \47\ See Ordinance of the Ministry of Finance No. 28 of October 
30, 1976.
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    However, in mitigation of not requiring margin between Consolidated 
Companies, the JFSA has explained that its capital requirements for 
FIBOs/RFIs apply not only on a consolidated basis but also on an 
individual, non-consolidated basis. Thus, a CSE that is a FIBO/RFI is 
required to hold enough capital to cover exposures under non-cleared 
OTC derivatives to individual entities in the same consolidated group. 
This capital requirement covers uncollateralized inter-affiliate 
exposure. Such capital requirement can be reduced if the CSE collects 
initial and/or variation margin for such inter-affiliate transactions.
    In addition to this, the JFSA has explained that its supervision of 
FIBOs/RFIs is a principles-based approach, and, in accordance with this 
approach, the JFSA's ``Guideline for Financial Conglomerates 
Supervision'' requires financial holding companies and parent companies 
to measure, monitor, and manage the risks caused by inter-affiliate 
transactions. Further, the JFSA's ``Inspection manual for financial 
holding companies'' requires financial holding companies to establish a 
robust governance framework and risk management system at a centralized 
group level, that would, in operation, require management of the risks 
caused by inter-affiliate transactions. Based on the foregoing, the 
JFSA has emphasized that it is not necessary for it to require the risk 
management procedures of FIBOs/RFIs applicable to inter-affiliate 
transactions to rely on margin requirements alone. Rather, taking into 
account capital requirements and the JFSA's supervision and inspection 
programs, the JFSA represents that it ensures the safety and soundness 
of FIBOs/RFIs as a whole.
3. Commission Determination
    Having compared the outcomes of the JFSA's margin requirements 
applicable to inter-affiliate non-cleared OTC derivatives to the 
outcomes of the Commission's corresponding margin requirements 
applicable to inter-affiliate uncleared swaps and reconsidered those 
outcomes in the broader context of the JFSA's prudential oversight of 
risk management and capital requirements, the Commission finds that the 
treatment of inter-affiliate transactions under the CFTC Margin Rule 
and the treatment of those transactions under the JFSA's margin 
requirements are comparable in outcome for purposes of Sec.  23.160.
    The CFTC Margin Rule generally excludes transactions between CSEs 
and their margin affiliates from its initial margin requirements \48\ 
and subjects such inter-affiliate transactions to its variation margin 
requirements. The JFSA margin requirements, on the other hand, exclude 
inter-affiliate transactions of JFSA Covered Entities from both initial 
and variation margin requirements.
---------------------------------------------------------------------------

    \48\ See infra note 51.
---------------------------------------------------------------------------

    An uncleared swap with an affiliate presents credit risk to a CSE. 
The Commission has determined that this credit risk must be managed by 
marking open positions to market each day and requiring the posting or 
collection of variation margin. If the affiliate were to default, the 
margin provided by the affiliate would allow a CSE to continue to meet 
its obligations. The JFSA on the other hand has determined that this 
credit risk can be adequately managed by specific capital requirements 
and more general risk management standards that require financial 
holding companies and parent companies to measure, monitor, and manage 
the risks caused by inter-affiliate transactions to holistically ensure 
the safety and soundness of the consolidated companies of which JFSA 
Covered Entities are a part. In 2013, the Commission found the JFSA's 
risk management requirements for JFSA Covered Entities comparable to 
the Commission's risk management requirements for SDs and MSPs under 
subpart J of part 23 of the Commission's regulations.\49\ In addition, 
uncollateralized credit risk from inter-affiliate swaps would be 
subject to capital requirements under the Commission's proposed capital 
rules for CSEs.\50\
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    \49\ See Comparability Determination for Japan: Certain Entity-
Level Requirements, 78 FR 78910 (Dec. 27, 2013).
    \50\ See Capital Requirements for Swap Dealers and Major Swap 
Participants, 81 FR 91252, 91258 (Dec. 16, 2016).
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    The Commission notes that if a CSE/JFSA Covered Entity enters into 
an uncleared swap with a margin affiliate that is itself a CSE and a 
U.S. person, then it will be required to exchange variation margin in 
accordance with the CFTC Margin Rule because the U.S. CSE is required 
to do so and substituted compliance for the inter-affiliate variation 
margin requirement is not available to U.S. CSEs.\51\ In addition, the 
Commission is aware of the historic volume and aggregate size of inter-
affiliate uncleared swaps of CSEs that may currently be eligible for 
substituted compliance pursuant to this determination. Given the 
inability to affirmatively transfer risk to U.S. margin affiliates that 
are CSEs without variation margin, the historic level of relevant 
inter-affiliate activity, and the capital and risk management 
requirements of both the JFSA and the Commission, and considerations of 
comity,\52\ the Commission has concluded that the requirements under 
the laws of Japan with respect to inter-affiliate margin for uncleared 
swaps are comparable to the requirements of the CFTC Margin Rule for 
purposes of Sec.  23.160. The Commission intends to monitor the volume 
and aggregate size of inter-affiliate swaps of CSEs that may be 
eligible for substituted compliance pursuant to this determination and, 
to the extent it deems prudent, may consult with the JFSA regarding the 
capital and risk management treatment of the attendant risk of such 
swaps.
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    \51\ See Cross-Border Margin Rule, 81 FR at 34829. The 
Commission notes that, subject to certain conditions, a CSE is 
generally not required to collect initial margin from a margin 
affiliate. See Sec.  23.159(a)(1). However, a CSE would be required 
to collect initial margin from a margin affiliate that is a 
financial end user where the margin affiliate is located in a 
jurisdiction that the Commission has not found to be eligible for 
substituted compliance with regard to the CFTC Margin Rule, and the 
margin affiliate does not collect initial margin on its swaps with 
unaffiliated third parties for which initial margin would be 
required if the swap were subject to the CFTC Margin Rule. See Sec.  
23.159(c)(2)(ii). With this Amendment, the Commission has found 
Japan to be eligible for substituted compliance with regard to all 
aspects of the CFTC Margin Rule, and thus, a CSE would generally not 
be required to collect initial margin from a margin affiliate in 
Japan that is a financial end user. See Sec.  23.159(c)(2)(iii).
    \52\ It is noted that the JFSA has provided reciprocal 
recognition of the CFTC Margin Rule.


[[Page 12080]]


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    Issued in Washington, DC on March 26, 2019, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Amendment to Comparability Determination for Japan: 
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    Today the Commission is amending its previous comparability 
determination for Japan with respect to margin requirements for 
uncleared swaps published on September 15, 2016.\1\ The amendment 
makes a positive determination of comparability with respect to the 
scope of entities subject to margin requirements and the treatment 
of inter-affiliate transactions. All other findings and 
determinations contained in the original comparability determination 
remain unchanged and in full force and effect.
---------------------------------------------------------------------------

    \1\ See Comparability Determination for Japan: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 81 FR 63376 (Sep. 15, 2016), available at: https://www.govinfo.gov/content/pkg/FR-2016-09-15/pdf/2016-22045.pdf.
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    When the Commission issued its rule addressing the cross-border 
application of margin requirements for uncleared swaps in 2016,\2\ I 
expressed my disagreement with the approach the Commission 
established as overly complex and unduly narrow.\3\ I also expressed 
my concern that the Commission's ``element-by-element'' methodology 
for determining when substituted compliance with a foreign 
regulator's margin regime would be permitted is contrary to the 
principles-based, holistic analysis the Commission has used in the 
past.
---------------------------------------------------------------------------

    \2\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016), available at: https://www.govinfo.gov/content/pkg/FR-2016-05-31/pdf/2016-12612.pdf.
    \3\ See Statement of Commissioner J. Christopher Giancarlo on 
the Comparability Determination for Japan: Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants (Sep. 
8, 2016), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement090816b.
---------------------------------------------------------------------------

    This overly complex and unduly narrow approach was reflected in 
the original comparability determination for Japan, which left firms 
subject to an impractical patchwork of U.S. and foreign regulations 
for cross-border transactions. I am pleased that the Commission has 
reconsidered its original finding and now finds that the remaining 
Japanese margin transaction requirements are comparable in outcome 
to the Commission's own requirements.
    Substituted compliance helps preserve the benefits of an 
integrated, global swap market by reducing the degree to which 
market participants will be subject to multiple sets of regulations. 
Further, substituted compliance builds on international efforts to 
develop a global margin framework. Today's comparability 
determination is further evidence that the Commission is committed 
to showing deference to foreign jurisdictions that have comparable 
regulatory and supervisory regimes.

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I support the expansion of the Commission's 2016 Margin 
Comparability Determination for Japan (Determination).\1\ I am 
pleased that the amendments to the Determination adopted by the 
Commission today apply an outcomes-based approach to substituted 
compliance and recognize the discretion of Japanese financial 
regulators to implement reforms consistent with the G-20 framework 
in a manner suited to their local markets. Moreover, the expanded 
Determination is appropriately deferential to our counterparts in 
Japan, who have already found CFTC margin regulations to be 
comparable to their own.
---------------------------------------------------------------------------

    \1\ Comparability Determination for Japan: Margin Requirements 
for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 
FR 63376 (Sept. 15, 2016).
---------------------------------------------------------------------------

    In the past, overly narrow comparability determinations have 
sometimes required Commission staff to provide additional no-action 
relief to address relatively minor differences between regimes. For 
example, after the 2016 Japan Determination was issued, swap dealers 
requested relief from the requirement to post and collect variation 
margin on a T+1 timeframe with certain counterparties.\2\ Instead of 
the T+1 standard, these firms requested a T+3 standard, in order to 
accommodate the use of Japanese Government Bonds (a very common form 
of collateral in Japan), which settle in two or three days. The 
relief was needed in order to allow swap dealers to continue 
transacting with smaller Japanese counterparties. I am pleased that 
under the comprehensive Determination issued today, further no-
action relief will not be necessary because the Determination 
appropriately accounts for swap dealers' various types of 
counterparties and the timing of collateral exchanges.
---------------------------------------------------------------------------

    \2\ CFTC Staff Letter No. 17-13, Commission Regulation 23.153: 
Time-Limited No-Action Position for the Timing of the Posting and 
Collection of Variation Margin from Certain Counterparties Operating 
in Japan (Feb. 23, 2017), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-13.pdf.
---------------------------------------------------------------------------

    It is also important to note that while the Determination is 
deferential to the approach taken in Japan, it limits the flow of 
risk back to the United States. This is because under the 
Commission's Cross-Border Margin Rule, when a U.S. swap dealer 
enters into an uncleared swap with a Japanese swap dealer or end-
user, it is required to collect initial margin and variation margin 
must be exchanged. In the case of uncleared swaps between affiliated 
U.S. and non-U.S. swap dealers, variation margin is always required. 
Moreover, the Commission will continue to work closely with the 
Financial Services Agency of Japan to coordinate our supervision and 
oversight of regulated entities that operate on a cross-border basis 
in both the United States and Japan.\3\
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    \3\ Memorandum of Cooperation Related to the Supervision of 
Cross-Border Covered Entities (March 10, 2014), https://www.cftc.gov/idc/groups/public/%40internationalaffairs/documents/file/cftc-jfsamoc031014.pdf.
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    I would like to thank the staff of the Division of Swap Dealer 
and Intermediary Oversight for their hard work in issuing today's 
amended Determination. I would also like to compliment Chairman 
Giancarlo for his leadership on the cross-border regulation of the 
global swaps market. The Chairman has presented a vision for cross-
border regulation grounded in deference and recognition that many of 
our global counterparts have implemented post-crisis reforms 
comparable to our own. I strongly support this vision and believe it 
is essential to maintaining a liquid, competitive global swaps 
market and avoiding regulatory-driven market fragmentation.

Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I support today's Amendment to Comparability Determination for 
Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants (``Amended Japan Determination'').
    The Commission's regulations governing margin requirements for 
uncleared swaps (``CFTC Margin Rules'') help mitigate risks posed by 
uncleared swaps to swap dealers, major swap participants, and the 
overall U.S. financial system.\1\ In this regard, the CFTC Margin 
Rules--and other rules around the world requiring margin for 
uncleared swaps--are a fundamental component of the regulatory 
reforms adopted in the wake of the 2008 financial crisis.
---------------------------------------------------------------------------

    \1\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
---------------------------------------------------------------------------

    In 2016, the CFTC adopted its cross-border margin rule to permit 
swap dealers and major swap participants located in non-U.S. 
jurisdictions to comply with the CFTC's Margin Rules by meeting the 
similar rules of their home jurisdiction if the Commission has 
deemed those rules comparable.\2\ This framework for ``substituted 
compliance'' supports the global nature of the swaps market and 
conforms to the directive in the Dodd-Frank Act for the Commission 
to consult and coordinate with international regulators to establish 
consistent international standards for the regulation of swaps 
entities and activities.\3\ The

[[Page 12081]]

substituted compliance framework helps reduce duplicative and 
overlapping regulatory requirements where effective comparable 
regulation exists, facilitates the ability of U.S. market 
participants to compete in foreign jurisdictions, and is consistent 
with the principle of international comity.
---------------------------------------------------------------------------

    \2\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants-Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016).
    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376, at section 752 (2010).
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    The CFTC's cross-border margin rule establishes an outcomes-
based approach that considers a number of factors and does not 
require strict conformity with the CFTC Margin Rules. As I have said 
before, a comparability determination should not be based solely on 
the home country's written laws and regulations, but also consider 
the country's broader system of regulation, including oversight and 
enforcement. In addition, the nature of the other country's relevant 
markets may be taken into account. Finally, in considering these 
issues, the Commission should keep in mind the principle of comity: 
the reciprocal recognition of the legislative, executive, and 
judicial acts of another jurisdiction.\4\ Given all of these 
factors, the analysis for each determination often is unique and can 
change over time as circumstances change.
---------------------------------------------------------------------------

    \4\ See Restatement (Third) of The Foreign Relations Law in the 
United States, section 101 (1987) (Am. Law Inst. 2019); https://www.law.cornell.edu/wex/comity.
---------------------------------------------------------------------------

    The Amended Japan Determination finds comparability regarding 
the scope of entities subject to the margin requirements and the 
treatment of margining for inter-affiliate transactions. The 
Commission's original determination for Japan's margin rules, issued 
on September 15, 2016, did not find comparability in these areas. 
Subsequently, it appeared that the absence of a finding of 
comparability regarding the scope of entities and inter-affiliate 
swaps issues was causing some confusion in applying the original 
determination. The CFTC staff therefore further reviewed applicable 
Japanese laws and regulations and engaged heavily with the Japan 
Financial Services Agency (``JFSA'') to develop a more complete 
understanding of how the JFSA regulates and supervises margining for 
the scope of entities that enter into swaps and inter-affiliate swap 
transactions. The in-depth analysis outlined in today's Amended 
Japan Determination reflects a more holistic understanding by the 
Commission of the JFSA's approach to managing the risks of swap 
trading for the scope of relevant entities and inter-affiliate 
swaps. The analysis also notes the potential for risks from these 
swap activities returning to the United States is expected to be 
significantly mitigated.
    For example, although the JFSA does not require variation margin 
for the same scope of entities covered by the CFTC Margin Rules, the 
JFSA indicated that the entities excluded tend to be smaller and 
have less regular involvement in the swap markets, thereby 
presenting less risk to the financial system. Furthermore, as noted 
in the determination, if a Japanese entity that would otherwise be 
subject to the CFTC Margin Rules, but for substituted compliance, 
enters into swaps with any U.S. entity covered by the CFTC Margin 
Rules, then both entities are required to exchange margin per our 
rules. This requirement limits the possibility of unmargined risk 
coming to the U.S. Similarly, for inter-affiliate swap treatment, a 
more complete understanding of the JFSA's approach to requiring 
Japanese affiliates to hold more capital when margin is not 
exchanged with other affiliates, among other things, helps offset 
exposures not covered when margin is not collected.
    As with other jurisdictions where the legal and regulatory 
structure does not mirror our own, and the substituted compliance 
determinations are based on the overall outcome of the regulatory 
system, subsequent monitoring may be appropriate to confirm that our 
initial understanding of the regulatory structure and the expected 
outcomes is accurate. Accordingly, I encourage the CFTC staff to 
periodically assess the implementation of this determination to 
confirm our expectations are accurate.
    I thank the CFTC staff for their thorough work on this 
determination and appreciate their responsiveness to our comments 
and suggestions. I would also like to thank my fellow Commissioners 
for their collaboration in helping us reach this positive outcome.

[FR Doc. 2019-06152 Filed 3-29-19; 8:45 am]
 BILLING CODE 6351-01-P