[Federal Register Volume 87, Number 238 (Tuesday, December 13, 2022)]
[Proposed Rules]
[Pages 76374-76402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26758]



[[Page 76373]]

Vol. 87

Tuesday,

No. 238

December 13, 2022

Part III





Commodity Futures Trading Commission





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17 CFR Chapter I





Notice of Proposed Order and Request for Comment on an Application for 
a Capital Comparability Determination Submitted on Behalf of Nonbank 
Swap Dealers Subject to Regulation by the Mexican Comision Nacional 
Bancaria y de Valores; Proposed Rule

  Federal Register / Vol. 87, No. 238 / Tuesday, December 13, 2022 / 
Proposed Rules  

[[Page 76374]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Notice of Proposed Order and Request for Comment on an 
Application for a Capital Comparability Determination Submitted on 
Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican 
Comision Nacional Bancaria y de Valores

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is soliciting public comment on a joint request submitted by 
Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Goldman Sachs 
Mexico, Casa de Bolsa, S.A. de C.V., and Casa de Bolsa Finamex, S.A. de 
C.V. requesting that the Commission determine that the capital and 
financial reporting laws and regulations of Mexico applicable to CFTC-
registered swap dealers organized and domiciled in Mexico, and licensed 
with the Mexican Banking and Securities Commission (Comision Nacional 
Bancaria y de Valores) as broker-dealers (casa de bolsa), provide a 
sufficient basis for an affirmative finding of comparability with 
respect to the Commission's swap dealer capital and financial reporting 
requirements adopted under the Commodity Exchange Act. The Commission 
also is soliciting public comment on a proposed order providing for the 
conditional availability of substituted compliance in connection with 
the application.

DATES: Comments must be received on or before February 13, 2023.

ADDRESSES: You may submit comments, identified by ``Mexico Swap Dealer 
Capital Comparability Determination'', by any of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this proposed order and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. To 
avoid possible delays with mail or in-person deliveries, submissions 
through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Commission Regulation 145.9.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to in this 
document are found at 17 CFR chapter I, and are accessible on the 
Commission's website at: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the proposed determination and order will be retained in 
the public comment file and will be considered as required under the 
Administrative Procedure Act and other applicable laws, and may be 
accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas Smith, Deputy Director, 202-418-5495, 
[email protected]; Rafael Martinez, Associate Director, 202-418-5462, 
[email protected]; Joshua Beale, Associate Director, 202-418-5446, 
[email protected]; Warren Gorlick, Associate Director, 202-418-5195, 
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472, 
[email protected]; Carmen Moncada-Terry, Special Counsel, 202-418-5795, 
[email protected]; Liliya Bozhanova, Special Counsel, 202-418-
6232, [email protected]; Justin McPhee, Risk Analyst, 202-418-6223, 
[email protected], Market Participants Division; Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW, 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment 
on an application dated September 28, 2021 (the ``Mexico Application'') 
and submitted jointly by Morgan Stanley Mexico, Casa de Bolsa, S.A. de 
C.V., Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V., and Casa de 
Bolsa Finamex, S.A. de C.V. (the ``Applicants'').\2\ The Applicants' 
Mexico Application requests that the Commission issue an order finding 
that registered nonbank \3\ swap dealers (``SDs'') organized and 
domiciled in Mexico (``Mexican nonbank SDs'') may satisfy certain 
capital and financial reporting requirements under the Commodity 
Exchange Act (``CEA'') \4\ by being subject to, and complying with, 
comparable capital and financial reporting requirements under Mexican 
laws and regulations. The Commission also is soliciting public comment 
on a proposed order that would permit Mexican nonbank SDs, subject to 
certain conditions, to comply with certain CFTC SD capital and 
financial reporting requirements in the manner set forth in the 
proposed order.
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    \2\ The Mexico Application was submitted by Colin D. Lloyd, 
Cleary Gottlieb Steen & Hamilton LLP, on behalf of the Applicants. 
The Mexico Application is available on the Commission's website at: 
https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \3\ As discussed in Section I.A. immediately below, the U.S. 
prudential regulators have capital jurisdiction over registered swap 
dealers that are subject to their regulation (``bank SDs'') and the 
Commission has capital jurisdiction over registered SDs that are not 
subject to the regulation of a U.S. prudential regulator (i.e., 
nonbank SDs).
    \4\ 7 U.S.C. 1 et seq. The CEA may be accessed through the 
Commission's website, www.cftc.gov.
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I. Introduction

A. Regulatory Background--Swap Dealer and Major Swap Participant 
Capital and Financial Reporting Requirements

    Section 4s(e) of the CEA \5\ directs the Commission and 
``prudential regulators'' \6\ to impose capital requirements on all 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'').
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    \5\ 7 U.S.C. 6s(e).
    \6\ The term ``prudential regulators'' is defined in the CEA to 
mean the Board of Governors of the Federal Reserve System (``Federal 
Reserve Board''); the Office of the Comptroller of the Currency; the 
Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency. See 7 U.S.C. 
1a(39).
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    Section 4s(e) applies a bifurcated approach with respect to the 
above Congressional directives, requiring each SD and MSP that is 
subject to the regulation of a prudential regulator (``bank SD'' and 
``bank MSP,''

[[Page 76375]]

respectively) to meet the minimum capital requirements and uncleared 
swaps margin requirements adopted by the applicable prudential 
regulator, and requiring each SD and MSP that is not subject to the 
regulation of a prudential regulator (``nonbank SD'' and ``nonbank 
MSP,'' respectively) to meet the minimum capital requirements and 
uncleared swaps margin requirements adopted by the Commission.\7\ 
Therefore, the Commission's authority to impose capital requirements 
and margin requirements for uncleared swap transactions extends to 
nonbank SDs and nonbank MSPs, including nonbank subsidiaries of bank 
holding companies regulated by the Federal Reserve Board.\8\
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    \7\ 7 U.S.C. 6s(e)(2).
    \8\ 7 U.S.C. 6s(e)(1) and (2).
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    The prudential regulators implemented Section 4s(e) in 2015 by 
amending existing capital requirements applicable to bank SDs and bank 
MSPs to incorporate swap transactions into their respective bank 
capital frameworks, and by adopting rules imposing initial and 
variation margin requirements on bank SDs and bank MSPs that engage in 
uncleared swap transactions.\9\ The Commission adopted final rules 
imposing initial and variation margin obligations on nonbank SDs and 
nonbank MSPs for uncleared swap transactions on January 6, 2016.\10\ 
The Commission also approved final capital requirements for nonbank SDs 
and nonbank MSPs on July 24, 2020, which were published in the Federal 
Register on September 15, 2020 with a compliance date of October 6, 
2021 (``CFTC Capital Rules'').\11\
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    \9\ See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015).
    \10\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
    \11\ See Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020).
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    Section 4s(f) of the CEA addresses SD and MSP financial reporting 
requirements.\12\ 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.\13\ The Commission's financial reporting obligations were 
adopted with the Commission's nonbank SD and nonbank MSP capital 
requirements, and also had a compliance date of October 6, 2021 (``CFTC 
Financial Reporting Rules'').\14\
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    \12\ 7 U.S.C. 6s(f).
    \13\ 7 U.S.C. 6s(f)(1)(A).
    \14\ See 85 FR 57462.
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B. Commission Capital Comparability Determinations for Non-U.S. Nonbank 
Swap Dealers and Non-U.S. Nonbank Major Swap Participants

    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'').\15\ 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 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'').\16\
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    \15\ 17 CFR 23.106. Regulation 23.106(a)(1) provides that a 
request for a Capital Comparability Determination may be submitted 
by a non-U.S. nonbank SD or a non-U.S. nonbank MSP, a trade 
association or other similar group on behalf of its SD or MSP 
members, or a foreign regulatory authority that has direct 
supervisory authority over one or more non-U.S. nonbank SDs or non-
U.S. nonbank MSPs. Commission regulations provide that any non-U.S. 
nonbank SD or non-U.S. nonbank MSP that is dually-registered with 
the Commission as a futures commission merchant (``FCM'') is subject 
to the capital requirements of Regulation 1.17 and may not petition 
the Commission for a Capital Comparability Determination. See 17 CFR 
23.101(a)(5) and (b)(4), respectively. Furthermore, non-U.S. bank 
SDs and non-U.S. bank MSPs may not petition the Commission for a 
Capital Comparability Determination with respect to their respective 
financial reporting requirements under Regulation 23.105(p) (17 CFR 
23.105(p)). Commission staff has issued, however, a time-limited no-
action letter stating the Market Participants Division will not 
recommend enforcement action against a non-U.S. bank SD that files 
with the Commission certain financial information that is provided 
to its home country regulator in lieu of certain financial reports 
required by Regulation 23.105(p). See CFTC Staff Letter 21-18, 
issued on August 31, 2021.
    \16\ 17 CFR 23.106(a)(3).
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    The Commission's approach for conducting a comparability 
determination with respect to the CFTC Capital Rules and the CFTC 
Financial Reporting Rules is a principles-based, holistic approach that 
focuses on whether the applicable foreign jurisdiction's capital and 
financial reporting requirements achieve comparable outcomes to the 
corresponding CFTC requirements.\17\ 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.\18\ 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.
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    \17\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
    \18\ See 85 FR 57521.
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    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.\19\
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    \19\ 17 CFR 23.106(a)(2).
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    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

[[Page 76376]]

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.\20\
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    \20\ See 17 CFR 23.106(a)(3) and 85 FR 57520-57522.
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    In performing the comparability assessment for foreign nonbank SDs, 
the Commission's review will include the extent to which the foreign 
jurisdiction's requirements address: (i) the process of establishing 
minimum capital requirements for nonbank SDs and how such process 
addresses risk, including market risk and credit risk of the nonbank 
SD's on-balance sheet and off-balance sheet exposures; (ii) the types 
of equity and debt instruments that qualify as regulatory capital in 
meeting minimum requirements; (iii) the financial reports and other 
financial information submitted by a nonbank SD to its relevant 
regulatory authority and whether such information provides the 
regulatory authority with the means necessary to effectively monitor 
the financial condition of the nonbank SD; and (iv) the regulatory 
notices and other communications between a nonbank SD and its foreign 
regulatory authority that address potential adverse financial or 
operational issues that may impact the firm. With respect to the 
ability of the relevant foreign regulatory authority to supervise and 
enforce compliance with the foreign jurisdiction's capital adequacy and 
financial reporting requirements, the Commission's review will include 
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 a foreign nonbank 
MSP,\21\ 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 a nonbank MSP 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 a nonbank MSP's compliance with such capital adequacy and 
financial reporting requirements, and the disciplinary process imposed 
on an MSP that fails to comply with such requirements.
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    \21\ Regulation 23.101(b) requires a nonbank MSP to maintain 
positive tangible net worth. There are no MSPs currently registered 
with the Commission.
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    Regulation 23.106 further provides that the Commission may impose 
any terms or conditions that it deems appropriate in issuing a Capital 
Comparability Determination.\22\ 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.
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    \22\ See 17 CFR 23.106(a)(5).
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    The Commission's capital adequacy and financial reporting 
requirements are designed to address and manage risks that arise from a 
firm's operation as a SD or MSP. Given their functions, both sets of 
requirements and rules must be applied on an entity-level basis 
(meaning that the rules apply on a firm-wide basis, irrespective of the 
type of transactions involved) to effectively address risk to the firm 
as a whole. 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.\23\ Notices must be filed electronically with the 
Commission's Market Participants Division (``MPD'').\24\ 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,\25\ 
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 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 the applicable 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.
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    \23\ 17 CFR 23.106(a)(4).
    \24\ Notices must be filed in electronic form to the following 
email address: [email protected].
    \25\ See 17 CFR 140.91(a)(11).
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    Each non-U.S. nonbank SD and/or non-U.S. nonbank MSP that receives, 
in accordance with the applicable Commission Capital Comparability 
Determination Order, 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.\26\ 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/

[[Page 76377]]

or CFTC Financial Reporting Rules.\27\ 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.\28\
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    \26\ 17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD 
under authority delegated by the Commission. See 17 CFR 
140.91(a)(11).
    \27\ Id.
    \28\ Id.
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    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.\29\ 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 Capital Comparability Determination and the Capital 
Comparability Determination Order.
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    \29\ The Commission has provided the Applicants with an 
opportunity to review for accuracy and completeness, and comment on, 
the Commission's description of relevant Mexican laws and 
regulations on which this proposed Capital Comparability 
Determination is based. The Commission relies on this review and any 
corrections received from the Applicants in making its proposal. A 
comparability determination based on an inaccurate description of 
foreign laws and regulations may not be valid.
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C. Mexico Application for a Capital Comparability Determination for 
Mexico-Domiciled Nonbank Swap Dealers

    The Applicants submitted the Mexico Application to request that the 
Commission issue a Capital Comparability Determination finding that 
compliance with the capital requirements of Mexico and the financial 
reporting requirements of Mexico, as specified in the Mexico 
Application, by a Mexican nonbank SD satisfies corresponding CFTC 
Capital Rules and the CFTC Financial Reporting Rules applicable to a 
nonbank SD under sections 4s(e) through (f) of the CEA and Regulations 
23.101 and 23.105.\30\
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    \30\ Mexico Application, p. 1.
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    The Applicants have represented that the Securities Market Law (Ley 
del Mercado de Valores, the ``Law'') \31\ and the General Provisions 
Applicable to Broker-Dealers (Disposiciones de Caracter General 
Aplicables a las Casa de Bolsa the ``General Provisions'') \32\ issued 
by the Mexican Banking and Securities Commission (``Mexican 
Commission'') \33\ contain the capital adequacy requirements (``Mexican 
Capital Rules'') and financial reporting requirements (``Mexican 
Financial Reporting Rules'') that apply to broker-dealers,\34\ 
including Mexican nonbank SDs.\35\ The Law and General Provisions 
impose mandatory capital and liquidity requirements that address 
quantifiable discretionary risks (credit risk, liquidity risk, and 
market risk), quantifiable non-discretionary risks (legal risk, 
operational risk, and technological risk), and non-quantifiable 
risks.\36\ The Applicants currently are the only Mexican nonbank SDs 
registered with the Commission as SDs, and they represent that they are 
licensed with the Mexican Commission as broker-dealers subject to the 
Mexican Capital Rules and Mexican Financial Reporting Rules.
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    \31\ Published in the Federal Official Gazette (Diario Oficial 
de la Federacion) on December 30, 2005, as amended.
    \32\ Published in the Federal Official Gazette on September 6, 
2004, as amended.
    \33\ The Applicants represented that the Mexican Commission is a 
governmental agency that is part of the Ministry of Finance, and has 
independent technical and executive powers. The Applicants further 
represented that the Mexican Commission is in charge of the 
supervision and regulation of financial entities, such as Mexican 
nonbank SDs, with the purpose of ensuring their stability and sound 
performance, as well as maintaining a safe and sound financial 
system. The Mexico Application provides that: (i) the scope of the 
Mexican Commission's authority includes inspection, supervision, 
prevention, and correction powers; (ii) the primary financial 
entities regulated by the Mexican Commission are commercial banks, 
national development banks, regulated multiple purpose financial 
institutions, and broker-dealers, such as Mexican nonbank SDs; and 
(iii) the Mexican Commission is also in charge of granting and 
revoking broker-dealer licenses in Mexico. See, Mexico Application, 
p. 4 (footnote 10).
    \34\ The Applicants represented that pursuant to the provisions 
set forth in Article 113 of the Law, broker-dealers, such as Mexican 
nonbank SDs, among other entities, are the only financial 
institutions that may conduct securities intermediation 
transactions. Under Article 2 of the Law, securities intermediation 
is defined as the customary and professional performance of any of 
the following activities in Mexico: (i) actions for the purpose of 
facilitating the contact between the supply and demand of 
securities; (ii) the execution of transactions with securities for 
the account of third parties as commission agent, attorney-in-fact, 
or in any other capacity, participating in the relevant legal 
transactions either personally or on behalf of third parties; and 
(iii) the negotiation of securities on an intermediary's own account 
with the general public or with other intermediaries acting on their 
own account or on behalf of third parties. The organization and 
operation of broker-dealers, such as Mexican nonbank SDs, is 
governed by the Law and General Provisions. See Mexico Application, 
p. 4 (footnote 11).
    \35\ Mexico Application, p. 4.
    \36\ Id.
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II. General Overview of Commission and Mexican Nonbank Swap Dealer 
Capital Rules

A. General Overview of the CFTC Nonbank Swap Dealer Capital Rules

    The CFTC Capital Rules provide nonbank SDs with three alternative 
capital approaches: (i) the Tangible Net Worth Capital Approach (``TNW 
Approach''); (ii) the Net Liquid Assets Capital Approach (``NLA 
Approach''); and (iii) the Bank-Based Capital Approach (``Bank-Based 
Approach'').\37\
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    \37\ 17 CFR 23.101.
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    Nonbank SDs that are ``predominantly engaged in non-financial 
activities'' may elect the TNW Approach.\38\ The TNW Approach requires 
a nonbank SD to maintain a level of ``tangible net worth'' \39\ equal 
to or greater than the higher of: (i) $20 million plus the amount of 
the nonbank SD's ``market risk exposure requirement'' \40\ and

[[Page 76378]]

``credit risk exposure requirement'' \41\ associated with the nonbank 
SD's swap and related hedge positions that are part of the nonbank SD's 
swap dealing activities; (ii) 8 percent of the nonbank SD's ``uncleared 
swap margin'' amount; \42\ or (iii) the amount of capital required by a 
registered futures association of which the nonbank SD is a member.\43\ 
The TNW Approach is intended to ensure the safety and soundness of a 
qualifying nonbank SD by requiring the firm to maintain a minimum level 
of tangible net worth that is based on the nonbank SD's swap dealing 
activities to provide a sufficient level of capital to absorb losses 
resulting from its swap dealing and other business activities.
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    \38\ 17 CFR 23.101(a)(2). The term ``predominantly engaged in 
non-financial activities'' is defined in Regulation 23.100 (17 CFR 
23.100) and generally provides that: (i) the nonbank SD's, or its 
parent entity's, annual gross financial revenues for either of the 
previous two completed fiscal years represents less than 15 percent 
of the nonbank SD's or the nonbank SD's parent's, annual gross 
revenues for all operations (i.e., commercial and financial) for 
such years, and (ii) the nonbank SD's, or its parent entity's, total 
financial assets at the end of its two most recently completed 
fiscal years represents less than 15 percent of the nonbank SD's, or 
its parent's, total consolidated financial and nonfinancial assets 
as of the end of such years.
    \39\ The term ``tangible net worth'' is defined in Regulation 
23.100 and generally means the net worth (i.e., assets less 
liabilities) of a nonbank SD, computed in accordance with applicable 
accounting principles, with assets further reduced by a nonbank SD's 
recorded goodwill and other intangible assets.
    \40\ The terms ``market risk exposure'' and ``market risk 
exposure requirement'' are defined in Regulation 23.100 (17 CFR 
23.100) and generally mean the risk of loss in a financial position 
or portfolio of financial positions resulting from movements in 
market prices and other factors. Market risk exposure is the sum of: 
(i) general market risks including changes in the market value of a 
particular asset that result from broad market movements, which may 
include an additive for changes in market value under stressed 
conditions; (ii) specific risk, which includes risks that affect the 
market value of a specific instrument but do not materially alter 
broad market conditions; (iii) incremental risk, which means the 
risk of loss on a position that could result from the failure of an 
obligor to make timely payments of principal and interest; and (iv) 
comprehensive risk, which is the measure of all material price risks 
of one or more portfolios of correlation trading positions.
    \41\ The term ``credit risk exposure requirement'' is defined in 
Regulation 23.100 (17 CFR 23.100) and generally reflects the amount 
at risk if a counterparty defaults before the final settlement of a 
swap transaction's cash flows.
    \42\ The term ``uncleared swap margin'' is defined in Regulation 
23.100 (17 CFR 23.100) to generally mean the amount of initial 
margin that a nonbank SD would be required to collect from each 
counterparty for each outstanding swap position of the nonbank SD. A 
nonbank SD must include all swap positions in the calculation of the 
uncleared swap margin amount, including swaps that are exempt or 
excluded from the scope of the Commission's uncleared swap margin 
regulations. A nonbank SD must compute the uncleared swap margin 
amount in accordance with the Commission's margin rules for 
uncleared swaps. See 17 CFR 23.154.
    \43\ The National Futures Association (``NFA'') is currently the 
only entity that is a registered futures association. The Commission 
will refer to NFA in this document when referring to the 
requirements or obligations of a registered futures association.
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    The TNW approach requires a nonbank SD to compute its market risk 
exposure requirement and credit risk exposure requirement using 
standardized capital charges set forth in Securities and Exchange 
Commission (``SEC'') Rule 18a-1 \44\ that are applicable to entities 
registered with the SEC as security-based swap dealers (``SBSDs'') or 
standardized capital charges set forth in Regulation 1.17 applicable to 
entities registered as FCMs or entities dually-registered as an FCM and 
nonbank SD.\45\ 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.\46\
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    \44\ 17 CFR 240.18a-1.
    \45\ 17 CFR 23.101(a)(2)(ii)(A).
    \46\ Id.
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    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.\47\ The NLA 
Approach is intended to ensure the safety and soundness of a nonbank SD 
by requiring the firm to maintain at all times at least one dollar of 
highly liquid assets to cover each dollar of the nonbank SD's 
liabilities.
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    \47\ 17 CFR 23.101(a)(1)(ii)(A). ``Net capital'' consists of a 
nonbank SD's highly liquid assets (subject to haircuts) less all of 
the firm's liabilities, excluding certain qualified subordinated 
debt. See 17 CFR 240.18a-1 for the calculation of ``net capital.''
---------------------------------------------------------------------------

    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.\48\ 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 as modified by the Commission's rule.\49\
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    \48\ See 17 CFR 240.18a-1(c) and (d).
    \49\ See 17 CFR 23.101(a)(1)(ii).
---------------------------------------------------------------------------

    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.\50\ 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.'' \51\
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    \50\ See 17 CFR 23.102.
    \51\ 17 CFR 23.101(a)(1)(ii)(A)(1). The term ``tentative net 
capital'' is defined in Regulation 23.101(a)(1)(ii)(A)(1) by 
reference to SEC Rule 18a-1 and generally means a nonbank SD's net 
capital prior to deducting market risk and credit risk capital 
charges.
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    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.\52\ 
The Bank-Based Approach also is consistent with the Basel Committee on 
Banking Supervision's (``BCBS'') international framework for bank 
capital requirements.\53\ 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.\54\ 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.
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    \52\ See 17 CFR 23.101(a)(1)(i).
    \53\ The BCBS is the primary global standard-setter for the 
prudential regulation of banks and provides a forum for cooperation 
on banking supervisory matters. Institutions represented on the BCBS 
include the Federal Reserve Board, the European Central Bank, 
Deutsche Bundesbank, Bank of England, Bank of France, Bank of Japan, 
Banco de Mexico, and Bank of Canada.
    \54\ 17 CFR 23.101(a)(1)(i).
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    The terms used in the Commission's Bank-Based Approach are defined 
by reference to regulations of the Federal Reserve Board.\55\ 
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.\56\ 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.\57\ 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).\58\ 
Subordinated debt also must meet certain requirements to qualify as 
tier 2

[[Page 76379]]

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.\59\
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    \55\ Id. Regulation 23.101(a)(1)(i) references Federal Reserve 
Board Rule 217.20 (12 CFR 217.20) for purposes of defining the terms 
used in establishing the minimum capital requirements under the 
Bank-Based Approach.
    \56\ See 12 CFR 217.20(b).
    \57\ See 12 CFR 217.20(c).
    \58\ See 12 CFR 217.20(d).
    \59\ The subordinated debt must meet the requirements set forth 
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See 17 CFR 
23.101(a)(1)(i)(B).
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    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 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 contained in Subpart D of 17 CFR part 
217.\60\
---------------------------------------------------------------------------

    \60\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the 
term BHC risk-weighted assets in 17 CFR 23.100.
---------------------------------------------------------------------------

    Standardized market risk charges are computed under 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.\61\ 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.
---------------------------------------------------------------------------

    \61\ See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).
---------------------------------------------------------------------------

    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.\62\ 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 codified in Subpart E and F, respectively, of 17 
CFR part 217.\63\ 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.
---------------------------------------------------------------------------

    \62\ See 17 CFR 23.102.
    \63\ Nonbank SDs electing the Bank-Based Approach that have been 
approved to use internal credit risk models may also be required to 
include a calculation of operational risk in its risk-weighted 
assets calculation.
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B. General Overview of Mexican Capital Rules for Mexican Nonbank SDs

    The Mexican Capital Rules impose bank-like capital requirements on 
a Mexican nonbank SD that are consistent with the BCBS framework for 
international bank-based capital standards.\64\ The Mexican Capital 
Rules are intended to require each Mexican nonbank SD to hold a 
sufficient amount of qualifying equity and subordinated debt to absorb 
decreases in the value of firm assets, increases in the value of firm 
liabilities, and to cover losses from business activities, including 
possible counterparty defaults and margin collateral shortfalls 
associated with swap dealing activities, without the firm becoming 
insolvent.\65\
---------------------------------------------------------------------------

    \64\ See Mexico Application, p. 9.
    \65\ See Mexico Application, pp. 4-5.
---------------------------------------------------------------------------

    The Mexican Capital Rules require each Mexican nonbank SD to hold 
and maintain: (i) common equity tier 1 capital equal to at least 4.5 
percent of the Mexican nonbank SD's risk-weighted assets; (ii) total 
tier 1 capital (i.e., common equity tier 1 capital plus additional tier 
1 capital) equal to at least 6 percent of the Mexican nonbank SD's 
risk-weighted assets; (iii) total capital (i.e., an aggregate amount of 
common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital) equal to at least 8 percent of the Mexican nonbank SD's risk-
weighted assets; and (iv) a capital conservation buffer \66\ equal to 
2.5 percent of the Mexican nonbank SD's risk-weighted assets, which 
must be met with common equity tier 1 capital.\67\ Therefore, a Mexican 
nonbank SD is effectively required to maintain total qualifying 
regulatory capital equal to or greater than 10.5 percent of the firm's 
risk-weighted assets, with common equity tier 1 capital comprising a 
minimum of 7 percent of the 10.5 percent total.\68\ The Mexican Capital 
Rules also restrict the types of equity instruments that qualify as 
regulatory capital as follows: (i) common equity tier 1 capital may be 
comprised of retained earnings and common equity instruments; (ii) 
additional tier 1 capital may be comprised of other capital instruments 
and certain long-term convertible subordinated debt instruments; and 
(iii) tier 2 capital may include certain subordinated debt 
instruments.\69\
---------------------------------------------------------------------------

    \66\ See Mexico Application, p. 5.
    \67\ Articles 172 and 173 of the Law and Article 162 of the 
General Provisions. Notably, the Mexico Capital Rules employ 
different terminology to refer to the components of total capital 
than the CFTC Capital Rules and the BCBS bank capital framework. For 
example, the Mexican Capital Rules refer to total capital as ``net 
capital,'' common equity tier 1 capital as ``fundamental capital,'' 
and the 8 percent requirement is described as a ``capitalization 
index'' requirement. For ease of reference between the capital 
regimes, and to avoid confusion, this Capital Comparability 
Determination and the proposed Capital Comparability Determination 
Order use the same terminology that is used in the Commission's 
Bank-Based Approach and in the BCBS bank capital framework.
    \68\ As noted above, the total capital requirement is the sum of 
the capital requirement equal to 8 percent of the firm's risk-
weighted assets, plus the capital conservation buffer of 2.5 percent 
of the firm's risk-weighted assets.
    \69\ Article 162 Bis and 162 Bis 1 of the General Provisions.
---------------------------------------------------------------------------

    The amount of regulatory capital required to be held by a Mexican 
nonbank SD is determined by calculating and aggregating the firm's 
total risk exposures, including market risk, credit risk, and 
operational risk.\70\ The methods of calculating such exposures are 
based on the BCBS bank capital framework.\71\
---------------------------------------------------------------------------

    \70\ Mexican Application, p. 9.
    \71\ Id.
---------------------------------------------------------------------------

    Mexican nonbank SDs compute the capital charges for market risk 
exposure and credit risk exposure using

[[Page 76380]]

standardized approaches.\72\ In this regard, the Mexican Capital Rules 
do not permit Mexican nonbank SDs to use internal models to compute 
credit risk charges.\73\ Also, although the Mexican Capital Rules 
permit a Mexican nonbank SD to calculate market risk charges using 
internal models that comply with guidelines issued by the Mexican 
Commission, no Mexican nonbank SD is currently approved to use internal 
market risk models nor do any Mexican nonbank SDs have model 
applications pending with the Mexican Commission.\74\ Therefore, the 
Commission, in performing this Capital Comparability Determination and 
in proposing the Capital Comparability Determination Order, has not 
reviewed or evaluated the use of internal models to compute market risk 
or credit risk charges under the Mexican Capital Rules. Accordingly, 
any Mexican nonbank SD that subsequently obtains the approval of the 
Mexican Commission to use internal models to compute market risk or 
credit risk charges, and seeks to use such models in lieu of the 
standardized charges set forth in the Mexican Capital Rules in meeting 
the CFTC capital requirements, may do so only after the Commission has 
reviewed and evaluated whether the Mexican Capital Rules impose 
conditions and requirements on the use of models that are comparable in 
purpose and effect as the conditions and requirements imposed on the 
use of models under the CFTC Capital Rules, and whether the use of the 
models under the Mexican Capital Rules and the CFTC Capital Rules 
achieve comparable outcomes. The Commission is further proposing to 
condition the order to require a Mexican nonbank SD to notify the 
Commission and NFA at the time it initiates the process to request 
approval to use internal models for capital purposes. The request to 
use internal market or credit risk models in lieu of standardized 
capital charges may require the Commission to amend an existing Capital 
Comparability Determination Order.
---------------------------------------------------------------------------

    \72\ Article 150 Bis of the General Provisions.
    \73\ Mexican Application, p. 11.
    \74\ Id., p. 9 (footnote 23).
---------------------------------------------------------------------------

    Standardized market risk and credit risk charges are calculated 
under the Mexican Capital Rules using a methodology that is consistent 
with the BCBS bank capital framework for standardized market risk and 
credit risk charges. With respect to market risk, the Mexican Capital 
Rules require a Mexican nonbank SD to multiply the market value or 
carrying value of its on-balance sheet and off-balance sheet market 
exposures by standard percentages established by the Mexican Commission 
and set forth in the Mexican Capital Rules.\75\ With respect to credit 
risk, the Mexican Capital Rules require the assignment of a scheduled 
risk-weight \76\ to each counterparty based on external risk 
assessments. For derivatives positions, the Mexican Capital Rules 
provide for the exposures to be computed based on the instruments 
underlying the derivatives positions \77\ with strict limitations on 
the recognition of offsetting risks.\78\ The resulting market risk 
exposure amount and credit risk exposure amount are multiplied by a 
factor of 12.5 to cancel the effect of the 8 percent multiplication 
factor applied to all of the Mexican nonbank SD's risk-weighted assets, 
which effectively requires a Mexican nonbank SD to hold qualifying 
regulatory capital equal to or greater than 100 percent of the total 
amount of its market risk and credit risk exposures.\79\
---------------------------------------------------------------------------

    \75\ Articles 150 to 158 Bis of the General Provisions.
    \76\ Articles 159, 160 and 161 of the General Provisions.
    \77\ Article 151 of the General Provisions.
    \78\ Article 152 of the General Provisions.
    \79\ Articles 158 Bis and 161 of the General Provisions.
---------------------------------------------------------------------------

    A Mexican nonbank SD calculates its capital charges for operational 
risk exposure using the basic method set forth in the General 
Provisions.\80\ The basic method calculates operational risk exposure 
as an amount equal to 15 percent of Mexican nonbank SD's average annual 
net positive income for the last three years,\81\ taking into account 
insurance coverage for operational risk, subject to strict limitations 
and conditions.\82\ The amount of the operational risk exposure is also 
subject to a floor equal to 5 percent and a ceiling equal to 15 percent 
of the monthly average sum of market risk and credit risk exposure 
amounts, calculated over the prior 36 months, on a rolling basis.\83\ 
The resulting operational risk exposure amount is also multiplied by a 
factor of 12.5 to cancel the effect of the 8 percent multiplication 
factor applied to all of the Mexican nonbank SD's risk-weighted assets, 
which effectively requires a Mexican nonbank SD to hold qualifying 
regulatory capital equal to or greater than 100 percent of its total 
operational risk exposure amount.\84\
---------------------------------------------------------------------------

    \80\ Article 161 Bis of the General Provisions.
    \81\ Article 161 Bis 1 of the General Provisions.
    \82\ Article 161 Bis 2 of the General Provisions.
    \83\ Article 161 Bis 3 of the General Provisions.
    \84\ Article 161 Bis 5 of the General Provisions.
---------------------------------------------------------------------------

    The Mexican Capital Rules also impose liquidity requirements on 
Mexican nonbank SDs in addition to minimum capital requirements.\85\ 
The liquidity provisions require each Mexican nonbank SD to hold or 
invest at least 20 percent of its total capital in any of the 
following: (i) bank deposits; (ii) highly liquid debt securities 
registered in Mexico; (iii) shares of debt investment funds; (iv) 
reserve funds created to maintain funds available to cover 
contingencies, as set forth by the applicable regulation issued by 
self-regulatory organizations (organismos autorregulatorios), such as 
the securities central clearinghouse (Contraparte Central de Valores De 
Mexico, S.A. de C.V.) and the central derivatives clearinghouse 
(Asigna, Compensacion y Liquidacion F/30430),\86\ as well as the 
Mexican Association of Securities Intermediaries (Asociacion Mexicana 
de Intermediarios Bursatiles, A.C. or AMIB); \87\ and (v) high and 
medium marketability shares to which a market value discount of 20 
percent and 25 percent, respectively, is applied, provided that they 
are registered as ``trading'' or ``available for sale'' securities.\88\
---------------------------------------------------------------------------

    \85\ See Article 146 of the General Provisions.
    \86\ Article 228 of the Law recognizes the stock exchange and 
the securities central clearinghouse as self-regulatory 
organizations and indicates that other entities that comply with 
certain requirements (such as Asigna and the AMIB) may be recognized 
as self-regulatory organizations.
    \87\ Reserve funds represent funds deposited with a self-
regulatory organization to cover potential losses, and are not 
freely available to a Mexican nonbank SD.
    \88\ Article 146 of the General Provisions.
---------------------------------------------------------------------------

    A Mexican nonbank SD also must follow specified procedures in 
monitoring its liquidity to ensure that it has sufficient liquid assets 
to meet anticipated needs.\89\ When monitoring and managing liquidity 
risk, a Mexican nonbank SD must, among other things: (i) measure, 
assess and monitor risk caused by differences between forecast cash 
flows on various dates; (ii) consider the assets and liabilities of the 
firm in Mexican pesos and foreign currency; (iii) assess the 
diversification of sources of financing to which the firm has access; 
(iv) quantify the potential loss from early or obligatory sale of 
assets at an unusual discount in order to meet immediate obligations; 
and (v) estimate the potential loss if it is not possible to renew 
liabilities or contract others under normal conditions.\90\ The 
liquidity requirements supplement the minimum capital requirements by 
obligating a Mexican nonbank SD to maintain a defined amount of liquid

[[Page 76381]]

assets to cover current liabilities and other current obligations to 
counterparties, including margin obligations, and obligations to other 
third parties.
---------------------------------------------------------------------------

    \89\ See Article 137 of the General Provisions.
    \90\ Id.
---------------------------------------------------------------------------

III. Commission Analysis of the Comparability of the Mexican Capital 
Rules With CFTC Capital Rules, and Mexican Financial Reporting Rules 
With CFTC Financial Reporting Rules

    The following section provides a description and comparative 
analysis of the regulatory requirements of the Mexican Capital Rules 
and Mexican 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 Applicants, the Commission provides a description of Mexico's 
corresponding laws, regulations, or rules. The Commission then provides 
a comparative analysis of the Mexican Capital Rules or the Mexican 
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 Mexican Capital 
Rules for Mexican nonbank SDs, as set forth in the Mexico Application 
and in the English language translation of certain Mexican laws and 
regulations, with the Commission's Bank-Based Approach. For clarity, 
the Commission did not assess the comparability of the Mexican Capital 
Rules to the Commission's TNW Approach or NLA Approach as the 
Commission understands that the Applicants, as of the date of the 
Mexico Application, are subject to the current bank-based capital 
approach of the Mexican Capital Rules. Accordingly, when the Commission 
makes a preliminary determination herein about the comparability of the 
Mexican Capital Rules with the CFTC Capital Rules, the determination 
pertains to the comparability of the Mexican Capital Rules with the 
Bank-Based Approach under the CFTC Capital Rules.
    As described below, it is proposed that any material changes to the 
Mexican Capital Rules will require notification to the Commission. 
Therefore, if there are subsequent material changes to the Mexican 
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.\91\
---------------------------------------------------------------------------

    \91\ The Commission also may amend or supplement the Order to 
address any material changes to the CFTC Capital Rules and CFTC 
Financial Reporting Rules that are adopted after a final Order is 
issued.
---------------------------------------------------------------------------

    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 
capital 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 bank 
capital 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 CFTC Financial Reporting Rules into key categories 
that focus the analysis on whether the Mexican capital and financial 
reporting requirements are comparable to the Commission's SD 
requirements in purpose and effect, and not whether the Mexican 
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 Mexican 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 Mexican 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 Mexican 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 Mexican nonbank SD with the Mexican Capital Rules and 
Mexican Financial Reporting rules is monitored and enforced. The 
Commission invites public comment on all aspects of the Mexico 
Application and on the Commission's Capital Comparability Determination 
discussed below.

A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 
Reporting Rules and Mexican Capital Rules and Mexican Financial 
Reporting Rules

1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 
Reporting Rules
    The regulatory objectives of the CFTC Capital Rules and 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.\92\ A primary function of the nonbank SD's 
capital is to protect the solvency of the firm from decreases in the 
value of firm assets, increases in the value of firm liabilities, and 
from losses, including losses resulting from counterparty defaults and 
margin collateral failures, by requiring the firm to maintain an 
appropriate level of quality capital, including qualifying subordinated 
debt, to absorb such losses without becoming insolvent. With respect to 
swap positions, capital and margin perform complementary risk 
mitigation functions by protecting nonbank SDs, containing the amount 
of risk in the financial system as a whole, and reducing the potential 
for contagion arising from uncleared swaps.
---------------------------------------------------------------------------

    \92\ See 7 U.S.C. 6s(e)(3)(A).
---------------------------------------------------------------------------

    The objective of the CFTC Financial Reporting Rules is to provide 
the Commission with the means to monitor

[[Page 76382]]

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.\93\
---------------------------------------------------------------------------

    \93\ See 17 CFR 23.105.
---------------------------------------------------------------------------

2. Regulatory Objective of Mexican Capital Rules and Mexican Financial 
Reporting Rules
    The regulatory objective of the Mexican Capital Rules is to ensure 
the safety and soundness of Mexican financial firms, including Mexican 
nonbank SDs. The Mexican Capital Rules are designed to preserve the 
financial stability and solvency of a Mexican nonbank SD by requiring 
the firm to maintain a sufficient amount of quality equity and 
subordinated debt to absorb decreases in the value of firm assets, 
increases in the value of firm liabilities, and to cover losses from 
business activities, including counterparty defaults and margin 
collateral shortfalls associated with the firm's swap dealing 
activities.\94\ The Mexican Capital Rules also are designed to ensure 
that a Mexican nonbank SD can meet its financial obligations to 
counterparties and other creditors during stressed market conditions by 
requiring each firm to maintain a minimum of 20 percent of its total 
capital in specified liquid assets.\95\
---------------------------------------------------------------------------

    \94\ Article 146 of the General Provisions.
    \95\ Id.
---------------------------------------------------------------------------

    The objective of the Mexican Financial Reporting Rules is to enable 
the Mexican Commission and other relevant Mexican regulatory 
authorities to assess the financial condition and safety and soundness 
of Mexican nonbank SDs.\96\ The Mexican Financial Reporting Rules aim 
to achieve this objective by requiring each Mexican nonbank SD to 
provide financial reports and other financial position and capital 
information to the Mexican Commission and Mexican Central Bank on a 
regular basis.\97\ The financial reporting by a Mexican nonbank SD 
provides the Mexican Commission and Mexican Central Bank with 
information necessary to effectively monitor the Mexican nonbank SD's 
overall financial condition and its ability to meet its regulatory 
obligations as a Mexican licensed broker-dealer.
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    \96\ See Article 173 of the Law.
    \97\ See Articles 201, 202, and 203 of the General Provisions.
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3. Commission Analysis
    The Commission has reviewed the Mexico Application and the relevant 
Mexican laws and regulations, and has preliminarily determined that the 
overall objectives of the Mexican Capital Rules and CFTC Capital Rules 
are comparable in that both sets of rules are intended to ensure the 
safety and soundness of nonbank SDs by establishing a regulatory regime 
that requires nonbank SDs to maintain a sufficient amount of qualifying 
regulatory capital to absorb losses, including losses from swaps and 
other trading activities, and to absorb decreases in the value of firm 
assets and increases in the value of firm liabilities without the 
nonbank SDs becoming insolvent. The Mexican 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, 
decreases in the value of assets, and increases in the value of 
liabilities without the banks becoming insolvent.\98\
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    \98\ The BCBS's mandate is to strengthen the regulation, 
supervision and practices of banks with the purpose of enhancing 
financial stability. See Basel Committee Charter available on the 
Bank for International Settlement website: www.bis.org/bcbs/charter.htm.
---------------------------------------------------------------------------

    The Mexican 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 Mexican 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 non-model, standardized approaches that result in comparable risk 
exposure amounts. The Mexican Capital Rules' and CFTC Capital Rules' 
requirements for identifying and measuring on-balance sheet and off-
balance sheet exposures under standardized 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 Mexican Capital Rules and CFTC Capital Rules achieve comparable 
outcomes and are comparable in purpose and effect in that both limit 
the types of capital instruments that 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 Mexican Capital Rules and the CFTC Capital 
Rules define high quality capital by the degree to which the capital 
represents permanent capital that is contributed, or readily available 
to a nonbank SD, on an unrestricted basis to absorb unexpected losses, 
including losses from swaps trading and other activities, decreases in 
the value of firm assets, and increases in the value of firm 
liabilities without the nonbank SD becoming insolvent.
    The Mexican Financial Reporting Rules are also comparable in 
purpose and effect with the CFTC Financial Reporting Rules as both the 
Mexican Commission 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 Mexican Commission with information 
necessary to comprehensively assess the financial condition of a 
nonbank SD on an ongoing basis, the financial reports further provide 
the CFTC and Mexican Commission with information regarding potential 
changes in a nonbank SD's risk profile by disclosing changes in account 
balances reported over a period of time. 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 Mexican Commission in meeting their 
respective objectives of ensuring the safety and soundness of nonbank 
SDs. In this connection, the early identification of potential 
financial

[[Page 76383]]

issues provides the Commission and Mexican Commission with an 
opportunity to address such issues with the nonbank SD before they 
develop to a state where the financial condition of the firm is 
impaired such that it may no longer hold a sufficient amount of 
qualifying regulatory capital to absorb decreases in the value of firm 
assets or increases in the value of firm liabilities, or to cover 
losses from the firm's business activities, including the firm's swap 
dealing activities and obligations to swap counterparties.
    The Commission invites public comment on its analysis above, 
including comment on the Mexico Application and relevant Mexican laws 
and regulations.

B. Nonbank Swap Dealer Qualifying Capital

1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach
    The CFTC Capital Rules require a nonbank SD electing the Bank-Based 
Approach to maintain regulatory capital in the form of common equity 
tier 1 capital, additional tier 1 capital, and tier 2 capital in 
amounts that meet certain stated minimum requirements set forth in 
Regulation 23. 101.\99\ 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.\100\ 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 increases in the value of the firm's 
liabilities, and to cover losses resulting from the firm's swap dealing 
and other activities, including possible counterparty defaults and 
margin collateral shortfalls, without the firm becoming insolvent.
---------------------------------------------------------------------------

    \99\ See 17 CFR 23.101(a)(1)(i), which requires a nonbank SD 
electing the Bank-Based Approach to maintain regulatory capital 
equal to or in excess of each of the following: (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.
    \100\ The terms ``common equity tier 1 capital,'' ``additional 
tier 1 capital,'' and ``tier 2 capital'' are defined in the bank 
holding company regulations of the Federal Reserve Board. See 12 CFR 
217.20.
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    Common equity tier 1 capital is generally composed of an entity's 
common stock instruments and any related surpluses, retained earnings, 
and accumulated other comprehensive income, and is a more conservative 
or permanent form of capital than additional tier 1 and tier 2 
capital.\101\ 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.\102\ Total 
tier 1 capital is composed of common equity tier 1 capital and further 
includes additional tier 1 capital.\103\ Tier 2 capital includes 
certain types of instruments that include both debt and equity 
characteristics such as qualifying subordinated debt.\104\
---------------------------------------------------------------------------

    \101\ 12 CFR 217.20.
    \102\ Id.
    \103\ Id.
    \104\ Id.
---------------------------------------------------------------------------

    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.\105\
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    \105\ The subordinated debt must meet the requirements set forth 
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See Regulation 
23.101(a)(1)(i)(B); 17 CFR 23.101(a)(1)(i)(B).
---------------------------------------------------------------------------

    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 increases in the value of the firm's 
liabilities, and to cover losses from business activities, including 
swap dealing activities, without the firm becoming insolvent.
2. Mexican Capital Rules: Qualifying Capital
    The Mexican Capital Rules require each Mexican nonbank SD to 
maintain a level of regulatory capital that equals or exceeds 8 percent 
of the firm's risk-weighted assets, which is the sum of the Mexican 
nonbank SD's market risk, credit risk, and operational risk 
charges.\106\ The Mexican Capital Rules limit the composition of 
regulatory capital to common equity tier 1 capital, additional tier 1 
capital, and tier 2 capital in a manner consistent with the BCBS bank 
capital framework.\107\ In this regard, the Mexican Capital Rules 
provide that: (i) common equity tier 1 capital may generally be 
composed of retained earnings and common equity instruments; (ii) 
additional tier 1 capital may include other capital instruments and 
certain long-term convertible debt instruments; and (iii) tier 2 
capital may include certain qualifying subordinated debt 
instruments.\108\
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    \106\ Articles 172 and 173 of the Law and Article 162 of the 
General Provisions.
    \107\ See Article 162 of the General Provisions (setting forth 
components of regulatory capital (i.e., capital fundamental, capital 
basico no fundamental, and capital complementario) equivalent to 
common equity tier 1 capital, additional tier capital and tier 2 
capital).
    \108\ Articles 162 Bis and 162 Bis 1 of the General Provisions.
---------------------------------------------------------------------------

    Furthermore, with respect to tier 2 capital, qualifying 
subordinated debt may not be short-term debt and the Mexican nonbank SD 
must retain the right to cancel the payment of interest on the 
debt.\109\ Specifically, qualifying subordinated debt under the Mexican 
Capital Rules must have an initial minimum term of 10 years and the 
Mexican nonbank SD must have the right to cancel interest payments, 
subject to certain conditions, or to convert the debt to common equity 
of the firm.\110\ In addition, the proceeds received by the Mexican 
nonbank SD from the issuance of the subordinated debt must be 
immediately available to the firm for use as it deems appropriate, with 
no restrictions.\111\
---------------------------------------------------------------------------

    \109\ Articles 162 Bis and 163 of the General Provisions.
    \110\ Id.
    \111\ Article 163 of the General Provisions.
---------------------------------------------------------------------------

    A Mexican nonbank SD must also maintain a capital conservation 
buffer equal to 2.5 percent of the firm's risk-weighted assets in 
addition to the requirement to maintain qualifying regulatory capital 
in excess of 8 percent of its risk-weighted assets. The 2.5 percent 
capital conservation buffer must be met with common equity tier 1 
capital.\112\ Common equity tier 1 capital, as noted above, is limited 
to the Mexican nonbank SD's common equity and retained earnings, and 
represents a more conservative or permanent form of capital than equity 
instruments that qualify as additional tier 1 capital and tier 2 
capital.
---------------------------------------------------------------------------

    \112\ Article 162 of the General Provisions.

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[[Page 76384]]

    The Mexican Capital Rules also impose different ratios for the 
various components of regulatory capital that are consistent with the 
BCBS bank capital framework.\113\ In this regard, the Mexican Capital 
Rules provide that a Mexican nonbank SD's minimum regulatory capital 
must satisfy the following requirements: (i) common equity tier 1 
capital must equal or exceed 4.5 percent of the firm's risk-weighted 
assets; (ii) total tier 1 capital (i.e., common equity tier 1 capital 
plus additional tier 1 capital) must equal or exceed 6 percent of the 
firm's risk-weighted assets; and (iii) total capital (i.e., an 
aggregate amount of common equity tier 1 capital, additional tier 1 
capital, and tier 2 capital) must equal or exceed 8 percent of the 
firm's risk-weighted assets. A Mexican nonbank SD also must maintain a 
capital conservation buffer of 2.5 percent of its total risk-weighted 
assets that must be met with common equity tier 1 capital.\114\ With 
the addition of the capital conservation buffer, each Mexican nonbank 
SD is required to maintain minimum regulatory capital that equals or 
exceeds 10.5 percent of the firm's risk-weighted assets, with common 
equity tier 1 capital comprising at least 7 percent of the 10.5 percent 
minimum regulatory capital requirement.
---------------------------------------------------------------------------

    \113\ See Id.
    \114\ See supra note 66.
---------------------------------------------------------------------------

3. Commission Analysis
    The Commission has reviewed the Mexico Application and the relevant 
Mexican laws and regulations, and has preliminarily determined that the 
Mexican Capital Rules are comparable in purpose and effect to CFTC 
Capital Rules with regard to the types and characteristics of a nonbank 
SD's equity that qualifies as regulatory capital in meeting its minimum 
requirements. The Mexican Capital Rules and the CFTC Capital Rules for 
nonbank SDs both require a nonbank SD to maintain a quantity of high-
quality and permanent capital, all defined in a manner that is 
consistent with the BCBS international bank capital framework, that 
based on the firm's activities and on-balance sheet and off-balance 
sheet exposures, is sufficient to absorb losses and decreases in the 
value of the firm's assets and increases in the value of the firm's 
liabilities without resulting in the firm becoming insolvent. 
Specifically, equity instruments that qualify as common equity tier 1 
capital and additional tier 1 capital under the Mexican Capital Rules 
and the CFTC Capital Rules have similar characteristics (e.g., the 
equity must be in the form of high-quality, committed, and permanent 
capital) and the equity instruments generally have no priority to the 
distribution of firm assets or income with respect to other 
shareholders or creditors of the firm, which makes this equity 
available to a nonbank SD to absorb unexpected losses, including 
counterparty defaults.
    In addition, the Commission has preliminarily determined that the 
conditions imposed on subordinated debt instruments under the Mexican 
Capital Rules and the CFTC Capital Rules are comparable and are 
designed to ensure that the subordinated debt has qualities that 
support its recognition by a nonbank SD as equity for capital purposes. 
The conditions include, in the case of the CFTC Capital Rules, 
regulatory requirements that effectively subordinate the claims of debt 
holders to interest and repayment of the debt to the claims of other 
creditors of the nonbank SD, and, in the case of the Mexican Capital 
Rules, regulatory requirements that provide Mexican nonbank SDs with 
the right to cancel scheduled interest payments and to convert the debt 
to common equity of the firm.\115\
---------------------------------------------------------------------------

    \115\ See 17 CFR 240.18a-1d and Articles 162 and 162 Bis of the 
General Provisions.
---------------------------------------------------------------------------

    Having reviewed the Mexico Application and the relevant Mexican 
laws and regulations, the Commission has made a preliminary 
determination that the Mexican Capital Rules and CFTC Capital Rules 
impose comparable requirements on Mexican 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 Mexico 
Application and the relevant Mexican laws and regulations.

B. Nonbank Swap Dealer Minimum Capital Requirement

1. CFTC Capital Rules: Nonbank SD Minimum Capital Requirement
    The CFTC Capital Rules require a nonbank SD electing the Bank-Based 
Approach to maintain regulatory capital that satisfies each of the 
following criteria: (i) an amount of common equity tier 1 capital of at 
least $20 million; (ii) an aggregate 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.\116\
---------------------------------------------------------------------------

    \116\ 17 CFR 23.101(a)(1)(i). NFA has adopted the CFTC minimum 
capital requirements for nonbank SDs, but has not adopted additional 
capital requirements at this time.
---------------------------------------------------------------------------

    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.\117\ 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.\118\
---------------------------------------------------------------------------

    \117\ Nonbank SDs electing the NLA Approach are subject to a 
minimum capital requirement that includes a fixed minimum dollar 
amount of net capital of $20 million. See 17 CFR 
23.101(a)(1)(ii)(A)(1). Nonbank SDs electing the TNW Approach are 
required to maintain levels of tangible net worth that equals or 
exceeds $20 million plus the amount of the nonbank SDs' market risk 
and credit risk associated with the firms' dealing activities. See 
17 CFR 23.101(a)(2)(ii)(A).
    \118\ See, e.g., 85 FR 57492.
---------------------------------------------------------------------------

    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 
or greater than 8 percent of the firm's uncleared swap margin provides 
a capital floor based on a measure of the risk and volume of the swap 
positions, and the number of counterparties and the complexity of 
operations, of the nonbank SD. The intent of the minimum capital 
requirement based on a percentage of the nonbank SD's uncleared swap 
margin was to establish a minimum capital requirement that would help 
ensure that the nonbank SD meets all of its obligations as a SD to 
market participants, and to cover potential operational risk, legal 
risk and

[[Page 76385]]

liquidity risk in addition to the risks associated with its trading 
portfolio.\119\
---------------------------------------------------------------------------

    \119\ See 85 FR 57462.
---------------------------------------------------------------------------

    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 
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 increases in the value of the firm's liabilities, and to 
cover unexpected losses resulting from business activities, including 
uncollateralized defaults from swap counterparties, without the nonbank 
SD becoming insolvent.
    A nonbank SD must compute its risk-weighted assets using 
standardized market risk and credit risk charges, unless the nonbank SD 
has been approved by the Commission or NFA to use internal models.\120\ 
For standardized market risk charges, the Commission incorporates by 
reference the standardized market risk charges set forth in Regulation 
1.17 for FCMs and SEC Rule 18a-1 for nonbank SBSDs.\121\ 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.\122\ The resulting total market risk exposure amount is 
multiplied by a factor of 12.5 to cancel the effect of the 8 percent 
multiplication factor applied to all of the nonbank SD's risk-weighted 
assets, which effectively requires a nonbank SD to hold qualifying 
regulatory capital equal to or greater than 100 percent of the amount 
of its market risk exposure.\123\
---------------------------------------------------------------------------

    \120\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the 
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
    \121\ See paragraph (3) of the definition of the term BHC 
equivalent risk-weighted assets in 17 CFR 23.100.
    \122\ See 17 CFR 240.18a-1(c)(1).
    \123\ See 17 CFR 23.100 (Definition of BHC equivalent risk-
weighted assets). As noted, a nonbank SD is required to maintain 
qualifying capital (i.e., an aggregate of common equity tier 1 
capital, additional tier 1 capital, and tier 2 capital) in an amount 
that exceeds 8 percent of its market risk-weighted assets and 
credit-risk-weighted assets. The regulations, however, require the 
nonbank SD to effectively maintain qualifying capital in excess of 
100 percent of its market risk-weighted assets by requiring the 
nonbank SD to multiply its market-risk-weighted assets by 12.5.
---------------------------------------------------------------------------

    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.\124\ 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.\125\ 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.\126\
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    \124\ See 17 CFR 23.101(a)(1)(i)(B) and the paragraph (1) of the 
definition of the term BHC equivalent risk-weighted assets in 17 CFR 
23.100.
    \125\ See 17 CFR 217.32.
    \126\ See 17 CFR 217.33.
---------------------------------------------------------------------------

    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'').\127\ 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.\128\ 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 futures exposure of the contract multiplied by a factor of 
1.4.\129\
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    \127\ See 17 CFR 217.34. See also Regulation 23.100 (17 CFR 
23.100) defining the term BHC Risk Equivalent Amount, which provides 
that a nonbank SD that does not have model approval may use either 
CEM or SA-CCR to compute its exposures for over-the-counter 
derivatives contracts with regard to the status of its affiliate 
entities under the Federal Reserve Board's capital rules.
    \128\ See 12 CFR 217.34.
    \129\ See 12 CFR 217.132(c).
---------------------------------------------------------------------------

    A nonbank SD also may obtain the approval of the Commission or NFA 
to use internal models to compute market risk and/or credit risk 
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.\130\ 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.
---------------------------------------------------------------------------

    \130\ See 17 CFR 23.102(c).
---------------------------------------------------------------------------

    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'').\131\ 
Subpart F is based on models that are consistent with the BCBS Basel 
2.5 capital framework.\132\ The Commission's qualitative and 
quantitative requirements for internal capital models also are 
comparable to the SEC's existing internal capital model requirements 
for BDs and SBSDs,\133\ which are also broadly based on the BCBS Basel 
2.5 capital framework.
---------------------------------------------------------------------------

    \131\ See paragraph (4) of the definition of BHC equivalent 
risk-weighted assets in 17 CFR 23.100.
    \132\ Compare 17 CFR 23.100 (providing for a nonbank SD that is 
approved to use internal models to calculate credit and market risk 
to calculate its risk-weighted assets using Subparts E and F of 12 
CFR part 217), Subpart F of 12 CFR, 17 CFR 23.101(a)(1)(ii) 
(providing for an SD that elects the NLA Approach to calculate its 
net capital in accordance with SEC Rule 18a-1) and Appendix A to 
Subpart E of 17 CFR part 23, with Basel Committee on Banking 
Supervision, Revisions to the Basel II Market Risk Framework (2011), 
https://www.bis.org/publ/bcbs193.pdf (describing the revised 
internal model approach under Basel 2.5).
    \133\ The SEC internal model requirements for SBSDs are listed 
in 17 CFR 240.18a-1(d). See also SEC FOCUS Report Part II, 
Computation of Net Capital (Filer Authorized to Use Models) 
(providing for inclusion of a market risk exposure section for Basel 
2.5 firms).
---------------------------------------------------------------------------

    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

[[Page 76386]]

regulations.\134\ These internal credit risk modeling requirements are 
also based on the Basel 2.5 capital framework or the Basel 3 capital 
framework.
---------------------------------------------------------------------------

    \134\ 12 CFR 217 Subpart E. A nonbank SD is provided with 
alternative approaches to computing is capital under the Federal 
Reserve Board's rules. As noted when the Commission adopted the SD 
capital rules, the Commission understands that some alternatives may 
include charges or deductions for risks not otherwise part of market 
and credit risk models described or explicitly required under the 
Commission's rule (e.g., operational risk), however, the Commission 
was not prepared to accept partial application of alternative 
calculation methods or to compensate this inclusion by reducing 
other charges calculated per this rule outside of the market and 
credit risk models. Therefore, such chargers or deductions must be 
factored into the calculation of the nonbank SD's minimum capital 
requirements. See 85 FR 57462 at 57496.
---------------------------------------------------------------------------

    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.\135\ 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.\136\
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    \135\ See 17 CFR part 23, Appendix A to Subpart E of Part 23, 
paragraph (i)(2)(iii), and Basel Committee on Banking Supervision, 
Revisions to the Basel II Market Risk Framework (2011), paragraph 
718(Lxxvi)(e), available at: https://www.bis.org/publ/bcbs193.pdf.
    \136\ The Commission's requirement is set forth in paragraph 
(i)(2)(iv)(A) of Appendix A to Subpart E of 17 CFR part 23. See also 
Basel Committee on Banking Supervision, Revisions to the Basel II 
Market Risk Framework (2011), paragraph 718(Lxxvi)(h), available at: 
https://www.bis.org/publ/bcbs193.pdf.
---------------------------------------------------------------------------

    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).
2. Mexican Capital Rules: Mexican Nonbank Swap Dealer Minimum Capital 
Requirements
    The Mexican Capital Rules impose bank-like capital requirements on 
a Mexican nonbank SD that, consistent with the BCBS international bank 
capital framework, require the Mexican nonbank SD to hold a sufficient 
amount of qualifying equity capital and subordinated debt to absorb 
decreases in the value of firm assets and increases in the value of 
firm liabilities, 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. Specifically, the Mexican Capital Rules require each Mexican 
nonbank SD to maintain qualifying regulatory capital to satisfy the 
following capital ratios, expressed as a percentage of the firm's total 
risk-weighted assets: (i) common equity tier 1 capital equal to at 
least 4.5 percent of the firm's risk-weighted assets; (ii) total tier 1 
capital (i.e., common equity tier 1 capital plus additional tier 1 
capital) equal to at least 6 percent of the firm's risk-weighted 
assets; (iii) total capital (i.e., an aggregate amount of common equity 
tier 1 capital, additional tier 1 capital, and tier 2 capital) equal to 
at least 8 percent of the firm's risk-weighted assets; and (iv) an 
additional capital conservation buffer of 2.5 percent of the firm's 
risk-weighted asset that must be met with common equity tier 1 
capital.\137\ Thus, a Mexican nonbank SD is required to maintain 
regulatory capital equal to at least 10.5 percent of its total risk-
weighted assets, with common equity tier 1 capital comprising at least 
7 percent of the regulatory capital (4.5 percent of the core capital 
plus the 2.5 percent capital conservation buffer).
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    \137\ Articles 172 and 173 of the Law and Article 162 of the 
General Provisions.
---------------------------------------------------------------------------

    The Mexican nonbank SD's risk-weighted assets are calculated as the 
sum of the firm's market risk, credit risk, and operational risk 
charges. The risk charges are computed using standardized (i.e., non-
model) approaches that are based on the same principles and methodology 
as the BCBS bank capital framework. The Applicants also represent that 
a Mexican nonbank SD is required to compute its risk-weighted assets 
using standardized approaches in a manner similar to the standardized 
approaches adopted by the Federal Reserve Board for bank holding 
companies and set forth in 12 CFR part 217 of the Federal Reserve 
Board's rules.\138\
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    \138\ Mexican Application, p. 7.
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    A Mexican nonbank SD is required to take a deduction from capital 
for market risk based on standardized charges published by the Mexican 
Commission,\139\ which include market risk deductions for interest 
rate, foreign exchange, precious metals and equity price risks.\140\ 
The Mexican Capital Rules do not have market risk charges specific to 
commodity price risk as Mexican nonbank SDs are not permitted to engage 
in physical commodity transactions.\141\
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    \139\ Market risk models may be used if authorized by the 
Mexican Commission. The Mexican Commission, however, has not 
authorized the use of market risk models for any of the Mexican 
nonbank SDs, and no Mexican nonbank SD is currently seeking model 
authorization.
    \140\ Article 150 Bis of the General Provisions.
    \141\ See, Mexico Application, p. 10, footnote 26.
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    For derivatives positions, a Mexican nonbank SD is required to take 
standardized market risk charges based on the nature of the instrument 
underlying the derivatives position.\142\ The market risk charges are 
based on cumulative calculations for individual derivatives positions 
with limited recognition of offsets.\143\
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    \142\ Article 151 of the General Provisions.
    \143\ Article 152 of the General Provisions.
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    The resulting total market risk exposure amount, including market 
risk exposure for derivative positions, is multiplied by a factor of 
12.5 to adjust the 8 percent multiplication factor applied to all of 
the Mexican nonbank SD's risk-weighted assets, which effectively 
requires a Mexican nonbank SD to hold qualifying regulatory capital 
equal to or greater than 100 percent of the firm's market risk exposure 
amount.
    The Mexican Capital Rules also require a Mexican nonbank SD to 
calculate credit risk exposure under a standardized approach by taking 
the accounting value of each of its on-balance sheet and off-balance 
sheet positions and exposures, determining a conversion value to credit 
risk determined pursuant to Mexican regulation,\144\ and then applying 
a specific risk-weight based on the type of issuer or counterparty, as 
applicable,

[[Page 76387]]

and the assets' credit quality.\145\ The resulting credit risk exposure 
amount is also multiplied by a factor of 12.5 to adjust the 8 percent 
multiplication factor applied to all of the firm's risk-weighted 
assets, which effectively requires the Mexican nonbank SD to hold 
regulatory capital equal to or greater than 100 percent of the firm's 
total credit risk exposure.
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    \144\ Article 160 of the General Provisions.
    \145\ Articles 159, 160, and 161 of the General Provisions. 
Mexican nonbank SDs are required to use a standardized approach to 
computing all credit risk charges as the Mexican Capital Rules do 
not authorize the use of internal credit risk models. See, Mexico 
Application, p. 11.
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    The Mexican Capital rules further require a Mexican nonbank SD to 
retain qualifying regulatory capital to cover operational risk. 
Operational risk is computed using the basic method set forth in the 
Mexican Capital Rules.\146\ The basic method calculates operational 
risk exposure as an amount equal to 15 percent of Mexican nonbank SD's 
average annual net positive income for the last three years,\147\ 
taking into account insurance coverage for operational risk, subject to 
strict limitations and conditions.\148\ The amount of the operational 
risk exposure is subject to a floor equal to 5 percent and a ceiling 
equal to 15 percent of the monthly average sum of market and credit 
risk exposure amounts, calculated over the prior 36 months, on a 
rolling basis.\149\ The resulting operational risk exposure amount is 
multiplied by a factor of 12.5 to adjust the effect of the 8 percent 
multiplication factor applied to all of the Mexican nonbank SD's risk-
weighted assets, which effectively requires a Mexican nonbank SD to 
hold qualifying regulatory capital equal to or greater than 100 percent 
of the amount of its operational risk exposure.\150\
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    \146\ Article 161 Bis of the General Provisions.
    \147\ Article 161 Bis 1 of the General Provisions.
    \148\ Article 161 Bis 2 of the General Provisions.
    \149\ Article 161 Bis 3 of the General Provisions.
    \150\ Article 161 Bis 5 of the General Provisions.
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    The Mexican Capital Rules also require a Mexican nonbank SD to 
comply with minimum paid-in capital requirements depending on the 
services or activities to be performed by the firm.\151\ The minimum 
paid-in capital is a fixed value of capital that a Mexican nonbank SD 
is required to maintain. The minimum paid-in-capital requirement is 
indexed to Inflation Indexed Units (``UDIs''), so a different minimum 
capital is required each year depending on the UDI equivalence. In the 
context of the Mexican nonbank SDs, which perform the broadest array of 
activities, the requirement was 12,500,000 UDIs, which for 2022 equaled 
approximately MXN $90,000,000 (or USD $4,300,000).\152\
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    \151\ Article 10 of the General Provisions.
    \152\ Considering an exchange rate per USD of MXN $20.7882 as 
published by the Mexican Central Bank in the Federal Official 
Gazette (Diario Oficial de la Federacion) on July 12, 2022.
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    In addition to the minimum paid-in-capital requirement, the Mexican 
Central Bank also imposes limits on a Mexican nonbank SD's overall 
leverage.\153\ The leverage rules are based principally on volume and 
counterparties without regard to risk-weighting.\154\
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    \153\ Section C.B1 of Circular 115/2002, issued by the Mexican 
Central Bank on November 11, 2002, as amended.
    \154\ Id. Mexican nonbank SDs may not have positions in 
securities and debt instruments acquired with financing that exceed 
specified limits, including issuer limits and global capital 
thresholds.
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    The Mexican Commission may also require a Mexican nonbank SD to 
satisfy additional capital requirements, considering the composition of 
the firm's capital, the composition of the firm's assets, the 
efficiency of the firm's internal control systems, the firm's 
compliance with its remuneration system and, in general, the firm's 
exposure and risk management.\155\ The Mexican Commission also 
quarterly publishes on its website the classification of broker-
dealers, including Mexican nonbank SDs, according to categories based 
on their respective capital ratios as an additional measure to 
incentivize firms to maintain sufficient levels of capital.\156\
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    \155\ Article 169 of the General Provisions.
    \156\ Article 204 Bis 1, Article 204 Bis 2, and Article 204 Bis 
3 of the General Provisions. The Mexican Commission classifies each 
broker-dealer into categories based on the firm's common equity tier 
1 capital ratio, basic capital ratio (i.e., common equity tier 1 
capital plus additional tier 1 capital ratios), and total capital 
ratio as reported to the Mexican Commission. The categories range 
from 1 to 5, with 1 being the highest classification category and 5 
being the lowest classification category. The classification 
categories for common equity tier 1 capital ratios are: (i) less 
than 4.5%; (ii) equal to or greater than 4.5% and less than 7%; and 
(iii) equal to or greater than 7%. The classifications for the basic 
capital ratio are: (i) less than 6%; (ii) equal to or greater than 
6% and less than 8.5%; and (iii) equal to or greater than 8.%. The 
classifications for a firm's total capital ratio are: (i) less than 
4.5%; (ii) equal to or greater than 4.5% and less than 7%; (iii) 
equal to or greater than 7% and less than 8%; (iv) equal to or 
greater than 8% and less than 10.5%; and (v) equal to or greater 
than 10.5%. The Mexican Commission announces the classification 
categories for each broker-dealer, including the Mexican nonbank 
SDs, on a quarterly basis and makes the classifications publicly 
available on the Mexican Commission's website.
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    The Mexican Capital Rules also impose liquidity requirements on 
Mexican nonbank SDs \157\ The liquidity provisions require each Mexican 
nonbank SD to invest or hold at least 20 percent of its total capital 
in defined cash accounts, investments, reserve funds set forth by 
regulations of applicable self-regulatory organizations or clearing 
organizations.\158\
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    \157\ See Article 146 of the General Provisions.
    \158\ Article 228 of the Law recognizes the stock exchange and 
the securities central clearinghouse as self-regulatory 
organizations and indicates that other entities that comply with 
certain requirements may be recognized as self-regulatory 
organizations. See, also, Article 146 of the General Provisions.
---------------------------------------------------------------------------

    A Mexican nonbank SD also must follow specified procedures in 
monitoring its liquidity and to ensure that it has sufficient liquid 
assets to meet anticipated needs.\159\ When monitoring and managing 
liquidity risk, a Mexican nonbank SD must, among other things: (i) 
measure, assess and monitor risk caused by differences between forecast 
cash flows on various dates; (ii) consider the assets and liabilities 
of the firm in Mexican pesos and foreign currency; (iii) assess the 
diversification of sources of financing to which the firm has access; 
(iv) quantify the potential loss from early or obligatory sale of 
assets at an unusual discount in order to meet immediate obligations; 
and (v) estimate the potential loss if it is not possible to renew 
liabilities or contract others under normal conditions.\160\ The 
liquidity requirements supplement the minimum capital requirements by 
obligating a Mexican nonbank SD to maintain a defined amount of liquid 
assets to cover current liabilities and other current obligations to 
counterparties, including margin obligations, and obligations to other 
third parties.
---------------------------------------------------------------------------

    \159\ See Article 137 of the General Provisions.
    \160\ Id.
---------------------------------------------------------------------------

    Lastly, a Mexican nonbank SD is required to conduct annual stress 
tests to ensure that the firm retains sufficient capital.\161\ The 
stress test assessments are designed to determine whether a Mexican 
nonbank SD's capital would be sufficient to cover losses under the 
supervisory scenarios identified by the Mexican Commission, whether the 
Mexican nonbank SD would remain in its current capital category, and 
whether the Mexican nonbank SD would comply with the minimum capital 
requirements.\162\ To this end, a Mexican nonbank SD must submit 
annually to the Mexican Commission a report containing the results of 
its stress test assessments.\163\ A Mexican nonbank SD also must file a 
preventive action plan if the stress tests indicate that the firm's 
capital ratios are not sufficient.\164\
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    \161\ Article 214 of the General Provisions.
    \162\ See id.
    \163\ Article 216 of the General Provisions.
    \164\ Article 217 of the General Provisions.

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[[Page 76388]]

3. Commission Analysis
    The Commission has reviewed the Mexico Application and the relevant 
Mexican laws and regulations, and has preliminarily determined that the 
Mexican 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 Mexican Capital Rules and the CFTC Capital Rules, as 
discussed below, the Commission preliminary believes that the Mexican 
Capital Rules and the CFTC Capital rules are designed to ensure the 
safety and soundness of a nonbank SD, and subject to the proposed 
conditions discussed below, will achieve comparable outcomes by 
requiring the firm to maintain a minimum level of qualifying regulatory 
capital, including subordinated debt, to absorb losses from the firm's 
business activities, including its swap dealing activities, and 
decreases in the value of the firm's assets and increases in the value 
of the firm's liabilities, without the nonbank SD becoming insolvent.
    The 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.\165\
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    \165\ 17 CFR 23.101(a)(1)(i). NFA has not adopted additional 
capital requirements for nonbank SDs and, therefore, an analysis of 
the comparability of this element of the CFTC Capital Rules with the 
Mexican Capital Rules is not applicable.
---------------------------------------------------------------------------

    Prong (i) of the CFTC Capital Rules recited above requires each 
nonbank SD electing the Bank-Based Approach to maintain a minimum of 
$20 million of common equity tier 1 capital. The CFTC's $20 million 
fixed-dollar minimum capital requirement is intended to ensure that 
each nonbank SD maintains a level of regulatory capital, without regard 
to the level of the firm's dealing and other activities, sufficient to 
meet its obligations to swap market participants given the firm's 
status as a CFTC-registered nonbank SD and to help ensure the safety 
and soundness of the nonbank SD.\166\
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    \166\ 85 FR 57492.
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    The Mexican Capital Rules also contain a requirement that each 
Mexican nonbank SD maintain a fixed amount of minimum paid-in capital 
that is based on the services or activities performed by the firm.\167\ 
The minimum paid-in capital requirement is a fixed value of capital 
that is indexed annually to UDIs. Mexican nonbank SDs that performed 
the broadest array of activities as of the year ending December 31, 
2021 were subject to a minimum paid-in capital requirement that equaled 
approximately MXN $90,000,000 (or USD $4,300,000).\168\
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    \167\ Article 10 of the General Provisions.
    \168\ Considering an exchange rate per USD of MXN $20.7882 as 
published by the Mexican Central Bank in the Federal Official 
Gazette (Diario Oficial de la Federacion) on July 12, 2022.
---------------------------------------------------------------------------

    The Mexican Capital Rules and the CFTC Capital Rules both require 
nonbank SDs to hold a minimum amount of regulatory capital that is not 
based on the risk-weighted assets of the firms. The Commission, 
however, preliminarily believes that CFTC-registered nonbank SDs should 
maintain a minimum amount of $20 million of common equity tier 1 
capital irrespective of the volume of its dealing activities to help 
ensure that the firm satisfies its regulatory obligations to market 
participants, including meeting its financial commitments to swap 
counterparties and creditors, without the firm becoming insolvent. The 
Commission recognizes that the $20 million of common equity tier 1 
capital required under the CFTC Capital Rules is substantially higher 
than the estimated $4.3 million of minimum paid-in capital required 
under the Mexican Capital Rules and preliminarily believes that the $20 
million represents a more appropriate level of minimum capital to help 
ensure the safety and soundness of the nonbank SD that is engaging in 
uncleared swap transactions. Since the Commission preliminarily finds 
fundamental capital, as defined in Article 162 and Article 162 Bis of 
the General Provisions, to be comparable to common equity tier 1 
capital required under the CFTC Capital Rules, the Commission is 
proposing to condition the Capital Comparability Determination Order to 
require each Mexican nonbank SD to maintain, at all times, a minimum 
level of $20 million of fundamental capital.\169\ The proposed 
condition would require each Mexican nonbank SD to maintain an amount 
denominated in pesos that is equivalent to $20 million in U.S. dollars. 
The Commission is also proposing that a Mexican nonbank SD may convert 
the peso-denominated amount of this minimum capital requirement to the 
U.S. dollar equivalent based on a commercially reasonable and observed 
exchange rate.
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    \169\ Each of the three current Mexican nonbank SDs currently 
maintains fundamental capital in excess of $20 million based on 
financial filings made with the Commission. Therefore, the 
Commission does not anticipate that the proposed condition would 
have any material impact on the Mexican nonbank SDs currently 
registered with the Commission. Nonetheless, the Commission requests 
comment on the proposed condition.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Mexican Capital 
Rules and CFTC Capital Rules are also comparable in that both impose 
minimum capital requirements on nonbank SDs that are based on the BCBS 
bank capital framework, which requires a banking entity to hold 
qualifying capital, including subordinated debt, in an amount in excess 
of certain percentages of the banking entity's risk-weighted assets 
(i.e., its on-balance sheet and off-balance sheet exposures). In this 
regard, prong (iii) of the CFTC Capital Rules recited above requires 
each nonbank SD to maintain an aggregate of common equity tier 1 
capital, additional tier 1 capital, and tier 2 capital in an amount 
equal to or greater than 8 percent of the nonbank SD's total risk-
weighted assets, with common equity tier 1 capital comprising at least 
6.5 percent of the 8 percent.\170\ Risk-weighted assets are a nonbank 
SD's on-balance sheet and off-balance sheet market risk and credit risk 
exposures, including exposures associated with proprietary swap, 
security-based swap, equity, and futures positions, weighted according 
to risk. The requirements and capital ratios set forth in prong (iii) 
are based on the Federal Reserve Board's capital requirements for bank 
holding companies and are consistent with the BCBS international bank 
capital adequacy framework. The requirement for each nonbank SD to 
maintain regulatory capital in an amount that equals or exceeds 8 
percent of the firm's total risk-weighted assets is intended to help 
ensure that the nonbank SD's level of capital is sufficient to absorb 
decreases in the value of the firm's assets and increases in the value 
of the firm's liabilities, and to cover unexpected losses resulting 
from the firm's business activities, including losses resulting from 
uncollateralized defaults from swap counterparties, without the nonbank 
SD becoming insolvent.
---------------------------------------------------------------------------

    \170\ 17 CFR 23.101(a)(1)(B).
---------------------------------------------------------------------------

    The Mexican Capital Rules contain capital requirements for Mexican 
nonbank SDs that the Commission preliminarily believes are comparable 
to the requirements contained in prong

[[Page 76389]]

(iii) of the CFTC Capital Rules. Specifically, the Mexican Capital 
Rules require each Mexican nonbank SD to maintain: (i) common equity 
tier 1 capital equal to at least 4.5 percent of the Mexican nonbank 
SD's risk-weighted assets; (ii) total tier 1 capital (i.e., common 
equity tier 1 capital plus additional tier 1 capital) equal to at least 
6 percent of the Mexican nonbank SD's risk-weighted assets; and (iii) 
total capital (i.e., an aggregate amount of common equity tier 1 
capital, additional tier 1 capital, and tier 2 capital) equal to at 
least 8 percent of the Mexican nonbanks SD's risk-weighted assets.\171\ 
In addition, the Mexican Capital Rules further require each Mexican 
nonbank SD to maintain an additional capital conservation buffer \172\ 
equal to 2.5 percent of the Mexican nonbank SD's risk-weighted assets, 
which must be met with common equity tier 1 capital.\173\ Thus, a 
Mexican nonbank SD is effectively required to maintain total qualifying 
regulatory capital equal to or greater than 10.5 percent of the firm's 
risk-weighted assets, which is a higher percentage than the 8 percent 
required of nonbank SDs under prong (iii) of the CFTC Capital 
Rules.\174\
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    \171\ Articles 172 and 173 of the Law and Article 162 of the 
General Provisions.
    \172\ See Mexico Application, p. 5.
    \173\ Articles 172 and 173 of the Law and Article 162 of the 
General Provisions.
    \174\ As noted above, the total capital requirement is the sum 
of the capital requirement equal to 8 percent of the firm's risk-
weighted assets, plus the capital conservation buffer of 2.5 percent 
of the firm's risk-weighted assets. See Articles 162 and 162 Bis of 
the General Provisions.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the Mexican Capital 
Rules and CFTC Capital Rules are comparable with respect to the 
calculation of market risk and credit risk in determining a nonbank 
SD's risk-weighted assets. As noted above, Mexican nonbank SDs 
currently are not authorized by the Mexican Commission to use models to 
compute market risk or credit risk exposures and, therefore, must 
compute their risk-weighted assets using standardized market risk and 
credit risk charges set forth in the Mexican Capital Rules, which 
generally produce charges that are higher than model-based 
charges.\175\
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    \175\ For clarity, the Commission notes that it has not reviewed 
or evaluated the use of internal models to compute market or credit 
risk charges under the Mexican Capital Rules. Therefore, a Mexican 
nonbank SD that obtains the approval of the Mexican Commission to 
use models to compute market risk or credit risk charges and seeks 
to use such models in lieu of the standardized charges, may do so 
only after the Commission has reviewed and evaluated the use of the 
subject models for purpose of comparison to the corresponding CFTC 
requirements.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the approach to 
computing the standardized market risk and credit risk charges set 
forth in the Mexican Capital Rules is comparable to the standardized 
approach set forth in the CFTC Capital Rules, and is also consistent 
with the approach for calculating standardized market risk and credit 
risk charges under the BCBS bank capital framework. Specifically, the 
standardized approaches under the Mexican Capital Rules and CFTC 
Capital Rules for calculating market and credit risk follow the same 
structure that is now the common global standard: allocating assets to 
categories according to risk and assigning each category a risk-weight; 
allocating counterparties according to risk assessments and assigning 
each a risk factor; calculating gross exposures based on 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 
their corresponding risk factor.
    The Mexican Capital Rules, however, differ from the CFTC Capital 
Rules with respect to a nonbank SD's computation of its market risk 
exposures and credit risk exposures that are included in the firm's 
risk-weighted assets. As noted above, the CFTC Capital Rules and 
Mexican Capital Rules both require a nonbank SD to maintain regulatory 
capital equal to or greater than 100 percent of the firm's market risk 
exposure amount.\176\ The Mexican Capital Rules, however, also require 
a Mexican nonbank SD to maintain regulatory capital equal to or greater 
than 100 percent of its credit risk exposure amount.\177\ The CFTC 
Capital Rules only require a nonbank SD to maintain regulatory capital 
equal to or greater than 8 percent of the firm's total credit risk 
exposure amount. The difference in approaches to computing risk-
weighted assets would result in a nonbank SD having a larger amount of 
risk-weighted assets, and a higher minimum capital requirement based on 
risk-weighted assets, under the Mexican Capital Rules as compared to 
the CFTC Capital Rules.
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    \176\ The CFTC Capital Rules and the Mexican Capital Rules both 
require a nonbank SD to maintain regulatory capital equal to or in 
excess of 8 percent of the firm's total risk-weighted assets. Both 
sets of rules further require that the nonbank SD multiply its total 
market risk exposure amount by a factor of 12.5 and add the 
resultant amount to its total risk-weighted assets, which has the 
effect of requiring the nonbank SD to hold regulatory capital equal 
to or greater than 100 percent of its market risk exposure amount.
    \177\ The Mexican Capital Rules require a Mexican nonbank SD to 
multiply its total credit risk exposure amount by a factor of 12.5 
and to add the resultant amount to its total credit risk-weighted 
assets, which has the effect of requiring the Mexican nonbank SD to 
hold regulatory capital equal to or greater than 100 percent of its 
credit risk exposure amount. In contrast, the CFTC Capital Rules 
require a nonbank SD to maintain regulatory capital sufficient to 
cover 8 percent of its credit risk exposure amount.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the Mexican Capital 
Rules and CFTC Capital Rules are comparable in that nonbank SDs are 
required to account for operational risk, in addition to market risk 
and credit risk, in computing their minimum capital requirements. In 
this connection, the Mexican Capital Rules require a Mexican nonbank SD 
to calculate an operational risk exposure amount equal to 15 percent of 
a Mexican nonbank SD's average annual net positive income for the last 
three years, on a rolling basis.\178\ The Mexican nonbank SD is then 
required to multiply the operational risk exposure amount by a factor 
of 12.5 and add the resultant amount to the total operational risk-
weighted assets, which has the effect of requiring the Mexican nonbank 
SD to hold regulatory capital equal to or greater than 100 percent of 
its operational risk exposure amount.
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    \178\ The amount of the operational risk exposure is also 
subject to a floor equal to 5 percent and a ceiling equal to 15 
percent of the monthly average sum of market and credit risk 
exposure amounts, calculated over the prior 36 months, also on a 
rolling basis. See, Article 161 Bis 3 of the General Provisions.
---------------------------------------------------------------------------

    The CFTC Capital Rules address operational risk as a stand-alone, 
separate minimum capital requirement that a nonbank SD is required to 
meet under prong (ii) of the Bank-Based Approach recited above, and not 
as an additional risk exposure element in the calculation of the 
nonbank SD's total risk weighted assets.\179\ Specifically, the CFTC 
Capital Rules require a nonbank SD to maintain regulatory capital in an 
amount equal to or greater than 8 percent of the firm's total uncleared 
swaps margin amount associated with its uncleared swap transactions to 
address potential operational, legal, and liquidity risks.\180\ As 
noted above, the

[[Page 76390]]

Commission, in establishing the requirement that a nonbank SD must 
maintain a level of regulatory capital in excess of 8 percent of the 
uncleared swap margin amount associated with the firm's swap 
transactions, stated that the intent of the requirement was to 
establish a method of developing a minimum amount of required capital 
for a nonbank SD to meet its obligations as a SD to market 
participants, and to cover potential operational, legal, and liquidity 
risks.\181\
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    \179\ As noted in footnote 134 above, nonbank SDs may be 
required to include operational risk in computing its risk-weighted 
assets if they elect certain alternatives set forth in the rules of 
Federal Reserve Board.
    \180\ The term ``uncleared swap margin'' is defined by 
Regulation 23.100 (17 CFR 23.100) as the amount of initial margin, 
computed in accordance with the Commission's margin rules for 
uncleared swaps (17 CFR 23.154), that a nonbank SD would be required 
to collect from each counterparty for each outstanding swap position 
of the nonbank SD. A nonbank SD must include all swap positions in 
the calculation of the uncleared swap margin amount, including swaps 
that are exempt or excluded from the scope of the Commission's 
margin regulations for uncleared swaps pursuant to Regulation 23.150 
(17 CFR 23.150), exempt foreign exchange swaps or foreign exchange 
forwards, or netting set of swaps or foreign exchange swaps, for 
each counterparty, as if that counterparty was an unaffiliated swap 
dealer. Furthermore, in computing the uncleared swap margin amount, 
a nonbank SD may not exclude any de minis thresholds contained in 
Regulation 23.151 (17 CFR 23.151).
    \181\ See 85 FR 57462 at 57485.
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    CFTC rules also require a SD to maintain a risk management program 
to address certain risks associated with operating as SD, including 
operational, liquidity, legal, market, credit, foreign currency, 
settlement, and other applicable risks.\182\ Specifically, CFTC 
Regulation 23.600(b) requires each SD to establish, document, maintain, 
and enforce a system of risk management policies and procedures 
designed to monitor and manage the risks related to swaps, and any 
products used to hedge swaps, including futures, options, swaps, 
security-based swaps, debt or equity securities, foreign currency, 
physical commodities, and other derivatives.\183\ The elements of the 
SD's risk management program are required to include the identification 
of risks and risk tolerance limits with respect to applicable risks, 
including operational, liquidity, and legal risk, together with a 
description of the risk tolerance limits set by the SD and the 
underlying methodology in written policies and procedures.\184\ With 
respect to operational risk, the risk management program must take into 
account, among other operational risks: (i) secure and reliable 
operating and information systems with adequate, scalable capacity; 
(ii) safeguards to detect, identify, and promptly correct deficiencies 
in operating and information systems; and (iii) the reconciliation of 
all data and information in operating and information systems.\185\
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    \182\ 17 CFR 23.600.
    \183\ 17 CFR 23.600(b).
    \184\ 17 CFR 23.600(c)(1).
    \185\ 17 CFR 23.600(c)(4)(vi).
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    The Mexican Capital Rules and CFTC rules also impose liquidity 
requirements on Mexican nonbank SDs and nonbank SDs, respectively. The 
Mexican Capital Rules require Mexican nonbank SDs to meet quantitative 
liquidity requirements, which require a Mexican nonbank SD to hold or 
invest at least 20 percent of the firm's total capital in liquid assets 
comprised of: (i) bank deposits; (ii) highly liquid debt securities 
registered in Mexico; (iii) shares of debt investment funds; (iv) 
reserve funds created to maintain funds available to cover 
contingencies; and (v) high and low marketability shares subject to 
market value discounts of 20 and 25 percent, respectively.\186\
---------------------------------------------------------------------------

    \186\ Article 146 of the General Provisions.
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    The CFTC Capital Rules do not include a specific, quantifiable, 
liquidity component. The CFTC rules, however, address liquidity risks 
through the SD risk management program. Specifically, the SD's risk 
management program must take into account, among other things, the 
daily measurement of liquidity needs, the assessment of the procedures 
to liquidate all non-cash collateral in a timely manner without a 
significant effect on price, and the application of appropriate 
haircuts that accurately reflect market risk and credit risk of the 
noncash collateral.\187\
---------------------------------------------------------------------------

    \187\ 17 CFR 23.600(c)(4)(iii).
---------------------------------------------------------------------------

    The CFTC SD risk management requirements also address legal risk. 
Regulation 23.600(c)(4)(v) requires a SD to take into account, among 
other things, determinations that transactions and netting arrangements 
entered into have a sound legal basis, and the establishment of 
documentation tracking procedures designed to ensure the completeness 
of relevant documentation and procedures to resolve any documentation 
exceptions on a timely basis.\188\
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    \188\ 17 CFR 23.600(c)(4)(v).
---------------------------------------------------------------------------

    The Commission has reviewed the Mexico Application and the relevant 
Mexican laws and regulations, and has preliminarily determined that the 
Mexican 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 to meet that requirement. As previously 
noted, the Commission's approach for conducting a comparability 
determination is a principles-based, holistic approach that focuses on 
whether the applicable foreign jurisdiction's capital requirements for 
nonbank SDs achieve comparable outcomes to the corresponding CFTC 
requirements for nonbank SDs.\189\ 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.\190\ Although there are differences between the Mexican 
Capital Rules and the CFTC Capital Rules, as discussed above, the 
Commission preliminary believes that the differences do not preclude a 
finding that the Mexican Capital Rules and CFTC Capital Rules, taken as 
a whole, produce comparable regulatory outcomes. In this connection, 
the Commission preliminarily finds that, subject to the proposed 
condition of a $20 million capital requirement, as discussed above, the 
Mexican Capital Rules and CFTC Capital Rules are comparable in purpose 
and effect, and are designed to ensure that nonbank SDs maintain 
appropriate levels of regulatory capital in order to meet their 
obligations as swap market participants and to absorb losses, including 
unexpected losses, without the firms becoming insolvent.
---------------------------------------------------------------------------

    \189\ See 85 FR 57520 and 57521.
    \190\ Id.
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    The Commission invites comment on the Mexico Application, Mexican 
laws and regulations, and the Commission's analysis above regarding its 
preliminary determination that, subject to the $20 million minimum 
capital requirement, the Mexican 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 Mexican Capital Rules for a Mexican 
nonbank SD to hold qualifying capital in an amount equal to 15 percent 
of its average annual net positive income from the last three years, 
taking into account insurance coverage for operational risk, and 
subject to a floor equal to 5 percent and a ceiling of 15 percent of 
the monthly average sum of market risk and credit risk exposures 
amounts, calculated over the prior 36 months, on a rolling basis, is 
sufficiently comparable in purpose and effect to the CFTC's requirement 
for a nonbank SD to hold qualifying capital in amount equal

[[Page 76391]]

to at least 8 percent of the nonbank SD's uncleared swap margin amount.

D. Nonbank Swap Dealer Financial Reporting Requirements

1. CFTC Financial Recordkeeping and Reporting Rules for Nonbank Swap 
Dealers
    The CFTC Financial Reporting Rules imposes financial recordkeeping 
and reporting requirements on nonbank SDs. 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.\191\ 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.\192\
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    \191\ 17 CFR 23.105(b).
    \192\ Id.
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    The CFTC Financial Reporting Rules also require each nonbank SD to 
prepare and file with the Commission and with NFA periodic unaudited 
and annual audited financial statements.\193\ A nonbank SD that elects 
the TNW Approach is required to file unaudited financial statements 
within 17 business day of the close of each quarter, and its annual 
audited financial statements within 90 days of the end of its fiscal 
year-end.\194\ A nonbank SD that elects 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 to file its 
annual audited financial statements within 60 days of the end of its 
fiscal year.\195\
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    \193\ 17 CFR 23.105(d) and (e).
    \194\ 17 CFR 23.105(d)(1) and (e)(1).
    \195\ Id.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules 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 requirement; and (vi) such further material information 
necessary to make the required statements not misleading.\196\ 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 compliance with and calculation 
of the applicable regulatory requirement; (vii) appropriate footnote 
disclosures; and (viii) a reconciliation of any material differences 
from the unaudited financial report prepared as of the nonbank SD's 
year-end date.\197\
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    \196\ 17 CFR 23.105(d)(2).
    \197\ 17 CFR 23.105(e)(4).
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    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.\198\ 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.\199\ 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 geographical distribution of derivatives exposures for 
the 10 largest countries.\200\
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    \198\ 17 CFR 23.105 (k) and (l) and Appendix B to Subpart E of 
Part 23.
    \199\ 17 CFR 23.105(l) and Appendix B to Subpart E of Part 23.
    \200\ 17 CFR 23.105(l) in Schedules 2, 3, and 4, respectively.
---------------------------------------------------------------------------

    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.\201\ 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.\202\
---------------------------------------------------------------------------

    \201\ 17 CFR 23.105(f).
    \202\ Id.
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    The CFTC Financial Reporting Rules further require each nonbank SD 
to make certain financial information publicly available by posting the 
information on its public website.\203\ 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.\204\ 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.\205\ A 
nonbank SD also must obtain written approval from NFA to change the 
date of its fiscal year-end for financial reporting.\206\
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    \203\ 17 CFR 23.105(i).
    \204\ Id.
    \205\ Id.
    \206\ 17 CFR 23.105(g).
---------------------------------------------------------------------------

    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'').\207\ The Margin Report contains: (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.\208\ 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

[[Page 76392]]

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.
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    \207\ 17 CFR 23.105(m).
    \208\ Id.
---------------------------------------------------------------------------

2. Mexican Nonbank Swap Dealer Financial Reporting Requirements
    The Mexican Financial Reporting Rules impose financial 
recordkeeping and reporting requirements on Mexican nonbank SDs that 
enable the Mexican Commission to assess the financial condition and 
safety and soundness of the Mexican nonbank SDs. Consistent with that 
purpose, a Mexican nonbank SD must periodically report its financial 
position and capital levels to the Mexican Commission and other Mexican 
regulatory authorities. The reporting of financial position and capital 
level information, along with other reporting requirements, provide the 
Mexican Commission with a comprehensive view of the activities and 
financial condition of each Mexican nonbank SD.
    Specifically, the Mexican Financial Reporting Rules require a 
Mexican nonbank SD to submit to the Mexican Commission quarterly 
consolidated financial reports and an annual consolidated financial 
report.\209\ The quarterly consolidated financial reports must be for 
the quarters ending March, June, and September of each year, and must 
be filed with the Mexican Commission within the month following the 
last day of each quarter.\210\ The annual consolidated financial report 
must be filed within 90 calendar days of the Mexican nonbank SD's 
fiscal year end, and must contain an audit report issued by an 
independent external auditor.\211\ The quarterly and annual financial 
reports are required to be denominated in millions of Mexican pesos and 
prepared in accordance with the Accounting Criteria for Broker-
Dealers.\212\
---------------------------------------------------------------------------

    \209\ Article 203 of the General Provisions.
    \210\ Id.
    \211\ Id.
    \212\ See Article 176 and Exhibit 5 of the General Provisions.
---------------------------------------------------------------------------

    The Mexican nonbank SD's quarterly consolidated financial reports 
and annual audited consolidated financial report must contain a balance 
sheet, a statement of income/loss, a statement of changes in equity, a 
statement of cash flows, and a statement showing the firm's compliance 
with minimum capital requirements.\213\ The annual audited consolidated 
report also must contain appropriate footnote disclosures relating to, 
among other topics, nominal amounts of derivatives contracts by type of 
instrument and by underlying valuation results, as well as the results 
obtained in the assessment of the adequacy of the firm's regulatory 
capital in relation to credit, market and operational risk 
requirements.\214\ Each quarterly and annual consolidated financial 
report also must be approved by the Mexican nonbank SD's board of 
directors and internal audit committee, and signed by at least the 
chief executive officer, the chief accountant, and the internal 
auditor, or their equivalent.\215\
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    \213\ Article 180 of the General Provisions.
    \214\ Id.
    \215\ Articles 175, 176, and 179 of the General Provisions.
---------------------------------------------------------------------------

    In addition to the above consolidated financial reports, each 
Mexican nonbank SD must provide the Mexican Commission, on a monthly 
basis, with a balance sheet and income statement, along with additional 
financial information.\216\ Such reports are due within 20 days 
following the end of the respective month.\217\ On a quarterly basis, 
each Mexican nonbank SD also must provide the Mexican Commission 
additional financial information regarding deferred income taxes, 
consolidation with respect to balance sheet and income statements, 
stockholders equity statements, and cash flow statements.\218\
---------------------------------------------------------------------------

    \216\ Article 202 of the General Provisions.
    \217\ Id.
    \218\ Article 202 and Exhibit 9 of the General Provisions.
---------------------------------------------------------------------------

    A Mexican nonbank SD licensed to enter into derivatives 
transactions for its own account is also required to file with the 
Mexican Central Bank, during May of each year, a written communication 
issued by the Mexican nonbank SD's internal audit committee evidencing 
compliance in the performance of its derivatives transactions with each 
and all applicable legal provisions and, when required by the Mexican 
Central Bank, a Mexican nonbank SD also must provide the Mexican 
Central Bank with all the information related to the derivatives 
transactions performed by the firm.\219\ Furthermore, a Mexican nonbank 
SD licensed to perform derivatives transactions is required to file a 
report with the Mexican Central Bank on a daily basis containing all 
the derivatives transactions performed by the Mexican nonbank SD.\220\
---------------------------------------------------------------------------

    \219\ Provision 3.1.3 of the Rule 4/2012 issued by the Mexican 
Central Bank.
    \220\ Mexico Application, p. 19.
---------------------------------------------------------------------------

    A Mexican nonbank SD is also required to make certain financial 
condition information publicly available by posting the information on 
a publicly accessible website. Specifically, a Mexican nonbank SD is 
required to provide its quarterly financial statements to the general 
public along with information related to the firm's regulatory capital 
structure, including the main components of the firm's regulatory 
capital structure, the capital adequacy level, and the amount of the 
assets subject to risk.\221\ A Mexican nonbank SD must also disclose 
its risk level,\222\ according to the credit rating issued by two 
credit rating agencies authorized by the Mexican Commission, including 
for such purposes both ratings, in their notes to their financial 
statements.\223\
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    \221\ Article 180 of the General Provisions.
    \222\ Pursuant to Article 144 of the General Provisions, broker-
dealers shall make available to investors, through notes in their 
annual financial statements and on their websites, the information 
related to the policies, methodologies, levels of risk assumed and 
other relevant measures adopted for the management of each type of 
risk, including qualitative and quantitative information in 
connection with such risks.
    \223\ Article 169 Bis of the General Provisions.
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3. Commission Analysis
    The Commission has reviewed the Mexico Application and the relevant 
Mexican laws and regulations, and has preliminarily determined that the 
financial reporting requirements of the Mexican Financial Reporting 
Rules, subject to the conditions specified below, are comparable to the 
CFTC Financial Reporting Rules in purpose and effect as they are 
intended to provide the Mexican Commission and Mexican Central Bank, as 
applicable, and the 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 increases in the value of firm liabilities, and to cover 
losses from business activities, including swap dealing activities, 
without the firm becoming insolvent.
    The Mexican Financial Reporting Rules require each Mexican nonbank 
SD to prepare and submit to the Mexican Commission on a quarterly basis 
an unaudited financial report, and on an annual basis an audited 
financial report, that includes: (i) a statement of financial 
condition; (ii) a statement of profit and loss; (iii) a statement of 
changes in equity; (iv) a statement of cash flows; and (v) a statement 
showing the firm's compliance with minimum capital requirements. In 
addition, a Mexican nonbank SD is required to file a

[[Page 76393]]

statement of financial condition and a statement of profit/loss as of 
the end of each month with the Mexican Commission. The Commission 
preliminarily finds that these financial reporting requirements are 
comparable with respect to overall form and content to the CFTC 
Financial Reporting Rules, which require each nonbank SD to file 
monthly unaudited financial reports with the Commission and NFA that 
contain: (i) a statement of financial condition; (ii) statement of 
profit/loss; (iii) a statement of changes in liabilities subordinated 
to the claims of general creditors; (iv) a statement of changes in 
ownership equity; and (v) a statement demonstrating compliance with the 
capital requirements. Accordingly, the Commission has preliminarily 
determined that a Mexican nonbank SD may comply with the financial 
reporting requirements contained in Regulations 23.105 by complying 
with the corresponding Mexican Financial Reporting Rules, subject to 
the conditions set forth below.\224\
---------------------------------------------------------------------------

    \224\ A Mexican nonbank SD that qualifies and elects to seek 
substituted compliance with Mexican Capital Rules must also seek 
substituted compliance with the Mexican Financial Reporting Rules.
---------------------------------------------------------------------------

    The Commission is proposing to condition the Capital Comparability 
Determination Order on a Mexican nonbank SD providing the Commission 
and NFA with copies of the monthly financial information, including a 
copy of its balance sheet and income statement, that is filed with the 
Mexican Commission pursuant to Article 202 and Exhibit 9 of the General 
Provisions. It is further proposed that a Mexican nonbank SD must 
provide the Commission and NFA with copies of its quarterly 
consolidated financial reports and annual audited financial reports 
that are filed with the Mexican Commission pursuant to Article 203 of 
the General Provisions. In addition, the Commission is proposing that 
the Mexican nonbank SD also provide as part of its monthly filing a 
statement of regulatory capital. The Commission is also proposing to 
condition the Capital Comparability Determination Order on the Mexican 
nonbank SD translating the annual audited and unaudited monthly and 
quarterly financial reports into the English language with balances 
contained in the unaudited financial reports converted to U.S. dollars. 
The annual audited financial report may be presented in U.S. dollars or 
Mexican pesos. The monthly financial information and the unaudited and 
audited financial reports must be filed with the Commission and NFA 
within 15 business days of the earlier of the date the respective 
reports are filed with the Mexican Commission or the date that the 
respective reports are required to be filed with the Mexican 
Commission.
    The Commission is proposing to impose these conditions as financial 
reporting is a critical and central component of the Commission's 
ongoing obligation to monitor and assess the safety and soundness of 
nonbank SDs as required under Section 4s(e) of the CEA. For nonbank SDs 
registered with the Commission, it is necessary for the Commission to 
effectively monitor the ongoing financial condition of all nonbank SDs, 
including Mexican nonbank SDs, to help ensure their safety and 
soundness and their ability to meet their financial obligations to 
customers, counterparties, and creditors.
    The Commission preliminarily believes that its approach of 
requiring Mexican nonbank SDs to provide the Commission and NFA with 
copies of the monthly financial information, and the quarterly and 
annual financial reports, that the firms currently file with the 
Mexican Commission strikes an appropriate balance of ensuring that the 
Commission receives the financial reporting necessary for the effective 
monitoring of the financial condition of the nonbank SDs, while also 
recognizing the existing regulatory structure of the Mexican Commission 
including its financial reporting requirements. Under the proposed 
conditions, the Mexican nonbank SD would not be required to prepare 
separate financial statements or reports for filing with the 
Commission, but would be required to translate its current financial 
statements and reports into the English language with balances 
converted to U.S. dollars so that Commission staff may properly 
understand and efficiently analyze the financial information. The 
proposed conditions also provide the Mexican nonbank SDs with 15 days 
from the date the reports are provided to the Mexican Commission to 
translate the documents into English and to convert balances to U.S. 
dollars.
    The Commission is also proposing to condition the Capital 
Comparability Determination Order on a Mexican nonbank SD filing with 
the Commission and NFA, on a monthly basis, the aggregate securities, 
commodities, and swap positions information set forth in Schedule 1 of 
Appendix B to Subpart E of Part 23.\225\ The Commission is proposing to 
require that Schedule 1 be filed with the Commission and NFA as part of 
the Mexican nonbank SD's monthly financial information that it prepares 
pursuant to Article 202 and Exhibit 9 of the General Provisions. 
Schedule 1 provides the Commission and NFA with detailed information 
regarding the financial positions that a nonbank SD holds as of the end 
of the month, which will allow for closer supervision and monitoring of 
the types of investment and other activities that the firm engages in, 
which will enhance the Commission's and NFA's ability to monitor the 
safety and soundness of the firm.
---------------------------------------------------------------------------

    \225\ Schedule 1 of Appendix B to Subpart E of Part 23 includes 
a nonbank SD's holding of U.S. Treasury securities, U.S. government 
agency debt securities, foreign debt and equity securities, money 
market instruments, corporate obligations, spot commodities, cleared 
and uncleared swaps, cleared and non-cleared security-based swaps, 
and cleared and uncleared mixed swaps in addition to other position 
information.
---------------------------------------------------------------------------

    The Commission is further proposing to condition the Capital 
Comparability Determination Order on a Mexican nonbank SD submitting 
with each monthly and quarterly financial report and each annual 
audited financial report, as well as the applicable Schedule 1, a 
statement by an authorized representative or representatives of the 
Mexican nonbank SD that to the best knowledge and belief of the 
representative or representatives the information contained in the 
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 Mexican nonbank SD would be in lieu of the 
oath or affirmation required of nonbank SDs under Regulation 
23.105(f),\226\ 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.
---------------------------------------------------------------------------

    \226\ 17 CFR 23.105(f).
---------------------------------------------------------------------------

    The Commission is further proposing to condition the Capital 
Comparability Determination Order on a Mexican nonbank SD filing the 
Margin Report specified in Regulation 23.105(m) with the Commission and 
NFA. The Margin Report is required to contain: (i) the name and address 
of each custodian holding initial margin or variation margin on behalf 
of the nonbank SD or its swap counterparties; (ii) the amount of 
initial and variation margin held by each custodian on behalf of the 
nonbank SD and on behalf its swap counterparties; and (iii) the 
aggregate

[[Page 76394]]

amount of initial margin that the nonbank SD is required to collect 
from, or post with, swap counterparties for uncleared swap 
transactions.\227\
---------------------------------------------------------------------------

    \227\ 17 CFR 23.105(m).
---------------------------------------------------------------------------

    The Commission preliminarily believes that receiving this margin 
information from Mexican nonbank SDs will assist in the Commission's 
assessment of the safety and soundness of the Mexican nonbank SDs. 
Specifically, the Margin Report would provide the Commission with 
information regarding a Mexican 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, is expected to assist the Commission 
in assessing and monitoring potential financial impacts to the nonbank 
SD resulting from defaults on its swap transactions. The Commission is 
proposing to require that the Margin Report be filed with the 
Commission as part of the Mexican nonbank SD's monthly financial 
information that it prepares pursuant to Article 202 and Exhibit 9 of 
the General Provisions. Therefore, it is being proposed that each 
Mexican nonbank SD must file a monthly Margin Report within 15 business 
days of the earlier of the date the monthly financial reports are filed 
with the Mexican Commission or the date that the respective reports are 
required to be filed with the Mexican Commission. The Commission is 
also proposing that the Margin Report must be prepared in the English 
language with balances reported in U.S. dollars.
    The Commission is not proposing to require a Mexican nonbank SD to 
file the monthly model metric information contained in Regulation 
23.105(k) with the Commission or NFA.\228\ 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. This information is 
not applicable as the Mexican Commission, as previously noted, has not 
approved the Mexican nonbank SDs to use internal models to compute 
market risk or credit risk.
---------------------------------------------------------------------------

    \228\ 17 CFR 23.105(k).
---------------------------------------------------------------------------

    The Commission is also not proposing to require a Mexican 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 Mexican Commission is best 
positioned to monitor a Mexican nonbank SD's credit exposures, which 
may be comprised of credit exposures to primarily other Mexican 
counterparties, as part of the Mexican Commission's overall monitoring 
of the financial condition of the firm.
    Furthermore, the Commission, in making the preliminary 
determination to not require a Mexican nonbank SD to file the 
counterparty exposures required by Regulation 23.105(l), recognizes 
that NFA's current risk monitoring program requires each bank SD and 
each nonbank SD, including each Mexican nonbank SD, to file risk 
metrics addressing market risk and credit risk with NFA on a monthly 
basis. NFA's risk metric information includes a list of the 15 largest 
swaps counterparty exposures providing for each counterparty: (i) 
current exposure by counterparty before collateral; and (ii) current 
exposure by counterparty net of collateral. The NFA risk metric 
information also includes a SD's total current exposure before 
collateral for the firm across all counterparties, as well as, total 
current exposure net of collateral.\229\ Although there are differences 
in the information required under Regulation 23.105(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 to such firms. The Commission 
preliminarily believes that the proposed financial statement reporting 
set forth in the proposed Capital Comparability Determination Order, 
and the risk metric and counterparty exposure information currently 
reported by bank SDs and nonbank SDs (including Mexican nonbank SDs) 
under NFA rules, provide the appropriate balance of recognizing the 
comparability of the Mexican 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 Mexican SDs.
---------------------------------------------------------------------------

    \229\ See NFA Financial Requirements, Section 17--Swap Dealer 
and Major Swap Participant Reporting Requirements, and Notice to 
Members--Monthly Risk Data Reporting for Swap Dealers (May 30, 
2017).
---------------------------------------------------------------------------

    The Commission notes that the proposed financial reporting 
conditions in the Mexican Capital Comparability Determination Order are 
consistent with the proposed conditions set forth in the Commission's 
proposed Japan Capital Comparability Determination Order,\230\ and 
reflects the Commission's approach in that proposal of permitting non-
U.S. nonbank SDs to meet their financial statement reporting 
obligations to the Commission by filing copies of existing financial 
reports currently prepared for home country regulators provided such 
reports are translated into English and, in certain circumstances, 
balances expressed in U.S. dollars. The Commission's proposed 
conditions also include certain financial information and notices that 
the Commission believes are necessary for effective monitoring of 
Mexican nonbank SDs that are not currently part of the Mexican 
Commission's supervision regime.
---------------------------------------------------------------------------

    \230\ See Notice of Proposed Order and Request for Comment on an 
Application for a Capital Comparability Determination from the 
Financial Services Agency of Japan, 87 FR 48092 (Aug. 8, 2022).
---------------------------------------------------------------------------

    The Commission invites public comment on its analysis above, 
including comment on the Mexico Application and relevant Mexican 
Financial Reporting Rules. The Commission also invites comment on the 
proposed conditions listed above and on the Commission's proposal not 
to require Mexican nonbank SDs to submit to the Commission and NFA the 
information set forth in Regulation 23.105(l) outlined above. Are there 
specific elements of the data required under Regulations 23.105(l) that 
the Commission should require of Mexican nonbank SDs for purposes of 
monitoring the financial condition of the firm?
    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 Mexican 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 requests specific comment regarding the setting 
of compliance dates for the reporting conditions that the proposed 
Capital

[[Page 76395]]

Comparability Determination Order would impose on Mexican nonbank SDs. 
In this connection, if the Commission were to require Mexican nonbank 
SDs to file the Margin Report discussed above and included in the 
proposed Order below, how much time would Mexican nonbank SDs need to 
develop new systems or processes to capture information that is 
required? Would Mexican 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 Mexican nonbank SD to develop 
and implement such systems or processes?

E. Notice Requirements

1. CFTC Nonbank SD Notice Reporting Requirements
    The CFTC Financial Reporting Rules require nonbank SDs to provide 
the Commission and NFA with written notice of certain defined 
events.\231\ 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, allow 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.
---------------------------------------------------------------------------

    \231\ 17 CFR 23.105(c).
---------------------------------------------------------------------------

    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.\232\ 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.\233\ 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.\234\
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    \232\ 17 CFR 23.105(c)(1), (2), and (3).
    \233\ 17 CFR 23.105(c)(4).
    \234\ 17 CFR 23.105(c)(7).
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    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.\235\ 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).\236\ SEC Rule 18a-8 requires SBSDs and MSBSPs to 
provide written notice to the SEC for comparable reporting events as 
the CFTC Capital Rule in Regulation 23.105(c), including if a SBSD or 
MSBSP is undercapitalized or fails to maintain current books and 
records.
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    \235\ 17 CFR 23.105(c)(5).
    \236\ 17 CFR 23.105(c)(6).
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2. Mexican Nonbank Swap Dealer Notices
    The Mexican Financial Reporting Rules do not include explicit 
notice provisions that require a Mexican nonbank SD to report certain 
predefined events to the relevant Mexican regulatory authorities. 
Specifically, the Mexican Capital Rules do not include provisions 
requiring a Mexican nonbank SD to notify the Mexican Commission or 
other relevant regulatory authority if the firm fails to maintain 
current books and records, fails to meet minimum capital requirements, 
or experiences a decrease in excess capital from a previous amount 
reported by the Mexican nonbank SD.
3. Commission Analysis
    The Commission has reviewed the Mexico Application and Mexican laws 
and regulations, and has preliminarily determined that the Mexican 
Financial Reporting Rules related to notice provisions are not 
comparable to the notice requirements set forth in in Regulation 
23.105(c) of the CFTC Financial Reporting Rules. Therefore, the 
Commission is proposing to condition the Capital Comparability 
Determination Order to require Mexican nonbank SDs to file certain 
notices contained in Regulation 23.105(c) with the Commission as 
discussed below.
    The notice provisions contained in Regulation 23.105(c) are 
intended to provide the Commission and NFA with information in a prompt 
manner regarding actual or potential financial or operational issues 
that may adversely impact the safety and soundness of a nonbank SD by 
impairing the nonbank SD's ability to meet its obligations to 
counterparties, other creditors, and the general swaps market. Upon the 
receipt of a notice from a nonbank SD under Regulation 23.105(c), the 
Commission and NFA will initiate reviews of the facts and circumstances 
that caused the notice to be filed including, as appropriate, engaging 
in conversations with personnel of the nonbank SD. The review of the 
facts and the interaction with the nonbank SD provide the Commission 
and NFA with information to initiate an assessment of whether it is 
necessary for the nonbank SD to take remedial action to address 
potential financial or operational issues, and whether the remedial 
actions instituted by the nonbank SD properly address the issues that 
are the root cause of the operational or financial issues. Such actions 
may include the infusion of additional capital into the firm and the 
development and implementation of additional internal controls to 
address operational issues. The notice filings further allow the 
Commission and NFA to monitor the firm's performance after the 
implementation of remedial actions to assess the effectiveness of such 
actions.
    As noted above, the Mexican Financial Reporting Rules do not 
include explicit, predefined notice provisions that require a Mexican 
nonbank SD to file prompt notice with the Mexican Commission or other 
relevant Mexican regulatory authority in a manner that is comparable to 
the notice provisions set forth in Regulation 23.105(c). Therefore, the 
Commission is proposing to condition the Capital Comparability 
Determination Order to require Mexican nonbank SDs to file certain 
defined notices with the Commission and NFA. Specifically, pursuant to 
the proposed conditions, a Mexican nonbank SD would be required to file 
a notice with the Commission and NFA, within the timeframe set forth in 
the proposed conditions, if the firm: (i) failed to keep current books 
and records; (ii) maintained regulatory capital at a level that is 
below the minimum capital requirement set by the

[[Page 76396]]

Mexican Capital Rules; (iii) maintained regulatory capital at a level 
that is below 120 percent of the minimum capital requirement set by the 
Mexican Capital Rules; (iv) experienced a 30 percent or more reduction 
in the firm's excess regulatory capital from the amount previously 
reported in its financial forms filed with the Mexican Commission 
pursuant to Article 202 and Exhibit 9 of the General Provisions; and 
(v) failed to exchange initial margin or variation margin required 
under Mexican law and/or regulations or CFTC margin rules to be 
exchanged for uncleared swaps and non-cleared security-based swaps in 
amounts that exceed defined thresholds.\237\
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    \237\ The Commission understands that the Mexican Commission 
intends to issue final rules addressing the margin requirements for 
uncleared swaps by September 2022. The Mexican nonbank SDs, however, 
are currently subject to the CFTC margin requirements for uncleared 
swap transactions as set forth in Regulation 23.160 for cross-border 
transactions.
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    The Commission is proposing these conditions so that it will be 
alerted to the occurrence of any of the defined events in a prompt 
manner, which will allow the Commission to communicate with the 
impacted Mexican nonbank SD and NFA to assess the seriousness of the 
matter and the effectiveness of any actions that the Mexican nonbank SD 
may have taken to remediate the matter. As noted above, the notices are 
intended to provide the Commission with ``early warning'' of potential 
adverse financial and operational issues at a nonbank SD. The receipt 
of ``early warning'' notices are an important component of the 
Commission's and NFA's programs for effectively overseeing the safety 
and soundness of nonbank SDs.
    The Commission invites public comment on its analysis above, 
including comment on the Mexico Application and the relevant Mexican 
Financial Reporting Rules. The Commission also invites comment on the 
proposed conditions to the Capital Comparability Determination Order 
that are listed above and set forth in the proposed Order below.
    The Commission requests comment on the timeframes set forth in the 
proposed conditions for Mexican nonbank SDs to file notices with the 
Commission and NFA. In this regard, the proposed conditions would 
require Mexican 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 Mexican Commission. 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 Mexican nonbank SDs may face meeting the filing requirements 
given translation and other issues.
    The Commission requests specific comment regarding the setting of 
compliance dates for the notice reporting conditions that the proposed 
Capital Comparability Determination Order would impose on Mexican 
nonbank SDs.

F. Supervision and Enforcement

1. Commission and NFA Supervision and Enforcement of 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 on-site examinations of nonbank SDs' books, records, and 
operations to ensure compliance with CFTC and NFA requirements.\238\
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    \238\ Section 17(p)(2) of the CEA (7 U.S.C. 21(p)(2)) requires 
NFA as a registered futures association to establish minimum capital 
and financial requirements for non-bank SDs and to implement a 
program to audit and enforce compliance with such requirements. 
Section 17(p)(2) further provides that NFA's capital and financial 
requirements may not be less stringent than the capital and 
financial requirements imposed by the Commission.
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    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, and creditors. 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.\239\ 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.\240\
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    \239\ See 17 CFR 23.105(c).
    \240\ See 17 CFR 23.105(h).
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    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 \241\ provides the Commission 
with exclusive authority to enforce the capital requirements imposed on 
nonbank SDs adopted under Section 4s(e) of the CEA.\242\
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    \241\ 7 U.S.C. 6b-1(a).
    \242\ 7 U.S.C. 6s(e).
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2. Mexican Commission's Supervision and Enforcement of Mexican Nonbank 
SDs
    The Mexican Commission has supervisory, inspection, and 
surveillance powers,\243\ which include the authority to require a 
Mexican nonbank SD to provide the Mexican Commission with all necessary 
information and documentation to verify the Mexican nonbank SD's 
compliance with Mexican Law and General Provisions. The Mexican 
Commission also has the authority to require a Mexican nonbank SD to 
adopt any necessary measures to correct irregular activities, and the 
Mexican Commission has the authority to conduct all necessary on-site 
inspections of a Mexican nonbank SD.\244\
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    \243\ Article 350 of the Law, Articles 5 and 19 of the Mexican 
Commission Law and the Supervision Regulations of the Mexican 
Commission.
    \244\ Pursuant to Article 358 of the Law, the Mexican Commission 
is entitled to provide foreign financial authorities with all kinds 
of information that it deems appropriate within the scope of its 
competence, such as documents, records, declarations and other 
evidence that the Mexican Commission has in its possession by virtue 
of having obtained the information it in the exercise of its powers 
and duties; provided that the Mexican Commission must have executed 
an agreement with the relevant foreign financial authorities for the 
exchange of information, in consideration of the principle of 
reciprocity.
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    As noted in section D.2 above, Mexican broker-dealers, including 
Mexican nonbank SDs, are required to submit financial reports to the 
Mexican Commission detailing their financial condition and operations. 
Specifically, Mexican nonbank SDs are required to submit to the Mexican 
Commission monthly balance sheet and income statements,\245\ as well as 
quarterly and annual financial reports.\246\ In addition, Mexican 
nonbank SDs must conduct

[[Page 76397]]

annual stress tests and provide the Mexican Commission with a report 
containing the results of the stress test assessments.\247\ The stress 
test assessments are designed to determine, among other things, whether 
a Mexican nonbank SD's capital would be sufficient to cover losses 
under the supervisory scenarios identified by the Mexican Commission 
and whether the firm would comply with the minimum capital 
requirements.\248\ The financial reports and stress test filed by each 
Mexican nonbank SD provides the Mexican Commission with information 
necessary to monitor the firm's compliance with the Mexican Capital 
Rules and to assess the firm's overall safety and soundness and its 
ability to meet financial obligations to customers, counterparties, and 
creditors.
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    \245\ Article 202 and Exhibit 9 of the General Provisions.
    \246\ Article 203 of the General Provisions.
    \247\ Article 214 of the General Provisions.
    \248\ See id. A Mexican nonbank SD also must file a preventive 
action plan if the stress tests indicate that the firm's capital 
ratios are not sufficient. See, Article 217 of the General 
Provisions.
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    The Mexican Commission also uses financial reporting from Mexican 
nonbank SDs as a component of its risk-bases methodology in setting the 
frequency and scope of its examinations of Mexican nonbank SDs. The 
Mexican Commission generally engages in examinations of broker-dealers, 
including Mexican nonbank SDs, as part of its general supervision and 
oversight program to assess firms' compliance with relevant laws and 
regulations.\249\ The Mexican Commission uses defined risk metrics in 
its risk-based methodology to assist with the selection of firms to be 
examined each year. The Mexican Commission generally conducts an 
examination, including on-site visits, of each firm at least once every 
two years. The Mexican Commission will also conduct an examination of a 
firm, including an on-site visit, to the extent that its daily, routine 
surveillance indicates a need for an immediate review. The Mexican 
Commission also uses information obtained from the Mexican Central Bank 
regarding broker-dealers, including Mexican nonbank SDs, in its 
supervision process.
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    \249\ Staff of the Mexican Commission provided an overview of 
its broker-dealer surveillance program to Commission staff on August 
10, 2022.
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    The Mexican Commission also may impose fines against Mexican 
nonbank SDs for failing to comply with relevant Mexican laws and 
regulations. Fines may range from approximately $130,000 to $432,000 
for failing to maintain sufficient regulatory capital in relation to 
the risks in the Mexican nonbank SD's operations.\250\ The Mexican 
Commission may also impose fines ranging from approximately $43,000 to 
$432,000 if a Mexican nonbank SD fails to comply with applicable 
information or documentation requirements made by the Mexican 
Commission, or if the Mexican nonbank SD fails to provide the Mexican 
Commission with required periodic informational filings.\251\
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    \250\ Article 392 paragraph III, subparagraph (v) of the Law.
    \251\ Article 392 paragraph I, subparagraph (a) of the Law.
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    In addition to imposing fines, the Mexican Commission also may 
order a Mexican nonbank SD that fails to comply with the applicable 
regulatory capital ratios, including the 2.5 percent common equity tier 
1 capital buffer, to take corrective measures including the following: 
\252\ (i) a prohibition on entering into transactions whose execution 
would cause a total capital ratio to be less than 8 percent of the 
risk-weighted assets; (ii) a requirement that the Mexican nonbank SD 
submit for the approval of the Mexican Commission a recovery capital 
plan, previously approved by the board of directors, which must contain 
at least: the sources of the resources to increase the capital and/or 
reduce the assets subject to risk, the period in which the Mexican 
nonbank SD will reach the level of the regulatory capital required, a 
calendar with the objectives that would be achieved in each period, and 
a detailed list of the information that the Mexican nonbank SD must 
provide periodically to the Mexican Commission to enable the Mexican 
Commission to monitor compliance of the Mexican nonbank SD's plan; 
(iii) a suspension of the payment of dividends, as well as any 
mechanism or acts involving a transfer of patrimonial benefits; (iv) a 
suspension of the programs of acquisition of shares of the capital 
stock of the Mexican nonbank SD; (v) a suspension of payments of 
compensation, extraordinary bonuses, or other remuneration in addition 
to the salary of the chief executive officer (``CEO'') and officials of 
the two hierarchical levels below the CEO, as well as a requirement to 
refrain from granting new compensation in the future for the CEO and 
officials; (vi) an engagement with external auditors or other 
specialized third parties to carry out special audits on specific 
issues; and (vii) a limitation on the execution of new transactions 
that may cause an increase in risk-weighted assets and/or cause greater 
impairment in the Mexican nonbank SD's regulatory capital ratios. 
Finally, the Mexican Commission may revoke a Mexican nonbank SD's 
license to operate as a broker-dealer if the firm fails to comply with 
the above corrective measures or if the firm reports losses that reduce 
its capital to a level below the minimum required.\253\
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    \252\ Articles 204 Bis 7 to 204 Bis 21 of the General 
Provisions.
    \253\ Article 153 of the Law.
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3. Commission Analysis
    Based on the above, the Commission preliminarily finds that the 
Mexican Commission has the necessary powers to supervise, investigate, 
and discipline entities for compliance with its capital, financial and 
reporting requirements, and to detect and deter violations of, and 
ensure compliance with, the applicable capital and financial reporting 
requirements in Mexico.\254\
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    \254\ Both the Commission and the Mexican Commission are 
signatories to the IOSCO Multilateral Memorandum of Understanding 
Concerning Consultation and Cooperation and the Exchange of 
Information (revised May 2012), which covers primarily information 
sharing in the context of enforcement matters.
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    The Commission also has a history of regulatory cooperation with 
the Mexican Commission and would expect to communicate and consult with 
the Mexican Commission regarding the supervision of the financial and 
operational condition of the Mexican nonbank SDs. An appropriate MOU or 
similar arrangement with the Mexican Commission would facilitate 
cooperation and information sharing in the context of supervising the 
Mexican nonbank SDs.\255\ Such an arrangement would enhance 
communication with respect to entities within the arrangement's scope 
(``Covered Firms''), as appropriate, regarding: (i) general supervisory 
issues, including regulatory, oversight, or other related developments; 
(ii) issues relevant to the operations, activities, and regulation of 
Covered Firms; and (iii) any other areas of mutual supervisory 
interest, and would anticipate periodic meetings to discuss relevant 
functions and regulatory oversight programs. The arrangement also would 
provide for the Commission and Mexican Commission to inform each other 
of certain events, including any material events that could adversely 
impact the financial or operational stability of a Covered Firm,

[[Page 76398]]

and would provide a procedure for any on-site examinations of Covered 
Firms.
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    \255\ The Commission entered into a Memorandum of Understanding 
Concerning Cooperation and the Exchange of Information Related to 
the Supervision of Cross-Border Central Counterparties and Trade 
Repositories (Aug. 31, 2016) with the Mexican Commission and the 
Banco de M[eacute]xico, which does not include entities such as SDs 
within its scope. See the Commission's website at https://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.
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    The Commission invites comment on the Mexico Application, Mexican 
laws and regulations, and the Commission's analysis above regarding its 
preliminary determination that Mexican Commission and CFTC have 
supervision programs and enforcement authority that are comparable in 
that the purpose of the relevant programs and authority is to ensure 
that nonbank SDs maintain compliance with applicable capital and 
financial reporting requirements.

IV. Proposed Capital Comparability Determination Order

A. Commission's Proposed Comparability Determination

    The Commission's preliminary view, based on the Mexico Application 
and the Commission's review of applicable Mexican laws and regulations, 
is that the Mexican Capital Rules and the Mexican 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 Mexican Capital Rules and CFTC Capital Rules 
and certain differences between the Mexican 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 Mexican 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 Mexican Capital Rules to the Bank-
Based Approach under the CFTC Capital Rules. As noted previously, the 
Applicants have not requested, and the Commission has not performed, a 
comparison of the Mexican Capital Rules to the Commission's NLA 
Approach or TNW Approach.

B. Proposed Capital Comparability Determination Order

    The Commission invites comments on all aspects of the Mexico 
Application, relevant Mexican laws and regulations, the Commission's 
preliminary views expressed above, the question of whether requirements 
under the Mexican 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.

C. Proposed Order Providing Conditional Capital Comparability 
Determination for Mexican Nonbank Swap Dealers

    It is hereby determined and ordered, pursuant to Commodity Futures 
Trading Commission (``CFTC'' or ``Commission'') Regulation 23.106 (17 
CFR 23.106) under the Commodity Exchange Act (``CEA'') (7 U.S.C. 1 et 
seq.) that a swap dealer (``SD'') organized and domiciled in Mexico and 
subject to the Commission's capital and financial reporting 
requirements under Sections 4s(e) and (f) of the CEA (7 U.S.C. 6s(e) 
and (f)) may satisfy the capital requirements under Section 4s(e) of 
the CEA and Commission Regulation 23.101(a)(1)(i) (17 CFR 
23.101(a)(1)(i)) (``CFTC Capital Rules''), and the financial reporting 
rules under Section 4s(f) of the CEA and Commission Regulation 23.105 
(17 CFR 23.105) (``CFTC Financial Reporting Rules''), by complying with 
certain specified Mexican laws and regulations cited below and 
otherwise complying with the following conditions, as amended or 
superseded from time to time:
    (1) The SD is not subject to regulation by a prudential regulator 
defined in Section 1a(39) of the CEA (7 U.S.C. 1a(39));
    (2) The SD is organized under the laws of Mexico and is domiciled 
in Mexico (a ``Mexican nonbank SD'');
    (3) The Mexican nonbank SD is a licensed casa de bolsa (broker-
dealer) with the Mexican Comision Nacional Bancaria y de Valores 
(Mexican Banking and Securities Commission) (the ``Mexican 
Commission'');
    (4) The Mexican nonbank SD is subject to and complies with: 
Articles 2, 113, 153, 172, 173, 228, 350, 358, and 392 of the Ley del 
Mercado de Valores (Securities Market Law) (referred to as ``the 
Law''); Articles 5 and 19 of the Mexican Commission Law, the 
Supervision Regulations of the Mexican Commission; Articles 10, 137, 
144, 146, 150 through 158 Bis, 159, 160, 161, 161 Bis through 161 Bis 
5, 162, 162 Bis, 162 Bis 1, 163, 163 Bis, 169, 169 Bis, 175, 176, 179, 
180, 201, 202, 203, 204 Bis 1, 204 Bis 2, 204 Bis 3, 204 Bis 7 through 
Bis 21, 214, 216, 217, Exhibits 5 and 9 of the Disposiciones de 
Caracter General Aplicables a las Casa De Bolsa (``General Provisions 
Applicable to Broker-Dealers''); Section C.B1 of Circular 115/2002, 
issued by the Mexican Central Bank; and Provision 3.1.3 of Rule 4/2012, 
issued by the Mexican Central Bank (collectively, the ``Mexican Capital 
Rules'' and ``Mexican Financial Reporting Rules,'' as applicable);
    (5) The Mexican nonbank SD maintains at all times fundamental 
capital, as defined in Article 162 and Article 162 Bis of the General 
Provisions Applicable to Broker-Dealers, equal to or in excess of the 
equivalent of $20 million in United States dollars (``U.S. dollars''). 
The Mexican nonbank SD shall use a commercially reasonable and observed 
peso/U.S. dollar exchange rate to convert the value of the peso-
denominated common equity tier 1 capital to U.S. dollars;
    (6) The Mexican nonbank SD has filed with the Commission a notice 
stating its intention to comply with the applicable Mexican Capital 
Rules and Mexican Financial Reporting Rules in lieu of the CFTC Capital 
Rules and CFTC Financial Reporting Rules. The notice of intent must 
include the Mexican nonbank SD's representations that the firm is 
organized and domiciled in Mexico; is a licensed casa de bolsa with the 
Mexican Commission; and is subject to, and complies with, the Mexican 
Capital Rules and Mexican Financial Reporting Rules. The Mexican 
nonbank SD may not rely on this Capital Comparability Determination 
Order until it receives confirmation from Commission staff that it may 
comply with the applicable Mexican Capital Rules and Mexican Financial 
Reporting Rules in lieu of the CFTC Capital Rules and CFTC Financial 
Reporting Rules. Each notice filed pursuant to this condition must be 
prepared in the English language and submitted to the Commission via 
email to the following address: [email protected];
    (7) The Mexican nonbank SD shall provide notice to the Commission 
and National Futures Association (``NFA'') if at any time it initiates 
the process of seeking the approval of the Mexican Commission to use 
internal models to compute market risk and/or credit risk. The Mexican 
nonbank SD shall not use internal models to compute its

[[Page 76399]]

regulatory capital under the terms of this Capital Comparability 
Determination Order without the authorization of the Commission or NFA;
    (8) The Mexican nonbank SD prepares and keeps current ledgers and 
other similar records in accordance with accounting principles required 
by the Mexican Commission;
    (9) The Mexican nonbank SD files with the Commission and with NFA a 
copy of its quarterly financial report filed with the Mexican 
Commission pursuant to Article 203 of the General Provisions Applicable 
to Broker-Dealers and a copy of the monthly financial information, 
including the monthly balance sheet and income statement, filed with 
the Mexican Commission pursuant to Article 202 and Exhibit 9 of the 
General Provisions Applicable to Broker-Dealers. The Mexican nonbank SD 
must also include with the monthly information provided to the 
Commission and NFA a statement of regulatory capital as of each month 
end. The quarterly financial report and monthly financial information 
must be translated into the English language and balances must be 
converted to U.S. dollars. The quarterly financial report and monthly 
financial information must be filed with the Commission and NFA within 
15 business days of the earlier of the date the quarterly financial 
report and monthly financial information are filed with the Mexican 
Commission or the date that the financial reports and financial 
information are required to be filed with the Mexican Commission;
    (10) The Mexican nonbank SD files with the Commission and with NFA 
a copy of its audited annual financial report that is required to be 
filed with the Mexican Commission in accordance with Article 203 of the 
General Provisions Applicable to Broker-Dealers. The audited annual 
report must be translated into the English language. The audited annual 
report must be filed with the Commission and NFA within 15 business 
days of the earlier of the date the audited annual report is filed with 
the Mexican Commission or the date that the audited annual report is 
required to be filed with the Mexican Commission;
    (11) The Mexican nonbank SD files Schedule 1 of Appendix B to 
Subpart E of Part 23 of the Commission's regulations (17 CFR part 23 
Subpart E--Appendix B) with the Commission and NFA on a monthly basis. 
Schedule 1 must be prepared in the English language with balances 
reported in U.S. dollars and must be filed with the Commission and NFA 
together with the financial information set forth in condition (9);
    (12) The Mexican nonbank SD must submit with the monthly financial 
information, the quarterly financial report, and the audited annual 
report required under conditions (9)-(11) of this Capital Comparability 
Determination Order a statement by an authorized representative or 
representatives of the Mexican nonbank SD that to the best knowledge 
and belief of the representative or representatives the information 
contained in the reports, including the translation of the reports into 
the English language and the conversion of balances into the reports to 
U.S. dollars (as applicable), is true and correct. The statement must 
be prepared in the English language;
    (13) The Mexican nonbank SD files a margin report containing the 
information specified in Regulation 23.105(m) (17 CFR 23.105(m)) with 
the Commission and with NFA.\256\ The margin report must be filed 
together with the monthly financial information required by Article 202 
and Exhibit 9 of the General Provisions Applicable to Broker-Dealers 
(condition 9). The margin report must be in the English language and 
balances reported in U.S. dollars;
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    \256\ 17 CFR 23.105(m).
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    (14) The Mexican nonbank SD files a notice with the Commission and 
NFA within 24 hours of being informed by the Mexican Commission that 
the firm is not in compliance with any component of the Mexican Capital 
Rules or Mexican Financial Reporting Rules. The notice must be prepared 
in the English language;
    (15) The Mexican nonbank SD files a notice with the Commission and 
NFA within 24 hours of when it knows that its regulatory capital is 
below 120 percent of the minimum capital requirement under the Mexican 
Capital Rules. The notice must be prepared in the English language;
    (16) The Mexican nonbank SD files a notice with the Commission and 
NFA if it experiences a 30 percent or more decrease in its excess 
regulatory capital as compared to that last reported in the financial 
information filed with the Mexican Commission pursuant to Article 202 
and Exhibit 9 of the General Provisions Applicable to Broker-Dealers. 
The notice must be prepared in the English language and filed within 
two business days of the firm experiencing the 30 percent or more 
decrease in excess regulatory capital;
    (17) The Mexican nonbank SD files a notice with the Commission and 
NFA within 24 hours of when it knows or should have known that it has 
failed to make or keep current the books and records required by the 
Mexican Commission. The notice must be prepared in the English 
language;
    (18) The Mexican nonbank SD files a notice with the Commission and 
NFA within 24 hours of the occurrence of any of the following: (i) a 
single counterparty, or group of counterparties under common ownership 
or control, fails to post required initial margin or pay required 
variation margin to the Mexican nonbank SD on uncleared swap and 
security-based swap positions that, in the aggregate, exceeds 25 
percent of the Mexican nonbank SD's minimum capital requirement; (ii) 
counterparties fail to post required initial margin or pay required 
variation margin to the Mexican nonbank SD for uncleared swap and 
security-based swap positions that, in the aggregate, exceeds 50 
percent of the Mexican nonbank SD's minimum capital requirement; (iii) 
a Mexican nonbank SD fails to post required initial margin or pay 
required variation margin for uncleared swap and security-based swap 
positions to a single counterparty or group of counterparties under 
common ownership and control that, in the aggregate, exceeds 25 percent 
of the Mexican nonbank SD's minimum capital requirement; and (iv) the 
Mexican nonbank SD fails to post required initial margin or pay 
required variation margin to counterparties for uncleared swap and 
security-based swap positions that, in the aggregate, exceeds 50 
percent of the Mexican nonbank SD's minimum capital requirement. The 
notice must be prepared in the English language;
    (19) The Mexican nonbank SD files a notice with the Commission and 
NFA of a change in its fiscal year end approved or permitted to go into 
effect by the Mexican Commission. The notice required by this condition 
will satisfy the requirement for a nonbank SD to obtain the approval of 
NFA for a change in fiscal year end under Regulation 23.105(g) (17 CFR 
23.105(g)). The notice of change in fiscal year end must be prepared in 
the English language and filed with the Commission and NFA at least 15 
business days prior to the effective date of the Mexican nonbank SD's 
change in fiscal year end;
    (20) The Applicants notify the Commission of any material changes 
to the information submitted in their application, including, but not 
limited to, material changes to the Mexican Capital Rules or Mexican 
Financial Reporting Rules imposed on Mexican nonbank SDs, the Mexican 
Commission's supervisory authority or

[[Page 76400]]

supervisory regime over Mexican nonbank SDs, and proposed or final 
material changes to the Mexican Capital Rules or Mexican Financial 
Reporting Rules as they apply to Mexican nonbank SDs. The notice must 
be prepared in the English language; and
    (21) Unless otherwise noted in the conditions above, the reports, 
notices, and other statements required to be filed by Mexican nonbank 
SD with the Commission or NFA pursuant to the conditions of this 
Capital Comparability Determination Order must be submitted 
electronically to the Commission and NFA in accordance with 
instructions provided by the Commission or NFA.

    Issued in Washington, DC, on December 5, 2022, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

Appendices to Notice of Proposed Order and Request for Comment on an 
Application for a Capital Comparability Determination Submitted on 
Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican 
Comision Nacional Bancaria y de Valores--Commission Voting Summary, 
Chairman's Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson, 
Goldsmith Romero, and Mersinger voted in the affirmative. 
Commissioner Pham voted to concur. No Commissioner voted in the 
negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    Today the Commission will consider a proposed order and request 
for comment on an application for a capital comparability 
determination submitted on behalf of three nonbank \1\ swap dealers 
that are domiciled in Mexico and subject to regulation by the 
Mexican Banking and Securities Commission. These nonbank swap 
dealers are Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V.; 
Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V.; and Casa de Bolsa 
Finamex, S.A. de C.V. (Mexican nonbank swap dealers). Today's 
preliminary capital comparability determination for Mexican nonbank 
swap dealers is the second proposed order and request for comment 
\2\ to come before the Commission since it adopted its substituted 
compliance framework for non-U.S. domiciled nonbank swap dealers in 
July 2020.\3\
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    \1\ The Commission has capital jurisdiction over registered swap 
dealers that are not subject to the regulation of a U.S. banking 
regulator (i.e., nonbank swap dealers).
    \2\ The Commission approved a Notice of Proposed Order and 
Request for Comment on an Application for a Capital Comparability 
Determination from the Financial Services Agency of Japan at its 
July 27, 2022 open meeting. See 87 FR 48092 (Aug. 8, 2022).
    \3\ See Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462, 57520 (Sept. 15, 2020). Regulation 23.106 
also sets forth the Commission's substituted compliance requirements 
for major swap participants; however, there are not any registered 
with the Commission.
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    I support the Commission's proposed order and request for 
comment on its preliminary determination that the Mexican nonbank 
swap dealers organized and domiciled in Mexico are subject to, and 
comply with, capital and financial reporting requirements in Mexico 
that are comparable to certain capital and financial reporting 
requirements under the Commodity Exchange Act and the Commission's 
regulations (Capital Comparability Determination), subject to 
certain conditions set forth in the proposed order.
    As CFTC provisionally-registered swap dealers operate and manage 
risk globally, the Commission's supervisory framework must 
acknowledge the realities of multi-jurisdictional operations. The 
Commission's approach to the proposed determination focuses on 
whether the Mexico Banking and Securities Commission's capital and 
financial reporting requirements achieve comparable outcomes to the 
corresponding CFTC requirements for nonbank swap dealers.\4\ 
Specifically, the Commission has also considered the scope and 
objectives of Mexico Banking and Securities Commission's capital 
adequacy and financial reporting requirements; the ability of the 
Mexico Banking and Securities Commission to supervise and enforce 
compliance with its capital and financial reporting requirements; 
and other facts or circumstances the Commission has deemed relevant 
for this application.
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    \4\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
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    Throughout its analysis, the Commission has recognized that 
jurisdictions may adopt unique approaches to achieving comparable 
outcomes, and the Commission has focused on how the Mexican Banking 
and Securities Commission's capital and financial reporting 
requirements are comparable to its own in purpose and effect, rather 
than whether each are comparable in every particular aspect or 
contain identical elements. In this regard, the approach was not a 
line-by-line assessment or comparison of the Mexican Banking and 
Securities Commission's regulatory requirements with the 
Commission's requirements.\5\
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    \5\ See 85 FR 57521.
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    Consistent with the Commission's authority to issue a Capital 
Comparability Determination with terms and conditions it deems 
appropriate, today's proposed order contains 21 conditions. These 
conditions aim to ensure that the proposed order, if finalized, 
would only apply to Mexican nonbank swap dealers that are eligible 
for substituted compliance and that these Mexican nonbank swap 
dealers comply with the Mexican Banking and Securities Commission's 
capital and financial reporting requirements as well as certain 
additional capital, margin, position, financial reporting, 
recordkeeping, and regulatory notice requirements.
    If the Commission, upon consideration of the comments received, 
determines to issue a favorable comparability determination, an 
eligible Mexican nonbank swap dealer would be required to file a 
notice of its intent to comply with the Mexican Banking and 
Securities Commission's capital adequacy and financial reporting 
rules in lieu of the Commission's requirements.\6\ The Commission 
(or the Market Participants Division through delegated authority) 
would then be obligated to confirm to the Mexican nonbank swap 
dealer that it may comply with the foreign jurisdiction's rules as 
well as any conditions that would be adopted as part of the final 
determination, and that, by doing so, it would be deemed to be in 
compliance with the Commission's corresponding capital adequacy and 
financial reporting requirements.
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    \6\ See 17 CFR 23.106(a)(4).
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    I believe it is important to note that today's proposed Capital 
Comparability Determination, if finalized, would not compromise the 
Commission's capital and financial reporting requirements. Instead, 
it recognizes the global nature of the swap markets with dually-
registered swap dealers that operate in multiple jurisdictions that 
mandate prudent capital and financial reporting requirements. As I 
have said before, a capital and financial reporting comparability 
determination order of this kind is not a compromise or deference to 
a foreign regulatory authority. The Commission would retain its 
enforcement authority and examinations authority as well as obtain 
all financial and event specific reporting to maintain direct 
oversight of nonbank swap dealers located in Mexico.
    I look forward to the public's submission of comments and 
feedback on this proposed determination and order.
    Thank you to the hardworking staff in the Market Participants 
Division for all of their efforts to bring us here today, as well as 
the support of our colleagues in the Office of the General Counsel 
and the Office of International Affairs.

Appendix 3--Statement of Support of Commissioner Kristin N. Johnson

    I support the Commission's issuance of the Notice of Proposed 
Order and Request for Comment (Notice of Proposed Order and Request 
for Comment) on the Application for the Capital Comparability 
Determination submitted on behalf of Nonbank Swap Dealers subject to 
Regulation by the Mexican Comisi[oacute]n Nacional Bancaria y de 
Valores (Mexican Banking and Securities Commission). The application 
of the nonbank swap dealers Morgan Stanley Mexico, Casa de Bolsa, 
S.A. de C.V.; Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V.; and 
Casa de Bolsa Finamex, S.A. de C.V. (Mexican nonbank swap dealers) 
domiciled in Mexico and subject to regulation by the Mexican Banking 
and Securities Commission seeking a capital comparability 
determination for Mexican nonbank swap dealers is the second 
proposed order and request for comment to come before the Commission 
since it adopted its substituted compliance framework for

[[Page 76401]]

non-U.S. domiciled nonbank swap dealers in July 2020.\1\
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    \1\ The Commission approved a Notice of Proposed Order and 
Request for Comment on an Application for a Capital Comparability 
Determination from the Financial Services Agency of Japan at its 
July 27, 2022 open meeting. See 87 FR 48092 (Aug. 8, 2022).
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    Today, a little over a decade after the onset of the financial 
crisis precipitated by events in the bespoke, bilateral, over the 
counter swaps market, we continue to vigilantly monitor and surveil 
the risk management activities among market participants. Our 
efforts to coordinate and harmonize regulation with regulators 
around the world reinforces the adoption, implementation, and 
enforcement of sound prudential and capital requirements. These 
requirements aim to ensure the integrity of entities operating in 
these markets, to ensure rapid identification and remediation of 
liquidity crises, and to mitigate the threat of systemic risks that 
may threaten the stability of domestic and global financial markets.
    Capital requirements play a critical role in fostering the 
safety and soundness of financial markets. As indicated in the 
Commodity Exchange Act, capital requirements protect market 
participants against concerning risks that threaten the integrity of 
individual market participants or potentially trigger a domino 
effect of cascading losses across financial markets.\2\ The 
Commission's capital and financial reporting requirements are 
critical to ensuring the safety and soundness of our markets.\3\ 
Ensuring necessary levels of capital, as well as accurate and timely 
reporting about financial conditions, helps to protect swap dealers 
and the broader financial markets ecosystem from shocks, thereby 
ensuring resiliency.
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    \2\ 7 U.S.C. 6s(e).
    \3\ See 7 U.S.C. 6s(e); 17 CFR subpart E.
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    Section 4s(e) of the CEA directs the Commission and ``prudential 
regulators'' to impose capital requirements on all swap dealers 
(``SDs'') and major swap participants (``MSPs'') registered with the 
Commission.\4\ 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. Applying the Congressional directive, Section 4s(e) 
bifurcates the oversight of bank affiliated and non-bank affiliated 
SD and MSP. The Commission has authority to impose capital 
requirements and margin requirements for uncleared swap 
transactions.\5\
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    \4\ 7 U.S.C. 6s(e).
    \5\ 7 U.S.C. 6s(e)(1) and (2).
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    Under Section 4s(f), the Commission may adopt rules imposing 
financial condition reporting obligations on all SDs and MSPs. In 
accord with the same, the Commission has adopted financial reporting 
obligations.
    I support acknowledging market participants' compliance with the 
regulations of foreign jurisdictions when the requirements lead to 
an outcome that is comparable to the outcome of complying with the 
CFTC's corresponding requirements. Substituted compliance must not, 
however, be confused with deference. To the contrary, the swap 
dealers that qualify for substituted compliance under regulation 
23.106 must be Commission registrants. The Proposed Order, if 
approved, would ensure that relevant swap dealers domiciled in 
Mexico remain subject to the Commission's examination and 
enforcement authority over the firms.
    Capital adequacy and financial reporting are pillars of risk 
management oversight for any business, and, for firms operating in 
our markets, it is of the utmost importance that rules governing 
these risk management tools are effectively calibrated, continuously 
assessed, and fit for purpose. The Commission's efforts in 
considering this proposal reflect careful and thoughtful evaluation 
of the comparability of relevant standards and an attempt to 
coordinate our efforts to bring transparency to the swaps market and 
reduce its risks to the public. I look forward to reviewing the 
comments that the Commission will receive in response to the Notice 
of Proposed Order and Request for Comment and, in particular, 
comments exploring proposed conditions.
    Finally, I appreciate our colleagues in the Market Participants 
Division and their continuous collaboration with our fellow 
regulator--the Comisi[oacute]n Nacional de Bancaria y de Valores. I 
also want to thank my fellow Commissioners for their support in 
advancing this matter before the Commission. Successfully 
implementing comparability determinations requires collaboration 
between the CFTC and its partner regulators in other countries. The 
economies of the United States and Mexico are closely intertwined, 
and increased collaboration can only be beneficial in achieving our 
key goals of customer protection and market integrity.

Appendix 4--Statement of Commissioner Christy Goldsmith Romero

    I support the Commission considering efforts to safeguard the 
resilience of swap dealers, including through the proposed capital 
comparability determination for Mexico. The proposal recognizes that 
strong capital requirements are essential to ensure a swap dealer's 
safety and soundness, and that cross-border coordination with a 
like-minded regulator can promote financial stability. I commend the 
staff for their hard work on today's proposal--and thank them for 
working closely with me and my office on changes to improve the 
proposal.

Lessons Learned From the 2008 Financial Crisis

    One of the lessons learned from the 2008 financial crisis was 
the need to protect our markets from the serious risks posed by 
inadequate amounts of capital that could serve as a buffer against 
risk. Critical financial reforms introduced by the Dodd-Frank Act 
included minimum capital requirements for swap dealers. I note that 
two of the three swap dealers in Mexico that would be immediately 
subject to this proposed determination are affiliates of two of the 
largest recipients of Troubled Asset Relief Program dollars.
    Dodd-Frank Act reforms led to the CFTC establishing capital 
requirements for nonbank swap dealers, implementing rules to keep 
our markets safe. Requiring firms to maintain a strong amount of 
high-quality capital helps to ensure their resilience--their ability 
to meet their financial commitments, and continue to perform their 
critical market making function, even when faced with stress events 
in the market, unexpected losses or decreases in the value of their 
assets. This lowers the risk in the financial system, and helps to 
ensure financial stability.
    Our capital rules are a critical pillar of the Dodd-Frank Act's 
reforms. Therefore, we must ensure that our comparability 
assessments are sound and do not increase risk to U.S. markets.

The CFTC's Second Substituted Compliance Determination for Capital 
Requirements

    The global nature of the 2008 financial crisis also highlighted 
the need for the CFTC to coordinate with foreign regulators, as swap 
activities in a foreign jurisdiction may have an impact in the 
United States. This is particularly relevant here as two of the 
three existing swap dealers are affiliates of large U.S. financial 
institutions.
    Today's proposal is only the second substituted compliance 
determination to be considered for the CFTC's capital rules, 
following our proposal in July related to swap dealers in Japan. 
Therefore, we should proceed carefully, as what we do will establish 
precedent.
    Substituted compliance is not an all-or-nothing proposition. The 
Commission can impose any terms or conditions that it deems 
appropriate, and can continue to require direct compliance with 
certain of the CFTC's rules. That is what we are proposing to do 
here in certain areas.
    For example, I strongly support the proposed condition for 
Mexican nonbank swap dealers to comply with the CFTC's $20 million 
minimum capital requirement--just as we proposed to require for 
nonbank swap dealers in Japan. This is one of the most critical 
components of the CFTC's capital requirements. It helps to ensure 
that each nonbank swap dealer maintains, at all times, a fixed 
amount of the highest quality capital to meet its financial 
obligations without becoming insolvent. The minimum capital 
requirement recognizes the significant role that swap dealers play 
in our markets--with extensive connections to other swap 
counterparties and to each other--and helps ensure their resilience.
    Even with substituted compliance, the CFTC must ensure that we 
receive--both on a periodic, and event-driven, basis--the 
information necessary to identify, evaluate and address situations 
that may have an adverse impact on firms or financial markets. That 
is why I support the conditions in the proposal that would require a 
nonbank swap dealer in Mexico to notify the Commission of 
undercapitalization and other events that may indicate financial or 
operational issues. I look forward to public comment on whether 
allowing Mexican nonbank swap dealers to submit financial reports 
that are required to be prepared under Mexico's rules will ensure 
that the Commission has access to the information needed to 
effectively monitor the

[[Page 76402]]

financial health--including the capital adequacy--of these firms.
    The CFTC has a duty to ensure that our comparability assessment 
is sound and that the foreign regulator is like-minded, not only in 
their rules but in their supervision, oversight, and enforcement. 
Therefore, a strong regulatory relationship with the Mexican Banking 
and Securities Commission (Comision Nacional Bancaria y de Valores) 
(``CNBV'') and regular continued coordination is important. I 
highlight, and express my appreciation for, the CNBV's engagement 
with our staff. Continued engagement will enhance our ability to 
work together swiftly and effectively to address any significant 
market stress events or other circumstances that may threaten a 
firm's safety and soundness.
    It is a priority for me to ensure that the CFTC guards against 
complacency with post-crisis reforms, particularly after market 
stresses from the pandemic and geopolitical events. Our capital 
rules serve as critical pillars of Dodd-Frank Act reforms to help 
ensure the safety and resilience of the markets and market 
participants from serious risks and contagion. Substituted 
compliance must leave U.S. markets and our economy at no greater 
risk than full compliance with our rules.

Appendix 5--Concurring Statement of Commissioner Caroline D. Pham

    I respectfully concur with the notice of proposed order and 
request for comment on an application for a capital comparability 
determination submitted on behalf of nonbank swap dealers subject to 
regulation by the Mexican Comision Nacional Bancaria y de Valores 
(CNBV).
    Today's proposed order and request for comment on a 
comparability determination for three nonbank swap dealers by 
Mexican CNBV marks yet another important step for cross-border 
harmonization. It is worth reiterating the progress that the world 
has made since the 2008 financial crisis in implementing this, among 
other, G20 global derivatives reforms.\1\ I would like to thank 
staff in the CFTC's Market Participants Division for their hard 
work, continued engagement with our global counterparts, and 
commitment to providing substituted compliance to continue 
implementing these reforms.
---------------------------------------------------------------------------

    \1\ See Commissioner Pham ``Concurring Statement of Commissioner 
Caroline D. Pham Regarding Proposed Swap Dealer Capital and 
Financial Reporting Comparability Determination'' (July 27, 2022); 
see also Financial Stability Board ``OTC Derivatives Market 
Reforms--Implementation Progress in 2021'' (Dec. 3, 2021), available 
at: https://www.fsb.org/2021/12/otc-derivatives-market-reforms-implementation-progress-in-2021/.
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    The proposed determination and order would permit, subject to 
several proposed conditions, CFTC registered nonbank swap dealers 
domiciled in Mexico to satisfy certain Commission swap dealer 
capital and financial reporting requirements via substituted 
compliance with certain capital and financial reporting requirements 
established by the Mexican Banking and Securities Commission 
(``Mexican Commission''). CFTC staff met with Mexican CNBV staff on 
several occasions to discuss the application process and capital and 
financial reporting requirements.
    One of my guiding principles throughout my career, both as a 
regulator and in the private sector, is that markets work best when 
there are clear and simple rules with common standards. Ensuring 
that these rules are harmonized minimizes operational complexity 
that can otherwise increase risks and costs. Without an approach 
that appropriately recognizes the home country regulations, trading 
and clearing becomes more complex and therefore costlier and less 
efficient for all market participants. Through the hard work of CFTC 
staff, today's order takes a step in mitigating these potential 
negative effects on the global and U.S. markets. I am also pleased 
that the proposed order recognizes that Mexico has implemented rules 
that are consistent with the Basel Committee for Banking Supervision 
Framework for International Bank Based Capital Standards. We must 
continue to appropriately adhere to international standards, because 
our markets are global and we are not regulating in a vacuum.
    I continue to believe that the CFTC should take an outcomes-
based approach to substituted compliance, one that strikes a balance 
of both recognizing the nature of cross-border regulation of global 
markets and that preserves access for U.S. persons to other 
markets.\2\ From my hands on perspective implementing policies, 
procedures, and processes to comply with our rules, I welcome 
comments, particularly on operational issues with additional 
reporting requirements given local governance and regulatory 
requirements, differences in financial reporting, or anything else 
anticipated by market participants.
---------------------------------------------------------------------------

    \2\ See Commissioner Pham ``Concurring Statement of Commissioner 
Caroline D. Pham Regarding Proposed Swap Dealer Capital and 
Financial Reporting Comparability Determination'' (July 27, 2022).
---------------------------------------------------------------------------

    There's just one small example that I wanted to mention. 
Specifically, I'm unsure as to how an entity can file a notice 
within 24 hours of when it ``should have known'' about a books and 
records issue. When you are designing an escalation and self-
reporting process and have to start the clock ticking, either you 
have identified an issue or you have not. There is a specific time, 
and then the deadline is 24 hours later. I am not sure how you count 
24 hours from ``should have known'' because there is no specific 
time from which to start the clock ticking. Perhaps we mean ``knows 
or reasonably suspects'' there is an issue. That is one of the 
reasons I am concurring in today's proposal.
    Nonetheless, I appreciate the careful consideration by the staff 
and the Commission of how to take a practical approach to achieving 
appropriate oversight and mitigation of risk to the United States 
and the markets. I urge a pragmatic approach with sufficient time to 
implement conditions before any compliance date, and I appreciate 
the thought that the staff have been putting into that.

[FR Doc. 2022-26758 Filed 12-12-22; 8:45 am]
BILLING CODE 6351-01-P