The proposed rule was published in the Federal Register of June 1, 2022, (87 FR 33064) inviting comments on proposed revisions to U.S. Standards for Grades of Pecans in the Shell and U.S. Standards for Grades of Shelled Pecans. The public was invited to review and comment on the proposed rule, which was to be accompanied by copies of the proposed standards, on https://www.regulations.gov. On June 28, 2022, AMS noted that the proposed U.S. Standards for Grades of Pecans in the Shell and the U.S. Standards for Grades of Shelled Pecans failed to upload to https://www.regulations.gov and the supporting documents were uploaded to https://www.regulations.gov on that date. To provide all interested persons a full 60-day comment period to view copies of the proposed standards and facilitate review of the proposed rule, AMS has extended the public comment period by 30 days to September 7, 2022. The 60-day comment period for the proposed rule published in the Federal Register on June 1, 2022 (87 FR 33064) ended on August 1, 2022.

On June 8, 2022 (87 FR 34980), AMS published in the Federal Register a proposal to revise the regulations under the Packers and Stockyards Act (7 U.S.C. 181 et seq. ) at 9 CFR part 201. Under the proposal, live poultry dealers would be required to make certain disclosures to poultry growers and prospective poultry growers in connection with poultry growing arrangements and to specify additional terms in poultry growing contracts. Further, live poultry dealers would be required to provide certain information to poultry growers in tournament pay systems—at the time of flock placement and at the time of settlement—about integrator-controlled inputs related to the poultry flocks growers receive for growout.

Comments on the proposed rule were required to be received on or before August 8, 2022. We are extending the comment period on Docket No. AMS-FTPP-21-0044 for an additional 15 days. This will allow interested persons additional time to prepare and submit comments. Comments must be submitted on or before August 23, 2022.

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is soliciting public comment on an application submitted by the Financial Services Agency of Japan (“FSA”), dated September 30, 2021 (“FSA Application”), requesting that the Commission determine that registered nonbank  2 swap dealers (“SDs”) organized and domiciled in Japan (“Japanese nonbank SDs”) may satisfy certain capital and financial reporting requirements under the Commodity Exchange Act (“CEA”)  3 by being subject to and complying with comparable capital and financial reporting requirements under Japanese laws and regulations. 4 The Commission also is soliciting public comment on a proposed Commission Comparability Determination order that would allow Japanese nonbank SDs, subject to certain conditions, to comply with certain CFTC SD capital and financial reporting requirements in the manner as set forth in the proposed order.

Section 4s(e) of the CEA  5 directs the Commission and “prudential regulators”  6 to impose capital requirements on SDs and major swap participants (“MSPs”) registered with the Commission. Section 4s(e) of the CEA also directs the Commission and prudential regulators to adopt regulations imposing initial and variation margin requirements on swaps entered into by SDs and MSPs that are not cleared by a registered derivatives clearing organization (“uncleared swaps”).

Section 4s(e) applies a bifurcated approach with respect to the above Congressional directives, requiring each SD and MSP that is subject to the regulation of a prudential regulator (“bank SD” and “bank MSP,” respectively) to meet the minimum capital requirements and uncleared swaps margin requirements adopted by the applicable prudential regulator, and requiring each SD and MSP that is not subject to the regulation of a prudential regulator (“nonbank SD” and “nonbank MSP,” respectively) to meet the minimum capital requirements and uncleared swaps margin requirements adopted by the Commission. 7 Therefore, the Commission's authority to impose capital requirements and margin requirements for uncleared swap transactions extends to nonbank SDs and nonbank MSPs, including nonbanking subsidiaries of bank holding companies regulated by the Federal Reserve Board.

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. 8 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. 9 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”). 10

Section 4s(f) of the CEA addresses SD and MSP financial reporting requirements. 11 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. 12 The Commission's financial reporting obligations were adopted with the Commission's nonbank SD and nonbank MSP capital requirements, and also had a compliance date of October 6, 2021 (“CFTC Financial Reporting Rules”). 13

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 “Capital Comparability Determination”). 14 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, and related financial recordkeeping and reporting requirements, for non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs are comparable to the corresponding CFTC Capital Rules and CFTC Financial Reporting Rules. The Commission will issue a Capital Comparability Determination in the form of a Commission order (“Capital Comparability Determination Order”). 15

The Commission's approach for conducting a comparability determination with respect to the CFTC Capital Rules and the CFTC Financial Reporting Rules is a principles-based, holistic approach that focuses on whether the applicable foreign jurisdiction's capital and financial reporting requirements achieve comparable outcomes to the corresponding CFTC requirements. 16 In this regard, the approach is not a line-by-line assessment or comparison of a foreign jurisdiction's regulatory requirements with the Commission's requirements. 17 In performing the analysis, the Commission recognizes that jurisdictions may adopt differing approaches to achieving comparable outcomes, and the Commission will focus on whether the foreign jurisdiction's capital and financial reporting requirements are comparable to the Commission's in purpose and effect, and not whether they are comparable in every aspect or contain identical elements.

A person requesting a Capital 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 as the Commission deems necessary to evaluate the comparability of the capital adequacy and financial reporting requirements of the foreign jurisdiction. 18

The Commission may consider all relevant factors in making a Capital Comparability Determination, including: (i) the scope and objectives of the relevant foreign jurisdiction's capital and financial reporting requirements; (ii) whether the relevant foreign jurisdiction's capital and financial reporting requirements achieve comparable outcomes to the Commission's corresponding capital requirements and financial reporting requirements; (iii) the ability of the relevant foreign regulatory authority or authorities to supervise and enforce compliance with the relevant foreign jurisdiction's capital adequacy and financial reporting requirements; and (iv) any other facts or circumstances the Commission deems relevant, including whether the Commission and foreign regulatory authority or authorities have a memorandum of understanding (“MOU”) or similar arrangement that would facilitate supervisory cooperation. 19

In performing the comparability assessment for foreign nonbank SDs, the Commission's review will include the extent to which the foreign jurisdiction's requirements address: (i) the process of establishing minimum capital requirements for nonbank SDs and how such process addresses risk, including market risk and credit risk of the nonbank SD's on-balance sheet and off-balance sheet exposures; (ii) the types of equity and debt instruments that qualify as regulatory capital in meeting minimum requirements; (iii) the financial reports and other financial information submitted by a nonbank SD to its relevant regulatory authority and whether such information provides the regulatory authority with the means necessary to effectively monitor the financial condition of the nonbank SD; and (iv) the regulatory notices and other communications between a nonbank SD and its foreign regulatory authority that address potential adverse financial or operational issues that may impact the firm. With respect to the ability of the relevant foreign regulatory authority to supervise and enforce compliance with the foreign jurisdiction's capital adequacy and financial reporting requirements, the Commission's review will include 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.

In performing the comparability assessment for foreign nonbank MSPs, 20 the Commission's review will include the extent to which the foreign jurisdiction's requirements address: (1) the process of establishing minimum capital requirements for nonbank MSPs and how such process establishes a minimum level of capital to ensure the safety and soundness of the nonbank MSP; (ii) the financial reports and other financial information submitted by a nonbank MSP 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 MSP; and (iii) the regulatory notices and other communications between a nonbank MSP and its foreign regulatory authority that address potential adverse financial or operational issues that may impact the firm. With respect to the ability of the relevant foreign regulatory authority to supervise and enforce compliance with the foreign jurisdiction's capital adequacy and financial reporting requirements, the Commission's review will include a review of the foreign jurisdiction's surveillance program for monitoring nonbank MSPs' compliance with such capital adequacy and financial reporting requirements, and the disciplinary process imposed on firms that fail to comply with such requirements.

Regulation 23.106 further provides that the Commission may impose any terms or conditions that it deems appropriate in issuing a Capital Comparability Determination. 21 Any specific terms or conditions with respect to capital adequacy or financial reporting requirements will be set forth in the Commission's Capital Comparability Determination Order. As a general condition to all Capital Comparability Determination Orders, the Commission expects to 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.

The Commission's capital adequacy and financial reporting requirements are designed to address and manage risks that arise from a firm's operation as a SD and 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) in order to effectively address risk to the firm as a whole. Therefore, in order to rely on a Capital Comparability Determination, a nonbank SD or nonbank MSP domiciled in the foreign jurisdiction and subject to supervision by the relevant regulatory authority (or authorities) in the foreign jurisdiction must file a notice with the Commission of its intent to comply with the applicable capital adequacy and financial reporting requirements of the foreign jurisdiction set forth in the Capital Comparability Determination in lieu of all or parts of the CFTC Capital Rules and/or CFTC Financial Reporting Rules. 22 Notices must be filed electronically with the Commission's Market Participants Division (“MPD”). 23 The filing of a notice by a non-U.S. nonbank SD or non-U.S. nonbank MSP provides MPD staff, acting pursuant to authority delegated by the Commission, 24 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 Capital Comparability Determination and that it will comply with any listed conditions. MPD will issue a letter under its 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 Capital Comparability Determination in lieu of complying with the CFTC Capital Rules and CFTC Financial Reporting Rules upon MPD's determination 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 all of the conditions in the Capital Comparability Determination.

Each non-U.S. nonbank SD and/or non-U.S. nonbank MSP that receives, in accordance with the applicable Commission Capital Comparability Determination, confirmation from the Commission that it may comply with a foreign jurisdiction's capital adequacy and/or financial reporting requirements will be deemed by the Commission to be in compliance with the corresponding CFTC Capital Rules and/or CFTC Financial Reporting Rules. 25 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. 26 In addition, a non-U.S. nonbank SD or non-U.S. nonbank MSP that receives confirmation of its ability to use substituted compliance remains subject to the Commission's examination and enforcement authority. 27

The Commission will consider an application for a Capital 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. 28 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 Capital Comparability Determination may not voluntarily comply with such laws or regulations in lieu of compliance with the CFTC Capital Rules or the CFTC Financial Reporting Rules. Each non-U.S. nonbank SD or non-U.S. nonbank MSP that seeks to rely on a Capital Comparability Determination Order is responsible for determining whether it is subject to the foreign laws and regulations found comparable in the Order.

The FSA Application requests that the Commission issue a Capital Comparability Determination finding that compliance with certain designated capital requirements of Japan (the “Japanese Capital Rules”) and certain designated financial reporting requirements of Japan (the “Japanese Financial Reporting Rules”) by a Japanese nonbank SD registered with the FSA as a Type I Financial Instruments Business Operator (“FIBO”) satisfies corresponding CFTC Capital Rules and CFTC Financial Reporting Rules applicable to a nonbank SD under Sections 4s(e) and (f) of the CEA and Regulations 23.101 and 23.105. 29 There are currently three Japanese nonbank SDs registered with Commission, and the FSA has represented that each of the three Japanese nonbank SDs are FSA-registered and regulated FIBOs. 30 The FSA Application requests that the Commission's Capital Comparability Determination cover each of the three Japanese nonbank SDs and any future Japanese registered and domiciled FIBOs that register with the Commission as nonbank SDs.

The FSA has represented that the capital adequacy and financial reporting requirements for swap activities in Japan are governed by the Japanese legal framework for financial regulation, which is mainly composed of Acts, Cabinet Orders, Ministerial Orders, and FSA Notices. 31 With regard to the Japanese Capital Rules and the Japanese Financial Reporting Rules, the Financial Instruments and Exchange Act (Act No. 25 of 1948) (“FIEA”) and its related order, Cabinet Office Order on Financial Instruments Business (Cabinet Office Order No. 52 of 2007) (“COO”), stipulate the prudential capital and financial reporting requirements applicable to FIBOs, including Japanese nonbank SDs. 32 FIEA, COO, and related FSA Notices impose mandatory capital and reporting requirements on FIBOs, including Japanese nonbank SDs. Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. (“Supervisory Guidelines for FIBO”) also supplement the framework. 33 The technical requirements for FIBOs, including Japanese nonbank SDs, to calculate capital adequacy ratios are specified in the FSA Notice No. 59 of 2007 (“Notice on Capital”) in accordance with Article 177(8) and Article 178(1) of the COO.

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”). 34

Nonbank SDs that are “predominantly engaged in non-financial activities” may elect the TNW Approach. 35 The TNW Approach requires a nonbank SD to maintain a level of “tangible net worth”  36 equal to or greater than the higher of: (i) $20 million plus the amount of the nonbank SD's “market risk exposure requirement”  37 and “credit risk exposure requirement”  38 associated with the nonbank SD's swap and related hedge positions that are part of the nonbank SD's swap dealing activities; (ii) eight percent of the nonbank SD's “uncleared swap margin” amount;  39 or (iii) the amount of capital required by a registered futures association of which the nonbank SD is a member. 40 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.

The TNW approach requires a nonbank SD to compute its market risk exposure requirement and credit risk exposure requirement using standardized capital charges set forth in Securities and Exchange Commission (“SEC”) Rule 18a-1 (17 CFR 240.18a-1) that are applicable to entities registered with the SEC as security-based swap dealers (“SBSDs”) or standardized capital charges set forth in CFTC Regulation 1.17 applicable to entities registered as FCMs or entities dually-registered as an FCM and nonbank SD. 41 Nonbank SDs that have received Commission or NFA approval pursuant to Regulation 23.102 may use internal models to compute market risk and/or credit risk capital charges in lieu of the SEC or CFTC standardized capital charges. 42

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. 43 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.

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. 44 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 the standardized capital charges contained in SEC Rule 18a-1 (17 CFR 240.18a-1) as modified by the Commission's rule. 45

A nonbank SD that has obtained Commission or NFA approval, may use internal market risk and/or credit risk models to compute market risk and/or credit risk capital charges in lieu of the standardized capital charges. 46 A nonbank SD that is approved to use internal market risk and/or credit risk models is further required to maintain a minimum of $100 million of “tentative net capital.”  47

The Commission's NLA Approach is consistent with the SEC's SBSD capital rule, 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 of the Commission's Bank-Based Approach as described below.

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. 48 The Bank-Based Approach also is consistent with the Basel Committee on Banking Supervision's (“BCBS”) international framework for bank capital requirements. 49 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. 50 The Bank-Based Approach is intended to ensure that the safety and soundness of a nonbank SD by requiring the firm to maintain at all times qualifying capital in an amount sufficient to absorb unexpected losses, expenses, decrease in firm assets, or increases in firm liabilities without the firm becoming insolvent.

The terms used in the Commission's Bank-Based Approach are defined by reference to regulations of the Federal Reserve Board. 51 Specifically, 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. 52 The term “additional tier 1 capital” is defined to include the nonbank SD's common equity tier 1 capital and further includes such additional equity instruments as preferred stock. 53 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). 54 Subordinated debt also must meet certain requirements to qualify as tier 2 capital, including that the term of the subordinated debt instrument is for a minimum of 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. 55

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.

A nonbank SD also must compute its risk-weighted assets using standardized capital charges or, if approved, internal models. 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., 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 CFTC 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 (Subpart D of 17 CFR part 217). 56

Standardized market risk charges are computed under CFTC 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. 57 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 17 CFR part 217.

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. 58 Nonbank SDs approved to use internal 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 17 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 estimation of the likelihood of default of counterparties.

The Japanese Capital Rules impose bank-like capital requirements on a Japanese nonbank SD that are consistent with the BCBS framework for international bank-based capital standards. 59 The Japanese Capital Rules are intended to require each Japanese nonbank SD to hold a sufficient amount of qualifying equity and subordinated debt to absorb decreases in the value of firm assets and to cover losses from its activities, including possible counterparty defaults and margin collateral shortfalls associated with its swap dealing activities, without the firm becoming insolvent.

The Japanese Capital Rules require each Japanese nonbank SD to hold and maintain a “capital adequacy amount” equal to 120 percent or more of the Japanese nonbank SD's “risk equivalent amount.”  60 A Japanese nonbank SD's “capital adequacy amount” is composed of the firm's equity classified as “Basic Items” and “Supplemental Items.”  61 Basic Items are composed of the firm's balance sheet capital including: (i) issued and outstanding shares; (ii) the payment for an application for new shares; (iii) the capital surplus; (iv) the earned surplus; (v) the negative valuation difference on available-for-sale securities; and (vi) the firm's own treasury stock. 62 Supplemental Items provide an additional layer of capital beyond Basic Items and are composed of the positive valuation difference on available-for-sale securities and certain subordinated debt instruments. 63

A Japanese nonbank SD's capital adequacy amount must be composed of at least 50 percent Basic Items, and limits are imposed on the aggregate amount of subordinated debt that may be used to meet the capital adequacy amount. 64 Subordinated debt also must satisfy specified conditions in order to be included in the Japanese nonbank SD's capital. Specifically, the subordinated debt instrument must: (i) contain special provisions subordinating the rights of the lender to the payment of principal and interest; (ii) not be secured by the Japanese nonbank SD; (iii) have a minimum original maturity of more than five years for long term subordinated debt, and at least two years for short term subordinated debt; (iv) provide that any early redemption must be done voluntarily by the Japanese nonbank SD and must be approved by the FSA; and (v) contain special provisions setting forth that no interest payment shall be made to the lender if such payment would result in the Japanese nonbank SD capital adequacy ratio falling below certain thresholds. 65

A Japanese nonbank SD's “risk equivalent amount” is calculated as the sum of the firm's: (i) market risk equivalent amount, which is the amount equivalent to possible risks which may accrue due to fluctuations in the prices of securities and other proprietary assets and transactions held;  66 (ii) counterparty risk equivalent amount, which is the amount equivalent to possible risks which may accrue due to the default in performance of contracts by the counterparties to transactions or any other reason;  67 and (iii) basic risk equivalent amount, which is the amount equivalent to possible risk which may accrue in the ordinary course of executing business, such as errors in business handling. 68 The risk equivalent amount is a method of risk-weighting the Japanese nonbank SD's assets by adjusting the notional or carrying value of each asset based on the inherent risk of the asset. Less risky assets have a lower risk equivalent amount than assets with higher risk. As a result, Japanese nonbank SDs are required to hold lower levels of regulatory capital for assets with a lower risk equivalent amount and higher levels of regulatory capital for assets with a higher level of risk equivalent amount.

To calculate its risk equivalent amount, a Japanese nonbank SD risk-weights its assets and exposures using specified standardized weights or approved internal model-based methodologies. The Japanese Capital Rules, including various ordinances, notices  69 and guidelines, 70 set out quantitative and qualitative requirements that internal models must meet in order to obtain and maintain approval. Topics addressed by the quantitative and qualitative requirements include model governance, validation, monitoring, and review.

Modeled credit risk and market risk capital charges require the estimation of potential losses, with a certain degree of likelihood, within a specified time period, of a portfolio of assets. 71 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 estimation of the likelihood of default of counterparties.

The following section provides a description and comparative analysis of the regulatory requirements of the Japanese Capital Rules and Japanese Financial Reporting Rules to the CFTC Capital Rules and CFTC Financial Reporting Rules. Immediately following a description of the requirement(s) of the CFTC Capital Rules or the CFTC Financial Reporting Rules for which a comparability determination was requested by the FSA, the Commission provides a description of Japan's corresponding laws, regulations, or rules. The Commission then provides a comparative analysis of the Japanese Capital Rules or the Japanese Financial Reporting Rules with the corresponding CFTC Capital Rules or CFTC Financial Reporting Rules. The Commission identifies any material differences between the respective rules.

The Commission performed this proposed Capital Comparability Determination by assessing the comparability of the Japanese Capital Rules for Japanese nonbank SDs as set forth in the FSA Application and in the English language translation of certain Japanese laws and regulations, with the Commission's Bank-Based Approach. For clarity, the Commission did not assess the comparability of the Japanese Capital Rules to the Commission's TNW Approach or NLA Approach as the Commission understands that all Japanese nonbank SDs, as of the date of the FSA Application, are subject to the current bank-based capital approach of the Japanese Capital Rules. Accordingly, for clarity, when the Commission makes a preliminary determination herein about the comparability of the Japanese Capital Rules with the CFTC Capital Rules, the determination pertains to the comparability of the Japanese Capital Rules with the Bank-Based Approach under the CFTC Capital Rules.

As described below, it is proposed that any material changes to the Japanese Capital Rules will require notification to the Commission. Therefore, if there are subsequent material changes to the Japanese Capital Rules to include, for example, another capital approach,—the Commission will review and assess the impact of such changes on the Capital Comparability Determination Order as it is then in effect, and may amend or supplement the Order. 72

In addition, although the BCBS bank capital standards establish minimum capital standards that are consistent with the requirements of the Commission's Bank-Based Approach, the Commission notes that consistency with the BCBS standards is not determinative of a finding of comparability with the CFTC Capital Rules. In the Commission's view, a foreign jurisdiction's consistency with the BCBS international bank standards is an element in the Commission's comparability assessment, but, in and of itself, it may not be sufficient to demonstrate comparability with the CFTC Capital Rules without an assessment of the individual elements of the foreign jurisdiction's capital framework.

Capital and financial reporting regimes are complex structures comprised of a number of interrelated regulatory components. Differences in how jurisdictions approach and implement these regimes are expected, even among jurisdictions that base their requirements on the principles and standards set forth in the BCBS international framework. Therefore, the Commission's comparability determination involves a detailed assessment of the relevant requirements of the foreign jurisdiction and whether those requirements, viewed in the aggregate, lead to an outcome that is comparable to the outcome of the CFTC's corresponding requirements. Consistent with this approach, the Commission has grouped the CFTC Capital Rules and the CFTC Financial Reporting Rules into key categories that focus the analysis on whether the Japanese capital and financial reporting requirements are comparable to the Commission's requirements in purpose and effect, and not whether the Japanese requirements meet every aspect or contain identical elements as the Commission's requirements.

Specifically, as discussed in detail below, the Commission used the following key categories in its review: (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 a Japanese 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 a Japanese nonbank SD to its relevant regulatory authorities to effectively monitor the financial condition of the firm; and (iv) the regulatory notices and other communications between the Japanese nonbank SD and its relevant regulatory authorities that detail potential adverse financial or operational issues that may impact the firm. The Commission also reviewed the manner in which compliance by a Japanese nonbank SD with the Japanese Capital Rules and Japanese Financial Reporting Rules is monitored and enforced. The Commission invites public comment on all aspects of the FSA Application and on the Commission's proposed Capital Comparability Determination discussed below.

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. 73 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 and from losses, including losses resulting from counterparty defaults and margin collateral failures, by requiring the firm to maintain an appropriate level of 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.

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 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 nonbank SD's ability to meet its obligations to counterparties and other creditors in the swaps market, or impact the firm's solvency.

The regulatory objective of the Japanese Capital Rules is to ensure the safety and soundness of FIBOs, including Japanese nonbank SDs. The Japanese Capital Rules are designed to preserve the financial stability and solvency of a Japanese nonbank SD by requiring the firm to maintain a sufficient amount of qualifying equity and subordinated debt to absorb decreases in the value of firm assets and to cover losses from business activities, including counterparty defaults and margin collateral shortfalls associated with the firm's swap dealing activities. The Japanese Capital Rules also place an emphasis on high quality equity, as a Japanese nonbank SD must maintain at least 50 percent of its minimum capital requirement in the form of Basic Items. 74 The Japanese Capital Rules further enhance a Japanese nonbank SD's capital available to meet its minimum capital requirements by requiring the firm to subtract the balance sheet carrying value of its fixed assets from the firm's Basic Items in computing its minimum capital. 75

The objective of the Japanese Financial Reporting Rules is to enable the FSA to assess the financial condition and safety and soundness of Japanese nonbank SDs. The Japanese Financial Reporting Rules aim to achieve this objective by requiring each Japanese nonbank SD to provide financial reports and other financial position and capital information to the FSA on a regular basis. The financial reporting by a Japanese nonbank SD provides the FSA with information necessary to effectively monitor the Japanese nonbank SD's overall financial condition and its ability to meet its regulatory obligations as a FIBO.

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the overall objectives of Japanese 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 without the nonbank SDs becoming insolvent. The Japanese Capital Rules and CFTC Capital Rules are also based on, and consistent with, the BCBS international bank capital framework, which was designed to ensure that banking entities hold sufficient levels of capital to absorb losses and decreases in the value of assets without the banks becoming insolvent.

The Japanese Capital Rules are comparable in purpose and effect to the CFTC Capital Rules in that both regulatory approaches compute the minimum capital requirements based on the level of a nonbank SD's on-balance sheet and off-balance sheet exposures, with the objective and purpose of ensuring that the nonbank SD's capital is adequate to absorb losses resulting from such exposures. The Japanese Capital Rules and CFTC Capital Rules also provide for a comparable approach to the calculation of on-balance sheet and off-balance sheet risk exposures using standardized or internal model-based approaches that result in comparable risk exposure amounts. The Japanese Capital Rules' and CFTC Capital Rules' requirements for identifying and measuring on-balance sheet and off-balance sheet exposures under standardized or internal model-based approaches are also consistent with the requirements set forth under the BCBS international bank capital framework for identifying and measuring on-balance sheet and off-balance sheet exposures.

The Japanese Capital Rules and CFTC Capital Rules further achieve comparable outcomes and are comparable in purpose and effect in that both limit the types of capital instruments that may qualify as regulatory capital to cover the on-balance sheet and off-balance sheet risk exposures to high quality equity capital and qualifying subordinated debt instruments that meet conditions designed to ensure that the holders of the debt have effectively subordinated their claims to other creditors of the nonbank SD. Both the Japanese Capital Rules and the CFTC Capital Rules define high quality capital by the degree to which the capital represents permanent capital that is contributed, or readily available to a nonbank SD, on an unrestricted basis to absorb unexpected losses, including losses from swaps trading and other activities, without the nonbank SD becoming insolvent.

The Japanese Financial Reporting Rules are also comparable in purpose and effect with the CFTC Financial Reporting Rules as both the FSA and CFTC require nonbank SDs to file periodic financial reports, including unaudited financial reports and an annual audited financial report, detailing their financial operations and demonstrating their compliance with minimum capital requirements. In addition to providing the CFTC and FSA with information necessary to comprehensively assess the financial condition of a nonbank SD on an ongoing basis, the financial reports further provide the CFTC and FSA with information regarding potential changes in a nonbank SD's risk profile by disclosing changes in account balances reported over a period of time. Such changes in account balances may indicate that the nonbank SD has entered into new lines of business, has increased its activity in an existing line of business relative to other activities, or has terminated a previous line of business.

The prompt and effective monitoring of the financial condition of nonbank SDs through the receipt and review of periodic financial reports supports the Commission and FSA in meeting their respective objectives of ensuring the safety and soundness of nonbank SDs. In this connection, the early identification of potential financial issues provides the Commission and FSA with an opportunity to address such issues with the nonbank SD before they develop to a state where the financial condition of the firm is impaired such that it may no longer hold a sufficient amount of qualifying regulatory capital to absorb decreases in the value of firm assets or cover losses from its business activities, including the firm's swap dealing activities and obligations to swap counterparties.

The Commission invites public comment on its analysis above, including comment on the FSA Application and relevant Japanese laws and regulations.

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 Regulation 23.101. 76 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. 77 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 the firm's assets and to cover losses resulting from the firm's swap dealing and other activities, without the firm becoming insolvent.

Common equity tier 1 capital is generally composed of an entity's common stock instruments and any related surpluses, retained earnings, and accumulated other comprehensive income, and is a more conservative or permanent form of capital than additional tier 1 and tier 2 capital. 78 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. 79 Total tier 1 capital is composed of common equity tier 1 capital and further includes additional tier 1 capital. 80 Tier 2 capital includes certain types of instruments that include both debt and equity characteristics such as qualifying subordinated debt. 81

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 (with the exception of approved revolving subordinated debt agreements which may have a maturity term that is less than one year), and contain terms that effectively subordinate the rights of lenders to receive any payments, including accrued interest, to other creditors of the firm. 82

Common equity tier 1 capital, additional tier 1 capital, and tier 2 capital are permitted to be included in a 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 a nonbank SD will have this regulatory capital to absorb decreases in the value of the firm's assets and losses from business activities, including swap dealing activities, without the firm becoming insolvent.

The Japanese Capital Rules require each Japanese nonbank SD to maintain a “capital adequacy amount” ( i.e., Basic Items and Supplemental Items) that equals or exceeds 120 percent of the firm's “risk equivalent amount,” which is the sum of the firm's market risk, credit risk, and basic risk. 83 Basic Items are composed of the Japanese nonbank SD's balance sheet capital including: issued and outstanding shares; (ii) the payment for an application for new shares; (iii) the capital surplus; (iv) the earned surplus; (v) the negative valuation difference on available-for-sale securities; and (vi) the firm's own treasury stock. 84 Supplemental Items include the positive valuation difference on available-for-sale securities and certain subordinated debt instruments. 85 Subordinated debt instruments also must meet certain conditions to qualify as Supplemental Items under the Japanese Capital Rules, including containing appropriate provisions subordinating the rights of the lender to the payment of principal and interest to other creditors of the Japanese nonbank SD. 86 The Japanese Capital Rules also provide that a minimum of 50 percent of a Japanese nonbank SD's capital adequacy amount must be composed of Basic Items. 87

The Japanese Capital Rules further require a Japanese nonbank SD, in computing its capital adequacy amount, to deduct the balance sheet carrying value of fixed assets from its Basic Items. 88 The deduction of the carrying value of fixed assets is a conservative approach to the computation of a Japanese nonbank SD's capital adequacy amount as it excludes the value of non-liquid fixed assets from the firm's total Basic Items. The deduction of the carrying value of fixed assets from a Japanese nonbank SD's Basic Items reduces the amount of regulatory capital that the firm may recognize in meeting its capital requirements, and places an emphasis on the Japanese nonbank SD maintaining liquid assets to meet its minimum capital requirement to absorb business losses and decreases in the value of firm assets, and to satisfy financial obligations to counterparties and creditors. 89

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the Japanese Capital Rules are comparable in purpose and effect to CFTC Capital Rules with regard to the types and characteristics of a nonbank SD's equity that qualifies as regulatory capital in meeting its minimum requirements. The Japanese 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 the firm's assets without resulting in the firm becoming insolvent.

The Japanese Capital Rules and the CFTC Capital Rules permit nonbank SDs to recognize comparable forms of equity capital and qualifying subordinated debt instruments toward meeting minimum capital requirements, with both the Japanese Capital Rules and the CFTC Capital Rules placing an emphasis on high quality equity capital instruments. In this regard, the types and characteristics of the equity instruments included in Basic Items under the Japanese Capital Rules are comparable to the types and characteristics of equity instruments comprising common equity tier 1 capital and additional tier 1 capital under the CFTC Capital Rules. Specifically, the Japanese Capital Rules' Basic Items and the CFTC Capital Rules' common equity tier 1 capital and additional tier 1 capital are comparable in that these forms of equity capital have similar characteristics ( e.g., the equity must be in the form of high-quality, committed, and permanent capital) and these forms of capital represent contributed equity capital that generally has no priority to the distribution of firm assets or income with respect to other shareholders or creditors of the firm, which allows a nonbank SD to use this equity to absorb decreases in the value of firm assets and cover losses from business activities, including the firm's swap dealing activities.

Supplemental Items under the Japanese Capital Rules are also comparable to tier 2 capital under the CFTC Capital Rules. Specifically, the qualifying conditions imposed on subordinated debt instruments are comparable under the Japanese Capital Rules and the CFTC Capital Rules and ensure that the debt has qualities that support its recognition by a nonbank SD as equity for capital purposes, including that the debt lenders have effectively subordinated their claims for repayment on the debt to other creditors of the nonbank SD. Qualifying subordinated debt under the Japanese Capital Rules and CFTC Capital Rules also must contain provisions limiting or restricting repayment of the subordinated loans if such repayments result in the nonbank SD's equity falling below certain defined thresholds. These terms and conditions provide assurances that the subordinated debt is appropriate to be recognized as regulatory capital available to a nonbank SD to meet its obligations and to absorb business losses and decreases in the value of firm assets.

The Japanese Capital Rules differ from the CFTC Capital Rules, however, in that the Japanese Capital Rules require Japanese nonbank SDs to exclude the carrying value of fixed assets from the sum of the Basic Items in computing the capital adequacy amount. The CFTC Capital Rules do not require a nonbank SD to exclude fixed assets from the firm's common equity tier 1 capital or additional tier 1 capital. The deduction of the carrying value of fixed assets is a stricter capital standard as it imposes an obligation on Japanese nonbank SDs to meet minimum regulatory capital requirements with assets that are more liquid than fixed assets.

Having reviewed the FSA Application and the relevant Japanese laws and regulations, the Commission has made a preliminary determination that the Japanese Capital Rules and CFTC Capital Rules impose comparable requirements on Japanese nonbank SDs with respect to the types and characteristics of equity capital that must be used to meet minimum regulatory capital requirements. The Commission invites public comment on its analysis above, including comment on the FSA Application and relevant Japanese laws and regulations.

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 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: (iii) 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; and (iv) the amount of capital required by the NFA. 90

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 in order 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. 91 The Commission adopted this minimum requirement as it believed that the role a nonbank SD performs in the financial markets by engaging in swap dealing activities warranted a minimum level of capital, stated as a fixed dollar amount that does not fluctuate with the level of the firm's dealing activities, to help ensure that the firm meets its financial commitments to swap counterparties and creditors without the firm becoming insolvent. 92

Prong (ii) above is a minimum capital requirement that is based on the amount of uncleared margin for 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 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 a 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. 93

Prong (iii) 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 international capital adequacy framework for banking institutions. As noted above, a nonbank SD under prong (iii) 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 unexpected losses resulting from business activities, including uncollateralized defaults from swap counterparties, without the nonbank SD becoming insolvent.

A nonbank SD must compute its risk-weighted assets using standardized market risk and/or credit risk charges, unless the nonbank SD has been approved by the Commission or NFA to use internal models. 94 For standardized market risk charges, the Commission adopts by reference the standardized market risk charges set forth in Regulation 1.17 for FCMs and SEC Rule 18a-1 for nonbank SBSDs. 95 The standardized market risk charges under Regulation 1.17 and SEC Rule 18a-1 are calculated as a percentage of the market value or notional value of the nonbank SD's marketable securities and derivatives positions, with the percentages applied to the market value or notional value increasing as the expected or anticipated risk of the positions increases. 96 As stated above, the nonbank SD must maintain qualifying capital in an amount that equals or exceeds 8 percent of the firm's total market risk-weighted assets. 97

With respect to standardized credit risk charges for exposures from non-derivatives positions, a nonbank SD computes its on-balance sheet and off-balance sheet exposures in accordance with the standardized credit risk charges adopted by the Federal Reserve Board and set forth in Subpart D of 12 CFR 217. 98 Standardized credit risk charges are computed by multiplying the amount of the exposure by defined counterparty credit risk factors that range from 0 percent to 150 percent. 99 A nonbank SD with off-balance sheet exposures is required to calculate a credit risk charge by multiplying each exposure by a credit conversion factor that ranges from 0 percent to 100 percent, depending on the type of exposure. 100

A nonbank SD may compute standardized credit risk charges for derivatives positions, including uncleared swaps and non-cleared security-based swaps, using either the current exposure method (“CEM”) or the standardized approach for measuring counterparty credit risk (“SA-CCR”). 101 Both CEM and SA-CCR are non-model, rules-based, approaches to calculating counterparty credit risk for derivatives positions. Credit risk under CEM is the sum of: (i) the current exposure ( i.e., the positive mark-to-market) of the derivatives contract; and (ii) the potential future exposure, which is calculated as the product of the notional principal amount of the derivatives contract multiplied by a standard credit risk conversion factor set forth in the rules of the Federal Reserve Board. 102 Credit risk under SA-CCR is defined as the exposure at default amount of a derivatives contract, which is computed as 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 multiplied by a factor of 1.4. 103

A nonbank SD also may obtain approval from the Commission or NFA to use internal models to compute market risk and/or credit risk charges in lieu of the standardized charges. A nonbank SD seeking approval to use an internal model is required to submit an application to the Commission or NFA. 104 The application is required to include, among other things, a list of 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 deductions for market risk and/or credit risk charges for such positions, as well as a description of the mathematical models used to compute market risk and credit risk charges.

A nonbank SD approved by the Commission or NFA to use internal models to compute market risk is required to comply with Subpart F of the Federal Reserve Board's Part 217 regulations (“Subpart F”). 105 Subpart F is based on models that are consistent with the BCBS Basel 2.5 capital framework. 106 The Commission's qualitative and quantitative requirements for internal capital models also are comparable to the SEC's existing internal capital model requirements for broker-dealers in securities and SBSDs, 107 which are also broadly based on the BCBS Basel 2.5 capital framework.

A nonbank SD approved to use internal models to compute credit risk is required to perform such computation in accordance with Subpart E of the Federal Reserve Board's Part 217 regulations. 108 These internal credit risk modeling requirements are also based on the Basel 2.5 capital framework and the Basel 3 capital framework.

Under the Basel 2.5 capital framework, nonbank SDs have flexibility in developing their internal 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 time-frame 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. 109 One specific concern is that internal models must capture the non-linear price characteristics of options positions, including but not limited to, relevant volatilities at different maturities. 110

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).

The Japanese Capital Rules impose bank-like capital requirements on a Japanese nonbank SD that, consistent with the BCBS international bank capital framework, require the Japanese nonbank SD to hold a sufficient amount of qualifying equity capital and subordinated debt to absorb decreases in the value of a firm assets and to cover losses from its business activities, including the firm's swap dealing activities, without the firm becoming insolvent. Specifically, the Japanese Capital Rules require each Japanese nonbank SD to maintain a “capital adequacy amount” that equals or exceeds 120 percent of the firm's “risk equivalent amount.”  111 The “capital adequacy amount” is calculated as the Japanese nonbank SD's qualifying balance sheet equity capital in the form of Basic Items and Supplemental Items. The Japanese Capital Rules further require that at least 50 percent of the Japanese nonbank SD's capital used to meet the 120 percent minimum requirement must be composed of Basic Items, and any subordinated debt included in Supplemental Items must meet regulatory requirements designed to ensure that the debt is adequately subordinated to claims of other potential creditors of the firm. 112

The Japanese nonbank SD's “risk equivalent amount” is calculated as the sum of the: (i) market risk equivalent amount; (ii) counterparty risk equivalent amount; and (iii) basic risk equivalent amount. 113 Comparable to nonbank SDs under the CFTC Bank-Based Approach, the Japanese Capital Rules require Japanese nonbank SDs to compute market risk and/or credit risk using a standardized approach or, if approved to use internal models, market risk and/or credit risk models. The basic risk equivalent amount is computed as an amount equal to 25 percent of the Japanese nonbank SD's defined annual operating expenses, and is intended to provide a capital cushion to cover risks that may accrue in the course of executing ordinary business operations, such as error in business transactions. 114

For standardized market risk charges, the Japanese Capital Rules require a Japanese nonbank SD to calculate a market risk equivalent amount to reflect possible decreases in value of the firm's financial positions including equity risk, interest rate risk, foreign exchange risk, commodity risk, crypto asset risk, and option risk. 115 The market risk equivalent amount is calculated by the Japanese nonbank SD by multiplying specified market risk charges set forth in the Japanese Capital Rules by the notional or market value of the relevant assets and positions. A Japanese nonbank SD is further required to include the full value of its market risk equivalent amount in its aggregate risk equivalent amount, which effectively requires the Japanese nonbank SD to hold qualifying equity capital and subordinated debt in an amount that equals or exceeds 120 percent of the market risk equivalent amount.

With respect to credit risk for non-derivatives positions, the Japanese Capital Rules require a Japanese nonbank SD to calculate its standardized counterparty risk equivalent amount by multiplying its exposure under a given transaction by the specific risk weight applicable to the counterparty under the provisions of the Japanese Capital Rules. In this regard, the Japanese Capital Rules impose risk-weights ranging from 0 percent to 25 percent on exposures to governmental financial institutions, non-governmental financial institutions, general corporations, and individuals. 116 For certain exposures, credit ratings are used to determine the percentage of the counterparty credit risk exposure and, if no credit ratings are available, the Japanese nonbank SD generally applies a 25 percent risk-weight.

A Japanese nonbank SD is required to include the full amount of the counterparty risk equivalent in its aggregate risk equivalent amount. Therefore, a Japanese nonbank SD is effectively required to maintain a capital adequacy amount that is equal to or in excess of 120 percent of its credit risk equivalent amount.

With respect to credit risk for derivatives positions, the Japanese Capital Rules require a Japanese nonbank SD that is not approved to use credit risk models to calculate its exposure using the CEM, which is one of the standardized methods that a nonbank SD may use to calculate its credit risk exposure under a derivatives transaction pursuant to the Commission's Bank-Based Approach. 117 Under the CEM, a Japanese nonbank SD calculates its exposures for over-the-counter derivatives using a standardized rules-based approach, and is required to hold an amount of qualifying capital that equals or exceeds 120 percent of the aggregate derivatives exposures.

Japanese nonbank SDs may use internal models approved by the FSA to calculate their market risk equivalent amount and/or counterparty risk equivalent amount in lieu of the standardized charges. Japanese Capital Rules set out qualitative and quantitative requirements  118 that internal models must meet in order to be approved for use. The Japanese Capital Rules also require Japanese nonbank SDs to satisfy qualitative and quantitative requirements in order to continue to use models after obtaining the initial approval. These qualitative and quantitative requirements address: the effective review and assessment of models during development, validation, and periodic examinations; identification of key assumptions and limitations; and management of model risk. In this regard, Japanese nonbank SDs approved to use internal models for capital purposes are subject to principles for model risk management. 119 The principles lay out practices for nonbank SDs, covering model governance, model risk rating, documentation, testing, monitoring, independent validation, controls of vendor products and external resources, and internal audit. The ongoing monitoring includes frequent tests, such as stress testing, backtesting and benchmarking. The FSA periodically confirms that firms using models are adhering to the conditions set.

The internal market risk model-based methodology contained in the Japanese Capital Rules is based on the Basel 2.5 standard, 120 and requires a Japanese nonbank SD to use a VaR model with a 99 percent, one-tailed confidence level with: (i) price changes equivalent to a 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. 121 The Japanese Capital Rules require a Japanese nonbank SD using approved internal models for market risk to calculate a stressed VaR, specific risk, incremental risk, and comprehensive risk of correlation trading. 122

The Japanese Capital Rules' internal credit risk model-based methodology is also based on the Basel 2.5 standard. The Japanese Capital Rules allow for the estimation of expected exposure, as a measure of potential future exposure, based on VaR techniques as well, with adjustments to the period of risk, as appropriate to the asset and counterparty. 123 Credit risk models may include internal ratings based on the estimation of default probabilities, consistent with the Basel framework and subject to the same model risk management guidelines.

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the Japanese Capital Rules are comparable in purpose and effect to CFTC Capital Rules with regard to the establishment of a nonbank SD's minimum capital requirement and the calculation of the nonbank SD's amount of regulatory capital. Although there are differences in the minimum capital requirements and calculation of regulatory capital between the Japanese Capital Rules and the CFTC Capital Rules, as discussed below, the Commission preliminarily believes that the Japanese Capital Rules and CFTC Capital Rules are designed to ensure the safety and soundness of a nonbank SD and, subject to the proposed condition discussed below, will achieve comparable outcomes by requiring the firm to maintain a minimum level of qualifying regulatory capital and subordinated debt to absorb losses from the firm's business activities, including its swap dealing activities, and decreases in the value of the firm's assets, without the nonbank SD becoming insolvent.

The CFTC Capital Rules require a nonbank SD electing the Bank-Based Approach to maintain regulatory capital in an amount that meets or exceeds each of the following requirements: (i) $20 million of common equity tier 1 capital; (ii) 8 percent of the nonbank SD's uncleared swap margin amount; (iii) 8 percent of the nonbank SD's risk-weighted assets (with common equity tier 1 capital comprising at least 6.5 percent of the 8 percent);and (iv) the amount of capital required by NFA. 124 The Japanese Capital Rules require a Japanese nonbank SD to maintain regulatory capital in an amount equal to or in excess of 9.6 percent of the market risk, credit risk, and operational risk of the firm. 125

The Japanese Capital Rules differ from the CFTC Capital Rules in that the Japanese Capital Rules do not impose a capital requirement on Japanese nonbank SDs based on a minimum dollar amount or based on a percentage of the margin for uncleared swap transactions. However, the approach for conducting a Capital Comparability Determination is a principles-based, holistic approach that focuses on whether the applicable foreign jurisdiction's capital requirements achieve comparable outcomes to the corresponding CFTC requirements for nonbank SDs. 126 The focus of the comparability determination is on whether the foreign jurisdiction's capital requirements are comparable to the Commission's in purpose and effect, and not on whether the foreign jurisdiction's capital requirements are comparable in every aspect or contain identical elements based on a line-by-line assessment or comparison of the foreign jurisdiction's regulatory requirements with the Commission's regulatory requirements. 127

Based on a principles-based assessment, the Commission preliminarily believes, subject to the proposed condition below, and further subject to its consideration of public comments to the proposed Capital Comparability Determination and Order, that the purpose and effect of the Japanese Capital Rules and the CFTC Capital Rules are comparable. In this connection, the Japanese Capital Rules and CFTC Capital rules are both designed to require a nonbank SD to maintain a sufficient amount of qualifying regulatory capital and subordinated debt to absorb losses resulting from the firm's business activities, and decreases in the value of firm assets, without the nonbank SD becoming insolvent. As discussed below, the Commission specifically seeks public comment on the question of whether requirements under the Japanese Capital Rules are comparable in purpose and effect to the Commission's requirement for a nonbank SD to hold regulatory capital equal to or greater than 8 percent of its uncleared swap margin amount.

The Commission preliminarily believes that the Japanese Capital Rules and CFTC Capital Rules impose a comparable approach by requiring a nonbank SD to maintain qualifying equity capital and qualifying subordinated debt in an amount that equals or exceeds the nonbank SD's risk-weighted assets, which are composed of the aggregate of the firm's market risk and credit risk charges. The Japanese Capital Rules, however, require a Japanese nonbank SD to maintain a higher percentage of regulatory capital relative to the firm's risk-weighted assets than the CFTC Capital Rules require. Specifically, the Japanese Capital Rules require a Japanese nonbank SD to maintain regulatory capital equal to or greater than 9.6 percent of the firm's risk-weighted assets. 128

Furthermore, the Japanese Capital Rules add operational risk to the market risk and credit risk charges in setting the minimum capital requirements whereas the CFTC Capital Rules sets operational risk as a separate minimum capital requirement from the market risk and credit risk calculation of the risk weighted assets. 129 Specifically, as noted above, under the Japanese Capital Rules the basic risk equivalent amount is computed as an amount equal to 25 percent of the Japanese nonbank SD's defined annual operating expenses, and is intended to provide a capital cushion to cover risks that may accrue in the course of executing ordinary business operations, such as error in business transactions. 130 In addition, the Japanese Capital Rules require a Japanese nonbank SD to deduct the carrying value of fixed assets from its Basic Items in computing its regulatory capital, which promotes a degree of liquidity into the Japanese nonbank SD's regulatory capital. The Commission preliminarily believes the inclusion of an operational risk charge with the market risk and credit risk charges, and the deduction of the carrying value of fixed assets from regulatory capital, will achieve a comparable outcome to the Commission's requirement for nonbank SDs to hold regulatory capital in excess of 8 percent of its uncleared swap margin amount. The Commission specifically seeks public comment below on the comparability of this Commission requirement with the Japanese requirements designed to address operational risk.

The calculation of market risk charges and credit risk charges is also comparable under the Japanese Capital Rules and the CFTC Capital Rules. Both regimes require a nonbank SD to use standardized approaches to compute market and credit 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; allocating counterparties to categories according to risk assessments and assigning each a risk factor; calculating gross exposures based on the valuation of assets; calculating a net exposure allowing offsets following well defined procedures and subject to clear limitations; adjusting the net exposure by the market risk weights; and finally, for credit risk exposures, multiplying the sum of net exposures to each counterparty by the corresponding risk factor. After reviewing the standardized risk weights contained in the Japanese Capital Rules and the CFTC Capital Rules, the Commission preliminarily believes that the resulting risk charges are comparable for corresponding categories of instruments and credit exposures.

Internal market risk and credit risk models under the Japanese Capital Rules and the CFTC Capital Rules are based on the BCBS framework and contain comparable quantitative and qualitative requirements covering the same risks, including comparable model risk management requirements. As both rule sets address the same types of risk, with similar allowed methodologies, calibrated to similar risk levels and under similar controls, the Commission preliminarily believes that these requirements are comparable, as they produce similar market and credit risk charges for comparable exposures. Market risk charges increase capital requirements, or conversely are deducted from available capital, in full amount. Credit risk charges increase capital requirements, or conversely are deducted from available capital, with an adjustment. This adjustment to credit risk charges is applied in the CFTC Capital Rules as a final multiplication of credit risk weights by 8 percent, while the Japanese Capital Rules apply a comparable adjustment directly via the counterparty risk weights. The Japanese Capital Rules and the CFTC Capital Rules 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, backtesting and benchmarking.

The Japanese Capital Rules differ from the CFTC Capital Rules in that the Japanese Capital Rules do not contain a requirement that each Japanese nonbank SD maintain a fixed amount of regulatory capital. As noted previously, the requirement in the CFTC Capital Rules for a non-bank SD to maintain a minimum of $20 million of common equity tier 1 capital is intended to ensure that each nonbank SD maintains a level of capital, without regard to the firm's level of dealing activities, sufficient to meet its obligations to swap market participants given the firm's status as a registered SD.

The Commission preliminarily believes that each CFTC-registered nonbank SD should maintain a minimum level of regulatory capital to help ensure that it satisfies its regulatory obligations and meets is financial commitments to swap counterparties and creditors without the firm becoming insolvent. Therefore, the Commission is proposing to condition the proposed Capital Comparability Determination Order to require each Japanese nonbank SD to maintain a minimum level of regulatory capital in the form of Basic Items, as defined in Article 176 of the COO. Specifically, the proposed condition would require each Japanese nonbank SD to maintain at all times regulatory capital in the form of Basic Items in an amount denominated in yen that is equivalent to or greater than $20 million in U.S. dollars. The Commission is also proposing that a Japanese nonbank SD may convert the yen-denominated amount of its Basic Items to the U.S. dollar equivalent based on a commercially reasonable and observed exchange rate.

Having compared the minimum capital requirements and the calculation of regulatory capital under the Japanese Capital Rules for Japanese nonbank SDs with the corresponding minimum capital requirements and calculation of regulatory capital under the CFTC's Capital Rules for nonbank SDs, the Commission preliminarily finds that, subject to the proposed condition discussed above, the minimum capital requirements and calculation of regulatory capital are comparable. The Commission invites public comment on its analysis above, including comment on the FSA Application and Japanese laws and regulations, and the Commission's preliminary determination that the Japanese Capital Rules and the CFTC Capital Rules are comparable in purpose and effect and achieve comparable outcomes with respect to the minimum regulatory capital requirements and the calculation of regulatory capital for nonbank SDs.

The Commission also specifically seeks public comment on the question of whether the requirement under the Japanese Capital Rules for a Japanese nonbank SD to hold qualifying capital in an amount equal to 25 percent of its defined annual operating expenses is sufficiently comparable in purpose and effect to the CFTC's requirement for a nonbank SD to hold qualifying capital in amount equal to at least 8 percent of the nonbank SD's uncleared swap margin amount.

The Commission further requests comment on the proposed condition that each Japanese nonbank SD maintains a minimum level of regulatory capital in the form of yen-denominated Basic Items (as defined in Article 176 of the COO) that equals or exceeds the equivalent of $20 million U.S. dollars. Lastly, the Commission requests comment on the proposed requirement that a Japanese nonbank SD determine the amount of yen-denominated Basic Items it holds in U.S. dollars by using a commercially reasonable and observed yen/U.S. dollar exchange rate.

The CFTC Financial Reporting Rules impose financial recordkeeping and reporting requirements on nonbank SDs. In this regard, the CFTC Financial Reporting Rules require each nonbank SD to prepare and keep current ledgers or similar records summarizing each transaction affecting the nonbank SD's asset, liability, income, expense, and capital accounts. 131 The nonbank SD's ledgers and similar records must be prepared in accordance with generally accepted accounting principles as adopted in the United States (“U.S. GAAP”), except that if the nonbank SD is not otherwise required to prepare financial statements in accordance with U.S. GAAP, the nonbank SD may prepare and maintain its accounting records in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. 132

The CFTC Financial Reporting Rules also require each nonbank SD to prepare and file with the Commission and NFA periodic unaudited and annual audited financial statements. 133 A nonbank SD that elects the TNW Approach is required to file unaudited financial statements within 17 business days of the close of each fiscal quarter, and its annual audited financial statements within 90 days of its fiscal year-end. 134 A nonbank SD that elects either the NLA Approach or the Bank-Based Approach is required to file unaudited financial statements within 17 business days of the end of each month, and its annual audited financial statements within 60 days of the end of its fiscal year. 135

The CFTC Financial Reporting Rules further provide that a nonbank SD's unaudited financial statements must include: (i) a statement of financial condition; (ii) a statement of income/loss; (iii) a statement of changes in liabilities subordinated to claims of general creditors; (iv) a statement of changes in ownership equity; (v) a statement demonstrating compliance with, and calculation of, the applicable regulatory minimum capital requirement; and (vi) such further material information necessary to make the required statements not misleading. 136 The annual audited financial statements must include: (i) a statement of financial condition; (ii) a statement of income/loss; (iii) a statement of cash flows; (iv) a statement of changes in liabilities subordinated to claims of general creditors; (v) a statement of changes in ownership equity; (vi) a statement demonstrating the calculation of, and compliance with, the applicable regulatory minimum capital requirement; (vii) appropriate footnote disclosures; and (vii) a reconciliation of any material differences between the annual audited financial statements and the unaudited financial statements prepared as of the nonbank SD's year-end date. 137

A nonbank SD that has obtained approval from the Commission or NFA to use internal capital models also must submit certain model metrics, such as aggregate VaR and counterparty credit risk information, each month to the Commission and NFA. 138 A nonbank SD also is required to provide the Commission and NFA with a detailed list of financial positions reported at fair market value as part of its monthly unaudited financial statements. 139 Each nonbank SD is also required to provide information to the Commission and NFA regarding its counterparty credit concentration for the 15 largest exposures in derivatives, a summary of its derivatives exposures by internal credit ratings, and the geographic distribution of derivatives exposures for the 10 largest countries. 140

The CFTC Financial Reporting Rules also require a nonbank SD to attach to each unaudited and audited financial report an oath or affirmation that to the best knowledge and belief of the individual making the affirmation the information contained in the financial report is true and correct. 141 The individual making the oath or affirmation must be a duly authorized officer if the nonbank SD is a corporation, or one of the persons specified in the regulation for business organizations that are not corporations. 142

The CFTC Financial Reporting Rules further require a nonbank SD to make certain financial information publicly available by posting the information on its public website. 143 Specifically, a nonbank SD must post on its website a statement of financial condition and a statement detailing the amount of the nonbank SD's regulatory capital and the minimum regulatory capital requirement based on its audited financial statements and based on its unaudited financial statements that are as of a date that is six months after the nonbank SD's audited financial statements. 144 Such public disclosure is required to be made within 10 business days of the filing of the audited financial statements with the Commission, and within 30 calendar days of the filing of the unaudited financial statements required with the Commission. 145 A nonbank SD also must obtain written approval from NFA to change the date of its fiscal year-end for financial reporting. 146

The CFTC Financial Reporting Rules also require a nonbank SD to provide the Commission and NFA with information regarding the custodianship of margin for uncleared swap transactions (“Margin Report”). 147 The Margin Report must contain: (i) the name and address of each custodian holding initial margin or variation margin that is required for uncleared swaps subject to the CFTC margin rules (“uncleared margin rules”), on behalf of the nonbank SD or its swap counterparties; (ii) the amount of initial and variation margin required by the uncleared margin rules held by each custodian on behalf of the nonbank SD and on behalf its swap counterparties; and (iii) the aggregate amount of initial margin that the nonbank SD is required to collect from, or post with, swap counterparties for uncleared swap transactions subject to the uncleared margin rules. 148 The Commission requires this information in order to monitor the use of custodians by nonbank SDs and their swap counterparties. Such information assists the Commission in monitoring the safety and soundness of a nonbank SD by monitoring whether the firm is current with its swap counterparties with respect to the posting and collecting of margin required by the uncleared margin rules. By requiring the nonbank SD to report the required amount of margin to be posted and collected, and the amount of margin that is actually posted and collected, the Commission could identify potential issues with the margin practices and compliance by nonbank SDs that may hinder the ability of the firm to meet its obligations to market participants. The Margin Report also allows the Commission to identify custodians used by nonbank SDs and their counterparties, which may permit the Commission to assess potential market issues, including a concentration of custodial services by a limited number of banks.

The Japanese Financial Reporting Rules impose financial reporting requirements on FIBOs, including Japanese nonbank SDs. Specifically, the Japanese Financial Reporting Rules require each of the Japanese nonbank SDs to submit monthly monitoring survey reports (“Monthly Monitoring Reports”) to the FSA. 149 The Monthly Monitoring Reports are required to report on the Japanese nonbank SD's balance sheet, profit and loss statement, capital adequacy ratio, market risk, counterparty risk and liquidity risk. 150 The Monthly Monitoring Reports are typically submitted by the Japanese nonbank SDs within 2-3 weeks of the end of each month. 151

Each Japanese nonbank SD is also required to submit a business report to the Commissioner of the FSA within three months of the end of the firm's fiscal year (“Annual Business Report”). 152 The Annual Business Report must include a balance sheet, profit and loss statement, statement of changes in shareholders' equity, balance of subordinated debt and statement of capital adequacy ratio. 153

Furthermore, each Japanese nonbank SD is required to prepare financial statements and business reports every business year pursuant to the Japanese Companies Act (Act No. 86 of 2005). The financial statements include a balance sheet, profit and loss statement, and statement of changes in shareholders' equity, and are required to be audited by an accounting auditor (“Annual Audited Financial Report”). 154 The Annual Audited Financial Report must be submitted to and approved by the shareholders' meeting within 3 months of the Japanese nonbank SD's fiscal year-end. 155

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the financial reporting requirements of the Japanese Financial Reporting Rules, subject to the conditions specified below, are comparable to CFTC Financial Reporting Rules in purpose and effect as they are intended to provide the FSA and Commission, respectively, with financial information to monitor and assess the financial condition of nonbank SDs and their ongoing ability to absorb decreases in the value of firm assets and to cover losses from business activities, including swap dealing activities, without the firm becoming insolvent.

The Japanese Financial Reporting Rules require Japanese nonbank SDs to file financial reports with the FSA that are comparable with respect to the content of the financial reporting and the frequency of the submission of the financial reports with the requirements for nonbank SDs under the CFTC Financial Reporting Rules. In this regard, the Japanese Financial Reporting Rules require Japanese nonbank SDs to prepare and submit reports that include statements of financial condition, statements of profit and loss, and statements of capital adequacy that are comparable to the statements required of nonbank SDs under Regulation 23.105 of the CFTC Financial Reporting Rules. Accordingly, the Commission has preliminarily determined that a Japanese nonbank SD may comply with the financial reporting requirements contained in Commission Regulation 23.105 by complying with the corresponding Japanese Financial Reporting Rules, subject to the conditions set forth below. 156

Such substituted compliance is proposed to be conditioned upon a Japanese nonbank SD providing the Commission and NFA with copies of its Monthly Monitoring Report and Annual Business Report filed with the FSA pursuant to Article 56-2(1) and Article 46-3(1), respectively, of the FIEA. It is proposed that a Japanese nonbank SD also must provide the Commission and NFA with a copy of its Annual Audited Financial Report that is required to be prepared pursuant to Article 453(2) of the Companies Act. The Monthly Monitoring Report, Annual Business Report, and Annual Audited Financial Report must be translated into the English language. 157 The Monthly Monitoring Report and the Annual Business Report must have balances converted from yen to U.S. dollars. The Commission, however, recognizes that the requirement to translate accounts denominated in yen to U.S. dollars on the audited financial statements may impact the opinion provided by the public accountant. The Commission is therefore proposing to accept the Annual Audited Financial Report denominated in yen, provided that the report is translated into the English language.

The Commission also is proposing to condition the Capital Comparability Determination Order below on the Japanese nonbank SD filing (i) its Annual Business Report with the Commission and NFA within 15 business days of the earlier of the date the report is filed with the FSA or the date that the report is required to be filed with the FSA; (ii) its Annual Audited Financial Statement with the Commission and NFA within 15 business days of the approval of the report at the Japanese nonbank SD's shareholder meeting; and (iii) its Monthly Monitoring Report within 15 business days of the earlier of the date the report is filed with the FSA or 35 calendar days after the month-end reporting date. 158 The Commission preliminarily believes that these proposed filing dates provide sufficient time for the respective reports to be translated into the English language and balances converted from yen to U.S. dollars, where applicable.

The filing of English language financial reports by a Japanese nonbank SD with the Commission and NFA is necessary as financial reporting is a critical and central component of the Commission's and NFA's ability to assess the safety and soundness of registered nonbank SDs as required under Section 4s(e) of the CEA. Although the Commission is proposing to permit Japanese nonbank SDs to comply with the form and content requirements for the financial reports set forth in the Japanese Financial Reporting Rules, the receipt of English language financial reports that have balances converted to U.S. dollars (with the exception of the Annual Audited Financial Report) is necessary for the Commission to effectively monitor the ongoing financial condition of all nonbank SDs, including Japanese nonbank SDs, to help ensure their safety and soundness and ability to meet their financial obligations to customers, counterparties, and general market participants.

The Commission preliminarily believes that its proposed approach of requiring Japanese nonbank SDs to provide the Commission and NFA with copies of the Monthly Monitoring Reports, Annual Business Reports, and Annual Audited Financial Reports that the firms currently file with the FSA or otherwise prepare strikes an appropriate balance of ensuring that the Commission and NFA receive the financial reporting necessary for the effective monitoring of the financial condition of the nonbank SDs, while also recognizing the appropriateness of providing substituted compliance based on the existing FSA financial reporting requirements and regulatory structure.

The Commission is also proposing to condition the Capital Comparability Determination Order on Japanese nonbank SDs filing the aggregate securities, commodities, and swap positions information set forth in Schedule 1 of Appendix B to Subpart E of Part 23 on a monthly basis with the Commission and NFA. 159 Schedule 1 provides the Commission and NFA with detailed information regarding the financial positions that a nonbank SD holds as of the end of each month, including the firm's swaps positions, which will allow the Commission and NFA to monitor the types of investments and other activities that the firm engages in and will enhance the Commission's and NFA's ability to monitor the safety and soundness of the firm.

The Commission is also proposing to condition the Capital Comparability Determination Order on a Japanese nonbank SD submitting with each Monthly Monitoring Report, Annual Business Report, and Annual Audited Financial Report, as well as the applicable Schedule 1, a statement by an authorized representative or representatives of the Japanese nonbank SD that to the best knowledge and belief of the person(s) the information contained in the respective report is true and correct, including the translation of the report into the English language and conversion of balances in the reports to U.S. dollars. The statement by the authorized representative or representatives of the Japanese nonbank SD is in lieu of the oath or affirmation required of nonbank SDs under Regulation 23.105(f), 160 and is intended to ensure that reports filed with the Commission and NFA are prepared and submitted by firm personnel with knowledge of the financial reporting of the firm who can attest to the accuracy of the reporting and translation.

The Commission is further proposing to condition the Capital Comparability Determination Order on a Japanese nonbank SD filing the Margin Report specified in Regulation 23.105(m) with the Commission and NFA. The Margin Report contains: (i) the name and address of each custodian holding initial margin or variation margin required by the uncleared margin rules on behalf of the nonbank SD or its swap counterparties; (ii) the amount of initial and variation margin required by the uncleared margin rules held by each custodian on behalf of the nonbank SD and on behalf its swap counterparties; and (iii) the aggregate amount of initial margin required by the uncleared margin rules that the nonbank SD is required to collect from, or post to, swap counterparties for uncleared swap transactions. 161

The Commission believes that receiving this margin information from Japanese nonbank SDs will assist in the Commission's assessment of the safety and soundness of the Japanese nonbank SDs. Specifically, the Margin Report will provide the Commission with information regarding a Japanese nonbank SD's swap book, the extent to which it has uncollateralized exposures to counterparties or has not met its financial obligations to counterparties. This information, along with the list of custodians holding both the firm's and counterparties' swaps collateral, will assist the Commission in assessing and monitoring potential financial impacts to the nonbank SD resulting from defaults on its swap transactions. The Commission is further proposing to require a Japanese nonbank SD to file its Margin Report at the same time that the Japanese nonbank SD files its Monthly Monitoring Report, and to require the Margin Report to be prepared in the English language with balances reported in U.S. dollars.

The Commission is not proposing to require a Japanese nonbank SD that has been approved by FSA to use capital models to file the monthly model metric information contained in Regulation 23.105(k) with the Commission or NFA. 162 Regulation 23.105(k) requires a nonbank SD that has obtained approval from the Commission or NFA to use internal capital models to submit to the Commission and NFA each month information regarding its risk exposures, including VaR and credit risk exposure information when applicable. The model metrics are intended to provide the Commission and NFA with information that would assist with the ongoing oversight and assessment of internal market risk and credit risk models that have been approved for use by a nonbank SD. The Commission preliminarily believes, however, that the receipt by the Commission and NFA of model metrics set forth in Regulation 23.105(k) from Japanese nonbank SDs is not necessary as the initial approval and the ongoing assessment of the performance of a Japanese nonbank SD's models will be performed by the FSA as part of its oversight function.

The Commission also is proposing not to require a Japanese nonbank SD to file the monthly counterparty credit exposure information specified in Regulation 23.105(l) and Schedules 2, 3, and 4 of Appendix B to Subpart E of Part 23 with the Commission or NFA. Regulation 23.105(l) requires each nonbank SD to provide information to the Commission and NFA regarding its counterparty credit concentration for the 15 largest exposures in derivatives, a summary of its derivatives exposures by internal credit ratings, and the geographic distribution of derivatives exposures for the 10 largest countries in Schedules 2, 3, and 4, respectively. The Commission preliminarily believes that, under a substituted compliance regime, the FSA is best positioned to monitor a Japanese nonbank SD's credit exposures, which may be comprised of credit exposures to primarily other Japanese counterparties, as part of the FSA's overall monitoring of the financial condition of the firm.

Furthermore, the Commission, in making the preliminary determination to not require a Japanese nonbank SD to file the model metrics and counterparty exposures required by Regulations 23.105(k) and (l), respectively, recognizes that NFA's current risk monitoring program requires each bank SD and each nonbank SD, including each Japanese nonbank SD, to file risk metrics addressing market risk and credit risk with NFA on a monthly basis. This information includes: (i) monthly VaR for interest rates, credit, foreign exchange, equities, commodities, and total VaR; (ii) total stressed VaR; (iii) interest rate, credit spread, foreign exchange market, and commodity sensitivities; (iv) total swaps current exposure both before and after offsetting against collateral held by the firm; and (v) a list of the 15 largest swaps counterparty current exposures. 163 While there are differences between the information filed with the NFA and the information required under Regulations 23.105(k) and (l), the NFA risk metrics provide a level of information that allows NFA to identify SDs that may pose heightened risk and to allocate appropriate NFA regulatory oversight resources. The Commission preliminarily believes that the proposed financial reporting set forth as conditions in the proposed Capital Comparability Determination Order, and the risk metric and counterparty exposure information required to be reported by nonbank SDs (including Japanese nonbank SDs) under NFA rules, provide the appropriate balance of recognizing the comparability of the Japanese Financial Reporting Rules to the CFTC Financial Reporting Rules while also ensuring that the Commission and NFA receive sufficient data to monitor and assess the overall financial condition of nonbank Japanese SDs.

The Commission invites public comment on its analysis above, including comment on the FSA Application and relevant Japanese Financial Reporting Rules. The Commission also invites comment on the proposed conditions listed above. The Commission recognizes that while the Monthly Monitoring Reports, Annual Business Reports, and Annual Audited Financial Reports contain financial information regarding a Japanese nonbank SD that is comparable to the financial information required of nonbank SDs under Regulation 23.105 (such as statements of financial condition, statements of income, and statements demonstrating compliance with capital requirements), the reports also contain financial information that exceeds the requirements of regulation 23.105 (such as information regarding the holding of customer funds under Japanese laws). The Commission requests comment on the scope of the financial information that Japanese nonbank SDs should be required to file with the Commission and NFA. Should the Commission limit the financial information required of Japanese nonbank SDs to the types of financial information required of nonbank SDs under regulation 23.105?

The Commission also invites comment on its proposal not to require Japanese nonbank SDs to submit to the Commission and NFA the information set forth in Regulations 23.105(k) and (l). Are there specific elements of the data required under Regulations 23.105(k) and (l) that the Commission should require of Japanese nonbank SDs for purposes of monitoring model performance?

The Commission requests comment on the proposed filing dates for the reports and information specified above. Specifically, do the proposed filing dates provide sufficient time for Japanese nonbank SDs to prepare the reports, translate the reports into English, and, where required, convert balances into U.S. dollars? If not, what period of time should the Commission consider imposing on one or more of the reports?

The Commission also specifically requests comment regarding the setting of compliance dates for the reporting conditions that the proposed Capital Comparability Determination Order would impose on Japanese nonbank SDs. In this connection, if the Commission were to require Japanese nonbank SDs to file the Margin Report as set forth in the proposed Order below, how much time would Japanese nonbank SDs need to develop new systems or processes to capture information that is required? Would Japanese nonbank SDs need a period of time to develop any systems or processes to meet any other reporting conditions in the proposed Capital Comparability Determination Order? If so, what would be an appropriate amount of time for a Japanese nonbank SD to develop and implement such systems or processes?

The CFTC Financial Reporting Rules require nonbank SDs to provide the Commission and NFA with written notice of certain defined events. 164 The notice provisions are intended to provide the Commission and NFA with an opportunity to assess whether the information contained in the written notices indicates the existence of actual or potential financial and/or operational issues at a nonbank SD, and, when necessary, allows the Commission and NFA to engage the nonbank SD in an effort to minimize potential adverse impacts on swap counterparties and the larger swaps market. The notice provisions are part of the Commission's overall program for helping to ensure the safety and soundness of nonbank SDs and the swaps markets in general.

The CFTC Financial Reporting Rules require a nonbank SD to provide written notice within specified timeframes if the firm is: (i) undercapitalized; (ii) fails to maintain capital at a level that is in excess of 120 percent of its minimum capital requirement; or (iii) fails to maintain current books and records. 165 A nonbank SD is also required to provide written notice if the firm experiences a 30 percent or more decrease in excess regulatory capital from its most recent financial report filed with the Commission. 166 A nonbank SD also is required to provide notice if the firm fails to post or collect initial margin for uncleared swap and non-cleared security-based swap transactions or exchange variation margin for uncleared swap or non-cleared security-based swap transactions as required by the Commission's uncleared swaps margin rules or the SEC's non-cleared security-based swaps margin rules, respectively, if the aggregate is equal to or greater than: (i) 25 percent of the nonbank SD's required capital under Regulation 23.101 calculated for a single counterparty or group of counterparties that are under common ownership or control; or (ii) 50 percent of the nonbank SD's required capital under Regulation 23.101 calculated for all of the firm's counterparties. 167

The CFTC Financial Reporting Rules further require a nonbank SD to provide advance notice of an intention to withdraw capital by an equity holder that would exceed 30 percent of the firm's excess regulatory capital. 168 Finally, a nonbank SD that is dually-registered with the SEC as an SBSD or major security-based swap participant (“MSBSP”) must file a copy of any notice with the Commission and NFA that the SBSD or MSBSP is required to file with the SEC under SEC Rule 18a-8 (17 CFR 240.18a-8). 169 SEC Rule 18a-8 requires SBSDs and MSBSPs to provide written notice to the SEC for comparable reporting events as the CFTC Capital Rules in Regulation 23.105(c), including if a SBSD or MSBSP is undercapitalized or fails to maintain current books and records.

The FSA maintains a system of notice reporting requirements (“Early Warning System”) that is designed to provide the FSA with notice of, and an opportunity to react to, potential financial and/or operational issues with a Japanese nonbank SD prior to the firm falling below the FSA's minimum capital requirements. Specifically, each Japanese nonbank SD is required to submit an immediate notification to the FSA if its capital adequacy ratio falls below 140 percent. 170 The Japanese nonbank SD's notification submitted to the FSA must be accompanied by a Plan Regarding Specific Voluntary Measures to Be Taken in Order to Maintain the Capital Adequacy Ratio, which is expected to include concrete measures that the firm will take to maintain a capital adequacy ratio above 140 percent. 171 The FSA also has the authority to examine the future outlook on the Japanese nonbank SD's capital adequacy ratio through hearings and to urge the firm to make voluntary improvement efforts. 172

A Japanese nonbank SD also must submit an immediate notification and a Plan Regarding Specific Voluntary Measures to Be Taken in Order to Improve the Capital Adequacy Ratio (the “Plan”) to the FSA if the firm's capital adequacy ratio falls below the minimum capital adequacy ratio of 120 percent. 173 The FSA reviews the Plan and, when necessary, identifies the specific method by which a Japanese nonbank SD must bring its capital adequacy ratio back above the prescribed minimum level and the estimated date of the recovery. In situations where the Japanese nonbank SD fails to maintain the minimum level of regulatory capital, the FSA will also examine other aspects of the firm's operations, including the status of segregated management of customer assets and fund-raising. If the FSA finds it to be necessary and appropriate in the public interest or for the protection of investors, the Commissioner of the FSA may order a change of business methods, order assets to be deposited, or issue orders with respect to matters that are otherwise necessary from a supervisory perspective. 174

If a Japanese nonbank SD's capital adequacy ratio falls below 100 percent, the Commissioner of the FSA may order the suspension of all or part of the firm's business activities for a period not to exceed three months if the FSA deems such action to be necessary and appropriate for the public interest or for the protection of investors. 175 If the Japanese nonbank SDs capital adequacy ratio does not exceed 100 percent, and the FSA determines that the firm's capital adequacy ratio status is not likely to recover, the Commissioner of the FSA may rescind the registration of the firm. 176

In addition to the above measures, the FSA may order a Japanese nonbank SD to change its business methods or to otherwise take measures that are necessary for improving its business operations or the state of its assets if the FSA finds such action necessary and appropriate in the public interest or for the protection of investors. 177 Finally, the Prime Minister of Japan may rescind the registration of a Japanese nonbank SD, or order the suspension of all or a part of its business activities for a period of no longer than six months, if the Japanese nonbank SD violates a disposition by a government agency, 178 or is likely to become insolvent due to the state of its business and assets. 179

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the Japanese Financial Reporting Rules related to notice provisions, subject to the conditions specified below, are comparable to the notice provisions of the CFTC Financial Reporting Rules in purpose and effect as each regulator's requirements are intended to provide the FSA and Commission with prompt notice of potential or actual financial or operational issues at a nonbank SD that may impact its ability to continue to meet its financial obligations to swap counterparties and other creditors, or otherwise impair its safety and soundness. The Commission is therefore proposing to issue a Capital Comparability Determination Order providing that a Japanese nonbank SD may comply with the notice provisions required under Japanese laws and regulations in lieu of certain notice provisions required of nonbank SDs under Regulation 23.105(c), subject to the conditions set forth below.

The Japanese Financial Reporting Rules require a Japanese nonbank SD to provide notice to the FSA if the firm experiences a reduction of its regulatory capital that exceeds certain predefined limits (“Japanese Early Warning Notices”). As noted above, pursuant to the Japanese Early Warning Notices, a Japanese nonbank SD is required to provide the FSA with notices if its regulatory capital falls below: (i) 140 percent; or (ii) 120 percent of its minimum capital requirement. The Japanese Early Warning Notices are also required to contain information regarding actions that the Japanese nonbank SD will take to ensure that the firm is properly capitalized.

The Commission has preliminarily determined that these Japanese Early Warning Notices achieve comparable outcomes to CFTC notice provisions contained in Regulation 23.105(c)(1) and (2) that require a nonbank SD to provide notice to the Commission and to NFA if a nonbank SD fails to meet its minimum capital requirement or if the firm's regulatory capital falls below 120 percent of its minimum capital requirement. These notice provisions set forth in the Japanese Financial Reporting Rules and the CFTC Financial Reporting Rules are further comparable in purpose and effect in that the provisions are intended to alert the FSA and Commission/NFA, respectively, of potential financial or operational issues that could have an adverse impact on the safety and soundness of a nonbank SD, including the nonbank SD's ability to meet its financial obligations to customers, counterparties, creditors, and general market participants. The notices are also intended to provide an opportunity for the applicable regulator to monitor a nonbank SD's financial condition and operations to ensure that the firm takes appropriate actions to maintain, or to regain, compliance with its minimum capital requirements.

The Japanese Financial Reporting Rules differ from the CFTC Financial Reporting Rules in certain respects. Specifically, unlike the CFTC Financial Reporting Rules, the Japanese Financial Reporting Rules do not contain explicit requirements for a Japanese nonbank SD to notify the FSA if the firm fails to maintain current books and records, experiences a decrease in capital over levels previously reported, or fails to collect or post initial margin or variation margin for uncleared swap transactions with swap counterparties that exceed certain threshold levels. 180 The Japanese Financial Reporting Rules also do not require a Japanese nonbank SD to provide the FSA with advance notice of capital withdrawals initiated by equity holders that exceed defined amounts or percentages of the firm's excess regulatory capital. 181

The Commission is proposing to condition the Capital Comparability Determination Order on a Japanese nonbank SD providing the Commission and NFA with notice if the firm fails to make or to keep current books and records required by the FSA. For avoidance of doubt, in this context the Commission believes that books and records would include current ledgers or other similar records which show or summarize, with appropriate references to supporting documents, each transaction affecting the Japanese nonbank SD's asset, liability, income, expense and capital accounts in accordance with the accounting principles accepted by the FSA. 182 The Commission preliminarily believes that the maintenance of current books and records is a fundamental and essential component of operating as a registered nonbank SD and that the failure to comply with such a requirement may indicate an inability of the firm to promptly and accurately record transactions and to ensure compliance with regulatory requirements, including regulatory capital requirements. Therefore, the proposed Order below is conditioned on a Japanese nonbank SD providing the Commission and NFA with a written notice within 24 hours if the firm fails to maintain on a current basis the books and records required by the FSA.

The Commission is also proposing to condition the Capital Comparability Determination Order on a Japanese nonbank SD providing the Commission and NFA with a written notice within 24 hours of the firm filing a notice with the FSA pursuant to Article 179(3) of the COO that the firm's regulatory capital has fallen below 140 percent of its minimum requirement. It is proposed that a Japanese nonbank SD also must provide the Commission and NFA with written notice within 24 hours of filing a notice with the FSA that the firm's regulatory capital has fallen below 120 percent of its minimum requirement.

The requirement for a nonbank SD to file notice with the Commission and NFA of a decrease of excess regulatory capital below defined levels is a central component of the Commission's and NFA's oversight program for nonbank SDs. 183 Therefore, the Commission preliminarily believes that it is necessary for the Commission and NFA to receive notice from a Japanese nonbank SD that the firm has filed a regulatory notice with the FSA that its capital level has decreased below 140 percent or 120 percent of its minimum regulatory capital requirement. The notice must be filed by the Japanese nonbank SD within 24 hours of the filing of the notice with the FSA, and the Commission expects that, upon the receipt of a notice, Commission staff and NFA staff will engage with staff of the FSA to obtain an understanding of the facts that led to the filing of the notice and will discuss with the FSA its plan for any ongoing monitoring of the Japanese nonbank SD. Therefore, the Commission's proposal would not require the Japanese nonbank SD to file copies of its recovery plan that is filed with the FSA with the Commission or NFA. To the extent the Commission needs further information from the Japanese nonbank SD, the Commission expects to request such information as part of its assessment of the notice and its discussions with the FSA.

The proposed Capital Comparability Determination Order also requires a Japanese nonbank SD to file notice with the Commission and NFA if: (i) a single counterparty, or group of counterparties under common ownership or control, fails to post required initial margin or pay required variation margin on uncleared swap and non-cleared security-based swap positions that, in the aggregate, exceeds 25 percent of the Japanese nonbank SD's minimum capital requirement; (ii) counterparties fail to post required initial margin or pay required variation margin to the Japanese nonbank SD for uncleared swap and non-cleared security-based swap positions that, in the aggregate, exceed 50 percent of the Japanese nonbank SD's minimum capital requirement; (iii) a Japanese nonbank SD fails to post required initial margin or pay required variation margin for uncleared swap and non-cleared security-based swap positions to a single counterparty or group of counterparties under common ownership and control that, in the aggregate, exceeds 25 percent of the Japanese nonbank SD's minimum capital requirement; and (iv) a Japanese nonbank SD fails to post required initial margin or pay required variation margin to counterparties for uncleared swap and non-cleared security-based swap positions that, in the aggregate, exceeds 50 percent of the Japanese nonbank SD's minimum capital requirement. The Commission is proposing to require this notice so that, in the event that such a notice is filed, it and NFA may commence communication with the Japanese nonbank SD and the FSA in order to obtain an understanding of the facts that led to the failure to exchange material amounts of initial margin or variation margin in accordance with the applicable margin rules, and to assess whether there is a concern regarding the financial condition of the firm that may impair its ability to meet its financial obligations to customers, counterparties, creditors, and general market participants, or otherwise adversely impact the firm's safety and soundness.

The proposed Capital Comparability Determination Order does not require a Japanese nonbank SD to file notices with the Commission concerning withdrawals of capital or changes in capital levels as such information will be reflected in the financial statement reporting filed with the Commission and NFA as conditions of the order, and because the Japanese nonbank SD's capital levels are monitored by the FSA, which the Commission preliminarily believes renders the separate reporting to the Commission superfluous.

The proposed Capital Comparability Determination Order requires a Japanese nonbank SD to file any notices required under the Order with the Commission and NFA in English and, where applicable, with any balances reported in U.S. dollars. Each notice required by the proposed Capital Comparability Determination Order must be filed in accordance with instructions issued by the Commission or NFA.

The Commission invites public comment on its analysis above, including comment on the FSA Application and relevant Japanese Financial Reporting Rules. The Commission also invites comment on the proposed conditions to the Capital Comparability Determination Order that are listed above.

The Commission requests comment on the timeframes set forth in the proposed conditions for Japanese nonbank SDs to file notices with the Commission and NFA. In this regard, the proposed conditions would require Japanese nonbank SDs to file certain written notices with the Commission within 24 hours of the occurrence of a reportable event or of being alerted to a reportable event by the FSA. These notices would have to be translated into English prior to being filed with the Commission and NFA. The Commission request comment on the issues Japanese nonbank SDs may face meeting the filing requirements given time-zone difference and translation issues. The Commission also requests specific comment regarding the setting of compliance dates for the notice reporting conditions that the proposed Capital Comparability Determination Order would impose on Japanese nonbank SDs.

The Commission and NFA conduct ongoing supervision of nonbank SDs to assess their compliance with the CEA, Commission regulations, and NFA rules by reviewing financial reports, notices, risk exposure reports, and other filings that nonbank SDs are required to file with the Commission and NFA. The Commission and NFA also conduct periodic examinations as part of their supervision of nonbank SDs, including routine onsite examinations of nonbank SDs' books, records, and operations to ensure compliance with CFTC and NFA requirements. 184

As noted in section D.1 above, financial reports filed by a nonbank SD provide the Commission and NFA with information necessary to ensure the firm's compliance with minimum capital requirements and to assess the firm's overall safety and soundness and its ability to meet its financial obligations to customers, counterparties, creditors, and general market participants. A nonbank SD is also required to provide written notice to the Commission and NFA if certain defined events occur, including that the firm is undercapitalized or maintains a level of capital that is less than 120 percent of the firm's minimum capital requirements. 185 The notice provisions, as stated in section E.1 above, are intended to provide the Commission and NFA with information of potential issues at a nonbank SD that may impact the firm's ability to maintain compliance with the CEA and Commission regulations. The Commission and NFA also have the authority to require a nonbank SD to provide any additional financial and/or operational information on a daily basis or at such other times as the Commission or NFA may specify to monitor the safety and soundness of the firm. 186

The Commission also has authority to take disciplinary actions against a nonbank SD for failing to comply with the CEA and Commission regulations. Section 4b-1(a) of the CEA provides the Commission with exclusive authority to enforce the capital requirements imposed on nonbank SDs adopted under Section 4s(e) of the CEA.

The FSA has supervision, audit, and investigation authority with respect to Japanese nonbank SDs, including the authority to require such firms to provide all necessary information for FSA to carry out its supervisory responsibilities. 187 Specifically, the FSA has the authority to require Japanese nonbank SDs to submit documents to the FSA and to conduct onsite inspections at the business offices of the Japanese nonbank SDs. 188

The FSA also monitors the capital adequacy ratios of Japanese nonbank SDs through supervisory measures on an ongoing basis. The monitoring includes a system of notice requirements, discussed in section E.2 above, that obligate Japanese nonbank SDs to provide notice to the FSA if certain triggering conditions are met. The FSA also has a variety of measures in place to address actual cases of a Japanese nonbank SD's failure to maintain its required level of minimum capital. Specifically, a Japanese nonbank SD is required to submit a notification and an action plan to the FSA if the Japanese nonbank SD's capital adequacy ratio falls below 120 percent. 189 The FSA will review the plan and, when necessary, identify the specific method by which the Japanese nonbank SD is required to bring its capital adequacy ratio back above the prescribed minimum level. The FSA also may order a Japanese nonbank SD to change its business methods, order assets to be deposited, or issue orders with respect to matters that are otherwise necessary from a supervisory perspective, if the FSA finds it in the public interest or for the protection of customers to take such actions. 190 Furthermore, a Japanese nonbank SD may have all or parts of its business suspended for a period of no more than six months or have its registration revoked if the firm violates certain laws or regulations in connection with the financial instruments business or services, 191 or if the firm is likely to become insolvent. 192 Finally, a Japanese nonbank SD is subject to fines and other possible actions if it fails to submit documents that are required by law to be filed with the FSA. 193

The Commission has a long history of regulatory cooperation with the FSA. In this connection, the Commission and FSA entered into a Memorandum of Cooperation (“MOC”) with regard to the cooperation and the exchange of information in the supervision and oversight of regulated entities that operate on a cross-border basis in both the U.S. and Japan (“Cross-Border Covered Entities”), including nonbank SDs registered with the Commission and FIBOs registered with the FSA. 194 Pursuant to the MOC, the Commission and FSA expressed an intent to consult regularly, as appropriate, regarding: (i) general supervisory issues, including regulatory, oversight, or other related developments; (ii) issues relevant to the operations, activities, and regulation of Cross-Border Covered Entities; and (iii) any other areas of mutual supervisory interest, and to meet periodically to discuss their respective functions and regulatory oversight programs. 195 The MOC further provides for the Commission and FSA to inform each other of certain events, including any material events that could adversely impact the financial or operational stability of a Cross-Border Covered Entity, and provides a procedure for the Commission or FSA to conduct on-site examinations in, respectively, Japan or the U.S. 196 Pursuant to the terms of the MOC, the Commission intends to communicate and consult with the FSA regarding the supervision of the financial and operational condition of Japanese nonbank SDs.

In addition, as discussed above, as part of FSA's ongoing prudential regulation and supervision of FSA regulated entities, it is able to take all measures necessary to ensure that FSA's capital, financial and reporting rules are implemented. 197 Thus, the Commission preliminarily finds that FSA has the necessary powers and ability to supervise and enforce Japanese nonbank SDs' compliance with Japanese capital adequacy and financial reporting requirements. 198

The Commission invites public comment on its analysis above, including comment on the FSA Application and relevant Japanese laws and regulations.

The Commission's preliminary view, based on the FSA's Application and the Commission's review of applicable Japanese laws and regulations, is that the Japanese Capital Rules and the Japanese Financial Reporting Rules, subject to the conditions set forth in the proposed Capital Comparability Determination Order below, achieve comparable outcomes and are comparable in purpose and effect to the CFTC Capital Rules and CFTC Financial Reporting Rules. In reaching this preliminary conclusion, the Commission recognizes that there are certain differences between the Japanese Capital Rules and CFTC Capital Rules and certain differences between the Japanese Financial Reporting Rules and the CFTC Financial Reporting Rules. The proposed Capital Comparability Determination Order is subject to proposed conditions that are preliminarily deemed necessary to promote consistency in regulatory outcomes, or to reflect the scope of substituted compliance that would be available notwithstanding certain differences. In the Commission's preliminary view, the differences between the two rule sets would not be inconsistent with providing a substituted compliance framework for Japanese nonbank SDs subject to the conditions specified in the proposed Order below.

Furthermore, the proposed Capital Comparability Determination Order is limited to the comparison of the Japanese Capital Rules to the Bank-Based Approach under the CFTC Capital Rules. As noted previously, the FSA has not requested, and the Commission has not performed, a comparison of the Japanese Capital Rules to the Commission's NAL Approach or TNW Approach.

The Commission invites comments on all aspects of the FSA Application, relevant Japanese laws and regulations, the Commission's preliminary views expressed above, the question of whether requirements under the Japanese Capital Rules are comparable in purpose and effect to the Commission's requirement for a nonbank SD to hold regulatory capital equal to or greater than 8 percent of its uncleared swap margin amount, and the Commission's proposed Capital Comparability Determination Order, including the proposed conditions included in the proposed Order, set forth below.

It is hereby determined and ordered , pursuant to Commodity Futures Trading Commission (“CFTC” or “Commission”) Regulation 23.106 (17 CFR 23.106) under the Commodity Exchange Act (“CEA”) (7 U.S.C. 1 et seq. ) that a swap dealer (“SD”) organized and domiciled in Japan and subject to the Commission's capital and financial reporting requirements under Sections 4s(e) and (f) of the CEA (7 U.S.C. 6s(e) and (f)) may satisfy the capital requirements under Section 4s(e) of the CEA and CFTC Regulation 23.101(a)(1)(i) (17 CFR 23.101(a)(1)(i)) (“CFTC Capital Rules”), and the financial reporting rules under Section 4s(f) of the CEA and Commission Regulation 23.105 (17 CFR 23.105) (“CFTC Financial Reporting Rules”), by complying with certain specified Japanese laws and regulations cited below and otherwise complying with the following conditions, as amended or superseded from time to time:

(1) The SD is not subject to regulation by a prudential regulator defined in section 1a(39) of the CEA (7 U.S.C. 1a(39));

(2) The SD is organized under the laws of Japan and is domiciled in Japan (a “Japanese nonbank SD”);

(3) The Japanese nonbank SD is registered as a Type I Financial Instruments Business Operator (“FIBO”) with the Japan Financial Services Agency;

(4) The Japanese nonbank SD is subject to and complies with: Articles 28(1), 29, 46-3, 46-6(2), 52(1), 53(1) through (3), 56-2, and 198-6 of the Financial Instruments and Exchange Act (Act No. 25 of 1948); Section II-1-4 (General Supervisory Processes), Section IV-2-1 (Preciseness of Capital Adequacy Ratio), and Section IV-2-2 (Supervisory Response to Cases of Financial Instruments Business Operators' Capital Adequacy Ratio Falling Below Prescribed Level) of the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators; Articles 172, 176, 177(8), 178(1), 179(3), and Appended Forms No. 12 of the Cabinet Office Order on Financial Instruments Business (Cabinet Office Order No. 52 of 2007); Articles 1 through 17 of the Financial Services Agency Notice No. 59 of 2007; Articles 2(vi), 328(1) and (2), 435(2), and 436(2)(i) of the Japanese Companies Act (Act No. 86 of 2005); and Article 59 of the Rules of Corporate Accounting (Ordinance of the Ministry of Justice No. 13 of 2006) (collectively, the “Japanese Capital Rules and Japanese Financial Reporting Rules”);

(5) The Japanese nonbank SD maintains at all times an amount of regulatory capital in the form of Basic Items, as defined in Article 176 of the Cabinet Office Order No. 52 of 2007, equal to or in excess of the equivalent of $20 million in United States dollars (“U.S. dollars”). The Japanese nonbank SD shall use a commercially reasonable and observed yen/U.S. dollar exchange rate to convert the value of the yen-denominated Basic Items to U.S. dollars;

(6) The Japanese nonbank SD has filed with the Commission a notice stating its intention to comply with the applicable Japanese Capital Rules and Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules and the CFTC Financial Reporting Rules. The notice of intent must include the Japanese nonbank SD's representation that the firm is organized and domiciled in Japan; is a registered FIBO; and is subject to, and complies with, the Japanese Capital Rules and Japanese Financial Reporting Rules. The Japanese nonbank SD may not rely on this Capital Comparability Determination Order until it receives confirmation from Commission staff, acting pursuant to authority delegated by the Commission, that the Japanese nonbank SD may comply with the applicable Japanese Capital Rules and Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules and CFTC Financial Reporting Rules. Each notice filed pursuant to this condition must be prepared in the English language and submitted to the Commission via email to the following address: MPDFinancialRequirements@cftc.gov;

(7) The Japanese nonbank SD prepares and keeps current ledgers and other similar records in accordance with accounting principles required by the Financial Services Agency;

(8) The Japanese nonbank SD files with the Commission and with the National Futures Association (“NFA”) a copy of its Monthly Monitoring Report that is required to be filed with the Financial Services Agency pursuant to Article 56-2(1) of the Financial Instruments and Exchange Act. The Monthly Monitoring Report must be translated into the English language and balances must be converted to U.S. dollars. The Monthly Monitoring Report must be filed with the Commission and NFA within 15 business days of the date the Monthly Monitoring Report is filed with the Financial Services Agency or 35 days after the month-end reporting date, whichever is earlier;

(9) The Japanese nonbank SD files with the Commission and with NFA a copy of its Annual Business Report that is required to be filed with the Financial Services Agency in accordance with Article 46-3(1) of the Financial Instruments and Exchange Act and Article 172 of the Cabinet Office Order on Financial Instruments Business. The Annual Business Report must be translated into the English language and balances must be converted to U.S. dollars. The Annual Business Report must be filed with the Commission and NFA within 15 business days of the earlier of the date the Annual Business Report is filed with the Financial Services Agency or the date that the Annual Business Report is required to be filed with the Financial Services Agency.

(10) The Japanese nonbank SD files with the Commission and with NFA a copy of its Annual Audited Financial Report that is required to be prepared pursuant to Article 435(2) of the Japanese Companies Act (Act No. 86 of 2005). The Annual Audited Financial Report must be translated into the English language and balances may be reported in yen. The Annual Audited Financial Report must be filed with the Commission and NFA within 15 business days of approval of the report at the shareholders' meeting of the Japanese nonbank SD;

(11) The Japanese nonbank SD files Schedule 1 of Appendix B to Subpart E of Part 23 of the CFTC's regulations (17 CFR 23 Subpart E—Appendix B) with the Commission and NFA on a monthly basis. Schedule 1 must be prepared in the English language with balances reported in U.S. dollars and must be filed with the Commission and NFA with the Japanese nonbank SD's Monthly Monitoring Report;

(12) The Japanese nonbank SD submits with each Monthly Monitoring Report, Schedule 1, Margin Report, Annual Business Report, and Annual Audited Financial Report a statement by an authorized representative or representatives of the Japanese nonbank SD that to the best knowledge and belief of the representative or representatives the information contained in the report, including as applicable the translation of the report into the English language and conversion of balances in the report to U.S. dollars, is true and correct. The statement must be prepared in the English language;

(13) The Japanese nonbank SD files a margin report containing the information specified in CFTC Regulation 23.105(m) (17 CFR 23.105(m)) with the Commission and with NFA on a monthly basis. The margin report must be prepared in the English language with balances reported in U.S. dollars and must be filed with the Commission and NFA with the Japanese nonbank SD's Monthly Monitoring Report;

(14) The Japanese nonbank SD files a notice with the Commission and NFA within 24 hours of being informed by the Financial Services Agency that the firm is not in compliance with any component of the Japanese Capital Rules or Japanese Financial Reporting Rules. The notice must be prepared in the English language;

(15) The Japanese nonbank SD files a notice within 24 hours with the Commission and NFA if it fails to maintain regulatory capital in the form of Basic Items, as defined in Article 176 of the Cabinet Office Order No. 52 of 2007, equal to or in excess of the U.S. dollar equivalent of $20 million using a commercially reasonable and observed yen/U.S. dollar exchange rate. The notice must be prepared in the English language;

(16) The Japanese nonbank SD provides the Commission and NFA with notice within 24 hours of filing a notice with the Financial Services Agency pursuant to Article 179 of the Cabinet Office Order on Financial Instruments Business that the firm's capital adequacy ratio has fallen below the early warning level of 140 percent. The notice filed with the Commission and NFA must be prepared in the English language;

(17) The Japanese nonbank SD provides the Commission and NFA with notice within 24 hours of filing a notice with the Financial Services Agency pursuant to Article 179 of the Cabinet Office Order on Financial Instruments Business that the firm's capital adequacy ratio has fallen below 120 percent. The notice filed with the Commission and NFA must be prepared in the English language;

(18) The Japanese nonbank SD files a notice with the Commission and NFA within 24 hours if it fails to make or keep current the financial books and records required by the Financial Services Agency. The notice must be prepared in the English language;

(19) The Japanese nonbank SD files a notice with the Commission and NFA within 24 hours of the occurrence of any of the following: (i) a single counterparty, or group of counterparties under common ownership or control, fails to post required initial margin or pay required variation margin on uncleared swap and non-cleared security-based swap positions that, in the aggregate, exceeds 25 percent of the Japanese nonbank SD's minimum capital requirement; (ii) counterparties fail to post required initial margin or pay required variation margin to the Japanese nonbank SD for uncleared swap and non-cleared security-based swap positions that, in the aggregate, exceeds 50 percent of the Japanese nonbank SD's minimum capital requirement; (iii) the Japanese nonbank SD fails to post required initial margin or pay required variation margin for uncleared swap and non-cleared security-based swap positions to a single counterparty or group of counterparties under common ownership and control that, in the aggregate, exceeds 25 percent of the Japanese nonbank SD's minimum capital requirement; or (iv) the Japanese nonbank SD fails to post required initial margin or pay required variation margin to counterparties for uncleared swap and non-cleared security-based swap positions that, in the aggregate, exceeds 50 percent of the Japanese nonbank SD's minimum capital requirement. The notice must be prepared in the English language;

(20) The Japanese nonbank SD files a notice with the Commission and NFA of a change in its fiscal year-end approved or permitted to go into effect by the Financial Services Agency. The notice required by this paragraph will satisfy the requirement for a nonbank SD to obtain the approval of NFA for a change in fiscal year-end under CFTC Regulation 23.105(g) (17 CFR 23.105(g)). The notice of change in fiscal year-end must be prepared in the English language and filed with the Commission and NFA at least 15 business days prior to the effective date of the Japanese nonbank SD's change in fiscal year-end;

(21) The Financial Services Agency notifies the Commission of any material changes to the information submitted in its application, including, but not limited to, material changes to the Japanese Capital Rules or Japanese Financial Reporting Rules imposed on Japanese nonbank SDs, the Financial Services Agency's supervisory authority or supervisory regime over Japanese nonbank SDs, and proposed or final material changes to the Japanese Capital Rules or Japanese Financial Reporting Rules as they apply to Japanese nonbank SDs; and

(22) Unless otherwise noted in the conditions above, the reports, notices, and other statements required to be filed by the Japanese nonbank SD with the Commission and NFA pursuant to the conditions of this Capital Comparability Determination Order must be submitted electronically to the Commission and NFA in accordance with instructions provided by the Commission or NFA.

On July 22, 2022, Messiah's Star LLC notified the Coast Guard that it will be conducting a film stunt from 7 p.m. on October 24, 2022 to 1 a.m. on October 25, 2022, as part of filming for a film titled “Just One Life.” The stunt is a controlled fall and is to take place from the Big Four Pedestrian Bridge to the Ohio River below at MM 603. The event will include 3 swimmers, a deck boat, and a houseboat.

The purpose of this rulemaking is to ensure the safety of vessels, stunt crew personnel, and the navigable waters before, during, and after the scheduled event. The Coast Guard is proposing this rulemaking under authority in 46 U.S.C. 70034 (previously 33 U.S.C. 1231).

The COTP is proposing to establish a safety zone from 7 p.m. on October 24, 2022 to 1 a.m. on October 25, 2022. The safety zone would cover all navigable waters of the Ohio River between MM 602.5 and MM 603.5. The duration of the zone is intended to ensure the safety of vessels and these navigable waters before, during, and after the scheduled 7 p.m. to 1 a.m. film stunt. No vessel or person would be permitted to enter the safety zone without obtaining permission from the COTP or a designated representative. The regulatory text we are proposing appears at the end of this document.

We developed this proposed rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders, and we discuss First Amendment rights of protestors.

Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. This NPRM has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, the NPRM has not been reviewed by the Office of Management and Budget (OMB).

This regulatory action determination is based on the size, location, duration, and time-of-day of the safety zone. This safety zone would restrict transit on a one-mile stretch of the Ohio River for 6 hours on one night. Moreover, the Coast Guard would issue a Broadcast Notice to Mariners via VHF-FM marine channel 16 about the zone.

The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities.

While some owners or operators of vessels intending to transit the safety zone may be small entities, for the reasons stated in section IV.A above, this proposed rule would not have a significant economic impact on any vessel owner or operator.

If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this proposed rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this rule would economically affect it.

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please call or email the person listed in the FOR FURTHER INFORMATION CONTACT section. The Coast Guard will not retaliate against small entities that question or complain about this proposed rule or any policy or action of the Coast Guard.

This proposed rule would not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

A rule has implications for federalism under Executive Order 13132 (Federalism), if it has a substantial direct effect on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this proposed rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.

Also, this proposed rule does not have tribal implications under Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments) because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this proposed rule has implications for federalism or Indian tribes, please call or email the person listed in the FOR FURTHER INFORMATION CONTACT section.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this proposed rule would not result in such an expenditure, we do discuss the potential effects of this proposed rule elsewhere in this preamble.

We have analyzed this proposed rule under Department of Homeland Security Directive 023-01, Rev. 1, associated implementing instructions, and Environmental Planning COMDTINST 5090.1 (series), which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This proposed rule involves a safety zone lasting 6 hours that would prohibit entry .5 nautical mile of a film stunt. Normally such actions are categorically excluded from further review under paragraph L60(a) of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 1. A preliminary Record of Environmental Consideration supporting this determination is available in the docket. For instructions on locating the docket, see the ADDRESSES section of this preamble. We seek any comments or information that may lead to the discovery of a significant environmental impact from this proposed rule.

The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to call or email the person listed in the FOR FURTHER INFORMATION CONTACT section to coordinate protest activities so that your message can be received without jeopardizing the safety or security of people, places, or vessels.

We view public participation as essential to effective rulemaking, and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation.

Submitting comments. We encourage you to submit comments through the Federal Decision Making Portal at https://www.regulations.gov. To do so, go to https://www.regulations.gov, type USCG-2022-0652 in the search box and click “Search.” Next, look for this document in the Search Results column, and click on it. Then click on the Comment option. If you cannot submit your material by using https://www.regulations.gov, call or email the person in the FOR FURTHER INFORMATION CONTACT section of this proposed rule for alternate instructions.

Viewing material in docket. To view documents mentioned in this proposed rule as being available in the docket, find the docket as described in the previous paragraph, and then select “Supporting & Related Material” in the Document Type column. Public comments will also be placed in our online docket and can be viewed by following instructions on the https://www.regulations.gov Frequently Asked Questions web page. We review all comments received, but we will only post comments that address the topic of the proposed rule. We may choose not to post off-topic, inappropriate, or duplicate comments that we receive.

Personal information. We accept anonymous comments. Comments we post to https://www.regulations.gov will include any personal information you have provided. For more about privacy and submissions to the docket in response to this document, see DHS's eRulemaking System of Records notice (85 FR 14226, March 11, 2020).

For the reasons discussed in the preamble, the Coast Guard is proposing to amend 33 CFR part 165 as follows:

On July 29, 2022, the Postal Service filed a petition pursuant to 39 CFR 3050.11 requesting that the Commission initiate a rulemaking proceeding to consider changes to analytical principles relating to periodic reports. 1 The Petition identifies the proposed analytical changes filed in this docket as Proposal Five.

Background. Contract Delivery Services (CDS) suppliers are independent contractors who provide delivery on specific routes that are not serviced by city or rural carriers. Petition, Proposal Five at 1. The Postal Service initiated research into the estimation of accrued costs and product costs of CDS in response to USPS Office of Inspector General (OIG) Report No. 20-313-R21. Id. That report recommended that the Postal Service: (1) reevaluate the cost proportion percentages used to estimate accrued CDS costs and assess the possibility of using actual CDS payment data to calculate product costs; and (2) conduct a study to whether the mail volumes delivered on CDS and rural routes are similar and consider an update to the distribution keys used to attribute CDS costs. Id. at 1-2.

CDS costs are not separately identified in the Postal Service's general ledger (GL). Id. at 2. Instead, CDS accrued costs are included as a portion of different GL expense accounts contained in cost segment 14 (purchased transportation), components 143 (Highway) and 145 (Domestic Water) and reported in GL Account No. 53605—Intra-CSD Regular (Intra-District)—and Account No. 53601—Intra-processing & distribution center (P&DC) Regular. Id. The Postal Service states that costs in these two accounts “comprise the overwhelming majority of all CDS costs and have a distinct treatment.” Id.

Currently, the Postal Service calculates the CDS volume variability by developing a cost-to-capacity variability and a capacity-to-volume variability and then multiplying these variabilities together to produce an overall volume variability for the contract costs. Id. at 2-3. The calculation of volume variable Intra-sectional center facility (SCF) costs relies upon two econometric analyses, approved in Docket Nos. RM2016-12 and RM2021-1, which updated the capacity-to-volume and cost-to-capacity variabilities, respectively. Id. at 3.

The Intra-P&DC and Intra-District account categories are made up of four transportation technologies and route types, including box, city, van, and tractor trailer. Id. Within each type, the costs are summed to form the account category's cost proportions. Id. The Postal Service individually estimates the cost-to-capacity volume variabilities for the Intra-District and the Intra-P&DC accounts as the cost-weighted averages of the variabilities of the four transportation/route types. Id.

The CDS costs in Intra-SCF accounts are distributed based on the Intra-SCF distribution factors estimated by the Transportation Cost System (TRACS) on a quarterly basis as a proxy because CDS routes are not sampled in TRACS. Id.

Proposal. The Postal Service proposes two revisions to analytical principles related to CDS costs based on its investigation into the OIG's recommendations.

First, the Postal Service proposes to update the Intra-P&DC and Intra-District cost proportions annually using Transportation Contract Support System (TCSS) data. More specifically, to update the cost proportions used for the GL accounts that it states comprise the majority of CDS costs, GL Account Nos. 53605 and 53601, using TCSS data. Id. at 4.

The Postal Service states that it assessed the feasibility of using CDS payment data from the Accounts Payable Excellence System (APEX) to form the cost proportions for the Intra-P&DC and Intra-District account categories, as the OIG recommended, but determined that APEX data does not contain the information necessary on vehicle capacity necessary to apportion payments between the four transportation/route types. Id.

Second, the Postal Service proposes using the rural cost distribution key (CS10, component 260) to attribute CDS costs to products. Id. at 6. The Postal Service states “that both operational protocols and field observations support the hypothesis that similar mail volumes are delivered on CDS routes and rural routes.” Id. Furthermore, the Postal Service contends that “support for the similarities between CDS contractors and rural carriers is found in the process that exists for the conversion of CDS routes to rural routes in comparable offices.” Id. at 7.

Impact. The Postal Service states that applying an initial update to the Intra-P&DC and Intra-District cost proportions, the first proposed revision, would result in an increase in volume variable highway costs by 0.03 percent. Id. at 9. The Postal Service reports that applying the rural cost distribution key to CDS costs, the second proposed change, would result in an increase “by $33.7 M, or 0.9 percent” in volume variable highway costs. Id.

The Postal Service states that implementing both of the proposed revisions would have resulted “in a shift of $42.6 M, or 1.2 percent, in highway costs from institutional to volume variable costs” using FY 2021 data. Id. at 11. The Postal Service reports that Competitive highway costs would decrease by 0.02 percent under this proposal while Market Dominant costs would increase by 2.5 percent. Id. The Postal Service acknowledges that highway costs for High Density and Saturation Flats/Parcels increase “significantly” on a percentage basis but states that the proposed changes result in less than a $0.01 increase on a unit cost basis. Id. The Postal Service states that the proposed methodology would result in approximately 0.2 percent of the volume variable costs for highway transportation being attributed to Total Domestic Market Dominant Services. Id.

The Commission establishes Docket No. RM2022-11 for consideration of matters raised by the Petition. More information on the Petition may be accessed via the Commission's website at http://www.prc.gov. Interested persons may submit comments on the Petition and Proposal Five no later than September 20, 2022. Pursuant to 39 U.S.C. 505, Almaroof Agoro is designated as an officer of the Commission (Public Representative) to represent the interests of the general public in this proceeding.

It is ordered:

1. The Commission establishes Docket No. RM2022-11 for consideration of the matters raised by the Petition of the United States Postal Service for the Initiation of a Proceeding to Consider Proposed Changes in Analytical Principles (Proposal Five), filed July 29, 2022.

2. Comments by interested persons in this proceeding are due no later than September 20, 2022.

3. Pursuant to 39 U.S.C. 505, the Commission appoints Almaroof Agoro to serve as an officer of the Commission (Public Representative) to represent the interests of the general public in this docket.

4. The Secretary shall arrange for publication of this order in the Federal Register .

I. General Information A. Does this action apply to me?

You may be potentially affected by this action if you own or operate a facility that manufactures, processes, or otherwise uses any chemicals in the proposed DINP category. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Facilities subject to reporting under EPCRA section 313 include:

• Facilities included in the following NAICS manufacturing codes (corresponding to Standard Industrial Classification (SIC) codes 20 through 39): 311*, 312*, 313*, 314*, 315*, 316, 321, 322, 323*, 324, 325*, 326*, 327, 331, 332, 333, 334*, 335*, 336, 337*, 339*, 111998*, 211130*, 212324*, 212325*, 212393*, 212399*, 488390*, 511110, 511120, 511130, 511140*, 511191, 511199, 512230*, 512250*, 519130*, 541713*, 541715* or 811490*. *Exceptions and/or limitations exist for these NAICS codes.

• Facilities included in the following NAICS codes (corresponding to SIC codes other than SIC codes 20 through 39): 211130 (corresponds to SIC code SIC 1321, Natural Gas Liquids and SIC 2819, Industrial Inorganic Chemicals, Not Elsewhere Classified); or 212111, 212112, 212113 (corresponds to SIC code 12, Coal Mining (except 1241)); or 212221, 212222, 212230, 212299 (corresponds to SIC code 10, Metal Mining (except 1011, 1081, and 1094)); or 221111, 221112, 221113, 221118, 221121, 221122, 221330 (limited to facilities that combust coal and/or oil for the purpose of generating power for distribution in commerce) (corresponds to SIC codes 4911, 4931, and 4939, Electric Utilities); or 424690, 425110, 425120 (limited to facilities previously classified in SIC code 5169, Chemicals and Allied Products, Not Elsewhere Classified); or 424710 (corresponds to SIC code 5171, Petroleum Bulk Terminals and Plants); or 562112 (limited to facilities primarily engaged in solvent recovery services on a contract or fee basis (previously classified under SIC code 7389, Business Services, NEC)); or 562211, 562212, 562213, 562219, 562920 (limited to facilities regulated under the Resource Conservation and Recovery Act, subtitle C, 42 U.S.C. 6921 et seq. ) (corresponds to SIC code 4953, Ref use Systems).

• Federal facilities.

A more detailed description of the types of facilities covered by the NAICS codes subject to reporting under EPCRA section 313 can be found at: https://www.epa.gov/toxics-release-inventory-tri-program/tri-covered-industry-sectors. To determine whether your facility would be affected by this action, you should carefully examine the applicability criteria in 40 CFR part 372, subpart B. Federal facilities are required to report under Executive Order 13834 ( https://www.govinfo.gov/content/pkg/FR-2018-05-22/pdf/2018-11101.pdf ) as explained in the Implementing Instructions from the Council on Environmental Quality ( https://www.sustainability.gov/pdfs/eo13834_instructions.pdf ). If you have questions regarding the applicability of this action to a particular entity, consult the person listed under FOR FURTHER INFORMATION CONTACT .

In response to a petition, EPA is proposing to add DINP as a category to the list of toxic chemicals subject to the reporting requirements under section 313 of EPCRA. As discussed in more detail later in this document, EPA is proposing to conclude that the members of the DINP category meet the EPCRA section 313(d)(2)(B) criteria for listing.

This action is issued under EPCRA sections 313(d), 313(e)(1) and 328, 42 U.S.C. 11023(d), 11023(e)(1) and 11048. EPCRA is also referred to as Title III of the Superfund Amendments and Reauthorization Act of 1986.

EPCRA section 313, 42 U.S.C. 11023, requires owners/operators of certain facilities that manufacture, process, or otherwise use listed toxic chemicals in amounts above reporting threshold levels to report their facilities' environmental releases and other waste management information on such chemicals annually. These facility owners/operators must also report pollution prevention and recycling data for such chemicals, pursuant to PPA section 6607, 42 U.S.C. 13106.

Under EPCRA section 313(c), Congress established an initial list of toxic chemicals subject to EPCRA toxic chemical reporting requirements that was comprised of 308 individually listed chemicals and 20 chemical categories.

EPCRA section 313(d) authorizes EPA to add or delete chemicals from the list and sets criteria for these actions. EPCRA section 313(d)(2) states that EPA may add a chemical to the list if any of the listing criteria in EPCRA section 313(d)(2) are met. Therefore, to add a chemical, EPA must determine that at least one criterion is met, but need not determine whether any other criterion is met. Conversely, to remove a chemical from the list, EPCRA section 313(d)(3) dictates that EPA must determine that none of the criteria in EPCRA section 313(d)(2) are met. The listing criteria in EPCRA section 313(d)(2)(A)-(C) are as follows:

• The chemical is known to cause or can reasonably be anticipated to cause significant adverse acute human health effects at concentration levels that are reasonably likely to exist beyond facility site boundaries as a result of continuous, or frequently recurring, releases.

• The chemical is known to cause or can reasonably be anticipated to cause in humans: cancer or teratogenic effects, or serious or irreversible reproductive dysfunctions, neurological disorders, heritable genetic mutations, or other chronic health effects.

• The chemical is known to cause or can be reasonably anticipated to cause, because of its toxicity, its toxicity and persistence in the environment, or its toxicity and tendency to bioaccumulate in the environment, a significant adverse effect on the environment of sufficient seriousness, in the judgment of the Administrator, to warrant reporting under this section.

EPA often refers to the EPCRA section 313(d)(2)(A) criterion as the “acute human health effects criterion;” the EPCRA section 313(d)(2)(B) criterion as the “chronic human health effects criterion;” and the EPCRA section 313(d)(2)(C) criterion as the “environmental effects criterion.”

Under EPCRA section 313(e)(1), any person may petition EPA to add chemicals to or delete chemicals from the list. EPA issued a statement of policy in the Federal Register of February 4, 1987 (52 FR 3479) providing guidance regarding the recommended content of and format for petitions. On May 23, 1991 (56 FR 23703), EPA issued guidance regarding the recommended content of petitions to delete individual members of the metal compounds categories reportable under EPCRA section 313. EPA published in the Federal Register of November 30, 1994 (59 FR 61432) (FRL-4922-2) a statement clarifying its interpretation of the EPCRA section 313(d)(2) and (d)(3) criteria for modifying the EPCRA section 313 list of toxic chemicals.

EPA is taking this action in response to a petition submitted under EPCRA section 313(e)(1). EPA is required to respond to petitions by ether initiating a rulemaking to grant the petition or publishing an explanation of why the petition is denied. In this case, EPA is proposing to grant the petition to list DINP.

EPA prepared an economic analysis for this action entitled, “Economic Analysis for the Addition of Diisononyl Phthalate Category; Community Right- to-Know Toxic Chemical Release Reporting” which presents an analysis of the costs of the proposed addition of the DINP category (Reference (Ref.) 1). EPA estimates that this action would result in an additional 198 to 396 reports being filed annually. EPA estimates that the costs of this action will be approximately $920,938 to $1,839,925 in the first year of reporting and approximately $438,542 to $876,155 in the subsequent years. In addition, EPA has determined that of the 181 to 362 small businesses affected by this action, none are estimated to incur annualized cost impacts of more than 1%. Thus, this action is not expected to have a significant adverse economic impact on a substantial number of small entities.

1. Submitting CBI. Do not submit CBI information to EPA through https://www.regulations.gov or email. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD-ROM that you mail to EPA, mark the outside of the disk or CD-ROM as CBI and then identify electronically within the disk or CD-ROM the specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a copy of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

2. Tips for preparing your comments. When preparing and submitting your comments, see the commenting tips at https://www.epa.gov/dockets/commenting-epa-dockets#tips.

On February 29, 2000, EPA received a petition from the Washington Toxics Coalition (which is now called Toxic-Free Future) requesting that EPA add DINP to the list of toxic chemicals subject to reporting under EPCRA Section 313 and PPA section 6607 (Ref. 2). The petitioner indicated that the composition of DINP varies, and that DINP is known by at least three CAS numbers: 28553-10-0, 68515-48-0, and 71549-78-5. The petitioner asserted that DINP causes cancer, systemic toxicity, developmental toxicity, and endocrine disruption, and therefore should be added to the list of chemicals subject to reporting under EPCRA Section 313 and PPA section 6607. The petitioner also stated that DINP is a dangerous phthalate ester used as the principal plasticizer in toys and other products used by children and adults. The petitioner asserted that in all studies conducted to measure DINP exposure from children's use of plastic, DINP migrates from the plastic into saliva when the plastic item is chewed or put into the child's mouth. (Ref. 2)

In response to the petition to add DINP to the EPCRA section 313 list of toxic chemicals, EPA published a proposed rule to add DINP as a category to the EPCRA section 313 list (65 FR 53681, September 5, 2000) (FRL-6722-3). The proposed rule was based on information contained in the hazard assessment for DINP that was developed in response to the petition. EPA proposed to list the DINP category based on cancer and serious or irreversible chronic health effects including liver, kidney, and developmental toxicity. In response to comments on the proposal, EPA revised its hazard assessment for DINP and issued a notice of data availability (NODA) requesting comments on the revised hazard assessment (70 FR 34437, June 14, 2005) (FRL-7532-4). In the NODA, EPA proposed to list DINP based on serious or irreversible chronic health effects including liver, kidney, and developmental toxicity but reserved judgment on whether cancer was an endpoint of concern for DINP.

Note that a considerable amount of time has elapsed since the DINP petition was received and EPA published the 2000 proposal and 2005 NODA. Therefore, EPA has prepared an updated hazard assessment based on currently available information, including studies developed since 2005 (Ref. 3). EPA has also updated the economic analysis for the addition of the DINP category (Ref. 1). For the reasons more fully explained in the updated hazard assessment (Ref. 3), EPA is now proposing to list the DINP category based on our preliminary conclusion that it is reasonably anticipated to cause cancer and serious or irreversible chronic health effects including developmental, kidney, and liver toxicity.

This supplemental proposal provides the public an opportunity to comment on all aspects of the proposed addition of the DINP category to the EPCRA section 313 toxic chemical list. EPA specifically requests comments on all parts of the updated hazard assessment and updated economic analysis as well as any other issues related to the addition of the DINP category. Note that EPA does not intend to respond to comments received in response to its 2000 proposal to add the DINP category to the EPCRA toxic chemicals list or those received in response to the associated 2005 NODA. This supplemental proposal presents an updated hazard assessment for DINP and an updated economic analysis for the proposed action. As such, comments on the prior hazard assessment and prior economic analysis are not relevant to the current proposed action. If a commenter believes a previously submitted comment is relevant to this proposed action, the commenter should resubmit the comment to the docket for this supplemental proposal. Also note that DINP is also undergoing a risk evaluation required under section 6(b) of the Toxic Substances Control Act (TSCA) and that the scientific analyses used for this listing will undergo further analyses and review as part of the TSCA risk evaluation process. Having chemicals on the TRI list can be helpful to the TSCA risk evaluation process, as well as any related risk management activities, as TRI can provide information concerning releases and waste management activities. Such information can help inform what potential exposures are present, as well as help identify facilities that deal with a given chemical ( e.g., chemicals in the proposed TRI DINP category). Nevertheless, EPA is not requesting comment in response to this present Notice on any issues related to the TSCA 6(b) risk evaluation as part of this rulemaking; rather, only comments directly related to the TRI listing proposal are relevant to this action.

The DINP category for purposes of this action is a category of chemicals that includes the branched alkyl di-esters of 1,2 benzenedicarboxylic acid in which the alkyl ester moieties contain a total of nine carbons. The DINP category is a family of di-ester phthalates widely used as plasticizers. These chemicals are colorless, oily liquids with high boiling points, low volatilities, and are poorly soluble in water (less than 10 −4 milligrams per liter (mg/L)). Multiple Chemical Abstracts Service (CAS) numbers are associated with DINPs including 28553-12-0, 71549-78-5, 14103-61-8 and 68515-48-0. There is no single generic CAS number that represents all DINPs. The chemicals represented by CAS numbers 28553-12-0 and 71549-78-5 consist of a mixture of isomers (compounds which have the same molecular formula but differ in the arrangement of their atoms). CAS number 14103-61-8 represents a single isomeric structure of DINP (bis(3,5,5-trimethylhexyl) phthalate). The alkyl ester moieties of the diisononyl phthalate esters represented by the three CAS numbers stated above are branched and contain a total of nine carbons. These alkyl ester moieties are represented by the molecular formula C 9 H 19 . The molecular formulas of these nine-carbon alkyl ester moieties are the same for these DINP isomers. They differ in structure mainly due to the variable location of the methyl group on the alkyl ester moieties. CAS number 68515-48-0 is also a DINP, but unlike the chemicals represented by the other three CAS numbers discussed above, 68515-48-0 consists of di-ester phthalates with nine-carbon alkyl ester moieties (approximately 70% by weight), mixed with lesser amounts of di-ester phthalates with eight- and ten-carbon alkyl ester moieties.

Of the chemicals represented by the four CAS numbers stated above, two (68515-48-0 and 28553-12-0) were reported by industry to EPA under the Chemical Data Reporting regulations at 40 CFR part 711 as having production volumes of greater than 25,000 pounds per year per manufacturing or importing site. While reviewing data for the hazard assessments, EPA noted that only a limited number of studies reported the CAS numbers for the DINP test chemical base stocks. When studies did report CAS numbers, the CAS numbers were either 68515-48-0 or 28553-12-0. These two CAS numbers represent the primary DINP products manufactured commercially in the United States. Again, these two CAS numbers represent a mixture of DINP isomers and not any one single specific DINP isomer. There was no literature available for review which identified a single specific DINP isomer as the test chemical. Please refer to EPA's updated hazard assessment (Ref. 3) for more details on the chemistry and environmental fate of DINP.

The principle use of DINP is as a plasticizer, particularly in the production of polyvinyl chloride (PVC) (Ref. 3). The treatment of plastics with DINP provides greater flexibility and softness to the final product. Some of the uses of DINP treated plastics are the production of coated fabrics, plastic toys, electrical insulation, and vinyl flooring. On October 27, 2017, the U.S. Consumer Product Safety Commission (CPSC) issued a final phthalates rule (82 FR 49938, 16 CFR part 1307) that made permanent the interim prohibition on children's toys that can be placed in a child's mouth and child care articles that contain concentrations of more than 0.1 percent of DINP.

EPA reviewed the available data on human health and ecological effects associated with DINP and has presented this information in an updated hazard assessment document (Ref. 3). Based on EPA's evaluation of the available data, EPA is proposing to conclude that DINP satisfies the criteria for listing under EPCRA section 313(d)(2)(B) because the members of the category can reasonably be anticipated to cause cancer and serious or irreversible chronic health effects in humans; specifically, developmental, kidney, and liver toxicity. Brief summaries of the available human health information that support listing the DINP category under EPCRA section 313(d)(2)(B) are provided in this Unit. Readers should consult the updated hazard assessment document (Ref. 3) for more detailed information about the effects discussed here as well as other human health and ecological effects associated with DINP.

1. What carcinogenicity data were found for DINP? In the following subsections a-c, EPA discusses some of the available cancer data for DINP. Subsection d summarizes the cancer data that supports EPA's proposed conclusion that DINP can reasonably be anticipated to cause cancer in humans. Additional information is provided in the updated DINP hazard assessment (Ref. 3).

EPA's evaluation used a weight of the evidence (or weight-of-evidence (WoE)) approach, which means a comprehensive evaluation of evidence and information, taking into consideration the strengths, limitations, and uncertainties across streams of evidence within a discipline. This yields a qualitative, overall summary of the strength of each evidence stream and an overall judgment across all relevant evidence (Ref. 4).

a. Liver Tumors. Chronic dietary exposure to DINP induced liver tumors in male and female rats fed 12,000 parts per million (ppm) (Ref. 5), in male mice fed 4,000 ppm and above, and in female mice fed 1,500 ppm and above (Ref. 6) when tested in 2-year oral bioassays. An increased incidence of liver carcinoma was also observed in male rats fed 6,000 ppm in the 2-year bioassay conducted by Lington et al. (Ref. 7), although the response did not reach statistical significance. These data indicate that DINP is a liver carcinogen in rats and mice.

The mode of action (MOA) for induction of hepatic tumors in rodents by DINP is by inducing peroxisome proliferation. Peroxisome proliferators are a structurally diverse group of non-mutagenic chemicals that induce a broad range of responses via interaction with peroxisome proliferator activated receptors (PPAR). There is evidence to suggest that the liver tumors which develop in rats and mice chronically exposed to DINP are mechanistically related to activation of PPAR receptor subtype alpha (PPARα) (Refs. 8, 9 and 10). Transgenic mice that lack PPARα are generally resistant to the pleiotropic effects of peroxisome proliferators, such as peroxisome proliferation, liver enlargement, and liver cancer (Refs. 11 and 12). There have been no 2-year studies of DINP in transgenic mice that lack PPARα to determine whether tumors would develop in this scenario. However, there are long term studies (about 70 weeks) available that show, development of hepatocellular carcinomas in PPARα transgenic mice with human PPARα agonists (GW7647), suggesting that PPARA is indeed responsible for carcinogenesis albeit at a dimished level (~35-72%) to a rodent PPARα driven carcinogenesis (Refs. 13 and 14).

There are no adequate epidemiological studies on cancer in humans exposed to PPARα agonists. Humans and non-human primates express functional PPARα, and hypolipidemic drugs are known to act through PPARα in humans. However, in vivo studies of DINP in primates ( e.g., Refs. 15 and 16) and in vitro studies of cultured primate or human cells (Refs. 17 and 18) exposed to DINP or its metabolite mono-isononyl phthalate (MINP) suggest that primates (including humans) are resistant to the induction of peroxisome proliferation. The basis for the species differences in these studies is unknown but may be related to differences in the quantity of PPARα or to differences in the regulatory sequences of the rodent and primate genes (Ref. 18). Human and mouse adenoviral recombinant PPARα expressed in PPARα deficient mice fully restored the development of peroxisome proliferator-induced immediate pleiotropic responses, including peroxisome proliferation and enhanced expression of genes involved in lipid metabolism, suggesting that the human PPARα is functionally competent and is equally as dose-sensitive as mouse PPARα in inducing peroxisome proliferation within the context of mouse liver environment (Ref. 19). Absolute levels of PPARα are generally thought to be lower in human compared with rodent liver. However, PPARα amount varies by an order of magnitude among individuals (Refs. 20 and 21); for example, one of the six human samples examined expressed levels comparable to the mouse in one study (Ref. 22).

New information has emerged from recent literature (post 2005), on the mechanism(s) by which multiple nuclear receptors are activated by chemicals producing certain carcinogenic responses in rodents, including advances in the understanding of the underlying genetic factors that mediate the biochemical and cellular responses to such chemicals (summarized in Refs. 23, 24, and 25). To study the question of whether peroxisome proliferating chemicals such as DINP are a hazard to humans considering this new information, several panels and workshops have been convened and charged with reviewing the state of the science on the relationship between peroxisome proliferation and hepatocarcinogenesis in rodents and the human relevance of PPARα-induced liver tumors. One of the first panels, composed of government, academic and industry scientists and organized by Toxicology Excellence for Risk Assessment (TERA), concluded that significant quantitative differences in PPARα-induced liver effects associated with hepatic tumor formation exist between humans and rodents (Ref. 24). Based on quantitative differences between species, most panel members felt that the PPARα MOA for liver tumorigenesis is “not relevant to humans;” however, several panel members concluded that it was more appropriate to conclude that the PPARα mode of action is “unlikely to be relevant to humans.” In a subsequent workshop sponsored by the Toxicology Forum, the human relevance of rodent PPARα and constitutive androstane receptor (CAR) mediated modes of action for liver tumors were considered by industry, academic, and government experts (Refs. 23 and 26). Similar to the first panel, most workshop participants concluded that the PPARα and CAR modes of action are not relevant to humans based on qualitative and quantitative differences. However, there is evidence to show that the mouse and human PPARα expression levels are almost similar (Rakhshandehroo et al Ref. 27) and the set of genes/pathways regulated are similar to one another.

In considering the role of PPARα in inducing liver tumors, the California Office of Environmental Health Hazard Assessment (OEHHA) classified DINP as a carcinogen under California's Proposition 65 based in part on evidence that DINP can induce liver tumors in mice and rats (Refs. 28 and 9) and concluded that there was sufficient evidence to suggest that “PPAR alpha activation may not be causally related to DINP-induced liver tumors in rats and mice” and that other mechanisms may be involved (Ref. 29). Similarly, Environment Canada and Health Canada concluded that the mechanisms of DINP-induced liver tumorigenesis have not been fully elucidated, but that there is sufficient evidence to suggest that multiple mechanisms, including PPARα-independent mechanisms, may be involved (Ref. 30). Based on this, Health Canada (Ref. 10) concluded that the phthalates in their evaluation (including DINP) pose a carcinogenic hazard to humans. While the relevance of PPARα-mediated carcinogenic MOA to humans is not entirely clear, evidence suggests that peroxisome proliferating chemicals such as DINP are a hazard to humans because of its ability to cause liver cancer.

b. Kidney Tumors. In the study conducted in rats by Moore (Ref. 5), renal tubule cell carcinoma was observed in 2/65 high-dose (12,000 ppm) males and 4/50 recovery males compared to 0/65 in the control group. The response in recovery males was statistically significant relative to the control group. In the Lington et al. study (Ref. 7), renal tubule cell carcinoma was observed in 1/80 low-dose (300 ppm) males and 2/80 high-dose males (6,000 ppm). No preneoplastic or neoplastic lesions were observed in females. Treatment-related histopathologic changes in the kidneys of rats were consistent with male rat-specific α2u-globulin nephropathy. Additional evidence for α2u-globulin nephropathy was obtained in the retrospective evaluation of archived kidney tissue from the Lington et al. study (Ref. 7) conducted by Caldwell et al. (Ref. 31).

As discussed in the updated hazard assessment (Ref. 3), the data obtained in these studies were evaluated against published criteria for male-specific α2u-globulin nephropathy and its relevance to kidney tumors in humans (USEPA (Ref. 32); International Agency for Research on Cancer (IARC) 1999 (Ref. 33)). The EPA criteria (Ref. 32) are: (1) Increase in number and size of hyaline (protein) droplets in kidney proximal tubule cells of treated male rats; (2) Immunohistochemical evidence of α2u-globulin accumulating protein in the hyaline droplets; and (3) Histopathological evidence of kidney lesions associated with α2u-globulin nephropathology. The IARC criteria (Ref. 33) are: (1) Tumors occur only in male rats; (2) Acute exposure exacerbates hyaline droplet formation; (3) α2u-Globulin accumulates in hyaline droplets; (4) Subchronic lesions include granular casts and linear papillary mineralization; (5) Absence of hyaline droplets and other histopathological changes in female rats and mice; and (6) Negative for genotoxicity. Additional IARC Supporting Evidence includes: (1) Reversible binding of chemical to α2u-globulin; (2) Increased sustained cell proliferation in proximal tubule (P2 segment) and (3) Dose-response relationship between hyaline droplet severity and renal tumor incidence. For DINP, the EPA criteria for the α2u-globulin MOA have been met. However, for DINP, only three of the IARC criteria were met (1, 3, and 6) the other three criteria (2, 4, and 5) were not met. The data for DINP do not meet any of the IARC supporting criteria. In addition, the evaluation noted that (1) kidney weight increases along with histopathological changes (increase tubule cell pigmentation) were identified in female rats and (2) exposure resulted in nephropathy in female mice. Thus, α2u-globulin accumulation in the renal tubules of male rats alone do not explain the MOA for renal tubule carcinomas observed in DINP-exposed rodents.

Based on this evaluation, EPA along with the California Environmental Protection Agency (CalEPA) (Ref. 9) and the Consumer Product Safety Commission (Refs. 34 and 35) have determined that DINP-induced kidney tumors are relevant to estimating cancer hazard to humans as part of WoE approach described in Unit III.B.1.

c. Mononuclear Cell Leukemia (MNCL). The incidence of MNCL was significantly elevated in male and female rats exposed to DINP in the diet when compared to study control animals and the corresponding spontaneous/background incidence in two independent chronic/carcinogenicity rat studies (Refs. 5 and 7). The key issue in use of these data to assess the hazard of DINP exposure is the relevance of MNCL to human health as part of the WoE to suggest the carcinogenic hazard of DINP to humans. As fully explained in the revised hazard assessment (Ref. 3), the WoE supports a finding that DINP can reasonably be anticipated to cause MNCL in humans.

MNCL, also referred to as large granular lymphocyte (LGL) leukemia or T (lymphocyte) leukemia, is a spontaneously occurring neoplasm of the hematopoietic system that is one of the most common tumor types in the Fischer-344 rat strain. MNCL is life threatening in Fischer rats and results in a decreased life span. In contrast, MNCL is rare in other strains of rats and does not occur in mice. Although MNCL is recognized as a common neoplasm in Fischer rats, the MOA for induction of MNCL is not completely understood. In addition, there are differing views on the existence of a close human correlate to MNCL (Refs. 31 and 36).

The increased mortality due to MNCL in DINP-treated rats suggests that DINP is associated with the elevated incidence, progression, and severity of MNCL. Findings indicate that the time to onset of tumor was decreased and the disease was more severe in treated than in control animals. On the basis of these data, the increase in severity of MNCL with increasing dose in male rats is indicative of a carcinogenic response to DINP. However, EPA notes that there are several sources of uncertainty in the interpretation of the experimental data. These include high and variable background rate and possible strain-specificity as well as incomplete information on the MOA for induction of MNCL. However, full details on MOA are not required to establish a cancer hazard unless there is evidence to suggest that the MOA is not applicable to an assessment of human cancer, which is not the case in the context of MNCL derived cancer hazard discussed here.

Overall, there is some scientific uncertainty as to the human significance of the MNCL observed in rats, and whether DINP can reasonably be anticipated to cause MNCL in humans. However, the WoE within the MNCL dataset supports a finding that DINP can reasonably be anticipated to cause MNCL in humans.

d. Additional considerations and conclusions. As discussed above in sections a through c and in full detail in the updated hazard assessment (Ref. 2), evidence for carcinogenicity of DINP is provided by multiple studies in rats and mice exposed chronically via oral route. Statistically significant increases in many tumor types were observed in rats and mice such as increase in hepatocellular tumors (Refs. 5 and 7), hepatocellular adenoma and carcinoma (Refs. 5, 6, and 37) mononuclear cell leukemia of the spleen (Refs. 5, 6, and 7), and renal tubular cell carcinomas (Refs. 5, 6, and 7). In addition, other non-significant increases in tumor types considered rare and/or uncommon were noted in DINP-treated animals, including renal tubular and transitional cell carcinoma (Refs. 5, 6, and 7), pancreatic islet cell carcinoma (Refs. 6 and 37), testicular interstitial (Leydig) cell carcinoma (Ref. 37), and uterine adenocarcinoma (Ref. 37). All the above enumerated significant and non-significant increases in tumor, carcinoma and adenomas were also evaluated by CPSC in 2001 and 2010 (Refs. 34 and 35).

To date, DINP has been classified as a human carcinogen by OEHHA of CalEPA, but not by any international agencies. OEHHA has published a document on the evidence on the carcinogenicity of DINP in which members of the Carcinogen Identification Committee (CIC) conclude that DINP has been clearly shown, through scientifically valid testing according to generally accepted principles, to cause cancer and should be listed under California's Proposition 65 as a carcinogen (Ref. 9). Accordingly, DINP was listed under California's Proposition 65 at the end of 2013 (Ref. 28). California OEHHA (Ref. 24) cites evidence from multiple studies in mice and rats to support the Proposition 65 listing of DINP, including identification of:

• Liver tumors in female SD rats;

• Liver tumors in male and female F344 rats;

• Liver tumors in male and female B6C3F1 mice;

• Mononuclear cell leukemia (MNCL) in male and female F344 rats;

• Renal tubular cell carcinomas, which are rare or uncommon, in male F344 rats;

• Renal transitional cell carcinomas, which are rare, in male F344 rats;

• Pancreatic islet cell carcinomas, which are rare, in male SD rats and female B6C3F1 mice;

• Testicular interstitial (Leydig) cell carcinomas, which are uncommon, in male SD rats; and

• Uterine adenocarcinomas, which are rare, in female SD rats.

DINP, similar to other phthalates, was negative in the limited number of genotoxic assays and ruled-out as a genotoxic carcinogen. However, that determination leaves non-genotoxic mechanisms for consideration as plausible carcinogenic mechanisms for DINP. DINP has been found to induce in vitro cell transformation in only one out of eight studies conducted with Balb/c-3T3 A31 mouse cells (Refs. 38 and 39). DINP binds to PPAR and activates both rodent and human PPARα and PPAR gamma but not PPAR beta receptors (Ref. 40). MINP, the metabolite of DINP, activated both the mouse and human PPARα and PPAR gamma receptors, but the degree of PPARα and PPAR gamma activation was greater for the mouse receptor than for the human receptor for both receptor types in the tested conditions (Ref. 40).

DINP has been shown to activate human CAR (hCAR2) and pregnane X receptor (PXR), and the metabolites of DINP, specifically MINP, activates hCAR2 isoform, suggesting that DINP and its metabolites have more than one MOA (Ref. 41). DINP has also been shown to promote and induce tumorigenesis in a variety of cell types through aryl hydrocarbon receptors (AhR)-mediated genomic and nongenomic pathways (Ref. 42). DINP induces several changes in rodent liver consistent with PPARα activation (Ref. 41). DINP induces some of these liver changes independently of PPARα activation as shown in PPARα-null mice (Ref. 12).

Tumor necrosis factor-alpha (TNF-α) plays a pivotal role in a number of cell signaling pathways involved in inflammation, cell proliferation, and apoptosis (Ref. 43). Although inconsistently reported with DINP treatment, TNF-α functional perturbation contributes to carcinogenesis (Ref. 43). In studies conducted in a human promonocyte cell line, DINP reduced phagocytosis in a dose-dependent manner and increased TNF-α levels (Ref. 44). DINP is shown to inhibit hepatic gap junctional intercellular communication (GJIC), and the inhibition of GJIC has been proposed as a non-genotoxic carcinogenic mechanism in rodents exposed to DINP for 2 or 4 weeks (Refs. 45 and 46).

In considering the structure activity relationships ( i.e., the read-across approach) between similar phthalates, DINP is structurally similar to di(2-ethylhexyl)phthalate (DEHP). Both the phthalates have phthalic acid as the common structure with different branched alkyl chains for the ester portion. DEHP has an eight carbon alkyl chain with an ethyl branch at the 2 position and DINP has a nine carbon alkyl chain with a methyl group at various positions. One of the commercially available DINP mixtures (CAS number 68515-48-0) contains ~70% nine-carbon alkyl ester chains with the rest being eight- and ten-carbon alky ester chains. Analog searches with AIM ( https://www.epa.gov/tsca-screening-tools/analog-identification-methodology-aim-tool ) and GenRA ( https://comptox.epa.gov/genra ), identified DEHP as the analog to DINP. DEHP and DINP are carcinogenic in rodents, are metabolized via similar detoxification pathways, and have similar modes of action ( e.g., PPARα is believed to play a role in liver tumorigenesis for most phthalates (Refs. 23 and 24). Due to these similarities, DEHP carcinogenicity data is useful for a read-across approach to DINP. DEHP has been classified by IARC as a Group 2B (possibly carcinogenic to humans) carcinogen (Refs. 47 and 48); by EPA as a Class B2 (Probable human carcinogen) carcinogen (Ref. 49); by the National Toxicology Program (NTP) to be reasonably anticipated to be a human carcinogen (Ref. 50); and is listed by CalEPA under California's Proposition 65 as causing cancer (Ref. 51). These previous assessments indicate DEHP is a carcinogenic hazard to humans. Based on available toxicity data for DINP in multiple species (mouse and rats) and adverse effects on multiple tissues (liver, kidney, uterus and testicular), with similar mechanism of action (MOA), through activation of multiple toxicity pathways by multiple nuclear receptors (such as PPARα/γ, CAR, AhR), leading to cancer in multiple organs and structural similarities between DEHP and DINP, it is reasonable to assume that DINP would be a carcinogenic hazard to humans.

In summary, the available literature as discussed above and in the updated hazard assessment (Ref. 3), provides evidence that DINP can be reasonably anticipated to cause cancer in humans. EPA proposes to conclude that the available cancer data provides a sufficient basis for listing DINP on the EPCRA section 313 toxic chemicals list pursuant to EPCRA section 313(d)(2)(B)(i) because it demonstrates that DINP can reasonably be anticipated to cause cancer in humans.

2. What chronic developmental toxicity data were found for DINP? In this section, EPA discusses the available developmental toxicity data that supports EPA's proposed conclusion that DINP can reasonably be anticipated to cause serious or irreversible developmental effects in humans. Additional information is provided in the updated hazard assessment (Ref. 3).

The available data for developmental toxicity (see Table 22 of Ref. 3) generally shows a consistent pattern of effects within the window of exposure ( in utero, prenatal, and post natal exposure). The results of the one- and two-generation reproductive studies indicate that DINP affects post natal growth, as evident from significantly reduced pup growth at doses of 143-285 milligrams per kilogram per day (mg/kg/day) (during gestation and lactation (Refs. 52 and 53)). The results of two developmental toxicity studies on DINP (Refs. 52 and 53) are also consistent. In both studies, DINP exposure in utero resulted in increased incidences of rudimentary lumbar and/or supernumerary cervical ribs and adverse renal effects in fetuses. Hellwig et al. (Ref. 52) identified a no-observed-adverse-effect level (NOAEL) and a lowest-observed-adverse-effect level (LOAEL) of 200 and 1,000 mg/kg/day, respectively, for these developmental effects. EPA has identified lower NOAEL and LOAEL values of 100 and 500 mg/kg/day, respectively, based on effects observed in the developmental study conducted by Waterman et al. (Ref. 53). DINP causes malformations of the reproductive tract and alterations in fetal testicular testosterone production and content in male offspring of rats exposed to 750 mg/kg/day during gestation (Refs. 54 and 55).

In a study of male sexual development, timed pregnant Crl:CD Sprague-Dawley rats were administered the test substance in corn oil via oral gavage at target doses of 0 (vehicle), 50, 250, or 750 mg/kg/day (corresponding to mean analytical doses of 0, 47, 242, or 760 mg/kg/day) from gestation days (GDs) 12-19 (Ref. 56). The maternal NOAEL and LOAEL were determined to be 47 and 242 mg/kg/day based on increased liver weights in dams. The developmental NOAEL and LOAEL were determined to be 47 and 242 mg/kg/day based on induction of multinucleated gonocytes (MNGs) and reduced testosterone in fetal testes.

In a prenatal developmental toxicity study, timed pregnant female Sprague-Dawley rats (20/group, 24 controls) were administered the test substance in the diet at target concentrations of 0 (base diet), 760, 3,800, or 11,400 ppm (target doses of 0, 50, 250, or 750 mg/kg/day, respectively) from GD 12 through post natal day (PND) 14 (Ref. 57). The study identified a LOAEL for maternal effects of 11,400 ppm (~750 mg/kg/day) based on reduced body weight, body weight gain, and food consumption during gestation and lactation; the NOAEL was 3,800 ppm (~250 mg/kg/day). The developmental LOAEL was 3,800 ppm (~250 mg/kg/day) for effects seen in male pups, including reduced pup weight and increased MNGs at greater than 3,800 ppm and decreased anogenital distance (AGD) and increased Leydig cell (LC) aggregation at 11,400 ppm. The developmental NOAEL was found to be 760 ppm (~50 mg/kg/day).

The WoE from the available reproductive and developmental toxicity studies that were considered and presented in Table 22 of the hazard assessment (Ref. 3) demonstrates that DINP causes serious or irreversible developmental effects in animals. The adverse effects include decreased body weight of pups during lactation in a rat two-generation reproductive toxicity study and in a multi-dose perinatal exposure study (Refs. 53 and 54); adverse renal and skeletal effects observed in two rat developmental toxicity studies (Refs. 52 and 58); altered sexual differentiation observed in a single dose gavage study (750 mg/kg/day) of perinatally-exposed male rats (Ref. 55); and occurrence of histological lesions in the ovaries and testes of male and female rats exposed perinatally via the diet (1,164-2,656 mg/kg/day) (Ref. 59).

Reduction in the mean body weight of pups exposed to DINP either for one generation, two generations, or perinatally is a sensitive indicator of developmental toxicity, in part because it is a continuous variable. The Agency believes that the weight of evidence indicates reduced pup body weight is a serious effect because (1) the observed responses were statistically significant; (2) the responses were dose-related, (3) the reductions ranged from 9-43% below control values (a range that is consistent with biological significance); (4) the magnitude of the response tended to increase with DINP exposure over time via lactation exposure during the post-natal period; (5) the reductions were observed in both sexes and in both F1 and F2 generations of the two-generation study; (6) the weight reductions were noted in both one- and two-generation and perinatal exposure studies; and (7) the response may have long-term consequences. Although there is always a question as to whether weight reduction is a permanent or transitory effect, little is known about the long-term consequences of short-term fetal or neonatal weight changes; however, a previous study has shown that exposure to chemicals during organogenesis that reduced pup birth weight also permanently reduced adult mouse weight with about 50% of the chemicals (about 40 tested) (Ref. 60), and there is growing epidemiological evidence of the long-term consequences of low birth weight in humans (Ref. 61). Therefore, EPA has concerns for potentially serious developmental effects of DINP in humans.

The kidney and skeletal variations observed in rats treated with DINP are serious because they are structural effects that indicate that development has been disrupted. The observed renal effects and skeletal variations occurred in the absence of or at minimal maternal toxicity. In particular, the occurrence of extra cervical ribs may be of serious health consequence. As noted by National Toxicology Program Center for the Evaluation of Risks to Human Reproduction (Ref. 62), supernumerary cervical ribs are an uncommon finding, and their presence may indicate a disruption of gene expression leading to this structural anomaly. In addition, there is concern that cervical ribs may interfere with normal nerve function and blood flow.

The effects on sexual differentiation observed in male rats by Gray et al. (Ref. 54) are serious because they represent gross morphological malformations not normally seen in development of this species. The discrepancy between the antiandrogenic effects observed in the perinatal exposure study (Ref. 54) and the absence of similar effects in the two-generation reproductive study conducted by Waterman et al. (Ref. 53) may be explained, in part, by the dose (750 mg/kg) used by Gray et al. (Ref. 54) and by differences in the protocol used for each study. Exposures during gestation in the two-generation study did not reach the dose that was used in the Gray et al. (Ref. 54) perinatal exposure study during gestation (approximately 560 mg/kg/day vs. 750 mg/kg/day, respectively) and the reproductive parameters affected in the study by Gray et al. (Ref. 54), including nipple retention, anogenital distance, age at testes descent, and age at preputial separation, were not measured in the two-generation reproductive study.

Furthermore, the number of F1 animals examined by Waterman et al. (Ref. 53) was not sufficient to detect the low (7.7%) but statistically significant incidence of malformations observed by Gray et al. (Ref. 54). The perinatal exposure study reported by Masutomi et al. (Ref. 59) did not detect the same type of alterations reported by Gray et al. (Ref. 54), although the administered dietary concentrations resulted in doses (306.7-656.7 mg/kg/day and 1,164-2,657 mg/kg/day) that bracketed the single gavage dose of 750 mg/kg/day administered by Gray et al. (Ref. 54). However, Masutomi et al. (Ref. 59) examined fewer litters (5 vs. 14), examined fewer pups (number of pups and developmental endpoints examined prior to culling were not reported) and did not report use of the same type of detailed internal and external examinations used by Gray et al. (Ref. 54) to detect areolas, retained nipples, and other developmental effects. In addition, the differing routes of administration (gavage vs. diet) used in these studies may have resulted in different peak blood concentrations of DINP.

Although the study by Gray et al. (Ref. 54) used a single dose and a NOAEL/LOAEL could not be established, the observed effects indicate that DINP has the potential for antiandrogenic effects in neonatal male rats when tested at 750 mg/kg/day. The effects of DINP on sexual differentiation were characterized by the study authors as malformations for the tested species and are therefore believed to be permanent ( i.e., not transient or reversible) and adverse. The observed effects may have resulted from inhibition of fetal testis hormone production during sexual differentiation, a process that is critical in all mammals including humans. It has been demonstrated that several other structurally related phthalate esters (dibutyl phthalate (DBP), DEHP, and benzyl butyl phthalate (BBP)) also alter sexual differentiation and do so by altering fetal testis testosterone production and/or content (Refs. 63 and 64) and insulin-like hormone 3 (Insl3) production (Ref. 65), resulting in malformations of male reproductive tissues that require these hormones for development. The results of a recent study by Borch et al. (Ref. 55), which showed decreased fetal testis production and content of testosterone in offspring of female rats treated with DINP during gestation, are consistent with this pattern and increase the WoE for disruption of testosterone synthesis as a potential MOA for the observed effects on the male reproductive system. Although information is currently lacking on (1) the precise mechanism(s) responsible for DINP-induced malformations and its relevance to humans, and (2) the critical window of susceptibility for these effects during reproductive development, based upon the WoE, EPA concludes that humans can reasonably be anticipated to be affected if exposed to sufficient concentrations of DINP or its metabolites at critical stages of reproductive development.

In summary, the available literature as discussed above and in the updated hazard assessment (Ref. 3), provides evidence that DINP can be reasonably anticipated to cause developmental toxicity in humans. EPA proposes to conclude that the available developmental toxicity data provides a sufficient basis for listing DINP on the EPCRA section 313 toxic chemicals list pursuant to EPCRA section 313(d)(2)(B)(ii) because it demonstrates that DINP can reasonably be anticipated to cause serious or irreversible chronic developmental toxicity.

3. What chronic kidney toxicity data were found for DINP? In this section, EPA discusses the available kidney toxicity data that supports EPA's proposed conclusion that DINP can reasonably be anticipated to cause chronic kidney toxicity in humans. Additional information is provided in the updated hazard assessment (Ref. 3).

The kidney is both a cancer and a non-cancer target organ of DINP in chronic toxicity studies in rats and mice. In rats, increased relative kidney weights were seen in a 21-day (Ref. 66) and three 2-year rodent studies of DINP (Refs. 5, 6, and 7). In the 2-year study conducted by Lington et al. (Ref. 7), exposure to dietary levels of 152 and 307 mg/kg/day increased relative kidney weights of both male and female rats. An increase in tubular cell pigment was also noted in the tubular epithelium of high-dose males at 18 months. In the 2-year study reported by Moore (Ref. 5), increased relative kidney weights occurred in rats receiving dietary doses greater than 359 mg/kg/day for males and 442 mg/kg/day for females. Urinalysis findings from the chronic studies included significant increases in urine output and corresponding decreases in electrolyte levels in high-dose males, suggesting compromised ability to concentrate urine in the renal tubule epithelium. These effects occurred at the same dosages that produced changes in kidney weights. In the Moore (Ref. 5) study, serum urea levels (a marker of kidney toxicity) were significantly increased in rats exposed to 359 mg/kg/day and higher during the second half of the study. Increases in urine volume and kidney lesions were observed in the recovery group exposed to 733 mg/kg/day.

In the Moore (Ref. 5) study, male rats with increased kidney weights also had increased mineralization of renal papillae. However, it is unlikely that the histological effects reported (mineralization of renal papillae in male rats and pigmentation of kidney tubule cells) account for the increased weights of the kidneys because routine histological observations do not account for observations of mineralizations and pigmentations in the kidney.

The kidney was also a target organ for DINP toxicity in the chronic study in mice (Ref. 6). Kidney weights were significantly decreased at doses of 1,500 ppm (276 mg/kg/day) and above in male mice. This decrease in kidney weight correlated with clinical chemistry findings of higher urine volumes accompanied by lower osmolarity (with lower concentrations of sodium, potassium and chlorides) in the highest dose group and recovery groups of both sexes. The urinalysis findings suggest compromised ability to concentrate urine in the renal tubule epithelium. Histopathology findings included a DINP-induced increase in the incidence of chronic progressive nephropathy in females of the highest dose group (but not in males). Granular pitted/rough kidneys were observed in female mice receiving the 8,000 ppm diet (1,888 mg/kg/day) and corresponded to increased incidence/severity of treatment-related nephropathy. The recovery group had a decreased incidence of chronic progressive nephropathy, suggesting that the effects of DINP were partially reversible upon cessation of DINP treatment or that cessation of treatment prevented exacerbation of existing lesions. Kidney changes in female mice (increased incidence and severity of nephrotoxicity) occurred at 8,000 ppm (1,888 mg/kg/day) and in male and female rats (increased kidney weights, compromised ability to concentrate urine) at 6,000 ppm (359 and 442 mg/kg/day, respectively). Such changes are indicative of kidney toxicity. Although effects in male rats appear to be due to α2u-globulin nephropathy, the toxic kidney effects in female mice and increased kidney weights in female rats cannot be explained by an α2u-globulin MOA.

In summary, the available literature as discussed above and in the updated hazard assessment (Ref. 3), provides evidence that DINP can be reasonably anticipated to cause chronic kidney toxicity in humans. EPA proposes to conclude that the available kidney toxicity data provides a sufficient basis for listing DINP on the EPCRA section 313 toxic chemicals list pursuant to EPCRA section 313(d)(2)(B)(ii) because it demonstrates that DINP can reasonably be anticipated to cause serious or irreversible chronic effects on the kidney.

4. What chronic liver toxicity data were found for DINP? In this section, EPA discusses the available liver toxicity data that supports EPA's proposed conclusion that DINP can reasonably be anticipated to cause chronic liver toxicity in humans. Additional information is provided in the updated hazard assessment (Ref. 3).

Adverse liver effects were noted in rats following chronic DINP exposure in three independent studies (Refs. 5, 6, and 7). Spongiosis hepatis, also called cystic or microcystic degeneration, has been identified as the most sensitive non-neoplastic response resulting from DINP exposure and is thus considered the critical non-cancer effect. The incidence of spongiosis hepatis was dose-related, and significantly elevated in male rats chronically treated with DINP in three studies conducted by different laboratories (Refs. 5, 6, and 7). In the Lington et al. (1997) study (Ref. 7), the LOAEL for spongiosis hepatis was 152 mg/kg/day, while the LOAEL in the Moore study (Ref. 5) was 359 mg/kg/day; the NOAELs were 15 and 88 mg/kg/day, respectively. A Histopathology Peer Review and Pathology Working Group (Ref. 67) independently evaluated the liver slides from rats chronically treated with DINP (Refs. 5 and 7) and confirmed that the incidence of spongiosis hepatis was increased in male rats in each study.

There is general agreement that spongiosis hepatis develops from the perisinusoidal (Ito) cells of the liver. The existing data support the conclusion that the increased incidence of spongiosis hepatis in dosed rats is clearly related to DINP treatment. In evaluating the data for hepatic spongiosis, EPA considered (1) the possibility that occurrence of spongiosis hepatis and induction of peroxisome proliferation were related; (2) the possibility that the occurrence of spongiosis hepatis was a consequence of MNCL; (3) the relationship of spongiosis hepatis to hepatocellular cancer; and (4) the human relevance of hepatis spongiosis.

The occurrence of spongiosis hepatis and peroxisome proliferation in the livers of rats exposed to DINP are likely to be unrelated due to two different MOAs. Although peroxisome proliferation appeared to occur in both sexes of rats and mice, the incidence of spongiosis hepatis was increased only in male rats. In addition, spongiosis hepatis occurred in control animals and in treated animals at doses that did not induce peroxisome proliferation. These data indicate that induction of peroxisome proliferation per se is not a prerequisite for induction of spongiosis hepatis.

The increased incidence of spongiosis hepatis observed in rats exposed to DINP is not due to MNCL. This conclusion is based on the findings of the Experimental Pathology Laboratories (Ref. 67), which noted that only about 50% of the animals with spongiosis hepatis also had MNCL and that the incidence of spongiosis hepatis increased in some rats that did not show signs of MNCL.

Spongiosis hepatis may be associated with or located within foci of cellular alteration or hepatocellular neoplasms. This association has prompted questions regarding the relationship of this lesion to carcinogenic processes in the liver. EPA considers the relationship between spongiosis hepatis and hepatic carcinogenesis to be two independent events. There does not appear to be strong correlation between the induction of spongiosis hepatis and the occurrence of hepatocellular neoplasms in rats treated with DINP. In addition, 4 of the 12 studies reviewed by Karbe and Kerlin (Ref. 68) reported spongiosis hepatis in the absence of hepatocellular neoplasms while a fifth study observed hepatocellular cancer in females only.

Spontaneous and induced spongiosis hepatis lesions have been observed in fish as well as rats, but the existence of the lesion in humans and other species is less well supported (Ref. 68). It is unknown whether human Ito cells are capable of developing spongiosis hepatis as observed in rats. In the absence of information that clearly indicates a species-specific MOA for development of spongiosis hepatis, the occurrence of this lesion in rats is assumed to be relevant to humans (Ref. 68).

Based on the available data, the WoE indicates that the spongiosis hepatis is a treatment-related lesion in rats treated with DINP and that the occurrence of this lesion in animals is relevant to human health. EPA has identified NOAEL and LOAEL values of 15 and 152 mg/kg/day, respectively, for the Lington study (Ref. 7) and 88 and 359 mg/kg/day, respectively, for the Moore study (Ref. 5) based on indications of serious liver damage ( i.e., a statistically significant increased incidence of spongiosis hepatis and increased liver weight and liver enzyme activities) in male rats chronically exposed to DINP for 2 years.

In summary, the available literature as discussed above and in the updated hazard assessment (Ref. 3), provides evidence that DINP can be reasonably anticipated to cause chronic liver toxicity in humans. EPA proposes to conclude that the available liver toxicity data provides a sufficient basis for listing DINP on the EPCRA section 313 toxic chemicals list pursuant to EPCRA section 313(d)(2)(B)(ii) because it demonstrates that DINP can reasonably be anticipated to cause serious or irreversible chronic effects on the liver.

Based on EPA's review of the available carcinogenicity data, EPA proposes to conclude that DINP can reasonably be anticipated to cause cancer in humans. In addition, based on EPA's review of the available chronic toxicity data, EPA proposes to conclude that DINP can reasonably be anticipated to cause serious or irreversible chronic human health effects at moderately low to low doses including developmental effects, kidney toxicity, and liver toxicity. The data for DINP demonstrates that DINP has moderately high to high human health toxicity based on the available animal studies. Therefore, EPA proposes to conclude that, based on the available toxicity data summarized above and in the updated hazard assessment, DINP meets the criteria in EPCRA section 313(d)(2)(B) for listing on the EPCRA section 313 toxic chemicals list.

EPA is proposing to add DINP to the EPCRA section 313 list as a chemical category under the name “Diisononyl Phthalates (DINP): Includes branched alkyl di-esters of 1,2 benzenedicarboxylic acid in which alkyl ester moieties contain a total of nine carbons.” As explained in Unit III.A., DINP includes the branched alkyl di-esters of 1,2 benzenedicarboxylic acid in which the alkyl ester moieties contain a total of nine carbons and there is no single generic CAS number that represents all DINPs. This category includes the four CAS numbers that represent the DINP esters identified in Unit III.A., as well as any other branched alkyl di-ester of 1,2-benzenedicarboxylic acid in which the alkyl ester moieties contain a total of nine carbons. As EPA has explained in the past (see 59 FR 61442-61443, November 30, 1994)(FRL-4922-2), EPCRA allows the Agency, in its discretion, to add a chemical category to the list, where EPA identifies the toxic effect of concern for at least one member of the category and then shows why that effect can reasonably be expected to be caused by all other members of the category. Given the structural similarities of the members of the proposed DINP category, it is reasonable to anticipate that all members of the DINP category as described will exhibit similar toxicity. For this reason, creating a category of DINP is the most appropriate way to list this class of chemicals.

EPA has concluded that it is not appropriate to consider exposure for chemicals that are moderately high to highly toxic based on a hazard assessment when determining if a chemical should be added for chronic human health effects pursuant to EPCRA section 313(d)(2)(B) (see 59 FR 61440-61442). Therefore, in accordance with EPA's standard policy on the use of exposure assessments (see November 30, 1994 (59 FR 61432, FRL-4922-2), an exposure assessment is neither necessary nor appropriate for determining whether DINP meets the criteria of EPCRA section 313(d)(2)(B).

The following is a listing of the documents that are specifically referenced in this document. The docket includes these documents and other information considered by EPA, including documents that are referenced within the documents that are included in the docket, even if the referenced document is not itself physically located in the docket. For assistance in locating these other documents, please consult the person listed under FOR FURTHER INFORMATION CONTACT .

Additional information about these statutes and Executive Orders can be found at https://www.epa.gov/laws-regulations/laws-and-executive-orders.

This action is not a significant regulatory action and was therefore not submitted to the Office of Management and Budget (OMB) for review under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011).

This action does not impose any new information collection burden under the PRA, 44 U.S.C. 3501 et seq. Burden is defined in 5 CFR 1320.3(b). OMB has previously approved the information collection activities contained in the existing regulations and has assigned OMB control numbers 2070-0212 and 2050-0078. Currently, the facilities subject to the reporting requirements under EPCRA section 313 and PPA section 6607 may use either EPA Toxic Chemicals Release Inventory Form R (EPA Form 9350-1), or EPA Toxic Chemicals Release Inventory Form A (EPA Form 9350-2). The Form R must be completed if a facility manufactures, processes, or otherwise uses any listed chemical above threshold quantities and meets certain other criteria. For the Form A, EPA established an alternative threshold for facilities with low annual reportable amounts of a listed toxic chemical. A facility that meets the appropriate reporting thresholds, but estimates that the total annual reportable amount of the chemical does not exceed 500 pounds per year, can take advantage of an alternative manufacture, process, or otherwise use threshold of 1 million pounds per year of the chemical, provided that certain conditions are met, and submit the Form A instead of the Form R. In addition, respondents may designate the specific chemical identity of a substance as a trade secret pursuant to EPCRA section 322, 42 U.S.C. 11042, 40 CFR part 350.

OMB has approved the reporting and recordkeeping requirements related to Forms A and R, supplier notification, and petitions under OMB Control number 2070-0212 (EPA Information Collection Request (ICR) No. 2613.02) and those related to trade secret designations under OMB Control 2050-0078 (EPA ICR No. 1428). As provided in 5 CFR 1320.5(b) and 1320.6(a), an Agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The OMB control numbers relevant to EPA's regulations are listed in 40 CFR part 9 and displayed on the information collection instruments ( e.g., forms, instructions).

I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA, 5 U.S.C. 601 et seq. The small entities subject to the requirements of this action are small manufacturing facilities. The Agency has determined that of the 198 to 396 entities estimated to be impacted by this action, 181 to 362 are small businesses; no small governments or small organizations are expected to be affected by this action. All small businesses affected by this action are estimated to incur annualized cost impacts of less than 1%. Thus, this action is not expected to have a significant adverse economic impact on a substantial number of small entities. A more detailed analysis of the impacts on small entities is located in EPA's economic analysis (Ref. 1).

This action does not contain an unfunded mandate of $100 million or more as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. This action is not subject to the requirements of UMRA because it contains no regulatory requirements that might significantly or uniquely affect small governments. EPA did not identify any small governments that would be impacted by this action. EPA's economic analysis indicates that the total industry cost of this action is estimated to be $920,938 to $1,839,925 in the first year of reporting and $438,542 to $876,155 in subsequent years (Ref. 1).

This action does not have federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

This action does not have tribal implications as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This action relates to toxic chemical reporting under EPCRA section 313, which primarily affects private sector facilities. Thus, Executive Order 13175 does not apply to this action.

EPA interprets Executive Order 13045 (62 FR 19885, April 23, 1997) as applying only to those regulatory actions that concern environmental health or safety risks that EPA has reason to believe may disproportionately affect children, per the definition of “covered regulatory action” in section 2-202 of the Executive Order. This action is not subject to Executive Order 13045 because it does not concern an environmental health risk or safety risk.

This action is not subject to Executive Order 13211, because it is not a significant regulatory action under Executive Order 12866.

This rulemaking does not involve technical standards. As such, NTTAA section 12(d), 15 U.S.C. 272 note, does not apply to this action.

Executive Order 12898 (59 FR 7629, February 16, 1994) directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations (people of color) and low-income populations. The EPA believes that this type of action does not directly concern human health or environmental conditions and therefore cannot be evaluated with respect to potentially disproportionate and adverse effects on people of color, low-income populations and/or indigenous peoples. This regulatory action adds an additional chemical category to the EPCRA section 313 reporting requirements; it does not have any impact on human health or the environment. This action does not address any human health or environmental risks and does not affect the level of protection provided to human health or the environment. This action adds an additional chemical category to the EPCRA section 313 reporting requirements which provides information that government agencies and others can use to identify potential problems, set priorities, and help inform activities.

Therefore, for the reasons set forth in the preamble, EPA proposes that 40 CFR chapter I be amended as follows:

FMCSA organizes this notice of proposed rulemaking (NPRM) as follows:

If you submit a comment, please include the docket number for this NPRM (FMCSA-2022-0128), indicate the specific section of this document to which your comment applies, and provide a reason for each suggestion or recommendation. You may submit your comments and material online or by fax, mail, or hand delivery, but please use only one of these means. FMCSA recommends that you include your name and a mailing address, an email address, or a phone number in the body of your document so FMCSA can contact you if there are questions regarding your submission.

To submit your comment online, go to https://www.regulations.gov/docket/FMCSA-2022-0128/document, click on this NPRM, click “Comment,” and type your comment into the text box on the following screen.

If you submit your comments by mail or hand delivery, submit them in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying and electronic filing. If you submit comments by mail and would like to know that they reached the facility, please enclose a stamped, self-addressed postcard or envelope.

FMCSA will consider all comments and material received during the comment period.

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to the NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to the NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission that constitutes CBI as “PROPIN” to indicate it contains proprietary information. FMCSA will treat such marked submissions as confidential under the Freedom of Information Act, and they will not be placed in the public docket of the NPRM. Submissions containing CBI should be sent to Mr. Brian Dahlin, Chief, Regulatory Analysis Division, Office of Policy, FMCSA, 1200 New Jersey Avenue SE, Washington DC 20590-0001. Any comments FMCSA receives not specifically designated as CBI will be placed in the public docket for this rulemaking.

To view any documents mentioned as being available in the docket, go to https://www.regulations.gov/docket/FMCSA-2022-0128/document and choose the document to review. To view comments, click this NPRM, then click “Browse Comments.” If you do not have access to the internet, you may view the docket online by visiting Dockets Operations in Room W12-140 on the ground floor of the DOT West Building, 1200 New Jersey Avenue SE, Washington, DC 20590-0001, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. To be sure someone is there to help you, please call (202) 366-9317 or (202) 366-9826 before visiting Dockets Operations.

DOT solicits comments from the public to better inform its regulatory process, in accordance with 5 U.S.C. 553(c). DOT posts these comments, without edit, including any personal information the commenter provides, to www.regulations.gov, as described in the system of records notice (DOT/ALL 14—Federal Docket Management System (FDMS)), which can be reviewed at www.transportation.gov/privacy.

This NPRM proposes to update an incorporation by reference found at 49 CFR 385.4(b)(1) and referenced at § 385.415(b). The provision at § 385.4(b)(1) currently references the April 1, 2021, edition of CVSA's handbook titled “North American Standard Out-of-Service Criteria and Level VI Inspection Procedures and Out-of-Service Criteria for Commercial Highway Vehicles Transporting Transuranics and Highway Route Controlled Quantities of Radioactive Materials as defined in 49 CFR part 173.403.” The CVSA handbook contains inspection procedures and Out-of-Service Criteria (OOSC) for inspections of shipments of transuranic waste and highway route controlled quantities of radioactive material. The OOSC, while not regulations, provide enforcement personnel nationwide, including FMCSA's State partners, with uniform enforcement tolerances for inspections. The material is available, and will continue to be available, for inspection at the FMCSA, Office of Safety, 1200 New Jersey Avenue SE, Washington, DC 20590 (Attention: Chief, Compliance Division) at (202) 366-1812. The document may be purchased from the Commercial Vehicle Safety Alliance, 6303 Ivy Lane, Suite 310, Greenbelt, MD 20770, (301) 830-6143, www.cvsa.org.

In this NPRM, FMCSA proposes to incorporate by reference the April 1, 2022, edition of the handbook. This NPRM will discuss all updates to the currently incorporated 2021 edition of the handbook.

Fourteen updates distinguish the April 1, 2022, handbook edition from the 2021 edition. The incorporation by reference of the 2022 edition does not impose new regulatory requirements.

Congress has enacted several statutory provisions to ensure the safe transportation of hazardous materials in interstate commerce. Specifically, in provisions codified at 49 U.S.C. 5105(d), relating to inspections of motor vehicles carrying certain hazardous material, and 49 U.S.C. 5109, relating to motor carrier safety permits, the Secretary of Transportation is required to promulgate regulations as part of a comprehensive safety program on hazardous materials safety permits. The FMCSA Administrator has been delegated authority under 49 CFR 1.87(d)(2) to carry out the rulemaking functions vested in the Secretary of Transportation. Consistent with that authority, FMCSA has promulgated regulations under 49 CFR part 385, subpart E to address the congressional mandate on hazardous materials safety permits. Those regulations are the underlying provisions to which the material incorporated by reference discussed in this notice is applicable.

In 1986, the U.S. Department of Energy and CVSA entered into a cooperative agreement to develop a higher level of inspection procedures, out-of-service (OOS) conditions and/or criteria, an inspection decal, and a training and certification program for inspectors to conduct inspections on shipments of transuranic waste and highway route controlled quantities of radioactive material. CVSA developed the North American Standard Level VI Inspection Program for Transuranic Waste and Highway Route Controlled Quantities of Radioactive Material. This inspection program for select radiological shipments includes inspection procedures, enhancements to the North American Standard Level I Inspection, radiological surveys, CVSA Level VI decal requirements, and the “North American Standard Out-of-Service Criteria and Level VI Inspection Procedures and Out-of-Service Criteria for Commercial Highway Vehicles Transporting Transuranics and Highway Route Controlled Quantities of Radioactive Materials as defined in 49 CFR part 173.403.” As of January 1, 2005, all vehicles and carriers transporting highway route controlled quantities of radioactive material are regulated by the U.S. Department of Transportation. All highway route controlled quantities of radioactive material must pass the North American Standard Level VI Inspection prior to the shipment being allowed to travel in the United States. All highway route controlled quantities of radioactive material shipments entering the United States must also pass the North American Standard Level VI Inspection either at the shipment's point of origin or when the shipment enters the United States.

Section 385.415 of title 49, Code of Federal Regulations, prescribes operational requirements for motor carriers transporting hazardous materials for which a hazardous materials safety permit is required. Section 385.415(b) requires that motor carriers ensure a pre-trip inspection is performed on each motor vehicle to be used to transport a highway route controlled quantity of a Class 7 (radioactive) material, in accordance with the requirements of CVSA's handbook titled “North American Standard Out-of-Service Criteria and Level VI Inspection Procedures and Out-of-Service Criteria for Commercial Highway Vehicles Transporting Transuranics and Highway Route Controlled Quantities of Radioactive Materials as defined in 49 CFR part 173.403.”

According to 2018-2021 data from FMCSA's Motor Carrier Management Information System (MCMIS), approximately 2.86 million Level I-Level VI inspections were performed annually. Nearly 96 percent of these were Level I, 1 Level II, 2 and Level III  3 inspections. During the same period, an average of 670 Level VI inspections were performed annually, comprising only 0.02 percent of all inspections. On average, OOS violations were cited in only 4 Level VI inspections annually (0.6 percent), whereas on average, OOS violations were cited in 212,603 Level I inspections (26 percent), 249,550 Level II inspections (25 percent), and 52,911 Level III inspections (6 percent) annually. As these statistics demonstrate, OOS violations are cited in a far lower percentage of Level VI inspections than Level I, II, and III inspections, due largely to the enhanced oversight and inspection of these vehicles because of the sensitive nature of the cargo being transported.

The changes to the 2022 edition of the CVSA handbook are intended to ensure clarity in the presentation of the OOS conditions and are generally editorial or ministerial. As discussed below, FMCSA does not expect the changes made in the 2022 edition of the CVSA handbook to affect the number of OOS violations cited during Level VI inspections.

Section 385.4(b)(1), as amended on December 23, 2021 (86 FR 72854), references the April 1, 2021, edition of the CVSA handbook. This NPRM proposes to amend § 385.4(b)(1) by replacing the reference to the April 1, 2021, edition date with a reference to the new edition date of April 1, 2022.

The changes made based on the 2022 edition of the handbook are outlined below. It is necessary to update the materials incorporated by reference to ensure motor carriers and enforcement officials have convenient access to the correctly identified inspection criteria referenced in the rules.

Fourteen changes in the 2022 edition of the CVSA handbook distinguish it from the April 1, 2021, edition:

(1) The Policy Statement of Part I was amended to provide a clear definition of OOSC and define the term “imminent hazard.” CVSA determined that the term “imminent hazard” should be used to describe an OOSC. As such, wording was used to provide consistency between the OOSC and the Federal Motor Carrier Safety Regulations (FMCSRs). A note was also added to clarify that the OOSC in Part I does not apply to a co-driver. This clarification is not expected to have any effect on the number of OOS violations cited during Level VI inspections in the United States.

(2) Part I, Item 2.a. and Item 3.a., was amended to add a note clarifying that information received from the National Law Enforcement Telecommunication System or the Commercial Driver's License Information System may be used for U.S. home jurisdiction license verification without the need of additional confirmation. The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(3) Part I, Item 2.b. and Item 3.c., were amended to clarify in the note on Mexico's “Licencia Federal de Conductor” (LFC) that only Class E requires an endorsement. Prior to February 25, 2016, a driver with Mexico's Class B license could operate a commercial motor vehicle combination that included double trailers. The “Observaciones” section on the back of the license did not include an explicit doubles endorsement. Similarly, a driver could obtain Mexico's Class E license and the “Observaciones” section on the back of the license did not include an explicit hazardous materials endorsement. After February 25, 2016, Mexico's Direccion General de Autotransporte Federal, Secretaría de Infraestructura, Comunicaciones, y Transportes required a new Class E license for drivers that wish and are qualified to operate doubles and/or transport hazardous materials. Additionally, the “Observaciones” section on the back of the license has an explicit endorsement specifying whether the driver is authorized to use doubles or transport hazardous materials or both. However, a clarification was needed to specify that the endorsement on the back of the license is for the Class E license, not the Class B license. This information had already been updated in the LFC Inspection Schematic issued in April 2021. This amendment is applicable only to the enforcement of Mexican regulations and will not have any effect on the number of OOS violations cited during Level VI inspections in the United States.

(4) Part I, Item 7.c., was amended to add a table clarifying the Commercial Driver's License (CDL) and non-CDL drivers prohibited in the Drug and Alcohol Clearinghouse. Currently, this section details the OOS actions that are required to be taken when a driver is recorded in the Drug and Alcohol Clearinghouse as prohibited from performing safety-sensitive functions per 382.501(a). However, CVSA noted that the current FMCSRs, specifically § 382.501, do not state that a driver operating a non-CDL required vehicle and engaged in intrastate commerce be placed OOS. Therefore, a guidance table was provided to clarify the OOSC for CDL and non-CDL drivers prohibited from performing safety sensitive functions during intrastate and interstate commerce. A note was also added explaining the applicability of the table. The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(5) The Policy Statement of Part II was amended to provide a clear definition of OOSC and define the term “imminent hazard.” CVSA determined that the term “imminent hazard” should be used to describe an OOSC. As such, wording was used to provide consistency between the OOSC and the FMCSRs. A note was also added to clarify that the OOSC in Part I does not apply to a co-driver. This clarification is not expected to have any effect on the number of OOS violations cited during Level VI inspections in the United States.

(6) The chart for “Defective Brakes” in Part II, Item 1.a., was amended to add a note to clarify that brakes on wheels required or not shall be used in the 20 percent calculation for the total number of brakes. Clarification was necessary specifically in driveaway/towaway combination cases where brakes are not required on the towed unit. The 20 percent calculation is only used to determine if the vehicle or combination is OOS based on the number of defective brakes versus the number of operational brakes. Therefore, CVSA determined that all brakes must be considered for the purpose of imminent hazard, whether they are required or not. This clarification is not expected to have any effect on the number of OOS violations cited during Level VI inspections in the United States.

(7) Part II, Item 1.d.2., was amended to add language to specify that a breakaway device can be attached to a permanently mounted hitch. Clarification was needed to specify that a hitch that is bolted to the towing vehicle should be considered permanently attached to the vehicle. Thus, a breakaway device like a cable attached to a permanent hitch is acceptable. This clarification is not expected to have any effect on the number of OOS violations cited during Level VI inspections in the United States.

(8) Reference table Part II, Item 1.h.1. was amended to clarify when an air hose should be placed OOS. CVSA contacted the industry to discuss air brake hose failure modes and OOS conditions. Brake hose manufacturers provided information indicating that when the reinforcement ply layer is frayed the integrity of the brake hose is compromised and thus, to prevent a failure, the brake hose should be placed OOS. According to this information, The Society of Automotive Engineers provided updated language and guidance to the OOS condition. As such, CVSA added language to the OOS reference table and updated the diagram for air hoses/tubing. In addition, a note was also added to define the term “reinforcement ply.” The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(9) Part II, Item 1.o., was amended to add an OOS condition to address a situation where the entire master cylinder assembly is found loose. In response to a video that shows an inspection where the entire master cylinder assembly, including the backup system, was loose on the firewall, CVSA determined that this condition, although rare, would cause a severe reduction in braking action and, in other cases, brake failure if the assembly is completely detached from the firewall. Part II, Item 1.o. was amended to add an OOS condition that a vehicle should be placed OOS when the master cylinder assembly including the backup system, power assist, or power brake unit has loose or missing mounting bolts. The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(10) Part II, Item 9.b. was amended to clarify that this section only applies to lighting systems and no other electrical systems. There have been instances where inspectors have been using this section and applying it incorrectly to electric brakes. The purpose of the OOS condition in the “Lighting Devices” section was to only address lighting. However, for further clarity, CVSA determined that the term “lighting” should be added to the existing language to clarify that this condition only applies to the lights. The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(11) Part II, Item 12.a.2., was amended to remove the reference to “breaker strip” in a steering tire. The term “breaker strip” in the OOSC is outdated nomenclature that is no longer used in reference materials describing radial truck tires. Enforcement personnel therefore have trouble identifying and finding the area of the “breaker strip” in supporting documentation. Also, the sidewall and tread area OOS conditions cover the same area of the tire rendering the term redundant. As such, CVSA determined that the term “breaker strip” should be removed from the section. The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(12) The Policy Statement of Part III was amended to provide a clear definition of OOSC and define the term “imminent hazard.” CVSA determined that the term “imminent hazard” should be used to describe an OOSC. As such, wording was used to provide consistency between the OOSC and the FMCSRs. A note was also added to clarify that the OOSC in Part III does not apply to a co-driver. This clarification is not expected to have any effect on the number of OOS violations cited during Level VI inspections in the United States.

(13) Part III, Item 4.a., was amended to clarify in the notes that the identification number is not required on the transport vehicle if it is visible on the bulk packaging. CVSA determined that if there is no identification number on the transport vehicle, the identification number displayed on an orange panel or incorporated with a placard (in the United States and Canada), or on a white square-on-point (United States only) that is visible on a bulk package is sufficient to satisfy the requirement. The changes are intended to ensure clarity in the presentation of the OOS conditions and are not expected to affect the number of OOS violations cited during Level VI inspections in the United States.

(14) The Policy Statement of Part IV was amended to provide a better description of OOSC and define the term “imminent hazard.” The former policy statement stated that an “Out of Service Violation” preclude a driver from further operation of a commercial motor vehicle for a specified period of time or for some violations until a required condition is met. CVSA found that the language in the OOSC description needed consistency with the FMCSRs and determined that a driver that presents an “imminent hazard” precluding safe operation of a commercial motor vehicle should be used to describe OOSC. Specifically, 383.5 defines imminent hazard as the existence of any condition of a driver that substantially increases the likelihood of serious injury or death if not discontinued immediately. As such, CVSA updated the language in the OOSC and defined “imminent hazard” as described in the FMCSRs. A note was also added to clarify that the OOSC in Part IV does not apply to a co-driver. This clarification is not expected to have any effect on the number of OOS violations cited during Level VI inspections in the United States.

Motor carriers and drivers are subject to the laws and regulations of the countries that they operate in, unless an international agreement states otherwise. Drivers and carriers should be aware of the regulatory differences between nations.

The CVSA is an organization representing Federal, State, and Provincial motor carrier safety enforcement agencies in the United States, Canada, and Mexico. The OOSC provide uniform enforcement tolerances for inspections conducted in all three countries.

Section 385.4(b)(1), as amended on December 23, 2021, references the April 1, 2021, edition of the CVSA handbook. This NPRM would replace the reference to the April 1, 2021, edition date with a reference to the new edition date of April 1, 2022.

FMCSA has considered the impact of this notice of proposed rulemaking under E.O. 12866 (58 FR 51735, Oct. 4, 1993), Regulatory Planning and Review, E.O. 13563 (76 FR 3821, Jan. 21, 2011), Improving Regulation and Regulatory Review, and DOT's regulatory policies and procedures. The Office of Information and Regulatory Affairs within the Office of Management and Budget (OMB) determined that this notice of proposed rulemaking is not a significant regulatory action under section 3(f) of E.O. 12866, as supplemented by E.O. 13563, and does not require an assessment of potential costs and benefits under section 6(a)(3) of that order. Accordingly, OMB has not reviewed it under that E.O.

The proposed rule, if finalized, would update an incorporation by reference from the April 1, 2021, edition to the April 1, 2022, edition of CVSA's handbook titled “North American Standard Out-of-Service Criteria and Level VI Inspection Procedures and Out- of-Service Criteria for Commercial Highway Vehicles Transporting Transuranics and Highway Route Controlled Quantities of Radioactive Materials as defined in 49 CFR part 173.403.” FMCSA reviewed its MCMIS data on inspections performed from 2018 to 2021 and does not expect the handbook updates to have any effect on the number of OOS violations cited during Level VI inspections. Therefore, the proposed rule's impact would be de minimis.

This rule is not a major rule as defined under the Congressional Review Act (5 U.S.C. 801-808). 4

Under 49 U.S.C. 31136(g), FMCSA is required to publish an advance notice of proposed rulemaking (ANPRM) or proceed with a negotiated rulemaking, if a proposed rule is likely to lead to the promulgation of a major rule. As this proposed rule is not likely to result in the promulgation of a major rule, the Agency is not required to issue an ANPRM or to proceed with a negotiated rulemaking.

The Regulatory Flexibility Act (5 U.S.C. 601, et seq. ) (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, 5 requires Federal agencies to consider the effects of the regulatory action on small business and other small entities and to minimize any significant economic impact. The term small entities comprises small businesses and not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000 (5 U.S.C. 601(6)). Accordingly, DOT policy requires an analysis of the impact of all regulations on small entities, and mandates that agencies strive to lessen any adverse effects on these businesses. None of the updates from the 2022 edition impose new requirements or make substantive changes to the FMCSRs.

When an Agency issues a rulemaking proposal, the RFA requires the Agency to “prepare and make available an initial regulatory flexibility analysis” that will describe the impact of the proposed rule on small entities (5 U.S.C. 603(a)). Section 605 of the RFA allows an agency to certify a rule, instead of preparing an analysis, if the proposed rule is not expected to impact a substantial number of small entities. The proposed rule would update an incorporation by reference found at § 385.4(b)(1) and referenced at § 385.415(b), and would incorporate by reference the April 1, 2022, edition of the CVSA handbook. The changes to the 2022 edition of the CVSA handbook from the 2021 edition are intended to ensure clarity in the presentation of the OOS conditions and are generally editorial or ministerial. As noted above, FMCSA does not expect the changes made in the 2022 edition of the CVSA handbook to affect the number of OOS violations cited during Level VI inspections in the United States. Accordingly, I certify that the proposed action would not have a significant economic impact on a substantial number of small entities.

In accordance with section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996, 6 FMCSA wants to assist small entities in understanding this proposed rule so they can better evaluate its effects on themselves and participate in the rulemaking initiative. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please consult the person listed under FOR FURTHER INFORMATION CONTACT .

Small businesses may send comments on the actions of Federal employees who enforce or otherwise determine compliance with Federal regulations to the Small Business Administration's Small Business and Agriculture Regulatory Enforcement Ombudsman (Office of the National Ombudsman, see https://www.sba.gov/about-sba/oversight-advocacy/office-national-ombudsman ) and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of FMCSA, call 1-888-REG-FAIR (1-888-734-3247). DOT has a policy regarding the rights of small entities to regulatory enforcement fairness and an explicit policy against retaliation for exercising these rights.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) (UMRA) requires Federal agencies to assess the effects of their discretionary regulatory actions. The Act addresses actions that may result in the expenditure by a State, local, or Tribal government, in the aggregate, or by the private sector of $178 million (which is the value equivalent of $100 million in 1995, adjusted for inflation to 2021 levels) or more in any 1 year. Though this NPRM would not result in such an expenditure, and the analytical requirements of UMRA do not apply as a result, the Agency discusses the effects of this rule elsewhere in this preamble.

This proposed rule contains no new information collection requirements under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

A rule has implications for federalism under section 1(a) of E.O. 13132 if it has “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.”

FMCSA has determined that this rule would not have substantial direct costs on or for States, nor would it limit the policymaking discretion of States. Nothing in this document preempts any State law or regulation. Therefore, this rule does not have sufficient federalism implications to warrant the preparation of a Federalism Impact Statement.

The Consolidated Appropriations Act, 2005, 7 requires the Agency to assess the privacy impact of a regulation that will affect the privacy of individuals. This NPRM would not require the collection of personally identifiable information.

This rule does not have Tribal implications under E.O. 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian Tribes, on the relationship between the Federal Government and Indian Tribes, or on the distribution of power and responsibilities between the Federal Government and Indian Tribes.

FMCSA analyzed this proposed rule pursuant to the National Environmental Policy Act of 1969 (42 U.S.C. 4321, et seq. ) and determined this action is categorically excluded from further analysis and documentation in an environmental assessment or environmental impact statement under FMCSA Order 5610.1 (69 FR 9680), Appendix 2, paragraph 6(b). This Categorical Exclusion (CE) covers minor revisions to regulations. The proposed requirements in this rulemaking are covered by this CE.

In consideration of the foregoing, FMCSA proposes to amend 49 CFR chapter III, part 385, as set forth below: