[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58470-58505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15092]



[[Page 58469]]

Vol. 89

Thursday,

No. 138

July 18, 2024

Part II





 Commodity Futures Trading Commission





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17 CFR Chapter I





Order Granting Conditional Substituted Compliance in Connection With 
Certain Capital and Financial Reporting Requirements Applicable to 
Nonbank Swap Dealers Subject to Regulation by the Financial Services 
Agency of Japan, by the United Kingdom Prudential Regulation Authority, 
by the Mexican Comision Nacional Bancaria y de Valores and Banco de 
Mexico, and Domiciled in the French Republic and Federal Republic of 
Germany and Subject to Regulation in the European Union; Final Rule

  Federal Register / Vol. 89, No. 138 / Thursday, July 18, 2024 / Rules 
and Regulations  

[[Page 58470]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Order Granting Conditional Substituted Compliance in Connection 
With Certain Capital and Financial Reporting Requirements Applicable to 
Nonbank Swap Dealers Subject to Regulation by the Financial Services 
Agency of Japan

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: On August 8, 2022, the Commodity Futures Trading Commission 
issued a notice and request for comment on an application submitted by 
the Financial Services Agency of Japan requesting that the Commission 
determine that registered nonbank swap dealers organized and domiciled 
in Japan may comply with certain capital and financial reporting 
requirements under the Commodity Exchange Act and Commission 
regulations by being subject to, and complying with, corresponding 
capital and financial reporting requirements of Japan. The Commission 
also solicited public comment on a proposed comparability determination 
and related order providing for the conditional availability of 
substituted compliance in connection with the application.
    The Commission is adopting the proposed order with certain 
modifications and clarifications to address comments. The final order 
provides that a nonbank swap dealer organized and domiciled in Japan 
may satisfy the capital requirements under the Commodity Exchange Act 
and applicable Commission regulations and the financial reporting rules 
under the Commodity Exchange Act and applicable Commission regulations 
by complying with certain specified Japanese laws and regulations and 
conditions set forth in the order.

DATES: This determination was made by the Commission on June 24, 2024.

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]; Warren Gorlick, Associate Director, 202-418-5195, 
[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 issuing an order providing that 
registered nonbank swap dealers organized and domiciled in Japan 
(``Japanese nonbank SDs'') may satisfy certain capital and financial 
reporting requirements under the Commodity Exchange Act (``CEA'') \1\ 
and Commission regulations \2\ by being subject to, and complying with, 
comparable capital and financial reporting requirements under relevant 
Japanese laws and regulations, subject to certain conditions set forth 
in the order below. The order is based on the proposed comparability 
determination and related proposed order published by the Commission on 
August 8, 2022,\3\ as modified in certain aspects to address comments 
and to clarify its terms.
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    \1\ 7 U.S.C. 1 et seq. The CEA may be accessed through the 
Commission's website, www.cftc.gov.
    \2\ 17 CFR Chapter I. Commission regulations may be accessed 
through the Commission's website, www.cftc.gov.
    \3\ Notice of Proposed Order and Request for Comment on an 
Application for Capital Comparability Determination from the 
Financial Services Agency of Japan, 87 FR 48092 (Aug. 8, 2022) 
(``2022 Proposal'').
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I. Introduction

A. Regulatory Background--CFTC Capital, Margin, and Financial Reporting 
Requirements for Swap Dealers and Major Swap Participants

    Section 4s(e) of the CEA \4\ directs the Commission and 
``prudential regulators'' \5\ to impose capital requirements on swap 
dealers (``SDs'') and major swap participants (``MSPs'') registered 
with the Commission.\6\ Section 4s(e) also directs the Commission and 
prudential regulators to adopt regulations imposing initial and 
variation margin requirements on swaps entered into by SDs and MSPs 
that are not cleared by a registered derivatives clearing organization 
(``uncleared swaps'').
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    \4\ 7 U.S.C. 6s(e).
    \5\ The term ``prudential regulators'' is defined in the CEA to 
mean the Board of Governors of the Federal Reserve System (``Federal 
Reserve Board''); the Office of the Comptroller of the Currency; the 
Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency. 7 U.S.C. 
1a(39).
    \6\ 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. 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) is a financial entity 
that: (a) is highly leveraged relative to the amount of capital it 
holds and that is not subject to capital requirements established by 
an appropriate Federal banking agency; and (b) maintains a 
substantial position in outstanding swaps in any major swap category 
as determined by the Commission. 7 U.S.C. 1a(33).
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    Section 4s(e) applies a bifurcated approach with respect to the 
above Congressional directives, requiring each SD and MSP that is 
subject to the regulation of a prudential regulator (``bank SD'' and 
``bank MSP,'' respectively) to meet the minimum capital requirements 
and uncleared swaps margin requirements adopted by the applicable 
prudential regulator, and requiring each SD and MSP that is not subject 
to the regulation of a prudential regulator (``nonbank SD'' and 
``nonbank MSP,'' respectively) to meet the minimum capital requirements 
and uncleared swaps margin requirements adopted by the Commission.\7\ 
Therefore, the Commission's authority to impose capital requirements 
and margin requirements for uncleared swap transactions extends to 
nonbank SDs and nonbank MSPs, including nonbanking subsidiaries of bank 
holding companies regulated by the Federal Reserve Board.\8\
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    \7\ 7 U.S.C. 6s(e)(2).
    \8\ 7 U.S.C. 6s(e)(1) and (2).
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    The prudential regulators implemented Section 4s(e) in 2015 by 
amending existing capital requirements applicable to bank SDs and bank 
MSPs to incorporate swap transactions into their respective bank 
capital frameworks, and by adopting rules imposing initial and 
variation margin requirements on bank SDs and bank MSPs that engage in 
uncleared swap transactions.\9\ The Commission adopted final rules 
imposing initial and variation margin obligations on nonbank SDs and 
nonbank MSPs for uncleared swap transactions on January 6, 2016.\10\ 
The Commission also approved final capital requirements for nonbank SDs 
and nonbank MSPs on July 24, 2020, which were published in the Federal 
Register on September 15, 2020 with a

[[Page 58471]]

compliance date of October 6, 2021 (``CFTC Capital Rules'').\11\
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    \9\ Margin and Capital Requirements for Covered Swap Entities, 
80 FR 74840 (Nov. 30, 2015).
    \10\ Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
    \11\ Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020). On April 30, 2024, the 
Commission amended the capital and financial reporting requirements 
to revise certain financial reporting obligations, among other 
changes. See Capital and Financial Reporting Requirements for Swap 
Dealers and Major Swap Participants, 89 FR 45569 (May 23, 2024). The 
amendments have limited impact on nonbank SDs covered by this order.
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    Section 4s(f) of the CEA addresses SD and MSP financial reporting 
requirements.\12\ Section 4s(f) 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) provides, in relevant part, that each 
registered SD and MSP must make financial condition reports as required 
by regulations adopted by the Commission.\13\ The Commission's 
financial reporting obligations were adopted with the Commission's 
nonbank SD and nonbank MSP capital requirements, and also had a 
compliance date of October 6, 2021 (``CFTC Financial Reporting 
Rules'').\14\
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    \12\ 7 U.S.C. 6s(f).
    \13\ 7 U.S.C. 6s(f)(1)(A).
    \14\ 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 
``Comparability Determination'').\15\ The Commission's capital adequacy 
and financial reporting requirements are designed to address and manage 
risks that arise from a firm's operation as an SD or MSP. Given their 
functions, both sets of requirements and rules must be applied on an 
entity-level basis (meaning that the rules apply on a firm-wide basis, 
irrespective of the type of transactions involved) to effectively 
address risk to the firm as a whole. The availability of such 
substituted compliance is conditioned upon the Commission issuing a 
Comparability Determination finding that the relevant foreign 
jurisdiction's capital adequacy and financial reporting requirements 
for non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs are comparable to 
the corresponding CFTC Capital Rules and CFTC Financial Reporting 
Rules. The Commission would issue a Comparability Determination in the 
form of an order (``Comparability Order'').\16\
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    \15\ 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides 
that a request for a Comparability Determination may be submitted by 
a non-U.S. nonbank SD or non-US 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-US nonbank SDs or non-U.S. nonbank MSPs. However, 
Commission regulations also provide that any non-U.S. nonbank SD or 
non-U.S. nonbank MSP that is dually-registered with the Commission 
as a futures commission merchant (``FCM'') is subject to the capital 
requirements of Commission Regulation 1.17 (17 CFR 1.17) and may not 
petition the Commission for a Comparability Determination. 17 CFR 
23.101(a)(5) and (b)(4), respectively.
    Furthermore, substituted compliance is not available to non-U.S. 
bank SDs and non-U.S. bank MSPs with respect to their respective 
financial reporting requirements under Commission Regulation 
23.105(p). Commission Regulation 23.105(p), however, permits non-
U.S. bank SDs and non-U.S. bank MSPs that do not submit financial 
reports to a U.S. prudential regulator to file with the Commission a 
statement of financial condition, certain regulatory capital 
information, and Schedule 1 of Appendix C to Subpart E of Part 23 of 
the Commission's regulations prepared and presented in accordance 
with the accounting standards permitted by the non-U.S. bank SD's or 
non-U.S. bank MSP's home country regulatory authorities. 17 CFR 
23.105(p)(2).
    \16\ 17 CFR 23.106(a)(3).
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    The Commission's approach for conducting a Comparability 
Determination with respect to the CFTC Capital Rules and the CFTC 
Financial Reporting Rules is a principles-based, holistic approach that 
focuses on assessing whether the applicable foreign jurisdiction's 
capital and financial reporting requirements have comparable objectives 
with, and achieve comparable outcomes to, corresponding CFTC 
requirements.\17\ The Commission's assessment is not a line-by-line 
evaluation or comparison of a foreign jurisdiction's regulatory 
requirements with the Commission's requirements.\18\ In performing the 
analysis, the Commission recognizes that jurisdictions may adopt 
differing approaches to achieving regulatory objectives and outcomes, 
and the Commission will focus on whether the foreign jurisdiction's 
capital and financial reporting requirements are based on regulatory 
objectives, and produce regulatory outcomes, that are comparable to the 
Commission's in purpose and effect, and not whether they are comparable 
in every aspect or contain identical elements.
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    \17\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
    \18\ See 85 FR 57462 at 57521.
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    A person requesting a Comparability Determination is required to 
submit an application to the Commission containing: (i) a description 
of the objectives of the relevant foreign jurisdiction's capital 
adequacy and financial reporting requirements applicable to entities 
that are subject to the CFTC Capital Rules and the CFTC Financial 
Reporting Rules; (ii) a description (including specific legal and 
regulatory provisions) of how the relevant foreign jurisdiction's 
capital adequacy and financial reporting requirements address the 
elements of the CFTC Capital Rules and CFTC Financial Reporting Rules, 
including, at a minimum, the methodologies for establishing and 
calculating capital adequacy requirements and whether such 
methodologies comport with international standards; and (iii) a 
description of the ability of the relevant foreign regulatory authority 
to supervise and enforce compliance with the relevant foreign 
jurisdiction's capital adequacy and financial reporting requirements. 
The applicant must also submit, upon request, such other information 
and documentation as the Commission deems necessary to evaluate the 
comparability of the capital adequacy and financial reporting 
requirements of the foreign jurisdiction.\19\
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    \19\ 17 CFR 23.106(a)(2).
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    The Commission will consider an application for a Comparability 
Determination to be a representation by the applicant that the laws and 
regulations of the foreign jurisdiction that are submitted in support 
of the application are finalized and in force, that the description of 
such laws and regulations is accurate and complete, and that, unless 
otherwise noted, the scope of such laws and regulations encompasses the 
relevant non-U.S. nonbank SDs and/or non-U.S. nonbank MSPs domiciled in 
the foreign jurisdiction.\20\ Each non-U.S. nonbank SD or non-U.S. 
nonbank MSP that seeks to rely on a Comparability Order is responsible 
for determining whether it is subject to the foreign laws and 
regulations found comparable in the Comparability Order. A non-U.S. 
nonbank SD or non-U.S. nonbank MSP

[[Page 58472]]

that is not legally required to comply with a foreign jurisdiction's 
laws and/or regulations determined to be comparable in a Comparability 
Order may not voluntarily comply with such laws and/or regulations in 
lieu of compliance with the CFTC Capital Rules or the CFTC Financial 
Reporting Rules.
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    \20\ The Commission provides the applicant with an opportunity 
to review for accuracy and completeness the Commission's description 
of relevant home country laws and regulations on which a proposed 
Comparability Determination and a proposed Comparability Order are 
based. The Commission relies on this review, and any corrections or 
feedback received, as part of the comparability assessment. A 
Comparability Determination and Comparability Order based on an 
inaccurate description of foreign laws and regulations may not be 
valid.
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    The Commission may consider all relevant factors in making a 
Comparability Determination, including: (i) the scope and objectives of 
the relevant foreign jurisdiction's capital and financial reporting 
requirements; (ii) whether the relevant foreign jurisdiction's capital 
and financial reporting requirements achieve comparable outcomes to the 
Commission's corresponding capital 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 
or similar arrangement that would facilitate supervisory 
cooperation.\21\
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    \21\ 17 CFR 23.106(a)(3) and 85 FR 57462 at 57520-57522.
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    In performing the comparability assessment for foreign nonbank SDs, 
the Commission's review will include the extent to which the foreign 
jurisdiction's requirements address: (i) the process of establishing 
minimum capital requirements for nonbank SDs and how such process 
addresses risk, including market risk and credit risk of the nonbank 
SD's on-balance sheet and off-balance sheet exposures; (ii) the types 
of equity and debt instruments that qualify as regulatory capital in 
meeting minimum requirements; (iii) the financial reports and other 
financial information submitted by a nonbank SD to its relevant 
regulatory authority and whether such information provides the 
regulatory authority with the means necessary to effectively monitor 
the financial condition of the nonbank SD; and (iv) the regulatory 
notices and other communications between a nonbank SD and its foreign 
regulatory authority that address potential adverse financial or 
operational issues that may impact the firm. With respect to the 
ability of the relevant foreign regulatory authority to supervise and 
enforce compliance with the foreign jurisdiction's capital adequacy and 
financial reporting requirements, the Commission's review will include 
an assessment of the foreign jurisdiction's surveillance program for 
monitoring nonbank SDs' compliance with such capital adequacy and 
financial reporting requirements, and the disciplinary process imposed 
on firms that fail to comply with such requirements.\22\
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    \22\ The Commission would conduct a similar analysis, adjusted 
as appropriate to account for regulatory distinctions, in performing 
a comparability assessment for foreign nonbank MSPs. Commission 
Regulation 23.101(b) requires a nonbank MSP to maintain positive 
tangible net worth. There are no MSPs currently registered with the 
Commission. 17 CFR 23.101(b).
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    Commission Regulation 23.106 further provides that the Commission 
may impose any terms or conditions that it deems appropriate in issuing 
a Comparability Determination.\23\ Any specific terms or conditions 
with respect to capital adequacy or financial reporting requirements 
will be set forth in the Commission's Comparability Order. As a general 
condition to all Comparability Orders, the Commission will require 
notification from the 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 foreign jurisdiction's 
relevant laws and regulations, as well as changes to the relevant 
supervisory or regulatory regime.
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    \23\ 17 CFR 23.106(a)(5).
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    To rely on a Comparability Order, a nonbank SD or nonbank MSP 
domiciled in the foreign jurisdiction and subject to supervision by the 
relevant regulatory authority (or authorities) in the foreign 
jurisdiction must file a notice with the Commission of its intent to 
comply with the applicable capital adequacy and financial reporting 
requirements of the foreign jurisdiction set forth in the Comparability 
Order in lieu of all or parts of the CFTC Capital Rules and/or CFTC 
Financial Reporting Rules.\24\ Notices must be filed electronically 
with the Commission's Market Participants Division (``MPD'').\25\ The 
filing of a notice by a non-U.S. nonbank SD or non-U.S. nonbank MSP 
provides MPD staff with the opportunity to engage with the firm and to 
obtain representations that it is subject to, and complies with, the 
laws and regulations cited in the Comparability Order and that it will 
comply with any listed conditions. MPD will issue a letter under 
delegated authority from the Commission confirming that the non-U.S. 
nonbank SD or non-U.S. nonbank MSP may comply with the foreign laws and 
regulations cited in the Comparability Order in lieu of complying with 
the CFTC Capital Rules and CFTC Financial Reporting Rules upon MPD's 
confirmation through discussions with the non-U.S. nonbank SD or non-
U.S. nonbank MSP that the firm is subject to, and complies with, such 
foreign laws and regulations, is subject to the jurisdiction of the 
applicable foreign regulatory authority (or authorities), and can meet 
the conditions in the Comparability Order.\26\
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    \24\ 17 CFR 23.106(a)(4)(i).
    \25\ Notices must be filed in electronic form to the following 
email address: [email protected].
    \26\ 17 CFR 23.106(a)(4)(ii) and 17 CFR 140.91(a)(11).
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    Each non-U.S. nonbank SD and each non-U.S. nonbank MSP that 
receives confirmation from the Commission that it may comply with a 
foreign jurisdiction's capital adequacy and financial reporting 
requirements will be deemed by the Commission to be in compliance with 
the corresponding CFTC Capital Rules and/or CFTC Financial Reporting 
Rules.\27\ A non-U.S. nonbank SD or non-U.S. nonbank MSP that receives 
confirmation of substituted compliance remains subject, however, to the 
Commission's examination and enforcement authority.\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 finding of a violation by a foreign 
jurisdiction's regulatory authority is not a prerequisite for the 
exercise of such examination and enforcement authority by the 
Commission.
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    \27\ 17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD 
under authority delegated by the Commission. Commission Regulation 
140.91(a)(11). 17 CFR 140.91(a)(11).
    \28\ 17 CFR 23.106(a)(4)(ii).
    \29\ Id.
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C. Japan Financial Services Agency's Application for a Comparability 
Determination for Japan-Domiciled Nonbank Swap Dealers

    On September 30, 2021, the Financial Services Agency of Japan 
(``FSA'') submitted an application (``FSA Application'') requesting 
that the Commission conduct a Comparability Determination and issue a 
Comparability Order finding that compliance with certain designated 
capital requirements of Japan (the ``Japanese Capital Rules'') and 
certain designated financial reporting requirements of Japan (the 
``Japanese Financial Reporting Rules'') by a Japanese nonbank SD 
registered with

[[Page 58473]]

the FSA as a Type I Financial Instruments Business Operator (``FIBO'') 
satisfies corresponding CFTC Capital Rules and CFTC Financial Reporting 
Rules applicable to a nonbank SD under Sections 4s(e) and (f) of the 
CEA and Commission Regulations 23.101 and 23.105.\30\ There are 
currently three Japanese nonbank SDs registered with the Commission, 
and the FSA represented in its application that each of the three 
Japanese nonbank SDs are FSA-registered and regulated FIBOs.\31\
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    \30\ Letter from Yuji Yamashita, Deputy Commissioner for 
International Affairs, Financial Services Agency of Japan, dated 
September 30, 2021, pp. 4-5 (fn. 11). The FSA Application is 
available on the Commission's website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \31\ The three Japanese nonbank SDs currently registered with 
the Commission are: BofA Securities Japan Co., Ltd.; Goldman Sachs 
Japan Co., Ltd.; and Morgan Stanley MUFG Securities Co., Ltd. The 
FSA's application did not request a Comparability Determination with 
respect to nonbank MSPs as currently there are no MSPs registered 
with the Commission and, accordingly, no nonbank MSPs domiciled in 
Japan and registered with the FSA. Accordingly, the Commission's 
Comparability Determination and Comparability Order do not address 
nonbank MSPs.
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    The FSA represented that the capital adequacy and financial 
reporting requirements for swap activities in Japan are governed by the 
Japanese legal framework for financial regulation, which is mainly 
composed of Acts, Cabinet Orders, Ministerial Orders, and FSA 
Notices.\32\ With regard to the Japanese Capital Rules and the Japanese 
Financial Reporting Rules, the Financial Instruments and Exchange Act 
(Act No. 25 of 1948) (``FIEA'') and its related order, Cabinet Office 
Order on Financial Instruments Business (Cabinet Office Order No. 52 of 
2007) (``COO''), set forth the prudential capital and financial 
reporting requirements applicable to FIBOs, including the Japanese 
nonbank SDs.\33\ FIEA, COO, and related FSA Notices impose mandatory 
capital and reporting requirements on FIBOs, including Japanese nonbank 
SDs. Comprehensive Guidelines for Supervision of Financial Instruments 
Business Operators, etc. (``Supervisory Guidelines for FIBO'') also 
supplement the framework.\34\ The technical requirements for FIBOs, 
including Japanese nonbank SDs, to calculate capital adequacy ratios 
are specified in the FSA Notice No. 59 of 2007 (``Notice on Capital'') 
in accordance with Article 177(8) and Article 178(1) of the COO.
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    \32\ FSA Application at p. 4.
    \33\ Businesses categorized as Type I Financial Instruments 
Business (Article 28(1) of the FIEA) can only be conducted by Type I 
FIBOs registered under Article 29 of the FIEA. Type I Financial 
Instruments Business includes market transactions of derivatives and 
foreign market derivatives transactions pertaining to certain highly 
liquid securities and over-the-counter transactions of derivatives.
    \34\ To implement and reinforce the legal framework, the FSA has 
developed and published supervisory guidelines. The supervisory 
guidelines are meant for FSA staff, but are public documents, which 
are expected to be followed by the applicable financial 
institutions. Financial institutions are consulted in connection 
with the establishment of, and any amendments to, the supervisory 
guidelines. FSA staff conducts supervision and enforcement based on 
the supervisory guidelines.
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D. Proposed Comparability Determination and Proposed Comparability 
Order for Japan-Domiciled Nonbank Swap Dealers

    On August 8, 2022, the Commission published the 2022 Proposal, 
seeking comment on the FSA Application and the Commission's proposed 
Comparability Determination and related Comparability Order.\35\ The 
2022 Proposal set forth the Commission's preliminary Comparability 
Determination and proposed Comparability Order providing that, based on 
its review of the FSA Application and applicable Japanese laws and 
regulations, the Commission preliminarily found that the Japanese 
Capital Rules and the Japanese Financial Reporting Rules, subject to 
the conditions set forth in the proposed Comparability Order, achieve 
comparable outcomes and are comparable in purpose and effect to the 
CFTC Capital Rules and CFTC Financial Reporting Rules.\36\ The 
Commission, however, noted that there were certain differences between 
the Japanese Capital Rules and CFTC Capital Rules and certain 
differences between the Japanese Financial Reporting Rules and the CFTC 
Financial Reporting Rules. As such, the Commission proposed certain 
conditions to the Comparability Order.\37\ The proposed conditions were 
designed to promote consistency in regulatory outcomes, to reflect the 
scope of substituted compliance that would be available notwithstanding 
the differences, and to ensure that the Commission and National Futures 
Association (``NFA'') receive information to monitor Japanese nonbank 
SDs for ongoing compliance with the Comparability Order.\38\ The 
Commission further stated that, in its preliminary view, the identified 
differences would not be inconsistent with providing a substituted 
compliance framework for Japanese nonbank SDs subject to the conditions 
specified in the proposed Comparability Order.\39\
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    \35\ 2022 Proposal, 87 FR 48092 (Aug. 8, 2022).
    \36\ See 2022 Proposal at 48092. Consistent with the process 
specified in section I.B. above for conducting Comparability 
Determinations, the Commission provided the FSA with an opportunity 
to review for factual accuracy and completeness the Commission's 
description of relevant Japanese laws and regulations on which the 
proposed Comparability Determination and proposed Comparability 
Order were based. The Commission has relied on FSA's review, and has 
incorporated feedback and corrections received from the FSA. As 
previously noted, a Comparability Determination and Comparability 
Order based on an inaccurate description of foreign laws and 
regulations may not be valid.
    \37\ See 2022 Proposal at 48114.
    \38\ NFA is a registered futures association under section 17 of 
the CEA (7 U.S.C. 21). Each SD registered with the Commission is 
required to be an NFA member. 17 CFR 170.16. NFA, as a registered 
futures association, is also required by the CEA to adopt rules 
imposing minimum capital, segregation, and other financial 
requirements, as applicable, to its members, including SDs, that are 
at least as stringent as the Commission's minimum capital, 
segregation, and other financial requirements for such registrants, 
and to implement a program to audit and enforce such requirements. 7 
U.S.C. 21(p). Therefore, the Commission's proposed Comparability 
Order required Japanese nonbank SDs to file certain financial 
reports and notices with NFA so that it may perform oversight of 
such firms as required under section 17 of the CEA. The Commission 
will refer to NFA in this Comparability Determination when referring 
to the requirements or obligations of a registered futures 
association.
    \39\ 2022 Proposal at 48114.
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    The proposed Comparability Order was limited to the comparison of 
the Japanese Capital Rules to the CFTC Capital Rules' Bank-Based 
Capital Approach (``Bank-Based Approach'') for computing regulatory 
capital for nonbank SDs, which is based on certain capital requirements 
imposed by the Federal Reserve Board for bank holding companies.\40\ As 
noted by the Commission in the 2022 Proposal, the FSA had not 
requested, nor has the Commission performed, a comparison of the 
Japanese Capital Rules to the Commission's TNW Approach or NLA 
Approach.\41\
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    \40\ Id. As described in the 2022 Proposal, 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 Approach. See 2022 Proposal at 48095-48096, and 17 
CFR 23.101. The Bank-Based Approach is consistent with the Basel 
Committee on Banking Supervision's (``BCBS'') international 
framework for bank capital requirements (``BCBS framework'' or 
``Basel standards''). 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.
    \41\ See 2022 Proposal at 48114.

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[[Page 58474]]

E. General Comments on the FSA Application and the Commission's 
Proposed Finding of Comparability Between the CFTC Capital Rules and 
CFTC Financial Reporting Rules and the Japanese Capital Rules and 
Japanese Financial Reporting Rules

    The public comment period on the FSA Application, the proposed 
Comparability Determination, and the proposed Comparability Order ended 
on October 7, 2022. The Commission received six comment letters from 
the following interested parties: Better Markets, Inc. (``Better 
Markets''); the FSA; the International Bankers Association of Japan 
(``IBAJ''); a joint letter from the Institute of International Bankers 
(``IIB''), the International Swaps and Derivatives Association 
(``ISDA''), and the Securities Industry and Financial Markets 
Association (``SIFMA''); and two letters from William J. 
Harrington.\42\
---------------------------------------------------------------------------

    \42\ Letter From Stephen Hall, Legal Director and Securities 
Specialist, Better Markets (Oct. 7, 2022) (``Better Markets 
Letter''); Letter from Yuji Yamashita, Deputy Commissioner for 
International Affairs, FSA (Oct. 7, 2022) (``FSA Letter''); Letter 
From Philippe Avril, Chair, IBAJ (Oct. 6, 2022) (``IBAJ Letter''); 
Letter From Stephanie Webster, General Counsel, IIB; Steven Kennedy, 
Global Head of Public Policy, ISDA; Kyle L. Brandon, Managing 
Director, Head of Derivatives Policy, SIFMA (collectively, 
``Associations'') (Oct. 7, 2022) (``Associations Letter''); Letters 
from William J. Harrington (``Harrington'') (Oct. 7 and Oct. 20, 
2022) (``Harrington 10/7/2022 Letter'' and ``Harrington 10/20/2022 
Letter'') The comment letters for the 2022 Proposal are available 
at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7301.
---------------------------------------------------------------------------

    Two commenters expressed support for the proposed Comparability 
Determination and proposed Comparability Order, agreeing with the 
Commission's overall analysis and determination of comparability of the 
CFTC Capital Rules and CFTC Financial Reporting Rules and the Japanese 
Capital Rules and Japanese Financial Reporting Rules.\43\ In addition, 
the FSA submitted a comment letter in support of the Commission's 
proposal, and recommending several technical amendments to the proposed 
Comparability Determination and Comparability Order that were 
corrective or typographical in nature.\44\
---------------------------------------------------------------------------

    \43\ Associations Letter at p. 1; IBAJ Letter at p. 1.
    \44\ FSA Letter. In particular, the FSA recommended that the 
Commission add Article 47 of the FIEA to the list of relevant 
provisions comprising the Japanese Capital Rules enumerated in 
proposed Condition 4. FSA Letter at p. 2. The Commission has revised 
final Condition 4 to that effect.
---------------------------------------------------------------------------

    Conversely, two commenters disagreed with the CFTC's proposed 
Comparability Determination and proposed Comparability Order.\45\ 
Better Markets asserted that the principles-based, holistic approach 
applied by the Commission, which assesses whether the applicable 
foreign jurisdiction's capital and financial requirements achieve 
comparable outcomes to the corresponding Commission requirements, is 
``insufficiently rigorous, leaving far too much room for inaccurate and 
unwarranted comparability determinations.'' \46\
---------------------------------------------------------------------------

    \45\ Better Markets Letter at p. 2; Harrington 10/20/2022 Letter 
at p. 20.
    \46\ Better Markets Letter at p. 2.
---------------------------------------------------------------------------

    The Commission does not believe that the principles-based, holistic 
assessment that it conducted on the comparability of the Japanese 
Capital Rules and Japanese Financial Reporting Rules with the CFTC 
Capital Rules and CFTC Financial Reporting Rules was ``insufficiently 
rigorous,'' nor does the Commission believe that it left ``room for 
inaccurate and unwarranted comparability determinations.'' The 
principles-based, holistic approach employed in the Comparability 
Determination was performed in accordance with the substituted 
compliance assessment framework adopted by the Commission for capital 
and financial reporting requirements for foreign nonbank SDs and set 
out in Commission Regulation 23.106. Consistent with this assessment 
framework, the Commission focused on whether the Japanese Capital Rules 
and Japanese Financial Reporting Rules are designed with the objective 
of ensuring overall safety and soundness of the Japanese nonbank SDs in 
a manner that is comparable with the Commission's overall objective of 
ensuring the safety and soundness of nonbank SDs.
    As stated in the 2022 Proposal, due to the detailed and complex 
nature of the capital frameworks, differences in how jurisdiction 
approach and implement the requirements are expected, even among 
jurisdictions that base their requirements on the principles and 
standards set forth in the BCBS framework.\47\ Furthermore, as 
discussed in Section I.B. above, when adopting Commission Regulation 
23.106, the Commission stated that ``its approach to substituted 
compliance is a principles-based, holistic approach that focuses on 
whether the foreign regulations are designed with the objectives of 
ensuring the overall safety and soundness of the [non-US nonbank SD] in 
a manner that is comparable with the Commission's overall capital and 
financial reporting requirements, and is not based on a line-by-line 
assessment or comparison of a foreign jurisdiction's regulatory 
requirements with the Commission's requirements.'' \48\
---------------------------------------------------------------------------

    \47\ See 2022 Proposal at 48098.
    \48\ 85 FR 57462 at 57521.
---------------------------------------------------------------------------

    The approach and standards set forth in Commission Regulation 
23.106, with the focus on ``comparable outcomes,'' are also consistent 
with the Commission's precedents of undertaking a principles-based, 
holistic assessment of the comparability of foreign regulatory regimes 
for purposes of substituted compliance for cross-border swap 
transactions. The Commission first outlined its approach to substituted 
compliance with respect to swaps requirements in 2013, when it issued 
an Interpretive Guidance and Policy Statement Regarding Compliance with 
Certain Swap Regulations.\49\ In the Guidance, the Commission stated 
that ``[i]n evaluating whether a particular category of foreign 
regulatory requirement(s) is comparable and comprehensive to the 
applicable requirement(s) under the CEA and Commission regulations, the 
Commission will take into consideration all relevant factors, including 
but not limited to, the comprehensiveness of those requirement(s), the 
scope and objectives of the relevant regulatory requirement(s), the 
comprehensiveness of the foreign regulator's supervisory compliance 
program, as well as the home jurisdiction's authority to support and 
enforce its oversight of the registrant.'' \50\ The Commission 
emphasized that in this context, ``comparable does not necessarily mean 
identical.'' \51\ Rather, the Commission stated that it would evaluate 
whether the home jurisdiction's regulatory requirement is comparable 
to, and as comprehensive as, the corresponding U.S. regulatory 
requirement(s).\52\ In conducting comparability determinations based on 
the policy set forth in the Guidance, the Commission noted that the 
``outcome-based'' approach recognizes that ``foreign regulatory systems 
differ and their approaches vary and may differ from how the Commission 
chose to address an issue, but that the foreign jurisdiction's 
regulatory requirements nonetheless achieve the regulatory outcome 
sought to be achieved by a certain provision of the CEA or Commission 
regulation.'' \53\
---------------------------------------------------------------------------

    \49\ Interpretative Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013) (``Guidance'').
    \50\ Guidance at 45343.
    \51\ Id.
    \52\ Id.
    \53\ See e.g., Comparability Determination for the European 
Union: Certain Entity-Level Requirements, 78 FR 78923 (December 27, 
2013) at 78926.

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[[Page 58475]]

    The Commission further elaborated on the required elements of 
comparability in 2016, when it issued final rules to address the cross-
border application of the Commission's margin requirements for 
uncleared swap transactions. Specifically, the Commission stated that 
its substituted compliance approach reflects an outcome-based 
assessment of the comparability of a foreign jurisdiction's margin 
requirements with the Commission's corresponding requirements.\54\ The 
Commission further stated that it would evaluate the objectives and 
outcomes of the foreign margin requirements in light of foreign 
regulator(s)' supervisory and enforcement authority.\55\ Consistent 
with its previously stated position, the Commission recognized that 
jurisdictions may adopt different approaches to achieving the same 
outcome and, therefore, the assessment would focus on whether the 
foreign jurisdiction's margin requirements are comparable to the 
Commission's in purpose and effect, not whether they are comparable in 
every aspect or contain identical elements.\56\ The Commission's policy 
thus reflects an understanding that a line-by-line evaluation of a 
foreign jurisdiction's regulatory regime is not the optimum approach to 
assessing the comparability of complex structures whose individual 
components may differ based on jurisdiction-specific considerations, 
but which achieve the objective and outcomes set forth in the 
Commission's framework.
---------------------------------------------------------------------------

    \54\ Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Cross-Border Application of the Margin 
Requirements, 81 FR 34817, 34836-34837 (May 31, 2016).
    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    With respect to the FSA Application, the process leading to the 
Comparability Determination involved Commission staff obtaining English 
language translations of relevant Japanese laws, rules, and regulations 
cited in the FSA Application from the FSA.\57\ Staff verified the 
assertions and citations contained in the FSA Application regarding the 
specific Japanese Capital Rules and Japanese Financial Reporting Rules 
to the relevant English language versions of the Japanese laws, rules, 
and regulations.\58\
---------------------------------------------------------------------------

    \57\ Commission staff received English translations on May 11, 
2021.
    \58\ Staff also reviewed the FSA website to confirm various 
provisions of Japanese laws and regulations that were relevant to 
the proposed Comparability Determination and proposed Comparability 
Order.
---------------------------------------------------------------------------

    Commission staff also evaluated the comparability of the Japanese 
Capital Rules and Japanese Financial Reporting Rules with the CFTC 
Capital Rules and CFTC Financial Reporting Rules with respect to the 
following areas: (i) the process of establishing minimum capital 
requirements for Japanese nonbank SDs and how such process addresses 
risk, including market risk and credit risk of the Japanese 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 a Japanese nonbank SD's minimum capital requirements; (iii) the 
financial reports and other financial information submitted by a 
Japanese nonbank SD to the FSA, and whether such information provides 
the FSA with the means necessary to effectively monitor the financial 
condition of the Japanese nonbank SD; and (iv) the regulatory notices 
and other communications between a Japanese nonbank SD and the FSA that 
address potential adverse financial or operational issues that may 
impact the firm.\59\ With respect to the ability of the FSA to 
supervise and enforce compliance with the Japanese Capital Rules and 
Japanese Financial Reporting Rules, the Commission's assessment 
included a review of the FSA's surveillance program for monitoring 
Japanese nonbank SDs compliance with Japanese Capital Rules and 
Japanese Financial Reporting Rules, and the disciplinary process 
imposed on firms that fail to comply with such requirements.\60\
---------------------------------------------------------------------------

    \59\ 2022 Proposal at 48098-48112.
    \60\ Id. at 48112-48113.
---------------------------------------------------------------------------

    Contrary to the position articulated by Better Markets regarding 
the nature of the comparability assessment, the Commission believes 
that the principles-based, holistic assessment of the Japanese Capital 
Rules and Japanese Financial Reporting Rules against the CFTC Capital 
Rules and CFTC Financial Reporting Rules, as outlined above and 
discussed in detail in Section II below, was sufficiently rigorous for 
purposes of determining if the Japanese laws and regulations are 
comparable in purpose and effect to the CEA and Commission regulations.
    Better Markets further asserted that even under a principles-based, 
holistic approach, the FSA capital and financial reporting requirements 
for Japanese nonbank SDs do not satisfy the test for an order granting 
substituted compliance because the FSA's regulatory framework governing 
capital and financial reporting is not comparable to the corresponding 
CFTC requirements.\61\ Better Markets cited the Commission's inclusion 
of conditions in the proposed Comparability Order as demonstrating the 
Commission's need ``to compensate for the acknowledged obvious gaps in 
the FSA framework.'' \62\ Better Markets further stated that the 
differences between the Japanese and the CFTC capital and financial 
reporting regimes mandate denial of the FSA Application for a 
comparability determination.\63\
---------------------------------------------------------------------------

    \61\ Better Markets Letter at p. 2.
    \62\ Id.
    \63\ Id.
---------------------------------------------------------------------------

    The Commission disagrees that the inclusion of conditions in the 
Comparability Order precludes a finding of comparability with respect 
to the Japanese Capital Rules and Japanese Financial Reporting Rules. 
The Commission's comparability assessment process, consistent with the 
holistic approach, contemplates the potential need for a Comparability 
Order to contain conditions. Specifically, Commission Regulation 
23.106(a)(5) states that the Commission may impose any terms and 
conditions it deems appropriate in issuing a Comparability Order, 
including conditions with respect to capital adequacy and financial 
reporting requirements of non-U.S. nonbank SDs.\64\
---------------------------------------------------------------------------

    \64\ 17 CFR 23.106(a)(5), which provides that in issuing a 
Capital Comparability Determination, the Commission may impose any 
terms and conditions it deems appropriate, including certain capital 
adequacy and financial reporting requirements on swap dealers. . . 
(Emphasis added). Commission Regulation 23.106(a)(3) establishes the 
Commission's standard of review for performing a Comparability 
Determination and provides that the Commission may consider all 
relevant factors, including whether the relevant foreign 
jurisdiction's capital adequacy and financial reporting requirements 
achieve comparable outcomes to the Commission's corresponding 
capital adequacy and financial reporting requirements for SDs. 17 
CFR 23.106(a)(3)(ii).
---------------------------------------------------------------------------

    The process employed in this Comparability Determination is 
consistent with the Commission's established approach to conducting 
comparability assessments. Upon a finding of comparability, the 
Commission's policy generally is that eligible entities may comply with 
a substituted compliance regime subject to the conditions the 
Commission places on its finding, and subject to the Commission's 
retention of its examination authority and its enforcement 
authority.\65\ In this regard, the Commission has stated that certain 
conditions included in a Comparability Order may be designed to ensure 
the

[[Page 58476]]

Commission's direct access to books and records required to be 
maintained by an SD registered with the Commission.\66\ Other 
conditions may address areas where the foreign jurisdiction lacks 
analogous requirements.\67\ The inclusion of conditions in a 
Comparability Order was contemplated as an integral part of the 
Commission's holistic, principle-based approach to conducting 
comparability assessments and is not inconsistent with a grant of 
substituted compliance. In particular, Commission Regulation 
23.106(a)(5) states the Commission's authority to impose conditions in 
issuing a Comparability Determination in connection with the CFTC 
Capital Rules and the CFTC Financial Reporting Rules. As further 
discussed below, the conditions proposed in the 2022 Proposal are 
clearly of the nature contemplated by Commission Regulation 
23.106(a)(5).
---------------------------------------------------------------------------

    \65\ 85 FR 57462 at 57520. See also Guidance at 45342-45344 and 
Comparability Determination for the European Union: Certain 
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at 
78880.
    \66\ Comparability Determination for the European Union: Certain 
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at 
78880.
    \67\ Guidance at 45343.
---------------------------------------------------------------------------

    The Commission also does not believe that the inclusion of the 
conditions in the proposed Comparability Order demonstrates ``obvious 
gaps in the FSA framework'' as asserted by Better Markets. Consistent 
with the Commission's policy described above, a majority of the 
conditions contained in the proposed Comparability Order are designed 
to ensure that: (i) the Japanese nonbank SD is eligible for substituted 
compliance based on the Japanese laws and regulations that were 
reviewed by the Commission in performing the comparability assessment, 
and (ii) the Commission and the NFA receive timely financial 
information and notices to effectively monitor a Japanese nonbank SD's 
compliance with the Comparability Order and to assess the ongoing 
safety and soundness of the Japanese nonbank SD. Specifically, there 
are 23 conditions in the final Comparability Order. Four conditions set 
forth criteria that a Japanese nonbank SD must meet to be eligible for 
substituted compliance pursuant to the Comparability Order.\68\ The 
four conditions ensure that only Japanese nonbank SDs that are within 
the scope of, and comply with, the Japanese Capital Rules and Japanese 
Financial Reporting Rules that were part of the Commission's 
comparability assessment may apply for substituted compliance. Eight 
additional conditions require Japanese nonbank SDs within scope of the 
Comparability Order to provide notice to the Commission and NFA of 
certain defined events,\69\ and a further three conditions require 
Japanese nonbank SDs to file with the Commission and NFA copies of 
certain unaudited and audited financial reports that the firms provide 
to the FSA.\70\ In addition, two additional conditions reflect 
administrative matters necessary to implement the substituted 
compliance framework.\71\ Lastly, five conditions impose obligations on 
Japanese nonbank SDs that align with certain of the Commission's 
requirements for nonbank SDs. The five conditions require a Japanese 
nonbank SD to: (i) maintain a minimum level of capital defined as Basic 
Items \72\ in an amount equivalent to at least $20 million (Condition 
5); (ii) prepare and keep current financial books and records 
(Condition 7); (iii) file a monthly schedule of the firm's financial 
positions on Schedule 1 of appendix B to Subpart E of part 23 of the 
Commission's regulations (Condition 11); (iv) file a monthly report 
listing the custodians holding margin posted by, and collected by, the 
Japanese nonbank SD, the amount of margin held by each custodian, and 
the aggregate amount of margin required to be posted and collected by 
the Japanese nonbank SD (Condition 13); and (v) submit, with each 
filing of financial information, a statement by an authorized 
representative that, to the best knowledge and belief of the person 
making the representation, the information is true and correct 
(Condition 14).\73\
---------------------------------------------------------------------------

    \68\ The four criteria provide that the Japanese nonbank SD: (i) 
is not subject to capital rules of a U.S. prudential regulator 
(Condition 1); (ii) is organized and domiciled in Japan (Condition 
2); (iii) is registered as a FIBO (Condition 3); and (iv) is subject 
to the Japanese Capital Rules and Japanese Financial Reporting Rules 
that are part of the Commission's comparability assessment 
(Condition 4).
    \69\ The eight conditions require a Japanese nonbank SD to 
provide notice to the Commission in the event that the firm: (i) is 
informed by the FSA that it failed to comply with any component of 
the Japanese Capital Rules or Japanese Financial Reporting Rules 
(Condition 15); (ii) fails to maintain regulatory capital in the 
form of Basic Items of at least the equivalent of $20 million 
(Condition 16); (iii) its capital adequacy ratio is below the early 
warning level of 140 percent (Condition 17); (iv) its capital 
adequacy ratio is below the minimum requirement of 120 percent 
(Condition 18); (v) fails to make or keep current financial books 
and records (Condition 19); (vi) fails to post or collect margin for 
uncleared swaps and non-cleared security-based swaps with one or 
more counterparties in amounts that exceed defined limits (Condition 
20); (vii) changes its fiscal year-end date (Condition 21); and 
(viii) is subject to material changes to the Japanese Capital Rules, 
Japanese Financial Reporting Rules, or the supervisory authority of 
the Japanese Commission (Condition 22).
    \70\ The three conditions provide that a Japanese nonbank SD 
must file with the Commission and NFA: (i) English language copies 
of certain financial reporting forms that the Japanese nonbank SD is 
required to submit to the FSA pursuant to Article 56-2(1) of the 
FIEA (Condition 8); (ii) an English language copy of the annual 
business report that the Japanese nonbank SDs is required to submit 
to the FSA pursuant to Article 46-3(1) of the FIEA and Article 172 
of the COO (Condition 9); and (iii) English language copies of the 
Japanese nonbank SD's annual audited financial statements and 
management report that are required to be prepared pursuant to 
Article 435(2) of the Japanese Companies Act (Act No. 86 of 2005) 
(Condition 10).
    \71\ One of the administrative conditions provides that a 
Japanese nonbank SD must provide a notice to the Commission of its 
intent to comply with the Comparability Order and the Japanese 
Capital Rules and Japanese Financial Reporting Rules in lieu of the 
CFTC Capital Rules and CFTC Financial Reporting Rules. The notice 
must include the Japanese nonbank SD's representation that the firm 
is organized and domiciled in Japan, is a registered FIBO, and is 
subject to and complies with the Japanese Capital Rules and the 
Japanese Financial Reporting Rules (Condition 6). The second 
administrative condition provides that a Japanese nonbank SD must 
file any documents with the Commission and NFA via electronic 
transmission (Condition 23). With respect to Condition 6, the 
Commission also notes that the language of the proposed condition 
required that a Japanese nonbank SD provide a notice of its intent 
to comply with ``applicable'' Japanese Capital Rules and Japanese 
Financial Reporting Rules. Given that ``Japanese Capital Rules and 
Japanese Financial Reporting Rules'' is a term defined in the 
Comparability Order to include laws and regulations that apply to 
Japanese nonbank SDs, the word ``applicable'' is superfluous and is, 
therefore, not included in final Condition 6 of the Comparability 
Order.
    \72\ ``Basic Items'' are analogous to common equity tier 1 
capital as defined in the CFTC Capital Rules. See discussion in 
section II.B.
    \73\ Another condition specifies that Japanese nonbank SDs that 
are registered with the U.S. Securities and Exchange Commission 
(``SEC'') as security-based swap dealers (``SBSDs'') and required to 
file with the SEC, or its designee, Form X-17A-5 (``FOCUS Report''), 
must file a copy of such FOCUS Report with the Commission and NFA 
within 35 calendar days after the end of each month (Condition 12). 
A Japanese nonbank SD that files a FOCUS Report pursuant to 
Condition 12 will not be required to file the reports and schedules 
specified in Conditions 8 and 11. Currently, no Japanese nonbank SD 
is registered as a SBSD.
---------------------------------------------------------------------------

    As the substance of these conditions demonstrates, the primary 
objective of a majority of the conditions is not to compensate for 
regulatory gaps in the Japanese capital and financial reporting 
framework, but rather to ensure that the Commission and NFA receive 
information to conduct ongoing monitoring of Japanese nonbank SDs for 
compliance with relevant capital and financial reporting requirements. 
As discussed above, in issuing the Comparability Order, the Commission 
is not ceding its supervisory and enforcement authorities. The 
Comparability Order permits Japanese nonbank SDs to satisfy the 
Commission's capital and financial reporting requirements by complying 
with certain laws and/or regulations of Japan that have been found 
comparable to the Commission's laws and/or regulations in purpose and 
effect. The Commission and NFA, however, have a continuing obligation 
to conduct

[[Page 58477]]

ongoing oversight, including potential examination, of Japanese nonbank 
SDs to ensure compliance with the Comparability Order, including its 
conditions. To that effect, the notice and financial reporting 
conditions set forth in the Comparability Order provide the Commission 
and NFA with information necessary to monitor for such compliance, and 
to evaluate the operational condition and ongoing financial condition 
of Japanese nonbank SDs. The Commission may also initiate an 
enforcement action against a Japanese nonbank SD that fails to comply 
with the conditions of the Comparability Order.\74\
---------------------------------------------------------------------------

    \74\ As the Commission stated in the 2022 Proposal, a non-U.S. 
nonbank SD that operates under a Comparability Order issued by the 
Commission remains subject to the Commission's examination and 
enforcement authority. Specifically, the Commission may initiate an 
enforcement action against a non-U.S. nonbank SD that fails to 
comply with its home-country capital adequacy and/or financial 
reporting requirements cited in a Comparability Order. See 2022 
Proposal at 48094-48095. See also 17 CFR 23.106(a)(4)(ii), which 
provides that the Commission may examine all nonbank SDs, regardless 
of whether the nonbank SDs rely on substituted compliance, and that 
the Commission may initiate an enforcement action under the 
Commission's capital and financial reporting regulations against a 
non-U.S. nonbank SD that fails to comply with a foreign 
jurisdiction's capital adequacy and financial reporting 
requirements.
---------------------------------------------------------------------------

    Furthermore, to the extent that a condition imposes a new 
obligation on Japanese nonbank SDs, the imposition of such condition is 
also consistent with Commission Regulation 23.106 and the Commission's 
established policy with regard to comparability determinations. As 
discussed above, the Commission contemplated that even in circumstances 
where the Commission finds two regulatory regimes comparable, the 
Commission may impose requirements on entities relying on substituted 
compliance where the Commission determines that the home jurisdiction's 
regime lacks comparable and comprehensive regulation on a specific 
issue.\75\ The Commission's authority to impose such conditions is set 
out in Commission Regulation 23.106(a)(5), which states that the 
Commission may impose ``any terms and conditions it deems appropriate, 
including certain capital adequacy and financial reporting requirements 
[on SDs].'' \76\
---------------------------------------------------------------------------

    \75\ Guidance at 45343.
    \76\ 17 CFR 23.106(a)(5).
---------------------------------------------------------------------------

    Better Markets further stated that if the Commission grants 
substituted compliance with regard to materially different regulatory 
requirements, it must make a well-supported comparability determination 
by, at a minimum, clearly and specifically setting forth the desired 
regulatory outcome and providing a detailed, evidence-based explanation 
as to how the jurisdiction's different legal requirements nonetheless 
lead to a comparable regulatory outcome.\77\ Better Markets also stated 
that if the Commission grants the Comparability Determination and 
Comparability Order, it must, at a minimum, ensure that the conditions 
are applied and enforced with full force and without exception or 
dilution.\78\ Better Markets asserted that ``[a] determination that a 
foreign jurisdiction's nonbank SDs rules would produce comparable 
regulatory outcomes is the beginning, not the end, of the CFTC's 
obligation to ensure that the activities of the foreign nonbank SD 
entities do not pose risks to the U.S. financial system. As time goes 
on, regulatory requirements that, in theory, are expected to produce 
one regulatory outcome may, in practice, produce a different one. And, 
of course, the regulatory requirements may themselves be changed in a 
variety of ways. Finally, the effectiveness of an authority's 
supervision and enforcement program can become weakened for any number 
of reasons--the CFTC cannot assume that an enforcement program that is 
presently effective will continue to be effective.'' \79\ Better 
Markets further asserted that to fulfill its obligation to protect the 
U.S. financial system, the Commission must ensure, on an ongoing basis, 
that each grant of substituted compliance remains appropriate over time 
by, at a minimum, requiring each Comparability Order to impose an 
obligation on the applicant, as appropriate, to: (i) periodically 
apprise the Commission of the activities and results of its supervision 
and enforcement programs, to ensure that they remain sufficiently 
robust to deter and address violations of the law; and (ii) immediately 
apprise the Commission of any material changes to the regulatory 
regime, including changes to rules or interpretations of rules.\80\
---------------------------------------------------------------------------

    \77\ Better Markets at p. 6.
    \78\ Id. at p. 2.
    \79\ Id. at p. 6.
    \80\ Id.
---------------------------------------------------------------------------

    Although the Commission disagrees that the Japanese Capital Rules 
and the Japanese Financial Reporting Rules, as a whole, are materially 
different or do not achieve comparable regulatory outcomes, the 
Commission concurs that granting substituted compliance should be the 
result of a well-supported comparability assessment. Consistent with 
that view, the Commission believes that this final Comparability 
Determination articulates the Commission's analysis in sufficient 
detail and provides an appropriate explanation of how the foreign 
jurisdiction's requirements are comparable in purpose and effect with 
the Commission's requirements, and lead to comparable regulatory 
outcomes with the Commission's requirements. Specifically, Section III 
of the 2022 Proposal and Section II of the final Comparability 
Determination reflect, among other observations, the Commission's 
detailed analysis with respect to each of the elements for 
consideration listed in Commission Regulation 23.106(a)(3).
    The Commission also concurs that the availability of substituted 
compliance is conditioned upon a non-US nonbank SD's ongoing compliance 
with the terms and conditions of the final Comparability Order, and the 
Commission's ongoing assessment that the Japanese Capital Rules and 
Japanese Financial Reporting Rules remain comparable in purpose and 
effect with the CFTC Capital Rules and CFTC Financial Reporting Rules. 
As noted above, and discussed in more detail in Sections II.D. and E. 
below, Japanese nonbank SDs are subject to notice and financial 
reporting requirements under the final Comparability Order that provide 
Commission and NFA staff with the ability to monitor the Japanese 
nonbank SDs' ongoing compliance with the conditions set forth in the 
final Comparability Order. In addition, the final Comparability Order 
requires Japanese nonbank SDs or the FSA to inform the Commission of 
changes to the relevant Japanese Capital Rules and Japanese Financial 
Reporting Rules so that the Commission may assess the continued 
effectiveness of the Comparability Order in ensuring that the Japanese 
laws and regulations have the comparable regulatory objectives of the 
CEA and Commission regulations of ensuring the safety and soundness of 
nonbank SDs.\81\ Commission staff will also monitor the Japanese 
nonbank SDs directly as part of its supervisory program and will 
discuss with the firms any proposed or pending revisions to specific 
laws and rules cited in the final

[[Page 58478]]

Comparability Order. Lastly, in addition to assessing the effectiveness 
of the Comparability Order as a result of revisions or proposed 
revisions to the Japanese laws, regulations, or supervisory regime, the 
Commission further notes that future material changes to the CFTC 
Capital Rules or CFTC Financial Reporting Rules, or the Commission's or 
NFA's supervisory programs, may necessitate an amendment to the 
Comparability Determination and Comparability Order to reflect those 
changes.\82\
---------------------------------------------------------------------------

    \81\ Condition 22 of the final Comparability Order requires 
Japanese nonbank SDs or the FSA to notify the Commission of any 
material changes to the information submitted in the FSA 
Application, including, but not limited to, proposed and final 
material changes to the Japanese Capital Rules or Japanese Financial 
Reporting Rules and proposed and final material changes to the FSA's 
supervisory authority or supervisory regime over Japanese nonbank 
SDs. The Commission notes that it also made certain non-substantive, 
clarifying changes to the language of final Condition 22 as compared 
to the proposed condition.
    \82\ 2022 Proposal at 48098 (n. 72).
---------------------------------------------------------------------------

    Another commenter, Harrington, stated that the Commission ``must 
prevent every regulated [SD] globally from providing a swap contract 
with a ``flip clause [. . .].'' \83\ Harrington further recommended 
that the Commission condition the Comparability Order on specifying 
that a Japanese nonbank SD that is party to a swap contract with a flip 
clause must hold additional capital determined based on the required 
margin and the contract market value.\84\ Alternatively, Harrington 
argued that the Commission should prohibit a Japanese nonbank SD from 
entering into a new swap contract with a flip clause or extending an 
existing one.\85\ Harrington has elsewhere referred to a description of 
a ``flip clause'' as a provision in swap contracts with structured debt 
issuers that reverses or ``flips'' the priority of payment obligations 
owed to the swap counterparty on the one hand and the noteholders on 
the other, following a specified event of default.\86\ Based on 
Harrington's description, flip clauses present a risk to the SD in 
synthetic transactions where payments under a swap contract are secured 
with the same collateral that would serve to cover payments under the 
notes issued by a structured debt issuer. In such circumstances, an 
``event of default'' by the SD would cause the SD's priority of payment 
from the collateral under a swap to ``flip'' to a more junior priority 
position, including for mark-to-market gains on ``in the money'' 
swaps.\87\
---------------------------------------------------------------------------

    \83\ Harrington 10/20/2022 Letter at p. 3.
    \84\ Harrington 10/20/2022 Letter at p. 23.
    \85\ Id.
    \86\ William J. Harrington, Submission to the U.S. Securities 
and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at 
p.8.
    \87\ For additional information on the legal mechanics of a flip 
clause, see Lehman Brothers Special Financing Inc v. Bank of America 
N.A., No. 18-1079 (2nd Cir. 2020).
---------------------------------------------------------------------------

    Harrington argued that no element of the CFTC Capital Rules or the 
Japanese Capital Rules addresses ``the 100% self-exposure that [an SD] 
incurs with each swap with flip clause.'' \88\ Harrington recognized, 
however, that the CFTC margin requirements for uncleared swap 
transactions address his concerns associated with the inclusion of a 
flip clause.\89\ Nonetheless, according to Harrington, risks arise in 
circumstances when non-U.S. margin rules exempt SDs from margin 
obligations in connection with swaps with a structured debt issuer.\90\
---------------------------------------------------------------------------

    \88\ Harrington 10/20/2022 Letter at p. 21-22.
    \89\ Harrington 10/20/2022 Letter at p.3 (noting that the 
requirement for SDs to post and collect variation margin for swap 
contracts with a securitization or structured debt issuer 
``generates the immense benefit of inducing U.S. securitization and 
structured debt issuers to forswear all swap contracts, both with 
and without a flip clause'').
    \90\ Harrington 10/20/2022 Letter at p.3 (arguing that ``non-
U.S. swap margin rules de facto exempt a swap provider from 
collecting or posting variation margin under a new contract with 
most securitization and structured debt issuers'').
---------------------------------------------------------------------------

    The Commission recognizes that given some definitional differences 
and differences in the activity thresholds with respect to the scope of 
application of the CFTC margin requirements and non-U.S. margin 
requirements, some transactions that are subject to the CFTC margin 
requirements for uncleared swaps may not be subject to margin 
requirements in another jurisdiction. In connection with this 
Comparability Determination, however, the Commission notes that both 
under the CFTC Capital Rules and the Japanese Capital Rules, 
uncollateralized exposures from uncleared swap transactions would 
generate a higher counterparty credit risk charge than the exposures 
resulting from transactions under which the counterparties have posted 
collateral.\91\ Accordingly, the Commission does not believe that the 
respective sets of rules adopt a conflicting approach or lead to a 
disparate outcome with respect to the capital treatment of 
uncollateralized uncleared swap exposures that would warrant a finding 
of non-comparability of the CFTC Capital Rules and the Japanese Capital 
Rules.
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    \91\ 12 CFR 217.34 and 12 CFR 217.132 (indicating that nonbank 
SDs may recognize the risk-mitigating effects of financial 
collateral for collateralized derivatives contracts) and Notice on 
Capital, Article 15.5. and 15-2.5 (similarly indicating that 
Japanese nonbank SDs are allowed to recognize the risk-mitigating 
effect of collateral by deducting the amount of collateral from the 
exposure at default amount).
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    With regard to Harrington's general recommendations, also included 
in a submission by Harrington in connection with the adoption of the 
CFTC Capital Rules, that the Commission impose additional capital 
charges for swap contracts with a flip clause,\92\ the Commission notes 
that any change in its capital requirements and approach, if deemed 
appropriate, would be addressed separately from the Comparability 
Determination. As the Commission stated in adopting the CFTC Capital 
Rules, over time the Commission may consider adjusting the capital 
charges applicable to nonbank SDs that engage in bespoke swap 
transactions, including contracts involving flip clauses, as a result 
of its experience and as market developments may warrant.\93\ If the 
Commission proceeds with adjustments to the CFTC Capital Rules, the 
Commission may reconsider the comparability between the CFTC Capital 
Rules and the Japanese Capital Rules in light of these changes.
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    \92\ Harrington 10/20/2022 Letter at p.24.
    \93\ 85 FR 57462 at 57475. As stated in the adopting release to 
the CFTC Capital Rules, the Commission considered that its rules 
were appropriately calibrated to account for a wide variety of 
possible uncleared swap transactions, including bespoke transactions 
involving flip clauses or other unique features. See id.
---------------------------------------------------------------------------

    Finally, IBAJ proposed several technical amendments to the 2022 
Proposal that were corrective or clarifying in nature.\94\ As further 
discussed below, several of the proposed changes have been 
incorporated, as appropriate, throughout the final Comparability 
Determination and Comparability Order.
---------------------------------------------------------------------------

    \94\ IBAJ Letter.
---------------------------------------------------------------------------

II. Final Capital and Financial Reporting Comparability Determination 
and Comparability Order

    The following section provides the Commission's comparative 
analysis of the Japanese Capital Rules and the Japanese Financial 
Reporting Rules with the corresponding CFTC Capital Rules and CFTC 
Financial Reporting Rules, as described in the 2022 Proposal, further 
modified to address comments received. As emphasized in the 2022 
Proposal, the capital and financial reporting regimes are complex 
structures comprised of a number of interrelated regulatory 
components.\95\ 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 
framework.
---------------------------------------------------------------------------

    \95\ See 2022 Proposal at 48098.
---------------------------------------------------------------------------

    The Commission performed the analysis by assessing the 
comparability of the Japanese Capital Rules for Japanese nonbank SDs as 
set forth in the FSA Application and in the English language 
translation of certain applicable Japanese laws and regulations with 
the Commission's Bank-Based Approach for nonbank SDs.

[[Page 58479]]

The Commission understands that, as of the date of the final 
Comparability Determination and Comparability Order, the three Japanese 
nonbank SDs registered with the Commission are subject to a bank-based 
capital approach under the Japanese Capital Rules. Accordingly, when 
the Commission makes its final determination herein about the 
comparability of the Japanese Capital Rules with the CFTC Capital 
Rules, the determination pertains to the comparability of the Japanese 
Capital Rules with the Bank-Based Approach under the CFTC Capital 
Rules. The Commission notes that any material changes to the 
information submitted in the FSA Application, including, but not 
limited to, proposed and final material changes to the Japanese Capital 
Rules or Japanese Financial Reporting Rules, as well as any proposed 
and final material changes to the FSA's supervisory authority or 
supervisory regime, will require notification to the Commission and NFA 
pursuant to Condition 22 of the final Comparability Order.\96\ 
Therefore, if there are subsequent material changes to the Japanese 
Capital Rules, Japanese Financial Reporting Rules, or the supervisory 
authority or supervisory regime, the Commission will review and assess 
the impact of such changes on the final Comparability Determination and 
Comparability Order as they are then in effect, and may amend or 
supplement the Comparability Order as appropriate.\97\
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    \96\ Condition 22 of the final Comparability Order. The 
Commission notes that it made certain non-substantive, clarifying 
changes to the language of final Condition 22 as compared to the 
proposed condition.
    \97\ See 2022 Proposal at 48098. As stated in the 2022 Proposal, 
the Commission may also amend or supplement the Comparability Order 
to address any material changes to the CFTC Capital Rules and CFTC 
Financial Reporting Rules, including rule amendments to capital 
rules of the Federal Reserve Board that are incorporated into the 
CFTC capital Rules' Bank-Based Approach under Commission Regulation 
23.101(a)(1)(i), that are adopted after the final Comparability 
Order is issued. See id. (fn. 72).
---------------------------------------------------------------------------

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

1. Preliminary Determination
    As reflected in the 2022 Proposal and discussed above, the 
Commission preliminarily determined that the overall objectives of the 
Japanese Capital Rules and the CFTC Capital Rules are comparable in 
that both sets of rules are intended to ensure the safety and soundness 
of nonbank SDs by establishing regulatory regimes that require 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.\98\ The Commission further noted that the Japanese 
Capital Rules and CFTC Capital Rules are also based on, and consistent 
with, the BCBS framework, which was designed to ensure that banking 
entities hold sufficient levels of capital to absorb losses and 
decreases in the value of firm assets and increases in the value of 
firm liabilities without the banks becoming insolvent.\99\
---------------------------------------------------------------------------

    \98\ See 2022 Proposal at 48099.
    \99\ Id.
---------------------------------------------------------------------------

    The Commission also preliminarily found that the Japanese Capital 
Rules are comparable in purpose and effect to the CFTC Capital Rules 
given that both regulatory approaches compute the minimum capital 
requirements based on the level of a nonbank SD's on-balance sheet and 
off-balance sheet exposures, with the objective and purpose of ensuring 
that the nonbank SD's capital is adequate to absorb losses or decreases 
in the value of firm assets or increases in the value of firm 
liabilities resulting from such exposures.\100\ The Commission observed 
that the Japanese Capital Rules and CFTC Capital Rules provide for a 
comparable approach to the calculation of on-balance sheet and off-
balance sheet risk exposures using standardized or internal model-based 
approaches.\101\ In addition, as discussed in the 2022 Proposal, the 
Japanese Capital Rules' and CFTC Capital Rules' requirements for 
identifying and measuring on-balance sheet and off-balance sheet 
exposures under standardized or internal model-based approaches are 
also consistent with the requirements set forth under the BCBS 
framework for identifying and measuring on-balance sheet and off-
balance sheet exposures.\102\
---------------------------------------------------------------------------

    \100\ Id.
    \101\ Id.
    \102\ Id.
---------------------------------------------------------------------------

    Finally, the Commission preliminarily noted that the Japanese 
Capital Rules and CFTC Capital Rules further achieve comparable 
outcomes and are comparable in purpose and effect in that both sets of 
rules limit the types of capital instruments that qualify as regulatory 
capital to cover the on-balance sheet and off-balance sheet risk 
exposures to high quality equity capital and qualifying subordinated 
debt instruments that meet conditions designed to ensure that the 
holders of the debt have effectively subordinated their claims to other 
creditors of the nonbank SD.\103\ As discussed in the 2022 Proposal and 
in Section II.B. below, both the Japanese Capital Rules and the CFTC 
Capital Rules define high quality capital by the degree to which the 
capital represents permanent capital that is contributed, or readily 
available to a nonbank SD, on an unrestricted basis to absorb 
unexpected losses, including losses from swaps trading and other 
activities, without the nonbank SD becoming insolvent.\104\
---------------------------------------------------------------------------

    \103\ Id. at 48099-48100.
    \104\ Id.
---------------------------------------------------------------------------

    The Commission further stated that it preliminarily found the 
Japanese Financial Reporting Rules to be comparable in purpose and 
effect to the CFTC Financial Reporting Rules as both the FSA and CFTC 
require nonbank SDs to file periodic financial reports, including 
unaudited financial reports and an annual audited financial report, 
detailing their financial operations and demonstrating their compliance 
with minimum capital requirements.\105\ As discussed in the 2022 
Proposal, in addition to providing the CFTC and FSA with information 
necessary to comprehensively assess the financial condition of a 
nonbank SD on an ongoing basis, the financial reports further provide 
the CFTC and FSA with information regarding potential changes in a 
nonbank SD's risk profile by disclosing changes in account balances 
reported over a period of time.\106\ Such changes in account balances 
may indicate, among other things, 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.\107\
---------------------------------------------------------------------------

    \105\ Id. at 48100.
    \106\ Id.
    \107\ Id.
---------------------------------------------------------------------------

    In assessing the comparability between the CFTC Financial Reporting 
Rules and the Japanese Financial Reporting Rules, the Commission noted 
that the prompt and effective monitoring of the financial condition of 
nonbank SDs through the receipt and review of periodic financial 
reports supports the Commission and FSA in meeting their respective 
objectives of ensuring the safety and soundness of nonbank SDs. In this 
regard, the Commission stated that the early identification of 
potential financial issues provides the Commission and FSA with an 
opportunity to address such issues with the nonbank SD before they 
develop to a state where the financial condition of the firm is

[[Page 58480]]

impaired such that it may no longer hold a sufficient amount of 
qualifying regulatory capital to absorb decreases in the value of firm 
assets, absorb increases in the value of firm liabilities, or cover 
losses from its business activities, including the firm's swap dealing 
activities and obligations to swap counterparties.\108\
---------------------------------------------------------------------------

    \108\ Id.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
    In response to the Commission's request for comment, Better Markets 
identified certain differences between the CFTC Capital Rules and CFTC 
Financial Reporting Rules and the Japanese Capital Rules and Japanese 
Financial Reporting Rules and stated that the differences mandated 
denial of the request for a comparability determination.\109\ Better 
Markets further stated that the imposition of conditions to achieve 
comparability between the regimes implicitly concedes that the regimes 
are not comparable, and is suboptimal and undesirable, as it creates a 
set of capital and reporting requirements that Japanese nonbank SDs 
must abide by and that the Commission must monitor.\110\
---------------------------------------------------------------------------

    \109\ Better Markets Letter at pp. 7-11. For example, Better 
Markets asserts that while the CFTC requires non-bank SDs to hold 
qualifying capital in an amount equal to at least 8 percent of the 
nonbank SDs uncleared swap margin amount, Japan's capital rules are 
based on an ``arbitrary percentage'' of a company's operating 
expenses. Better Markets also asserted that while the CFTC's capital 
rules require nonbank SDs to ``maintain regulatory capital in the 
form of common equity tier 1 capital, additional tier 1 capital, and 
tier 2 capital, Japan's capital rules require nonbank SDs to 
maintain a ``capital adequacy amount'' in the form of ``Basic Items 
and Supplemental Items'' and that the Japanese framework has no 
dollar minimum capital requirement. These distinctions between the 
CFTC Capital Rules and Financial Reporting Rules, and the Japanese 
Capital and Financial Reporting Rules are discussed in detail in 
sections II.C. and II.B., respectively, below.
    \110\ Id.
---------------------------------------------------------------------------

    As described herein and in the 2022 Proposal, Commission staff has 
engaged in a detailed, comprehensive study and evaluation of the 
Japanese capital and financial reporting framework and has confirmed 
that its understanding of the elements and application of the framework 
is accurate. The Commission has also concluded, based on its 
evaluation, that the FSA has a comprehensive oversight program for 
monitoring Japanese nonbank SD's compliance with relevant Japanese 
Capital Rules.
    Furthermore, as discussed in Section I.E. above, the conditions set 
forth in the Comparability Order are generally intended to ensure that: 
(i) only Japanese nonbank SDs that are subject to the laws and 
regulations assessed under the Comparability Determination are eligible 
for substituted compliance; (ii) the Japanese nonbank SDs are subject 
to supervision by the FSA; and (iii) the Japanese nonbank SDs provide 
information to the Commission and NFA that is relevant to the ongoing 
supervision of their operations and financial condition. Considering 
this thorough analysis and the ongoing requirement for Japanese nonbank 
SDs to provide information to the Commission and NFA demonstrating 
compliance with the Comparability Order, the Commission is confident 
that it is capable of effectively conducting, together with NFA, 
appropriately tailored oversight of the Japanese nonbank SDs. In light 
of the Commission's ultimate conclusion that the Japanese capital and 
financial reporting requirements are comparable based on the standards 
articulated in Commission Regulation 23.106(a)(3), the Commission 
believes that a failure to issue a Comparability Determination and 
Comparability Order would in fact be ``suboptimal and undesirable'' as 
it would impose duplicative requirements that would result in increased 
costs for registrants and market participants without a commensurate 
benefit from an oversight perspective.
    As discussed in Sections I.B. and E. above, and detailed herein, 
the Commission finds that the CFTC Capital Rules and Financial 
Reporting Rules and the Japanese Capital Rules and Financial Reporting 
Rules are comparable in purpose and effect, and have overall comparable 
objectives, notwithstanding the identified differences. In this regard, 
the Commission notes that instead of conducting a line-by-line 
assessment or comparison of the Japanese Capital and Japanese Financial 
Reporting Rules and the CFTC Capital and CFTC Financial Reporting 
Rules, it has applied in the assessment set forth in this determination 
and order, a principles-based, holistic approach in assessing the 
comparability of both regimes, consistent with the standard of review 
it adopted in Commission Regulation 23.106(a)(3). Based on that 
principles-based, holistic assessment, the individual elements of which 
are described in more detail in Sections II.B. through II.F below, the 
Commission has determined that both sets of rules are designed to 
ensure the safety and soundness of nonbank SDs and achieve comparable 
outcomes. As such, the Commission adopts the Comparability 
Determination and Comparability Order as proposed with respect to the 
analysis of the regulatory objectives of the CFTC Capital Rules and 
Financial Reporting Rules and the Japanese Capital and Financial 
Reporting Rules.

B. Nonbank Swap Dealer Qualifying Capital

1. Preliminary Determination
    As discussed in the 2022 Proposal, the Commission preliminarily 
determined that the Japanese Capital Rules are comparable in purpose 
and effect to CFTC Capital Rules with regard to the types and 
characteristics of a nonbank SD's equity that qualifies as regulatory 
capital in meeting its minimum requirements.\111\ The Commission 
explained that the Japanese Capital Rules and the CFTC Capital Rules 
for nonbank SDs both require a nonbank SD to maintain a quantity of 
high-quality and permanent capital that, based on the firm's activities 
and on-balance sheet and off-balance sheet exposures, is sufficient to 
absorb losses and decreases in the value of firm assets and increases 
in the value of firm liabilities without resulting in the firm becoming 
insolvent.\112\ The Commission observed that the Japanese Capital Rules 
and the CFTC Capital Rules permit nonbank SDs to recognize comparable 
forms of equity capital and qualifying subordinated debt instruments 
toward meeting minimum capital requirements, with both the Japanese 
Capital Rules and the CFTC Capital Rules emphasizing high quality 
capital instruments.\113\
---------------------------------------------------------------------------

    \111\ See 2022 Proposal at 48101.
    \112\ Id.
    \113\ Id.
---------------------------------------------------------------------------

    In support of its preliminary Comparability Determination, the 
Commission noted that 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.\114\ 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 that is last in line to receive distributions in the event of 
the entity's insolvency.\115\ Additional tier 1 capital is generally 
composed of

[[Page 58481]]

equity instruments such as preferred stock and certain hybrid 
securities that may be converted to common stock if triggering events 
occur and may have a preference in distributions over common equity 
tier 1 capital in the event of an insolvency.\116\ Total tier 1 capital 
is composed of common equity tier 1 capital and further includes 
additional tier 1 capital. Tier 2 capital includes certain types of 
instruments that include both debt and equity characteristics such as 
qualifying subordinated debt.\117\ Subordinated debt must meet certain 
conditions to qualify as tier 2 capital under the CFTC Capital 
Rules.\118\
---------------------------------------------------------------------------

    \114\ 17 CFR 23.101(a)(1)(i) and 2022 Proposal at 48100. 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.
    \115\ 12 CFR 217.20(b).
    \116\ 12 CFR 217.20(c).
    \117\ 12 CFR 217.20(d).
    \118\ Subordinated debt must meet requirements set forth in SEC 
Rule 18a-1d. 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. 17 CFR 23.101(a)(1)(i)(B) 
and 17 CFR 240.18a-1d.
---------------------------------------------------------------------------

    The preliminary Comparability Determination also noted that the 
Japanese Capital Rules require each Japanese nonbank SD to maintain a 
``capital adequacy amount'' (i.e., an aggregate of Basic Items and 
Supplemental Items, after deducting carrying value of fixed assets, 
with Basic Items representing at least 50 percent of the total capital 
adequacy amount) \119\ that equals or exceeds 120 percent of the firm's 
``risk equivalent amount,'' which is the sum of the firm's market risk, 
credit risk, and basic risk.\120\ Basic Items are composed of the 
Japanese nonbank SD's balance sheet capital, including: (i) issued and 
outstanding shares; (ii) the payment for an application for new shares; 
(iii) the capital surplus; (iv) the earned surplus; (v) the negative 
valuation difference on available-for-sale securities; and (vi) the 
firm's own treasury stock.\121\ Supplemental Items include the positive 
valuation difference on available-for-sale securities and certain 
subordinated debt instruments.\122\ Subordinated debt instruments also 
must meet certain conditions to qualify as Supplemental Items under the 
Japanese Capital Rules, including containing appropriate provisions 
subordinating the rights of the lender to the payment of principal and 
interest to other creditors of the Japanese nonbank SD.\123\ In 
addition, any accelerated payment of the subordinated debt may only be 
made on a voluntarily basis by the Japanese nonbank SD after obtaining 
approval from the FSA.\124\
---------------------------------------------------------------------------

    \119\ See 2022 Proposal at 48100. The phrase ``after deducting 
carrying value of fixed assets'' has been added after ``Supplemental 
Items'' in response to a technical comment by IBAJ. IBAJ Letter at 
p. 5. As the Commission explained in the 2022 Proposal, the 
deduction of the carrying value of fixed assets is a conservative 
approach to the computation of a Japanese nonbank SD's capital 
adequacy amount as it excludes the value of non-liquid fixed assets 
from the firm's total Basic Items. See 2022 Proposal at 48101.
    \120\ Article 46-6(2) of the FIEA, Article 176 of the COO and 
section IV-2-1 (Preciseness of Capital Adequacy Ratio) of the 
Supervisory Guidelines for FIBO.
    \121\ Article 176(1)(i) through (vi) of the COO.
    \122\ Article 176(1)(vii) of the COO.
    \123\ Article 176(2) and (3) of the COO.
    \124\ Id.
---------------------------------------------------------------------------

    Based on its comparative assessment, the Commission preliminarily 
found that the types and characteristics of the equity instruments 
included in Basic Items under the Japanese Capital Rules are comparable 
to the types and characteristics of equity instruments comprising 
common equity tier 1 capital and additional tier 1 capital under the 
CFTC Capital Rules.\125\ Specifically, the Commission noted that the 
Japanese Capital Rules' Basic Items and the CFTC Capital Rules' common 
equity tier 1 capital and additional tier 1 capital are comparable in 
that these forms of equity capital have similar characteristics (e.g., 
the equity must be in the form of high-quality, committed, and 
permanent capital) and represent contributed equity capital that 
generally has no priority to the distribution of firm assets or income 
with respect to other shareholders or creditors of the firm, which 
allows a nonbank SD to use this equity to absorb decreases in the value 
of firm assets, absorb increases in the value of firm liabilities, and 
cover losses from business activities, including the firm's swap 
dealing activities.\126\
---------------------------------------------------------------------------

    \125\ See 2022 Proposal at 48101.
    \126\ Id.
---------------------------------------------------------------------------

    The Commission also found the Supplemental Items under the Japanese 
Capital Rules to be comparable to tier 2 capital under the CFTC Capital 
Rules.\127\ Specifically, the Commission noted that the qualifying 
conditions imposed on subordinated debt instruments are comparable 
under the Japanese Capital Rules and the CFTC Capital Rules in that 
they are designed to ensure that the debt has qualities supporting its 
recognition by a nonbank SD as equity for capital purposes, including 
by effectively subordinating the lenders' claims for repayment on the 
debt, or interest payments on the debt, to the claims of other 
creditors of the nonbank SD, and by limiting or restricting repayment 
or accelerated payments of the subordinated loans if such repayments or 
accelerated prepayments would result in the nonbank SD's equity falling 
below certain defined thresholds.\128\ The Commission preliminarily 
concluded that the terms and conditions provided assurances that the 
subordinated debt was appropriate to be recognized as regulatory 
capital available to a nonbank SD to meet its regulatory obligations 
and to absorb business losses and decreases in the value of firm assets 
and increases in the value of firm liabilities.\129\
---------------------------------------------------------------------------

    \127\ Id.
    \128\ Id.
    \129\ Id.
---------------------------------------------------------------------------

    The Commission also noted that the Japanese Capital Rules differ 
from the CFTC Capital Rules in that the Japanese Capital Rules require 
Japanese nonbank SDs to exclude the carrying value of fixed assets from 
the sum of the Basic Items and Supplemental Items in computing the 
capital adequacy amount, whereas the CFTC Capital Rules do not require 
a nonbank SD to exclude the carrying value of fixed assets from the 
firm's common equity tier 1 capital or additional tier 1 capital.\130\ 
As discussed in the 2022 Proposal, the deduction of the carrying value 
of fixed assets under the Japanese Capital Rules is a more conservative 
standard as it imposes an obligation on Japanese nonbank SDs to meet 
minimum regulatory capital requirements with capital that reflects or 
represents balance sheet assets that are more liquid than fixed 
assets.\131\
---------------------------------------------------------------------------

    \130\ The IBAJ noted that the Japanese Capital Rules require the 
carrying value of fixed assets to be deducted from both Basic Items 
and Supplemental Items (and not just Basic Items as stated in the 
2022 Proposal). The Commission has incorporated this clarification 
into the final Comparability Determination. IBAJ Letter at p. 5.
    \131\ See Article 177 of the COO for a breakdown of the fixed 
assets to be deducted.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
    In response to the Commission's request for comment on the 
qualifying capital analysis, Better Markets objected to the 
Commission's determination that the Japanese Capital Rules are 
comparable to the CFTC Capital Rules with respect to the type and 
characteristics of equity that qualifies as regulatory capital.\132\ 
Better Markets asserted that the Commission did not adequately analyze 
the differences between the two regulatory regimes with respect to the 
items of qualifying capital.\133\ More specifically, Better Markets 
stated that Basic Items under the Japanese Capital Rules include 
treasury stock, whereas, under the CFTC Capital Rules, which are based 
on definitions of capital from the Federal

[[Page 58482]]

Reserve Board, common equity tier 1 capital is net of treasury 
stock.\134\
---------------------------------------------------------------------------

    \132\ Better Markets Letter at p. 9.
    \133\ Id. at p. 8.
    \134\ Id. at p. 9.
---------------------------------------------------------------------------

    The Commission recognizes that the Japanese Capital Rules list 
treasury stock, which represents previously issued shares of stock that 
have been repurchased by the firm, as a Basic Item.\135\ In application 
of the Japanese Rules of Corporate Accounting, however, treasury stock 
must be deducted from the shareholders' equity component of the firms' 
balance sheet.\136\ As such, consistent with the treatment received 
under the CFTC Capital Rules, the treasury stock is not counted towards 
the Japanese nonbank SD's Basic Items or Supplemental Items in meeting 
its minimum regulatory capital requirement. Accordingly, the Commission 
does not find that the CFTC Capital Rules and the Japanese Capital 
Rules diverge with respect to their respective approach to exclude 
treasury stock from regulatory capital.
---------------------------------------------------------------------------

    \135\ Article 176 of the COO.
    \136\ Article 76(2) of Rules of Corporate Accounting (Ordinance 
of the Ministry of Justice No. 13 of February 7, 2006). To account 
for the accurate treatment of treasury stock, the Commission has 
revised final Condition 4 of the final Comparability Order to 
include Article 76 of the Rules of Corporate Accounting to the list 
of laws comprising the Japanese Capital Rules that a Japanese 
nonbank SD must comply with under the Comparability Order.
---------------------------------------------------------------------------

    In addition, upon further analysis, the Commission not only 
reiterates its observations that the Japanese Capital Rules' Basic 
Items present characteristics that are comparable to the 
characteristics of common equity tier 1 and additional tier 1 capital, 
but the Commission further concludes that, despite certain definitional 
differences, the Japanese Capital Rules' Basic Items are more closely 
equated to common equity tier 1 capital. In particular, the Basic 
Items' categories of ``issued and outstanding shares,'' ``capital 
surplus,'' and ``earned surplus,'' correspond to the CFTC Capital 
Rules' common equity tier 1 categories of ``common stock and related 
surpluses,'' and ``retained earnings'' as the categories represent 
equity contributions and earnings that have been retained by the 
nonbank SDs and represent residual ownership interest in the nonbank 
SDs. Similarly, whereas the CFTC Capital Rules provide for the 
inclusion of unrealized losses and gains on available-for-sale 
securities in the common equity tier 1 category of ``accumulated other 
comprehensive income,'' the Japanese Capital Rules require that the 
positive valuation of available-for-sale securities (i.e., unrealized 
gain) be excluded and the negative valuation difference (i.e., 
unrealized loss) of available-for-sale securities be included in Basic 
Items, thus mandating a similar, if not more conservative, treatment 
for this category of capital items. Finally, as clarified above, the 
CFTC Capital Rules and the Japanese Capital Rules treat treasury stock 
consistently for purposes of determining qualifying capital. More 
generally, the Commission is of the view that the Japanese Capital 
Rules' Basic Items are comparable to the CFTC Capital Rules' common 
equity tier 1 items in that both categories represent a more 
conservative, permanent form of capital that is last in line to receive 
distributions in the event of the entity's insolvency.
    In conclusion, the Commission finds that the Japanese Capital Rules 
and the CFTC Capital Rules, are comparable in purpose and effect, and 
achieve comparable regulatory outcomes, with respect to the types of 
capital instruments that qualify as regulatory capital. Both the 
Japanese Capital Rules and the CFTC Capital Rules limit regulatory 
capital to permanent and conservative forms of capital, including 
common equity, capital surpluses, retained earnings, and subordinate 
debt where debt holders effectively subordinate their claims to 
repayment to all other creditors of the nonbank SD in the event of the 
firm's insolvency. Limiting regulatory capital to the above categories 
of equity and debt instruments promotes the safety and soundness of the 
nonbank SD by helping to ensure that the regulatory capital is not 
withdrawn or converted to other equity instruments that may have rights 
or priority with respect to payments, such as dividends or 
distributions in insolvency, over other creditors, including swap 
counterparties. The Commission, therefore, is adopting the 
Comparability Order as proposed with respect to the types and 
characteristics of equity and subordinated debt that qualify as 
regulatory capital to meet minimum capital requirements under the 
Japanese Capital Rules.

C. Nonbank Swap Dealer Minimum Capital Requirement

1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements
    As reflected in the 2022 Proposal, the CFTC Capital Rules require a 
nonbank SD electing the Bank-Based Approach to maintain regulatory 
capital that satisfies each of the following criteria: (i) an amount of 
common equity tier 1 capital of at least $20 million; (ii) an aggregate 
amount of common equity tier 1 capital, additional tier 1 capital, and 
tier 2 capital equal to or greater than 8 percent of the nonbank SD's 
total risk-weighted assets, provided that common equity tier 1 capital 
comprises at least 6.5 percent of the 8 percent; (iii) an aggregate of 
common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital in an amount equal to or in excess of 8 percent of the nonbank 
SD's uncleared swap margin amount; \137\ and (iv) the amount of capital 
required by NFA.\138\
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    \137\ 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. 17 CFR 23.154.
    \138\ 17 CFR 23.101(a)(1)(i)(D). See also 2022 Proposal at 48101 
and 48104. Commission Regulation 23.101(a)(1)(i) sets forth one of 
the minimum thresholds that a nonbank SD must meet as the ``the 
amount of capital required by a registered futures association.'' As 
previously noted, NFA is currently the only entity that is a 
registered futures association. NFA has adopted the Commission's 
capital requirements as its own requirements, and has not adopted 
any additional or stricter minimum capital requirements. See NFA 
rulebook, Financial Requirements section 18 Swap Dealer and Major 
Swap Participant Financial Requirements, available at 
nfa.futures.org.
---------------------------------------------------------------------------

    In comparison, the Japanese Capital Rules require each Japanese 
nonbank SD to maintain a ``capital adequacy amount'' that equals or 
exceeds 120 percent of the firm's ``risk equivalent amount.'' \139\ As 
explained in the 2022 Proposal, the ``capital adequacy amount'' is 
calculated as the Japanese nonbank SD's qualifying balance sheet equity 
capital in the form of Basic Items and Supplemental Items, after 
deducting the carrying value of fixed assets from both Basic Items and 
Supplemental Items.\140\ The Commission noted that the Japanese Capital 
Rules further require that at least 50 percent of the Japanese nonbank 
SD's capital used to meet the 120 percent minimum requirement must be 
composed of Basic Items, and any subordinated debt included in 
Supplemental Items must meet regulatory requirements designed to ensure 
that the debt is adequately subordinated to claims of other potential 
creditors of the firm.\141\
---------------------------------------------------------------------------

    \139\ See 2022 Proposal at 48103.
    \140\ Id.
    \141\ See 2022 Proposal at 48099 and Article 176(1)(vii) of the 
COO.
---------------------------------------------------------------------------

2. Preliminary Determination and Comment Analysis
    While noting certain differences in the minimum capital 
requirements and

[[Page 58483]]

calculation of regulatory capital between the Japanese Capital Rules 
and the CFTC Capital Rules, the Commission preliminarily found that the 
Japanese Capital Rules and CFTC Capital Rules achieve, subject to the 
proposed conditions in the proposed Comparability Determination and 
proposed Comparability Order, comparable outcomes by requiring a 
nonbank SD to maintain a minimum level of qualifying regulatory capital 
and subordinated debt to absorb losses from the firm's business 
activities, including its swap dealing activities, and decreases in the 
value of the firm's assets and increases in the firm's liabilities 
without the nonbank SD becoming insolvent.\142\ As further discussed 
below, the Commission's preliminary finding of comparability was based 
on a principles-based, holistic comparative analysis of the three 
minimum capital requirement thresholds of the CFTC Capital Rules' Bank-
Based Approach referenced above and the respective elements of the 
Japanese Capital Rules' requirements.
---------------------------------------------------------------------------

    \142\ See 2022 Proposal at 48104.
---------------------------------------------------------------------------

a. Fixed Amount Minimum Capital Requirement
    As noted above, prong (i) of the CFTC Capital Rules requires each 
nonbank SD electing the Bank-Based Approach to maintain a minimum of 
$20 million of common equity tier 1 capital. The Commission'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.\143\ In contrast, the 
Japanese Capital Rules do not impose a capital requirement on Japanese 
nonbank SDs based on a minimum dollar amount.
---------------------------------------------------------------------------

    \143\ 85 FR 57462 at 57492.
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    The Commission expressed the preliminary view that each CFTC-
registered nonbank SD should maintain a minimum level of regulatory 
capital to help ensure that it satisfies its regulatory obligations and 
meets its financial commitments to swap counterparties and creditors 
without the firm becoming insolvent.\144\ Accordingly, the Commission 
proposed to condition the Comparability Order to require each Japanese 
nonbank SD to maintain, at all times, a minimum level of regulatory 
capital in the form of Basic Items, as defined in Article 176 of the 
COO, in an amount denominated in yen that is equivalent to, or greater 
than, $20 million in U.S. dollars.\145\
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    \144\ See 2022 Proposal at 48106.
    \145\ Id. The Commission also proposed to allow a Japanese 
nonbank SD to convert the yen-denominated amount of its Basic Items 
to the U.S. dollar equivalent based on a commercially reasonable and 
observed exchange rate.
---------------------------------------------------------------------------

    One commenter, Better Markets, argued that the absence of a base 
level requirement in the Japanese Capital Rules that is equivalent to 
the CFTC Capital Rules' requirement for each nonbank SD to maintain a 
minimum of $20 million of common equity tier 1 capital ``demonstrates a 
fatal lack of comparability.'' \146\ Better Markets further asserted 
that the Commission's proposed condition requiring that Japanese 
nonbank SDs maintain a minimum level of regulatory capital of at least 
$20 million inadequately compensates for the gap in the Japanese 
framework.\147\ Specifically, Better Markets argued that by allowing 
Japanese nonbank SD to meet the proposed minimum capital level with 
Basic Items, which the Commission preliminarily found to be equivalent 
to the combination of common equity tier 1 and additional tier 1 
capital, instead of limiting the qualifying items to the higher form of 
common equity tier 1 capital, the Commission would impose a materially 
weaker capital requirement.\148\
---------------------------------------------------------------------------

    \146\ Better Markets Letter at p. 9.
    \147\ Id.
    \148\ Id.
---------------------------------------------------------------------------

    As noted above, the Commission recognized the difference between 
the Japanese Capital Rules and the CFTC Capital Rules with respect to 
the $20 million minimum dollar amount of regulatory capital a nonbank 
SD is required to maintain. The Commission's proposed condition, 
however, effectively addresses this difference by providing that a 
Japanese nonbank SD may not avail itself of substituted compliance 
unless it maintains a minimum of $20 million of regulatory capital in 
the form of Basic Items. The imposition of the condition was consistent 
with the Commission authority under Commission Regulation 23.106(a)(5). 
Furthermore, as discussed in Section I.E. above, the Commission has 
stated that entities relying on substituted compliance may be required 
to comply with certain Commission-imposed requirements in situations 
where comparable regulations in their home country jurisdiction are 
deemed to be lacking.\149\
---------------------------------------------------------------------------

    \149\ Guidance at 45343.
---------------------------------------------------------------------------

    As discussed in Section II.B.2. above, the Commission is also of 
the view that the Japanese Capital Rules' Basic Items are comparable to 
the CFTC Capital Rules' common equity tier 1 items in that both 
categories represent a conservative, permanent form of capital that is 
last in line to receive distributions in the event of the entity's 
insolvency. Specifically, the capital that may be recognized by a 
nonbank SD and Japanese nonbank SD to meet its common equity tier 1 
capital requirement and Basic Items requirement, respectively, is 
generally limited to common stock, related common stock surpluses, and 
retained earnings. As such, the Commission concludes that the 
requirement for Japanese nonbank SDs to maintain an amount of 
regulatory capital in the form of Basic Items equal to or in excess of 
the equivalent of $20 million will impose a comparable standard to the 
analogue requirement under the CFTC Capital Rules and will 
appropriately address the lack of a minimum fixed amount capital 
requirement under the Japanese Capital Rules.
    In conclusion, the Commission finds that the Japanese Capital Rules 
and the CFTC Capital Rules, with the imposition of the condition for 
Japanese nonbank SDs to maintain a minimum level of Basic Items in an 
amount equivalent to at least $20 million, are comparable in purpose 
and effect and achieve comparable regulatory outcomes with respect to 
capital requirements based on a minimum dollar amount. The requirement 
for a nonbank SD with limited swap dealing or other business activities 
to maintain a minimum level of regulatory capital equivalent to $20 
million helps to ensure the firm's safety and soundness by allowing it 
to absorb decreases in firm assets, absorb increases in firm 
liabilities, and meet obligations to swap counterparties, other 
creditors, and market participants, without the firm becoming 
insolvent.
b. Minimum Capital Requirement Based on Risk-Weighted Assets
    Prong (ii) of the CFTC Capital Rules' minimum capital requirements 
described above requires each nonbank SD electing the Bank-Based 
Approach 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.\150\ Risk-weighted assets are a nonbank SD's on-balance 
sheet and off-balance sheet exposures, including market risk and credit 
risk exposures, and include

[[Page 58484]]

exposures associated with proprietary swap, security-based swap, 
equity, and futures positions, weighted according to risk. The 
requirements and capital ratios set forth in prong (ii) are based on 
the Federal Reserve Board's capital requirements for bank holding 
companies \151\ and are consistent with the BCBS framework.\152\ 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, absorb increases in the value of the firm's liabilities, and 
cover unexpected losses resulting from the firm's business activities, 
including losses resulting from collateralized and uncollateralized 
defaults from swap counterparties, without the nonbank SD becoming 
insolvent.\153\
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    \150\ 17 CFR 23.101(a)(1)(i)(B).
    \151\ 12 CFR 217.10(a)(1). The minimum capital requirement for a 
bank holding company under the Federal Reserve Board's rules 
requires bank holding companies to satisfy their 8 percent minimum 
capital ratio requirement with a minimum of 4.5 percent of common 
equity tier 1 capital. The CFTC Capital Rules, however, require a 
nonbank SD to meet its minimum 8 percent capital ratio with at least 
6.5 percent of common equity tier 1 capital. 17 CFR 
23.101(a)(1)(i)(B).
    \152\ Risk-based capital requirements RBC20, Calculation of 
minimum risk-based capital requirements (Version effective as of 01 
January 2023), published by the BCBS and available here: https://www.bis.org/basel_framework/chapter/RBC/20.htm?inforce=20230101&published=20201126.
    \153\ See generally 85 FR 57462 at 57530.
---------------------------------------------------------------------------

    The Japanese Capital Rules contain capital requirements for 
Japanese nonbank SDs that the Commission preliminarily found comparable 
in purpose and effect to the requirements in prong (ii) of the CFTC 
Capital Requirements.\154\ Specifically, the Japanese Capital Rules 
require a Japanese nonbank SD to maintain regulatory capital in an 
amount equal to or in excess of 120 percent of the firm's risk ``risk 
equivalent amount'' (i.e., the firm's risk-weighted assets).\155\ A 
Japanese nonbank SD's ``risk equivalent amount'' is calculated as the 
sum of the firm's: (i) market risk equivalent amount (i.e., the amount 
equivalent to possible risks which may accrue due to fluctuations in 
the prices of securities and other proprietary assets and transactions 
held); \156\ (ii) counterparty risk equivalent amount (i.e., the amount 
equivalent to possible risks which may accrue due to the default in 
performance of contracts by the counterparties to transactions or any 
other reason); \157\ and (iii) basic risk equivalent amount (i.e., the 
amount equivalent to possible risk which may accrue in the ordinary 
course of executing business, such as errors in business 
handling).\158\
---------------------------------------------------------------------------

    \154\ See 2022 Proposal at 48105.
    \155\ See discussion in 2022 Proposal at 48105. The Japanese 
Capital Rules require a Japanese nonbank SD to maintain a capital 
adequacy amount that equals or exceeds 120 percent of its ``risk 
equivalent amount.'' Article 46-6(2) of the FIEA, Article 176 of the 
COO, and section IV-2-1 (Preciseness of Capital Adequacy Ratio) of 
the Supervisory Guidelines for FIBO.
    \156\ Article 178(1)(i) of the COO and Articles 10 through 14 of 
the Notice on Capital. The ``market risk equivalent amount'' 
corresponds to ``market risk'' in the CFTC Capital Rules' Bank-Based 
Approach and the BCBS framework.
    \157\ Article 178(1)(ii) of the COO and Articles 15 through 15-7 
of the Notice on Capital. The ``counterparty risk equivalent 
amount'' corresponds to ``credit risk'' in the BCBS and Bank-Based 
Approach frameworks.
    \158\ Article 178(1)(iii) of the COO and Article 16 of the 
Notice on Capital.
---------------------------------------------------------------------------

    The Commission also preliminarily found that the Japanese Capital 
Rules and the CFTC Capital Rules are comparable with respect to the 
approaches used in the calculation of risk-weighted amounts for market 
risk and credit risk in determining the nonbank SD's risk-weighted 
assets.\159\ In this connection, the Commission noted that both regimes 
require a nonbank SD to use standardized approaches to compute market 
risk and credit risk amounts, unless the firm is approved to use 
internal models.\160\
---------------------------------------------------------------------------

    \159\ See 2022 Proposal at 48105.
    \160\ Id.
---------------------------------------------------------------------------

    As the Commission observed, the standardized approaches to 
calculating risk-weighted asset amounts for market risk and credit risk 
under both the Japanese Capital Rules and the CFTC Capital Rules 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 finally, (vi) for credit risk exposures, multiplying the sum of net 
exposures to each counterparty by their corresponding risk factor.\161\
---------------------------------------------------------------------------

    \161\ Id
---------------------------------------------------------------------------

    More specifically, with respect to the calculation of standardized 
risk-weighted asset amounts for market risk, the Commission explained 
that the CFTC Capital Rules incorporate by reference the standardized 
market risk charges set forth in Commission Regulation 1.17 for FCMs 
and SEC Rule 18a-1 for nonbank security-based swap dealers 
(``SBSDs'').\162\ 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 assets, 
including 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.\163\ For 
example, the CFTC Capital Rules require nonbank SDs to calculate 
standardized market risk-weighted asset amounts for uncleared swaps 
based on notional values of the swap positions multiplied by 
percentages set forth in the applicable rules.\164\ In addition, market 
risk-weighted asset amounts for readily marketable equity securities 
are calculated by multiplying the fair market value of the securities 
by 15 percent.\165\
---------------------------------------------------------------------------

    \162\ See paragraph (3) of the definition of the term BHC 
equivalent risk-weighted assets in 17 CFR 23.100.
    \163\ 17 CFR 1.17(c)(5) and 17 CFR 240.18a-1(c)(1).
    \164\ 17 CFR 1.17(c)(5)(iii).
    \165\ 17 CFR 1.17(c)(5)(v), referencing SEC Rule 15c3-
1(c)(2)(vi) (17 CFR 240.15c3-1(c)(2)(vi)).
---------------------------------------------------------------------------

    Under the CFTC Capital Rules, the resulting total market risk-
weighted asset amount is multiplied by a factor of 12.5 to cancel the 
effect of the 8 percent multiplication factor applied to all of the 
nonbank SD's risk-weighted assets under prong (ii) of the rules' 
minimum capital requirements described above. As a result, a nonbank SD 
is effectively required to hold qualifying regulatory capital equal to 
or greater than 100 percent of the amount of its market risk exposure 
amount.\166\
---------------------------------------------------------------------------

    \166\ 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 equals or exceeds 8 percent of its risk-weighted assets. The 
regulations, however, require the nonbank SD to effectively maintain 
qualifying capital equal to or in excess of 100 percent of its 
market risk-weighted assets by requiring the nonbank SD to multiply 
its market-risk weighted assets by a factor of 12.5. For example, 
the market risk exposure amount for marketable equity securities 
with a current fair market value of $250,000 is $37,500 (market 
value of $250,000 x .15 standardized market risk factor). The 
nonbank SD is required to maintain regulatory capital equal to or in 
excess of full market risk exposure amount of $37,500 (risk exposure 
amount of $37,500 x 8 percent regulatory capital requirement equals 
$3,000; the regulatory capital requirement is then multiplied by a 
factor of 12.5, which effectively requires the nonbank SD to hold 
regulatory capital in an amount equal to at least 100 percent of the 
market risk exposure amount ($3,000 x 12.5 factor equals $37,500)).
---------------------------------------------------------------------------

    Comparable to the CFTC Capital Rules, the Japanese Capital Rules

[[Page 58485]]

require a Japanese nonbank SD to calculate its standardized market risk 
equivalent amount by multiplying specified market risk weights set 
forth in the Japanese Capital Rules by the notional or market value of 
the relevant assets and positions.\167\ A Japanese nonbank SD is 
further required to include the full value of its market risk 
equivalent amount in its aggregate risk equivalent amount, which 
effectively requires the Japanese nonbank SD to hold qualifying equity 
capital and subordinated debt in an amount that equals or exceeds 120 
percent of the market risk equivalent amount.\168\
---------------------------------------------------------------------------

    \167\ See 2022 Proposal at 48103.
    \168\ Id. Using the example above, if the market risk exposure 
amount for the equity securities under the Japanese Capital Rules 
was calculated to be $37,500, the Japanese nonbank SD would be 
required to hold an amount of regulatory capital equal to or in 
excess of $45,000 (market risk exposure amount of $37,500 x 120 
percent).
---------------------------------------------------------------------------

    With respect to standardized risk-weighted asset amounts for credit 
risk from non-derivatives positions, the Commission explained that 
under the CFTC Capital Rules, a nonbank SD must compute its on-balance 
sheet and off-balance sheet exposures in accordance with the 
standardized risk-weighting requirements adopted by the Federal Reserve 
Board and set forth in Subpart D of 12 CFR 217 as if the SD itself were 
a bank holding company subject to Subpart D.\169\ Standardized risk-
weighted asset amounts for credit risk are computed by multiplying the 
amount of the exposure by defined counterparty credit risk factors that 
range from 0 percent to 150 percent.\170\ A nonbank SD with off-balance 
sheet exposures is required to calculate a risk-weighted asset amount 
for credit risk by multiplying each exposure by a credit conversion 
factor that ranges from 0 percent to 100 percent, depending on the type 
of exposure.\171\
---------------------------------------------------------------------------

    \169\ 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. See 
also 2022 Proposal at 48102.
    \170\ 12 CFR 217.32. Lower credit risk factors are assigned to 
entities with lower credit risk and higher credit risk factors are 
assigned to entities with higher credit risk. For example, a credit 
risk factor of 0 percent is applied to exposures to the U.S. 
government, the Federal Reserve Bank, and U.S. government agencies 
(12 CFR 217.32(a)(1)), and a credit risk factor of 100 percent is 
assigned to an exposure to foreign sovereigns that are not members 
of the Organization of Economic Co-operation and Development (12 CFR 
217.32(a)(2)). See also discussion in 2022 Proposal at 48102.
    \171\ 12 CFR 217.33. See also discussion in 2022 Proposal at 
48102.
---------------------------------------------------------------------------

    In comparison, the Commission noted that Japanese Capital Rules 
require a Japanese nonbank SD to calculate its standardized 
counterparty risk equivalent amount by multiplying its exposure under a 
given transaction by the specific risk weight applicable to the 
counterparty under the provisions of the Japanese Capital Rules.\172\ 
In this regard, the Japanese Capital Rules impose risk weights ranging 
from 0 percent to 25 percent on exposures to governmental financial 
institutions, non-governmental financial institutions, general 
corporations, and individuals.\173\ For certain exposures, credit 
ratings are used to determine the percentage of the counterparty credit 
risk exposure and, if no credit ratings are available, the Japanese 
nonbank SD generally applies a 25 percent risk weight.\174\ A Japanese 
nonbank SD is required to include the full amount of the counterparty 
risk equivalent amount in its aggregate risk equivalent amount.\175\ As 
noted above, a Japanese nonbank SD is also required to maintain a 
``capital adequacy amount'' that equals or exceeds 120 percent of the 
firm's ``risk equivalent amount.'' Therefore, a Japanese nonbank SD is 
effectively required to maintain an amount of qualifying capital that 
is equal to or in excess of 120 percent of its credit risk equivalent 
amount.
---------------------------------------------------------------------------

    \172\ See 2022 Proposal at 48103-48104.
    \173\ Article 15(3) of the Notice on Capital. See also 
discussion in 2022 Proposal at 48104.
    \174\ Id.
    \175\ Id.
---------------------------------------------------------------------------

    With respect to credit risk for derivatives positions, the 
Commission explained that under the CFTC Capital Rules, a nonbank SD 
may compute standardized credit risk exposures, using either the 
current exposure method (``CEM'') or the standardized approach for 
measuring counterparty credit risk (``SA-CCR'').\176\ 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.\177\ 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.\178\
---------------------------------------------------------------------------

    \176\ 17 CFR 217.34 and 17 CFR 23.100 (defining the term BHC 
risk-weighted assets and providing 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 with respect to the use of a 
calculation approach under the Federal Reserve Board's capital 
rules). See also discussion in 2022 Proposal at 48102.
    \177\ 12 CFR 217.34.
    \178\ 12 CFR 217.132(c).
---------------------------------------------------------------------------

    In comparison, the Japanese Capital Rules require a Japanese 
nonbank SD that is not approved to use credit risk models to calculate 
its exposure using the CEM.\179\ Under the CEM, a Japanese nonbank SD 
calculates its exposures for over-the-counter derivatives using a 
standardized rules-based approach, and is required to hold an amount of 
qualifying capital that equals or exceeds 120 percent of the aggregate 
derivatives exposures.
---------------------------------------------------------------------------

    \179\ See 2022 Proposal at 48104.
---------------------------------------------------------------------------

    As discussed in the 2022 Proposal, both the CFTC Capital Rules and 
the Japanese Capital Rules also provide that, if approved by NFA or the 
FSA, respectively, nonbank SDs may also use internal models to 
calculate market and/or credit risk exposures.\180\ The Commission 
noted that the internal market and credit risk models under the 
Japanese Capital Rules and the CFTC Capital Rules are based on the BCBS 
framework and preliminarily found that such models must meet comparable 
quantitative and qualitative requirements covering the same risks, 
including comparable model risk management requirements.\181\ In this 
regard, the Commission observed that both rule sets address the same 
types of risk, with similar allowed methodologies, calibrated to 
similar risk levels and under similar controls.\182\ The Commission 
also noted that the Japanese Capital Rules and the CFTC Capital Rules 
contain comparable

[[Page 58486]]

requirements for the management of model risk, which depend on a series 
of controls, including the independence of validation, ongoing 
monitoring and audit.
---------------------------------------------------------------------------

    \180\ Id. at 48102-48104.
    \181\ Id. For a discussion of the qualitative and quantitative 
requirements that models must meet under the CFTC Capital Rules and 
the Japanese Capital Rules, see 2022 Proposal at 48102-48103 and 
48104, respectively. In this context, the Commission notes that, as 
emphasized by IBAJ, the expected exposure method is the only 
internal model allowed for purposes of calculating credit risk under 
the Japanese Capital Rules. IBAJ Letter at pp. 5-6. The Commission 
had erroneously indicated, in referring to credit risk models under 
the Japanese Capital Rules, that internal credit risk models can 
also further include estimation of the likelihood of default of 
counterparties and that credit risk models may include internal 
ratings based on the estimation of default probabilities, consistent 
with the Basel framework and subject to the same model risk 
management guidelines. 2022 Proposal at 48098 and 48104. The 
Commission hereby rectifies its summary of the relevant Japanese 
Capital Rules and specifies that these statements do not apply to 
credit risk models under the Japanese Capital Rules. The Commission, 
however, maintains its conclusion that model requirements under the 
CFTC Capital Rules and the Japanese Capital Rules are comparable.
    \182\ See 2022 Proposal at 48105.
---------------------------------------------------------------------------

    In addition, the Japanese Capital Rules require a Japanese nonbank 
SD to calculate a basic risk equivalent amount (i.e., an operational 
risk exposure amount) as a component of the firm's risk equivalent 
amount. The basic risk equivalent amount is computed as an amount equal 
to 25 percent of the Japanese nonbank SD's defined annual operating 
expenses, and is intended to provide a capital cushion to cover risks 
that may occur in the course of executing ordinary business operations, 
such as errors in business transactions.\183\
---------------------------------------------------------------------------

    \183\ Article 178(1)(iii) of the COO and Article 16 of the 
Notice on Capital. See also discussion in 2022 Proposal at 48104.
---------------------------------------------------------------------------

    One commenter, Better Markets, noted that the CFTC Bank-Based 
Approach requires nonbank SDs to maintain 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 non-bank SD's total risk-weighted 
assets, provided that common equity tier 1 capital must comprise at 
least 6.5 percent of the 8 percent of risk-weighted assets.\184\ Better 
Markets stated that, in contrast, the Japanese Capital Rules require 
Japanese nonbank SDs to hold capital equal to or greater than 120 
percent of their risk-weighted assets, including 50 percent that must 
be held in Basic Items.\185\ Better Markets further asserted that in 
stating that the 120 percent of risk-weighted assets required by the 
Japanese capital rules equates to an ``effective minimum capital 
requirement of 9.6 percent of risk-weighted assets,'' the Commission 
did not provide an analysis of how the CFTC calculated that effective 
minimum and did not disclose how much of the 9.6 percent is held in 
Basic Items as opposed to Supplementary Items.\186\ In Better Markets' 
view, without this information and analysis, no comparability 
determination can be made because U.S. nonbank SDs are required to 
maintain 6.5 percent of the total 8 percent of risk-weighted assets in 
the highest form of capital, namely common equity tier 1 capital.\187\
---------------------------------------------------------------------------

    \184\ Better Markets Letter at p 9.
    \185\ Id. at p. 10.
    \186\ Id.
    \187\ Id.
---------------------------------------------------------------------------

    Another commenter, IBAJ, offered a contrasting view, stating that 
Japanese nonbank SDs must maintain capital equal to 120 percent of 
market risk, credit risk, and basic risk equivalent amounts and that 
such amount of capital translated into an effective capital ratio 
requirement of 9.6 percent of risk weighted assets, which is higher 
than the 8 percent capital ratio required by the Basel standards or 
CFTC Capital Rules.\188\ As discussed immediately below, the Commission 
agrees with the IBAJ that the capital ratio required by the Japanese 
Capital Rules exceeds the capital ratio required by the CFTC Capital 
Rules under the Bank-Based Approach.
---------------------------------------------------------------------------

    \188\ IBAJ Letter at p. 2.
---------------------------------------------------------------------------

    In response to the comment asserting that the Commission did not 
provide an analysis supporting the statement that the Japanese Capital 
Rules impose on Japanese nonbank SDs ``an effective minimum requirement 
of 9.6 percent of the risk-weighted assets,'' the Commission notes that 
the 9.6 percent figure is intended to express the Japanese minimum 
capital as a capital ratio in a manner consistent with the CFTC Capital 
Rules for purposes of a comparison. Specifically, the Japanese Capital 
Rules require a Japanese nonbank SD to maintain regulatory capital in 
an amount that equals or exceeds 120 percent of the aggregate of the 
firm's risk-weighted assets. In contrast, the CFTC Capital Rules 
require a nonbank SD to maintain a minimum capital ratio to total risk-
weighted assets of 8 percent. Converting the Japanese Capital Rules' 
requirement to an equivalent capital ratio under the CFTC Capital Rules 
would result in the capital ratio of 8 percent being increased by 20 
percent, effectively requiring nonbank SDs to maintain a ratio of total 
regulatory capital to risk-weighted assets of 9.6 percent (i.e., 8 
percent plus 20 percent of 8 percent).\189\
---------------------------------------------------------------------------

    \189\ See 2022 Proposal at 48104 and fn. 125.
---------------------------------------------------------------------------

    In addition, the Japanese Capital Rules' standardized approach to 
calculating minimum capital requirements also results in a higher 
regulatory capital requirement for counterparty credit risk. Although 
the standardized credit risk weights under the Japanese Capital Rules 
range from 0 to 25 percent, whereas those applicable under the CFTC 
Capital Rules range from 0 to 150 percent, the Japanese Capital Rules' 
requirement that Japanese nonbank SDs hold 120 percent of the firm's 
risk-weighted assets would yield a higher capital requirement. For 
example, for an exposure that is subject to the highest risk weight for 
counterparty credit risk, the Japanese Capital Rules would require a 
Japanese nonbank SD to hold capital equal to 30 percent of the exposure 
amount (i.e., 25 percent risk weight multiplied by 120 percent capital 
requirement), whereas the CFTC Capital Rules would require a nonbank SD 
to hold capital equal to 12 percent of the exposure amount (i.e., 150 
percent risk weight multiplied by 8 percent capital requirement).
    Furthermore, the Commission notes that under the Japanese Capital 
Rules, the total risk-weighted assets include amounts for operational 
and similar risks arising from a Japanese nonbank SD's activities 
(i.e., basic risk equivalent amount). These risk-weighted asset amounts 
are included in the risk equivalent amount in all circumstances, 
whether the nonbank SD uses a standardized approach or a model approach 
to calculating risk-weighted assets.\190\ As such, the basic risk 
equivalent amount increases the amount of the risk-weighted assets and 
thus the amount of regulatory capital that a Japanese nonbank SD is 
required to maintain. Taking these factors into account in the 
computation of risk-weighted assets and regulatory capital under the 
Japanese Capital Rules, the Commission believes that a nonbank SD is 
generally required to maintain a higher level of regulatory capital 
under the Japanese Capital Rules than it would be under the CFTC 
Capital Rules.
---------------------------------------------------------------------------

    \190\ In contrast, the CFTC Capital Rules do not require nonbank 
SDs to include an operational risk charge in the firm's risk-
weighted assets if the firm uses a standardized approach to 
calculating risk-weighted asset amounts. An operational risk 
component is included in the firm's risk-weighted assets only if the 
firm uses a model to calculate risk-weighted asset amounts for 
credit risk. See definition of BHC equivalent risk-weighted assets 
in Commission Regulation 23.100 (cross referencing subparts E and D 
of 12 CFR part 217). 17 CFR 23.100.
---------------------------------------------------------------------------

    Moreover, to the extent the Japanese Capital Rules might require a 
lesser amount of common equity tier 1 capital than the CFTC Capital 
Rules, the Commission believes that the difference will be generally 
offset and mitigated by the higher amount of regulatory capital 
required by the Japanese Capital Rules. Accordingly, the Commission 
finds that the Japanese Capital Rules and the CFTC Capital Rules are 
comparable in purpose and effect with respect to the minimum amount of 
capital and type of capital required by these rules.
    In conclusion, the Commission finds that the Japanese Capital Rules 
and the CFTC Capital Rules are comparable in purpose and effect with 
respect to the computation of minimum capital requirements based on a 
nonbank SD's risk-weighted assets. The Commission finds that 
notwithstanding the differences discussed above, the Japanese Capital 
Rules and the CFTC Capital rules have a comparable approach to the 
computation of market

[[Page 58487]]

risk exposure amounts and credit risk exposure amounts for on-balance 
sheet and off-balance sheet exposures, which are intended to achieve 
comparable regulatory outcomes by ensuring that a nonbank SD maintains 
a sufficient level of regulatory capital to absorb decreases in firm 
assets, absorb increases in firm liabilities, and meet obligations to 
counterparties and creditors, without the firm becoming insolvent.
c. Minimum Capital Requirement Based on the Uncleared Swap Margin 
Amount
    As noted above, prong (iii) 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.\191\
---------------------------------------------------------------------------

    \191\ More specifically, 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, the Commission stated that the intent of 
the uncleared swap margin amount was to establish a method of 
developing a minimum amount of capital for a nonbank SD to meet its 
obligations as an SD to market participants, and to cover potential 
operational risk, legal risk and liquidity risk, and not just the 
risks of its trading portfolio. See 85 FR 57462 at 57485.
---------------------------------------------------------------------------

    The Japanese Capital Rules differ from the CFTC Capital Rules in 
that they do not impose a capital requirement on Japanese nonbank SDs 
based on a percentage of the margin for uncleared swap 
transactions.\192\ In the 2022 Proposal, the Commission described, 
however, how certain Japanese capital and liquidity requirements may 
compensate for the lack of direct analogue to the 8 percent uncleared 
swap margin amount requirement.\193\ Specifically, the Commission noted 
that under the Japanese Capital Rules the risk equivalent amount (i.e., 
the firm's risk-weighted assets) is calculated as the sum of the market 
risk equivalent amount, the counterparty risk equivalent amount, and 
the basic risk equivalent amount.\194\ As discussed, the basic risk 
equivalent amount is computed as an amount equal to 25 percent of the 
Japanese nonbank SD's defined annual operating expenses, and is 
intended to provide a capital cushion to cover risks that may accrue in 
the course of executing ordinary business operations, such as errors in 
business transactions.\195\ In addition, the Japanese Capital Rules 
require a Japanese nonbank SD to deduct the carrying value of fixed 
assets from its Basic Items and Supplemental Items in computing its 
regulatory capital, which promotes a degree of liquidity into the 
Japanese nonbank SD's regulatory capital by requiring assets that are 
more liquid than fixed assets to support the Basic Items and 
Supplemental Items that are used to meet the Japanese nonbank SD's 
minimum capital requirement. As stated in the 2022 Proposal, the 
Commission preliminarily determined that the inclusion of an 
operational risk charge as a separate component of the risk equivalent 
amount, including by Japanese nonbank SDs that do not use internal 
models, and the deduction of the carrying value of fixed assets from 
regulatory capital, would 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.\196\
---------------------------------------------------------------------------

    \192\ See 2022 Proposal at 48104.
    \193\ Id. at 48105.
    \194\ Article 178(1)(iii) of the COO and Article 16 of the 
Notice on Capital. The basic risk equivalent amount is calculated as 
25 percent of certain defined operating expenses incurred by the 
Japanese nonbank SD over a 12-month period, and includes general 
expenses, selling expenses, and financial expenses.
    \195\ See 2022 Proposal at 48105.
    \196\ Id.
---------------------------------------------------------------------------

    Focusing on the absence of a capital requirement based on a 
percentage of the margin for uncleared swap transactions under the 
Japanese Capital Rules, Better Markets asserted that the Japanese 
Capital Rules are not only different from the CFTC Capital Rules in 
form and substance, but lead to a regulatory outcome that is not 
comparable.\197\ In support, Better Markets noted that, whereas the 
CFTC relies on an approach that requires nonbank SDs to hold qualifying 
capital in an amount equal to at least 8 percent of the nonbank SD's 
uncleared swap margin amount, the Japanese Capital Rules are based on 
``an arbitrary percentage of a company's operating expenses, which 
would be closer in concept to liquidity needs.'' \198\
---------------------------------------------------------------------------

    \197\ Better Markets Letter at p. 7.
    \198\ Id.
---------------------------------------------------------------------------

    Other commenters agreed with the Commission's preliminary 
determination that the Japanese Capital Rules and CFTC Capital Rules 
are comparable notwithstanding the absence in the Japanese Capital 
Rules of a capital requirement based on uncleared swap margin.\199\ In 
this regard, FSA asserted that the Japanese Capital Rules are largely 
comparable in outcome even in the absence of the uncleared swap margin 
requirement because the Japanese capital adequacy ratio takes into 
account operational risk.\200\
---------------------------------------------------------------------------

    \199\ Associations Letter at p. 2; FSA Letter at p. 1; IBAJ 
Letter at p. 2.
    \200\ FSA Letter at p. 1.
---------------------------------------------------------------------------

    The Associations and IBAJ expressed the view that the Japanese 
Capital Rules are comparable in purpose and effect to the Commission's 
requirements for a nonbank SD to hold regulatory capital equal to or 
greater than 8 percent of its uncleared swap margin amount.\201\ The 
commenters explained that under the Japanese Capital Rules, liquidity 
risk is covered through the deduction of the balance sheet carrying 
value of fixed assets, and operational risk and legal risk are covered 
by the basic risk equivalent amount, which is a simplified but 
conservative approach to calculating a proxy for operational risks 
under the Basel standards.\202\ Under the approach, basic risk is 
incrementally added to market risk and credit risk, which further 
increases the required capital amount under the Japanese Capital 
Rules.\203\ The commenters further explained that the Japanese Capital 
Rules' basic risk equivalent amount is computed as an amount equal to 
25 percent of the Japanese nonbank SD's defined annual operating 
expenses, and is intended to provide a capital cushion to cover risk 
that may accrue in the course of executing ordinary business 
operations, such as errors in business transactions.\204\ According to 
the commenters, such amount combined with market risk, credit risk, and 
the deduction of the carrying value of fixed assets will broadly 
capture obligations to market participants, potential operational risk, 
legal risk, and liquidity risk, as well as market risk and credit 
risk.\205\ The commenters further noted that the calculation will 
capture both the trading portfolio as well as non-trading assets, 
whereas the CFTC's requirement to hold 8 percent of nonbank SD's 
uncleared swap margin amount will not capture non-trading assets.\206\ 
As such, the commenters concluded that the Japanese Capital Rules' 
basic risk equivalent requirement is sufficiently comparable to the 
CFTC Capital Rules' uncleared swap margin requirement.\207\
---------------------------------------------------------------------------

    \201\ Associations Letter at p. 2; IBAJ Letter at p. 2.
    \202\ Id.
    \203\ Id.
    \204\ Associations Letter at p. 3; IBAJ Letter at p. 3.
    \205\ Id.
    \206\ Id.
    \207\ Id.
---------------------------------------------------------------------------

    The Commission believes that the Japanese Capital Rules' approach 
to calculating the basic risk equivalent amount, which accounts for 
operational risk and legal risk, and the deduction of the balance sheet 
carrying value of fixed

[[Page 58488]]

assets to reflect liquidity risk, support the comparability of the 
Japanese Capital Rules and the CFTC Capital Rules even in the absence 
of a separate capital requirement in the Japanese Capital Rules 
requiring Japanese nonbank SDs to have qualified capital equal to or 
greater than 8 percent of the amount of uncleared swap margin.
    In conclusion, the Commission finds that the Japanese Capital Rules 
and the CFTC Capital Rules are comparable in purpose and effect with 
respect to the requirement that a nonbank SD's minimum level of 
regulatory capital reflects potential operational risk exposures in 
addition to market risk and credit risk exposures. The Commission 
emphasizes that the intent of the minimum capital requirement based on 
a percentage of the nonbank SD's uncleared swap margin is to establish 
a minimum capital requirement that would help ensure that the nonbank 
SD meets its obligations as an SD to market participants, and to cover 
potential operational risk, legal risk, and liquidity risk in addition 
to the risks associated with its trading portfolio.\208\ The Commission 
further notes that the minimum capital requirement based on a 
percentage of the nonbank SD's uncleared swap margin amount was 
conceived as a proxy, not an exact measure, for inherent risk in the 
SD's positions and operations, including operational risk, legal risk, 
and liquidity risk.\209\ As the Commission noted in adopting the CFTC 
Capital Rules, although the amount of capital required of a nonbank SD 
under the uncleared swap margin calculation is directly related to the 
volume, size, complexity, and risk of the covered SD's positions, the 
minimum capital requirement is intended to cover a multitude of 
potential risks faced by the SD.\210\ The Commission understands that 
other jurisdictions may adopt alternative measures to cover the same 
risks. In this regard, the Japanese Capital Rules address comparable 
risks albeit not through a requirement based on a Japanese nonbank SD's 
uncleared swap margin amount. Specifically, Japanese nonbank SDs are 
required to maintain a minimum level of regulatory capital based on an 
aggregate of the firm's total risk-weighted asset exposure amounts for 
market risk, credit risk, and operational risk. The Commission further 
notes that a Japanese nonbank SD is required to maintain regulatory 
capital in an amount that exceeds 120 percent of the total risk-
weighted assets, which is 20 percent higher than the CFTC Capital 
Rules. Accordingly, the Commission has determined that, notwithstanding 
the differences in approaches, the Japanese Capital Rules and CFTC 
Capital Rules are comparable in purpose and effect, and achieve 
comparable regulatory outcomes, by requiring nonbank SDs to maintain a 
sufficient minimum level of regulatory capital to addresses potential 
market risk, credit risk, and operational risk, and to help ensure the 
safety and soundness of the firm by requiring it to hold capital to 
absorb decreases in firm assets, absorb increases in firm liabilities, 
and meet its obligations to counterparties and creditors, without the 
firm becoming insolvent.
---------------------------------------------------------------------------

    \208\ See 2022 Proposal at 48102 (referencing 85 FR 57462).
    \209\ 85 FR 57462 at 57497.
    \210\ 85 FR 57462 at 57485 and 57497.
---------------------------------------------------------------------------

3. Final Determination
    Based on its analysis of comments and its holistic assessment of 
the respective requirements discussed in Section II.C.2.a., b., and c. 
above, the Commission adopts the Comparability Determination and 
Comparability Order as proposed with respect to the minimum capital 
requirements and calculation of regulatory capital, subject to the 
condition that Japanese nonbank SDs must maintain a minimum level of 
regulatory capital in the form of Basic Items that equals or exceeds 
the equivalent of $20 million U.S. dollars.

D. Nonbank Swap Dealer Financial Reporting Requirements

1. Proposed Determination
    The Commission detailed the requirements of the CFTC Financial 
Reporting Rules in the 2022 Proposal.\211\ Specifically, the 2022 
Proposal notes that the CFTC Financial Reporting Rules require nonbank 
SDs to file with the Commission and NFA periodic unaudited and annual 
audited financial reports.\212\ The unaudited financial reports must 
include: (i) a statement of financial condition; (ii) a statement of 
income/loss; (iii) a statement demonstrating compliance with, and 
calculation of, the applicable regulatory minimum capital requirement; 
(iv) a statement of changes in ownership equity; (v) a statement of 
changes in liabilities subordinated to claims of general creditors; and 
(vi) such further material information necessary to make the required 
statements not misleading.\213\ The annual audited financial reports 
must include the same financial statements that are required to be 
included in the unaudited financial reports, and must further include: 
(i) a statement of cash flows; (ii) appropriate footnote disclosures; 
and (iii) a reconciliation of any material differences between the 
financial statements contained in the annual audited financial reports 
and the financial statements contained in the unaudited financial 
reports prepared as of the nonbank SD's year-end date.\214\ In 
addition, a nonbank SD must 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.\215\ 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.\216\
---------------------------------------------------------------------------

    \211\ 2022 Proposal at 48106-48107.
    \212\ Id. and 17 CFR 23.105(d) and (e).
    \213\ Id. and 17 CFR 23.105(d)(2).
    \214\ Id. and 17 CFR 23.105(e)(4).
    \215\ Id. and 17 CFR 23.105(f).
    \216\ Id.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules also require a nonbank SD to 
file the following financial information with the Commission and NFA on 
a monthly basis: (i) a schedule listing the nonbank SD's financial 
positions reported at fair market value; \217\ (ii) schedules showing 
the nonbank SD's 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; \218\ and (iii) for nonbank SDs 
approved to use internal capital models, certain model metrics, such as 
aggregate value-at-risk (``VaR'') and counterparty credit risk 
information.\219\
---------------------------------------------------------------------------

    \217\ Id. and 17 CFR 23.105(l) and Schedule 1 of Appendix B to 
Subpart E of part 23 (``Schedule 1''). Schedule 1 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, and cleared 
and uncleared swaps, security-based swaps, and mixed swaps in 
addition to other position information.
    \218\ Id. and schedules 2, 3 and 4, respectively, of Commission 
Regulation 23.105(l). 17 CFR 23.105(l).
    \219\ Id. and 17 CFR 23.105(k) and (l), and appendix B to 
Subpart E of part 23.
---------------------------------------------------------------------------

    The CFTC Financial Reporting Rules further require a nonbank SD to 
provide the Commission and NFA with information regarding the 
custodianship of margin for uncleared swap transactions (``Margin 
Report'').\220\ The Margin Report must contain: (i) the name and 
address of each custodian holding initial margin or variation margin on 
behalf of the nonbank SD or

[[Page 58489]]

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.\221\
---------------------------------------------------------------------------

    \220\ Id. and 17 CFR 23.105(m).
    \221\ Id.
---------------------------------------------------------------------------

    A nonbank SD electing the Bank-Based Capital Approach is required 
to file the unaudited financial report, Schedule 1, schedules of 
counterparty credit exposures, and the Margin Report with the 
Commission and NFA no later than 17 business days after the applicable 
month end reporting date.\222\ A nonbank SD must file its annual report 
with the Commission and NFA no later than 60 calendar days after the 
end of its fiscal year.\223\
---------------------------------------------------------------------------

    \222\ Id.
    \223\ Id.
---------------------------------------------------------------------------

    The 2022 Proposal also detailed relevant financial reporting 
requirements of the Japanese Financial Reporting Rules.\224\ The 
Japanese Financial Reporting Rules require a Japanese nonbank SD to 
submit monthly monitoring survey reports (``Monthly Monitoring 
Report'') to the FSA.\225\ The Monthly Monitoring Report must include 
information on the Japanese nonbank SD's capital adequacy ratio, and 
the status of the firm's business operations and accounting (including 
a balance sheet and profit/loss statement), market risk, counterparty 
risk, operational risk, and liquidity risk.\226\ The Monthly Monitoring 
Report are typically submitted by a Japanese nonbank SD within two to 
three weeks of the end of each month.\227\
---------------------------------------------------------------------------

    \224\ 2022 Proposal at 48106-48110.
    \225\ Id. and section II-1-4 (General Supervisory Process) of 
the Supervisory Guidelines for FIBO, which directs the FSA as part 
of its offsite monitoring to require FIBOs (including the Japanese 
nonbank SDs) to submit a monitoring survey report regarding the 
following matters: capital adequacy ratio, status of business 
operations and accounting (including a balance sheet and profit and 
loss statement), status of segregated management of customer assets, 
market risk, counterparty risk, operational risk, and liquidity 
risk. The FSA has, pursuant to Article 56-2(1) of the FIEA, ordered 
the Japanese nonbank SDs to submit monthly monitoring reports to the 
FSA.
    \226\ Id.
    \227\ The Commission noted that there are various types of 
reports which are required of the Japanese nonbank SDs under 
``Reporting orders'' issued by the FSA in accordance with Article 
56-2(1) of the FIEA. Some of these reports are required to be 
submitted on a monthly basis, whereas other reports are required to 
be submitted on a quarterly basis, semi-annual basis, or annual 
basis. The FSA typically does not set a specific filing deadline and 
instead requests all reports to be submitted ``without delay.'' In 
case of monthly reports, the normal practice is for firms to submit 
such reports within two to three weeks from the prior month-end.
---------------------------------------------------------------------------

    A Japanese nonbank SD is also required to submit a business report 
to the Commissioner of the FSA within three months of the end of the 
firm's fiscal year (``Annual Business Report'').\228\ The Annual 
Business Report must include a balance sheet, profit/loss statement, 
statement of changes in shareholders' equity, balance of subordinated 
debt, and a statement of capital adequacy ratio.\229\ Furthermore, a 
Japanese nonbank SD is required to prepare financial statements and 
business reports every business year pursuant to the Japanese Companies 
Act (``Annual Audited Financial Report'').\230\ The Annual Audited 
Financial Report includes the firm's balance sheet, profit/loss 
statement, and statement of changes in shareholders' equity, and such 
statements are required to be audited by an accounting auditor.\231\ 
The Annual Audited Financial Report must be submitted to, and approved 
by, the shareholders at a meeting within three months of the Japanese 
nonbank SD's fiscal year-end.\232\
---------------------------------------------------------------------------

    \228\ 2022 Proposal at 48107 and Article 46-3(1) of the FIEA and 
Article 172 of the COO.
    \229\ 2022 Proposal at 48107 and Appended Forms No. 12 of the 
COO.
    \230\ 2022 Proposal at 48107 and Japanese Companies Act (Act No. 
86 of 2005).
    \231\ 2022 Proposal at 48107 and Article 328(1) and (2), Article 
435(2), and 436(2)(i) of the Companies Act, and Article 59 of the 
Rules of Corporate Accounting (Ordinance of the Ministry of Justice 
No. 13 of 2006). The audit requirement applies to a ``Large 
Company,'' which is defined by Article 2(vi) of the Companies Act as 
a stock company that satisfies any of the following requirements: 
(i) that the amount of stated capital in the balance sheet as of the 
end of the firm's most recent business year is JPY 500 million or 
more; or (ii) that the total sum of the liabilities section of the 
balance sheet as of the end of the firm's most recent business year 
is JPY 20 billion or more. The FSA has represented that each of the 
current CFTC-registered Japanese nonbank SDs is a Large Company 
under the Companies Act, and is subject to the audit requirement for 
its financial statements. FSA Application p. 18.
    \232\ Id.
---------------------------------------------------------------------------

    Based on its review of the FSA Application and the relevant 
Japanese laws and regulations, the Commission preliminarily determined 
that, subject to the conditions specified in the 2022 Proposal and 
discussed below, the Japanese Financial Reporting Rules are comparable 
to CFTC Financial Reporting Rules in purpose and effect.\233\ The 
Commission noted that both sets of rules provide the FSA and the 
Commission with financial information necessary to monitor a nonbank 
SD's compliance with capital requirements and to assess a nonbank SD's 
overall safety and soundness. Specifically, both CFTC Financial 
Reporting Rules and the Japanese Financial Reporting Rules require a 
nonbank SD to file statements of financial condition, statements of 
profit and loss, and statements of regulatory capital that, 
collectively, provide information for the FSA, Commission, and NFA to 
assess a nonbank SD's overall ability to absorb decreases in the value 
of firm assets, absorb increases in the value of firm liabilities, and 
cover losses from business activities, including swap dealing 
activities, without the firm becoming insolvent.\234\
---------------------------------------------------------------------------

    \233\ See 2022 Proposal at 48106-48110.
    \234\ Id.
---------------------------------------------------------------------------

    The proposed conditions in the proposed Comparability Order were 
intended to ensure that the Commission and NFA receive appropriate and 
timely financial information from Japanese nonbank SDs in order to 
monitor the firms' compliance with FSA capital requirements and to 
assess the firms' overall safety and soundness. The proposed conditions 
would require a Japanese nonbank SD to provide the Commission and NFA 
with copies of its Monthly Monitoring Report, Annual Business Report, 
and Annual Audited Financial Report.\235\ The proposed conditions would 
also require the Monthly Monitoring Report, Annual Business Report, and 
Annual Audited Financial Report to be translated into the English 
language.\236\ The Monthly Monitoring Report and the Annual Business 
Report also must have balances converted from yen to U.S. dollars. The 
Commission further recognized that the requirement to translate 
balances denominated in yen to U.S. dollars on the audited financial 
statements may have an unintended impact on the opinion expressed by 
the public accountant on the financial statements. The Commission, 
therefore, proposed to accept the Annual Audited Financial Report 
denominated in yen, but required the report to be translated into the 
English language.\237\
---------------------------------------------------------------------------

    \235\ See 2022 Proposal at 48107 and Article 46-3(1) of the 
FIEA, Article 172 of the COO, and Appended Forms No. 12 of the COO.
    \236\ In the 2022 Proposal, the Commission proposed that the 
translation of audited financial statements into the English 
language would not be required to be subject to the audit of the 
public accountants. A Japanese nonbank SD would be required to 
report the exchange rate that it used to convert balances from yen 
to U.S. dollars to the Commission and NFA as part of the financial 
reporting.
    \237\ See 2022 Proposal at 48108.
---------------------------------------------------------------------------

    The proposed conditions also would require a Japanese nonbank SD to 
file with the Commission and NFA its: (i) Monthly Monitoring Reports 
within 15 business days of the earlier of the date

[[Page 58490]]

the report is filed with the FSA or 35 calendar days after the month-
end reporting date; \238\ (ii) Annual Business Report within 15 
business days of the earlier of the date the report is filed with the 
FSA or the date that the report is required to be filed with the FSA; 
\239\ and (iii) Annual Audited Financial Report within 15 business days 
of the approval of the report at the Japanese nonbank SD's shareholder 
meeting.\240\ The Commission stated that, in its preliminary view, the 
proposed filing dates provided sufficient time for the respective 
reports to be translated into the English language with balances 
converted from yen to U.S. dollars, as applicable.\241\
---------------------------------------------------------------------------

    \238\ 2022 Proposal at 48108 and proposed Condition 8. As noted, 
the FSA does not set a specific filing date for Monthly Monitoring 
Reports, electing to instead require firms to file such reports 
``without delay.'' The Commission proposed to establish a due date 
that is no later than 35 calendar days from the reporting date to 
set a definitive filing date that also provides Japanese nonbank SDs 
with sufficient time to translate the reports into English and 
convert balances to U.S. dollars.
    \239\ 2022 Proposal at 48108 and proposed Condition 9.
    \240\ 2022 Proposal at 48108 and proposed Condition 10.
    \241\ See 2022 Proposal at 48108.
---------------------------------------------------------------------------

    The Commission also proposed a condition to require Japanese 
nonbank SDs to file with the Commission and NFA, on a monthly basis, 
Schedule 1 showing the aggregate securities, commodities, and swap 
positions of the firm at fair market value as of the reporting 
date.\242\ The Commission explained that Schedule 1 provides the 
Commission and NFA with detailed information regarding the fair market 
value of the nonbank SD's financial positions as of the end of each 
month, including the firm's swaps positions, which allows the 
Commission and NFA to monitor the types of investments and other 
activities that the firm engages in and would assist the Commission and 
NFA in monitoring the safety and soundness of the firm.\243\ The 
Commission proposed to require that Schedule 1 be filed by a Japanese 
nonbank SD along with the firm's Monthly Monitoring Report. The 
Commission also proposed to require that Schedule 1 be prepared in the 
English language with balances reported in U.S. dollars.
---------------------------------------------------------------------------

    \242\ See id. In response to a comment by the IBAJ, the 
Commission confirms that its intent was to require that Schedule 1 
of Appendix B to Subpart E of part 23 be filed at the same time as 
the Monthly Monitoring Report, consistent with Condition (11) of the 
Order. IBAJ Letter at p. 6.
    \243\ See 2022 Proposal at 48108.
---------------------------------------------------------------------------

    The Commission also proposed a condition to require a Japanese 
nonbank SD to submit a statement by an authorized representative or 
representatives of the Japanese nonbank SD that, to the best knowledge 
and belief of the person(s), the information contained within each 
Monthly Monitoring Report, Schedule 1, Annual Business Report, and 
Annual Audited Financial Report, is true and correct, including as it 
relates to the translation of the report into the English language and 
the conversion of balances to U.S. dollars.\244\ The statement by an 
authorized representative or representatives of the Japanese nonbank SD 
was intended to be the equivalent of the oath or affirmation required 
of nonbank SDs under Commission Regulation 23.105(f),\245\ to ensure 
that reports filed with the Commission and NFA were 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.\246\
---------------------------------------------------------------------------

    \244\ Id. at 48108-48109 and proposed Condition 12.
    \245\ 17 CFR 23.105(f). Commission Regulation 23.105(f) requires 
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. 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.
    \246\ See 2022 Proposal at 48109.
---------------------------------------------------------------------------

    The Commission further proposed a condition that would require a 
Japanese nonbank SD to file a Margin Report with the Commission and NFA 
on a monthly basis.\247\ The Commission noted that a Margin Report 
would assist the Commission and NFA in their assessment of the safety 
and soundness of the Japanese nonbank SDs by providing information 
regarding the firm's swaps book and the extent to which it has 
uncollateralized swap exposures to counterparties or has not met its 
margin obligations to swap counterparties. The Commission explained 
that this information, along with the list of custodians holding both 
the firm's and counterparties' swaps collateral, would assist with 
identifying potential financial impacts to the nonbank SD resulting 
from defaults on its swap transactions.
---------------------------------------------------------------------------

    \247\ Id.
---------------------------------------------------------------------------

    In the Commission's preliminary view, its proposed approach of 
requiring Japanese nonbank SDs to provide the Commission and NFA with 
copies of the Monthly Monitoring Reports, Annual Business Reports, and 
Annual Audited Financial Reports that the firms currently file with the 
FSA or otherwise prepare struck an appropriate balance of ensuring that 
the Commission and NFA receive the financial reporting necessary for 
the effective monitoring of the financial condition of the nonbank SDs, 
while also recognizing the appropriateness of providing substituted 
compliance based on the existing FSA financial reporting requirements 
and regulatory structure.\248\
---------------------------------------------------------------------------

    \248\ Id.
---------------------------------------------------------------------------

    The Commission's preliminary determination did not require a 
Japanese nonbank SD to file the model metrics and counterparty credit 
exposure information required by Commission Regulations 23.105(k) and 
(l),\249\ respectively, in recognition that NFA's current SD risk 
monitoring program requires all SDs, including Japanese nonbank SDs, to 
file with NFA on a monthly basis certain risk metrics that are 
comparable with the risk metrics contained in Commission Regulation 
23.105(k) and (l) and address the market risk and credit risk of the 
SD's positions.\250\ Specifically, the Commission noted that 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.\251\
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    \249\ 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 
requires certain credit risk exposure information from model and 
non-model approved firms. 17 CFR 23.105(k). 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).
    \250\ 2022 Proposal at 48109.
    \251\ See 2022 Proposal at 48109 and 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) (``NFA Notice I-17-10''), available 
here: https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4817.
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    Furthermore, the Commission recognized that although the Japanese 
Financial Reporting Rules do not contain an analogue to the CFTC's 
requirements for nonbank SDs to file monthly model metric information 
and counterparty exposure information, the FSA has access to comparable

[[Page 58491]]

information.\252\ More specifically, the Commission noted that the FSA 
would perform the initial approval and ongoing assessment of the 
performance of a Japanese nonbank SD's models as part of its oversight 
function and may be better positioned to monitor a Japanese nonbank 
SD's model metrics and performance and to assess the Japanese nonbank 
SD's credit exposures as part of the FSA's overall monitoring of the 
financial condition of the firm.\253\ As such, the FSA would have 
access to information allowing it to assess the ongoing performance of 
risk models and to monitor the Japanese nonbank SD's credit exposures, 
which may be comprised of credit exposures to primarily Japanese 
counterparties.
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    \252\ Under the Japanese Financial Reporting Rules, the FSA has 
broad powers to request any information necessary for the exercise 
of its functions. FSA Application at p. 16 (referencing Article 56-2 
of the FIEA) and discussion in 2022 Proposal at 48113.
    \253\ See 2022 Proposal at 48109.
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2. Comment Analysis and Final Determination
    The Commission received comments regarding the comparability of 
financial reporting and specific comments addressing several of the 
financial reporting issues on which the Commission solicited feedback. 
Regarding the scope of the financial information that a Japanese 
nonbank SD should be required to file, Better Markets stated that the 
2022 Proposal does not adequately support the Commission's preliminary 
conclusion that the content of the Monthly Monitoring Reports, Annual 
Business Reports, and Annual Audited Financial Reports required 
pursuant to the Japanese Capital Rules are comparable with the 
requirements of the CFTC Financial Reporting Rules.\254\ In contrast, 
FSA stated that the Commission should limit the request of financial 
information to the extent consistent and sufficient with the purpose of 
the Commission's capital requirements to efficiently and effectively 
achieve its supervisory and monitoring objectives.\255\ IBAJ stated 
that the Commission should limit the financial information required to 
be filed to the types of financial information required of nonbank SDs 
under Commission Regulation 23.105.\256\ IBAJ further stated that, 
consistent with the types of schedules and data nonbank SDs are 
required to file under Commission Regulation 23.105, the Commission 
should require Japanese nonbank SDs to file the following information 
from the Monthly Monitoring Report: (i) Form 1-1 Capital Ratio Summary; 
(ii) Form 1-2 Capital Ratio: Deductible Assets; (iii) Form 1-3 Market 
Risk; (iv) Form 1-4 Counterparty Risk; (v) Form 2-1 Monthly Financial 
Statement (1); and (vi) Form 2-2 Monthly Financial Statement (2). IBAJ 
also stated that other financial information contained within the 
Monthly Monitoring Report should not be required as the information is 
either not submitted by nonbank SDs under Commission Regulation 23.105, 
such as client assets segregation status and transaction volume, or the 
information is similar to the information contained in the quarterly 
risk exposure report and monthly risk data report that Japanese nonbank 
SDs already provide to the Commission and NFA.\257\ IBAJ also asserted 
that limiting the scope of information to the six items noted above 
from the Monthly Monitoring Report would be consistent with the 
financial information that Commission staff has required from Japanese 
nonbank SDs under CFTC Staff Letter 22-10.\258\
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    \254\ Better Markets Letter at p. 10.
    \255\ FSA Letter at p. 2.
    \256\ IBAJ Letter at p. 4.
    \257\ Id.
    \258\ Id. and CFTC Staff Letter No. 22-10, Extension of Time-
Limited No-Action Position for Foreign Based Nonbank Swap Dealers 
domiciled in Japan, Mexico, the United Kingdom, and the European 
Union, issued by the Market Participants Division on August 17, 
2022. CFTC Staff Letter No. 22-10, which extended the expiration of 
CFTC Staff Letter 21-20, provides that the Market Participants 
Division (``MPD'') would not recommend an enforcement action to the 
Commission if a non-U.S. nonbank SD covered by the letter (``covered 
nonbank SDs''), subject to certain conditions, complied with their 
respective home-country capital and financial reporting requirements 
in lieu of the Commission's capital and financial reporting 
requirements set forth in Commission Regulations 23.100 through 
23.106, pending the Commission's determination of whether the 
capital and financial reporting requirements of certain foreign 
jurisdictions are comparable to the Commission's corresponding 
requirements. The relevant conditions include that a covered nonbank 
SD domiciled in Japan must: (i) be registered as a Type I FIBO with 
the FSA; (ii) submit to MPD financial information required by the 
FSA within 15 days of submitting such information to the FSA; and 
(iii) submit to the Commission a statement of financial condition, 
statement of income/loss, and statement of regulatory capital to the 
extent that such financial information is not required by the FSA.
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    The Commission has reviewed the comments and believes that the 
Japanese Financial Reporting Requirements, subject to the conditions 
below, are comparable to the CFTC Financial Reporting Requirements in 
purpose and effect in that both the Japanese rules and the CFTC 
regulations provide information necessary for the monitoring of the 
financial condition of a nonbank SD. In response to the comments, the 
Commission is modifying the conditions in the final Comparability Order 
to list specific schedules of the Monthly Monitoring Report that each 
Japanese nonbank SD is required to file with the Commission and NFA. 
Specifically, the Commission agrees that the Comparability Order should 
specify the required information that a Japanese nonbank SD must submit 
to the Commission and NFA from its Monthly Monitoring Report to be 
consistent with the types of capital and general financial statement 
information that a nonbank SD is required to file under Commission 
Regulation 23.105. This modification would ensure that the Commission 
receives the relevant financial information necessary to monitor the 
general financial condition and capital compliance of a Japanese 
nonbank SD, while eliminating the requirement for Japanese nonbank SDs 
to provide other information contained in the Monthly Monitoring Report 
that is specific to certain requirements in Japan and beyond the 
overall financial condition and capital compliance of the firm.
    Therefore, consistent with the statement above, the Commission is 
modifying Condition 8 of the Comparability Order to provide that a 
Japanese nonbank SD must file Form 1-1 Capital Ratio Summary (``Form 1-
1''), Form 1-2 Capital Ratio: Deductible Assets (``Form 1-2''), Form 1-
3 Market Risk (``Form 1-3''), Form 1-4 Counterparty Risk (``Form 1-
4''), Form 2-1 Monthly Financial Statement (1) (``Form 2-1''), and Form 
2-2 Financial Statement (2) (``Form 2-2'') of the Monthly Monitoring 
Report with the Commission and with NFA on a monthly basis. Final 
Condition 8 will continue to require a Japanese nonbank SD to file such 
forms translated into the English language with balances converted to 
U.S. dollars,\259\ and, as further discussed below, will require that 
such forms be filed with the Commission and NFA within 35 calendar days 
after the end of each month.
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    \259\ The condition will also specify that Japanese nonbank SDs 
must use a commercially reasonable and observable yen/U.S. dollar 
spot rate as of the date of the reports.
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    The Commission finds that the financial information provided by 
Japanese nonbank SDs in the specified forms of the Monthly Monitoring 
Report, the Annual Business Report, and the Annual Audited Financial 
Report is comparable to the unaudited and audited financial information 
provided by nonbank SDs under the relevant provisions of Commission 
Regulation 23.105(d) and (e), respectively. With respect to Better 
Markets' comment regarding the

[[Page 58492]]

sufficiency of the support for a finding of comparability of the 
financial reporting requirements, the Commission believes that the 
description of the reporting forms' content demonstrates the similarity 
between the required information. In this regard, Form 2-1 and Form 2-2 
of the Monthly Monitoring Report present a Japanese nonbank SD's 
statement of financial condition and statement of profit/loss, 
respectively. Form 2-1 and Form 2-2 provide information that is 
necessary for the monitoring of the financial condition of a Japanese 
nonbank SD and are comparable to the statement of financial condition 
and statement of profit/loss required by the Commission of nonbank SDs 
under Commission Regulation 23.105(d)(2).
    Form 1-1, Form 1-2, Form 1-3, and Form 1-4 detail the calculation 
of a Japanese nonbank SD's capital ratio. Form 1-3 and Form 1-4 provide 
details concerning a Japanese nonbank SD's calculation of market risk 
and counterparty credit risk, respectively, that is incorporated into 
the firm's calculation of its risk-weighted assets. Form 1-3 details 
market risk by asset class (e.g., equity, interest rate, foreign 
exchange, commodity, and crypto assets) and contract type (e.g., spot 
transactions or forward transactions). Form 1-4 details counterparty 
credit risk by transaction type (e.g., foreign exchange, interest 
rates, and equity). Form 1-2 details the deductions that a Japanese 
nonbank SD must take in computing its Basic and Supplemental capital to 
reflect illiquid assets (e.g., fixed assets). Form 1-1 summarizes the 
Japanese nonbank SD's capital calculation of its Basic and Supplemental 
Items and further contains the firm's overall capital ratio to 
demonstrate compliance with the Japanese Capital Rules. Forms 1-1 
through 1-4 of the Monthly Monitoring Report require a Japanese nonbank 
SD to file financial information regarding its capital ratio that is 
comparable to the capital ratio reporting requirements under Commission 
Regulation 23.105(d)(2), which requires a nonbank SD to submit a 
statement of its capital requirement calculation and the firm's 
compliance with such capital requirement.
    The Commission is also adopting Conditions 9 and 10 of the proposed 
Comparability Order substantially as proposed.\260\ Final Conditions 9 
and 10 require a Japanese nonbank SD to file a copy of its Annual 
Business Report and Annual Audited Financial Report, respectively, with 
the Commission and NFA. The Annual Business Report and Annual Audited 
Financial Report are comparable to the annual audited financial report 
that each nonbank SD is required to file with the Commission and NFA 
pursuant to Commission Regulation 23.105(e). Specifically, information 
included in the Annual Business Report and Annual Audited Financial 
Reports includes the Japanese nonbank SD's statements of financial 
condition, statement of income or loss, a statement demonstrating the 
firm's capital levels and its compliance with the Japanese Capital 
Rules, a statement of changes in ownership equity and a statement of 
subordinated debt. This information is comparable to the audited 
financial information required by the Commission from nonbank SDs under 
Commission Regulation 23.105(e) and detailed above.
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    \260\ Subject to the specification in final Condition 9 that the 
conversion of balances to U.S. dollars must be done using a 
commercially reasonable and observable yen/U.S. dollar spot rate as 
of the date of the report.
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    The Annual Business Report and Annual Audited Financial Report must 
be translated into English, and balances in the Annual Business Report 
must be converted into U.S. dollars.\261\ The Annual Business Report is 
required to be filed with the Commission and NFA within 15 business 
days of the earlier of the date that the report is filed, or is 
required to be filed, with the FSA, and the Annual Audited Financial 
Report is required to be filed with the Commission and NFA within 15 
business days of the approval of the report at the shareholders' 
meeting.
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    \261\ As noted above, the 2022 Proposal included a proposal to 
permit balances in the Annual Audited Financial Report to be 
presented in yen to avoid raising potential issues with respect to 
the audit opinion expressed on the financial statements by the 
accountant engaged to conduct the audit of the Japanese nonbank SD's 
financial statements. See 2022 Proposal at 48108 and proposed 
Condition 10 at 48115. As previously stated herein, the Commission 
is adopting Condition 10 in the final Comparability Order as 
proposed.
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    For purposes of clarity, the Commission notes that Japanese nonbank 
SDs may present the financial information required to be provided to 
the Commission and NFA under the final Comparability Order in 
accordance with generally accepted accounting principles that the 
Japanese nonbank SD uses to prepare general purpose financial 
statements in Japan. This clarification is consistent with proposed 
Condition 7, which the Commission adopts subject to a minor 
modification in the final Comparability Order, requiring that the 
Japanese nonbank SD prepares and keeps current ledgers and other 
similar records ``in accordance with accounting principles permitted by 
the [FSA].'' \262\
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    \262\ 2022 Proposal at 48114. Proposed Condition 7 stated that 
Japanese nonbank SDs must prepare and keep current ledgers and other 
similar records ``in accordance with accounting principles required 
by the [FSA]''. To promote consistency across the Comparability 
Determinations the Commission is adopting with respect to several 
other jurisdictions and to reflect the fact that certain 
jurisdictions may not issue a formal approval of the accounting 
standards used by nonbank SDs, the Commission is replacing the 
adjective ``required'' with the adjective ``permitted'' in the 
reference to the accounting standards to be used by Japanese nonbank 
SDs.
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    In taking the position that Japanese nonbank SDs may provide 
financial reporting prepared in accordance with the accounting 
standards applicable in their home jurisdiction, the Commission 
considered the nature of the financial reporting information required 
from nonbank SDs for purposes of monitoring their overall financial 
condition and compliance with capital requirements. Specifically, the 
Commission notes that the requirements for how nonbank SDs calculate 
their risk-weighted assets and capital ratio, in both Japan and the 
U.S., follow a rules-based approach consistent with the Basel 
standards, and, consequently, the Commission does not anticipate that a 
variation in the applicable accounting standards would materially 
impact this calculation.\263\ In this regard, the

[[Page 58493]]

Commission notes that Japanese nonbank SDs currently submit financial 
reports, including a statement of financial condition and a statement 
of regulatory capital, pursuant to CFTC Staff Letter 22-10.\264\ The 
reports provide the Commission with appropriate information to assess 
the financial and operational condition of Japanese nonbank SDs, as 
well as the firms' compliance with the capital ratios imposed on 
Japanese nonbank SDs under the Japanese Capital Rules.
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    \263\ Furthermore, the Commission's approach to permitting 
Japanese nonbank SDs to maintain financial books and records, and to 
file financial reports and other financial information, prepared in 
accordance with local accounting standards is consistent with the 
SEC's final comparability determinations for non-U.S. SBSDs. 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) at 59812 
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 Manner and Format Order'') at 
59219. Specifically, the SEC stated that the use of local reporting 
requirements will avoid non-U.S. SBSDs ``having to perform and 
present two Basel capital calculations (one pursuant to local 
requirements and one pursuant to U.S. requirements).'' SEC Manner 
and Format Order at 59219. The SEC noted, in this regard, that the 
Basel standards are international standards that have been adopted 
in the U.S. and in jurisdictions where substituted compliance is 
available for capital under the SEC comparability determinations and 
that, therefore, requirements for how firms calculate capital 
pursuant to the Basel standards generally should be similar. Id. In 
addition, if a Japanese nonbank SD becomes registered with the SEC 
as an SBSD and is required to file a FOCUS Report, the Commission's 
approach to permitting Japanese nonbank SDs to maintain financial 
books and records, and file financial information, prepared in 
accordance with local accounting standards would facilitate 
financial reporting by such dually-registered entities. In such 
case, dually-registered entities would not have to perform multiple 
calculations under different accounting standards or submit two 
different FOCUS Reports.
    \264\ CFTC Staff Letter No. 22-10, Extension of Time-Limited No-
Action Position for Foreign Based Nonbank Swap Dealers domiciled in 
Japan, Mexico, the United Kingdom, and the European Union, August 
17, 2022.
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    In addition, the Commission is adding a condition in the final 
Comparability Order to specify that Japanese nonbank SDs that are 
registered with the SEC as an SBSD and required to file a FOCUS Report 
with the SEC or its designee, must file a copy of the FOCUS Report with 
the Commission and NFA within 35 calendar days after the end of each 
month. Currently, no Japanese nonbank SD is registered as an SBSD. The 
Commission, however, is including the condition in anticipation of 
potential future dual registrants. Under final Condition 12, a Japanese 
nonbank SD that files a copy of the FOCUS Report will not be required 
to file the financial reports and schedules specified in final 
Conditions 8 and 11 of the Comparability Order. Final Condition 12 is 
also consistent with Commission Regulation 23.105(d)(3), which mandates 
the filing of a FOCUS Report by dual registrants.\265\
---------------------------------------------------------------------------

    \265\ 17 CFR 23.105(d)(3).
---------------------------------------------------------------------------

    One commenter, Better Markets, disagreed with the 2022 Proposal to 
the extent that the Commission proposed not to require Japanese nonbank 
SDs that have been approved by the FSA to use capital models to file 
the monthly model metric information required by Commission Regulation 
23.105(k) with the Commission or NFA.\266\ Commission Regulation 
23.105(k) requires nonbank SDs that have been approved by the 
Commission or NFA to use models to compute market risk or credit risk 
for computing capital requirements to file certain information with the 
Commission and NFA on a monthly basis.\267\ The information required to 
be filed includes: (i) for nonbank SDs approved to use market risk 
models, a listing of any products that the nonbank SD excludes from the 
approved market risk model and the amount of the standardized market 
risk charge taken on such products; (ii) a graph reflecting, for each 
business line of the nonbank SD, the daily intra-month VaR; (iii) the 
aggregate VaR for the nonbank SD; and (iv) certain credit risk 
information for swaps, mixed swaps and security-based swaps, including: 
(a) overall current exposure, (b) current exposure listed by 
counterparty for the 15 largest exposures, (c) the 10 largest 
commitments listed by counterparty, (d) maximum potential exposure 
listed by counterparty for the 15 largest exposures, (e) aggregate 
maximum potential exposure, (f) a summary report reflecting the SD's 
current and maximum potential exposures by credit rating category, and 
(g) a summary report reflecting current exposure for each of the top 
ten countries to which the nonbank SD is exposed.\268\ Better Markets 
stated that by not requiring the information contained in Commission 
Regulation 23.105(k), the Commission was proposing to ``take a back 
seat to the FSA and blindly accept [Japanese nonbank SDs'] assessments 
resulting from their use of internal models to calculate risk,'' and 
that such an approach undercuts the comparability of the financial 
reporting and risk assessment of both regimes.\269\
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    \266\ Better Markets Letter at p. 11.
    \267\ 17 CFR 23.105(k).
    \268\ 17 CFR 23.105(k)(1).
    \269\ Better Markets Letter at p. 11.
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    The Commission does not agree that its approach is effectively 
deferring model oversight to the FSA or that it is otherwise ``blindly 
accept[ing]'' the internal model-based assessments of the Japanese 
nonbank SDs. As noted above, pursuant to NFA rules, all registered SDs, 
including Japanese nonbank SDs, are required to submit to NFA, on a 
monthly basis, a list of specified risk metrics related to the SD's 
market risk and credit risk exposures.\270\ As part of its regulatory 
oversight program, NFA uses the risk metrics information to identify 
firms that may pose heightened risk and allocates appropriate oversight 
resources. NFA also may request additional information from a nonbank 
SD to the extent it determines that information in the risk metrics or 
other financial filings warrants a need for additional follow-up. 
Furthermore, Commission staff has access to the collected risks metrics 
information and participates in NFA's risk monitoring function by 
regularly exchanging information and discussing potential risks with 
NFA staff.
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    \270\ NFA Rulebook, Financial Requirements, section 17 Swap 
Dealer and Major Swap Participant Reporting Requirements, available 
here: https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=SECTION%2017&Section=7, and NFA Notice I-17-10.
---------------------------------------------------------------------------

    As the list of specified risk metrics discussed above indicates, 
although the information collected by NFA is not identical to the 
information required under Commission Regulation 23.105(k), there is a 
significant overlap in the data items. Working with industry 
participants, NFA identified the risk data items listed in NFA Notice 
I-17-10 as relevant risk metrics to be collected for oversight 
purposes, noting that most SDs use these or similar metrics as part of 
their own risk management program. The Commission believes that the 
information required pursuant to NFA Notice I-17-10 would provide the 
Commission and NFA with key data allowing them to monitor nonbank SDs' 
risk exposures. In addition, the Commission and NFA have the ability to 
request additional information from its registrants, including Japanese 
nonbank SDs, at any time.\271\ Finally, the Commission notes that the 
FSA, which will be conducting the initial approval and ongoing 
assessment of the performance of the Japanese nonbank SDs' internal 
models, under a regulatory framework that the Commission finds 
comparable to the CFTC Capital Rules, will have access to additional 
information that the FSA deems relevant in the conduct of such approval 
and assessment. The Commission, therefore, concludes that it is not 
necessary to require Japanese nonbank SDs relying on the final 
Comparability Order to submit the model metric information mandated by 
Commission Regulation 23.105(k).
---------------------------------------------------------------------------

    \271\ 17 CFR 23.105(h), which provides that the Commission or 
NFA may, by written notice, require any SD to file financial 
operational information at such time as may be specified by the 
Commission or NFA.
---------------------------------------------------------------------------

    Better Markets also noted that the proposed Comparability 
Determination was conditioned on a Japanese nonbank SD submitting a 
statement by an authorized representative that to the best knowledge 
and belief of the person the information contained in reports submitted 
to the Commission is true and correct, in lieu of the oath or 
affirmation required by Commission Regulation 23.105(f).\272\ Better 
Markets stated that there are significant legal differences between a 
statement and the oath or affirmation required by the CFTC Financial 
Reporting Rules, further highlighting the differences between the

[[Page 58494]]

regulatory reporting requirements of the U.S. and those of Japan.\273\
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    \272\ Better Markets Letter at p.10.
    \273\ Id.
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    For completeness, the Commission notes that the proposed condition 
requires that an authorized representative of the Japanese nonbank SD 
provide a statement that, to the best of the knowledge and belief of 
the representative, the information contained in the financial reports 
filed with the Commission and NFA is true and correct, including the 
applicable translation of the reports to the English language and the 
conversion of balances to U.S. dollars. The proposed condition was 
based on current Commission Regulation 23.105(f), which provides that a 
nonbank SD must attach to each unaudited and annual audited financial 
report filed with the Commission and NFA an oath or affirmation that to 
the best knowledge and belief of the individual making the oath or 
affirmation the information in the financial reports is true and 
correct. Similar to the intent of Commission Regulation 23.105(f), the 
purpose of the proposed condition is to obtain a formal attestation 
from a representative with the appropriate knowledge and authority that 
the information provided in the requisite financial reports is accurate 
and properly translated. The Commission's choice of language in using 
the term ``statement'' was not intended to make a legal distinction 
between this term and the terms ``oath'' or ``affirmation,'' but rather 
to select a generic term that is universally understood across 
jurisdictions to reflect the above-referenced purpose. In practice, the 
Commission does not believe that there is a material legal difference 
between the language of the proposed condition and the required oath or 
affirmation required under Commission Regulation 23.105(f). Instead, 
the Commission is of the view that the proposed condition would have 
the same legal effect as Commission Regulation 23.105(f) of providing 
the Commission with a stronger basis to take legal action if a Japanese 
nonbank SD files erroneous information.
    Commenters also addressed the Commission's request for comment on 
the proposed filing dates for the reports and information specified 
above and the compliance dates for any new reporting obligations that 
the Comparability Order would impose on Japanese nonbank SDs. IBAJ 
stated that the proposed filing of reports and information with the 
Commission and NFA within 15 days of the date when the filing is made 
with the FSA is sufficient.\274\ Other commenters requested that the 
Commission set the compliance date at least six months following the 
issue date of the Comparability Order to adequately prepare for 
compliance with the reporting conditions imposed by the Order.
---------------------------------------------------------------------------

    \274\ IBAJ Letter at p. 6.
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    The Commission believes that granting an additional period of time 
to allow Japanese nonbank SDs to develop and implement the necessary 
systems and processes for compliance with the Comparability Order is 
appropriate with respect to new reporting obligations imposed on 
Japanese nonbank SDs under the final Order. For other reporting 
obligations, for which a process already exists, such as the reports 
that Japanese nonbank SDs currently submit to the Commission and NFA 
pursuant to CFTC Staff Letter 22-10 and/or prepare pursuant to the 
Japanese Financial Reporting Rules, additional time for compliance does 
not appear necessary. Accordingly, the Commission is setting a 
compliance date of 180 calendar days from the date of publication of 
the final Comparability Order in the Federal Register, to comply with 
final Conditions 11 and 13, which require Japanese nonbank SDs to file 
Schedule 1 and the Margin Report with the Commission and NFA.
    In an effort to align, where appropriate, the filing deadlines for 
financial reporting obligations imposed by the Comparability Order on 
Japanese nonbank SDs with the filing deadlines that the Commission 
proposed for nonbank SDs domiciled in several other jurisdictions, the 
Commission is also setting the filing deadline in final Condition 8 to 
35 calendar days after the end of each month.\275\ The filing deadline 
will apply to the selected forms of the Monthly Monitoring Report, as 
well as to Schedule 1 and the Margin Report, which pursuant to final 
Conditions 11 and 13 must be filed with the selected forms of the 
Monthly Monitoring Report.
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    \275\ See 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, 88 FR 41774 (June 27, 
2023) and 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 Capital and Financial 
Reporting Requirements of the United Kingdom and Regulated by the 
United Kingdom Prudential Regulation Authority, 89 FR 8026 (Feb. 5, 
2024).
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    In summary, the Commission is adopting the Comparability Order and 
conditions as proposed with respect to the comparability of the CFTC 
Financial Reporting Requirements and Japanese Financial Reporting 
Requirements, subject to the adjustments to the required content of the 
Monthly Monitoring Report, the filing deadlines discussed above, the 
minor change in the language of final Condition 7 to specify that 
Japanese nonbank SDs must keep current ledgers or similar records in 
accordance with accounting principles ``permitted'' by the FSA, and the 
specifications in final Conditions 8, 9, 11, and 13 that the conversion 
of balances to U.S. dollars must be done using a commercially 
reasonable and observable yen/U.S. dollar spot rate as of the date of 
the respective report. The Commission also grants an additional 
compliance period for the new reporting obligations imposed on Japanese 
nonbank SDs as set forth in the final Comparability Order below.

E. Notice Requirements

1. Proposed Determination
    The Commission noted in the 2022 Proposal that the CFTC Financial 
Reporting Rules require nonbank SDs to provide the Commission and NFA 
with written notice of certain defined events.\276\ Commission 
Regulation 23.105(c) requires a nonbank SD to file written notice with 
the Commission and NFA of the following events: (i) the nonbank SD's 
regulatory capital is less than the minimum amount required; (ii) the 
nonbank SD's regulatory capital is less than 120 percent of the minimum 
amount required; (iii) the nonbank SD fails to make or to keep current 
required financial books and records; (iv) the nonbank SD experiences a 
reduction in the level of its excess regulatory capital of 30 percent 
or more from the amount last reported in a financial report filed with 
the Commission; (v) the nonbank SD plans to distribute capital to 
equity holders in an amount in excess of 30 percent of the firm's 
excess regulatory capital; (vi) the nonbank SD fails to post to, or 
collect from, a counterparty (or group of counterparties under common 
ownership or control) required initial and variation margin, and the 
aggregate amount of such margin equals or exceeds 25 percent of the 
nonbank SD's minimum capital requirement; (vii) the nonbank SD fails to 
post to, or collect from, swap counterparties required initial and 
variation margin, and the aggregate amount of such margin equals or 
exceeds 50 percent of the nonbank SD's minimum capital requirement; and 
(viii) the nonbank SD is registered with the SEC as an SBSD and files a 
notice

[[Page 58495]]

with the SEC under applicable SEC Rules.\277\
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    \276\ 2022 Proposal at 48110. See, also, 17 CFR 23.105(c).
    \277\ 17 CFR 23.105(c).
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    The notices are part of the Commission's overall program of helping 
to ensure the safety and soundness of nonbank SDs and the swaps markets 
in general.\278\ Notices provide the Commission and NFA with an 
opportunity to assess whether there is an actual or potential financial 
and/or operational issue at a nonbank SD. In situations where there is 
an underlying issue, Commission and NFA staff engage with the nonbank 
SD in an effort to minimize potential adverse impacts on the firm, swap 
counterparties, and the larger swaps market.\279\
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    \278\ Id.
    \279\ See 2022 Proposal at 48110.
---------------------------------------------------------------------------

    The 2022 Proposal also noted the that the Japanese Financial 
Reporting Rules include notice requirements for Japanese nonbank SDs, 
although in a more limited manner than the Commission's notice 
requirements. The Japanese Financial Reporting Rules require a Japanese 
nonbank SD to provide immediate notice to the FSA if the firm's capital 
adequacy ratio falls below 140 percent (i.e., ``Japanese Early Warning 
Notice'').\280\ The Japanese Early Warning Notice must be accompanied 
by a Plan Regarding Specific Voluntary Measures to Be Taken in Order to 
Maintain the Capital Adequacy Ratio, which includes the concrete 
measures that the Japanese nonbank SD will take to maintain a capital 
adequacy ratio above 140 percent.\281\ The FSA also has the authority 
to examine the future outlook of the Japanese nonbank SD's capital 
adequacy ratio through hearings and to urge the firm to make voluntary 
improvement efforts.\282\
---------------------------------------------------------------------------

    \280\ Id., citing Article 179 of the COO.
    \281\ Id.
    \282\ Id. citing section IV-2-2 (Supervisory Response to Cases 
of Financial Instruments Business Operators' Capital Adequacy Ratio 
Falling Below Prescribed Level) (1) of the Supervisory Guidelines 
for FIBO.
---------------------------------------------------------------------------

    A Japanese nonbank SD is also required to file immediate notice 
with the FSA if the firm's capital adequacy ratio falls below the 120 
percent minimum requirement.\283\ The notification must include the 
Japanese nonbank SD's Plan Regarding Specific Voluntary Measures to Be 
Taken in Order to Improve the Capital Adequacy Ratio.\284\ The FSA will 
review the plan and, when necessary, identify the specific method by 
which a Japanese nonbank SD must bring its capital adequacy ratio back 
above the prescribed minimum level and the estimated date of the 
recovery. In situations where the Japanese nonbank SD fails to maintain 
the minimum level of regulatory capital, the FSA will also examine 
other aspects of the firm's operations, including the status of 
segregated management of customer assets and fund-raising. If the FSA 
finds it to be necessary and appropriate in the public interest or for 
the protection of investors, the Commissioner of the FSA may order a 
change of business methods, order assets to be deposited, or issue 
orders with respect to matters that are otherwise necessary from a 
supervisory perspective.\285\
---------------------------------------------------------------------------

    \283\ 2022 Proposal at 48110, citing Article 179 of COO.
    \284\ Id.
    \285\ 2022 Proposal at 48110-48111. Article 53(1) of the FIEA. 
Section IV-2-2 (Supervisory Response to Cases of Financial 
Instruments Business Operators' Capital Adequacy Ratio Falling Below 
Prescribed Level) (3) of the Supervisory Guidelines for FIBO 
indicates four examples of the order: (i) to draft and implement 
measures (including the drafting of specifics and the implementation 
schedule) to bring the capital adequacy ratio back above the legally 
prescribed level and maintain the ratio above that level on a 
permanent basis; (ii) to implement measures to ensure the protection 
of investors in preparation for an unexpected event, through 
appropriate management of securities and cash and careful management 
of fund-raising; (iii) to avoid activities that could lead to 
wasteful use of corporate assets; and (iv) to compile the 
projections of the balance sheet and fund-raising status on a daily 
basis and the projection of the capital adequacy ratio in ways to 
reflect the specific measures to be implemented, in order to bring 
the capital adequacy ratio back above the legally prescribed level.
---------------------------------------------------------------------------

    If a Japanese nonbank SD's capital adequacy ratio falls below 100 
percent, the Commissioner of the FSA may order the suspension of all or 
part of the firm's business activities for a period not to exceed three 
months if the FSA deems such action to be necessary and appropriate for 
the public interest or for the protection of investors.\286\ If the 
Japanese nonbank SDs capital adequacy ratio does not exceed 100 
percent, and the FSA determines that the firm's capital adequacy ratio 
status is not likely to recover, the Commissioner of the FSA may 
rescind the registration of the firm.\287\
---------------------------------------------------------------------------

    \286\ 2022 Proposal at 48111. Article 53(2) of the FIEA.
    \287\ Id. Article 53(3) of the FIEA.
---------------------------------------------------------------------------

    Furthermore, in addition to the above measures, the FSA may order a 
Japanese nonbank SD to change its business methods or to otherwise take 
measures that are necessary for improving its business operations or 
the state of its assets if the FSA finds such action necessary and 
appropriate in the public interest or for the protection of 
investors.\288\ Finally, the Prime Minister of Japan may rescind the 
registration of a Japanese nonbank SD, or order the suspension of all 
or a part of its business activities for a period of no longer than six 
months, if the Japanese nonbank SD violates a disposition by a 
government agency,\289\ or is likely to become insolvent due to the 
state of its business and assets.\290\
---------------------------------------------------------------------------

    \288\ Id. Article 51 of the FIEA.
    \289\ Id. Article 52(1)(vii) of the FIEA.
    \290\ Id. Article 52(1)(viii) of the FIEA.
---------------------------------------------------------------------------

    Based on its review of the FSA Application and the relevant 
Japanese laws and regulations, the Commission preliminarily determined 
that the Japanese Financial Reporting Rules and the CFTC Financial 
Reporting Rules were comparable in purpose and effect with respect to 
the requirements in Commission Regulation 23.105(c)(1) and (2) for 
nonbank SDs to provide notice if the firm fails to maintain the minimum 
level of regulatory capital or falls below 120 percent of the minimum 
level of regulatory capital. Therefore, the Commission proposed to 
condition the Comparability Order on a Japanese nonbank SD providing 
the Commission and NFA with written notice within 24 hours of the firm 
filing notice with the FSA, pursuant to Article 179(3) of the COO, that 
its capital adequacy ratio had fallen below 140 percent or 120 
percent.\291\ The Commission noted that upon receipt of a notice, 
Commission staff and NFA staff would engage with the FSA and the 
Japanese nonbank SD to obtain an understanding of the facts that led to 
the filing of the notice and would discuss with the FSA its plan for 
any ongoing monitoring of the Japanese nonbank SD. Accordingly, the 
Commission stated that its proposal would not require the Japanese 
nonbank SD to file copies of its recovery plan that it filed with the 
FSA with the Commission or NFA. The Commission stated that to the 
extent it needed further information from the Japanese nonbank SD, the 
Commission expected to request such information as part of its 
interaction with the Japanese nonbank SD and from its discussions with 
the FSA.\292\ The Commission believed that its proposed conditions 
would ensure that the Commission and NFA received the appropriate 
information covered by Commission Regulation 23.105(c)(1) and (2), 
while also removing the obligation for the Japanese nonbank SD to file 
separate and duplicative notices with the Commission/NFA and the FSA.
---------------------------------------------------------------------------

    \291\ Id.
    \292\ See 2022 Proposal at 48112.
---------------------------------------------------------------------------

    The Commission, however, also acknowledged that the notice 
provisions of the Japanese Financial Reporting Rules differ in certain 
respects from the CFTC Financial Reporting Rules.\293\

[[Page 58496]]

Specifically, unlike the CFTC Financial Reporting Rules, the Japanese 
Financial Reporting Rules do not contain explicit requirements for a 
Japanese nonbank SD to notify the FSA if the firm fails to make or keep 
current books and records required by the FSA, experiences a specified 
decrease in its capital adequacy ratio when compared to levels 
previously reported, or fails to collect or post required initial 
margin and/or variation margin for uncleared swap and non-cleared 
security-based swap transactions with counterparties that exceed 
certain threshold levels.\294\ The Japanese Financial Reporting Rules 
also do not require a Japanese nonbank SD to provide the FSA with 
advance notice of capital withdrawals initiated by equity holders that 
exceed defined amounts or percentages of the firm's excess regulatory 
capital.\295\
---------------------------------------------------------------------------

    \293\ Id.
    \294\ See 17 CFR 23.105(c)(3), (4), and (7).
    \295\ See 17 CFR 23.105(c)(5) (requiring 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). See 2022 Proposal at 48111.
---------------------------------------------------------------------------

    To address these differences and to ensure that the Commission and 
NFA receive appropriate notices of events that may have potential 
adverse impacts on registered SDs, the Commission proposed to condition 
the Comparability Order to require Japanese nonbank SDs to file certain 
additional notices directly with the Commission and NFA. In this 
regard, the Commission stated 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 ensuring compliance with regulatory 
requirements, including regulatory capital requirements.\296\ As such, 
the Commission proposed to condition the proposed Comparability Order 
on a Japanese nonbank SD providing the Commission and NFA with a 
written notice within 24 hours if the firm fails to make or to keep 
current books and records required by the FSA.\297\ The Commission 
stated that, in this context, books and records would include current 
ledgers or other similar records which show or summarize, with 
appropriate references to supporting documents, each transaction 
affecting the Japanese nonbank SD's asset, liability, income, expense, 
and capital accounts in accordance with the accounting principles 
permitted by the FSA.\298\
---------------------------------------------------------------------------

    \296\ 2022 Proposal at 48111.
    \297\ Id. at 48111-48112. See also, proposed Condition 18 at 
48115.
    \298\ Id. at 48111. For comparison, see Commission Regulation 
23.105(b) (similarly defining the term ``current books and records'' 
as used in the context of Commission's requirements). 17 CFR 
23.105(b).
---------------------------------------------------------------------------

    The Commission further proposed to condition the Comparability 
Order on a Japanese nonbank SD filing a notice with the Commission and 
NFA if: (i) a single counterparty, or group of counterparties under 
common ownership or control, fails to post required initial margin or 
pay required variation margin on uncleared swap and non-cleared 
security-based swap positions that, in the aggregate, exceeds 25 
percent of the Japanese nonbank SD's minimum capital requirement; (ii) 
counterparties fail to post required initial margin or pay required 
variation margin to the Japanese nonbank SD for uncleared swap and non-
cleared security-based swap positions that, in the aggregate, exceeds 
50 percent of the Japanese nonbank SD's minimum capital requirement; 
(iii) a Japanese nonbank SD fails to post required initial margin or 
pay required variation margin for uncleared swap and non-cleared 
security-based swap positions to a single counterparty or group of 
counterparties under common ownership and control that, in the 
aggregate, exceeds 25 percent of the Japanese nonbank SD's minimum 
capital requirement; and (iv) a Japanese nonbank SD fails to post 
required initial margin or pay required variation margin to 
counterparties for uncleared swap and non-cleared security-based swap 
positions that, in the aggregate, exceed 50 percent of the Japanese 
nonbank SD's minimum capital requirement. The Commission proposed to 
require this notice so that, in the event that such a notice is filed, 
the Commission and NFA may commence communication with the Japanese 
nonbank SD and the FSA to obtain an understanding of the facts that led 
to the failure to exchange material amounts of initial margin or 
variation margin in accordance with the applicable margin rules, and to 
assess whether there is a concern regarding the financial condition of 
the firm that may impair its ability to meet its financial obligations 
to customers, counterparties, creditors, and general market 
participants, or otherwise adversely impact the firm's safety and 
soundness.\299\
---------------------------------------------------------------------------

    \299\ Id. See also, proposed Condition 19 at 48115.
---------------------------------------------------------------------------

    The Commission also proposed to require that a Japanese nonbank SD 
file any notices required under the proposed Comparability Order with 
the Commission and NFA in English and, where applicable, with any 
balances reported in U.S. dollars. The Commission stated that each 
notice required by the proposed Comparability Order had to be filed in 
accordance with instructions issued by the Commission or NFA.\300\
---------------------------------------------------------------------------

    \300\ Id.
---------------------------------------------------------------------------

    The Commission did not propose to require a Japanese nonbank SD to 
file notices with the Commission concerning withdrawals of capital or 
changes in capital levels as such information would be reflected in the 
financial statement reporting filed with the Commission and NFA as 
conditions of the order, and because the Japanese nonbank SD's capital 
levels are also monitored by the FSA. As such, the Commission 
preliminarily considered that the separate reporting of the information 
to the Commission would be superfluous.\301\
---------------------------------------------------------------------------

    \301\ Id.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
    The Commission received several comments with respect to the notice 
provisions. IBAJ noted, with respect to the proposed requirement in 
proposed Condition 18 that a Japanese nonbank SD file notice with the 
Commission and NFA within 24 hours of the firm failing to make or keep 
current the financial books and records required by the FSA, that it is 
practically challenging for a firm to submit a notification prior to 
the discovery of the relevant failure.\302\ IBAJ recommended that the 
condition require a notice ``following the discovery'' by the Japanese 
nonbank SD of its failure to maintain current financial books and 
records.\303\
---------------------------------------------------------------------------

    \302\ IBAJ Letter at p. 7.
    \303\ Id.
---------------------------------------------------------------------------

    Maintaining current books and records of all financial transactions 
is a fundamental recordkeeping requirement for a registered nonbank SD, 
and is essential in order to provide management with the information 
necessary to ensure that financial transactions are timely and 
accurately reported and that the firm is in compliance with capital and 
other regulatory requirements. The Commission believes that it is 
necessary for a nonbank SD to maintain internal controls and procedures 
to affirmatively monitor that books and records are being maintained on 
a current basis. Therefore, the Commission is adopting Condition 18 
(renumbered as final Condition 19) as proposed.\304\ For

[[Page 58497]]

further clarification of this condition, the Commission also confirms 
that the requirement for Japanese nonbank SDs to file a notice with the 
Commission if the firm fails to maintain current books and records will 
apply with respect to books and records addressing the Japanese nonbank 
SD's financial condition and financial reporting requirements.
---------------------------------------------------------------------------

    \304\ The Commission also notes that final Condition 19 is 
consistent with Commission Regulation 23.105(c)(3), which requires 
nonbank SDs subject to the Commission's notice requirements to file 
notice within 24 hours if the firm does not maintain current books 
and records. 17 CFR 23.105(c)(3).
---------------------------------------------------------------------------

    IBAJ also recommended a technical edit to the proposed condition 
requiring Japanese nonbank SDs to file a notice in case of a failure to 
exchange material amounts of initial margin or variation margin. 
Specifically, IBAJ suggested that the phrase ``to the Japanese nonbank 
SD'' be added after the phrase ``a single counterparty, or group of 
counterparties under common ownership or control, fails to post 
required initial margin or pay required variation margin'' in prong (i) 
of proposed Condition 19.\305\ The Commission considers this edit 
appropriate as it reflects the intent of the Condition as set forth in 
the 2022 Proposal, and has revised proposed Condition 19 (renumbered as 
Condition 20 of the final Order) by adding the phrase ``to the Japanese 
nonbank SD.'' Separately, for purposes of clarity, the Commission notes 
that, in proposing a notice condition based on thresholds of 
``required'' margin, the Commission's intent was to set the notice 
trigger by reference to margin amounts that are legally required to be 
exchanged under the applicable margin requirements. To determine the 
applicable margin requirements, the Commission will consider the 
framework set forth in Commission Regulation 23.160.\306\ To the extent 
Japanese nonbank SDs intending to rely on the Comparability Order have 
inquiries regarding the scope of uncleared swap margin transactions to 
be monitored for purposes of complying with final Condition 20, MPD 
will discuss such inquiries with the Japanese nonbank SD during the 
confirmation process referenced in final Condition 6 of the 
Comparability Order.
---------------------------------------------------------------------------

    \305\ IBAJ Letter at p. 7.
    \306\ Commission Regulation 23.160 governs the cross-border 
application of the CFTC margin requirements for uncleared swaps 
depending on the category of entities involved in the transactions 
and the availability of substituted compliance. 17 CFR 23.160.
---------------------------------------------------------------------------

    Finally, IBAJ requested that the Commission clarify the meaning of 
the term ``minimum capital requirement'' in proposed Condition 19.\307\ 
The Commission notes that the concept of ``minimum capital 
requirement'' refers to the minimum amount of capital that a Japanese 
nonbank SD is required to hold pursuant to the Japanese Capital Rules. 
The Commission understands that this amount corresponds to the Japanese 
nonbank SD's required ``capital adequacy amount'' (i.e., 120 percent of 
the Japanese nonbank SD's risk equivalent amount). To more accurately 
reflect the intent of the condition, however, the Commission will set 
forth the notice requirement in proposed Condition 19 (renumbered as 
final Condition 20) by reference to the Japanese nonbank SD's risk 
equivalent amount. By using the Japanese nonbank SD's risk equivalent 
amount as a threshold reference, the Commission will more closely align 
the condition with Commission Regulation 23.105(c)(7).
---------------------------------------------------------------------------

    \307\ Id. at p. 8 (asking whether ``minimum capital 
requirement'' in this context meant the amount calculated by 
multiplying the risk equivalent amount and 120 percent under the 
Japanese Capital Rules).
---------------------------------------------------------------------------

    As discussed in Section II.E.1. above, the notice provisions are 
central part of the Commission's and NFA's oversight of nonbank SDs. To 
ensure that the Commission and NFA receive appropriate and timely 
notice of potential capital issues with Japanese nonbank SDs, the 
Commission is adopting proposed Conditions 16 and 17, which require a 
Japanese nonbank SD to file notice with the Commission and NFA within 
24 hours of filing notice with the FSA that the firm's capital adequacy 
requirement has fallen below 140 percent and 120 percent, 
respectively.\308\
---------------------------------------------------------------------------

    \308\ Proposed Conditions 16 and 17 have been renumbered as 
Conditions 17 and 18, respectively, in the final Comparability 
Order.
---------------------------------------------------------------------------

    Furthermore, the Commission did not receive any comments with 
respect to the following proposed notice conditions: (i) the Japanese 
nonbank SD files notice with the Commission and NFA within 24 hours of 
being informed by the FSA that the firm is not in compliance with any 
component of the Japanese Capital Rules or Japanese Financial Reporting 
Rules (proposed Condition 14); (ii) the Japanese nonbank SD files 
notice with the Commission and NFA within 24 hours if the firm fails to 
maintain regulatory capital in the form of Basic Items, as defined in 
Article 176 of the COO, equal to or in excess of the U.S. dollar 
equivalent of $20 million (proposed Condition 15); or (iii) the 
Japanese nonbank SD files notice of the FSA approving a change in the 
firm's fiscal year-end date, which must be filed with the Commission 
and NFA at least 15 business days prior to the effective date of the 
change (proposed Condition 20). The Commission, having considered the 
2022 Proposal, is adopting the above conditions as proposed.\309\
---------------------------------------------------------------------------

    \309\ The Commission is renumbering proposed Conditions 14, 15, 
19, and 20 as Conditions 15, 16, 20, and 21, respectively, in the 
final Comparability Order.
---------------------------------------------------------------------------

    Commenters also requested that the Commission set the compliance 
date at least six months following the issue date of the Comparability 
Order to allow Japanese nonbank SDs to adequately prepare for 
compliance with the notice reporting obligations imposed by the 
Comparability Order.\310\ Similar to its position with regard to the 
financial reporting obligations, the Commission believes that granting 
an additional period of time to allow Japanese nonbank SDs to establish 
and implement the necessary processes to comply with the notice 
requirements imposed by the Comparability Order is appropriate with 
respect to certain notice obligations. Specifically, the Commission 
understands that establishing a process for monitoring failures to 
collect or post initial margin or variation margin for uncleared swap 
transactions that exceed specified thresholds for purposes of complying 
with final Condition 20 may take time. Conversely, the Commission does 
not believe that additional time is necessary for implementing a 
process of providing a notice to the Commission and NFA in connection 
with the occurrence of events that Japanese nonbank SDs currently 
monitor and/or report to the FSA. The Commission is also of the view 
that, given the nature of the notice obligation, Japanese nonbank SDs 
should be in a position to comply with all other notice obligations, 
including those requiring Japanese nonbanks SDs to provide notice to 
the Commission and NFA if they fail to make or keep current financial 
books and records, or if they fail to maintain regulatory capital in 
the form of Basic Items equal to, or in excess of, the U.S. dollar 
equivalent of $20 million, immediately upon effectiveness of the 
Comparability Order. Accordingly, the Commission is setting a 
compliance date of 180 calendar days after the publication of the 
Comparability Order in the Federal Register with respect to the notice 
reporting obligations under final Condition 20 of the Comparability 
Order. Commenters did not address any other aspects of the proposed 
Comparability Determination or Comparability Order concerning the

[[Page 58498]]

comparability of the Japanese and CFTC nonbank SD notice requirements.
---------------------------------------------------------------------------

    \310\ IBAJ Letter at p. 4 and Associations Letter at p. 4.
---------------------------------------------------------------------------

    In conclusion, the Commission finds that the regulatory notice 
provisions of Japanese Financial Reporting Rules and the CFTC Financial 
Reporting Rules, after consideration of the conditions imposed in the 
final Comparability Order, are comparable in purpose and effect, and 
achieve comparable regulatory outcomes, by providing timely notice to 
the FSA, and to the Commission and NFA, of specified events at a 
nonbank SD that may potentially indicate an ongoing issue with the 
safety and soundness of the firm and/or its ability to meet its 
obligations to swap counterparties, creditors, or other market 
participants without the firm becoming insolvent. As such, the 
Commission adopts the final Comparability Order and conditions as 
proposed with respect to the Commission's analysis of comparability of 
the Japanese and Commission's nonbank SD notice reporting requirements, 
subject to the technical edits in Condition 20 discussed above. The 
Commission is also adopting a compliance date for certain notice 
reporting requirements as discussed above in the final Comparability 
Order.

F. Supervision and Enforcement

1. Proposed Determination
    In the 2022 Proposal, the Commission discussed the oversight of 
nonbank SDs, noting that 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.\311\ As discussed, the 
Commission and NFA also conduct periodic examinations as part of their 
supervision of nonbank SDs, including routine onsite examinations of 
nonbank SDs' books, records, and operations to ensure compliance with 
CFTC and NFA requirements.\312\
---------------------------------------------------------------------------

    \311\ See 2022 Proposal at 48112.
    \312\ See id. Section 17(p)(2) of the CEA requires NFA as a 
registered futures association to establish minimum capital and 
financial requirements for nonbank 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.
---------------------------------------------------------------------------

    The Commission also referred to the financial reports and notices 
required under the CFTC Financial Reporting Rules, noting that the 
reports and notices provide the Commission and NFA with information 
necessary to ensure the nonbank SD's compliance with minimum capital 
requirements; assess the firm's overall safety and soundness and 
ability to meet its financial obligations to customers, counterparties, 
creditors, and general market participants; and identify potential 
issues at a nonbank SD that may impact the firm's ability to maintain 
compliance with the CEA and Commission regulations.\313\ As discussed 
in the 2022 Proposal, the Commission and NFA also have the authority to 
require a nonbank SD to provide any additional financial and/or 
operational information as they may specify to monitor the safety and 
soundness of the firm.\314\
---------------------------------------------------------------------------

    \313\ See 2022 Proposal at 48112-48113.
    \314\ 17 CFR 23.105(h). See also 2022 Proposal at 48112-48113.
---------------------------------------------------------------------------

    The Commission further noted that it has authority to take 
disciplinary actions against a nonbank SD for failing to comply with 
the CEA and Commission regulations. In this regard, Section 4b-1(a) of 
the CEA provides the Commission with exclusive authority to enforce the 
capital requirements imposed on nonbank SDs adopted under Section 4s(e) 
of the CEA.\315\ NFA also may take disciplinary actions against nonbank 
SDs for failure to comply with NFA rules.\316\
---------------------------------------------------------------------------

    \315\ Id. at 48113.
    \316\ NFA is required by the CEA to maintain rules providing 
that its member and persons associated with its members, including 
nonbank SDs, shall be appropriately disciplined by expulsion, 
suspension, fine, censure, or being suspended or barred from being 
associated with all members, or any other fitting penalty, for any 
violation of its rules. 7 U.S.C. 21(b)(8); see also Commission 
Regulation 170.6 (17 CFR 170.6), which requires, among other things, 
a registered futures association to take vigorous action against 
members that engage in activities in violation of the association's 
rules and to impose discipline that is fair and has a reasonable 
basis in fact.
---------------------------------------------------------------------------

    With respect to the FSA's authority to supervise Japanese nonbank 
SDs and carry out enforcement actions, the Commission stated that the 
FSA has supervision, audit, and investigation authority with respect to 
Japanese nonbank SDs, including the authority to require such firms to 
provide all necessary information for the FSA to carry out its 
supervisory responsibilities.\317\ Specifically, as discussed in the 
2022 Proposal, the FSA has the authority to require Japanese nonbank 
SDs to submit documents to the FSA and to conduct onsite inspections at 
the business offices of the Japanese nonbank SDs.\318\
---------------------------------------------------------------------------

    \317\ FSA Application, p. 16.
    \318\ Article 56-2 of the FIEA. See 2022 Proposal at 48113.
---------------------------------------------------------------------------

    The Commission noted that the FSA also monitors the capital 
adequacy ratios of Japanese nonbank SDs through supervisory measures on 
an ongoing basis, referring to the system of notice requirements, 
discussed in Section E.1. above, that obligate Japanese nonbank SDs to 
provide notice to the FSA if certain triggering conditions are met. The 
Commission also discussed the FSA's authority to address actual cases 
of a Japanese nonbank SD's failure to maintain its required capital 
adequacy ratio. Specifically, as discussed, a Japanese nonbank SD is 
required to submit a notification and an action plan to the FSA if the 
Japanese nonbank SD's capital adequacy ratio falls below 120 
percent.\319\ The FSA will review the plan and, when necessary, 
identify the specific method by which the Japanese nonbank SD is 
required to bring its capital adequacy ratio back above the prescribed 
minimum level. The FSA also may order a Japanese nonbank SD to change 
its business methods, order assets to be deposited, or issue orders 
with respect to matters that are otherwise necessary from a supervisory 
perspective, if the FSA finds it in the public interest or for the 
protection of customers to take such actions.\320\ Furthermore, a 
Japanese nonbank SD may have all or parts of its business suspended for 
a period of up to six months or have its registration revoked if the 
firm violates certain laws or regulations in connection with the 
financial instruments business or services,\321\ or if the firm is 
likely to become insolvent.\322\ Finally, a Japanese nonbank SD is 
subject to fines and other possible actions if it fails to submit 
documents that are required by law to be filed with the FSA.\323\ Based 
on its analysis of the FSA's supervisory regime, the Commission 
preliminarily found that the FSA has the necessary powers and ability 
to supervise and enforce Japanese nonbank SDs' compliance with Japanese 
capital adequacy and financial reporting requirements.
---------------------------------------------------------------------------

    \319\ Article 53(2) of the FIEA.
    \320\ Id.
    \321\ Article 52(1)(vii) of the FIEA.
    \322\ Article 52(1)(viii) of the FIEA.
    \323\ Article 198-6 of the FIEA. See 2022 Proposal at 48113.
---------------------------------------------------------------------------

    The Commission also cited its long history of regulatory 
cooperation with the FSA, noting that the Commission and the FSA have 
entered into a Memorandum of Cooperation (``MOC'') with regard to the 
cooperation and the exchange of information in the supervision and 
oversight of regulated entities that operate on a cross-border basis in 
both the U.S. and Japan (``Cross-Border Covered Entities''), including

[[Page 58499]]

nonbank SDs registered with the Commission and FIBOs registered with 
the FSA.\324\ As discussed in the 2022 Proposal, pursuant to the MOC, 
the Commission and FSA have expressed an intent to consult regularly, 
as appropriate, regarding: (i) general supervisory issues, including 
regulatory, oversight, or other related developments; (ii) issues 
relevant to the operations, activities, and regulation of Cross-Border 
Covered Entities; and (iii) any other areas of mutual supervisory 
interest, and to meet periodically to discuss their respective 
functions and regulatory oversight programs.\325\ The MOC further 
provides for the Commission and FSA to inform each other of certain 
events, including any material events that could adversely impact the 
financial or operational stability of a Cross-Border Covered Entity, 
and provides a procedure for the Commission or FSA to conduct on-site 
examinations in, respectively, Japan or the U.S.\326\ The Commission 
stated that, pursuant to the terms of the MOC, it intends to 
communicate and consult with the FSA regarding the supervision of the 
financial and operational condition of Japanese nonbank SDs.\327\
---------------------------------------------------------------------------

    \324\ Memorandum of Cooperation Related to the Supervision of 
Cross-Border Covered Entities (Mar. 10, 2014), available here: 
https://www.cftc.gov/idc/groups/public/%40internationalaffairs/documents/file/cftc-jfsamoc031014.pdf. In addition, both the 
Commission and the FSA 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. 
See 2022 Proposal at 48111-48112.
    \325\ MOC, paragraphs 19 and 26.
    \326\ MOC, paragraph 22 and 29. Event-triggered notification in 
paragraph 22 of the MOC includes any known adverse material change 
in the ownership, operating environment, operations, financial 
resources, management, or systems and controls of a Cross-Border 
Covered Entity, and the failure of a Cross-Border Covered Entity to 
satisfy any of its requirements for continued authorization or 
registration where that failure could have a material adverse effect 
in the jurisdiction of the Commission or FSA.
    \327\ See 2022 Proposal at 48113.
---------------------------------------------------------------------------

    Finally, in addition to preliminarily finding that the FSA has the 
necessary powers and authorities to conduct supervisory programs, the 
Commission also noted that it retains examination authority and 
enforcement authority over Japanese nonbank SDs.\328\ The ability of 
the Commission to exercise its enforcement authority over Japanese 
nonbank SD is not conditioned upon a finding by the FSA of a violation 
of the Japanese Capital Rules or Japanese Financial Reporting Rules. In 
addition, as each Japanese nonbank SD is a member of NFA, the firm is 
subject to NFA membership rules, examination authority, and 
disciplinary process.\329\
---------------------------------------------------------------------------

    \328\ 2022 Proposal at 48094-48095. In discussing the 
comparability framework, the Commission noted that a non-U.S. 
nonbank SD that has received confirmation of its ability to operate 
under a Comparability Order remains subject to the Commission's 
examination authority and may be subject to a Commission enforcement 
action if the firm fails to comply with a foreign jurisdiction's 
capital adequacy or financial reporting requirements.
    \329\ 7 U.S.C. 21(p).
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2. Comment Analysis and Final Determination
    In response to the Commission's request for comment, Better Markets 
stated that to ensure that the Commission fulfills its obligation to 
protect the U.S. financial system, it must ensure, on an ongoing basis, 
that each grant of substituted compliance remains appropriate over time 
by, at least, requiring that each order granting substituted 
compliance, and each memorandum of understanding with a foreign 
regulatory authority, impose an obligation that the applicant, as 
appropriate: (1) periodically apprise the Commission of the activities 
and results of its supervision and enforcement programs, to ensure that 
they remain sufficiently robust to deter and address violations of the 
law; and (2) immediately apprise the Commission of any material changes 
to the regulatory regime, whether explicit (i.e., rules changes) or 
implicit (i.e., changes in how a rule is interpreted, applied, or 
enforced).\330\
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    \330\ Better Markets Letter at pp. 6-7.
---------------------------------------------------------------------------

    As discussed above, the Commission has entered into an MOC with the 
FSA, which sets forth a comprehensive framework for cooperation, timely 
communications, and exchange of information between the agencies. In 
addition, the 2022 Proposal includes a proposed condition requiring the 
FSA to notify the Commission of any material changes to the information 
submitted in the FSA Application, including, but not limited to, 
proposed and final material changes to the Japanese Capital Rules or 
Japanese Financial Reporting Rules and proposed and final material 
changes to the FSA's supervisory authority or supervisory regime over 
Japanese nonbank SDs. The Commission has included this condition in its 
final Comparability Order and further expanded it to require that a 
Japanese nonbank SD relying on the Comparability Order provide such 
notice.\331\ As such, the Commission believes that the comment 
concerning the nature and extent of cooperation and communication 
between the CFTC and the FSA with respect to the supervision and 
oversight of Japanese nonbank SDs is adequately addressed.
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    \331\ Condition 22 of the final Comparability Order. Final 
Condition 22 requires that the ``Japanese nonbank SD or the [FSA]'' 
provide a notice of material changes to the information submitted in 
the FSA Application. Although the FSA is the applicant, the 
Commission believes that Japanese nonbank SDs who rely on the 
Comparability Order and are responsible for complying with the terms 
of the Order must also have an obligation to inform the Commission 
and NFA of material changes to the information submitted in the FSA 
Application. Japanese nonbank SDs may act individually or in 
coordination with the FSA to ensure that the Commission and NFA 
receive a timely notice.
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    Furthermore, in issuing a Comparability Order, the Commission is 
not ceding its supervisory and enforcement authority. Japanese nonbank 
SDs that are subject to a Comparability Order are registered with the 
Commission as SDs and are members of NFA, and, as such, are subject to 
the CEA, Commission regulations, and NFA membership rules and 
requirements. Japanese nonbank SDs covered by the Comparability Order 
also remain subject to the Commission's examination authority with 
respect to all elements of the CEA and Commission regulations, 
including capital and financial reporting.\332\ Therefore, the 
Commission and NFA have an ongoing obligation to conduct oversight, 
including potential examination, of Japanese nonbank SDs. In this 
regard, Japanese nonbank SDs covered by a Comparability Order are not 
only required to provide the Commission and NFA with information 
pursuant to the conditions in the order, they are also required to 
directly provide the Commission and NFA with additional information 
upon the Commission's and/or NFA's request in order to facilitate the 
ongoing supervision of such firms.\333\ Further, Section 17 of NFA's SD 
Financial Requirements rule provides that each SD member of NFA must 
file the financial, operational, risk management and other information 
required by NFA in the form and manner prescribed by NFA.\334\ The 
ability to obtain information directly from Japanese nonbank SDs 
ensures that the Commission and NFA have access to the information 
necessary to monitor the financial condition of such firms and to 
assess the firms' compliance with applicable capital and financial 
reporting requirements.
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    \332\ 17 CFR 23.106(a)(4)(ii).
    \333\ 17 CFR 23.105(h).
    \334\ NFA Financial Requirements, Section 17. Swap Dealer and 
Major Swap Participant Reporting Requirements, available at NFA's 
website: https://www.nfa.futures.org/rulebooksql/index.aspx.
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    In addition, as detailed in Section I.E. above, the conditions set 
forth in the Comparability Order reflect that the

[[Page 58500]]

Commission and NFA have a continuing obligation to conduct ongoing 
oversight, including potential examination, of Japanese nonbank SDs to 
ensure compliance with the Comparability Order. Specifically, as part 
of this oversight, the conditions require Japanese nonbank SDs to file 
directly with the Commission and NFA financial reports and notices that 
are comparable to the financial reports and notices filed by nonbank 
SDs domiciled in the U.S. In addition to requiring Japanese nonbank SDs 
to maintain current books and records reflecting all transactions,\335\ 
the conditions further require each Japanese nonbank SD covered by the 
Comparability Order to file directly with the Commission and NFA: (i) 
notice that the firm was informed by the FSA that it is not in 
compliance with any component of the Japanese Capital Rules or Japanese 
Financial Reporting Rules; \336\ (ii) monthly and annual financial 
reports; \337\ (iii) notice that the firm's capital adequacy ratio has 
fallen below 140 percent or 120 percent; \338\ (iv) notice that the 
firm has failed to maintain regulatory capital in the form of Basic 
Items in amount equal to or in excess of the equivalent of $20 million; 
\339\ and (v) notice that the firm has failed to make or keep current 
financial books and records required by the FSA.\340\ The Comparability 
Order further requires a Japanese nonbank SD or the FSA to provide 
notice to the Commission of any material changes to the information 
submitted in the application, including, but not limited to, proposed 
and final material changes to the Japanese Capital Rules or Japanese 
Financial Reporting Rules and proposed and final material changes to 
the FSA's supervisory authority or supervisory regime over Japanese 
nonbank SDs.\341\ The financial information and notices required to be 
filed directly with the Commission and NFA under the Comparability 
Order, and through the Commission's and NFA's direct authority to 
obtain additional information from Japanese nonbank SDs, will allow the 
Commission and NFA to conduct ongoing oversight of such firms to assess 
their overall safety and soundness.
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    \335\ Condition 7 of the final Comparability Order.
    \336\ Condition 15 of the final Comparability Order.
    \337\ Conditions 8, 9 and 10 of the final Comparability Order.
    \338\ Conditions 17 and 18 of the final Comparability Order.
    \339\ Condition 16 of the final Comparability Order.
    \340\ Condition 19 of the final Comparability Order.
    \341\ Condition 22 of the final Comparability Order.
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    In conclusion, the Commission finds that the FSA maintains a 
supervisory program over Japanese nonbank SDs that is comparable to the 
Commission's supervisory program over nonbank SDs. The FSA's 
supervisory program is comparable in purpose and effect to the 
Commission's supervisory program in that both programs are designed to 
monitor the safety and soundness of nonbank SDs through a combination 
of periodic financial reporting, notice reporting, and examination. 
Also, as noted above, the Commission and NFA will continue to conduct 
oversight of Japanese nonbank SDs through conditions in the 
Comparability Order imposing obligations on the firms to provide 
financial reporting and notices directly to the Commission and NFA.
    In addition, the Commission finds that the FSA and Commission have 
comparable and sufficient enforcement authority over nonbank SDs. As 
discussed in Section II.F.1. above, the FSA and the Commission may 
sanction nonbank SDs for noncompliance with capital and financial 
reporting requirements by imposing fines or, if necessary, revoking the 
firms' registration. Furthermore, as discussed above, NFA may also take 
disciplinary action against a nonbank SD for failure to comply with its 
rules, including nonbank SD capital and financial reporting 
requirements. Accordingly, the Commission is adopting the Comparability 
Order as proposed with respect to the Commission's analysis concerning 
the comparability of the supervisory programs and enforcement 
authorities of the Commission, NFA, and FSA with respect to nonbank SD 
capital and financial reporting.

III. Final Capital Comparability Determination and Comparability Order

A. Commission's Final Comparability Determination

    Based on the FSA's Application and the Commission's review of 
applicable Japanese laws and regulations, as well as the review of 
comments submitted in response to the Commission's request for comment 
on the FSA Application and the proposed Comparability Determination and 
Comparability Order, the Commission finds that the Japanese Capital 
Rules and the Japanese Financial Reporting Rules, subject to the 
conditions set forth in the Comparability 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 
conclusion, the Commission recognizes that there are certain 
differences between the Japanese Capital Rules and CFTC Capital Rules 
and certain differences between the Japanese Financial Reporting Rules 
and the CFTC Financial Reporting Rules. The Comparability Order below 
is subject to conditions that are 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 view, the differences between the two rule sets are not 
inconsistent with providing a substituted compliance framework for 
Japanese nonbank SDs subject to the conditions specified in the Order 
below.
    Furthermore, the Comparability Determination and Comparability 
Order are limited to the comparison of the Japanese Capital Rules to 
the Bank-Based Approach under the CFTC Capital Rules. As noted 
previously, the FSA has not requested, and the Commission has not 
performed, a comparison of the Japanese Capital Rules to the 
Commission's NLA Approach or TNW Approach.

B. Order Providing Conditional Capital Comparability Determination for 
Japanese 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 Japan and 
subject to the Commission's capital and financial reporting 
requirements under Sections 4s(e) and (f) of the CEA (7 U.S.C. 6s(e) 
and (f)) may satisfy the capital requirements under Section 4s(e) of 
the CEA and 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 Japanese laws and regulations cited below and 
otherwise complying with the following conditions, as amended or 
superseded from time to time:
    (1) The SD is not subject to regulation by a prudential regulator 
defined in Section 1a(39) of the CEA (7 U.S.C. 1a(39));
    (2) The SD is organized under the laws of Japan and is domiciled in 
Japan (a ``Japanese nonbank SD'');
    (3) The Japanese nonbank SD is registered as a Type I Financial 
Instruments Business Operator (``FIBO'') with the Japan Financial 
Services Agency;

[[Page 58501]]

    (4) The Japanese nonbank SD is subject to and complies with: 
Articles 28(1), 29, 46-3, 46-6(2), 47, 52(1), 53(1) through (3), 56-2, 
and 198-6 of the Financial Instruments and Exchange Act (Act No. 25 of 
1948); Section II-1-4 (General Supervisory Processes), Section IV-2-1 
(Preciseness of Capital Adequacy Ratio), and Section IV-2-2 
(Supervisory Response to Cases of Financial Instruments Business 
Operators' Capital Adequacy Ratio Falling Below Prescribed Level) of 
the Comprehensive Guidelines for Supervision of Financial Instruments 
Business Operators; Articles 172, 176, 177(8), 178(1), 179(3), and 
Appended Forms No. 12 of the Cabinet Office Order on Financial 
Instruments Business (Cabinet Office Order No. 52 of 2007); Articles 1 
through 17 of the Financial Services Agency Notice No. 59 of 2007; 
Articles 2(vi), 328(1) and (2), 435(2), and 436(2)(i) of the Japanese 
Companies Act (Act No. 86 of 2005); and Articles 59 and 76 of the Rules 
of Corporate Accounting (Ordinance of the Ministry of Justice No. 13 of 
2006) (collectively, the ``Japanese Capital Rules and Japanese 
Financial Reporting Rules'');
    (5) The Japanese nonbank SD maintains at all times an amount of 
regulatory capital in the form of Basic Items, as defined in Article 
176 of the Cabinet Office Order No. 52 of 2007, equal to or in excess 
of the equivalent of $20 million in United States dollars (``U.S. 
dollars''). The Japanese nonbank SD shall use a commercially reasonable 
and observed yen/U.S. dollar exchange rate to convert the value of the 
yen-denominated Basic Items to U.S. dollars;
    (6) The Japanese nonbank SD has filed with the Commission a notice 
stating its intention to comply with the Japanese Capital Rules and 
Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules 
and the CFTC Financial Reporting Rules. The notice of intent must 
include the Japanese nonbank SD's representation that the firm is 
organized and domiciled in Japan; is a registered FIBO; and is subject 
to, and complies with, the Japanese Capital Rules and Japanese 
Financial Reporting Rules. The Japanese nonbank SD may not rely on this 
Comparability Order until it receives confirmation from Commission 
staff, acting pursuant to authority delegated by the Commission under 
Commission Regulation 140.91(a)(11) (17 CFR 140.91(a)(11)), that the 
Japanese nonbank SD may comply with the Japanese Capital Rules and 
Japanese Financial Reporting Rules in lieu of the CFTC Capital Rules 
and CFTC Financial Reporting Rules. Each notice filed pursuant to this 
condition must be prepared in the English language and submitted to the 
Commission via email to the following address: 
[email protected];
    (7) The Japanese nonbank SD prepares and keeps current ledgers and 
other similar records in accordance with accounting principles 
permitted by the Financial Services Agency;
    (8) The Japanese nonbank SD files with the Commission and with the 
National Futures Association (``NFA'') a copy of Forms 1-1 Capital 
Ratio Summary, 1-2 Capital Ratio: Deductible Assets, 1-3 Market Risk, 
1-4 Counterparty Risk, 2-1 Monthly Financial Statement (1), and 2-2 
Monthly Financial Statement (2) of its Monthly Monitoring Report that 
is required to be filed with the Financial Services Agency pursuant to 
Article 56-2(1) of the Financial Instruments and Exchange Act. The 
selected forms of the Monthly Monitoring Report must be translated into 
the English language and balances must be converted to U.S. dollars, 
using a commercially reasonable and observable yen/U.S. dollar spot 
rate as of the date of the reports. The selected forms of the Monthly 
Monitoring Report must be filed with the Commission and NFA within 35 
calendar days after the end of each month;
    (9) The Japanese nonbank SD files with the Commission and with NFA 
a copy of its Annual Business Report that is required to be filed with 
the Financial Services Agency in accordance with Article 46-3(1) of the 
Financial Instruments and Exchange Act and Article 172 of the Cabinet 
Office Order on Financial Instruments Business. The Annual Business 
Report must be translated into the English language and balances must 
be converted to U.S. dollars, using a commercially reasonable and 
observable yen/U.S. dollar spot rate as of the date of the report. The 
Annual Business Report must be filed with the Commission and NFA within 
15 business days of the earlier of the date the Annual Business Report 
is filed with the Financial Services Agency or the date that the Annual 
Business Report is required to be filed with the Financial Services 
Agency;
    (10) The Japanese nonbank SD files with the Commission and with NFA 
a copy of its Annual Audited Financial Report that is required to be 
prepared pursuant to Article 435(2) of the Japanese Companies Act (Act 
No. 86 of 2005). The Annual Audited Financial Report must be translated 
into the English language and balances may be reported in yen. The 
Annual Audited Financial Report must be filed with the Commission and 
NFA within 15 business days of approval of the report at the 
shareholders' meeting of the Japanese nonbank SD;
    (11) The Japanese nonbank SD files Schedule 1 of appendix B to 
Subpart E of Part 23 of the Commission'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, using a commercially reasonable and observable yen/U.S. 
dollar spot rate as of the date of the report, and must be filed with 
the Commission and NFA with the selected forms of the Japanese nonbank 
SD's Monthly Monitoring Report required under Condition (8) of this 
Comparability Order;
    (12) A Japanese nonbank SD that is a registered securities-based 
swap dealer with the U.S. Securities and Exchange Commission (``SEC'') 
and is required to file a monthly Form X-17A-5 (``FOCUS Report'') with 
the SEC, or its designee, must file a copy of the FOCUS Report with the 
Commission and NFA within 35 calendar days after the end of each month. 
A Japanese nonbank SD that files a FOCUS Report with the Commission and 
NFA pursuant to this Condition is not required to file the financial 
reports and schedules specified in Conditions 8 and 11 of this 
Comparability Order;
    (13) The Japanese 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 on a monthly basis 
(``Margin Report''). The Margin Report must be prepared in the English 
language with balances reported in U.S. dollars, using a commercially 
reasonable and observable yen/U.S. dollar spot rate as of the date of 
the report, and must be filed with the Commission and NFA with the 
selected forms of the Japanese nonbank SD's Monthly Monitoring Report;
    (14) The Japanese nonbank SD submits with the specified forms of 
the Monthly Monitoring Report set forth in Condition 8, Schedule 1 of 
appendix B to Subpart E of Part 23 specified in Condition 11, the 
Margin Report specified in Condition 13, the Annual Business Report 
specified in Condition 9, and the Annual Audited Financial Report 
specified in Condition 10, a statement by an authorized representative 
or representatives of the Japanese nonbank SD that to the best 
knowledge and belief of the representative or representatives the 
information contained in the applicable

[[Page 58502]]

forms, schedules, and reports, including as applicable the translation 
of the forms, schedules, and reports into the English language and 
conversion of balances to U.S. dollars, is true and correct. The 
statement must be prepared in the English language;
    (15) The Japanese nonbank SD files a notice with the Commission and 
NFA within 24 hours of being informed by the Financial Services Agency 
that the firm is not in compliance with any component of the Japanese 
Capital Rules or Japanese Financial Reporting Rules. The notice must be 
prepared in the English language;
    (16) The Japanese nonbank SD files a notice with the Commission and 
NFA within 24 hours if it fails to maintain regulatory capital in the 
form of Basic Items, as defined in Article 176 of the Cabinet Office 
Order No. 52 of 2007, equal to or in excess of the U.S. dollar 
equivalent of $20 million using a commercially reasonable and observed 
yen/U.S. dollar exchange rate. The notice must be prepared in the 
English language;
    (17) The Japanese nonbank SD provides the Commission and NFA with 
notice within 24 hours of filing a notice with the Financial Services 
Agency pursuant to Article 179 of the Cabinet Office Order on Financial 
Instruments Business that the firm's capital adequacy ratio has fallen 
below the early warning level of 140 percent. The notice filed with the 
Commission and NFA must be prepared in the English language;
    (18) A Japanese nonbank SD provides the Commission and NFA with 
notice within 24 hours of filing a notice with the Financial Services 
Agency pursuant to Article 179 of the Cabinet Office Order on Financial 
Instruments Business that the firm's capital adequacy ratio has fallen 
below 120 percent. The notice filed with the Commission and NFA must be 
prepared in the English language;
    (19) The Japanese nonbank SD files a notice with the Commission and 
NFA within 24 hours if it fails to make or keep current the financial 
books and records required by the Financial Services Agency. The notice 
must be prepared in the English language;
    (20) The Japanese nonbank SD files a notice with the Commission and 
NFA within 24 hours of the occurrence of any of the following: (i) a 
single counterparty, or group of counterparties under common ownership 
or control, fails to post required initial margin or pay required 
variation margin to the Japanese nonbank SD on uncleared swap and non-
cleared security-based swap positions that, in the aggregate, exceeds 
25 percent of the Japanese nonbank SD's risk equivalent amount; (ii) 
counterparties fail to post required initial margin or pay required 
variation margin to the Japanese nonbank SD for uncleared swap and non-
cleared security-based swap positions that, in the aggregate, exceeds 
50 percent of the Japanese nonbank SD's risk equivalent amount; (iii) 
the Japanese nonbank SD fails to post required initial margin or pay 
required variation margin for uncleared swap and non-cleared security-
based swap positions to a single counterparty or group of 
counterparties under common ownership and control that, in the 
aggregate, exceeds 25 percent of the Japanese nonbank SD's risk 
equivalent amount; or (iv) the Japanese nonbank SD fails to post 
required initial margin or pay required variation margin to 
counterparties for uncleared swap and non-cleared security-based swap 
positions that, in the aggregate, exceeds 50 percent of the Japanese 
nonbank SD's risk equivalent amount. The notice must be prepared in the 
English language;
    (21) The Japanese nonbank SD files a notice with the Commission and 
NFA of a change in its fiscal year-end approved or permitted to go into 
effect by the Financial Services Agency. The notice required by this 
paragraph will satisfy the requirement for a nonbank SD to obtain the 
approval of NFA for a change in fiscal year-end under 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 Japanese nonbank SD's change in fiscal year-end;
    (22) The Japanese nonbank SD or the Financial Services Agency 
notifies the Commission of any material changes to the information 
submitted in the application, including, but not limited to, proposed 
and final material changes to the Japanese Capital Rules or Japanese 
Financial Reporting Rules and proposed and final material changes to 
the Financial Services Agency's supervisory authority or supervisory 
regime over Japanese nonbank SDs. The notice must be prepared in the 
English language; and
    (23) Unless otherwise noted in the conditions above, the reports, 
notices, and other statements required to be filed by the Japanese 
nonbank SD with the Commission and NFA pursuant to the conditions of 
this Comparability Order must be submitted electronically to the 
Commission and NFA in accordance with instructions provided by the 
Commission or NFA.
    It is also hereby determined and ordered that this Comparability 
Order becomes effective upon its publication in the Federal Register, 
with the exception of Conditions 11, 13, and 20, which will become 
effective 180 calendar days after publication of the Comparability 
Order in the Federal Register.

    Issued in Washington, DC, on July 3, 2024, 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 Order Granting Conditional Substituted Compliance in 
Connection with Certain Capital and Financial Reporting Requirements 
Applicable to Nonbank Swap Dealers Subject to Regulation by the 
Financial Services Agency of Japan--Voting Summary and Chairman's and 
Commissioners' Statements

Appendix 1--Voting Summary

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

Appendix 2--Supporting Statement of Chairman Rostin Behnam

    I support the Commission's approval of four comparability 
determinations and related orders finding that the capital and 
financial reporting requirements in Japan, Mexico, the European 
Union (France and Germany), and the United Kingdom (for swap dealers 
(SDs) designated for prudential supervision by the UK Prudential 
Regulation Authority (PRA)) are comparable to the Commission's 
capital and financial reporting requirements applicable to nonbank 
SDs. These are the first comparability determinations that the 
Commission has finalized for applications filed following the July 
2020 adoption of its regulatory framework for substituted compliance 
for non-U.S. domiciled nonbank SDs.\1\ There are currently 15 non-
U.S. nonbank SDs that are eligible to comply with these conditional 
orders: three in Japan; three in Mexico; two in Germany and one in 
France for the EU; and six in the UK that are PRA-designated.
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    \1\ Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020). The Commission issued 
the final rule on July 24, 2020.
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    As part of the process leading to the Commission's final 
comparability determinations and orders, Commission staff engaged in 
a thorough analysis of each foreign jurisdictions' capital and 
financial reporting frameworks and considered the public comments 
received on the proposed determinations and orders. Based on those 
reviews, the Commission has determined that

[[Page 58503]]

the respective foreign jurisdictions' rules are comparable in 
purpose and effect, and achieve comparable outcomes, to the CFTC's 
capital and financial reporting rules. Specifically, the Commission 
considered the scope and objectives of the foreign regulators' 
capital adequacy and financial reporting requirements; the ability 
of those regulators to supervise and enforce compliance with their 
respective capital and financial reporting requirements; and other 
facts or circumstances the Commission deemed relevant for each of 
the applications.
    In certain instances, the Commission found that a foreign 
jurisdiction's rules impose stricter standards. In limited 
circumstances, where the Commission concluded that a foreign 
jurisdiction lacks comparable and comprehensive requirements on a 
specific issue, the Commission included a targeted condition 
designed to impose an equally stringent standard. The Commission has 
issued the final orders consistent with its authority to issue a 
comparability determination with the conditions it deems 
appropriate. These conditions aim to ensure that the orders only 
apply to nonbank SDs that are eligible for substituted compliance in 
these respective jurisdictions and that those non-U.S. nonbank SDs 
comply with the foreign country's capital and financial reporting 
requirements as well as certain additional capital, financial 
reporting, recordkeeping, and regulatory notice requirements. This 
approach acknowledges that jurisdictions may adopt unique approaches 
to achieving comparable outcomes. As a result, the Commission has 
focused on whether the applicable foreign jurisdiction's capital and 
financial reporting requirements achieve comparable outcomes to the 
corresponding Commission requirements for nonbank SDs, not whether 
they are comparable in every aspect or contain identical elements.
    With these comparability determinations, the Commission fully 
retains its enforcement and examination authority as well as its 
ability to obtain financial and event specific reporting to maintain 
direct oversight of nonbank SDs located in these four jurisdictions. 
The avoidance of duplicative requirements without a commensurate 
benefit to the Commission's oversight function reflects the 
Commission's approach to recognizing the global nature of the swap 
markets with dually-registered SDs that operate in multiple 
jurisdictions, which mandate prudent capital and financial reporting 
requirements. This is, however, an added benefit and not the 
Commission's sole justification for issuing these comparability 
determinations.
    The comparability orders will become effective upon their 
publication in the Federal Register. For several order conditions, 
the Commission is granting an additional compliance period of 180 
calendar days. To rely on a comparability order, an eligible non-
U.S. nonbank SD must notify the Commission of its intention to 
satisfy the Commission's capital and financial requirements by 
substituted compliance and receive a Commission confirmation before 
relying on a determination.
    I appreciate the hard work and dedication of the staff in the 
Market Participants Division over the past several years to propose 
and finalize these four determinations. I also thank the staff in 
the Office of the General Counsel and the Office of International 
Affairs for their support on these matters.

Appendix 3--Statement of Commissioner Kristin N. Johnson

    I support the Commodity Futures Trading Commission's (Commission 
or CFTC) issuance of four final capital and financial reporting 
comparability determinations and related orders (together, Final 
Comparability Determinations) for non-U.S. nonbank swap dealers 
(foreign nonbank SDs) and non-U.S. nonbank major swap participants 
(foreign nonbank MSPs) organized and domiciled in the United Kingdom 
(UK), the European Union (specifically, France and Germany), Mexico, 
and Japan.\1\
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    \1\ Though the Final Comparability Determinations will apply to 
foreign nonbank MSPs in the relevant jurisdictions, there are no 
such MSPs currently registered with the Commission at this time. I 
will refer only to SDs herein.
---------------------------------------------------------------------------

    The Final Comparability Determinations allow eligible foreign 
nonbank SDs to satisfy certain capital and financial reporting 
requirements under the Commodity Exchange Act (CEA) and Commission 
regulations if they: (1) are subject to, and comply with, comparable 
capital and financial reporting requirements under the laws and 
regulations applicable in their home countries and (2) comply with 
the conditions enumerated in the applicable Final Comparability 
Determination. Under this conditional substituted compliance 
framework, foreign nonbank SDs in the relevant jurisdictions that 
comply with these conditions are deemed to be in compliance with the 
Commission's capital and financial reporting requirements.
    Well-calibrated capital requirements create a cushion to absorb 
unexpected losses in times of market stress, and well-calibrated 
financial reporting requirements provide the Commission with 
information to monitor the business operations and financial 
condition of registered SDs. These tools are critical to managing 
systemic risk and fostering the stability of U.S. derivatives 
markets and the U.S. financial system. The Commission's substituted 
compliance framework addresses the need to promote sound global 
derivatives regulation while mitigating potentially duplicative 
cross-border regulatory requirements for non-U.S. market 
participants operating in our markets. Where the Commission permits 
substituted compliance, it must retain sufficient oversight, 
examination, and enforcement authority to ensure compliance with the 
foreign jurisdiction's laws and the conditions to substituted 
compliance.
    Crucially, while these Final Comparability Determinations permit 
foreign nonbank SDs to comply with home country regulations in lieu 
of compliance with Commission regulations, the Commission is also 
imposing important guardrails to ensure continuous supervision of 
the operations and financial condition of the foreign SD.

Background

    For an example of the detrimental consequences of failing to 
adequately capitalize nonbank swap market participants, one need 
look no further than the 2008 global financial crisis. According to 
the U.S. Government Accountability Office, the crisis, which 
threatened the stability of the U.S. financial system and the health 
of the U.S. economy, may have led to $10 trillion in losses, 
including large declines in employment and household wealth, reduced 
tax revenues from lower economic activity, and lost economic 
output.\2\ In response to the crisis, in 2010, the U.S. Congress 
passed the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the Dodd-Frank Act), which amended the CEA to create a new 
regulatory framework for swaps.
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    \2\ United States Government Accountability Office, Financial 
Regulatory Reform: Financial Crisis Losses and Potential Impacts of 
the Dodd-Frank Act (Jan. 2013), https://fraser.stlouisfed.org/title/gao-reports-testimonies-6136/financial-regulatory-reform-622249.
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    As amended, Section 4s(e) of the CEA directs the Commission and 
prudential regulators to impose minimum capital requirements on SDs 
registered with the Commission. Section 4s(e) adopts separate 
approaches for the imposition of minimum capital requirements on 
bank and nonbank SDs. For bank SDs, prudential regulators are 
authorized to set the minimum capital requirements. For nonbank SDs, 
the Commission is authorized to set those requirements. The amended 
CEA also sets out financial reporting requirements for SDs. Under 
Section 4s(f) of the CEA, registered SDs are required to make 
financial condition reports and other reports regarding transactions 
and positions as mandated by Commission regulations.
    In 2020, the Commission adopted regulations implementing both 
the capital and financial reporting requirements for SDs, which were 
amended in 2024 (the Capital and Financial Reporting Rules).\3\ The 
Capital and Financial Reporting Rules set minimum capital levels 
that nonbank SDs must maintain and financial reporting requirements 
that nonbank SDs must comply with, including filing periodic 
unaudited financial statements and an annual audited financial 
report.\4\
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    \3\ Capital Requirements of Swap Dealers and Major Swap 
Participants, 85 FR 57462 (Sept. 15, 2020).
    \4\ The reporting requirements imposed on bank SD and bank MSPs 
were ``more limited'' ``as the financial condition of these entities 
will be predominantly supervised by the applicable prudential 
regulator and subject to its capital and financial reporting 
requirements.'' Id. at 57513. In May 2024, the Commission adopted 
amendments to the Capital and Financial Reporting Rules that 
codified two previously-issued staff letters providing interpretive 
guidance and no-action relief and made other technical amendments. 
89 FR 45569 (May 23, 2024).
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    Like the U.S., many other nations adopted their own regulatory 
regimes to govern swaps markets in the aftermath of the financial 
crisis. Since then, regulators from around the world have endeavored 
to improve the resilience of swaps markets and establish a global 
set of standards on critical risk

[[Page 58504]]

management issues, such as capital and financial reporting 
requirements. These efforts led to the development of the Principles 
for Financial Market Infrastructures, to which many jurisdictions, 
including our own, look for guidance.\5\
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    \5\ Principles for Financial Market Infrastructures, Bank for 
International Settlements and International Organization of 
Securities Commissions (Apr. 2012), https://www.bis.org/cpmi/publ/d101a.pdf.
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    The Dodd-Frank Act amendments specifically address the cross-
border application of the CFTC's swaps regime. Section 2(i) of the 
CEA establishes that the CEA's swaps provisions apply to foreign 
swaps activities that have a ``direct and significant'' connection 
to, or effect on, U.S. markets. In line with Section 2(i) of the 
CEA, the Capital and Financial Reporting Rules set out a substituted 
compliance framework in Commission Regulation 23.106 for foreign 
nonbank SDs seeking to comply with the Commission's capital and 
financial reporting requirements.
    The substituted compliance framework consists of comparability 
determinations that afford ``due consideration [to] international 
comity principles'' while being ``consistent with . . . the 
Commission's interest in focusing its authority on potential 
significant risks to the U.S. financial system.'' \6\ The 
determinations involve an assessment of the home-country 
requirements that is a principles-based, holistic approach, focusing 
on whether the applicable home-country requirements have comparable 
objectives and achieve comparable outcomes to the Commission's 
Capital and Financial Reporting Rules.
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    \6\ Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants, 85 FR 56924, 56924 (Sept. 14, 2020).
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Today's Final Comparability Determinations

    The Final Comparability Determinations will apply to 15 foreign 
nonbank SDs currently registered with the Commission and subject to 
oversight by the UK Prudential Regulation Authority, the European 
Central Bank, the Mexican Comisi[oacute]n Nacional Bancaria y de 
Valores, and the Financial Services Agency of Japan. I commend staff 
for their hard work on the Final Comparability Determinations, 
including their work to thoroughly and thoughtfully analyze and 
address comments.
    Importantly, while the Final Comparability Determinations permit 
foreign nonbank SDs in the relevant jurisdictions to comply with 
home country regulations in lieu of compliance with Commission 
regulations, there are numerous protections in place to ensure the 
Commission's ability to supervise on an ongoing basis the adequacy 
of the foreign nonbank SDs' compliance. The Final Comparability 
Determinations all include key conditions with which the foreign 
nonbank SDs must comply. For example, each of the Final 
Comparability Determinations requires that the foreign nonbank SDs 
provide monthly and annual financial reports to the Commission--and 
the Commission can request additional information as required to 
facilitate ongoing supervision. Each Final Comparability 
Determination also requires the foreign nonbank SDs to notify the 
Commission if adverse events occur, such as a significant decrease 
in excess regulatory capital, a significant failure of a 
counterparty to post required margin, or non-compliance with certain 
capital or financial reporting requirements. Finally, in recognition 
of the fact that a country's capital standards and financial 
reporting requirements may change over time, the Final Comparability 
Determinations require the foreign nonbank SDs to provide notice of 
material changes to the home country capital or financial reporting 
frameworks.
    Moreover, the foreign nonbank SDs subject to these 
determinations are registered with the Commission and are members of 
the National Futures Association (NFA). Therefore, these entities 
are subject to the CEA, Commission regulations, and NFA membership 
rules, and each entity remains subject to Commission supervisory, 
examination and enforcement authority. As noted in the Final 
Comparability Determinations, if a foreign SD fails to comply with 
its home country's capital and financial reporting requirements, the 
Commission may initiate an action for a violation of the 
Commission's Capital and Financial Reporting Rules.
    As I have previously noted,\7\ it is important to recognize 
foreign market participants' compliance with the laws and 
regulations of their regulators when the requirements lead to an 
outcome that is comparable to the outcome of complying with the 
CFTC's corresponding requirements. Respect for partner regulators in 
foreign jurisdictions advances the Commission as a global standard 
setter for sound derivatives regulation and enhances market 
stability.
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    \7\ Kristin N. Johnson, Commissioner, CFTC, Combatting Systemic 
Risk and Fostering Integrity of the Global Financial System Through 
Rigorous Standards and International Comity (Jan. 24, 2024), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement012424; 
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of 
Notice and Order on EU Capital Comparability Determination (June 7, 
2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement060723c; Kristin N. Johnson, Commissioner, CFTC, 
Statement in Support of Proposed Order and Request for Comment on 
Mexican Capital Comparability Determination (Nov. 10, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement111022c; 
Kristin N. Johnson, Commissioner, CFTC, Statement in Support of 
Proposed Order on Japanese Capital Comparability Determination (July 
27, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement072722c.
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    I thank the staff in the Market Participants Division for their 
hard work on these matters, particularly Amanda Olear, Tom Smith, 
and Lily Bozhanova.

Appendix 4--Concurring Statement of Commissioner Caroline D. Pham

    I respectfully concur with the order granting conditional 
substituted compliance in connection with certain capital and 
financial reporting requirements applicable to nonbank swap dealers 
subject to regulation by the Financial Services Agency of Japan 
(JFSA) (Japan Final Order) because I believe the order imposes a 
condition relating to financial reporting that exceeds the scope of 
CFTC Regulation 23.105.
    I would like to thank Amanda Olear, Thomas Smith, Rafael 
Martinez, Warren Gorlick, Liliya Bozhanova, Joo Hong, and Justin 
McPhee from the CFTC's Market Participants Division for their truly 
hard work on the Japan Final Order and for addressing some of my 
concerns. I commend the staff for their tireless efforts for over a 
decade to finalize the CFTC's capital comparability determinations. 
I would also like to thank the JFSA for their assistance and 
support.
    I have repeatedly stated the need for a pragmatic, outcomes-
based approach to the CFTC's capital comparability determinations, 
based on recognition of the Basel Committee for Banking Supervision 
(BCBS) Framework for International Bank Based Capital Standards,\1\ 
that mitigates market fragmentation while promoting financial 
stability. However, the Japan Final Order overreaches on its 
conditions relating to financial reporting requirements.
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    \1\ Concurring Statement of Commissioner Caroline D. Pham 
Regarding Proposed Swap Dealer Capital and Financial Reporting 
Comparability Determination (July 27, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072722; Bank for 
International Settlements Basel Committee on Banking Supervision, 
The Basel Framework, https://www.bis.org/baselframework/BaselFramework.pdf.
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    The International Bankers Association of Japan (IBAJ) requested 
that the CFTC limit the financial information required to be filed 
by Japanese nonbank swap dealers with the CFTC and National Futures 
Association (NFA) to the types of financial information required of 
U.S. nonbank swap dealers under CFTC Regulation 23.105.\2\ By 
requiring the filing of the full home regulator report, the CFTC and 
NFA will receive information from Japanese nonbank swap dealers that 
exceeds the scope of Regulation 23.105. For example, IBAJ stated 
that the out-of-scope information the CFTC and NFA would receive 
includes information on client assets segregation status, mutual 
fund and deemed securities transaction volumes, the status of the 
deemed securities, and other various asset management business 
status reports that do not relate to swap dealing activity.\3\ 
Accordingly, the CFTC is not entitled to that information. By way of 
another example, the CFTC does not receive information regarding the 
consumer banking activity of bank swap dealers.
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    \2\ International Bankers Association of Japan, Letter Re: Japan 
Swap Dealer Capital Comparability Determination, 87 FR 48092 (August 
8, 2022), (Oct. 6, 2022), 3-4.
    \3\ Id.
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    Instead of taking the common-sense approach of requiring the 
same information in Regulation 23.105 that is applicable to U.S. 
entities, the CFTC is requiring more information from Japanese 
nonbank swap dealers. The CFTC's justification for exceeding the 
scope of Regulation 23.105 in the Japan Final Order is so that the 
CFTC can see the totality of the home regulator report to better 
determine whether there is extraneous information that is not 
necessary and can be eliminated.

[[Page 58505]]

    Mere curiosity is not a sufficient justification to contravene 
principles of international comity and respect for other sovereign 
nations that is the foundation of the global financial system. Not 
only did the IBAJ identify the specific extraneous information that 
is outside the scope of the CFTC's regulations, but also, I do not 
understand why the CFTC would set ourselves up to have to amend the 
Japan Final Order to address this overreach in the future.
    Regrettably, this is not the only time that the CFTC appears to 
take a less deferential approach to Japanese law and, therefore, a 
more punitive approach to Japanese entities in contrast to other 
jurisdictions. I question the inequity that is inherent in the 
CFTC's view of Japan, which has certain banking and financial 
services laws that are stricter than the United States. Japan is a 
member of the G7, and its regulators are members of the Financial 
Stability Board (FSB), BCBS, International Organization of 
Securities Commissions (IOSCO), and many other international fora 
dedicated to safeguarding the global financial system. The CFTC has 
entered into multiple Memorandum of Understanding (MOU) with the 
JFSA. It goes without saying that Japan protects Japanese citizens 
and their assets. The Commission must show the same respect for 
Japanese laws that it provides to other jurisdictions, particularly 
because Japan is a key international partner and ally to the United 
States.
    On May 25, 2024, the G7 Finance Ministers and Central Bank 
Governors' Communiqu[eacute] stated: ``We also reiterate our strong 
commitment to a free, fair, and rules-based multilateral system. 
Building on the legacy of the Japanese G7 Presidency, we will 
advance our cooperation to enhance global economic resilience and 
economic security and protect our economies from systemic shocks and 
vulnerabilities.'' \4\ I urge the Commission to honor this 
commitment by the United States.
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    \4\ G7 Finance Ministers and Central Bank Governors' 
Communiqu[eacute], Stresa, 23-25 May 2024, https://www.consilium.europa.eu/media/muhnmsh1/stresa-communique-25-may-2024.pdf.

[FR Doc. 2024-15092 Filed 7-17-24; 8:45 am]
BILLING CODE 6351-01-P