[Federal Register Volume 88, Number 122 (Tuesday, June 27, 2023)]
[Proposed Rules]
[Pages 41774-41813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13446]



[[Page 41773]]

Vol. 88

Tuesday,

No. 122

June 27, 2023

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 Domiciled in the French Republic and Federal Republic of 
Germany and Subject to Capital and Financial Reporting Requirements of 
the European Union; Proposed Rule

  Federal Register / Vol. 88 , No. 122 / Tuesday, June 27, 2023 / 
Proposed Rules  

[[Page 41774]]


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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 Domiciled in the French Republic and 
Federal Republic of Germany and Subject to Capital and Financial 
Reporting Requirements of the European Union

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission is soliciting public 
comment on an application submitted by the Institute of International 
Bankers, International Swaps and Derivatives Association, and 
Securities Industry and Financial Markets Association requesting that 
the Commission determine that the capital and financial reporting laws 
and regulations of the European Union applicable to CFTC-registered 
swap dealers organized and domiciled in the French Republic and Federal 
Republic of Germany provide sufficient bases for an affirmative finding 
of comparability with respect to the Commission's swap dealer capital 
and financial reporting requirements adopted under the Commodity 
Exchange Act. The Commission is also 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 August 28, 2023.

ADDRESSES: You may submit comments, identified by ``EU 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 
release are found at 17 CFR chapter I, and are accessible on the 
Commission's website: 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]; Liliya Bozhanova, Special Counsel, 202-418-6232, 
[email protected]; Joo Hong, Risk Analyst, 202-418-6221, 
[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 Commodity Futures Trading Commission 
(``Commission'' or ``CFTC'') is soliciting public comment on an 
application dated September 24, 2021 (the ``EU Application'') submitted 
by the Institute of International Bankers, International Swaps and 
Derivatives Association, and Securities Industry and Financial Markets 
Association (together, the ``Applicants'').\2\ The Applicants request 
that the Commission determine that registered nonbank swap dealers \3\ 
(``nonbank SDs'') organized and domiciled within the European Union 
(``EU'') (``EU 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 EU laws and regulations. As 
described below, the EU Application addresses nonbank SDs located in 
the French Republic (``France'') and the Federal Republic of Germany 
(``Germany''), the two member states of the EU (``EU Member States'') 
in which EU nonbank SDs currently registered with the Commission are 
located.\5\ The Commission also is soliciting public comment on a 
proposed order under which EU nonbank SDs organized and domiciled in 
France and Germany would be able, subject to defined conditions, to 
comply with certain CFTC nonbank SD capital and financial reporting 
requirements in the manner set forth in the proposed order.
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    \2\ See Letter dated September 24, 2021 from Stephanie Webster, 
General Counsel, Institute of International Bankers, Steven Kennedy, 
Global Head of Public Policy, International Swaps and Derivatives 
Association, and Kyle Brandon, Managing Director, Head of 
Derivatives Policy, Securities Industry and Financial Markets 
Association. The EU 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 
Commission has the authority to impose capital requirements on 
registered swap dealers (``SDs'') that are not subject to regulation 
by 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 at: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
    \5\ As further discussed below, there are currently four EU 
nonbank SDs registered with the Commission: BofA Securities Europe 
SA and Goldman Sachs Paris Inc. et Cie are organized and domiciled 
in France; Citigroup Global Markets Europe AG and Morgan Stanley 
Europe SE are organized and domiciled in Germany.
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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 \6\ directs the Commission and 
``prudential regulators'' \7\ to impose capital requirements on all SDs 
and major swap participants (``MSPs'') registered with the 
Commission.\8\ Sections 4s(e) of the

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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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    \6\ 7 U.S.C. 6s(e).
    \7\ The term ``prudential regulator'' 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).
    \8\ Subject to certain exceptions, the term ``swap dealer'' is 
generally defined as any person that (i) holds itself out as a 
dealer in swaps; (ii) makes a market in swaps; (iii) regularly 
enters into swaps with counterparties as an ordinary course of 
business for its own account; or (iv) engages in any activity 
causing the person to be commonly known in the trade as a dealer or 
market maker in swaps. See 7 U.S.C. 1a(49). The term ``major swap 
participant'' is generally defined as any person who is not an SD, 
and (i) subject to certain exclusions, maintains a substantial 
position in swaps for any of the major swap categories as determined 
by the Commission; (ii) whose outstanding swaps create substantial 
counterparty exposure that could have serious adverse effects on the 
financial stability of the U.S. banking system or financial markets; 
or (iii) maintains a substantial position in outstanding swaps in 
any major swap category as determined by the Commission. See 7 
U.S.C. 1a(33).
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    Section 4s(e) applies a bifurcated approach with respect to the 
above Congressional directives, requiring each SD and MSP that is 
subject to the regulation of a prudential regulator (``bank SD'' and 
``bank MSP,'' respectively) to meet the minimum capital requirements 
and uncleared swaps margin requirements adopted by the applicable 
prudential regulator, and requiring each SD and MSP that is not subject 
to the regulation of a prudential regulator (``nonbank SD'' and 
``nonbank MSP,'' respectively) to meet the minimum capital requirements 
and uncleared swaps margin requirements adopted by the Commission.\9\ 
Therefore, the Commission's authority to impose capital requirements 
and margin requirements for uncleared swap transactions extends to 
nonbank SDs and nonbank MSPs, including nonbanking subsidiaries of bank 
holding companies regulated by the Federal Reserve Board.\10\
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    \9\ 7 U.S.C. 6s(e)(2).
    \10\ 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.\11\ 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.\12\ 
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'').\13\
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    \11\ See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015).
    \12\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
    \13\ 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.\14\ 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.\15\ The Commission's financial reporting obligations were 
adopted with the Commission's nonbank SD and nonbank MSP capital 
requirements, and have a compliance date of October 6, 2021 (``CFTC 
Financial Reporting Rules'').\16\
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    \14\ 7 U.S.C. 6s(f).
    \15\ 7 U.S.C. 6s(f)(1)(A).
    \16\ 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

    Commission Regulation 23.106 establishes a substituted compliance 
framework whereby the Commission may determine that compliance by a 
non-U.S. domiciled nonbank SD or non-U.S. domiciled nonbank MSP with 
its home country's capital and financial reporting requirements will 
satisfy all or parts of the CFTC Capital Rules and all or parts of the 
CFTC Financial Reporting Rules (such a determination referred to as a 
``Capital Comparability Determination'').\17\ 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'').\18\
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    \17\ 17 CFR 23.106. Commission 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. In addition, Commission regulations provide that 
any non-U.S. nonbank SD or non-U.S. nonbank MSP that is dually-
registered with the Commission as a futures commission merchant 
(``FCM'') is subject to the capital requirements of Commission 
Regulation 1.17 (17 CFR 1.17) and may not petition the Commission 
for a 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 Commission Regulation 
23.105(p) (17 CFR 23.105(p)). Commission staff has issued, however, 
a time-limited no-action letter stating that 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 Commission Regulation 23.105(p). See 
CFTC Staff Letter 21-18, issued on August 31, 2021.
    \18\ 17 CFR 23.106(a)(3).
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    The Commission's approach for conducting a Capital 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.\19\ 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.\20\ 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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    \19\ See 85 FR 57462 at 57521.
    \20\ Id.
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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

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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.\21\
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    \21\ 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 
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.\22\
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    \22\ 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's SDs compliance with such capital adequacy and 
financial reporting requirements, and the disciplinary process imposed 
on firms that fail to comply with such requirements.
    In performing the comparability assessment for foreign nonbank 
MSPs,\23\ 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 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 nonbank MSPs' compliance with such capital adequacy and 
financial reporting requirements, and the disciplinary process imposed 
on firms that fail to comply with such requirements.
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    \23\ Commission Regulation 23.101(b) requires a nonbank MSP to 
maintain positive tangible net worth. There are no MSPs currently 
registered with the Commission. 17 CFR 23.101(b).
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    Commission Regulation 23.106 further provides that the Commission 
may impose any terms or conditions that it deems appropriate in issuing 
a Capital Comparability Determination.\24\ 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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    \24\ 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.\25\ Notices must be filed electronically with the 
Commission's Market Participants Division (``MPD'').\26\ 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,\27\ 
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

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complying with the CFTC Capital Rules and the 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 any conditions in the Capital Comparability 
Determination.
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    \25\ 17 CFR 23.106(a)(4).
    \26\ Notices must be filed in electronic form to the following 
email address: [email protected].
    \27\ 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.\28\ Accordingly, if a nonbank SD or nonbank 
MSP fails to comply with the foreign jurisdiction's capital adequacy 
and/or financial reporting requirements, the Commission may initiate an 
action for a violation of the corresponding CFTC Capital Rules and or 
CFTC Financial Reporting Rules.\29\ 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.\30\
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    \28\ 17 CFR 23.106(a)(4).
    \29\ Id.
    \30\ 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.\31\ A non-U.S. 
nonbank SD or non-U.S. nonbank MSP that is not legally required to 
comply with a foreign jurisdiction's laws or regulations determined to 
be comparable in a Capital Comparability Determination may not 
voluntarily comply with such laws or regulations in lieu of compliance 
with the CFTC Capital Rules or the CFTC Financial Reporting Rules. Each 
non-U.S. nonbank SD or non-U.S. nonbank MSP that seeks to rely on a 
Capital Comparability Determination Order is responsible for 
determining whether it is subject to the foreign laws and regulations 
found comparable in the Capital Comparability Determination and the 
Capital Comparability Determination Order.
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    \31\ The Commission has provided the Applicants with an 
opportunity to review for accuracy and completeness, and comment on, 
the Commission's description of relevant EU 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. Thus, to the extent that 
the Commission relies on an inaccurate description of foreign laws 
and regulations submitted by the Applicants, the comparability 
determination may not be valid.
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C. Application for a Capital Comparability Determination for Certain EU 
Nonbank Swap Dealers

    The Applicants submitted the EU Application requesting that the 
Commission issue a Capital Comparability Determination finding that an 
EU nonbank SD's compliance with the capital requirements of the EU and 
the financial reporting requirements of the EU, as specified in the EU 
Application, satisfies corresponding CFTC Capital Rules and the CFTC 
Financial Reporting Rules applicable to a nonbank SD under Sections 
4s(e)-(f) of the CEA and Commission Regulations 23.101 and 23.105.\32\ 
There are currently four EU nonbank SDs registered with the Commission: 
BofA Securities Europe SA and Goldman Sachs Paris Inc. et Cie are 
organized and domiciled in France; Citigroup Global Markets Europe AG 
and Morgan Stanley Europe SE are organized and domiciled in Germany.
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    \32\ EU Application, p. 1. There are currently no MSPs 
registered with the Commission, and the Applicants have not 
requested that the Commission issue a Capital Comparability 
Determination concerning EU nonbank MSPs. Accordingly, the 
Commission's Capital Comparability Determination and proposed 
Capital Comparability Determination Order do not address EU nonbank 
MSPs.
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    The capital and financial reporting framework applicable to EU 
financial institutions is established by EU regulations and directives. 
Specifically, the Capital Requirements Regulation \33\ and the Capital 
Requirements Directive \34\ set forth capital and financial reporting 
requirements applicable to entities defined as ``credit institutions'' 
or ``investment firms,'' including EU nonbank SDs.
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    \33\ Regulation (EU) No 575/2013 of the European Parliament and 
of the Council of 26 June 2013 on prudential requirements for credit 
institutions and amending Regulation (EU) No 648/2012, as amended 
(``Capital Requirements Regulation'' or ``CRR'').
    \34\ Directive 2013/36/EU of the European Parliament and of the 
Council of 26 June 2013 on access to the activity of credit 
institutions and the prudential supervision of credit institutions, 
amending Directive 2002/87/EC and repealing Directives 2006/48/EC 
and 2006/49/EC, as amended (``Capital Requirements Directive'' or 
``CRD'').
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    The term ``credit institution'' includes an entity engaged in 
taking deposits or other repayable funds from the public and granting 
credits for its own account (``Banking Activities'').\35\ An entity 
engaged in Banking Activities is subject to the capital and financial 
reporting requirements of CRR and CRD.
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    \35\ CRR, Article 4(1)(1) (defining the term ``credit 
institution'').
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    The term ``credit institution'' also includes an entity engaged in 
(i) dealing for its own account, (ii) underwriting financial 
instruments, or (iii) placing financial instruments on a firm 
commitment basis (collectively, ``Investment Activities''), provided 
that the entity also meets certain defined financial thresholds set 
forth in the definition.\36\ Specifically, an entity engaged in 
Investment Activities that maintains a total value of consolidated 
assets equal to or in excess of EUR 30 billion is required to be 
authorized as a ``credit institution'' and is subject to the capital 
and financial reporting requirements of CRR and CRD.\37\
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    \36\ Id.
    \37\ Id. and CRD, Articles 8 and 8a (requiring an entity that 
engages in Investment Activities and meets the financial thresholds 
to submit an application for authorization as a ``credit 
institution'' under the relevant provisions of the applicable 
national law).
    CRR, Article 4(1)(1) provides that an entity carrying out 
Investment Activities meets the financial threshold for 
authorization as a credit institution if: (i) the total value of the 
consolidated assets of the entity is equal to or in excess of EUR 30 
billion; (ii) the total value of the assets of the entity is less 
than EUR 30 billion, and the entity is part of a group in which the 
total value of the consolidated assets of all entities in that group 
that individually have total assets of less than EUR 30 billion and 
that engage in Investment Activities is equal to or in excess of EUR 
30 billion; or (iii) the total value of the assets of the entity is 
less than EUR 30 billion, and the entity is part of a group in which 
the total value of the consolidated assets of all entities in the 
group that engage in Investment Activities is equal to or in excess 
of EUR 30 billion, where the consolidated supervisor, in 
consultation with the supervisory college, decides that the entity 
must be authorized as a credit institution in order to address 
potential risks of circumvention and potential risks for financial 
stability of the EU.
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    Credit institutions that qualify as ``significant supervised 
entities'' are subject to the direct prudential supervision of the 
European Central Bank (``ECB'').\38\ Credit institutions that

[[Page 41778]]

are ``less significant supervised entities'' are prudentially 
supervised by the applicable prudential supervisory authority in the 
entity's home EU Member State (``national competent authority'').\39\ 
The term ``competent authority'' is used in this document to refer to 
the ECB or the national competent authority, as appropriate.
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    \38\ See generally, Council Regulation (EU) 1024/2013 of 15 
October 2013 Conferring Specific Tasks to the European Central Bank 
Concerning Policies Relating to the Prudential Supervision of Credit 
Institutions (''SSM Regulation'') and Regulation (EU) No 468/2014 of 
the European Central Bank of 16 April 2014 Establishing the 
Framework for Cooperation within the Single Supervisory Mechanism 
Between the European Central Bank and the National Competent 
Authorities and with National Designated Authorities (''SSM 
Framework Regulation'').
    The criteria for determining whether credit institutions are 
considered ``significant supervised entities'' include size, 
economic importance for the specific EU Member State or the EU 
economy, significance of cross-border activities, and request for or 
receipt of direct public financial assistance. See SSM Regulation, 
Article 6 and SSM Framework Regulation, Articles 39-44 and 50-62.
    \39\ SSM Regulation, Article 6. Less significant entities are 
supervised by their national competent authorities in close 
cooperation with the ECB. With respect to the prudential supervision 
of less significant entities, the ECB has the power to issue 
regulations, guidelines or general instructions to the national 
competent authorities. SSM Regulation, Article 6(5)(a). At any time, 
the ECB can also decide to directly supervise a less significant 
entity to ensure that high supervisory standards are applied 
consistently. SSM Regulation, Article 6(5)(b).
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    The term ``investment firm'' is defined as an entity authorized 
under the Markets in Financial Instruments Directive,\40\ and whose 
regular business is the provision of one or more investment services to 
third parties and/or the performance of one or more investment-related 
activities on a professional basis (including Investment Activities as 
defined above).\41\ An investment firm that engages in Investment 
Activities and maintains total consolidated assets of at least EUR 15 
billion is also subject to the capital and financial reporting 
requirements of CRR and CRD.\42\ The investment firm, however, is not 
required to be authorized as a ``credit institution'' under the 
relevant provisions of the applicable national law in the EU Member 
State and is prudentially supervised by the national competent 
authority.
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    \40\ Directive 2014/65/EU of the European Parliament and of the 
Council of 15 May 2014 on markets in financial instruments and 
amending Directive 2002/92/EC and Directive 2011/61/EU (``Markets in 
Financial Instruments Directive'' or ``MiFID'').
    \41\ CRR, Article 4(1)(2) cross-referencing Article 4(1)(1) of 
MiFID.
    \42\ See Regulation (EU) 2019/2033 of the European Parliament 
and of the Council of 27 November 2019 on the prudential 
requirements of investment firms and amending Regulations (EU) No 
1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 
(``Investment Firms Regulation'' or ``IFR''), Article 1(1) and 
(1)(2) (indicating that an investment firm that engages in 
Investment Activities is subject to CRR (and by cross-reference to 
CRD) if any of the following applies: (i) the total value of the 
consolidated assets of the investment firm is equal to or exceeds 
EUR 15 billion; (ii) the total value of the consolidated assets of 
the investment firm is less than EUR 15 billion, and the investment 
firm is part of a group in which the total value of the consolidated 
assets of all investment firms in the group that individually have 
total assets of less than EUR 15 billion and that engage in 
Investment Activities is equal to or exceeds EUR 15 billion; or 
(iii) the total value of the consolidated assets of the investment 
firm is equal to or exceeds EUR 5 billion, the investment firm 
engages in Investment Activities, and the competent authority has 
determined that the investment firm should be subject to CRR based 
on criteria set forth in Article 5 of Directive (EU) 2019/2034). See 
also, Directive (EU) 2019/2034 of the European Parliament and of the 
Council of 27 November 2019 on the prudential supervision of 
investment firms and amending Directives 2002/87/EC, 2009/65/EC, 
2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (``Investment 
Firms Directive'' or ``IFD''), Article 5 (providing that the 
competent authority may decide to apply the requirements of CRR to 
an investment firm whose consolidated assets are equal or exceed EUR 
5 billion and that engages in Investment Activities if one or more 
of the following criteria apply: (i) the investment firm engages in 
Investment Activities on a scale that the failure or distress of the 
investment firm could lead to systemic risk; (ii) the investment 
firm is a clearing member; and/or (iii) the competent authority 
considers it to be justified in light of the size, nature, scale and 
complexity of the activities of the investment firm considering the 
importance of the investment firm for the economy of the EU or of 
the relevant EU Member State, the significance of the investment 
firm's cross-border activities, and the interconnectedness of the 
investment firm with the financial system).
---------------------------------------------------------------------------

    Lastly, an entity defined as an ``investment firm'' that does not 
engage in Investment Activities, or that engages in Investment 
Activities but does not meet the criteria of either maintaining 
consolidated assets of at least EUR 15 billion or maintaining 
consolidated assets of at least EUR 5 billion and meeting certain 
criteria of significance and interconnectedness, is not subject to CRR 
and CRD.\43\ Such an investment firm is subject to new capital and 
financial reporting requirements established by IFR and IFD, which EU 
Member States were required to adopt and apply by June 26, 2021.\44\ 
The new IFR and IFD capital and financial reporting requirements are 
tailored to the risks faced and posed by smaller investment firms that 
operate differently from banking entities and larger investment firms. 
Such smaller investment firms are also prudentially supervised by the 
national competent authority.
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    \43\ See IFD, Article 5 (setting forth the criteria that may 
justify a decision by the competent authority to apply the 
requirements of CRR to an investment firm that engages in Investment 
Activities and whose consolidated assets equal or exceed EUR 5 
billion).
    \44\ IFR, Article 66 and IFD, Article 67.
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    The four EU nonbank SDs currently registered with the Commission 
are subject to CRR and CRD.\45\ The EU Application does not include an 
analysis of the comparability of the capital and financial reporting 
rules under the IFR and IFD to the CFTC Capital Rules and CFTC 
Financial Reporting Rules. Therefore, the Commission is not assessing 
the comparability of the capital and financial reporting requirements 
imposed by IFR and IFD on smaller investment firms with the CFTC 
Capital Rules and CFTC Financial Reporting Rules. Thus, an EU nonbank 
SD, or a future EU nonbank SD applicant, that is subject to the IFR and 
IFD framework and seeks substituted compliance for some or all of the 
CFTC Capital Rules and CFTC Financial Reporting Rules must submit an 
application to the Commission in accordance with Commission Regulation 
23.106.\46\ The application must include a description of how IFR and 
IFD address the elements of the Commission's capital adequacy and 
financial reporting requirements for nonbank SDs, including, at a 
minimum, the methodologies for establishing and calculating capital 
adequacy requirements.\47\
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    \45\ BofA Securities Europe SA, Citigroup Global Markets Europe 
AG and Morgan Stanley Europe SE have been authorized as credit 
institutions. The three EU nonbank SDs also qualify as ``significant 
supervised entities'' subject to the direct supervision of the ECB. 
Goldman Sachs Paris Inc. et Cie has a pending application for 
authorization as a credit institution. CRD, Article 8a allows 
entities engaged in Investment Activities to continue carrying out 
such activities until they obtain authorization as credit 
institutions. The Applicants represented that Goldman Sachs Paris 
Inc et Cie would likely be a categorized as a ``less significant 
supervised entity'' and subject to direct supervision by the 
national competent authority. According to the Applicants, however, 
the ECB is still considering whether it may exercise direct 
supervisory authority over the entity, pursuant to SSM Regulation, 
Article 6. See Responses to Staff Questions of May 15, 2023.
    \46\ 17 CFR 23.106.
    \47\ Commission Regulation 23.106(a)(2)(ii). 17 CFR 
23.106(a)(2)(ii).
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    In addition, as noted above, the four EU nonbank SDs that are 
currently registered with the Commission are domiciled in the EU Member 
States of France and Germany. As further described below, the 
Commission's analysis therefore involves an assessment of how certain 
EU directives were implemented into the national laws of France and 
Germany. The Commission has not reviewed the implementation of the 
relevant EU directives in other EU Member States. Therefore, an entity 
organized and domiciled in an EU Member State other than France or 
Germany that seeks to register with the Commission as an SD and to 
comply with some or all of the Commission's capital and financial 
reporting rules via substituted compliance would have to submit an 
application for a Capital Comparability Determination under Commission 
Regulation 23.106. Commission staff expects that it will engage with 
such entities during the registration process

[[Page 41779]]

and rely to the extent practicable on the analysis performed in this 
document to assess the comparability of the applicant's home country 
capital and financial reporting requirements with the Commission's 
corresponding requirements.
    As noted above, the EU nonbank SDs currently registered with the 
Commission are subject to CRR and CRD. CRR, as a regulation, is binding 
in its entirety and directly applicable in all EU Member States.\48\ 
CRD, as a directive, was required to be transposed into EU Member 
States' national law.\49\ France implemented CRD in various provisions 
of its Monetary and Financial Code (``MFC'') \50\ and through several 
ministerial orders, including Ministerial Order on Capital Buffers \51\ 
and Ministerial Order on Internal Control.\52\ France also adopted 
Ministerial Order on Distribution Restrictions \53\ and amended 
relevant national law provisions, including the above-referenced 
ministerial orders, to implement CRD V.\54\ Germany implemented CRD via 
amendments to the Banking Act (Kreditwesengesetz, ``KWG'') and its 
subordinate statutory instruments.\55\ In addition, Germany adopted and 
published the Risk Reduction Act (Risikoreduzierungsgesetz, ``RiG'') on 
December 14, 2020 to implement CRD V, with most of the relevant changes 
becoming effective on December 28, 2020. CRR and CRD as implemented in 
French and German law are collectively referred to hereafter as the 
``EU Capital Rules.''
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    \48\ Consolidated Version of the Treaty on the Functioning of 
the European Union, OJ (C 326) 171, Oct. 26, 2012 (``TFEU''), 
Article 288. Accordingly, CRR is directly applicable and binding law 
in France and Germany, the two EU Member States where EU nonbank SDs 
are currently organized and operating. Most CRR requirements, 
including provisions introduced by Regulation (EU) 2019/876 of the 
European Parliament and of the Council of 20 May 2019 amending 
Regulation (EU) No 575/2013 (``CRR II''), have been in effect since 
June 28, 2021, with some provisions having an earlier effective 
date. CRR II, Article 3. Several provisions have a delayed effective 
date. These include market risk-related amendments to CRR, Article 
106 (Internal Hedges) and new Article 204a (Eligible Types of Equity 
Derivatives), which will come into effect on June 28, 2023. Id.
    \49\ TFEU, Article 288 (stating that a directive is binding as 
to the result to be achieved upon each EU Member State to which the 
directive is addressed, and further provides, however, that each EU 
Member State elects the form and method of implementing the 
directive). In this connection, EU Member States were required to 
implement and start applying amendments to CRD, introduced by 
Directive (EU) 2019/878 of the European Parliament and of the 
Council of 20 May 2019 amending Directive 2013/36/EU as regards 
exempted entities, financial holding companies, mixed financial 
holding companies, remuneration, supervisory measures and powers and 
capital conservation measures (``CRD V'') by December 29, 2020. Some 
CRD V provisions were subject to delayed implementation deadlines of 
June 28, 2021 and January 1, 2022, but all CRD V provisions are 
currently effective. CRD V, Article 2.
    \50\ In particular, MFC, Articles L.511-41 to L.511-50-1 contain 
provisions relating to prudential requirements applicable to credit 
institutions. In addition, MFC, Articles L.612-1 to L.612-50 relate 
to the role, functioning, and powers of the national competent 
authority.
    \51\ Arr[ecirc]t[eacute] of 3 November 2014 Relating to Capital 
Buffers of Banking Services Providers and Investment Firms Other 
Than Portfolio Management Companies.
    \52\ Arr[ecirc]t[eacute] of 3 November 2014 on Internal Control 
of Companies in the Banking, Payment Services and Investment 
Services Sector Subject to the Control of Autorit[eacute] de 
Contr[ocirc]le Prudentiel et de R[eacute]solution.
    \53\ Arr[ecirc]t[eacute] of 25 February 2021 Relating to 
Distribution Restrictions Applicable to Credit Institutions, 
Financial Companies and Certain Investment Firms.
    \54\ Specifically, to implement CRD V, France amended the MFC 
via Ordinance No. 2020-1635 of December 21, 2020 and Decree No. 
2020-1637 of December 22, 2020, with most of the relevant changes 
becoming effective on December 29, 2020. France also introduced 
consecutive amendments to Ministerial Order on Capital Buffers and 
Ministerial Order on Internal Control, with the latest changes 
effective as of August 1, 2021.
    \55\ Specifically, the KWG includes, among other things, 
provisions related to capital adequacy requirements, including 
provisions granting power the Federal Ministry of Finance to issue 
statutory instruments to provide details on capital adequacy 
requirements (Section 10(1)), provisions specifying the basis for 
imposing higher capital requirements (Section 10(3)), provisions 
setting forth requirements related to capital buffers (Sections 10c 
to 10i) and provisions describing the powers of the competent 
authority (Sections 6b, 56, 60b).
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    The Applicants also represent that in addition to CRR and CRD, the 
Bank Recovery and Resolution Directive (``BRRD'') includes relevant EU 
capital requirements.\56\ BRRD establishes a framework for recovery and 
resolution of credit institutions and investment firms, and mandates 
that EU Member States require such institutions to satisfy ``a minimum 
requirement for own funds and eligible liabilities'' (``MREL'') if they 
meet certain requirements.\57\ France implemented BRRD primarily via 
amendments to the MFC.\58\ Germany transposed BRRD into national law by 
the Recovery and Resolution Act (Sanierungs und Abwicklungsgesetz, 
``SAG'').\59\
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    \56\ Directive 2014/59/EU of the European Parliament and of the 
Council of 15 May 2014 establishing a framework for the recovery and 
resolution of credit institutions and investment firms and amending 
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 
2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/
36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of 
the European Parliament and of the Council. See EU Application, p. 
5.
    \57\ EU Member States were required to transpose BRRD into 
national law and start applying the implementing measures from 
January 1, 2015. BRRD, Article 130. BRRD was amended by Directive 
(EU) 2019/879 of the European Parliament and of the Council of 20 
May 2019 amending Directive 2014/59/EU as regards loss-absorbing and 
recapitalization capacity of credit institutions and investment 
firms and Directive 98/26/EC (``Bank Recovery and Resolution 
Directive II'' or ``BRRD II'') and EU Member States were required to 
start applying national law measures implementing BRRD II by 
December 28, 2020. BRRD II, Article 3. BRRD as amended by BRRD II 
will be referred to as ``BRRD'' in this document, unless otherwise 
stated.
    \58\ Among other provisions, MFC Article L.613-44 relates in 
particular to the MREL requirement and Article R.613-46-1 defines 
the conditions that items and instruments need to meet to qualify as 
``eligible liabilities.''
    \59\ In particular, SAG, Section 49(1) and (2) relate to the 
MREL requirement.
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    The Applicants further represent that with respect to supervisory 
financial reporting, Commission Implementing Regulation (EU) 2021/451 
\60\ supplements CRR with implementing technical standards (``CRR 
Reporting ITS'') specifying, among other things, uniform formats and 
frequencies for the financial reporting required under CRR.\61\ In 
addition, the ECB has adopted a regulation setting forth a common 
minimum set of financial information that should be reported by credit 
institutions subject to CRR, including EU nonbank SDs, on the basis of 
the CRR Reporting ITS (``ECB FINREP Regulation'').\62\ The Applicants 
also represent that Directive 2013/34/EU \63\ contains provisions 
related to financial reporting, including a mandate that entities of a 
certain size be required to prepare annual audited financial statements 
and a management report.\64\ CRR, CRR Reporting ITS, ECB FINREP 
Regulation, relevant provisions of CRD regarding certain notice 
requirements as implemented in French and German law, and the relevant 
provisions of the Accounting Directive as implemented in French and 
German law are collectively referred to hereafter as the ``EU Financial 
Reporting Rules.''
---------------------------------------------------------------------------

    \60\ Commission Implementing Regulation (EU) 2021/451 of 17 
December 2020 laying down implementing technical standards for the 
application of Regulation (EU) No 575/2013 of the European 
Parliament and of the Council with regard to supervisory reporting 
of institutions and repealing Implementing Regulation (EU) No 680/
2014.
    \61\ EU Application, p. 21 and Responses to Staff Questions of 
May 15, 2023.
    \62\ Regulation (EU) 2015/534 of the European Central Bank of 17 
March 2015 on reporting of supervisory financial information.
    \63\ Directive 2013/34/EU of the European Parliament and of the 
Council of 26 June 2013 on the annual financial statements, 
consolidated financial statements and related reports of certain 
types of undertakings, amending Directive 2006/43/EC of the European 
Parliament and of the Council and repealing Council Directives 78/
660/EEC and 83/394/EEC (``Accounting Directive'').
    \64\ EU Application, p. 5. Accounting Directive, Articles 4, 19 
and 34.
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    The Applicants also note that the U.S. Securities and Exchange 
Commission (``SEC'') has issued orders permitting an SEC-registered 
nonbank security-based swap dealer domiciled in France or

[[Page 41780]]

Germany (``EU nonbank SBSD'') to satisfy SEC capital \65\ and financial 
reporting requirements via substituted compliance with applicable 
French and German capital and financial reporting.\66\ The French Order 
and German Order conditioned substituted compliance for capital 
requirements on an EU nonbank SBSD complying with specified laws and 
regulations, including CRR, CRD, and BRRD, and also maintaining total 
liquid assets in an amount that exceeds the EU nonbank SBSD's total 
liabilities by at least $100 million and by at least $20 million after 
applying certain deductions to the value of the liquid assets to 
reflect market, credit, and other potential risks to the value of the 
assets.\67\
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    \65\ Section 15F(e)(1)(B) of the Exchange Act (15 U.S.C. 78o-10) 
directs the SEC to adopt capital rules for security-based swap 
dealers (``SBSDs'') that do not have a prudential regulator.
    \66\ See Amended and Restated Order Granting Conditional 
Substituted Compliance in Connection with Certain Requirements 
Applicable to Non-U.S. Security-Based Swap Dealers and Major 
Security-Based Swap Participants Subject to Regulation in the 
Federal Republic of Germany; Amended Orders Addressing Non-U.S. 
Security-Based Swap Entities Subject to Regulation in the French 
Republic or the United Kingdom; and Order Extending the Time to Meet 
Certain Conditions Relating to Capital and Margin, 86 FR 59797 (Oct. 
28, 2021) (``German Order''); Order Granting Conditional Substituted 
Compliance in Connection with Certain Requirements Applicable to 
Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap 
Participants Subject to Regulation in the French Republic, 86 FR 
41612 (Aug. 8, 2021) (``French Order''); and Order Specifying the 
Manner and Format of Filing Unaudited Financial and Operational 
Information by Security-Based Swap Dealers and Major Security-Based 
Swap Participants that are not U.S. Persons and are Relying on 
Substituted Compliance with Respect to Rule 18a-7, 86 FR 59208 (Oct. 
26, 2021) (``SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information'').
    \67\ The conditioning of the German and French substituted 
compliance orders on EU nonbank SBSDs maintaining liquid assets in 
an amount that exceeds the EU nonbank SBSD's total liabilities by at 
least $100 million and by at least $20 million after applying 
certain deductions to the value of the liquid assets reflects that 
the SEC's capital rule for nonbank SBSDs is a liquidity-based 
requirement and that the SEC capital requirements are not based on 
the Basel bank capital standards. See 17 CFR 240.18a-1(a)(1) 
(requiring a SBSD to maintain, in relevant part, net capital of $20 
million or, if approved to use capital models, $100 million of 
tentative net capital and $20 million of net capital).
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II. General Overview of Commission and EU 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'').\68\
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    \68\ 17 CFR 23.101.
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    Nonbank SDs that are ``predominantly engaged in non-financial 
activities'' may elect the TNW Approach.\69\ The TNW Approach requires 
a nonbank SD to maintain a level of ``tangible net worth'' \70\ equal 
to or greater than the higher of: (i) $20 million plus the amount of 
the nonbank SD's ``market risk exposure requirement'' \71\ and ``credit 
risk exposure requirement'' \72\ 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; \73\ or (iii) the amount of capital required by a 
registered futures association of which the nonbank SD is a member.\74\ 
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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    \69\ 17 CFR 23.101(a)(2). The term ``predominantly engaged in 
non-financial activities'' is defined in Commission Regulation 
23.100 and generally provides that: (i) the nonbank SD's, or its 
parent entity's, annual gross financial revenues for either of the 
previous two completed fiscal years represents less than 15 percent 
of the nonbank SD's or the nonbank SD's parent's, annual gross 
revenues for all operations (i.e., commercial and financial) for 
such years; and (ii) the nonbank SD's, or its parent entity's, total 
financial assets at the end of its two most recently completed 
fiscal years represents less than 15 percent of the nonbank SD's, or 
its parent's, total consolidated financial and nonfinancial assets 
as of the end of such years. 17 CFR 23.100.
    \70\ The term ``tangible net worth'' is defined in Commission 
Regulation 23.100 and generally means the net worth (i.e., assets 
less liabilities) of a nonbank SD, computed in accordance with 
applicable accounting principles, with assets further reduced by a 
nonbank SD's recorded goodwill and other intangible assets. 17 CFR 
23.100.
    \71\ The terms ``market risk exposure'' and ``market risk 
exposure requirement'' are defined in Commission Regulation 23.100 
and generally mean the risk of loss in a financial position or 
portfolio of financial positions resulting from movements in market 
prices and other factors. 17 CFR 23.100. Market risk exposure is the 
sum of: (i) general market risks including changes in the market 
value of a particular asset that results from broad market 
movements, which may include an additive for changes in market value 
under stressed conditions; (ii) specific risk, which includes risks 
that affect the market value of a specific instrument but do not 
materially alter broad market conditions; (iii) incremental risk, 
which means the risk of loss on a position that could result from 
the failure of an obligor to make timely payments of principal and 
interest; and (iv) comprehensive risk, which is the measure of all 
material price risks of one or more portfolios of correlation 
trading positions.
    \72\ The term ``credit risk exposure requirement'' is defined in 
Commission Regulation 23.100 and generally reflects the amount at 
risk if a counterparty defaults before the final settlement of a 
swap transaction's cash flows. 17 CFR 23.100.
    \73\ The term ``uncleared swap margin'' is defined in Commission 
Regulation 23.100 to generally mean the amount of initial margin 
that a nonbank SD would be required to collect from each 
counterparty for each outstanding swap position of the nonbank SD. 
17 CFR 23.100. A nonbank SD must include all swap positions in the 
calculation of the uncleared swap margin amount, including swaps 
that are exempt or excluded from the scope of the Commission's 
uncleared swap margin regulations. A nonbank SD must compute the 
uncleared swap margin amount in accordance with the Commission's 
margin rules for uncleared swaps. See 17 CFR 23.154.
    \74\ 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 SEC Rule 18a-1 \75\ that are 
applicable to entities registered with the SEC as SBSDs or standardized 
capital charges set forth in Commission Regulation 1.17 applicable to 
entities registered as FCMs or entities dually-registered as an FCM and 
nonbank SD.\76\ Nonbank SDs that have received Commission or NFA 
approval pursuant to Commission Regulation 23.102 may use internal 
models to compute market risk and/or credit risk capital charges in 
lieu of the SEC or CFTC standardized capital charges.\77\
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    \75\ 17 CFR 240.18a-1.
    \76\ 17 CFR 23.101(a)(2)(ii)(A).
    \77\ Id.
---------------------------------------------------------------------------

    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.\78\ 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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    \78\ 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.''
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    A nonbank SD is required to reduce the value of its highly liquid 
assets by the market risk exposure requirement and/or the credit risk 
exposure requirement in computing its net capital.\79\ A nonbank SD 
that does not have Commission or NFA approval to use internal models 
must compute its market risk exposure requirement and/

[[Page 41781]]

or credit risk exposure requirement using the standardized capital 
charges contained in SEC Rule 18a-1 as modified by the Commission's 
rule.\80\
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    \79\ See 17 CFR 240.18a-1(c) and (d).
    \80\ 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.\81\ 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.'' \82\
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    \81\ See 17 CFR 23.102.
    \82\ 17 CFR 23.101(a)(1)(ii)(A)(1). The term ``tentative net 
capital'' is defined in Commission Regulation 23.101(a)(1)(ii)(A)(1) 
by reference to SEC Rule 18a-1 and generally means a nonbank SD's 
net capital prior to deducting market risk and credit risk capital 
charges.
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    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.\83\ 
The Bank-Based Approach also is consistent with the Basel Committee on 
Banking Supervision's (``BCBS'') international framework for bank 
capital requirements.\84\ 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.\85\ 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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    \83\ See 17 CFR 23.101(a)(1)(i).
    \84\ The BCBS is the primary global standard-setter for the 
prudential regulation of banks and provides a forum for cooperation 
on banking supervisory matters. Institutions represented on the BCBS 
include the Federal Reserve Board, the European Central Bank, 
Deutsche Bundesbank, Bank of England, Bank of France, Bank of Japan, 
Banco de Mexico, and Bank of Canada. The BCBS framework is available 
at https://www.bis.org/basel_framework/index.htm.
    \85\ 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.\86\ 
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.\87\ The 
term ``additional tier 1 capital'' is defined to include equity 
instruments that are subordinated to claims of general creditors and 
subordinated debt holders, but contain certain provisions that are not 
available to common stock, such as the right of nonbank SD to call the 
instruments for redemption or to convert the instruments to other forms 
of equity.\88\ 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).\89\ Subordinated debt also 
must meet certain requirements to qualify as tier 2 capital, including 
that the term of the subordinated debt instrument is for a minimum of 
one year (with the exception of approved revolving subordinated debt 
agreements which may have a maturity term that is less than one year), 
and the debt instrument is an effective subordination of the rights of 
the lender to receive any payment, including accrued interest, to other 
creditors.\90\
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    \86\ Id. Commission Regulation 23.101(a)(1)(i) references 
Federal Reserve Board Rule 217.20 for purposes of defining the terms 
used in establishing the minimum capital requirements under the 
Bank-Based Approach. 17 CFR 23.101(a)(1)(i) and 12 CFR 217.20.
    \87\ See 12 CFR 217.20(b).
    \88\ See 12 CFR 217.20(c).
    \89\ See 12 CFR 217.20(d).
    \90\ 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) providing that the subordinated debt used by a 
nonbank SD to meet its minimum capital requirement under the Bank-
Based Approach must satisfy the conditions for subordinated debt 
under SEC Rule 18a-1d.
---------------------------------------------------------------------------

    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 Commission Regulation 1.17 and SEC 
Rule 18a-1, and must compute their credit risk charges using the 
standardized capital charges set forth in regulations of the Federal 
Reserve Board for bank holding companies in Subpart D of 12 CFR part 
217.\91\
---------------------------------------------------------------------------

    \91\ 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 Commission 
Regulation 1.17 and SEC Rule 18a-1 by multiplying, as appropriate to 
the specific asset schedule, the notional value or market value of the 
nonbank SD's proprietary financial positions (such as swaps, security-
based swaps, futures, equities, and U.S. Treasuries) by fixed 
percentages set forth in the Regulation or Rule.\92\ Standardized 
credit risk charges require the nonbank SD to multiply on-balance sheet 
and off-balance sheet exposures (such as receivables from 
counterparties, debt instruments, and exposures from derivatives) by 
predefined percentages set forth in the applicable Federal Reserve 
Board regulations contained in Subpart D of 12 CFR part 217.
---------------------------------------------------------------------------

    \92\ See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).
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    A nonbank SD also may apply to the Commission or NFA for approval 
to use internal models to compute market risk exposure and/or credit 
risk exposure for

[[Page 41782]]

purposes of determining its total risk-weighted assets.\93\ 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 12 CFR part 217. Credit risk and 
market risk capital charges computed with internal models require the 
estimation of potential losses, with a certain degree of likelihood, 
within a specified time period, of a portfolio of assets. Internal 
models allow for consideration of potential co-movement of prices 
across assets in the portfolio, leading to offsets of gains and losses. 
Internal credit risk models can also further include estimation of the 
likelihood of default of counterparties.
---------------------------------------------------------------------------

    \93\ See 17 CFR 23.102.
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B. General Overview of EU Capital Rules for EU Nonbank SDs

    The Applicants state that the EU Capital Rules impose bank-like 
capital requirements on an EU nonbank SD that are consistent with the 
BCBS framework for international bank-based capital standards.\94\ The 
Applicants further state that the EU Capital Rules are intended to 
require each EU nonbank SD to hold a sufficient amount of qualifying 
equity capital and subordinated debt based on the EU nonbank SD's 
activities, 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.\95\
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    \94\ See EU Application, p. 10.
    \95\ See EU Application, pp. 5-6, 10 and 15.
---------------------------------------------------------------------------

    The EU Capital Rules require each EU nonbank SD to hold and 
maintain regulatory capital in the form of qualifying common equity 
tier 1 capital, additional tier 1 capital, and tier 2 capital in an 
aggregate amount that equals or exceeds 8 percent of the EU nonbank 
SD's total risk exposure amount, which is calculated as a sum of the 
firm's risk-weighted assets and exposures.\96\ Common equity tier 1 
capital must comprise a minimum of 4.5 percent of the 8 percent capital 
ratio,\97\ and tier 1 capital (which is the aggregate of common equity 
tier 1 capital and additional tier 1 capital) must comprise a minimum 
of 6 percent of the total 8 percent capital ratio.\98\ Tier 2 capital 
may comprise a maximum of 2 percent of the total 8 percent capital 
ratio.\99\
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    \96\ CRR, Articles 26, 28, 50-52, 61-63 and 92.
    \97\ Id., Article 92(1)(a).
    \98\ Id., Article 92(1)(b).
    \99\ Id., Article 92(1)(c), which provides that the total 
capital ratio must be equal to or greater than 8 percent, with a 
minimum common equity and additional tier 1 capital comprising at 
least 6 percent of the 8 percent minimum requirement. In addition to 
the requirement to maintain minimum capital ratios, an EU nonbank SD 
will not be authorized as a credit institution by its competent 
authorities unless it maintains at least EUR 5 million of common 
equity tier 1 capital. CRD, Article 12.
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    Under the EU Capital Rules, common equity tier 1 capital is 
composed of common equity capital instruments, retained earnings, 
accumulated other comprehensive income, and other reserves of the EU 
nonbank SD.\100\ Additional tier 1 capital is composed of capital 
instruments other than common equity and retained earnings (i.e., 
common equity tier 1 capital), and includes certain long-term 
convertible debt securities.\101\ Tier 2 capital instruments, which 
provide an additional layer of supplementary capital, include other 
reserves, hybrid capital instruments, and certain subordinated 
debt.\102\
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    \100\ CRR, Articles 26 and 28. Retained earnings, accumulated 
other comprehensive income and other reserves qualify as common 
equity tier 1 capital only where the funds are available to the EU 
nonbank SD for unrestricted and immediate use to cover risks or 
losses as such risks or losses occur. See CRR, Article 26(1).
    \101\ Id., Articles 50-52.
    \102\ Id., Articles 62-63.
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    To qualify as tier 2 regulatory capital, capital instruments and 
subordinated debt must meet certain conditions including that: (i) the 
capital instruments are issued by the EU nonbank SD and are fully paid-
up; (ii) the capital instruments are not purchased by the EU nonbank SD 
or its subsidiaries; (iii) the claims on the principal amount of the 
capital instruments rank below any claim from instruments that are 
``eligible liabilities,'' \103\ meaning that they are effectively 
subordinated to claims of all non-subordinated creditors of the EU 
nonbank SD; (iv) the capital instruments have an original maturity of 
at least five years; and (v) the provisions governing the capital 
instruments do not include any incentive for the principal amount to be 
redeemed or repaid by the EU nonbank SD prior to the capital 
instruments' respective maturities.\104\
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    \103\ ``Eligible liabilities'' are non-capital instruments, 
including instruments that are directly issued by the EU nonbank SD 
and fully paid up with remaining maturities of at least a year. CRR, 
Articles 72a and 72b. In addition, the liabilities cannot be owned, 
secured, or guaranteed, by the EU nonbank SD itself, and the EU 
nonbank SD cannot have either directly or indirectly funded their 
purchase. CRR, Article 72b.
    \104\ Id., Article 63 (listing the conditions that capital 
instruments must meet to qualify as tier 2 instruments) and Articles 
72a-72b (listing the conditions that liabilities must meet to 
qualify as eligible liabilities). See also infra note 123.
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    In addition to the requirement to maintain total regulatory capital 
in an amount equal to or in excess of 8 percent of its risk-weighted 
assets, the EU Capital Rules also require an EU nonbank SD to maintain 
a capital conservation buffer composed exclusively of common equity 
tier 1 capital in an amount equal to 2.5 percent of the firm's total 
risk-weighted assets.\105\ The common equity tier 1 capital used to 
meet the 2.5 percent capital conservation buffer must be separate and 
independent of the 4.5 percent of common equity tier 1 capital used to 
meet the 8 percent core capital requirement.\106\
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    \105\ CRD, Articles 129. CRD, Article 129(1) directs EU Member 
States to impose a capital conservation buffer on certain 
institutions, including the four EU nonbank SDs that are currently 
registered with the Commission, that requires each institution to 
maintain a capital conservation buffer of common equity tier 1 
capital equal to 2.5 percent of the institution's total risk 
exposure amount. CRD, Article 129(1) was transposed into French law 
by Article L.511-41-1-A of the French MFC and Article 2 of 
Ministerial Order on Capital Buffers and was transposed into German 
law by Section 10c(1) of KWG.
    \106\ Id. In effect, the EU Capital Rules require an EU nonbank 
SD to hold common equity tier 1 capital equal to or in excess of 7 
percent of the firm's risk-weighted assets, and total capital equal 
to or in excess of 10.5 percent of the firm's risk-weighted assets.
    In addition, an EU nonbank SD may also be subject to: (i) an 
institution-specific capital countercyclical buffer, if the EU 
Member States in which the EU nonbank SD has exposures have 
implemented a capital countercyclical buffer; (ii) a global 
systemically important institution (``G-SII'') or other systemically 
important institution (``O-SII'') buffer, if the EU nonbank SD has 
been designated as a G-SII or O-SII; and (iii) a systemic risk 
buffer if the EU Member State in which the EU nonbank SD is 
domiciled, or at least one EU Member State in which the EU nonbank 
SD has exposures, has implemented a systemic risk buffer. See CRD, 
Articles 130, 131 and 133. To meet these additional capital buffer 
requirements, the EU nonbank SD must maintain a level of common 
equity tier 1 capital that is in addition to the common equity tier 
1 capital required to meet its core capital requirement of 4.5 
percent of its risk-weighted assets and the common equity tier 1 
capital required to meet its capital conservation buffer. See CRR, 
Article 92(1) and CRD, Article 130(5). The total amount of common 
equity tier 1 capital required to meet all applicable capital buffer 
requirements is referred to as the ``combined buffer requirement.'' 
CRD, Article 128. In practice, several EU Member States, including 
France and Germany, have implemented countercyclical capital buffers 
with rates ranging from 0.5 percent to 2.5 percent of risk-weighted 
assets and several EU Member States, including Germany, have 
implemented systemic risk buffers with rates ranging from 0.5 to 9 
percent of risk-weighted assets, varying across subsets of 
exposures. Germany's systemic risk buffer applies only with respect 
to exposures secured by residential property. In addition, as of 
January 2023, none of the four EU nonbank SDs registered with the 
Commission has been designated as G-SII and only one entity, 
Citigroup Global Markets Europe AG has been designated as an O-SII 
and subject to a 0.25 percent additional capital requirement.

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[[Page 41783]]

    The EU Capital Rules further impose a 3 percent leverage ratio 
floor on EU nonbank SDs as an additional element of the capital 
requirements.\107\ Specifically, each EU nonbank SD is required to 
maintain tier 1 capital (i.e., an aggregate of common equity tier 1 
capital and additional tier 1 capital) equal to or in excess of 3 
percent of the firm's total on-balance sheet and off-balance sheet 
exposures, including exposures on uncleared swaps, without regard to 
any risk-weighting.\108\ The leverage ratio is a non-risk based minimum 
capital requirement that is intended to prevent an EU nonbank SD from 
engaging in excessive leverage, and complements the risk-based minimum 
capital requirement that is based on the EU nonbank SD's risk-weighted 
assets.
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    \107\ CRR, Article 92(1).
    \108\ Total exposures are required to be computed in accordance 
with CRR, Article 429.
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    As noted above, the amount of regulatory capital that an EU nonbank 
SD is required to hold is determined by calculating the firm's total 
risk exposure, which requires the EU nonbank SD to risk-weight its on-
balance sheet and off-balance sheet assets and exposures using 
specified standardized weights or, if approved for use by competent 
authorities, internal model-based methodologies.\109\ Risk-weighting 
assets and exposures involves adjusting the notional or carrying value 
of each asset and risk exposure based on the inherent risk of the asset 
or exposure. Less risky assets and exposures are adjusted to lower 
values (i.e., have less weight) than more risky assets or exposures. As 
a result, EU nonbank SDs are required to hold lower levels of 
regulatory capital for less risky assets and exposures and higher 
levels of regulatory capital for riskier assets and exposures. The 
categories of risk charges that an EU nonbank SD must include in 
determining its total risk exposure include charges reflecting: (i) 
market risk; (ii) credit risk; (iii) settlement risk; (iv) CVA risk of 
OTC derivative instruments; and (v) operational risk.\110\ The methods 
for calculating such risk charges are based on the BCBS framework.\111\
---------------------------------------------------------------------------

    \109\ With regulator permission, EU nonbank SDs may use internal 
models to calculate credit risk (CRR, Article 143), including 
certain counterparty credit risk exposures (CRR, Article 283), 
operational risk (CRR, Article 312(2)), market risk (CRR, Article 
363), and credit valuation adjustment risk (``CVA risk'') of over-
the-counter (``OTC'') derivatives instruments (CRR, Article 383). 
The permission to use, and continue using, internal models is 
subject to strict criteria and supervisory oversight by the 
competent authorities.
    \110\ CRR, Article 92(3).
    \111\ EU Application, pp. 10-11.
---------------------------------------------------------------------------

    Standardized market risk charges are generally calculated by 
multiplying the notional or carrying amount of net positions or of 
adjusted net positions by risk-weighting factors, which are based on 
the underlying market risk of each asset or exposure. The sum of the 
calculated amounts comprises the portion of the risk exposure amount 
attributable to market risk.\112\ Standardized credit risk charges are 
generally calculated by multiplying the notional or carrying value of 
the EU nonbank SD's on-balance sheet and off-balance sheet assets and 
exposures by clearly defined risk-weighting factors, which are based on 
the underlying credit risk of each asset or exposure. The sum of the 
calculated amounts comprises the portion of the risk exposure amount 
attributable to credit risk.\113\
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    \112\ CRR, Articles 326-350.
    \113\ Id., Articles 111-134.
---------------------------------------------------------------------------

    Settlement risk charges are intended to account for the price 
difference to which an EU nonbank SD is exposed if its transactions 
remain unsettled after the respective transaction's due delivery 
date.\114\ CVA risk charges reflect the current market value of the 
credit risk of the counterparty to the EU nonbank SD in an OTC 
derivatives transaction.\115\ Operational risk charges reflect the risk 
of loss resulting from inadequate or failed internal processes, people 
and systems or from external events, and includes legal risk.\116\
---------------------------------------------------------------------------

    \114\ Id., Article 378.
    \115\ Id., Article 381.
    \116\ Id., Article 4(1)(52).
---------------------------------------------------------------------------

    As noted above, EU nonbank SDs may use internal model-based 
methodologies to calculate certain categories of risk charges in lieu 
of standardized charges if they have obtained the requisite regulatory 
approval.\117\ EU Capital Rules set out quantitative and qualitative 
requirements that internal models must meet in order to obtain and 
maintain approval.\118\ Quantitative and qualitative requirements 
address, among other issues, governance, validation, monitoring, and 
review. Modeled risk charges generally require the estimation of 
potential losses, with a certain degree of likelihood, within a 
specified time period, of a portfolio of assets.\119\ Internal models 
allow for consideration of potential co-movement of prices across 
assets in the portfolio, leading to offsets of gains and losses. Credit 
risk models can also further include estimation of the likelihood of 
default of counterparties.
---------------------------------------------------------------------------

    \117\ Id., Articles 143 (credit risk), 283 (counterparty credit 
risk); 312(2) (operational risk), 363 (market risk), and 383 (CVA 
risk).
    \118\ See e.g., CRR, Articles 144, 283(2); 321-322 and 365-369.
    \119\ The EU Capital Rules require EU nonbank SDs with internal 
model approval for market risk to use a VaR model with a 99 percent, 
one-tailed confidence interval with: (i) price change equivalent to 
10 business-day movement in rates and prices; (ii) effective 
historical observation periods of at least one year; and (iii) at 
least monthly data set updates. See CRR, Article 365(1). EU nonbank 
SDs approved to use internal ratings-based credit risk models must 
support the assessment of credit risk, the assignment of exposures 
to rating grades or pools, and the quantification of default and 
loss estimates that have been developed for a certain type of 
exposures, among other conditions. See CRR, Articles 142-144. In 
addition, when EU nonbank SDs are approved to use a model to 
calculate counterparty credit risk exposures for OTC derivatives 
transactions, the model must specify the forecasting distribution 
for changes in the market value of a netting set attributable to 
joint changes in relevant market variables and calculate the 
exposure value for the netting set at each of the future dates on 
the basis of the joint changes in the market variables. See CRR, 
Article 284. EU nonbank SDs allowed to follow the ``advanced 
method'' of calculating CVA risk charges for OTC derivatives 
transactions must also use an internal market risk model to simulate 
changes in the credit spreads of counterparties, applying a 99 
percent confidence interval and a 10-day equivalent holding period. 
See CRR, Article 383. Finally, EU nonbank SDs using ``advanced 
measurement approaches'' based on their own measurement systems to 
compute operational risk exposures must calculate capital 
requirements as comprising both expected loss and unexpected loss 
and capture potentially severe tail events, achieving a sound 
standard comparable to a 99.9 confidence interval over a one-year 
period. See CRR, Article 322.
---------------------------------------------------------------------------

    Furthermore, the EU Capital Rules also impose separate requirements 
on an EU nonbank SD to address liquidity risk. The liquidity 
requirements are composed of three main obligations. First, an EU 
nonbank SD is required to hold an amount of sufficiently liquid assets 
to meet the firm's expected payment obligations under stressed 
conditions for 30 days.\120\ Second, an EU nonbank SD is subject to a 
stable funding requirement whereby the firm must hold a diversity of 
stable funding instruments \121\ sufficient to meet long-term 
obligations under both normal and stressed conditions.\122\ Third, to 
ensure that an EU nonbank SD continues to meet its liquidity 
requirements, the firm is required to maintain robust strategies, 
policies, processes, and system for the

[[Page 41784]]

identification of liquidity risk over an appropriate set of time 
horizons, including intra-day.\123\ The EU Capital Rules' liquidity 
requirements are intended to help ensure that EU nonbank SDs can 
continue to fund their operations over various time horizons, including 
the timely making of payments to customers and counterparties.
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    \120\ CRR, Article 412(1). Liquid assets primarily include cash, 
exposures to central banks, government-backed assets and other 
highly liquid assets with high credit quality. Id. Article 416(1).
    \121\ Stable funding instruments include common equity tier 1 
capital instruments, additional tier 1 capital instruments, tier 2 
capital instruments, and other preferred shares and capital 
instruments in excess of the tier 2 allowable amount with an 
effective maturity of one year or greater. CRR, Article 427(1).
    \122\ CRR, Article 413(1).
    \123\ CRD, Article 86 provides that EU Member States' competent 
authorities must ensure that institutions, including EU nonbank SDs, 
have robust strategies, policies, processes and systems for the 
identification, measurement, management and monitoring of liquidity 
risk over an appropriate set of time horizons, including intra-day, 
so as to ensure that entities maintain adequate levels of liquidity 
buffers. The strategies, policies, processes, and systems must be 
tailored to business lines, currencies, branches, and legal entities 
and must include adequate allocation mechanisms of liquidity costs, 
benefits and risks.
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    In addition, resolution authorities \124\ in EU Member States may 
require that EU nonbank SDs satisfy an institution-specific MREL 
pursuant to provisions transposing BRRD.\125\ The MREL requirement is 
separate from the minimum capital requirements imposed on EU nonbank 
SDs under CRR and CRD and is designed to ensure that credit 
institutions and investment firms, including the EU nonbank SDs subject 
to the requirement,\126\ maintain at all times sufficient eligible 
instruments to facilitate the implementation of the preferred 
resolution strategy.\127\ Specifically, the MREL is intended to permit 
loss absorption, where appropriate, such that the EU nonbank SD's 
capital and leverage ratios could be restored to the level necessary 
for compliance with its capital requirements.\128\ The MREL is set by 
the relevant resolution authority and is expressed as two ratios that 
have to be met in parallel: (i) a percentage of the entity's total risk 
exposure amount, and (ii) a percentage of the entity's total leverage 
ratio exposure measure.\129\ The MREL amount varies depending on the 
entity's size, funding model, and risk profile, among other 
considerations.\130\
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    \124\ In application of BRRD, Article 3, EU Member States 
designate resolution authorities that are empowered to apply the 
resolution tools and exercise the resolution powers described in 
BRRD. EU Member States may provide that the resolution authority is 
the competent authority for supervision for the purposes of CRR and 
CRD, provided an operational independence exists between the 
resolution functions and the supervisory or other functions of the 
relevant authority. BRRD, Article 3(3).
    \125\ BRRD, Articles 45, 45a to 45h; French MFC, Article L.613-
44; and German SAG, Sections 49(1) and (2). Eligible liabilities 
include, among others items, instruments that are directly issued by 
the EU nonbank SD and fully paid up with remaining maturities of at 
least a year. CRR, Articles 72a and 72b. In addition, the 
liabilities cannot be owned, secured or guaranteed, by the EU 
nonbank SD itself, and the EU nonbank SD cannot have either directly 
or indirectly funded its purchase. CRR, Article 72b. The inclusion 
of derivatives is possible if certain requirements are met. BRRD, 
Article 45b(2); French MFC, Article R. 613-46-1; German SAG, Section 
49b.
    \126\ Of the four EU nonbank SDs currently registered with the 
Commission, two--Citigroup Global Markets Europe AG and and Morgan 
Stanley Europe SE--are subject to MREL. See Responses to Staff 
Questions of May 15, 2023.
    \127\ BRRD, Article 45c. See also Single Resolution Board, 
Minimum Requirement for Own Funds and Eligible Liabilities (MREL), 
June 2022 (``SRB MREL Policy 2022''), at 5, available at: https://www.srb.europa.eu/system/files/media/document/2022-06-08_MREL_clean.pdf.
    \128\ BRRD, Article 45c.
    \129\ BRRD, Articles 45 and 45c. Pursuant to BRRD, Article 45, 
the total risk exposure amount is calculated in accordance with CRR, 
Article 92(3) and the total leverage ratio exposure measure is 
calculated in accordance with CRR, Articles 429 and 429a.
    \130\ BRRD, Article 45c(1)(d).
---------------------------------------------------------------------------

    Furthermore, CRR imposes an additional supplemental standard of 
total loss absorbing capacity (``TLAC'') for G-SII entities \131\ 
identified as resolution entities \132\ and requires such entities to 
maintain a risk-based capital and eligible liabilities ratio of 18 
percent of the entity's total risk exposure amount and a non-risk-based 
capital and eligible liabilities ratio of 6.75 percent of the firm's 
total leverage ratio exposure measure.\133\ In addition, CRR requires 
that ``material subsidiaries'' of non-EU G-SIIs, including subsidiaries 
of U.S. GSIBs, that are not resolution entities maintain MREL equal to 
90 percent of the foregoing as applied to their parent entity at all 
times.\134\
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    \131\ ``G-SII entity'' is defined in CRR, Article 4(1)(136) as 
entity that is a G-SII or is part of a G-SII or of a non-EU G-SII. 
Although none of the EU nonbank SDs that are currently registered 
with the Commission has been designated as a G-SII in France or 
Germany as of January 2023, all four EU nonbank SDs are subsidiaries 
of a U.S. global systemically important bank (``GSIB'') and 
therefore considered a G-SII entity.
    \132\ ``Resolution entity'' is defined in general terms to mean 
a legal entity established in the EU, which has been identified by 
the resolution authority as an entity in respect of which the 
resolution plan provides for a resolution action. BRRD, Article 
1(1)(83a). None of the four EU nonbank SDs is currently designated 
as a resolution entity as of March 30, 2023. See Responses to Staff 
Questions of May 15, 2023. As such, the EU nonbank SDs currently 
registered with the Commission are not subject to a TLAC 
requirement.
    \133\ CRR, Article 92a(1). As indicated in CRR, Article 92a(1), 
the total risk exposure amount is calculated in accordance with CRR, 
Articles 92(3) and 92(4) and the total leverage ratio exposure 
measure is calculated in accordance with CRR, Article 429(4).
    \134\ Id., Article 92b(1). An EU nonbank SD may become subject 
to the requirement of CRR, Article 92b should it become a ``material 
subsidiary'' of non-EU G-SII. The term ``material subsidiary'' is 
defined as a subsidiary that on an individual or consolidated basis 
meets any of the following conditions: (i) the subsidiary holds more 
than 5 percent of the consolidated risk-weighted assets of the 
parent entity; (ii) the subsidiary generates more than 5 percent of 
the total operating income of the parent entity; or (iii) the total 
exposure measure (i.e., the total on-balance sheet and off-balance 
sheet exposures) of the subsidiary is more than 5 percent of the 
consolidated total exposure measure of the parent entity. See CRR, 
Article 4(135) (defining the term ``material subsidiary'') and 
Article 429 (setting forth the method for calculating the total 
exposure measure). None of the EU nonbank SDs registered with the 
Commission is currently considered a ``material subsidiary'' of a 
non-EU G-SII and, therefore, subject to the 90 percent of MREL 
requirement.
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III. Commission Analysis of the Comparability of the EU Capital Rules 
and EU Financial Reporting Rules With CFTC Capital Rules and CFTC 
Financial Reporting Rules

    The following section provides a description and comparative 
analysis of the regulatory requirements of the EU Capital Rules and EU 
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 the EU's 
corresponding laws, regulations, or rules. The Commission then provides 
a comparative analysis of the EU Capital Rules or the EU Financial 
Reporting Rules with the corresponding CFTC Capital Rules or CFTC 
Financial Reporting Rules and identifies any material differences 
between the respective rules.
    The Commission performed this proposed Capital Comparability 
Determination by assessing the comparability of the EU Capital Rules 
for EU nonbank SDs as set forth in the EU Application with the 
Commission's Bank-Based Approach. For clarity, the Commission did not 
assess the comparability of the EU Capital Rules to the Commission's 
TNW Approach or NLA Approach as the Commission understands that the EU 
nonbank SDs, as of the date of the EU Application, are subject to the 
current bank-based capital approach of the EU Capital Rules. In 
addition, as noted in Section I.C. above, the Applicants did not 
include the capital framework and requirements imposed on small 
investment firms under the IFR and IFD as part of the EU Application, 
and the Commission did not assess the comparability of the IFR and IFD 
capital requirements with the CFTC Capital Rules. Accordingly, when the 
Commission makes a preliminary determination herein regarding the 
comparability of the EU Capital Rules with the CFTC Capital Rules, the 
determination pertains to the comparability of the EU Capital Rules as 
imposed under CRR and CRD with the

[[Page 41785]]

Bank-Based Approach under the CFTC Capital Rules.
    As described below, it is proposed that any material changes to the 
EU Capital Rules will require notification to the Commission. 
Therefore, if there are subsequent material changes to the EU 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.\135\
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    \135\ The Commission also may amend or supplement the Capital 
Comparability Determination 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 international 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 the key 
categories that focus the analysis on whether the EU capital and 
financial reporting requirements are comparable to the Commission's SD 
requirements in purpose and effect, and not whether the EU 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 an EU nonbank SD and how such process addresses market 
risk and credit risk of the firm's on-balance sheet and off-balance 
sheet exposures; (iii) the financial reports and other financial 
information submitted by an EU 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 EU 
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 an 
EU nonbank SD with the EU Capital Rules and EU Financial Reporting 
rules is monitored and enforced. The Commission invites public comment 
on all aspects of the EU Application and on the Commission's proposed 
Capital Comparability Determination discussed below.

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

1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 
Reporting Rules
    The regulatory objectives of the CFTC Capital Rules and the CFTC 
Financial Reporting Rules are to further the Congressional mandate to 
ensure the safety and soundness of nonbank SDs to mitigate the greater 
risk to nonbank SDs and the financial system arising from the use of 
swaps that are not cleared.\136\ 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.
---------------------------------------------------------------------------

    \136\ 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 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.\137\
---------------------------------------------------------------------------

    \137\ See 17 CFR 23.105.
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2. Regulatory Objective of EU Capital Rules and EU Financial Reporting 
Rules
    The regulatory objective of the EU Capital Rules is to ensure the 
safety and soundness of EU financial institutions, including EU nonbank 
SDs.\138\ The EU Capital Rules are designed to preserve the financial 
stability and solvency of an EU nonbank SD by requiring the firm to 
maintain a sufficient amount of qualifying equity capital and 
subordinated debt based on the EU nonbank SD's activities 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 the firm's swap dealing activities.\139\ The EU Capital 
Rules are also designed to ensure that the EU nonbank SDs have 
sufficient liquidity to meet their financial obligations to 
counterparties and other creditors in a distress scenario by requiring 
each firm to hold an amount of sufficiently liquid assets to meet 
expected payment obligations under stressed conditions for 30 days 
\140\

[[Page 41786]]

and to hold a diversity of stable funding instruments sufficient to 
meet long-term obligations under both normal and stressed 
conditions.\141\
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    \138\ EU Application, pp. 5-6.
    \139\ Id.
    \140\ CRR, Article 412(1). Liquid assets primarily include cash, 
exposures to central banks, government-backed assets and other 
highly liquid assets with high credit quality. CRR, Article 416(1).
    \141\ Stable funding instruments include common equity tier 1 
capital instruments, additional tier 1 capital instruments, tier 2 
capital instruments, and other preferred shares and capital 
instruments in excess of the tier 2 allowable amount with an 
effective maturity of one year or greater. CRR, Article 427(1).
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    With respect to financial reporting, the objective of the EU 
Financial Reporting Rules is to enable the applicable supervisory 
authorities to assess the financial condition and safety and soundness 
of EU nonbank SDs. The EU Financial Reporting Rules aim to achieve this 
objective by requiring an EU nonbank SD to provide financial reports 
and other financial position and capital information to the applicable 
supervisory authorities on a regular basis.\142\ The financial 
reporting by an EU nonbank SD provides the supervisory authorities with 
information necessary to effectively monitor the EU nonbank SD's 
overall financial condition and its ability to meet its regulatory 
obligations as a nonbank SD.
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    \142\ CRR, Article 430.
---------------------------------------------------------------------------

3. Commission Analysis
    The Commission has reviewed the EU Application and the relevant EU 
laws and regulations, and has preliminarily determined that the overall 
objectives of the EU 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 EU Capital Rules and CFTC Capital 
Rules are also based on, and consistent with, the BCBS international 
bank capital framework, which is designed to ensure that banking 
entities hold sufficient levels of capital to absorb losses and 
decreases in the value of assets without the banks becoming insolvent.
    The Commission further preliminarily believes that the EU Financial 
Reporting Rules have comparable objectives with the CFTC Financial 
Reporting Rules as both sets of rules require nonbank SDs to file and/
or publish, as applicable, 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, with the goal of providing the EU 
supervisory authorities and the CFTC staff with information necessary 
to comprehensively assess the financial condition of a nonbank SD on an 
ongoing basis. In addition, to achieve this objective, the financial 
reports further provide the CFTC and EU authorities with information 
regarding potential changes in a nonbank SD's risk profile by 
disclosing changes in account balances reported over a period of time. 
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 EU supervisory authorities in 
meeting their respective objectives of ensuring the safety and 
soundness of nonbank SDs. In connection with these objectives, the 
early identification of potential financial issues provides the 
Commission and EU supervisory authorities with an opportunity to 
address such issues with the nonbank SD before the issues 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 EU Application and relevant EU 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 
Commission Regulation 23.101.\143\ 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.\144\ 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.
---------------------------------------------------------------------------

    \143\ See 17 CFR 23.101(a)(1)(i).
    \144\ 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.
---------------------------------------------------------------------------

    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.\145\ 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.\146\ Total 
tier 1 capital is composed of common equity tier 1 capital and further 
includes additional tier 1 capital.\147\ Tier 2 capital includes 
certain types of instruments that include both debt and equity 
characteristics such as qualifying subordinated debt.\148\
---------------------------------------------------------------------------

    \145\ 12 CFR 217.20.
    \146\ Id.
    \147\ Id.
    \148\ 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.\149\
---------------------------------------------------------------------------

    \149\ 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) (providing that the subordinated debt used by a 
nonbank SD to meet its minimum capital requirement under the Bank-
Based Approach must satisfy the conditions for subordinated debt 
under SEC Rule 18a-1d).

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[[Page 41787]]

    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. EU Capital Rules: Qualifying Capital
    The EU Capital Rules require an EU nonbank SD to maintain an amount 
of regulatory capital (i.e., equity capital and qualifying subordinated 
debt) equal to or greater than 8 percent of the EU nonbank SD's total 
risk exposure, which is calculated as the sum of the firm's: (i) 
capital charges for market risk; (ii) risk-weighted exposure amounts 
for credit risk; (iii) capital charges for settlement risk; (iv) CVA 
risk of OTC derivatives instruments; and (v) capital charges for 
operational risk.\150\ The EU Capital Rules limit the composition of 
regulatory capital to common equity tier 1 capital, additional tier 1 
capital, and tier 2 capital in a manner consistent with the BCBS bank 
capital framework.\151\ In this regard, the EU Capital Rules provide 
that an EU nonbank SD's regulatory capital may be composed of: (i) 
common equity tier 1 capital instruments, which generally include the 
EU nonbank SD's common equity, retained earnings, and accumulated other 
comprehensive income; \152\ (ii) additional tier 1 capital instruments, 
which include other forms of capital instruments and certain long-term 
convertible debt instruments; \153\ and (iii) tier 2 capital 
instruments, which includes other reserves, hybrid capital instruments, 
and certain qualifying subordinated term debt.\154\
---------------------------------------------------------------------------

    \150\ CRR, Article 92.
    \151\ Id.
    \152\ CRR, Articles 26 and 28. Capital instruments that qualify 
as common equity tier 1 capital under the EU Capital Rules include 
instruments that: (i) are issued directly by the EU nonbank SD; (ii) 
are paid in full and not funded directly or indirectly by the EU 
nonbank SD; and (iii) are perpetual. In addition, the principal 
amount of the instruments may not be reduced or repaid, except in 
the liquidation of the EU nonbank SD or the repurchase of shares 
pursuant to the permission of the appropriate regulatory authority.
    \153\ Id., Articles 50-52. To qualify as additional tier 1 
capital, the instruments must meet certain conditions including: (i) 
the instruments are issued directly by the EU nonbank SD and paid in 
full; (ii) the instruments are not owned by the EU nonbank SD or its 
subsidiaries; (iii) the purchase of the instruments is not funded 
directly or indirectly by the EU nonbank SD; (iv) the instruments 
rank below tier 2 instruments in the event of the insolvency of the 
EU nonbank SD; (v) the instruments are not secured or guaranteed by 
the EU nonbank SD or an affiliate; (vi) the instruments are 
perpetual and do not include an incentive for the EU nonbank SD to 
redeem them; and (vii) distributions under the instruments are 
pursuant to defined terms and may be cancelled under the full 
discretion of the EU nonbank SD.
    \154\ Id., Articles 62-63.
---------------------------------------------------------------------------

    Furthermore, subordinated debt instruments must meet certain 
conditions to qualify as tier 2 regulatory capital under the EU Capital 
Rules, including that the: (i) loans are not granted by the EU nonbank 
SD or its subsidiaries; (ii) claims on the principal amount of the 
subordinated loans under the provisions governing the subordinated loan 
agreement rank below any claim from eligible liabilities instruments 
(i.e., certain non-capital instruments), meaning that they are 
effectively subordinated to claims of all non-subordinated creditors of 
the EU nonbank SD; (iii) subordinated loans are not secured, or subject 
to a guarantee that enhances the seniority of the claim, by the EU 
nonbank SD, its subsidiaries, or affiliates; (iv) loans have an 
original maturity of at least five years; and (v) provisions governing 
the loans do not include any incentive for the principal amount to be 
repaid by the EU nonbank SD prior to the loans' maturity.\155\
---------------------------------------------------------------------------

    \155\ Id., Article 63.
---------------------------------------------------------------------------

    An EU nonbank SD must also maintain a capital conservation buffer 
equal to 2.5 percent of the firm's total risk exposure in addition to 
the requirement to maintain qualifying regulatory capital in excess of 
8 percent of its total risk exposure.\156\ The 2.5 percent capital 
conservation buffer must be met with common equity tier 1 capital.\157\ 
Common equity tier 1 capital, as noted above, is limited to the EU 
nonbank SD's common equity, retained earnings, and accumulated other 
comprehensive income, and represents a more permanent form of capital 
than equity instruments that qualify as additional tier 1 capital and 
tier 2 capital.
---------------------------------------------------------------------------

    \156\ CRD, Article 129(1). In addition, an EU nonbank SD may 
also be subject to a capital countercyclical buffer which requires 
the EU nonbank SD to hold an additional amount of common equity tier 
1 capital equal to its total risk-weighted assets multiplied by the 
weighted average of the countercyclical buffer rates that apply in 
all EU countries where the relevant exposures of the EU nonbank SD 
are located. CRD, Articles 130 and 140. EU nonbank SDs may also be 
subject to a G-SII or an O-SII buffer if they are of systemic 
importance. CRD, Article 131. In practice, however, only one of the 
EU nonbank SD registered with the Commission, Citigroup Global 
Markets Europe AG, is subject to an O-SII buffer (of 0.25 percent) 
as of January 2023 and none of the entities is subject to a G-SII 
buffer. Finally, EU nonbank SDs may be subject to a systemic risk 
buffer if the EU Member State in which they are domiciled or at 
least one EU Member State in which they have exposures has 
implemented a systemic risk buffer. CRD, Article 133. To meet the 
additional buffer requirements, if applicable, an EU nonbank SD must 
maintain a level of common equity tier 1 capital that is in addition 
to the common equity tier 1 capital required to meet its core 
capital requirement of 4.5 percent of its risk-weighted assets and 
the common equity tier 1 capital required to meet its capital 
conservation buffer. See CRD, Articles 130(1), 131(4), 131(5a) and 
133(1). For EU Member States that have implemented capital 
countercyclical buffer rates, the rate varies between 0.5 percent 
and 2.5 percent of total risk exposure. See information about EU 
Member States' countercyclical capital buffer rate available here: 
https://www.esrb.europa.eu/national_policy/ccb/html/index.en.html.
    \157\ CRD, Article 129(1).
---------------------------------------------------------------------------

    The EU Capital Rules also impose different ratios for the various 
components of regulatory capital that are consistent with the BCBS bank 
capital framework.\158\ In this regard, the EU Capital Rules provide 
that an EU nonbank SD's minimum regulatory capital must satisfy the 
following requirements: (i) common equity tier 1 capital ratio of 4.5 
percent of the firm's total risk exposure amount; (ii) total tier 1 
capital (i.e., common equity tier 1 capital plus additional tier 1 
capital) ratio of 6 percent of the firm's total risk exposure amount; 
and (iii) total capital (i.e., an aggregate amount of common equity 
tier 1 capital, additional tier 1 capital, and tier 2 capital) ratio of 
8 percent of the firm's total risk exposure amount. As noted above, an 
EU nonbank SD must also maintain a capital conservation buffer of 2.5 
percent of its total risk exposure amount that must be met with common 
equity tier 1 capital.\159\ With the addition of the capital 
conservation buffer, each EU nonbank SD is required to maintain minimum 
regulatory capital that equals or exceeds 10.5 percent of the firm's 
total risk exposure amount, with common equity tier 1 capital 
comprising at least 7 percent of the 10.5 percent minimum regulatory 
capital requirement.\160\
---------------------------------------------------------------------------

    \158\ CRR, Article 92(1).
    \159\ CRD, Article 129(1).
    \160\ The countercyclical capital buffer, the G-SII or O-SII 
buffer, and the systemic risk buffer are not included in the 
analysis given their varying implementation by EU Member States and 
limited applicability to the EU nonbank SDs that are currently 
registered with the Commission.
---------------------------------------------------------------------------

    Common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital are permitted to be included in an EU 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

[[Page 41788]]

that an EU 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.
3. Commission Analysis
    The Commission has reviewed the EU Application and the relevant EU 
laws and regulations, and has preliminarily determined that the EU 
Capital Rules are comparable in purpose and effect to the CFTC Capital 
Rules with regard to the types and characteristics of a nonbank SD's 
equity that qualifies as regulatory capital in meeting its minimum 
requirements. The EU Capital Rules and the CFTC Capital Rules for 
nonbank SDs both require a nonbank SD to maintain a quantity of high-
quality capital 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 EU Capital Rules and 
the CFTC Capital Rules have similar characteristics (e.g., the equity 
must be in the form of high-quality, committed and permanent capital) 
and the equity instruments generally have no priority in distribution 
of firm assets or income with respect to other shareholders or 
creditors of the firm, which makes the equity available to a nonbank SD 
to absorb unexpected losses, including counterparty defaults.\161\
---------------------------------------------------------------------------

    \161\ Compare 12 CFR 217.20(b) (defining capital instruments 
that qualify as common equity tier 1 capital under the rules of the 
Federal Reserve Board) and 12 CFR 217.20(c) (defining capital 
instruments that qualify as additional tier 1 capital under the 
rules of the Federal Reserve Board) with CRR, Articles 26 and 28 
(defining items and capital instruments that qualify as common 
equity tier 1 capital under the EU Capital Rules) and CRR, Article 
52 (defining capital instruments that qualify as additional tier 1 
capital under the EU Capital Rules).
---------------------------------------------------------------------------

    In addition, the Commission has preliminarily determined that the 
conditions imposed on subordinated debt instruments under the EU 
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 regulatory 
capital purposes. Specifically, in both sets of rules, the conditions 
include a requirement that the debt holders have effectively 
subordinated their claims for repayment of the debt to the claims of 
other creditors of the nonbank SD.\162\
---------------------------------------------------------------------------

    \162\ Compare 17 CFR 240.18a-1d with CRR, Article 63(d).
---------------------------------------------------------------------------

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

C. 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.\163\
---------------------------------------------------------------------------

    \163\ See 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 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.\164\ 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 the safety and soundness of the nonbank SD.\165\
---------------------------------------------------------------------------

    \164\ 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).
    \165\ 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 liquidity risk in addition to the risks associated with its 
trading portfolio.\166\
---------------------------------------------------------------------------

    \166\ 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

[[Page 41789]]

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/or credit risk charges, unless the nonbank 
SD has been approved by the Commission or NFA to use internal 
models.\167\ For standardized market risk charges, the Commission 
incorporates by reference the standardized market risk charges set 
forth in Commission Regulation 1.17 for FCMs and SEC Rule 18a-1 for 
nonbank SBSDs.\168\ The standardized market risk charges under 
Commission 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.\169\ 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.\170\
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    \167\ 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.
    \168\ See paragraph (3) of the definition of the term BHC 
equivalent risk-weighted assets in 17 CFR 23.100.
    \169\ See 17 CFR 240.18a-1(c)(1).
    \170\ 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 as if the SD itself were a bank holding 
company subject to Subpart D.\171\ 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.\172\ 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.\173\ In addition to the risk-
weighted assets for general credit risk, a nonbank SD calculating risk 
charges under Subpart D of 12 CFR 217 must also calculate risk-weighted 
assets for unsettled transactions involving securities, foreign 
exchange instruments, and commodities that have a risk of delayed 
settlement or delivery.
---------------------------------------------------------------------------

    \171\ See 17 CFR 23.101(a)(1)(i)(B) and paragraph (1) of the 
definition of the term BHC equivalent risk-weighted assets in 17 CFR 
23.100.
    \172\ See 17 CFR 217.32. Lower credit risk factors are assigned 
to entities with lower credit risk and higher credit risk factors 
are assigned to entities with higher credit risk. For example, a 
credit risk factor of 0% is applied to exposures to the U.S. 
government, the Federal Reserve Bank, and U.S. government agencies 
(see 12 CFR 217.32 (a)(1)), and a credit risk factor of 100% is 
assigned to an exposure to foreign sovereigns that are not members 
of the Organization of Economic Co-operation and Development (see 12 
CFR 217.32(a)(2)).
    \173\ 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'').\174\ Both CEM and SA-CCR are non-model, 
rules-based, approaches to calculating counterparty credit risk 
exposures for derivatives positions. Credit risk exposure under CEM is 
the sum of: (i) the current exposure (i.e., the positive mark-to-
market) of the derivatives contract; and (ii) the potential future 
exposure, which is calculated as the product of the notional principal 
amount of the derivatives contract multiplied by a standard credit risk 
conversion factor set forth in the rules of the Federal Reserve 
Board.\175\ Credit risk exposure under SA-CCR is defined as the 
exposure at default amount of a derivatives contract, which is computed 
by multiplying a factor of 1.4 by the sum of: (i) the replacement costs 
of the contract (i.e., the positive mark-to market); and (ii) the 
potential future exposure of the contract.\176\
---------------------------------------------------------------------------

    \174\ See 17 CFR 217.34. See also, Commission Regulation 23.100 
(17 CFR 23.100) defining the term BHC risk-weighted assets, which 
provides that a nonbank SD that does not have model approval may use 
either CEM or SA-CCR to compute its exposures for over-the-counter 
derivative contracts without regard to the status of its affiliate 
entities with respect to the use of a calculation approach under the 
Federal Reserve Board's capital rules.
    \175\ See 12 CFR 217.34.
    \176\ See 12 CFR 217.132(c).
---------------------------------------------------------------------------

    A nonbank SD may also obtain approval from the Commission or NFA to 
use internal models to compute market risk and/or credit risk charges 
in lieu of the standardized charges. A nonbank SD seeking approval to 
use an internal model is required to submit an application to the 
Commission or NFA.\177\ 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 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.
---------------------------------------------------------------------------

    \177\ 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'').\178\ 
Subpart F is based on models that are consistent with the BCBS Basel 
2.5 capital framework.\179\ The Commission's qualitative and 
quantitative requirements for internal capital models are also 
comparable to the SEC's existing internal capital model requirements 
for broker-dealers in securities and SBSDs,\180\ which are broadly 
based on the BCBS Basel 2.5 capital framework.
---------------------------------------------------------------------------

    \178\ See paragraph (4) of the definition of BHC equivalent 
risk-weighted assets in 17 CFR 23.100.
    \179\ Compare 17 CFR 23.100 (providing for a nonbank SD that is 
approved to use internal models to calculate market and credit risk 
to calculate its risk-weighted assets using Subparts E and F of 12 
CFR part 217), Subpart F of 12 CFR, 17 CFR 23.101(a)(1)(ii) 
(providing for an SD that elects the Net Liquid Assets Approach to 
calculate its net capital in accordance with Rule 18a-1), and 17 CFR 
23.102(a), with Basel Committee on Banking Supervision, Revisions to 
the Basel II Market Risk Framework (2011), https://www.bis.org/publ/bcbs193.pdf (describing the revised internal model approach under 
Basel 2.5).
    \180\ The SEC internal model requirements for SBSDs are listed 
in 17 CFR 240.18a-1(d).
---------------------------------------------------------------------------

    A nonbank SD approved to use internal models to compute credit risk 
charges is required to perform such computation in accordance with 
Subpart E of the Federal Reserve Board's Part 217 regulations \181\ as 
if the SD itself were a bank holding company subject to Subpart E.\182\ 
The internal credit risk modeling requirements are also based on the 
Basel 2.5 capital framework and the Basel 3 capital framework. A 
nonbank SD that computes its credit risk charges using internal models 
must multiply the resulting capital requirement by a factor of 
12.5.\183\
---------------------------------------------------------------------------

    \181\ 12 CFR 217 Subpart E.
    \182\ See 85 FR 57462 at 57496.
    \183\ 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv), and 
217.132(d)(9)(iii).

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[[Page 41790]]

    In adopting the final Bank-Based Approach rules, the Commission 
also noted that in choosing an alternative calculation, the nonbank SD 
must adopt the entirety of the alternative. As such, if the nonbank SD 
is calculating its risk-weighted assets using the regulations in 
Subpart E of 12 CFR 217, the nonbank SD must include charges reflecting 
all categories of risk-weighted assets applicable under these 
regulations, which include among other things, charges for operational 
risk, CVA of OTC derivatives contracts, and unsettled transactions 
involving securities, foreign exchange instruments, and commodities 
that have a risk of delayed settlement or delivery.\184\ The capital 
charge for operational risk and CVA of OTC derivatives contracts 
calculated in accordance with Subpart E of 12 CFR 217 must also be 
multiplied by a factor of 12.5.\185\
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    \184\ Settlement risk for OTC derivatives contracts is addressed 
as part of the counterparty-credit risk calculation methodology 
described in 12 CFR 217.132.
    \185\ 12 CFR 217.162(c) (operational risk) and 217.132(e)(4) 
(CVA of OTC derivative contracts).
---------------------------------------------------------------------------

    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.\186\ 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.\187\
---------------------------------------------------------------------------

    \186\ See 17 CFR Appendix A to Subpart E of Part 23(i)(2)(iii), 
and Basel Committee on Banking Supervision, Revisions to the Basel 
II Market Risk Framework (2011), paragraph 718(Lxxvi)(e), available 
at: https://www.bis.org/publ/bcbs193.pdf.
    \187\ 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. EU Capital Rules: EU Nonbank Swap Dealer Minimum Capital 
Requirements
    The EU Capital Rules impose bank-like capital requirements on an EU 
nonbank SD that, consistent with the BCBS international bank capital 
framework, require the EU nonbank SD to hold a sufficient amount of 
qualifying equity capital and subordinated debt based on the EU nonbank 
SD's activities to absorb decreases in the value of firm assets and 
increases in the value of the firm's liabilities, and to cover losses 
from its business activities, including possible counterparty defaults 
and margin collateral shortfalls associated with the firm's swap 
dealing activities, without the firm becoming insolvent. Specifically, 
the EU Capital Rules require each EU nonbank SD to maintain sufficient 
levels of capital to satisfy the following capital ratios, expressed as 
a percentage of the EU nonbank SD's total risk exposure amount (i.e., 
the sum of the EU nonbank SD's risk-weighted assets and exposures): (i) 
a common equity tier 1 capital ratio of 4.5 percent; \188\ (ii) a tier 
1 capital ratio of 6 percent; \189\ and (iii) a total capital ratio of 
8 percent.\190\ The EU Capital Rules further require an EU nonbank SD 
to maintain a capital conservation buffer composed of common equity 
capital tier 1 capital in amount equal to 2.5 percent of the firm's 
total risk exposure.\191\ The common equity tier 1 capital used to meet 
the capital conservation buffer must be separate and in addition to the 
4.5 percent of common equity tier 1 capital that the EU nonbank is 
required to maintain in meeting its core 8 percent capital 
requirement.\192\ Thus, an EU nonbank SD is required to maintain 
regulatory capital equal to at least 10.5 percent of its total risk 
exposure amount, 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).
---------------------------------------------------------------------------

    \188\ CRR, Article 92(1)(a).
    \189\ Id., Article 92(1)(b). Tier 1 capital is the sum of the EU 
nonbank SD's common equity tier 1 capital and additional tier 1 
capital.
    \190\ Id., Article 92(1)(c). The total capital is the sum of the 
EU nonbank SD's tier 1 capital and tier 2 capital.
    \191\ CRD, Article 129(1).
    \192\ Id. An EU nonbank SD may also be required to maintain a 
countercyclical capital buffer composed of common equity tier 1 
capital equal to the firm's total risk exposure multiplied by an 
entity-specific countercyclical buffer rate. The entity-specific 
countercyclical capital buffer rate is determined by calculating the 
weighted average of the countercyclical buffer rates that apply in 
the jurisdictions in which the EU nonbank SD has relevant credit 
exposures. See CRD, Article 140. In each EU Member State, the 
countercyclical buffer rate is set by a designated authority on a 
quarterly basis. See CRD, Article 136. In addition, an EU nonbank SD 
may be subject to a G-SII or O-SII buffer, if the entity is of 
systemic importance, and a systemic risk buffer if the EU Member 
State in which the EU nonbank SD is domiciled or at least one EU 
Member State in which the EU nonbank SD has exposures has 
implemented one. See CRD, Articles 131 and 133. In practice, 
however, currently only one of the EU nonbank SD registered with the 
Commission, Citigroup Global Markets Europe AG, is subject to O-SII 
buffer (of 0.25 percent) as of January 2023 and none of the 
registered EU nonbank SDs is subject to a G-SII buffer.
---------------------------------------------------------------------------

    An EU nonbank SD's total risk exposure amount is calculated as the 
sum of the firm's: (i) capital requirements for market risk; (ii) risk-
weighted exposure amounts for credit risk; (iii) capital requirements 
for settlement risk; (iv) capital requirements for CVA risk of OTC 
derivatives instruments; and (v) capital requirements for operational 
risk.\193\ Capital charges for market risk and risk-weighted exposures 
for credit risk are computed based on the EU 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.\194\ Settlement risk capital charges reflect the price 
difference to which an

[[Page 41791]]

EU nonbank SD is exposed if its transactions in debt instruments, 
equity, foreign currency, and commodities remain unsettled after the 
respective product's due delivery date.\195\ CVA is an adjustment to 
the mid-market value of the portfolio of OTC derivative transactions 
with a counterparty and reflects the current market value of the credit 
risk of the counterparty to the EU nonbank SD.\196\ Operational risk 
capital charges reflect the risk of loss resulting from inadequate or 
failed internal processes, people and systems or from external events, 
and includes legal risk.\197\ To compute its total risk exposure 
amount, an EU nonbank SDs is also required to multiply the capital 
requirements for market risk, settlement risk, CVA risk, and 
operational risk, calculated in accordance with the EU Capital Rules, 
by a factor of 12.5, which effectively requires an EU nonbank SD to 
hold qualifying regulatory capital equal to or greater than the full 
amount of the relevant risk exposures.\198\ The formulae for 
calculating risk-weighted exposure amounts for credit risk also include 
a 12.5 multiplication factor.\199\
---------------------------------------------------------------------------

    \193\ CRR, Article 92(3).
    \194\ To compute capital requirements for market risk, EU 
nonbank SDs are required to calculate capital charges for all 
trading book positions and non-trading book positions that are 
subject to foreign exchange or commodity risk. See CRR, Article 325. 
The risk-weighted exposure amounts for credit risk include: (i) 
risk-weighted exposure amounts for credit risk and dilution risk in 
respect of all the business activities of the EU nonbank SD, 
excluding risk-weighted exposure amounts from the trading book 
business of the firm; and (ii) risk-weighted exposure amounts for 
counterparty risk arising from the trading book business for certain 
derivatives transactions, repurchase agreements, securities or 
commodities lending or borrowing transactions, margin lending or 
long settlement transactions. See CRR, Article 92(3)(a) and (f).
    \195\ CRR, Article 378. Settlement risk is calculated as 8 
percent, 50 percent, 75 percent, or 100 percent of the price 
difference for transactions that are not settled within 5 to 15 
business days, 16 to 30 business days, 31 to 45 business days, or 46 
or more business days, respectively, from the due settlement date.
    \196\ Id., Article 381.
    \197\ Id., Article 4(1)(52).
    \198\ Id., Article 92(4).
    \199\ Id., Article 153 et seq.
---------------------------------------------------------------------------

    Consistent with the Commission's Bank-Based Approach and the BCBS 
capital framework, the EU Capital Rules require EU nonbank SDs to 
compute market risk exposures and credit risk exposures using a 
standardized approach or, if approved by the relevant competent 
authorities, internal risk models.\200\ In addition, EU Capital Rules, 
consistent with the BCBS capital framework, require EU nonbank SDs to 
compute capital charges for CVA risk and operational risk using 
standardized approaches, unless approved to use internal models by 
relevant competent authorities.\201\
---------------------------------------------------------------------------

    \200\ With the permission of the relevant competent authority, 
an EU nonbank SD may use internal models to calculate market risk 
(see CRR, Article 363) and credit risk (see CRR, Articles 143 and 
283).
    \201\ See, CRR, Articles 382-384 for CVA risk calculations; and 
Article 312(2) for operational risk.
---------------------------------------------------------------------------

    EU nonbank SDs calculate standardized market risk charges generally 
by multiplying the notional or carrying amount of net positions by 
risk-weighting factors, which are based on the underlying market risk 
of each asset or exposure and increase as the expected risk of the 
positions increase. Market risk requirements for debt instruments and 
equity instruments are calculated separately under the standardized 
approach, and are each calculated as the sum of specific risk and 
general risk of the positions. Securitizations are treated as debt 
instruments for market risk requirements,\202\ whereas derivative 
positions are generally treated as exposures on their underlying 
assets,\203\ with options being delta-adjusted.\204\
---------------------------------------------------------------------------

    \202\ Id., Article 326. See also CRR, Articles 334-340 
(provisions related to debt instruments) and 341-343 (provisions 
related to equities).
    \203\ Id., Articles 328-330, 358.
    \204\ Id., Article 329.
---------------------------------------------------------------------------

    The EU Capital Rules also require EU nonbank SDs to include in 
their risk-weighted assets market risk exposures to certain foreign 
currency and gold positions. Specifically, an EU nonbank SD with net 
positions in foreign exchange and gold that exceed 2 percent of the 
firm's total capital must calculate capital requirements for foreign 
exchange risk.\205\ The capital requirement for foreign exchange risk 
under the standardized approach is 8 percent of the EU nonbank SD's net 
positions in foreign exchange and gold.\206\
---------------------------------------------------------------------------

    \205\ Id., Article 351.
    \206\ Id.
---------------------------------------------------------------------------

    The EU Capital Rules further require EU nonbank SDs to include 
exposures to commodity positions in calculating the firm's risk-
weighted assets. The standardized calculation of commodity risk 
exposures may follow one of three approaches depending on type of 
position or exposure. The first is the sum of a flat percentage rate 
for net positions, with netting allowed among tightly defined sets, 
plus another flat percentage rate for the gross position.\207\ The 
other two standardized approaches are based on maturity-ladders, where 
unmatched portions of each maturity band (i.e., portions that do not 
net out to zero) are charged at a step-up rate in comparison to the 
base charges for matched portions.\208\
---------------------------------------------------------------------------

    \207\ Id., Article 360.
    \208\ Id., Articles 359-361.
---------------------------------------------------------------------------

    With respect to credit risk, the EU Capital Rules require an EU 
nonbank SD to calculate its standardized credit risk exposure in a 
manner aligned with the Commission's Bank-Based Approach and the BCBS 
framework by taking the carrying value or notional value of each of the 
EU nonbank SD's on-balance sheet and off-balance sheet exposures, 
making certain additional credit risk adjustments, and then applying 
specific risk-weights based on the type of counterparty and the asset's 
credit quality.\209\ For instance, high quality credit exposures, such 
as exposures to EU Member States' central banks, carry a zero percent 
risk-weight. Exposures to EU banks, other investment firms, or other 
businesses, however, may carry risk-weights between 20 percent and 150 
percent depending on the credit ratings available for the entity or, 
for exposures to banks and investment firms, for its central 
government.\210\ If no credit rating is available, the EU nonbank SD 
must generally apply a 100 percent risk-weight, meaning the total 
accounting value of the exposure is used.\211\
---------------------------------------------------------------------------

    \209\ Id., Articles 111 and 113(1).
    \210\ Id., Articles 114-122.
    \211\ Id., Articles 121(2) and 122(2).
---------------------------------------------------------------------------

    With respect to counterparty credit risk for derivatives 
transactions and certain other agreements that give rise to bilateral 
credit risk, the EU Capital Rules require an EU nonbank SD that is not 
approved to use credit risk models to calculate its exposure using the 
standardized approach for counterparty credit risk (i.e., SA-CCR),\212\ 
which is one of the methods that a nonbank SD may use to calculate its 
credit risk exposure under a derivatives transaction pursuant to the 
Commission's Bank-Based Approach.\213\ The exposure amount under the 
SA-CCR is computed, under both the EU Capital Rules and the 
Commission's Bank-Based Approach, as the sum of the replacement cost of 
the contract and the potential future exposure of the contract, 
multiplied by a factor of 1.4.\214\
---------------------------------------------------------------------------

    \212\ CRR, Articles 92(3)(f) and 274-280e. EU nonbank SDs with 
smaller-sized derivatives business may also use a ``simplified 
standardized approach to counterparty credit risk'' (CRR, Article 
281) or an ``original exposure method'' (CRR, Article 282) as 
simpler methods for calculating exposure values. To use either of 
these alternative methods, an entity's on-and off-balance sheet 
derivatives business must be equal or less than 10 percent of the 
entity's total assets and EUR 300 million or 5 percent of the 
entity's total assets and EUR 100 million, respectively. CRR, 
Article 273a.
    \213\ 12 CFR 217.34.
    \214\ CRR, Article 274(2) and 12 CFR 217.132(c).
---------------------------------------------------------------------------

    EU Capital Rules also require an EU nonbank SD to calculate capital 
requirements for settlement risk.\215\ Consistent with the BCBS 
framework, the capital charge for settlement risk for transactions 
settled on a delivery-versus-payment basis is computed by multiplying 
the price difference to which an EU nonbank SD is exposed as a result 
of an unsettled transaction by a

[[Page 41792]]

percentage factor that varies from 8 percent to 100 percent based on 
the number of working days after the due settlement date during which 
the transaction remains unsettled.\216\ The CFTC's Bank-Based Approach 
provides for a similar calculation methodology for risk-weighted asset 
amounts for unsettled transactions involving securities, foreign 
exchange instruments, and commodities.\217\
---------------------------------------------------------------------------

    \215\ CRR, Article 378 (indicating that if transactions in which 
debt instruments, equities, foreign currencies and commodities 
excluding repurchase transactions and securities or commodities 
lending and securities or commodities borrowing are unsettled after 
their due delivery dates, an EU nonbank SD must calculate the price 
difference to which it is exposed).
    \216\ Id. The price difference to which an EU nonbank SD is 
exposed is the difference between the agreed settlement price for an 
instrument (i.e., a debt instrument, equity, foreign currency or 
commodity) and the instrument's current market value, where the 
difference could involve a loss for the firm. CRR, Article 378.
    \217\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted 
assets), 12 CFR 217.38 and 12 CFR 217.136.
---------------------------------------------------------------------------

    Consistent with the BCBS framework, an EU nonbank SD is also 
required to calculate capital charges for CVA risk for OTC derivative 
instruments \218\ to reflect the current market value of the credit 
risk of the counterparty to the EU nonbank SD.\219\ CVA can be 
calculated following similar methodologies as those described in 
Subpart E of the Federal Reserve Board's Part 217 regulations.\220\
---------------------------------------------------------------------------

    \218\ CRR, Article 382 (1). CVA risk charges need not be 
calculated for credit derivatives recognized to reduce risk-weighted 
exposure amounts for credit risk. Id.
    \219\ Id., Article 381. CVA is defined to exclude debit 
valuation adjustment.
    \220\ See CRR, Articles 383-384 and 12 CFR 217.132(e)(5) and 
(6). Under the CFTC's Bank-Based Approach, nonbank SDs calculating 
their credit risk-weighted assets using the regulations in Subpart D 
of the Federal Reserve Board's Part 217 regulations, do not 
calculate CVA of OTC derivatives instruments.
---------------------------------------------------------------------------

    EU nonbank SD's total risk exposure amount also includes 
operational risk charges. Consistent with the BCBS framework, EU 
nonbank SDs may calculate standardized operational risk charges using 
either one of two approaches--the Basic Indicator Approach or the 
Standardized Approach.\221\ Both the Basic Indicator Approach and the 
Standardized Approach use as a calculation basis the three-year average 
of the ``relevant indicator,'' which is the sum of certain items on the 
statement of income/loss (i.e., the firm's net interest income and net 
non-interest income). Under the Basic Indicator Approach, EU nonbank 
SDs are required to multiply the relevant indicator by a factor of 15 
percent. When using the Standardized Approach, firms need to allocate 
the relevant indicator into eight business lines specified by 
regulation (e.g., trading and sales; retail brokerage; corporate 
finance) and multiply the corresponding portion by a percentage factor 
ranging from 12 to 18 percent depending on the business line. The 
capital requirements for operational risk are calculated as the sum of 
the individual business lines' charges.
---------------------------------------------------------------------------

    \221\ CRR, Article 312.
---------------------------------------------------------------------------

    As noted above, if approved by its relevant supervisory authority, 
an EU nonbank SD may use internal models to calculate its market risk 
charges, credit risk charges, including counterparty credit risk 
charges, CVA risk charges, and operational risk charges in lieu of 
using a standardized approach.\222\ To obtain permission, an EU nonbank 
SD must demonstrate to the satisfaction of the relevant authority that 
it meets certain conditions for the use of models.\223\
---------------------------------------------------------------------------

    \222\ Id., Articles 143 (credit risk), 283 (counterparty credit 
risk), 312 (operational risk), 363 (market risk) and 383 (CVA risk). 
EU nonbank SDs are not permitted, however, to calculated 
counterparty credit risk charges using internal models when 
calculating large exposures. CRR, Article 390(4).
    \223\ Id., Articles 143, 283, 312(2) and 363(1).
---------------------------------------------------------------------------

    With respect to market risk, the relevant supervisory authority may 
grant an EU nonbank SD permission to use internal models to calculate 
one or more of the following risk categories: (i) general risk of 
equity instruments, (ii) specific risk of equity instruments, (iii) 
general risk of debt instruments, (iv) specific risk of debt 
instruments, (v) foreign exchange risk, or (vi) commodities risk,\224\ 
along with interest rate risk on derivatives.\225\ To obtain approval 
to use a market risk model, an EU nonbank SD must meet conditions 
related to specified model elements and controls including risk and 
stressed risk calculations,\226\ back-testing and multiplication 
factors,\227\ risk measurement requirements,\228\ governance and 
qualitative requirements,\229\ internal validation,\230\ and specific 
requirements by risk categories.\231\ An EU nonbank SD approved to use 
models must also obtain approval from the relevant authority to 
implement a material change to the model or make a material extension 
to the use of the model.\232\ The EU Capital Rules' market risk model-
based methodology is based on the Basel 2.5 standard \233\ and 
incorporates relevant aspects of the BCBS framework in terms of 
requiring EU nonbank SDs with model approval to use a VaR model with a 
99 percent, one-tailed confidence level with (i) price changes 
equivalent to a 10-business day movement in rates and prices, (ii) 
effective historical observation periods of at least one year, and 
(iii) at least monthly data set updates.\234\ EU Capital Rules also 
include a framework for governance that includes requirements related 
to the implementation of independent risk management,\235\ senior 
management's involvement in the risk-control process,\236\ 
establishment of procedures for monitoring and ensuring compliance with 
a documented set of internal policies and controls,\237\ and the 
conducting of independent review of the models as part of the internal 
audit process.\238\
---------------------------------------------------------------------------

    \224\ Id., Article 363(1).
    \225\ Id., Article 331(1), using sensitivity models.
    \226\ Id., Articles 364-365.
    \227\ Id., Article 366.
    \228\ Id., Article 367.
    \229\ Id., Article 368.
    \230\ Id., Article 369.
    \231\ Id., Articles 364-377.
    \232\ Id., Article 363(3).
    \233\ Compare CRR, Articles 362-377 with Revisions to the Basel 
II Market Risk Framework.
    \234\ Id., Article 365(1).
    \235\ Id., Articles 368 (1)(b).
    \236\ Id., Articles 368 (1)(c).
    \237\ Id., Articles 368 (1)(e).
    \238\ Id., Articles 368 (1)(h).
---------------------------------------------------------------------------

    With regulatory permission, EU nonbank SDs may also use models to 
calculate credit risk exposures.\239\ Credit risk models may include 
internal ratings based on the estimation of default probabilities and 
loss given default, consistent with the BCBS framework and subject to 
similar model risk management guidelines.\240\ To obtain approval for 
the use of internal ratings-based models, an EU nonbank SD must meet 
requirements related to, among other things, the structure of its 
rating systems and its criteria for assigning exposures to grades and 
pools within a rating system, the parameters of risk quantification, 
the validation of internal estimates, and the internal governance and 
oversight of the rating systems and estimation processes.\241\
---------------------------------------------------------------------------

    \239\ Id., Article 143.
    \240\ Id.
    \241\ Id., Articles 170-177 (rating systems), 178-184 (risk 
quantification), 185 (validation of internal estimates), and 189-191 
(internal governance and oversight).
---------------------------------------------------------------------------

    In addition, subject to regulatory approval, EU nonbank SDs may use 
internal models to calculate counterparty credit risk exposures for 
derivatives, securities financing, and long settlement 
transactions.\242\ The prerequisites for approval for such models 
include requirements related to the establishment and maintenance of a 
counterparty credit risk management framework, stress testing, the 
integrity of the modelling process, the risk

[[Page 41793]]

management system, and validation.\243\ The EU Capital Rules' internal 
counterparty credit risk model-based methodology is also based on the 
Basel 2.5 standard.\244\ The EU Capital Rules allow for the estimation 
of expected exposure as a measure of the average of the distribution of 
exposures at a particular future date,\245\ with adjustments to the 
period of risk, as appropriate to the asset and counterparty.
---------------------------------------------------------------------------

    \242\ Id., Article 283. As noted above, however, EU nonbank SDs 
are not permitted to calculate counterparty credit risk charges 
using internal models when calculating large exposures. CRR, Article 
390(4).
    \243\ Id., Articles 283-294.
    \244\ Compare CRR, Article 362-377 with Revisions to the Basel 
II Market Risk Framework.
    \245\ CRR, Article 272(19), 283-285.
---------------------------------------------------------------------------

    EU nonbank SDs may also obtain regulatory permission to use 
``advanced measurement approaches'' based on their own operational risk 
measurement systems, to calculate capital charges for operational risk. 
To obtain such permission, EU nonbank SDs must meet qualitative and 
quantitative standards, as well as general risk management standards 
set forth in the EU Capital Rules.\246\ Specifically, among other 
qualitative standards, EU nonbank SDs must meet requirements related to 
the governance and documentation of their operational risk management 
processes and measurement systems.\247\ In addition, EU nonbank SDs 
must meet quantitative standards related to process, data, scenario 
analysis, business environment and internal control factors laid down 
in the EU Capital Rules.\248\
---------------------------------------------------------------------------

    \246\ CRR, Article 312(1), cross-referencing CRR, Articles 321 
and 322 and CRD, Articles 74 and 85.
    \247\ CRR, Article 321.
    \248\ Id., Article 322.
---------------------------------------------------------------------------

    As an additional element to the capital requirements, the EU 
Capital Rules further impose a 3 percent leverage ratio floor on EU 
nonbank SDs.\249\ Specifically, each EU nonbank SD is required to 
maintain an aggregate amount of common equity tier 1 capital and 
additional tier 1 capital equal to or in excess of 3 percent of the 
firm's total on-balance sheet and off-balance sheet exposures, 
including exposures on uncleared swaps, without regard to any risk-
weighting.\250\ The leverage ratio is a non-risk based minimum capital 
requirement that is intended to prevent an EU nonbank SD from engaging 
in excessive leverage, and complements the risk-based minimum capital 
requirement that is based on the EU nonbank SD's risk-weighted assets.
---------------------------------------------------------------------------

    \249\ Id., Article 92(1)(d).
    \250\ Total exposures are required to be computed in accordance 
with CRR, Article 429.
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    Furthermore, the EU Capital Rules also impose separate liquidity 
requirements on an EU nonbank SD to address liquidity risk. The 
liquidity requirements are composed of three main obligations. First, 
an EU nonbank SD is required to hold an amount of sufficiently liquid 
assets to meet the firm's expected payment obligations under stressed 
conditions for 30 days.\251\ Second, an EU nonbank SD is subject to a 
stable funding requirement whereby the firm must hold a diversity of 
stable funding instruments \252\ sufficient to meet long-term 
obligations under both normal and stressed conditions.\253\ Third, to 
ensure that an EU nonbank SD continues to meet its liquidity 
requirements, the firm is required to maintain robust strategies, 
policies, processes, and systems for the identification of liquidity 
risk over an appropriate set of time horizons, including intra-
day.\254\ The EU Capital Rules' liquidity requirements are intended to 
help ensure that EU nonbank SDs can continue to fund their operations 
over various time horizons, including the timely making of payments to 
customers and counterparties.
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    \251\ CRR, Article 412(1) provides that an EU nonbank SD shall 
hold liquid assets in amount sufficient to cover the liquidity 
outflows less the liquidity inflows under stressed conditions so as 
to ensure the firm maintains levels of liquidity buffers that are 
adequate to address any possible imbalance between liquidity inflows 
and outflows under stressed conditions over a period of 30 days. 
Liquid assets primarily include cash, deposits with central banks 
(to the extent that the deposits can be withdrawn at any times in 
periods of stress), government-backed assets and other highly liquid 
assets with high credit quality. Id., Article 416(1).
    \252\ Stable funding instruments include common equity tier 1 
capital instruments, additional tier 1 capital instruments, tier 2 
capital instruments, and other preferred shares and capital 
instruments in excess of the tier 2 allowable amount with an 
effective maturity of one year or greater. CRR, Article 427(1).
    \253\ CRR, Article 413(1).
    \254\ CRD, Article 86 provides that EU Member States' competent 
authorities must ensure that institutions, including EU nonbank SDs, 
have robust strategies, policies, processes and systems for the 
identification, measurement, management and monitoring of liquidity 
risk over an appropriate set of time horizons, including intra-day, 
so as to ensure that entities maintain adequate levels of liquidity 
buffers. The strategies, policies, processes, and systems must be 
tailored to business lines, currencies, branches, and legal entities 
and must include adequate allocation mechanisms of liquidity costs, 
benefits, and risks. CRD, Article 86 was implemented into French law 
by MFC, Articles L.511-41-1-B and L.511-41-1-C for credit 
institutions and L.533-2-1 for investment firms subject to the CRR/
CRD framework, as well as the Articles 148 to 186 of the Ministerial 
Order on Internal Control. Article 86 was implemented into German 
law by Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht's 
(``BaFin'') Minimum Requirements for Risk Management (``MaRisk'') 
Circular.
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    The EU Capital Rules also require EU nonbank SDs to comply with a 
minimum initial capital requirement of EUR 5 million in order to become 
and remain licensed as a credit institution.\255\ The initial capital 
requirement must be met with common equity tier 1 capital.\256\
---------------------------------------------------------------------------

    \255\ CRD, Article 12(1).
    \256\ Id., Article 12(2).
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3. Commission Analysis
    The Commission has reviewed the EU Application and the relevant EU 
laws and regulations, and has preliminarily determined that the EU 
Capital Rules are comparable in purpose and effect to the CFTC Capital 
Rules with regard to the establishment of the nonbank SD's minimum 
capital requirement and the calculation of the nonbank SD's amount of 
regulatory capital to meet that requirement.\257\ Although there are 
differences between the EU Capital Rules and the CFTC Capital Rules, as 
discussed below, the Commission preliminarily believes that the EU 
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 swap dealing activities, and decreases 
in the value of the firm's assets and increases in the value of the 
firm's liabilities, without the nonbank SD becoming insolvent. The 
Commission's preliminary finding of comparability is based on a 
comparative analysis of the three minimum capital requirements 
thresholds of the CFTC Capital Rules' Bank-Based Approach (i.e., the 
three prongs recited in Section III.C.1 above) and the respective 
elements of the EU Capital Rules' requirements, as discussed below.
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    \257\ The Commission notes that pursuant to Article 7 of CRR, 
the competent authority may exempt an entity subject to CRR from the 
applicable capital requirements, provided certain conditions are 
met. In such case, the relevant requirements would apply to the 
entity's parent entity, on a consolidated basis. The Commission's 
assessment does not cover the application of Article 7 of CRR and 
therefore an entity that benefits from an exemption under Article 7 
of CRR would not qualify for substituted compliance under the 
Capital Comparability Determination Order.
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a. Fixed Amount Minimum Capital Requirement
    CFTC Capital Rules and the EU 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. Prong (i) of the CFTC Capital 
Rules requires each nonbank SD electing the Bank-Based Approach to 
maintain a minimum of $20 million of common

[[Page 41794]]

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.\258\ The EU Capital Rules also contain a requirement 
that an EU nonbank SD maintain a fixed amount of minimum initial 
capital of EUR 5 million of common equity tier 1 capital in order to 
become and remain authorized as a credit institution.\259\
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    \258\ 85 FR 57492.
    \259\ CRD, Article 12.
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    The Commission recognizes that the $20 million fixed-dollar minimum 
capital required under the CFTC Capital Rules is substantially higher 
than the EUR 5 million minimum initial capital required under the EU 
Capital Rules and the Commission 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. Accordingly, the Commission is proposing 
to condition the Capital Comparability Determination Order to require 
each EU nonbank SD to maintain, at all times, a minimum level of $20 
million regulatory capital in the form of common equity tier 1 items as 
defined in Article 26 of CRR.\260\ The proposed condition would require 
each EU nonbank SD to maintain an amount of common equity tier 1 
capital denominated in euro that is equivalent to the $20 million in 
U.S. dollars.\261\ The Commission is also proposing that an EU nonbank 
SD may convert the euro-denominated common equity tier 1 capital amount 
to the U.S. dollar equivalent based on a commercially reasonable and 
observable exchange rate.
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    \260\ The Commission notes that the proposed requirement that EU 
nonbank SDs maintain a minimum level of $20 million of common equity 
tier 1 capital is consistent with conditions set forth in the 
proposed Capital Comparability Determination Orders for Japan and 
Mexico, respectively. 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) (``Proposed Japan Order''); 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, 
87 FR 76374 (Dec. 13, 2022) (``Proposed Mexico Order'').
    \261\ Each of the four current EU nonbank SDs currently 
maintains common equity tier 1 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 EU nonbank SDs currently registered 
with the Commission. Nonetheless, the Commission requests comment on 
the proposed condition.
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b. Minimum Capital Requirement Based on Risk-Weighted Assets
    Prong (iii) of the CFTC Capital Rules 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.\262\ 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.
---------------------------------------------------------------------------

    \262\ 17 CFR 23.101(a)(1)(B).
---------------------------------------------------------------------------

    The EU Capital Rules contain capital requirements for EU nonbank 
SDs that the Commission preliminarily believes are comparable to the 
requirements contained in prong (iii) of the CFTC Capital Rules. 
Specifically, the EU Capital Rules require an EU nonbank SD to 
maintain: (i) common equity tier 1 capital equal to at least 4.5 
percent of the EU nonbank SD's total risk exposure amount; (ii) total 
tier 1 capital (i.e., common equity tier 1 capital plus additional tier 
1 capital) equal to at least 6 percent of the EU nonbank SD's total 
risk exposure amount; and (iii) total capital (i.e., an aggregate 
amount of common equity tier 1 capital, additional tier 1 capital, and 
tier 2 capital) equal to at least 8 percent of the EU nonbanks SD's 
total risk exposure amount.\263\ In addition, the EU Capital Rules 
further require each EU nonbank SD to maintain an additional capital 
conservation buffer equal to 2.5 percent of the EU nonbank SD's total 
risk exposure amount, which must be met with common equity tier 1 
capital.\264\ Thus, an EU nonbank SD is effectively required to 
maintain total qualifying regulatory capital in an amount equal to or 
in excess of 10.5 percent of the market risk, credit risk, CVA risk, 
settlement risk and operational risk of the firm (i.e., total capital 
requirement of 8 percent of risk-weighted assets and an additional 2.5 
percent of risk-weighted assets as a capital conservation buffer), 
which is higher than the 8 percent required of nonbank SDs under prong 
(iii) of the CFTC Capital Rules.\265\
---------------------------------------------------------------------------

    \263\ CRR, Article 92(1).
    \264\ CRD, Article 129(1).
    \265\ CRR, Article 92(1) and CRD, Article 129(1).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the EU Capital 
Rules and the CFTC Capital Rules are comparable with respect to the 
calculation of capital charges for market risk and credit risk 
(including as it relates to aspects of settlement risk and CVA risk), 
in determining the nonbank SD's risk-weighted assets. More 
specifically, with respect to the calculation of market risk charges 
and general credit risk charges, both regimes require a nonbank SD to 
use standardized approaches to compute market and credit risk, unless 
the firms are approved to use internal models. The standardized 
approaches follow the same structure that is now the common global 
standard: (i) allocating assets to categories according to risk and 
assigning each a risk-weight; (ii) allocating counterparties according 
to risk assessments and assigning each a risk factor; (iii) calculating 
gross exposures based on valuation of assets; (iv) calculating a net 
exposure allowing offsets following well defined procedures and subject 
to clear limitations; (v) adjusting the net exposure by the market 
risk-weights; and (vi) finally, for credit risk exposures, multiplying 
the sum of net exposures to each counterparty by their corresponding 
risk factor.
    Internal market risk and credit risk models under the EU Capital 
Rules and the CFTC Capital Rules are based on the BCBS framework and 
contain comparable quantitative and qualitative requirements, covering 
the same risks, though with slightly different categorization, and 
including comparable model risk management requirements. As both rule 
sets address the same types of risk, with similar allowed methodologies 
and under similar controls, the Commission

[[Page 41795]]

preliminarily believes that these requirements are comparable.
    The Commission also preliminarily believes that the EU Capital 
Rules and CFTC Capital Rules are comparable in that nonbank SDs are 
required to account for operational risk in computing their minimum 
capital requirements. In this connection, the EU Capital Rules require 
an EU nonbank SD to calculate an operational risk exposure as a 
component of the firm's total risk exposure amount.\266\ EU nonbank SDs 
may use either a standardized approach or, if the EU nonbank SD has 
obtained regulatory permission, an internal approach based on the 
firm's own measurement systems, to calculate their capital charges for 
operational risk. The CFTC Capital Rules address operational risk both 
as a stand-alone, separate minimum capital requirement that a nonbank 
SD is required to meet under prong (ii) of the Bank-Based Approach 
\267\ and as a component of the calculation of risk-weighted assets for 
nonbank SDs that use Subpart E of the Federal Reserve Board's Part 217 
regulations to calculate their credit risk-weighted assets via internal 
models.\268\
---------------------------------------------------------------------------

    \266\ CRR, Article 92(3).
    \267\ Specifically, as further discussed below, prong (ii) of 
the CFTC Capital Rules' Bank-Based Approach requires a nonbank SD to 
maintain regulatory capital in an amount equal to or greater than 8 
percent of the firm's total uncleared swaps margin amount associated 
with its uncleared swap transactions to address potential 
operational, legal, and liquidity risks. 17 CFR 101(a)(i)(C). The 
term ``uncleared swap margin'' is defined by Commission Regulation 
23.100 as the amount of initial margin, computed in accordance with 
the Commission's margin rules for uncleared swaps, that a nonbank SD 
would be required to collect from each counterparty for each 
outstanding swap position of the nonbank SD. 17 CFR 23.100 and 
23.154. 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 Commission 
Regulation 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. 17 CFR 23.100 and 23.150. Furthermore, in computing the 
uncleared swap margin amount, a nonbank SD may not exclude any de 
minis thresholds contained in Commission Regulation 23.151. 17 CFR 
23.100 and 23.151.
    \268\ 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100 (definition of 
BHC equivalent risk-weighted assets).
---------------------------------------------------------------------------

c. Minimum Capital Requirement Based on the Uncleared Swap Margin 
Amount
    As noted above, prong (ii) of the CFTC Capital Rules' Bank-Based 
Approach requires a nonbank SD to maintain regulatory capital in an 
amount equal to or greater than 8 percent of the firm's total uncleared 
swaps margin amount associated with its uncleared swap transactions to 
address potential operational, legal, and liquidity risks.
    The EU Capital Rules differ from the CFTC Capital Rules in that 
they do not impose a capital requirement on EU nonbank SDs based on a 
percentage of the margin for uncleared swap transactions. The 
Commission notes, however, that the EU Capital Rules impose capital and 
liquidity requirements that may compensate for the lack of direct 
analogue to the 8 percent uncleared swap margin requirement. 
Specifically, as discussed above, under the EU Capital Rules, the total 
risk exposure amount is computed as the sum of the EU nonbank SD's 
capital charges for market risk, credit risk, settlement risk, CVA risk 
of OTC derivatives instruments, and operational risk.\269\ Notably, the 
EU Capital Rules require that EU nonbank SDs, including firms that do 
not use internal models, calculate capital charges for operational risk 
as a separate component of the total risk exposure amount. The EU 
Capital Rules also impose separate liquidity requirements designed to 
ensure that the EU nonbank SDs can meet both short- and long-term 
obligations, in addition to the general requirement to maintain 
processes and systems for the identification of liquidity risk.\270\ In 
comparison, the Commission requires nonbank SDs to maintain a risk 
management program covering liquidity risk, among other risk 
categories, but does not have a distinct liquidity requirement.\271\
---------------------------------------------------------------------------

    \269\ CRR, Article 92(3).
    \270\ More specifically, the EU Capital Rules impose separate 
liquidity buffers and ``stable funding'' requirements designed to 
ensure that EU nonbank SDs can cover both long-term obligations and 
short-term payment obligations under stressed conditions for 30 
days. CRR, Article 412-413. In addition, EU nonbank SDs are required 
to maintain robust strategies, policies, processes, and systems for 
the identification of liquidity risk over an appropriate set of time 
horizons, including intra-day. CRD, Article 86.
    \271\ 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. The elements of the SD's risk management program are 
required to include the identification of risks and risk tolerance 
limits with respect to applicable risks, including operational, 
liquidity, and legal risk, together with a description of the risk 
tolerance limits set by the SD and the underlying methodology in 
written policies and procedures. 17 CFR 23.600.
---------------------------------------------------------------------------

    As such, the Commission preliminarily believes the inclusion of an 
operational risk charge in the EU nonbank SD's total risk exposure 
amount in all circumstances, and the existence of separate liquidity 
requirements, will achieve a comparable outcome to the Commission's 
requirement for nonbank SDs to hold regulatory capital in excess of 8 
percent of its uncleared swap margin amount. In that regard, the 
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 an SD to market 
participants, and to cover potential operational, legal, and liquidity 
risks.\272\
---------------------------------------------------------------------------

    \272\ See 85 FR 57462 at 57485.
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d. Preliminary Finding of Comparability
    Based on a principles-based, holistic assessment, the Commission 
has preliminarily determined, subject to the proposed condition below, 
and further subject to its consideration of public comments to the 
proposed Capital Comparability Determination and Order, that the 
purpose and effect of the EU Capital Rules and the CFTC Capital Rules 
are comparable. In this regard, the EU Capital Rules and the CFTC 
Capital Rules are both designed to require a nonbank SD to maintain a 
sufficient amount of qualifying regulatory capital and subordinated 
debt to absorb losses resulting from the firm's business activities, 
and decreases in the value of firm assets, without the nonbank SD 
becoming insolvent.
    The Commission invites comment on the EU Application, the EU laws 
and regulations, and the Commission's analysis above regarding its 
preliminary determination that, subject to the $20 million minimum 
capital requirement, the EU 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 
requirements under the EU Capital Rules that EU nonbank SDs calculate 
an operational risk exposure as part of the firm's total risk exposure 
amount and meet separate liquidity requirements are sufficiently 
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.

[[Page 41796]]

D. Nonbank Swap Dealer Financial Reporting Requirements

1. CFTC Financial Recordkeeping and Reporting Rules for Nonbank Swap 
Dealers
    The CFTC Financial Reporting Rules impose 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.\273\ 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.\274\
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    \273\ 17 CFR 23.105(b).
    \274\ 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.\275\ A nonbank SD that elects 
the TNW Approach is required to file unaudited financial statements 
within 17 business days of the close of each quarter, and its annual 
audited financial statements within 90 days of its fiscal year-
end.\276\ 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 its fiscal year-end.\277\
---------------------------------------------------------------------------

    \275\ 17 CFR 23.105(d) and (e).
    \276\ 17 CFR 23.105(d)(1) and (e)(1).
    \277\ 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.\278\ 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 capital 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.\279\
---------------------------------------------------------------------------

    \278\ 17 CFR 23.105(d)(2).
    \279\ 17 CFR 23.105(e)(4).
---------------------------------------------------------------------------

    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.\280\ 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.\281\ 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.\282\
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    \280\ 17 CFR 23.105(k) and (l) and Appendix B to Subpart E of 
Part 23.
    \281\ 17 CFR 23.105(l) and Appendix B to Subpart E of Part 23.
    \282\ 17 CFR 23.105(l) and Appendix B to Subpart E of Part 23, 
Schedules 2, 3, and 4.
---------------------------------------------------------------------------

    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.\283\ 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.\284\
---------------------------------------------------------------------------

    \283\ 17 CFR 23.105(f).
    \284\ Id.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules further require a nonbank SD to 
make certain financial information publicly available by posting the 
information on its public website.\285\ 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.\286\ 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.\287\ A 
nonbank SD also must obtain written approval from NFA to change the 
date of its fiscal year-end for financial reporting.\288\
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    \285\ 17 CFR 23.105(i).
    \286\ Id.
    \287\ Id.
    \288\ 17 CFR 23.105(g).
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    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'').\289\ The Margin Report must contain: (i) the name and 
address of each custodian holding initial margin or variation margin 
that is required for uncleared swaps subject to the CFTC margin rules 
(``uncleared margin rules''), on behalf of the nonbank SD or its swap 
counterparties; (ii) the amount of initial and variation margin 
required by the uncleared margin rules held by each custodian on behalf 
of the nonbank SD and on behalf its swap counterparties; and (iii) the 
aggregate amount of initial margin that the nonbank SD is required to 
collect from, or post with, swap counterparties for uncleared swap 
transactions subject to the uncleared margin rules.\290\ 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 
verifying whether the firm is current with its swap counterparties with 
respect to the posting and collecting of margin required by the 
uncleared margin rules. By requiring the nonbank SD to report the 
required amount of margin to be posted and collected, and the amount of 
margin that is actually posted and collected, the Commission could 
identify potential issues with the margin practices and compliance by 
nonbank SDs that may hinder the ability of the firm to meet its 
obligations to market participants. The Margin Report also allows the 
Commission to identify custodians used by nonbank SDs and

[[Page 41797]]

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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    \289\ 17 CFR 23.105(m).
    \290\ Id.
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2. EU Nonbank Swap Dealer Financial Reporting Requirements
    The EU Financial Reporting Rules impose financial reporting 
requirements on an EU nonbank SD that are designed to provide relevant 
EU competent authorities with a comprehensive view of the financial 
information and capital position of the firm. Specifically, Article 430 
of CRR requires an EU nonbank SD to report information to the relevant 
competent authorities concerning its capital and financial condition 
sufficient to provide a comprehensive view of the firm's risk profile, 
including information on the firm's capital requirements, leverage 
ratio, large exposures, and liquidity requirements.\291\
---------------------------------------------------------------------------

    \291\ CRR, Article 430(1). CRR also establishes reporting 
requirements for reporting on stable funding (Articles 427-428) and 
TLAC (Articles 92a and 430).
---------------------------------------------------------------------------

    Article 430 of CRR does not mandate the specific individual 
financial statements that an EU nonbank SD is required to provide to 
its applicable competent authorities in view of differing local 
conventions in EU Member States. Instead, the relevant competent 
authorities specify the financial statements to be submitted. To ensure 
a level of consistency, the European Banking Authority (``EBA'') 
developed implementing technical standards to specify uniform reporting 
templates and to determine the frequency of reporting by EU nonbank 
SDs.\292\
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    \292\ The EBA is a regulatory agency of the EU that is tasked 
with establishing a single regulatory and supervisory framework for 
the banking sector in EU Member States. CRR, Article 430(7) provides 
that the EBA shall develop draft implementing technical standards to 
specify the uniform reporting formats and templates, the 
instructions and methodology on how to use the templates, the 
frequency and dates of reporting, and the definitions.
---------------------------------------------------------------------------

    The implementing technical standards under Article 430 of CRR 
(``CRR Reporting ITS'') \293\ require an EU nonbank SD subject to the 
standards, including the EU nonbank SDs currently registered with the 
Commission, to prepare and deliver to its competent authorities common 
reporting (``COREP'') on a quarterly basis. COREP requires, among other 
things, calculations in relation to the EU nonbank SD's capital and 
capital requirements,\294\ capital ratios and capital levels,\295\ and 
market risk (the listed items are collectively referred to hereinafter 
as ``COREP Reports'').\296\
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    \293\ See Commission Implementing Regulation (EU) 2021/451 of 17 
December 2020 laying down implementing technical standards for the 
application of Regulation (EU) No 575/2013 of the European 
Parliament and of the Council with regard to supervisory reporting 
of institutions and repealing Implementing Regulation (EU) No 680/
2014.
    \294\ CRR, Article 430; Annex I, Template Numbers 1 and 2 CRR 
Reporting ITS.
    \295\ CRR, Article 430; Annex I, Template Number 3 CRR Reporting 
ITS.
    \296\ CRR, Article 430; Annex I, Template Numbers 18-25 (as 
applicable) CRR Reporting ITS.
---------------------------------------------------------------------------

    The CRR Reporting ITS also specify the contents of the required 
financial reports (``FINREP'') for certain EU nonbank SDs that report 
financial information on a consolidated basis.\297\ To further ensure 
comparability of the financial information reported by EU nonbank SDs, 
the ECB has adopted a regulation setting forth a common minimum set of 
financial information that must be reported by credit institutions 
subject to CRR to their relevant competent authorities on the basis of 
the CRR Reporting ITS (``ECB FINREP Regulation'').\298\ More 
specifically, the ECB FINREP Regulation complements the CRR Reporting 
ITS by imposing financial reporting requirements applying on an 
individual basis to entities subject to CRR, including EU nonbank SDs, 
whereas CRR, Article 430 and the CRR Reporting ITS impose financial 
reporting requirements on a consolidated basis.\299\ In addition to 
those requirements, each national competent authority has discretion to 
require institutions subject to CRR to report additional supervisory 
information on the basis of CRR and the CRR Reporting ITS or of 
national law.\300\
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    \297\ See CRR, Article 430(3), (4), and (9); CRR Reporting ITS, 
Articles 11 and 12 (requiring EU nonbank SDs subject to CRR to 
submit FINREP reports on a consolidated basis if they are any of the 
following: (i) an entity that prepares its consolidated accounts in 
accordance with IFRS; (ii) an entity that determines its capital 
requirements on a consolidated basis in accordance with IFRS and has 
been required by the competent authority to submit FINREP reports on 
a consolidated basis; and (iii) an entity subject to a national 
accounting framework that is not already reporting on a consolidated 
basis, to which the competent authority has decided to extend the 
requirement to submit FINREP reports on a consolidated basis).
    \298\ See Regulation (EU) 2015/534 of the European Central Bank 
of March 17, 2015 on reporting of supervisory financial information.
    \299\ ECB FINREP Regulation, Articles 6, 7, 13, and 14.
    \300\ In France, the Autorit[eacute] de Contr[ocirc]le 
Prudentiel et de R[eacute]solution (``ACPR''), the French regulatory 
authority with prudential supervision authority over French 
financial firms, including EU nonbank SDs domiciled in France, 
requires the submission of several statistical financial reports and 
may request additional information during examinations pursuant to 
French MFC, Articles L.612-1 and L.612-24. In Germany, BaFin, the 
German financial sector regulatory authority, may request 
information on all business matters pursuant to German KWG, Section 
44. See Responses to Staff Questions of May 15, 2023.
---------------------------------------------------------------------------

    Pursuant to the CRR Reporting ITS, as complemented by the ECB 
FINREP Regulation, an EU nonbank SD is required to provide, among other 
items, the following statements or reports to its relevant competent 
authorities: (i) on a quarterly basis, a balance sheet statement (or 
statement of financial position) that reflects the EU nonbank SD's 
financial condition; \301\ (ii) on a quarterly basis, a statement of 
profit or loss; \302\ (iii) on a quarterly basis, a breakdown of 
financial liabilities by product and by counterparty sector; \303\ (iv) 
on a quarterly basis, a listing of subordinated financial liabilities; 
\304\ and (v) on an annual basis, a statement of changes in 
equity.\305\ Under the FINREP requirements, an EU nonbank SD subject to 
the CRR Reporting ITS is also required to provide its competent 
authorities with additional financial information, including a 
breakdown of its loans and advances by product and type of 
counterparty,\306\ as well as detailed information regarding its

[[Page 41798]]

derivatives trading activities,\307\ collateral and guarantees.\308\
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    \301\ CRR, Article 430; Annex III, Template Numbers 1.1, 1.2, 
and 1.3 (for reporting according to IFRS) and Annex IV, Template 
Numbers 1.1., 1.2, and 1.3 (for reporting according to national 
accounting frameworks), CRR Reporting ITS; and ECB FINREP 
Regulation, Articles 6, 7 and 13 (referring to Annex III and Annex 
IV of the CRR Reporting ITS, as applicable).
    \302\ CRR, Article 430; Annex III, Template Number 2 (for 
reporting according to IFRS) and Annex IV, Template Number 2 (for 
reporting according to national accounting frameworks), CRR 
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13 
(referring to Annex III and Annex IV of the CRR Reporting ITS, as 
applicable).
    \303\ CRR, Article 430; Annex III, Template Number 8.1 (for 
reporting according to IFRS) and Annex IV, Template Number 8.1(for 
reporting according to national accounting frameworks), CRR 
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13 
(referring to Annex III and Annex IV of the CRR Reporting ITS, as 
applicable).
    \304\ CRR, Article 430, Annex III, Template Number 8.2 (for 
reporting according to IFRS) and Annex IV, Template Number 8.3 (for 
reporting according to national accounting frameworks), CRR 
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13 
(referring to Annex III and Annex IV of the CRR Reporting ITS, as 
applicable).
    \305\ CRR, Article 430; Annex III, Template Number 46 (for 
reporting according to IFRS) and Annex IV, Template Number 46 (for 
reporting according to national accounting frameworks), CRR 
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13 
(referring to Annex III and Annex IV of the CRR Reporting ITS, as 
applicable).
    \306\ CRR, Article 430; Annex III, Template Numbers 5.1 and 6.1 
(for reporting according to IFRS) and Annex IV, Template Numbers 5.1 
and 6.1, CRR Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 
and 13 (referring to Annex III and Annex IV of the CRR Reporting 
ITS, as applicable).
    \307\ CRR, Article 430; Annex III, Template Number 10 (for 
reporting according to IFRS) and Annex IV, Template Number 10 (for 
reporting according to national accounting frameworks), CRR 
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13 
(referring to Annex III and Annex IV of the CRR Reporting ITS, as 
applicable).
    \308\ CRR, Article 430; Annex III, Template Number 13 (for 
reporting according to IFRS) and Annex IV, Template Number 13 (for 
reporting according to national accounting frameworks), CRR 
Reporting ITS; and ECB FINREP Regulation, Articles 6, 7 and 13 
(referring to Annex III and Annex IV of the CRR Reporting ITS, as 
applicable).
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    Furthermore, with the exception of certain ``small'' entities, EU 
nonbank SDs are required to prepare annual audited financial statements 
and a management report (together, ``annual audited financial report'') 
pursuant to Article 430 of CRR and the Accounting Directive.\309\ The 
audit of the financial statements and management report is required to 
be performed by one or more statutory auditors or auditors approved by 
EU Member States to conduct audits of EU nonbank SDs.\310\ The annual 
audited financial report, together with the opinion and statements of 
the auditor, must be published.\311\
---------------------------------------------------------------------------

    \309\ Accounting Directive, Articles 4, 19 and 34; French MFC, 
Articles L.511-35 to L.511-38; German Commercial Code 
(Handelsgesetzbuch, ``HGB''), Section 316 et seq. The Accounting 
Directive provides that the audit requirement is not applicable to 
``small'' entities defined as firms meeting the following 
requirements: (1) the firm's balance sheet is not more than EUR 4 
million; (2) the firm's net turnover does not exceed more than EUR 8 
million; or (3) the firm did not employ more than 50 employees 
during the financial year. See Article 3(2) and Article 34 of the 
Accounting Directive. The Applicants represent that the four EU 
nonbank SDs currently registered with the Commission do not meet the 
criteria to be classified as ``small'' entities and, therefore, are 
required to prepare audited annual financial reports. See EU 
Application, p. 5.
    \310\ Accounting Directive, Article 34(1).
    \311\ Id., Article 30.
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    The annual audited financial statements must comprise, at a 
minimum, a balance sheet, a profit and loss statement, and notes to the 
financial statements.\312\ The auditor's audit report must include: (i) 
a specification of the financial statements subject to the audit and 
the financial reporting framework that was applied in their 
preparation; (ii) a description of the scope of the audit, which must 
specify the auditing standards used to conduct the audit; (iii) an 
audit opinion stating whether the financial statements give a true and 
fair view in accordance with the relevant financial reporting 
framework; and (iv) a reference to any matters emphasized by the 
auditor that did not qualify the audit opinion.\313\
---------------------------------------------------------------------------

    \312\ Id., Article 4(1).
    \313\ Id., Article 35.
---------------------------------------------------------------------------

    The management report is required to include a review of the 
development and performance of the EU nonbank SD's business and of its 
position, with a description of the principal risks and uncertainties 
that the firm faces.\314\ The auditors are required to express an 
opinion on whether the management report is consistent with the 
financial statements for the same financial year, and whether the 
management report has been prepared in accordance with applicable legal 
requirements.\315\ The opinion also must state whether the auditor has 
identified material misstatements in the management report and, if so, 
describe the misstatement.\316\
---------------------------------------------------------------------------

    \314\ Id., Article 19.
    \315\ Id.
    \316\ Id.
---------------------------------------------------------------------------

    In addition, the SEC's French and German Orders granting 
substituted compliance for financial reporting to EU nonbank SBSDs, as 
supplemented by the SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information, require an EU nonbank SBSD to 
file an unaudited SEC Form X-17A-5 Part II (``FOCUS Report'') with the 
SEC on a monthly basis.\317\ The FOCUS Report is required to include, 
among other statements and schedules: (i) a statement of financial 
condition; (ii) a statement of the EU nonbank SBSD's capital 
computation in accordance with home country Basel-Based requirements; 
(iii) a statement of income/loss; and (iv) a statement of capital 
withdrawals.\318\ An EU nonbank SBDS is required to file its FOCUS 
Report with the SEC within 35 calendar days of the month end.\319\
---------------------------------------------------------------------------

    \317\ See, French Order and German Order. See also, SEC Order on 
Manner and Format of Filing Unaudited Financial and Operational 
Information.
    \318\ See, SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information.
    \319\ Id.
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3. Commission Analysis
    The Commission has reviewed the EU Application and the relevant EU 
laws and regulations, and has preliminarily determined that, subject to 
the proposed conditions described below, the financial reporting 
requirements of the EU Financial Reporting Rules are comparable to CFTC 
Financial Reporting Rules in purpose and effect as they are intended to 
provide the relevant EU competent authorities and the Commission, 
respectively, with financial information to monitor and assess the 
financial condition of nonbank SDs and their ability to absorb 
decreases in firm assets and increases in firm liabilities, and to 
cover losses from business activities, including swap dealing 
activities, without the firm becoming insolvent.
    The EU Financial Reporting Rules require EU nonbank SDs to prepare 
and submit to the competent authorities on a quarterly basis unaudited 
financial information that includes: (i) a statement of financial 
condition; (ii) a statement of profit or loss; and (iii) a schedule of 
the breakdown of financial liabilities by product and by counterparty 
sector. The EU Financial Reporting Rules also require EU nonbank SDs to 
prepare and submit to the competent authorities on an annual basis an 
unaudited statement of changes in equity. Under the FINREP reporting 
requirements, an EU nonbank SD is also required to provide its 
competent authorities with additional financial information, including 
a breakdown of its loans and advances by product and type of 
counterparty, as well as detailed information regarding its derivatives 
trading activities, collateral, and guarantees. In addition, under the 
COREP reporting requirement, an EU nonbank SD is required to provide 
its competent authorities on a quarterly basis with calculations in 
relation to the EU nonbank SD's capital requirements and capital 
ratios, among other items.
    The EU Financial Reporting Rules further require an EU nonbank SD 
to prepare and publish an annual audited financial report. The annual 
audited financial report is required to include a statement of 
financial condition and a statement of profit or loss, and must also 
include relevant notes to the financial statements.\320\
---------------------------------------------------------------------------

    \320\ Accounting Directive, Articles 4(1), 30, and 34.
---------------------------------------------------------------------------

    The Commission preliminarily finds that the EU Financial Reporting 
Rules impose reporting requirements that are comparable with respect to 
overall form and content to the CFTC Financial Reporting Rules, which 
require each nonbank SD to file, among other items, periodic unaudited 
financial reports with the Commission and NFA that contain: (i) a 
statement of financial condition; (ii) a statement of profit or 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 an EU nonbank SD may comply with the financial reporting 
requirements contained in Commission Regulation 23.105 by complying 
with the corresponding EU Financial Reporting

[[Page 41799]]

Rules, subject to the conditions set forth below.\321\
---------------------------------------------------------------------------

    \321\ An EU nonbank SD that qualifies and elects to seek 
substituted compliance with the EU Capital Rules must also seek 
substituted compliance with the EU Financial Reporting Rules.
---------------------------------------------------------------------------

    The Commission is proposing to condition the Capital Comparability 
Determination Order on an EU nonbank SD providing the Commission and 
NFA with copies of the relevant templates of the FINREP reports and 
COREP reports that correspond to the EU nonbank SD's statement of 
financial condition, statement of income/loss, and statement of 
regulatory capital, total risk exposure, and capital ratios. These 
templates consist of FINREP templates 1.1 (Balance Sheet Statement: 
assets), 1.2 (Balance Sheet Statement: liabilities), 1.3 (Balance Sheet 
Statement: equity), 2 (Statement of profit or loss), and 10 
(Derivatives--Trading and economic hedges), and COREP templates 1 (Own 
Funds), 2 (Own Funds Requirements) and 3 (Capital Ratios). The 
Commission also notes that EU nonbank SDs submit FINREP and COREP 
templates in addition to the ones listed above to their competent 
authorities. These templates generally provide supporting detail to the 
core financial templates that the Commission is proposing to require 
from each EU nonbank SD. The Commission is not proposing to require an 
EU nonbank SD to file these additional FINREP and COREP templates as a 
condition to the Capital Comparability Order, and alternatively would 
exercise its authority under Commission Regulation 23.105(h) to direct 
EU nonbank SDs to provide such additional information to the Commission 
and NFA on an ad hoc basis as necessary to oversee the financial 
condition of the firms.\322\
---------------------------------------------------------------------------

    \322\ Commission Regulation 23.105(h) provides that the 
Commission or NFA may, by written notice, require any nonbank SD to 
file financial or operational information as may be specified by the 
Commission or NFA. 17 CFR 23.105(h).
---------------------------------------------------------------------------

    As noted in Section D.2. of this Determination, EU Financial 
Reporting Rules require EU nonbank SDs to submit the unaudited FINREP 
and COREP templates to their competent authorities on a quarterly 
basis. The CFTC Financial Reporting Rules contain a more frequent 
reporting requirement by requiring nonbank SDs that elect the Bank-
Based Approach to file unaudited financial information with the 
Commission and NFA, on a monthly basis.\323\ The financial statement 
reporting requirements are an integral part of the Commission's and 
NFA's oversight programs to effectively and timely monitor nonbank SDs' 
compliance with capital and other financial requirements, and for 
Commission and NFA staff to assess the overall financial condition and 
business operations of nonbank SDs. The Commission has extensive 
experience with monitoring the financial condition of registrants 
through the receipt of financial statements, including FCMs and, more 
recently, nonbank SDs. Both FCMs and nonbank SDs that elect the Bank-
Based Approach or NLA Approach file financial statements with the 
Commission and NFA on a monthly basis. The Commission preliminarily 
believes that receiving financial information from EU nonbank SDs on a 
quarterly basis is not comparable with the CFTC Financial Reporting 
Rules and would impede the Commission's and NFA's ability to 
effectively and timely monitor the financial condition of EU nonbank 
SDs for the purposes of assessing their safety and soundness, as well 
as their ability to meet obligations to creditors and counterparties 
without becoming insolvent. Therefore, the Commission is preliminarily 
proposing to include a condition in the Capital Comparability 
Determination Order to require EU nonbank SDs to file the applicable 
templates of the FINREP reports and COREP reports with the Commission 
and NFA on a monthly basis. The Commission also is proposing to 
condition the Capital Comparability Determination Order on the EU 
nonbank SD filing the above-listed templates of the FINREP reports and 
COREP reports with the Commission and NFA within 35 calendar days of 
the end of each month.\324\
---------------------------------------------------------------------------

    \323\ Commission Regulation 23.105(d) (17 CFR 23.105(d)).
    \324\ The proposed condition for EU nonbank SDs to file monthly 
unaudited financial information with the Commission and NFA is 
consistent with proposed conditions contained in the Commission's 
proposed Capital Comparability Determinations for Japanese nonbank 
SDs and Mexican nonbank SDs. See Proposed Japan Order and Proposed 
Mexico Order.
---------------------------------------------------------------------------

    The Commission is further proposing that in lieu of filing such 
FINREP and COREP reports, EU nonbank SDs that are registered with the 
SEC as EU nonbank SBSDs could satisfy this condition by filing with the 
CFTC and NFA, on a monthly basis, copies of the unaudited FOCUS Reports 
that the EU nonbank SDs are required to file with the SEC pursuant to 
the SEC French Order or SEC German Order, as supplemented by the SEC 
Order on Manner and Format of Filing Unaudited Financial and 
Operational Information. The FOCUS Report is required to include, among 
other statements and schedules: (i) a statement of financial condition; 
(ii) a statement of the EU nonbank SBSD's capital computation in 
accordance with home country Basel-Based requirements; (iii) a 
statement of income/loss; and (iv) a statement of capital 
withdrawals.\325\
---------------------------------------------------------------------------

    \325\ See, SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information.
---------------------------------------------------------------------------

    The filing of a FOCUS Report would be at the election of the EU 
nonbank SD as an alternative to the filing of unaudited FINREP and 
COREP templates that such firms would otherwise be required to file 
with the Commission and NFA pursuant to the proposed Order. Three of 
the EU nonbank SDs currently registered with the SEC as EU nonbank 
SBSDs would be eligible to file copies of their monthly FOCUS Report 
with the Commission and NFA in lieu of the FINREP and COREP templates 
and Schedule 1. An EU nonbank SD electing to file copies of its monthly 
FOCUS Reports would be required to submit the reports to the Commission 
and NFA within 35 calendar days of the end of each month.
    In addition, the Commission is proposing to condition the Capital 
Comparability Determination Order on an EU nonbank SD submitting to the 
Commission and NFA copies of the EU nonbank SD's annual audited 
financial report that is required to be prepared pursuant to provisions 
implementing the Accounting Directive.\326\ EU nonbank SDs would be 
required to file the annual audited financial report with the 
Commission and NFA on the earliest of the date the report is filed with 
the competent authority, the date the report is published, or the date 
the report is required to be filed with the competent authority or the 
date the report is required to be published pursuant to the EU 
Financial Reporting Rules.
---------------------------------------------------------------------------

    \326\ Accounting Directive, Articles 4, 19, and 34; French MFC, 
Articles L.511-35 to L.511-38; German HGB, Section 316 et seq.
---------------------------------------------------------------------------

    The Commission is also proposing to condition the Capital 
Comparability Determination Order on the EU nonbank SD translating the 
reports and statements into the English language with balances 
converted to U.S. dollars.\327\ The Commission, however, recognizes 
that the requirement to translate accounts denominated in euro to U.S. 
dollars on the annual audited financial report may impact the opinion 
provided by the independent auditor. The Commission is therefore 
proposing

[[Page 41800]]

to accept the annual audited financial report denominated in euro, 
provided that the report is translated into the English language.
---------------------------------------------------------------------------

    \327\ The translation of audited financial statements into the 
English language and the conversion of account balances from euro to 
U.S. dollars is not required to be subject to the audit of the 
independent auditor. An EU nonbank SD must report the exchange rate 
that it used to convert balances from euro to U.S. dollars to the 
Commission and NFA as part of the financial reporting.
---------------------------------------------------------------------------

    The Commission is proposing to impose these conditions as they are 
necessary to ensuring that the CFTC Financial Reporting Rules and EU 
Financial Reporting Rules, supplemented by the proposed conditions, are 
comparable and provide the Commission and NFA with appropriate 
financial information to effectively monitor the financial condition of 
EU nonbank SDs. Frequent financial reporting is a central component of 
the Commission's and NFA's programs for monitoring and assessing the 
safety and soundness of nonbank SDs as required under Section 4s(e) of 
the CEA. Although, as further discussed in Section D.2. below, the 
Commission preliminarily believes that the competent authorities have 
the necessary powers to supervise and enforce compliance by EU nonbank 
SDs with applicable capital and financial reporting requirements, the 
Commission is proposing the conditions to facilitate the timely access 
to information allowing the Commission and NFA to effectively monitor 
and assess the ongoing financial condition of all nonbank SDs, 
including EU 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 considers that its approach of 
requiring EU nonbank SDs to provide the Commission and NFA with the 
selected FINREP and COREP templates and the annual audited financial 
report that the firms currently file with the relevant competent 
authorities 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 EU Financial 
Reporting Rules. Under the proposed conditions, the EU nonbank SD would 
not be required to prepare different financial reports and statements 
for filing with the Commission, but would be required to prepare 
selected reports and statements in the content and format used for 
submissions to the relevant competent authority and translate the 
reports and financial statements into the English language with 
balances converted to U.S. dollars so that Commission staff may 
properly understand and efficiently analyze the financial information. 
Although the Commission is proposing to require submission of certain 
reports (i.e., selected FINREP and COREP templates) on a more frequent 
basis (monthly instead of quarterly as required by the EU Financial 
Reporting Rules), the proposed conditions provide the EU nonbank SDs 
with 35 calendar days from the end of each month to translate the 
documents into English and to convert balances to U.S. dollars. In 
addition, EU nonbank SDs that are registered as SBSDs with the SEC 
would have the option of filing a copy of the FOCUS Report they submit 
to the SEC in lieu of the FINREP and COREP templates. The Commission 
preliminarily believes that by requiring that EU nonbank SDs file 
unaudited financial reports on a monthly basis instead of quarterly, 
the Commission would help ensure that the CFTC Financial Reporting 
Rules and the EU Financial Reporting Rules achieve a comparable 
outcome.
    The Commission is also proposing to condition the Capital 
Comparability Determination Order on EU nonbank SDs 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.\328\ The Commission is proposing to 
require that Schedule 1 be filed with the Commission and NFA as part of 
the EU nonbank SD's monthly submission of selected FINREP and COREP 
templates or FOCUS Report, as applicable. Schedule 1 provides the 
Commission and NFA with detailed information regarding the financial 
positions that a nonbank SD holds as of the end of each month, 
including the firm's swap positions, which will allow the Commission 
and NFA to monitor the types of investments and other activities that 
the firm engages in and will enhance the Commission's and NFA's ability 
to monitor the safety and soundness of the firm.
---------------------------------------------------------------------------

    \328\ 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 also proposing to condition the Capital 
Comparability Determination Order on an EU nonbank SD submitting with 
each set of selected FINREP and COREP templates, annual audited 
financial report, and the applicable Schedule 1 a statement by an 
authorized representative or representatives of the EU nonbank SD that 
to the best knowledge and belief of the person(s) the information 
contained in the respective reports and statements is true and correct, 
including the translation of the reports and statements into the 
English language and conversion of balances in the statements to U.S. 
dollars, as applicable. The statement by the authorized representative 
or representatives of the EU nonbank SD is in lieu of the oath or 
affirmation required of nonbank SDs under Commission Regulation 
23.105(f), and is intended to ensure that reports and statements filed 
with the Commission and NFA are prepared and submitted by firm 
personnel with knowledge of the financial reporting of the firm who can 
attest to the accuracy of the reporting and translation.
    The Commission is further proposing to condition the Capital 
Comparability Determination Order on an EU nonbank SD filing the Margin 
Report specified in Commission Regulation 23.105(m) with the Commission 
and NFA. The Margin Report contains: (i) the name and address of each 
custodian holding initial margin or variation margin 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 amount of 
initial margin that the nonbank SD is required to collect from, or post 
with, swap counterparties for uncleared swap transactions.\329\
---------------------------------------------------------------------------

    \329\ 17 CFR 23.105(m).
---------------------------------------------------------------------------

    The Commission preliminarily believes that receiving this margin 
information from EU nonbank SDs will assist in the Commission's 
assessment of the safety and soundness of the EU nonbank SDs. 
Specifically, the Margin Report would provide the Commission with 
information regarding an EU 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 firms' and counterparties' 
collateral for swap transactions, 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 
further proposing to require an EU nonbank SD to file the Margin Report 
with the Commission and NFA within 35 calendar days of the end of each 
month, which corresponds with the proposed timeframe for the EU nonbank 
SD to file the selected FINREP and COREP templates or FOCUS Report, as 
applicable, and proposing to require the Margin Report to be prepared 
in the

[[Page 41801]]

English language with balances reported in U.S. dollars.
    The Commission notes that the proposed conditions in the EU Capital 
Comparability Determination Order are consistent with the proposed 
conditions set forth in the proposed Capital Comparability 
Determination Orders for Japan and Mexico,\330\ and reflects the 
Commission's approach of preliminarily determining that non-U.S. 
nonbank SDs could meet their financial statement reporting obligations 
to the Commission by filing financial reports currently prepared for 
home country regulators, albeit in the case of certain financial 
reports under a more frequent submission schedule, provided such 
reports are translated into English language 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 EU nonbank SDs that are not currently part of the 
relevant EU authorities' supervision regimes.
---------------------------------------------------------------------------

    \330\ See Proposed Japan Order and Proposed Mexico Order.
---------------------------------------------------------------------------

    The Commission is not proposing to require that an EU nonbank SD 
that has been approved by the relevant competent authority to use 
capital models files with the Commission or NFA the monthly model 
metric information contained in Commission Regulation 23.105(k) \331\ 
or that an EU nonbank SD files with the Commission or NFA the monthly 
counterparty credit exposure information specified in Commission 
Regulation 23.105(l) and Schedules 2, 3, and 4 of Appendix B to Subpart 
E of Part 23.\332\
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    \331\ Commission Regulation 23.105(k) requires a nonbank SD that 
has obtained approval from the Commission or NFA to use internal 
capital models to submit to the Commission and NFA each month 
information regarding its risk exposures, including VaR and credit 
risk exposure information when applicable. The model metrics are 
intended to provide the Commission and NFA with information that 
would assist with the ongoing oversight and assessment of internal 
market risk and credit risk models that have been approved for use 
by a nonbank SD. 17 CFR 23.105(k).
    \332\ Commission 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. 17 CFR 23.105(l).
---------------------------------------------------------------------------

    The Commission, in making the preliminary determination to not 
require an EU nonbank SD to file the model metrics and counterparty 
exposures required by Commission Regulations 23.105(k) and (l), 
respectively, recognizes that NFA's current risk monitoring program 
requires each bank SD and each nonbank SD, including each EU nonbank 
SD, to file risk metrics addressing market risk and credit risk with 
NFA on a monthly basis. NFA's monthly risk metric information includes: 
(i) VaR for interest rates, credit, foreign exchange, equities, 
commodities, and total VaR; (ii) total stressed VaR; (iii) interest 
rate, credit spread, foreign exchange market, and commodity 
sensitivities; (iv) total swaps current exposure both before and after 
offsetting against collateral held by the firm; and (v) a list of the 
15 largest swaps counterparty current exposures before collateral and 
net of collateral.\333\
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    \333\ 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).
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    Although there are differences in the information required under 
Commission Regulations 23.105(k) and (l), the NFA risk metrics provide 
a level of information that allows NFA to identify SDs that may pose 
heightened risk and to allocate appropriate NFA regulatory oversight 
resources. The Commission preliminarily believes that the proposed 
financial statement reporting set forth in the proposed Capital 
Comparability Determination Order, and the risk metric and counterparty 
exposure information currently reported by nonbank SDs (including EU 
nonbank SDs) under NFA rules, provide the appropriate balance of 
recognizing the comparability of the EU 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 EU nonbank SDs. The Commission has 
access to the monthly risk metric filings collected by NFA. In 
addition, the Commission retains authority to request EU nonbank SDs to 
provide information regarding their model metrics and counterparty 
exposures on an ad hoc basis.
    Furthermore, the Commission notes that although the EU Financial 
Reporting Rules do not contain an analogue to the CFTC's requirements 
for nonbank SDs to file monthly model metric information and 
counterparty exposures information, the competent authorities have 
access to comparable information. More specifically, under the EU 
Financial Reporting Rules, the competent authorities have broad powers 
to request any information necessary for the exercise of their 
functions.\334\ As such, the competent authorities have access to 
information allowing them to assess the ongoing performance of risk 
models and to monitor the EU nonbank SD's credit exposures, which may 
be comprised of credit exposures to primarily other EU counterparties. 
In addition, the COREP reports, which EU nonbank SDs are required to 
file with the competent authority on a quarterly basis, include 
information regarding the EU nonbank SD's risk exposure amounts, 
including risk-weighted exposure amounts for credit risk.\335\
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    \334\ See CRD, Article 65(3)(a), French MFC, Article L.612-24, 
and SSM Regulation, Article 10 (indicating that competent 
authorities have broad information gathering powers).
    \335\ See CRR Reporting ITS, Annex I.
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    The Commission invites public comment on its analysis above, 
including comment on the EU Application and relevant EU Financial 
Reporting Rules. The Commission also invites comment on the proposed 
conditions listed above and on the Commission's proposal to exclude EU 
nonbank SDs from certain reporting requirements outlined above. 
Specifically, the Commission requests comment on its preliminary 
determination to not require EU nonbank SDs to submit the information 
set forth in Commission Regulations 23.105(k) and (l). Are there 
specific elements of the data required under Commission Regulations 
23.105(k) and (l) that the Commission should require of EU nonbank SDs 
for purposes of monitoring model performance?
    The Commission requests comment on the proposed filing dates for 
the reports and information specified above. Specifically, do the 
proposed filing dates provide sufficient time for EU 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 any new reporting obligations that the proposed 
Capital Comparability Determination Order would impose on EU nonbank 
SDs. In this connection, if the Commission were to require EU nonbank 
SDs to file the Margin Report discussed above and included in the 
proposed Order below, how much time would EU nonbank SDs need to 
develop new systems or processes to capture information that is 
required? Would EU nonbank SDs need a period of time to develop any 
systems or processes to

[[Page 41802]]

meet any other reporting obligations in the proposed Capital 
Comparability Determination Order? If so, what would be an appropriate 
amount of time for an EU 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.\336\ The notice provisions are intended to provide the 
Commission and NFA with an opportunity to assess whether the 
information contained in the notices indicates the existence of actual 
or potential financial and/or operational issues at a nonbank SD, and, 
when necessary, allows the Commission and NFA to engage the nonbank SD 
in an effort to minimize potential adverse impacts on swap 
counterparties and the larger swaps market. The notice provisions are 
part of the Commission's overall program for helping to ensure the 
safety and soundness of nonbank SDs and the swaps markets in general.
---------------------------------------------------------------------------

    \336\ 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.\337\ 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.\338\ 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 and 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 Commission 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 Commission Regulation 23.101 calculated for all of the firm's 
counterparties.\339\
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    \337\ 17 CFR 23.105(c)(1), (2), and (3).
    \338\ 17 CFR 23.105(c)(4).
    \339\ 17 CFR 23.105(c)(7).
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    The CFTC Financial Reporting Rules further require a nonbank SD to 
provide notice two business days prior to a withdrawal of capital by an 
equity holder that would exceed 30 percent of the firm's excess 
regulatory capital.\340\ 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).\341\ SEC Rule 18a-8 
requires SBSDs and MSBSPs to provide written notice to the SEC for 
comparable reporting events as in the CFTC Capital Rule in Commission 
Regulation 23.105(c), including if a SBSD or MSBSP is undercapitalized 
or fails to maintain current books and records.
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    \340\ 17 CFR 23.105(c)(5).
    \341\ 17 CFR 23.105(c)(6).
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2. EU Nonbank Swap Dealer Notice Requirements
    The EU capital and resolution frameworks require EU nonbank SDs to 
provide certain notices to competent authorities concerning the firm's 
compliance with relevant laws and regulations. The EU Financial 
Reporting Rules require an EU nonbank SD to provide notice within five 
business days to the competent authority \342\ if the firm fails to 
meet its combined buffer requirement, which at a minimum consists of a 
capital conservation buffer of 2.5 percent of the EU nonbank SD's total 
risk exposure amount.\343\ As noted earlier, to meet its capital buffer 
requirements, an EU nonbank SDs must hold common equity tier 1 capital 
in addition to the minimum common equity tier 1 ratio requirement of 
4.5 percent of the firm's core capital requirement of 8 percent of the 
firm's total risk exposure amount. The notice to the competent 
authority must be accompanied by a capital conservation plan that sets 
out how the EU nonbank SD will restore its capital levels.\344\ The 
capital conservation plan is required to include: (i) estimates of 
income and expenditures and a forecast balance sheet; (ii) measures to 
increase the capital ratios of the EU nonbank SD; (iii) a plan and 
timeframe for the increase in the capital of the EU nonbank SD with the 
objective of meeting fully the combined buffer requirement; and (iv) 
any other information that the competent authority considers to be 
necessary to assess the capital conservation plan.\345\
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    \342\ As further discussed in Section F.2. below, the relevant 
prudential competent authority may either be the national competent 
authority with jurisdiction to oversee compliance with the EU 
Capital Rules and the EU Financial Reporting Rules or, for EU 
nonbank SDs that are authorized as credit institutions and qualify 
as ``significant supervised entities,'' the ECB. See generally SSM 
Regulation and SSM Framework Regulation.
    \343\ CRD, Article 142; French MFC, Article L.511-41-1-A; French 
Ministerial Order on Capital Buffers, Articles 61 to 64; German KWG, 
Sections 10i(2) to (9). The combined capital buffer requirement is 
the total common equity tier 1 capital required to meet the 
requirement for the capital conservation buffer required by Article 
129 of CRD, extended to include, as applicable, an institution-
specific countercyclical buffer required by Article 130 of CRD, a G-
SII buffer required by Article 131(4) of CRD, an O-SII buffer 
required by Article 131(5) of CRD, and a systemic risk buffer 
required by Article 133 of CRD. CRD, Article 128.
    \344\ Id., Article 142(1); French Ministerial Order on Capital 
Buffers, Article 61; German KWG, Section 10i(6). The competent 
authority may extend the filing deadline, and require the EU nonbank 
SD to file the capital conservation plan within 10 days of the firm 
identifying that it failed to meet the applicable buffer 
requirements.
    \345\ Id., Article 142(2); French Ministerial Order on Capital 
Buffers, Article 62; German KWG, Section 10i(6).
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    The relevant competent authority is required to assess the capital 
conservation plan, and may approve the plan only if it considers that 
the plan would be reasonably likely to conserve or raise sufficient 
capital to enable the EU nonbank SD to meet its combined capital buffer 
requirement within a timeframe that the competent authority considers 
to be appropriate.\346\ If the relevant competent authority does not 
approve the capital conservation plan, the competent authority may 
impose requirements for the EU nonbank SD to increase its capital to 
specified levels within a specified time or the competent authority may 
impose more restrictions on distributions.\347\
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    \346\ Id., Article 142(3); French MFC, Article L.511-41-1-1; 
French Ministerial Order on Capital Buffers, Article 63; German KWG, 
Section 10i(7).
    \347\ Id., Article 142(4); French MFC, Article L.511-41-1-A; 
French Ministerial Order on Capital Buffers, Article 64 and French 
Ministerial Order on Distribution Restrictions, Articles 2 to 9; 
German KWG, Section 10i(8).
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    In addition, an EU nonbank SD must immediately notify its relevant 
resolution authority in situations where the firm meets the combined 
buffer requirement, but fails to meet the combined buffer requirement 
when considered in addition to the applicable MREL requirements.\348\ 
The EU nonbank SD must also notify the relevant resolution authority if 
it

[[Page 41803]]

considers the firm to be failing or likely to fail.\349\
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    \348\ BRRD, Article 16a; French MFC, Article L.613-56 III and 
French Ministerial Order on Distribution Restrictions, Articles 7 
and 8; German SAG, Article 58a.
    \349\ BRRD, Article 81(1); French MFC, Article L.613-49; German 
SAG, Section 138(1).
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    Furthermore, if an EU nonbank SD breaches its liquidity or MREL 
requirements, the EU authorities possess wide-ranging tools to deal 
with the firm's financial deterioration. Specifically, the competent 
authority may impose administrative penalties or other administrative 
measures, including prudential capital charges, if an EU nonbank SD's 
liquidity position repeatedly or persistently falls below the liquidity 
and stable funding requirements established at the national or EU 
level.\350\
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    \350\ CRD, Articles 67(1)(j) and 105; French MFC, Articles 
L.511-41-3 and L.612-40; German KWG, Section 45(1), (2) and (3), 
36(1) and (3).
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    In addition, if MREL is breached, the EU nonbank SD's resolution 
authority may take early measures to intervene, such as requiring 
management to take certain actions, order members of management to be 
removed or replaced, or require changes to the firm's business strategy 
or legal or operational structure, among other measures.\351\ If 
additional requirements are met, it is also possible that resolution 
authorities may assess the EU nonbank SD as ``failing or likely to 
fail,'' triggering a resolution action, which could occur even before 
the firm actually breached its minimum capital requirements.\352\ A 
breach of the EU nonbank SD's MREL requirements may also trigger 
restrictions on the firm's ability to make certain distributions (e.g., 
paying certain dividends or employee bonuses).\353\
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    \351\ BRRD, Article 27(1); French MFC, Article L.511-41-5; 
German SAG, Section 36(1).
    \352\ BRRD, Article 32(1)(a); French MFC, Article L.613-49; 
German SAG, Section 62(2).
    \353\ BRRD, Article 16a; French MFC, Article L.613-56 III and 
French Ministerial Order on Distribution Restrictions, Articles 7 
and 8; German SAG, Article 58a.
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3. Commission Analysis
    The Commission has reviewed the EU Application and the relevant EU 
laws and regulations, and has preliminarily determined that the EU 
Financial Reporting Rules related to notice provisions, subject to the 
conditions specified below, are comparable to the notice provisions of 
the CFTC Financial Reporting Rules. The Commission is therefore 
proposing to issue a Capital Comparability Determination Order 
providing that an EU nonbank SD may comply with the notice provisions 
required under EU laws and regulations in lieu of certain notice 
provisions required of nonbank SDs under Commission Regulation 
23.105(c),\354\ subject to the conditions set forth below.
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    \354\ 17 CFR 23.105(c).
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    The notice provisions contained in Commission 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 firm's ability to meet its obligations to 
counterparties, creditors, and the general swaps market. Upon the 
receipt of a notice from a nonbank SD under Commission Regulation 
23.105(c), the Commission and NFA initiate reviews of the facts and 
circumstances that resulted in the notice being filed including, as 
appropriate, communicating with personnel of the nonbank SD. The review 
of the facts and the interaction with the personnel of the nonbank SD 
provide the Commission and NFA with information to develop 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, or 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.
    The EU Financial Reporting Rules require an EU nonbank SD to 
provide notice to competent authorities if the firm fails to maintain a 
minimum capital ratio of common equity tier 1 capital to risk-weighted 
assets equal or greater than 7 percent (4.5 percent of the core capital 
requirement plus the 2.5 percent capital conservation buffer 
requirement, assuming no other capital buffer requirements apply). The 
EU nonbank SD is also required to file a capital conservation plan with 
its notice to the competent authority. The capital conservation plan is 
required to contain information regarding actions that the EU nonbank 
SD will take to ensure proper capital adequacy.
    The Commission has preliminarily determined that the requirement 
for an EU nonbank SD to provide notice of a breach of its capital 
buffer requirements to its competent authority is not sufficiently 
comparable in purpose and effect to the CFTC notice provisions 
contained in Commission Regulation 23.105(c)(1) and (2),\355\ which 
require a nonbank SD to provide notice to the Commission and to NFA if 
the firm fails to meet its minimum capital requirement or if the firm's 
regulatory capital falls below 120 percent of its minimum capital 
requirement (``Early Warning Level''). The requirement for an EU 
nonbank SD to provide notice of a breach of its capital buffer 
requirements does not achieve a comparable outcome to the CFTC's Early 
Warning Level requirement due to the difference in the thresholds 
triggering a notice requirement in the respective rule sets.
---------------------------------------------------------------------------

    \355\ 17 CFR 23.105(c)(1) and (2).
---------------------------------------------------------------------------

    The requirement for a nonbank SD to file notice with the Commission 
and NFA if the firm becomes undercapitalized or if the firm experiences 
a decrease of excess regulatory capital below defined levels is a 
central component of the Commission's and NFA's oversight program for 
nonbank SDs.\356\ Therefore, the Commission preliminarily believes that 
it is necessary for the Commission and NFA to receive copies of notices 
filed under Article 142 of CRD by EU nonbank SDs alerting competent 
authorities of a breach of the EU nonbank SD's combined capital buffer. 
The notice must be filed by the EU nonbank SD within 24 hours of the 
filing of the notice with the relevant competent authority, and the 
Commission expects that, upon the receipt of a notice, Commission staff 
and NFA staff will engage with staff of the EU nonbank SD to obtain an 
understanding of the facts that led to the filing of the notice and 
will discuss with the EU nonbank SD the firm's capital conservation 
plan. The proposed condition would not require the EU nonbank SD to 
file copies of its capital conservation plan with the Commission or 
NFA. To the extent Commission staff needs further information from the 
EU nonbank SD, the Commission expects to request such information as 
part of its assessment of the notice and its communications with the EU 
nonbank SD.
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    \356\ See Commission Regulation 23.105(c)(4), which requires a 
nonbank SD to file notice with the Commission and NFA if it 
experiences decrease in excess capital of 30 percent or more from 
the excess capital reported in its last financial filing with the 
Commission. 17 CFR 23.105(c)(4).
---------------------------------------------------------------------------

    In addition, due to the lack of a sufficiently comparable analogue 
to the CFTC Financial Reporting Rules' Early Warning Level requirement, 
the Commission is proposing to condition the Capital Comparability 
Determination Order to require an EU nonbank SD to file a notice with 
the

[[Page 41804]]

Commission and NFA if the firm's capital ratio does not equal or exceed 
12.6 percent.\357\ The proposed condition would further require the EU 
nonbank SD to file the notice with the Commission and NFA within 24 
hours of when the firm knows or should have known that its regulatory 
capital was below 120 percent of its minimum capital requirement. The 
timing requirement for the filing of the proposed notice with the 
Commission and NFA is consistent with the Commission's requirements for 
an FCM or a nonbank SD, which are both required to file an Early 
Warning Level notice with the Commission and NFA when the firm knows or 
should have known that its regulatory capital is below specified 
reporting levels.\358\ The requirement for a firm to file a notice with 
the Commission when it knows or should have known that its capital is 
below the reporting level is designed to prevent a situation where a 
firm's deficient recordkeeping leads to an inadequate monitoring of the 
Early Warning Level threshold. More generally, the ``should have 
known'' part of the timing standard for the filing of the proposed 
notice is intended to cover facts and circumstances that should 
reasonably lead the firm to believe that its regulatory capital is 
below 120 percent of the minimum requirement.\359\ In practice, even if 
the EU nonbank SD's books and records do not reflect a decrease of 
regulatory capital below 120 percent of the minimum requirement or if 
the computations that may reveal a decrease of regulatory capital below 
120 percent have not been made yet, the firm would be expected to 
provide notice if it became aware of deficiencies in its recordkeeping 
processes that could result in inaccurate recording of the firm's 
capital levels or if it had other reasons to believe its regulatory 
capital is below the Early Warning Level threshold.\360\
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    \357\ The Commission's proposed reporting level of 12.6 percent 
reflects the aggregate of the EU nonbank SD's core capital 
requirement of 8 percent and capital conservation buffer requirement 
of 2.5 percent, multiplied by a factor of 1.20. For purposes of the 
calculation, the Commission proposes that the 20 percent capital 
increase must be comprised of common equity tier 1 capital (i.e., 
common equity tier 1 capital must comprise a minimum of 8.4 percent, 
which reflects the aggregate of the 4.5 percent core common equity 
tier 1 capital requirement and the 2.5 percent capital conservation 
buffer requirement, multiplied by a factor of 1.20).
    \358\ 17 CFR 1.12 and 17 CFR 23.105(c)(ii)(2).
    \359\ This interpretation is consistent with the Commission's 
discussion of the timing standard in the preamble to the 1998 final 
rule adopting amendments to Commission Regulation 1.12, where the 
Commission noted that the part of the standard requiring an FCM to 
report when it ``should know'' of a problem may be defined as the 
point at which a party, in the exercise of reasonable diligence, 
should become aware of an event. See 63 FR 45711 at 45713.
    \360\ To that point, in discussing the standard applicable to 
the timing requirement for the filing of a notice by an FCM to 
report an undersegregated or undersecured condition (i.e., situation 
where the FCM has insufficient funds in accounts segregated for the 
benefit of customers trading on U.S. contract markets or has 
insufficient funds set aside for customers trading on non-U.S. 
markets to meet the FCM's obligations to its customers), the 
Commission noted that an obligation to file a notice could arise 
even before the required computations that would reveal deficiencies 
must be made. See id.
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    As noted above, a purpose of the proposed Early Warning Level 
notice provision is to allow the Commission and NFA to initiate 
conversations and fact finding with a registrant that may be 
experiencing operational or financial issues that may adversely impact 
the firm's ability to meet its obligations to market participants, 
including customers or swap counterparties. The notice filing is a 
central component of the Commission's and NFA's oversight program, and 
the Commission believes that a firm that is experiencing operational 
challenges that prevent the firm from definitively computing its 
capital level during a period when it recognizes from the facts and 
circumstances that the firm's capital level may be below the reporting 
threshold should file the notice with the Commission and NFA. 
Therefore, the Commission preliminarily deems it appropriate to include 
a similar early warning notice condition in the Capital Comparability 
Determination Order.
    The EU Financial Reporting Rules also do not contain an explicit 
requirement for an EU nonbank SD to notify its competent authority if 
the firm fails to maintain current books and records, experiences a 
decrease in regulatory capital over levels previously reported, or 
fails to collect or post initial margin with uncleared swap 
counterparties that exceed certain threshold levels.\361\ The EU 
Financial Reporting Rules also do not require an EU nonbank SD to 
provide the relevant competent authority with advance notice of equity 
withdrawals initiated by equity holders that exceed defined amounts or 
percentages of the firm's excess regulatory capital.\362\
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    \361\ 17 CFR 23.105(c)(3), (4), and (7).
    \362\ Commission Regulation 23.105(c)(5) requires a nonbank SD 
to provide written notice to the Commission and NFA two business 
days prior to the withdrawal of capital by action of the equity 
holders if the amount of the withdrawal exceeds 30 percent of the 
nonbank SD's excess regulatory capital. 17 CFR 23.105(c)(5).
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    To ensure that the Commission and NFA receive prompt information 
concerning potential operational or financial issues that may adversely 
impact the safety and soundness of an EU nonbank SD, the Commission is 
proposing to condition the Capital Comparability Determination Order to 
require EU nonbank SDs to file certain notices required under the CFTC 
Financial Reporting Rules with the Commission and NFA. In this 
connection, the Commission is proposing to condition the Capital 
Comparability Determination Order on an EU nonbank SD providing the 
Commission and NFA with notice if the firm fails to maintain current 
books and records with respect to its financial condition and financial 
reporting requirements. For avoidance of doubt, in this context the 
Commission believes that books and records would include current 
ledgers or other similar records which show or summarize, with 
appropriate references to supporting documents, each transaction 
affecting the EU nonbank SD's asset, liability, income, expense and 
capital accounts in accordance with the accounting principles accepted 
by the relevant competent authorities.\363\ The Commission 
preliminarily believes that the maintenance of current books and 
records is a fundamental and essential component of operating as a 
registered nonbank SD and that the failure to comply with such a 
requirement may indicate an inability of the firm to promptly and 
accurately record transactions and to ensure compliance with regulatory 
requirements, including regulatory capital requirements. Therefore, the 
proposed Order would require an EU nonbank SD to provide the Commission 
and NFA with a written notice within 24 hours if the firm fails to 
maintain books and records on a current basis.
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    \363\ For comparison, see Commission Regulation 23.105(b), which 
similarly defines the term ``current books and records'' as used in 
the context of the Commission's requirements. 17 CFR 23.105(b).
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    The proposed Capital Comparability Determination Order would also 
require an EU nonbank SD to file notice with the Commission and NFA if: 
(i) a single counterparty, or group of counterparties under common 
ownership or control, fails to post required initial margin or pay 
required variation margin on uncleared swap and security-based swap 
positions that, in the aggregate, exceeds 25 percent of the EU nonbank 
SD's minimum capital requirement; (ii) counterparties fail to post 
required initial margin or pay required variation margin to the EU 
nonbank SD for uncleared swap and security-based swap positions that, 
in the aggregate, exceeds 50 percent of the EU nonbank

[[Page 41805]]

SD's minimum capital requirement; (iii) an EU 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 EU nonbank SD's minimum capital 
requirement; and (iv) an EU 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 EU nonbank SD's minimum capital requirement. The 
Commission is proposing to require this notice so that it and the NFA 
may commence communication with the EU nonbank SD and the relevant 
competent authority in order to obtain an understanding of the facts 
that have led to the failure to exchange material amounts of initial 
margin and variation margin in accordance with the applicable margin 
rules, and to assess whether there is a concern regarding the financial 
condition of the firm that may impair its ability to meet its financial 
obligations to customers, counterparties, creditors, and general market 
participants, or otherwise adversely impact the firm's safety and 
soundness.
    The proposed Capital Determination Order would not require an EU 
nonbank SD to file notices with the Commission and NFA concerning 
withdrawals of capital or changes in capital levels as such information 
will be reflected in the financial statement reporting filed with the 
Commission and NFA as conditions of the Order, and because the EU 
nonbank SD's capital levels are monitored by the relevant competent 
authority, which the Commission preliminarily believes renders the 
separate reporting to the Commission superfluous.
    The proposed Capital Comparability Determination Order would 
require an EU nonbank SD to file any notices required under the Order 
with the Commission and NFA in English and, where applicable, to 
reflect any balances in U.S. dollars. Each notice required by the 
proposed Capital Comparability Determination Order must be filed in 
accordance with instructions issued by the Commission or NFA.\364\
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    \364\ The proposed conditions for EU nonbank SDs to file a 
notice with the Commission and NFA if the firm fails to maintain 
current books and records or fails to collect or post margin with 
uncleared swap counterparties that exceed the above-referenced 
threshold levels are consistent with the proposed conditions in the 
proposed Capital Comparability Determination Orders for Japan and 
Mexico. See Proposed Japan Order and Proposed Mexico Order.
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    The Commission invites public comment on its analysis above, 
including comment on the EU Application and relevant EU Financial 
Reporting Rules. The Commission also invites comment on the proposed 
conditions to the Capital Comparability Determination Order that are 
listed above.
    The Commission requests comment on the timeframes set forth in the 
proposed conditions for EU nonbank SDs to file notices with the 
Commission and NFA. In this regard, the proposed conditions would 
require EU 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 relevant competent 
authority. These notices would have to be translated into English prior 
to being filed with the Commission and NFA. The Commission requests 
comment on the issues EU nonbank SDs may face meeting the filing 
requirements given time-zone difference, translation, and governance 
issues, as applicable. The Commission also requests specific comment 
regarding the setting of compliance dates for the notice reporting 
conditions that the proposed Capital Comparability Determination Order 
would impose on EU 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/or NFA also conduct periodic 
examinations as part of the supervision of nonbank SDs, including 
routine onsite examinations of nonbank SDs' books, records, and 
operations to ensure compliance with CFTC and NFA requirements.\365\
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    \365\ Section 17(p)(2) of the CEA 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. 7 U.S.C. 21(p)(2). 
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.\366\ 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.\367\
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    \366\ See 17 CFR 23.105(c).
    \367\ 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 \368\ provides the Commission 
with exclusive authority to enforce the capital requirements imposed on 
nonbank SDs adopted under Section 4s(e) of the CEA.\369\
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    \368\ 7 U.S.C. 6b-1(a).
    \369\ 7 U.S.C. 6s(e).
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2. EU Authorities' Supervision and Enforcement of EU Nonbank SDs
    Supervision of EU nonbank SDs' compliance with the EU Capital Rules 
and the EU Financial Reporting Rules is conducted by the ECB and the 
relevant national competent authorities in the EU Member States. EU 
nonbank SDs that are registered as credit institutions and that qualify 
as ``significant supervised entities'' fall under the direct authority 
of the ECB and are supervised within the ``Single Supervisory 
Mechanism'' (``SSM'').\370\ Within the SSM, the ECB supervises firms 
for compliance with the EU Capital Rules and the EU Financial Reporting 
Rules through joint supervisory teams (``JSTs''), comprised of ECB 
staff and staff of the national competent

[[Page 41806]]

authorities.\371\ EU nonbank SDs that are registered as credit 
institutions and that qualify as ``less significant supervised 
entities,'' \372\ or EU nonbank SDs registered as investment firms that 
remain subject to the CRR/CRD framework regime, fall under the direct 
authority of the applicable national competent authorities.\373\
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    \370\ See generally SSM Regulation and SSM Framework Regulation. 
The criteria for determining whether credit institutions are 
considered ``significant supervised entities'' include size, 
economic importance for the specific EU Member State or the EU 
economy, significance of cross-border activities, and request for or 
receipt of direct public financial assistance. See SSM Regulation, 
Article 6 and SSM Framework Regulation, Articles 39-44 and 50-62.
    \371\ SSM Framework Regulation, Article 3.
    \372\ SSM Regulation, Article 6. Entities that qualify as ``less 
significant supervised entities'' are supervised by their national 
competent authorities in close cooperation with the ECB. With 
respect to the prudential supervision of these entities, the ECB has 
the power to issue regulations, guidelines or general instructions 
to the national competent authorities. SSM Regulation, Article 
6(5)(a). At any time, the ECB can also decide to directly supervise 
any one of these less significant supervised entities to ensure that 
high supervisory standards are applied consistently. SSM Regulation, 
Article 6(5)(b).
    \373\ Three of the four EU nonbank SDs currently registered with 
the Commission (BofA Securities Europe S.A.; Citigroup Global 
Markets Europe AG; and Morgan Stanley Europe SE) are registered as 
credit institutions and qualify as ``significant supervised 
entities'' subject to the direct supervision of the ECB. One entity 
(Goldman Sachs Paris Inc. et Cie) is registered as an investment 
firm, but has a pending application for authorization as a credit 
institution. The Applicants represented that Goldman Sachs Paris Inc 
et Cie would likely be a categorized as a ``less significant 
supervised entity'' and subject to direct supervision by the French 
ACPR. According to the Applicants, however, the ECB is still 
considering whether it may exercise direct supervisory authority 
over the entity, pursuant to SSM Regulation, Article 6. See 
Responses to Staff Questions of May 15, 2023.
    Accordingly, this Section describes the supervisory powers of 
the ECB and the French ACPR and refers to provisions establishing 
those powers. Therefore, if a future EU nonbank SD applicant that is 
subject to supervision by a national competent authority in an EU 
Member State other than France, seeks substituted compliance for 
some or all of the CFTC Capital Rules and CFTC Financial Reporting 
Rules, the EU nonbank SD applicant must submit an application to the 
Commission in accordance with Commission Regulation 23.106 (17 CFR 
23.106) and provide, among other information, a description of the 
ability of the relevant EU Member State regulatory authority to 
supervise and enforce compliance with the relevant EU Member State's 
capital adequacy and financial reporting requirements.
---------------------------------------------------------------------------

    The ECB and the ACPR have supervision, audit, and investigation 
powers with respect to EU nonbank SDs, which include the power to 
require EU nonbank SDs to provide all necessary information in order 
for the authorities to carry out their supervisory tasks; \374\ examine 
the books and records of EU nonbank SDs; obtain written and oral 
explanations from the EU nonbank SD's management, staff, and other 
persons; \375\ and conduct all necessary inspections at the business 
premises of EU nonbank SDs and other group entities.\376\
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    \374\ CRD, Article 65(3)(a); French MFC, Article L.612-24; and 
SSM Regulation, Article 10.
    \375\ CRD, Article 65(3)(b); French MFC, Article L.612-24; and 
SSM Regulation, Article 11.
    \376\ CRD, Article 65(3)(c); French MFC, Articles L.612-23 and 
L.612-26; and SSM Regulation, Article 12.
---------------------------------------------------------------------------

    The competent authorities also monitor the capital adequacy of EU 
nonbank SDs through supervisory measures on an ongoing basis. The 
monitoring includes assessing the notices and the capital conservation 
plan discussed in Section E.2. above. In addition to the tools 
described in Section E.2., the relevant competent authorities are 
empowered with a variety of measures to address an EU nonbank SD's 
financial deterioration. Specifically, if an EU nonbank SD fails to 
meet its capital or liquidity thresholds or if the competent authority 
has evidence that the EU nonbank SD is likely to breach its capital or 
liquidity thresholds in the next 12 months, the competent authority may 
order an EU nonbank SD to comply with additional requirements, 
including: (i) maintaining additional capital in excess of the minimum 
requirements, if certain conditions are met; (ii) requiring that the EU 
nonbank SD submit a plan to restore compliance with applicable capital 
or liquidity thresholds; (iii) imposing restrictions on the business or 
operations of the EU nonbank SD; (iv) imposing restrictions or 
prohibitions on distributions or interest payments to shareholders or 
holders of additional tier 1 capital instruments; (v) requiring 
additional or more frequent reporting requirements; and (vi) imposing 
additional specific liquidity requirements.\377\ The competent 
authority may also withdraw an EU nonbank SD's authorization if the 
firm no longer meets its minimum capital requirements.\378\
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    \377\ CRD, Articles 102(1) and 104(1); French MFC, Articles 
L.511-41-3 and L.612-31 to L.612-33; SSM Regulation, Article 16.
    \378\ CRD Article 18; MiFID, Article 8c; French MFC, Articles 
L.532-6 and L.612-40; SSM Regulation, Article 14.
---------------------------------------------------------------------------

    Although the relevant competent authorities generally have broad 
discretion as to what powers they may exercise, the EU Capital Rules 
and the EU Financial Reporting Rules specifically mandate that the 
competent authorities require EU nonbank SDs to hold increased capital 
when: (i) risks or elements of risks are not covered by the capital 
requirements imposed by the EU Capital Rules; (ii) the EU nonbank SD 
lacks robust governance arrangements, appropriate resolution and 
recovery plans, processes to manage large exposures or effective 
processes to maintain on an ongoing basis the amounts, types and 
distribution of capital needed to cover the nature and level of risks 
to which they might be exposed and it is unlikely that other 
supervisory measures would be sufficient to ensure that those 
requirements can be met within an appropriate timeframe; (iii) the EU 
nonbank SD repeatedly fails to establish or maintain an adequate level 
of additional capital to cover the guidance communicated by the 
relevant competent authorities; or (iv) other entity-specific 
situations deemed by the relevant competent authority to raise material 
supervisory concerns.\379\
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    \379\ CRD, Article 104 and 104a; French MFC, Article L.511-41-3; 
German KWG, Section 6c(1); and SSM Regulation, Articles 9 
(indicating that the ECB shall have all the powers and obligations 
that national authorities have under EU law, unless otherwise 
provided in the SSM Regulation, and that the ECB may require, by way 
of instructions, that national competent authorities make use of 
their powers, where the SSM Regulation does not confer such powers 
to the ECB) and 16 (describing ECB's supervisory powers, including 
the power to require entities subject to its authority to hold 
capital in excess of the capital requirements imposed by relevant EU 
law).
---------------------------------------------------------------------------

    The national competent authorities can also issue administrative 
penalties and other administrative measures if an EU nonbank SD (or its 
management) does not fully comply with its reporting requirements.\380\ 
These penalties and measures include: (i) public statements identifying 
a firm or one or more of its managers as responsible for the breach; 
(ii) cease-and-desist orders; (iii) temporary bans against a member of 
the firm's management body or other manager; (iv) administrative 
monetary penalties against the firm of up to 10 percent of the total 
annual net turnover of the preceding year; (v) administrative monetary 
penalties of up to twice the amount of the profits gained or losses 
avoided because of the breach; or (vi) withdrawal of the firm's 
authorization.\381\
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    \380\ CRD, Articles 65, 67(1)(e) to (i) and 67(2); French MFC, 
Article L.612-39 and L.612-40; German KWG, Sections 56(6) and (7), 
60b(1) and (3).
    \381\ Id.
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    The ECB has the same powers to impose administrative monetary 
penalties for breaches of directly applicable EU laws and 
regulations.\382\ In addition, the ECB can instruct the national 
competent authorities to open proceedings that may lead to the 
imposition of non-monetary penalties for breaches of directly 
applicable EU law and regulations, monetary and non-monetary penalties 
for breaches of EU Member State laws implementing relevant directives, 
and monetary and non-monetary penalties against natural

[[Page 41807]]

persons for breaches of relevant EU laws and regulations.\383\
---------------------------------------------------------------------------

    \382\ SSM Regulation, Article 18.
    \383\ SSM Regulation, Article 9.
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3. Commission Analysis
    Based on the above, the Commission preliminarily finds that the 
competent authorities have the necessary powers to supervise, 
investigate, and discipline EU nonbank SDs for compliance with the 
applicable capital and financial reporting requirements, and to detect 
and deter violations of, and ensure compliance with, the applicable 
capital and financial reporting requirements in the EU.\384\
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    \384\ The Commission, the French Autorit[eacute] des 
March[eacute]s Financiers (``AMF'') (the French market conduct 
regulatory authority with which the ACPR shares supervision 
authority over French financial firms, including EU nonbank SDs 
domiciled in France, as it regards business conduct matters), and 
the German BaFin (the German financial sector regulatory authority 
whose staff participates in the SSM's JSTs that conduct prudential 
supervision of the two EU nonbank SDs domiciled in Germany) 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.
---------------------------------------------------------------------------

    The Commission would expect to communicate and consult, to the 
fullest extent permissible under applicable law, with the relevant 
competent authorities regarding the supervision of the financial and 
operational condition of the EU nonbank SDs. An appropriate MOU or 
similar arrangement with the relevant competent authorities would 
facilitate cooperation and information sharing in the context of 
supervising the EU nonbank SDs. 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 would 
provide for the Commission and the relevant competent authority to 
inform each other of certain events, including any material events that 
could adversely impact the financial or operational stability of a 
Covered Firm, and would provide a procedure for any on-site 
examinations of Covered Firms.
    In the absence of an MOU or similar information sharing 
arrangement, the Commission is proposing to condition the Capital 
Comparability Determination Order on an EU nonbank SD providing notice 
to the Commission and NFA if its competent authority has required an EU 
nonbank SD to: (i) maintain additional capital in excess of the minimum 
requirements; (ii) require that the EU nonbank SD submit a plan to 
restore compliance with applicable capital or liquidity thresholds; 
(iii) impose restrictions on the business or operations of the EU 
nonbank SD; (iv) impose restrictions or prohibitions on distributions 
or interest payments to shareholders or holders of additional tier 1 
capital instruments; (v) require additional or more frequent reporting 
requirements; or (vi) impose additional specific liquidity 
requirements.\385\ Upon receipt of such notice, the Commission and NFA 
would communicate with the EU nonbank SD to obtain further information 
regarding the underlying issues that prompted the competent authority 
to direct the EU nonbank SD to take such actions and would obtain 
information regarding how the EU nonbank SD would address the 
underlying issues.
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    \385\ The authority for the competent authorities to impose such 
conditions or requirements is set forth in CRD, Articles 102(1) and 
104(1); French MFC, Articles L.511-41-3 and L.612-31 to L.612-33; 
SSM Regulation, Article 16.
---------------------------------------------------------------------------

    The Commission invites public comment on the EU Application, the EU 
laws and regulations, and the Commission's analysis above regarding its 
preliminary determination that the competent authorities in the EU and 
the 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 EU Application and 
the Commission's review of applicable EU laws and regulations, is that 
the EU Capital Rules and the EU 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 EU 
Capital Rules and CFTC Capital Rules and certain differences between 
the EU 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 rules sets would not be inconsistent with 
providing a substituted compliance framework for EU 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 EU Capital Rules to the Bank-Based 
Approach contained within the CFTC Capital Rules. As noted previously, 
the Applicants have not requested, and the Commission has not 
performed, a comparison of the EU Capital Rules to the Commission's NAL 
Approach or TNW Approach. In addition, as discussed in Section I.C. 
above, the Applicants have not requested, and the Commission has not 
performed, a comparison of the capital rules for smaller EU investment 
firms under IFR to the Commission's Bank-Based Approach, NAL Approach, 
or TNW Approach.

B. Proposed Capital Comparability Determination Order

    The Commission invites comments on all aspects of the EU 
Application, relevant EU laws and regulations, the Commission's 
preliminary views expressed above, the question of whether requirements 
under the EU 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 Certain EU 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 the French 
Republic (``France'') or the Federal

[[Page 41808]]

Republic of Germany (``Germany'') 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 requirements of 
the European Union (``EU'') 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 France or Germany (``EU 
Member State'') and is domiciled in France or Germany, respectively 
(``EU nonbank SD'');
    (3) The EU nonbank SD is licensed as a credit institution or an 
investment firm in an EU Member State and is treated for the purposes 
of the EU capital and financial reporting rules as an ``institution,'' 
as defined in Regulation (EU) No 575/2013 of the European Parliament 
and of the Council of 26 June 2013 on prudential requirements for 
credit institutions and amending Regulation (EU) No 648/2012 (``Capital 
Requirements Regulation'' or ``CRR''), Article 4(1)(3), and Directive 
2013/36/EU of the European Parliament and of the Council of 26 June 
2013 on access to the activity of credit institutions and the 
prudential supervision of credit institutions, amending Directive 2002/
87/EC and repealing Directives 2006/48/EC and 2006/49/EC (``Capital 
Requirements Directive'' or ``CRD''), Article 3(1)(3);
    (4) The EU nonbank SD is subject to and complies with: CRR and CRD 
as implemented in the national laws of France and Germany 
(collectively, ``EU Capital Rules'');
    (5) The EU nonbank SD satisfies at all times applicable capital 
ratio and leverage ratio requirements set forth in Article 92 of CRR, 
the capital conservation buffer requirements set forth in Article 129 
of CRD, and applicable liquidity requirements set forth in Articles 412 
and 413 of CRR, and otherwise complies with the requirements to 
maintain a liquidity risk management program as required under Article 
86 of CRD;
    (6) The EU nonbank SD is subject to and complies with: Commission 
Implementing Regulation (EU) 2021/451 of 17 December 2020 laying down 
implementing technical standards for the application of Regulation (EU) 
No 575/2013 of the European Parliament and of the Council with regard 
to supervisory reporting of institutions and repealing Implementing 
Regulation (EU) No 680/2014 (``CRR Reporting ITS''); Regulation (EU) 
2015/534 of the European Central Bank of 17 March 2015 on reporting of 
supervisory financial information (``ECB FINREP Regulation''); and 
Directive 2013/34/EU of the European Parliament and of the Council of 
26 June 2013 on the annual financial statements, consolidated financial 
statements and related reports of certain types of undertakings, 
amending Directive 2006/43/EC of the European Parliament and of the 
Council and repealing Council Directives 78/660/EEC and 83/349/EEC 
(``Accounting Directive'') as implemented in the national laws of 
France and Germany (collectively and together with CRR and CRD as 
implemented in the national laws of France and Germany, ``EU Financial 
Reporting Rules'');
    (7) The EU nonbank SD is subject to prudential supervision by an EU 
Member State supervisory authority with jurisdiction to enforce the 
requirements set forth by the EU Capital Rules and the EU Financial 
Reporting Rules or the European Central Bank (``ECB''), as applicable 
(``competent authority'');
    (8) The EU nonbank SD maintains at all times an amount of 
regulatory capital in the form of common equity tier 1 capital as 
defined in Article 26 of CRR, equal to or in excess of the equivalent 
of $20 million in United States dollars (``U.S. dollars''). The EU 
nonbank SD shall use a commercially reasonable and observable euro/U.S. 
dollar exchange rate to convert the value of the euro-denominated 
common equity tier 1 capital to U.S. dollars;
    (9) The EU nonbank SD has filed with the Commission a notice 
stating its intention to comply with the EU Capital Rules and the EU 
Financial Reporting Rules in lieu of the CFTC Capital Rules and the 
CFTC Financial Reporting Rules. The notice of intent must include the 
EU nonbank SD's representation that the firm is organized and domiciled 
in an EU Member State, is a licensed investment firm or a credit 
institution in an EU Member State, and is subject to, and complies 
with, the EU Capital Rules and EU Financial Reporting Rules. An EU 
nonbank SD may not rely on this Capital Comparability Determination 
Order until it receives confirmation from Commission staff, acting 
pursuant to authority delegated by the Commission, that the EU nonbank 
SD may comply with the applicable EU Capital Rules and EU Financial 
Reporting Rules in lieu of the CFTC Capital Rules and CFTC 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];
    (10) The EU nonbank SD prepares and keeps current ledgers and other 
similar records in accordance with accounting principles required by 
the relevant competent authority;
    (11) The EU nonbank SD files with the Commission and with the 
National Futures Association (``NFA'') a copy of templates 1.1 (Balance 
Sheet Statement: assets), 1.2 (Balance Sheet Statement: liabilities), 
1.3 (Balance Sheet Statement: equity), 2 (Statement of profit or loss), 
and 10 (Derivatives--Trading and economic hedges) of the financial 
reports (``FINREP'') that EU nonbank SDs are required to submit 
pursuant to CRR Reporting ITS, Annex III or IV, or the ECB FINREP 
Regulation, as applicable, and templates 1 (Own Funds), 2 (Own Funds 
Requirements) and 3 (Capital Ratios) of the common reports (``COREP'') 
that EU nonbank SDs are required to submit pursuant to CRR Reporting 
ITS, Annex I. The FINREP and COREP templates must be translated into 
the English language and balances must be converted to U.S. dollars. 
The FINREP and COREP templates must be filed with the Commission and 
NFA within 35 calendar days of the end of each month. EU nonbank SDs 
that are registered as security-based swap dealers (``SBSDs'') with the 
U.S. Securities and Exchange Commission (``SEC'') may comply with this 
condition by filing with the Commission and NFA a copy of Form X-17A-5 
(``FOCUS Report'') that the EU nonbank SD is required to file with the 
SEC or its designee pursuant to an order granting conditional 
substituted compliance with respect to Securities Exchange Act of 1934 
Rule 18a-7. The copy of the FOCUS Report must be filed with the 
Commission and NFA within 35 calendar days after the end of each month 
in the manner, format and conditions specified by the SEC in Order 
Specifying the Manner and Format of Filing Unaudited Financial and 
Operational Information by Security-Based Swap Dealers and Major 
Security-Based Swap Participants that are not U.S. Persons and are 
Relying on Substituted Compliance with Respect to Rule 18a-7, 86 FR 
59208 (Oct. 26, 2021);
    (12) The EU nonbank SD files with the Commission and with NFA a 
copy

[[Page 41809]]

of its annual audited financial statements and management report 
(together, ``annual audited financial report'') that are required to be 
prepared and published pursuant to Articles 4, 19, 30 and 34 of the 
Accounting Directive as implemented in the national laws of France and 
Germany. The annual audited financial report must be translated into 
the English language and balances may be reported in euro. The annual 
audited financial report must be filed with the Commission and NFA on 
the earliest of the date the report is filed with the competent 
authority, the date the report is published, or the date the report is 
required to be filed with the competent authority or the date the 
report is required to be published pursuant to the EU Financial 
Reporting Rules;
    (13) The EU nonbank SD files Schedule 1 of Appendix B to Subpart E 
of Part 23 of the CFTC's regulations (17 CFR 23 Subpart E--Appendix B) 
with the Commission and NFA on a monthly basis. Schedule 1 must be 
prepared in the English language with balances reported in U.S. dollars 
and must be filed with the Commission and NFA within 35 calendar days 
of the end of each month;
    (14) The EU nonbank SD submits with each set of FINREP and COREP 
templates, annual audited financial report, and Schedule 1 of Appendix 
B to Subpart E of Part 23 of the CFTC's regulations a statement by an 
authorized representative or representatives of the EU 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 English and conversion of balances in 
the reports to U.S. dollars, is true and correct. The statement must be 
prepared in the English language;
    (15) The EU nonbank SD files a margin report containing the 
information specified in Commission Regulation 23.105(m) (17 CFR 
23.105(m)) with the Commission and with NFA within 35 calendar days of 
the end of each month. The margin report must be in the English 
language and balances reported in U.S. dollars;
    (16) The EU nonbank SD files a notice with the Commission and NFA 
within 24 hours of being informed by a competent authority that the 
firm is not in compliance with any component of the EU Capital Rules or 
EU Financial Reporting Rules. The notice must be prepared in the 
English language;
    (17) The EU nonbank SD files a notice within 24 hours with the 
Commission and NFA if it fails to maintain regulatory capital in the 
form of common equity tier 1 capital as defined in Article 26 of CRR, 
equal to or in excess of the U.S. dollar equivalent of $20 million 
using a commercially reasonable and observable euro/U.S. dollar 
exchange rate. The notice must be prepared in the English language;
    (18) The EU nonbank SD provides the Commission and NFA with notice 
within 24 hours of filing a capital conservation plan with the relevant 
competent authority pursuant to the relevant EU Member State's 
provisions implementing Article 143 of CRD, indicating that the firm 
has breached its combined capital buffer requirement. The notice filed 
with the Commission and NFA must be prepared in the English language;
    (19) The EU nonbank SD provides the Commission and NFA with notice 
within 24 hours if it is required by its competent authority to 
maintain additional capital or additional liquidity requirements, or to 
restrict its business operations, or to comply with other requirements 
pursuant to Articles 102(1) and 104(1) of CRD as implemented in the 
national laws of France or to Article 16 of Council Regulation (EU) No 
1024/2013 of 15 October 2013 conferring specific tasks on the European 
Central Bank concerning policies relating to the prudential supervision 
of credit institutions. The notice filed with the Commission and NFA 
must be prepared in the English language;
    (20) The EU nonbank SD files a notice with the Commission and NFA 
within 24 hours if it fails to maintain its minimum requirement for own 
funds and eligible liabilities (``MREL''), if such requirement is 
applicable to the EU nonbank SD pursuant to Directive 2014/59/EU of the 
European Parliament and of the Council of 15 May 2014 establishing a 
framework for the recovery and resolution of credit institutions and 
investment firms and amending Council Directive 82/891/EEC, and 
Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 
2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/
2010 and (EU) No 648/2012, of the European Parliament and of the 
Council as implemented in the national laws of France and Germany. The 
notice filed with the Commission and NFA must be prepared in the 
English language;
    (21) The EU nonbank SD files a notice with the Commission and NFA 
within 24 hours of when the firm knew or should have known that its 
regulatory capital fell below 120 percent of its minimum capital 
requirement, comprised of the firm's core capital requirements and any 
applicable capital buffer requirements. For purposes of the 
calculation, the 20 percent excess capital must be in the form of 
common equity tier 1 capital. The notice filed with Commission and NFA 
must be prepared in the English language;
    (22) The EU nonbank SD files a notice with the Commission and NFA 
within 24 hours if it fails to make or keep current the financial books 
and records. The notice must be prepared in the English language;
    (23) The EU nonbank SD files a notice with the Commission and NFA 
within 24 hours of the occurrence of any of the following: (i) a single 
counterparty, or group of counterparties under common ownership or 
control, fails to post required initial margin or pay required 
variation margin on uncleared swap and non-cleared security-based swap 
positions that, in the aggregate, exceeds 25 percent of the EU nonbank 
SD's minimum capital requirement; (ii) counterparties fail to post 
required initial margin or pay required variation margin to the EU 
nonbank SD for uncleared swap and non-cleared security-based swap 
positions that, in the aggregate, exceeds 50 percent of the EU nonbank 
SD's minimum capital requirement; (iii) the EU nonbank SD fails to post 
required initial margin or pay required variation margin for uncleared 
swap and non-cleared security-based swap positions to a single 
counterparty or group of counterparties under common ownership and 
control that, in the aggregate, exceeds 25 percent of the EU nonbank 
SD's minimum capital requirement; or (iv) the EU nonbank SD fails to 
post required initial margin or pay required variation margin to 
counterparties for uncleared swap and non-cleared security-based swap 
positions that, in the aggregate, exceeds 50 percent of the EU nonbank 
SD's minimum capital requirement. The notice must be prepared in the 
English language;
    (24) The EU 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 relevant competent authority. The notice required by this 
paragraph will satisfy the requirement for a nonbank SD to obtain the 
approval of NFA for a change in fiscal year-end under Commission 
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 EU nonbank SD's change in fiscal year-end;
    (25) The EU nonbank SD or an entity acting on its behalf notifies 
the

[[Page 41810]]

Commission of any material changes to the information submitted in the 
application for capital comparability determination, including, but not 
limited to, material changes to the EU Capital Rules or EU Financial 
Reporting Rules imposed on EU nonbank SDs, the ECB or relevant EU 
Member State authority's supervisory authority or supervisory regime 
over EU nonbank SDs, and proposed or final material changes to the EU 
Capital Rules or EU Financial Reporting Rules as they apply to EU 
nonbank SDs; and
    (26) Unless otherwise noted in the conditions above, the reports, 
notices, and other statements required to be filed by the EU nonbank SD 
with the Commission and NFA pursuant to the conditions of this Capital 
Comparability Determination Order must be submitted electronically to 
the Commission and NFA in accordance with instructions provided by the 
Commission or NFA.

    Issued in Washington, DC, on June 20, 2023, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

Appendices to Notice of Proposed Order and Request for Comment on an 
Application for a Capital Comparability Determination Submitted on 
Behalf of Nonbank Swap Dealers Domiciled in the French Republic and 
Federal Republic of Germany and Subject to Capital and Financial 
Reporting Requirements of the European Union--Voting Summary and 
Commissioners' Statements

Appendix 1--Voting Summary

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

Appendix 2--Statement of Chairman Rostin Behnam in Support of the 
Notice of Proposed Order and Request for Comment on the Capital 
Comparability Determination Submitted on Behalf of Nonbank Swap Dealers 
Domiciled in the French Republic and Federal Republic of Germany and 
Subject to Capital and Financial Reporting Requirements of the European 
Union

    I support the Commission's proposed order and request for 
comment on an application for a preliminary capital comparability 
determination on behalf of four nonbank swap dealers that are 
domiciled in France or Germany. All four of these EU nonbank SDs are 
subject to, and comply with, the EU capital and financial reporting 
rules as implemented by the national laws of France or Germany, 
which the Commission has preliminarily determined are comparable to 
certain capital and financial reporting requirements under the 
Commodity Exchange Act and the Commission's regulations, subject to 
certain conditions. This preliminary capital comparability 
determination for these EU nonbank SDs is the third proposed order 
and request for comment to come before the Commission since it 
adopted its substituted compliance framework for non-U.S. domiciled 
nonbank swap dealers in July 2020.

Appendix 3--Statement of Commissioner Kristin N. Johnson in Support of 
Notice and Order on EU Capital Comparability Determination

    I support the Commission's issuance of the proposed capital 
comparability order for comment (Proposed Order).\1\ The Proposed 
Order, if approved, will allow registered nonbank swap dealers (SDs) 
organized and domiciled in France and Germany to satisfy certain 
capital and financial reporting requirements under the Commodity 
Exchange Act (CEA) by being subject to and complying with comparable 
capital and financial reporting requirements under the European 
Union (EU) laws and regulations applicable in those countries. Since 
July 2020, this is the third proposed capital comparability 
determination approved for comment.\2\
---------------------------------------------------------------------------

    \1\ The application here is by three trade associations (the 
Institute of International Bankers, the International Swaps and 
Derivatives Association, and the Securities Industry and Financial 
Markets Association), and there are currently four nonbank swap 
dealers who would be eligible to take advantage of a comparability 
determination if made (France: BofA Securities Europe SA and Goldman 
Sachs Paris Inc. et Cie; Germany: Citigroup Global Markets Europe AG 
and Morgan Stanley Europe SE). See Letter dated Sept. 24, 2021, from 
Stephanie Webster, General Counsel, Institute of International 
Bankers, Steven Kennedy, Global Head of Public Policy, International 
Swaps and Derivatives Association, and Kyle Brandon, Managing 
Director, Head of Derivatives Policy, Securities Industry and 
Financial Markets Association, https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm. There are no other nonbank SDs 
registered with the Commission and organized and domiciled within 
the EU.
    \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 48,092 (Aug. 8, 2022); see 
also Statement of Commissioner Kristin N. Johnson in Support of 
Proposed Order on Japanese Capital Comparability Determination, July 
27, 2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072722c.
    The Commission approved a 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 Comisi[oacute]n Nacional Bancaria y de 
Valores at its November 10, 2022 open meeting. See 87 FR 76374 (Dec. 
13, 2022); see also Statement of Commissioner Kristin N. Johnson in 
Support of Proposed Order and Request for Comment on Mexican Capital 
Comparability Determination, Nov. 10, 2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement111022c.
---------------------------------------------------------------------------

    As I previously noted in the context of another recent proposed 
capital comparability determination,\3\ the Commission vigilantly 
monitors and surveils risk management activities by our market 
participants. Capital requirements play a critical role in fostering 
the safety and soundness of financial markets. Our efforts to 
coordinate and harmonize regulation with regulators around the world 
reinforce 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.
---------------------------------------------------------------------------

    \3\ See Statement of Commissioner Kristin N. Johnson in Support 
of Proposed Order and Request for Comment on Mexican Capital 
Comparability Determination, Nov. 10, 2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement111022c; see also 
Statement of Commissioner Kristin N. Johnson in Support of Proposed 
Order on Japanese Capital Comparability Determination, July 27, 
2022, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072722c.
---------------------------------------------------------------------------

    Section 4s(e) of the CEA directs the Commission to impose 
capital requirements on all SDs registered with the Commission.\4\ 
Section 4s(f) of the CEA directs the Commission to adopt rules 
imposing financial condition reporting obligations on all SDs.\5\ 
The Commission's capital and financial reporting requirements 
adopted pursuant to these sections of the CEA are critical to 
ensuring the safety and soundness of our markets by addressing and 
managing risks that arise from a firm's operation as an SD.\6\ 
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 solvency and resiliency. This, in turn, protects the 
financial system as a whole, reducing the risk of contagion that 
could arise from uncleared swaps. Financial reporting requirements 
work with the capital requirements by allowing the Commission to 
monitor and assess an SD's financial condition, including compliance 
with minimum capital requirements. The Commission uses the 
information it receives pursuant to these requirements to detect 
potential risks before they materialize.
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    \4\ 7 U.S.C. 6s(e).
    \5\ 7 U.S.C. 6s(f).
    \6\ See 7 U.S.C. 6s(e); 17 CFR subpart E.
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    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. Moreover, notwithstanding our 
issuance of the Proposed Order, the covered swap dealers domiciled 
in France and Germany would remain subject to the Commission's 
examination and enforcement authority. 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

[[Page 41811]]

are effectively calibrated, continuously assessed, and fit for 
purpose. The Commission's efforts in considering the Proposed Order 
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 Proposed Order.
    I commend the work of staff in the Market Participants Division 
and their careful consideration of this application. I commend the 
staff of the Market Participants Division: Amanda Olear, Tom Smith, 
Rafael Martinez, Liliya Bozhanova, Joo Hong, and Justin McPhee, as 
well as the members of the Office of International Affairs for their 
careful review of the capital and financial reporting requirements 
for SDs organized and domiciled in France and Germany.
    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 
EU is one of our closest partners internationally, 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 on the 
CFTC's Proposed Comparability Determination for European Swap Dealer 
Capital Requirements

    Today, the Commission considers efforts to safeguard the 
resilience of four swap dealers in the European Union (``EU'').\1\ 
The proposal is part of the Commission's ``substituted compliance'' 
framework--a framework that promotes global harmonization with like-
minded foreign regulators that have rules, supervision and 
enforcement that are comparable in purpose and effect to the CFTC. 
Our capital rules are a critical pillar of the Dodd-Frank Act 
reforms. We must ensure that our comparability assessments are sound 
and do not increase risk to U.S. markets.
---------------------------------------------------------------------------

    \1\ The four swap dealers in the European Union are located in 
France and Germany--BofA Securities Europe SA (France), Citigroup 
Global Markets Europe AG (Germany), Morgan Stanley Europe SE 
(Germany), and Goldman Sachs Paris Inc. et Cie (France).
---------------------------------------------------------------------------

    The CFTC's capital framework for swap dealers heeds the lessons 
of the 2008 financial crisis.
    The 2008 financial crisis precipitated the failure or near-
failure of almost every major investment bank and a number of 
systemically important banks. It demonstrated all too clearly the 
financial stability risks presented by undercapitalized financial 
institutions, including a sprawling network of globally 
interconnected derivatives dealers. That is why Congress mandated 
that the Commission establish capital requirements for non-bank swap 
dealers. The Dodd-Frank Act provided that swap dealer capital 
requirements should ``offset the greater risk to the SD . . . and 
the financial system arising from the use of swaps that are not 
cleared'' \2\ and ``help ensure the safety and soundness of the 
SD.'' \3\ The Commission's capital requirements, adopted in 2020,\4\ 
are intended to do exactly that.
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    \2\ 7 U.S.C. 6s(e)(3)(A).
    \3\ 7 U.S.C. 6s(e)(3)(A)(i). The capital requirements also must 
``be appropriate to the risk associated with non-cleared swaps.'' 7 
U.S.C. 6s(e)(3)(A)(ii).
    \4\ See Commodity Futures Trading Commission, Capital 
Requirements of Swap Dealers and Major Swap Participants, 85 FR 
57462 (Sept. 15, 2020).
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    Our capital requirements promote the resilience of swap dealers 
and protect the U.S. financial system. They ensure that swap dealers 
can weather economic downturns, and remain resilient during periods 
of stress to continue their critical market functions. Our capital 
requirements also help prevent contagion of losses spreading to 
other financial institutions.
    The CFTC must ensure that capital requirements eligible for 
substituted compliance are comparable in outcomes, supervision, and 
enforcement.
    Substituted compliance must leave U.S. markets at no greater 
risk than full compliance with our rules. The Commission has to 
proceed cautiously given the importance of capital to financial 
stability, the complexity of capital frameworks, the interconnected 
nature of global derivatives markets, and the speed of contagion in 
the global financial system.
    First, we have to ensure that our substituted compliance 
framework recognizes only those frameworks that are comparable with 
respect to the most fundamental outcome--the amount of capital 
required to support a swap dealer's activities. The substituted 
compliance framework must result in the application of capital rules 
that are legitimately a substitute for the capital protections 
provided by U.S. law.
    Second, the fact that a foreign regulator may have comparable 
capital rules will not be enough. We have to look beyond the four 
corners of rules. Substituted compliance requires a like-minded 
foreign regulator with comparable supervision and enforcement to the 
CFTC.
    Our substituted compliance decisions should not allow for 
regulatory arbitrage for swap dealers to escape strong U.S. capital 
rules--a situation that could erode Dodd-Frank Act post-crisis 
reforms. I served as the Special Inspector General for the Troubled 
Asset Relief Program (``SIGTARP'') for more than a decade, providing 
oversight over the U.S. Government's unprecedented taxpayer-funded 
injections of hundreds of billions of dollars in capital into Wall 
Street as a response to the 2008 financial crisis. I have testified 
before Congress and reported to Congress about how inadequate 
capitalization at the largest banks contributed to the financial 
crisis, how the significant interconnections between financial 
institutions posed systemic risk, and the painful toll the crisis 
took on hardworking America families and small businesses.
    All four swap dealers who would be able to avail themselves of 
our determination today are affiliated with the largest TARP 
recipients. That fact alone is a good reminder of what is at stake 
in terms of risk. It is not just danger to financial institutions, 
but also American families and businesses. Under this proposal in 
addition to the Commission's two prior capital comparability 
proposals,\5\ 10 of 106 registered swap dealers would be eligible to 
rely on substituted compliance.\6\
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    \5\ See Commodity Futures Trading Commission, 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); See also Commodity Futures 
Trading Commission, 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, 87 FR 76374 
(Dec. 13, 2022).
    \6\ 55 of the 107 swap dealers are subject to U.S. prudential 
regulatory capital requirements.
---------------------------------------------------------------------------

    Strong capital requirements and areas where the Commission would 
particularly benefit from public comment.
    Three of the four EU swap dealers are dually-registered with the 
U.S. Securities and Exchange Commission (``SEC''). The SEC has 
issued final comparability determination orders permitting them to 
satisfy certain SEC capital requirements through substituted 
compliance with applicable French and German requirements.\7\
---------------------------------------------------------------------------

    \7\ See Amended and Restated Order Granting Conditional 
Substituted Compliance in Connection with Certain Requirements 
Applicable to Non-U.S. Security-Based Swap Dealers and Major 
Security-Based Swap Participants Subject to Regulation in the 
Federal Republic of Germany; Amended Orders Addressing Non-U.S. 
Security-Based Swap Entities Subject to Regulation in the French 
Republic or the United Kingdom; and Order Extending the Time to Meet 
Certain Conditions Relating to Capital and Margin, 86 FR 59797 (Oct. 
28, 2021); Order Granting Conditional Substituted Compliance in 
Connection with Certain Requirements Applicable to Non-U.S. 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants Subject to Regulation in the French Republic, 86 FR 
41612 (Aug. 8, 2021); and Order Specifying the Manner and Format of 
Filing Unaudited Financial and Operational Information by Security-
Based Swap Dealers and Major Security-Based Swap Participants that 
are not U.S. Persons and are Relying on Substituted Compliance with 
Respect to Rule 18a-7, 86 FR 59208 (Oct. 26, 2021).
---------------------------------------------------------------------------

    In conducting the CFTC's own analysis, it is important to 
remember that substituted compliance is not an all-or-nothing 
proposition. The Commission retains examinations and enforcement 
authority and it can, should, and will, impose any conditions and 
take all actions appropriate to protect the safety and soundness of 
swap dealers and the U.S. financial system. Today, the Commission 
proposes 24 conditions, including conditions requiring capital 
reporting and Commission notification that are essential to 
monitoring the financial condition and capital adequacy of swap 
dealers.
    Just as with swap dealers in Japan and Mexico,\8\ one of the 
most important

[[Page 41812]]

conditions is that the Commission will continue to require 
compliance with the CFTC's minimum capital requirement of $20 
million in common equity tier 1 capital.\9\ This is one of the most 
critical components of the CFTC's capital requirements. It helps to 
ensure that each nonbank swap dealer, whether current or a future 
new entrant, maintains at all times, $20 million of the highest 
quality capital to meet its financial obligations without becoming 
insolvent.
---------------------------------------------------------------------------

    \8\ See CFTC Commissioner Christy Goldsmith Romero, Proposal for 
Strong Capital Requirements and Financial Reporting for Swap Dealers 
in Japan, (July 27, 2022) Statement of Commissioner Christy 
Goldsmith Romero Regarding the Proposal for Strong Capital 
Requirements and Financial Reporting for Swap Dealers in Japan 
available at https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072722b. See also CFTC Commissioner Christy Goldsmith 
Romero, Promoting the Resilience of Swap Dealers in Mexico Through 
Strong Capital Requirements and Financial Reporting, (Nov. 10, 2022) 
Statement of Commissioner Christy Goldsmith Romero on a Proposed 
Comparability Determination for Capital available at https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatment111022b.
    \9\ This CFTC capital rule substantially exceeds the EUR 5 
million minimum capital required under EU capital rules.
---------------------------------------------------------------------------

    Today, the Commission preliminarily finds that EU capital rules 
requiring 8 percent of risk-weighted assets and an additional 2.5 
percent buffer, for a total of 10.5 percent, are higher than the 
CFTC's requirement of 8 percent of risk-weighted assets. This 
capital requirement helps ensure that the swap dealer has sufficient 
capital levels to cover for example, unexpected losses from business 
activities.
    There are proposed deviations from the Commission's bank-based 
capital requirements that should be closely scrutinized. For 
example, the Commission proposes to permit compliance with EU 
capital rules that are not necessarily anchored by a threshold 
percentage of uncleared swap margin as the CFTC requires. I note 
that EU capital rules address liquidity, operational risks, as well 
as other risks arising from derivatives exposures, through other 
mechanisms. I look forward to public comment on the comparability of 
the approaches.
    In these areas, and others, public comments will be tremendously 
beneficial. I approve.

Appendix 5--Statement of Commissioner Caroline D. Pham in Support of 
Proposed Order and Request for Comment on Comparability Determination 
for EU Nonbank Swap Dealer Capital and Financial Reporting Requirements

    In order to implement Title VII of the Dodd-Frank Act and create 
a comprehensive regulatory framework for over-the-counter (OTC) 
derivatives markets, the Commodity Futures Trading Commission 
(Commission or CFTC) promulgated rules for the registration of swap 
dealers in 2012.\1\ Since that time, the Commission has issued 
dozens of rules for the oversight of swap dealers and their 
activities.\2\ Because swaps markets are global and involve cross-
border transactions, and both U.S. and non-U.S. swap dealers must 
register with the CFTC, the Commission has also made 12 
comparability determinations in order to provide for substituted 
compliance for non-U.S. swap dealers with home jurisdiction 
regulations that are comparable and comprehensive.\3\
---------------------------------------------------------------------------

    \1\ See Registration of Swap Dealers and Major Swap Participants 
(Final Rule), 77 FR 2613 (Jan. 19, 2012), https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2012-792a.pdf.
    \2\ These rules range from business conduct standards to 
thresholds for registration with the CFTC. See, e.g., Business 
Conduct Standards for Swap Dealers and Major Swap Participants with 
Counterparties (Final Rule), 77 FR 9734 (Feb. 17, 2012).
    \3\ See generally, 7 U.S.C. 2(i). The Commission created the 
comparable and comprehensive standard for substituted compliance 
determinations. See Cross-Border Application of Certain Swaps 
Provisions of the Commodity Exchange Act (Proposed Rule), 77 FR 
41214, 41230 (July 12, 2012). The comparable standard is now in CFTC 
regulations 23.23 for swap dealer registration, 23.160 for margin, 
and 23.106 for capital. See 17 CFR 23.23, 23.160, and 23.106. The 
CFTC maintains its list of comparability determinations for 
substituted compliance purposes at https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
---------------------------------------------------------------------------

    I support the Commission's proposed order and request for 
comment on a comparability determination for European Union (EU) 
nonbank swap dealer capital and financial reporting requirements. I 
would like to first deeply thank the staff of the Market 
Participants Division (MPD) for their hard work on these incredibly 
technical and detailed requirements, involving many hours of 
engagement with the European Central Bank (ECB), Autorit[eacute] de 
contr[ocirc]le prudentiel et de resolution (ACPR), and CFTC 
registrants. This proposal is the staff's third proposed capital 
adequacy and financial reporting comparability determination in the 
past year, after Japan \4\ and Mexico,\5\ with the UK to be 
addressed next.
---------------------------------------------------------------------------

    \4\ Commissioner Pham ``Concurring Statement of Commissioner 
Caroline D. Pham Regarding Proposed Swap Dealer Capital and 
Financial Reporting Comparability Determination'' (July 27, 2022).
    \5\ Commissioner Pham ``Concurring Statement of Commissioner 
Caroline D. Pham Regarding Proposed Order and Request for Comment on 
an Application for a Capital Comparability Determination'' (Nov. 10, 
2022).
---------------------------------------------------------------------------

    I want to remind you that this decidedly unglamorous work by 
CFTC staff creates the underpinnings of global markets that enable 
governments, central banks and commercial banks, asset managers and 
investors, and companies to manage the risks inherent in 
international flows of capital that fuel economic growth and 
prosperity in both developed and developing economies. I commend 
these MPD staff members for their dedication and work on this 
proposal: Amanda Olear, Tom Smith, Rafael Martinez, Liliya 
Bozhanova, Joo Hong, and Justin McPhee.

Conditions for Notice Requirements

    I especially thank the staff for addressing my comments on the 
prior capital and financial reporting comparability determination 
proposals, by providing more clarity on the conditions for notice 
requirements for certain defined events such as undercapitalization 
or breaches of capital levels. Generally, the proposal states that 
written notice to the CFTC and the National Futures Association 
(NFA) is required within 24 hours of when the firm ``knows or should 
have known'' of the defined event.
    I am pleased that this proposal solves the guessing game and now 
makes clear that the ``should have known'' part of the timing 
standard for the filing of the proposed notice is ``intended to 
cover facts and circumstances that should reasonably lead the firm 
to believe'' that the defined event has occurred. This additional 
clarity will allow EU nonbank swap dealers to implement reasonably 
designed notification processes to comply with the proposed 
conditions.
    In addition, I thank the staff for providing more clarity in 
response to my feedback on conditions for written notice within 24 
hours to the CFTC and NFA if an EU nonbank swap dealer fails to 
maintain current books and records. I am pleased that this proposal 
now makes clear that the proposed notice requirement applies to 
books and records with respect to the EU nonbank swap dealer's 
financial condition and financial reporting requirements, such as 
``current ledgers or other similar records'' regarding asset, 
liability, income, expense, and capital accounts ``in accordance 
with the accounting principles accepted by the relevant competent 
authorities.''
    Without this substantive clarification, the proposed notice 
requirement could have been so overbroad as to require 24 hours' 
written notice to the CFTC and NFA for any failure to maintain books 
and records. The Commission could have been inundated by a nonstop 
deluge of written notices for recordkeeping lapses, no matter how 
immaterial.

Market Fragmentation and Good Practices for Cross-Border Regulation

    The importance of substituted compliance and these comparability 
determinations for global swaps markets cannot be overstated. As 
noted by the International Organization of Securities Commissions 
(IOSCO) in its 2019 report on Market Fragmentation and Cross-Border 
Regulation \6\ under the Japanese Presidency of the G20, unintended 
market fragmentation \7\ can be harmful to wholesale securities and 
derivatives markets.
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    \6\ IOSCO Report ``Market Fragmentation & Cross Border 
Regulation'' (June 2019), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD629.pdf.
    \7\ Both the Financial Stability Board and IOSCO have defined 
``market fragmentation'' as ``global markets that break into 
segments, either geographically or by type of products or 
participants.'' Id. at 6-9.
---------------------------------------------------------------------------

    Despite its flaws and inauspicious beginnings,\8\ the CFTC's 
2013 Cross-Border Guidance is the foundation for today's $600 
trillion notional swaps markets \9\ that spans

[[Page 41813]]

the globe from one financial markets trading hub to another--New 
York, to London, Paris, Frankfurt, Tokyo, Hong Kong, Singapore, and 
beyond. The Commission and its staff have labored for the past 10 
years to improve upon the Cross-Border Guidance and promote 
international regulatory harmonization through substituted 
compliance comparability determinations, rulemakings, guidance, 
advisories, and no-action letters. These efforts have helped to 
address features and indicators of market fragmentation set forth in 
the IOSCO 2019 report:
---------------------------------------------------------------------------

    \8\ Commissioner O'Malia ``Statement of Dissent by Commissioner 
Scott D. O'Malia, Interpretive Guidance and Policy Statement 
Regarding Compliance with Certain Swap Regulations and Related 
Exemptive Order'' (July 12, 2013), https://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
    \9\ See Bank for International Settlements ``OTC derivatives 
statistics at end-June 2022'' (Nov. 30, 2022), https://www.bis.org/publ/otc_hy2211.pdf.

 Multiple liquidity pools in market sectors or for 
instruments of the same economic value which reduces depth and may 
reduce firms' abilities to diversify or hedge their risks and result 
in similar assets quoted at significantly different prices
 Reduction in cross-border flows that would otherwise occur 
to meet demand
 Increased costs to firms in both risks and fees
 Potential scope for regulatory arbitrage or hindrance of 
effective market oversight

    I am pleased that the Commission is finishing what it started 
back in 2012 by taking these steps to complete comparability 
determinations necessary to providing a substituted compliance 
regime over the whole of the CFTC's swaps regulation. As I have 
stated before, global collaboration and coordination are critical to 
promoting regulatory cohesion and financial stability, and 
mitigating market fragmentation and systemic risk.\10\
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    \10\ Commissioner Pham ``Opening Statement of Commissioner 
Caroline D. Pham before the Global Markets Advisory Committee'' 
(Feb. 13, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement021323.
---------------------------------------------------------------------------

    I continue to believe that the CFTC should take an outcomes-
based approach to substituted compliance that promotes efficient 
global markets and preserves access for U.S. persons to other 
markets. In particular, I encourage the Commission, its staff, and 
our regulatory counterparts around the world to adhere to the 
recommendations in IOSCO's 2020 report on Good Practices on 
Processes for Deference, which was developed to provide solutions to 
the challenges and drivers of market fragmentation.\11\
---------------------------------------------------------------------------

    \11\ IOSCO Report, ``Good Practices on Processes for Deference'' 
(June 2020), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD659.pdf.
---------------------------------------------------------------------------

    As set forth in the IOSCO 2020 report, such processes for 
deference \12\ are typically outcomes-based; risk-sensitive; 
transparent; cooperative; and sufficiently flexible.
---------------------------------------------------------------------------

    \12\ IOSCO uses ``deference'' as an ``overarching concept to 
describe the reliance that authorities place on one another when 
carrying out regulation or supervision of participants operating 
cross-border.'' Id. at 1. The CFTC's use of substituted compliance 
for swaps regulation is an example of regulatory deference 
mechanisms.
---------------------------------------------------------------------------

Conclusion

    When used appropriately, substituted compliance can take a 
balanced approach to achieving these key objectives: (1) 
facilitating market access to foreign market participants seeking to 
conduct business on a cross-border basis; (2) maintaining 
appropriate levels of market participant protection; and (3) 
managing systemic risks.\13\ I commend the staff for striking the 
appropriate balance in this proposed order and request for comment 
on a comparability determination for EU nonbank swap dealer capital 
and financial reporting requirements. I encourage the public to 
comment on this, and to especially note any areas where the proposed 
conditions may be unnecessarily burdensome, create operational 
complexity, or present implementation challenges.
---------------------------------------------------------------------------

    \13\ These considerations for regulatory authorities were 
recognized by IOSCO in its 2015 Report on Cross-Border Regulation. 
See IOSCO Report, ``IOSCO Task Force on Cross-Border Regulation 
Final Report'' (Sept. 2015), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD507.pdf.

[FR Doc. 2023-13446 Filed 6-26-23; 8:45 am]
BILLING CODE 6351-01-P