[Federal Register Volume 89, Number 138 (Thursday, July 18, 2024)]
[Rules and Regulations]
[Pages 58535-58572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-15094]


-----------------------------------------------------------------------

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 United Kingdom 
Prudential Regulation Authority

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

-----------------------------------------------------------------------

SUMMARY: On February 5, 2024, the Commodity Futures Trading Commission 
issued a notice and request for comment on an application submitted by 
the Institute of International Bankers, International Swaps and 
Derivatives Association, and Securities Industry and Financial Markets 
Association requesting that the Commission determine that registered 
nonbank swap dealers organized and domiciled in the United Kingdom 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 the United Kingdom Prudential Regulation Authority. 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 the 
United Kingdom may satisfy the capital requirements under the Commodity 
Exchange Act and Commission applicable Commission regulations and the 
financial reporting rules under the Commodity Exchange Act and 
applicable Commission regulations by complying with certain specified 
United Kingdom 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]; 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 (``SDs'') organized and domiciled in 
the

[[Page 58536]]

United Kingdom (``UK'') 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 
UK 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 
February 5, 2024,\3\ as modified in certain aspects to address comments 
and to clarify its terms.
---------------------------------------------------------------------------

    \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 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) (``2024 Proposal'').
---------------------------------------------------------------------------

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 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'').
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \7\ 7 U.S.C. 6s(e)(2).
    \8\ 7 U.S.C. 6s(e)(1) and (2).
---------------------------------------------------------------------------

    The prudential regulators implemented section 4s(e) in 2015 by 
amending existing capital requirements applicable to bank SDs and bank 
MSPs to incorporate swap transactions into their respective bank 
capital frameworks, and by adopting rules imposing initial and 
variation margin requirements on bank SDs and bank MSPs that engage in 
uncleared swap transactions.\9\ The Commission adopted final rules 
imposing initial and variation margin obligations on nonbank SDs and 
nonbank MSPs for uncleared swap transactions on January 6, 2016.\10\ 
The Commission also approved final capital requirements for nonbank SDs 
and nonbank MSPs on July 24, 2020, which were published in the Federal 
Register on September 15, 2020 with a compliance date of October 6, 
2021 (``CFTC Capital Rules'').\11\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \12\ 7 U.S.C. 6s(f).
    \13\ 7 U.S.C. 6s(f)(1)(A).
    \14\ 85 FR 57462.
---------------------------------------------------------------------------

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

[[Page 58537]]

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \17\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
    \18\ 85 FR 57462 at 57521.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \19\ 17 CFR 23.106(a)(2).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
(``MOU'') or similar arrangement that would facilitate supervisory 
cooperation.\21\
---------------------------------------------------------------------------

    \21\ 17 CFR 23.106(a)(3) and 85 FR 57462 at 57520-57522.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).

---------------------------------------------------------------------------

[[Page 58538]]

    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.
---------------------------------------------------------------------------

    \23\ 17 CFR 23.106(a)(5).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

C. Application for a Comparability Determination for Nonbank Swap 
Dealers Domiciled in the United Kingdom and Subject to Regulation by 
the Prudential Regulation Authority

    On May 4, 2021, the Institute of International Bankers (``IIB''), 
International Swaps and Derivatives Association (``ISDA''), and 
Securities Industry and Financial Markets Association (``SIFMA'') 
(together, the ``Applicants'') submitted an application (the ``UK 
Application'') requesting that the Commission conduct a Comparability 
Determination and issue a Comparability Order finding that compliance 
with certain designated capital and financial reporting requirements of 
the United Kingdom satisfy certain Commission capital rules and 
financial reporting rules for nonbank SDs.\30\ Specifically, the 
Applicants requested that the Commission determine that registered 
nonbank SDs \31\ organized and domiciled within the UK, licensed as 
investment firms, and designated for prudential supervision by the UK 
Prudential Regulation Authority (``PRA-designated UK nonbank SDs''), 
may satisfy 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.\32\
---------------------------------------------------------------------------

    \30\ Letter dated May 4, 2021 from Stephanie Webster, General 
Counsel, IIB, Steven Kennedy, Global Head of Public Policy, ISDA, 
and Kyle Brandon, Managing Director, Head of Derivatives Policy, 
SIFMA. The UK Application is available on the Commission's website 
at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
    \31\ As discussed in Section I.A. immediately below, the 
Commission has the authority to impose capital requirements on 
registered SDs that are not subject to regulation by a U.S. 
prudential regulator (i.e., nonbank SDs).
    \32\ The Applicants also requested that the Commission determine 
that nonbank SDs licensed as investment firms and prudentially 
regulated by the UK Financial Conduct Authority (``FCA'') (``FCA-
regulated UK nonbank SDs'') may satisfy certain capital and 
financial reporting requirements under the CEA by being subject to, 
and complying with, comparable capital and financial reporting 
requirements under UK laws and regulations. Due to the differences 
between the capital and financial reporting regimes applicable to 
PRA-designated UK nonbank SD and FCA-regulated UK nonbank SDs, the 
Commission anticipates assessing the comparability of the rules 
applicable to FCA-regulated UK nonbank SDs through a separate 
comparability determination.
---------------------------------------------------------------------------

    To be designated for prudential supervision by the UK Prudential 
Regulation Authority (``PRA''), a UK-domiciled investment firm must be 
authorized, or have requested authorization, to deal in investments as 
principal.\33\ For an investment firm that is authorized, or has 
requested authorization, to deal in investments as principal, the PRA 
may designate the firm for prudential supervision if the PRA determines 
that the dealing activities of the firm should be a PRA-regulated 
activity. The PRA considers the following in determining whether an 
investment firm should be subject to PRA supervision: (i) the assets of 
the investment firm; and (ii) where the investment firm is a member of 
a group, (a) the assets of other firms within the group that are 
authorized, or have sought authorization, to deal in investments as 
principal, (b) whether any other member of the group is subject to 
prudential supervision by the PRA, and (c) whether the investment 
firm's activities have, or might have, a material impact on the ability 
of the PRA to advance any of its objectives in relation to a PRA-
authorized person in its group.\34\ The PRA also must consult

[[Page 58539]]

with the FCA before designating a person for prudential 
supervision.\35\
---------------------------------------------------------------------------

    \33\ Article 3(1) and (2) of The Financial Services and Markets 
Act 2000 (PRA-regulated Activities) Order 2013.
    \34\ Id., Article 3(4).
    \35\ Id., Article 3(6).
---------------------------------------------------------------------------

    The PRA also has issued a Statement of Policy providing further 
detail regarding the factors that are considered in assessing an 
investment firm for prudential supervision.\36\ The factors include: 
(i) whether the firm's balance sheet exceeds an average of GBP 15 
billion total gross assets over four quarters; (ii) where the 
investment firm is part of a group, whether the sum of the balance 
sheets of all firms within the group that are authorized, or have 
requested authorization, to deal in investments as principals exceeds 
an average of GBP 15 billion over four quarters; and/or (iii) where the 
firm is part of a group subject to PRA supervision, whether the 
investment firm's revenues, balance sheet and risk taking is 
significant relative to the group's revenues, balance sheet, and risk-
taking.\37\ There are currently six PRA-designated UK nonbank SDs 
registered with the Commission: Citigroup Global Markets Limited, 
Goldman Sachs International, Merrill Lynch International, Morgan 
Stanley & Co. International Plc, MUFG Securities EMEA Plc, and Nomura 
International Plc.
---------------------------------------------------------------------------

    \36\ PRA, Statement of Policy, Designation of Investment Firms 
for Prudential Supervision by the Prudential Regulation Authority, 
December 2021, available here: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/statement-of-policy/2021/designation-of-investment-firms-for-prudential-supervision-by-the-pra-december-2021.pdf?la=en&hash=007EB17EDF2FA84714D372095F9E03627355776F.
    \37\ Id., at p. 5.
---------------------------------------------------------------------------

    The Applicants represented that the capital and financial reporting 
framework applicable to PRA-designated UK nonbank SDs is primarily 
based on the framework established by the European Union's (``EU'') 
Capital Requirements Regulation \38\ and Capital Requirements 
Directive,\39\ which set forth capital and financial reporting 
requirements applicable to ``credit institutions'' \40\ and 
``investment firms.'' \41\ CRR, as a regulation, is directly applicable 
in all member states of the EU (``EU Member States'') and was, 
therefore, binding law in the UK during the UK's membership in the 
EU.\42\ CRD, as a directive, was required to be transposed into EU 
Member States' national law, including UK law.\43\ With regard to PRA-
designated UK nonbank SDs, the UK implemented CRD primarily through a 
series of regulations, including the Capital Requirements Regulations 
2013 \44\ and the Capital Requirements (Capital Buffers and Macro-
prudential Measures) Regulations 2014,\45\ and the rules of the 
PRA.\46\
---------------------------------------------------------------------------

    \38\ Regulation (EU) No 575/2013 of the European Parliament and 
of the Council of 26 June 2013 on prudential requirements for credit 
institutions and amending Regulation (EU) No 648/2012 (``Capital 
Requirements Regulation'' or ``CRR'').
    \39\ Directive 2013/36/EU of the European Parliament and of the 
Council of 26 June 2013 on access to the activity of credit 
institutions and the prudential supervision of credit institutions, 
amending Directive 2002/87/EC and repealing Directives 2006/48/EC 
and 2006/49/EC (``Capital Requirements Directive'' or ``CRD'').
    \40\ The term ``credit institution'' is defined as an entity 
whose business consists of taking deposits and other repayable funds 
from the public and granting credits. CRR, Article 4(1), as 
applicable in the UK. For a reference to CRR provisions applicable 
in the UK, see infra note 50.
    \41\ The term ``investment firm'' is defined as an entity 
authorized under Directive 2014/65/EU of the European Parliament and 
of the Council of 15 May 2014 on markets in financial instruments 
and amending Directive 2002/92/EC and Directive 2011/61/EU 
(``Markets in Financial Instruments Directive'' or ``MiFID''), and 
whose regular business is the provision of one or more investment 
services to third parties and/or the performance of one or more 
investment-related activities on a professional basis, which 
includes dealing in derivatives for its own account. CRR, Article 
4(1)(2) cross-referencing Article 4(1)(1) of MiFID.
    \42\ Consolidated Version of the Treaty on the Functioning of 
the European Union, OJ (C 326) 171, Oct. 26, 2012 (``TFEU''), 
Article 288.
    \43\ Id., Article 288 (stating that a directive is binding as to 
the result to be achieved upon each EU Member State to which the 
directive is addressed, and further provides, however, that each EU 
Member State elects the form and method of implementing the 
directive). In this connection, EU Member States were required to 
implement and start applying amendments to CRD, introduced by 
Directive (EU) 2019/878 of the European Parliament and of the 
Council of 20 May 2019 amending Directive 2013/36/EU as regards 
exempted entities, financial holding companies, mixed financial 
holding companies, remuneration, supervisory measures and powers and 
capital conservation measures (``CRD V'') by December 29, 2020. Some 
CRD V provisions were subject to delayed implementation deadlines of 
June 28, 2021 and January 1, 2022. CRD V, Article 2.
    \44\ Capital Requirements Regulations 2013, Statutory Instrument 
2013 No. 3115 (``Capital Requirements Regulations 2013'').
    \45\ Capital Requirements (Capital Buffers and Macro-prudential 
Measures) Regulations 2014, Statutory Instrument 2014 No. 894 
(``Capital Requirements (Capital Buffers and Macro-prudential 
Measures) Regulations 2014'').
    \46\ The PRA's rules (``PRA Rulebook'') are available here: 
https://www.prarulebook.co.uk/.
---------------------------------------------------------------------------

    Following the UK's withdrawal from EU membership (``Brexit''), EU 
laws that were in effect and applicable as of December 31, 2020, were 
retained in UK law subject to certain non-substantive amendments 
seeking to reflect the UK's new position outside of the EU.\47\ As 
such, directly applicable EU law, such as CRR, was converted into 
domestic UK law and UK legislation implementing EU directives, such as 
CRD, was preserved. The UK subsequently adopted additional changes, 
generally consistent with amendments introduced by the EU to CRR, CRD 
and other relevant EU provisions,\48\ and incorporated certain CRR 
provisions in the PRA Rulebook.\49\ The CRR provisions as applicable in 
the UK are referred hereafter as ``UK CRR.'' \50\ The UK capital and 
financial reporting framework also comprises UK-specific requirements 
in respect of certain matters. Requirements applicable to PRA-
designated UK nonbank SDs are included in the PRA Rulebook. In 
addition, Commission Delegated Regulation (EU) 2015/61,\51\ which 
supplements UK CRR with regard to liquidity coverage requirement for 
credit institutions, applies to PRA-designated UK nonbank SDs and 
imposes separate liquidity requirements to these firms.\52\
---------------------------------------------------------------------------

    \47\ See, An Act to Repeal the European Communities Act 1972 and 
make other provisions in connection with the withdrawal of the 
United Kingdom from the EU (2018 c.16) (``European Union 
(Withdrawal) Act 2018'').
    \48\ PRA, Policy Statement 21/21--The UK Leverage Framework, 
October 2021, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2021/june/changes-to-the-uk-leverage-ratio-framework, and Policy Statement 22/21--Implementation 
of Basel standards: Final rules, October 2021, available here: 
https://www.bankofengland.co.uk/prudential-regulation/publication/2021/october/implementation-of-basel-standards.
    \49\ Pursuant to the Financial Services and Markets Act 2023 
(``FSMA 2023''), the UK revoked CRR and replaced it with: (i) PRA 
rules adopted under Section 144 of the Financial Services and 
Markets Act 2000 (``FSMA'') and (ii) UK regulations, adopted under 
Section 4 of FSMA 2023, restating CRR provisions.
    \50\ The UK CRR is available here: https://www.legislation.gov.uk/eur/2013/575/contents. The provisions that 
were incorporated in the PRA Rulebook are no longer part of UK CRR 
and appear instead in the PRA Rulebook.
    \51\ Commission Delegated Regulation (EU) 2015/61 of 10 October 
2014 to supplement Regulation (EU) No 575/2013 of the European 
Parliament and the Council with regard to liquidity coverage 
requirement for Credit Institutions (``Liquidity Coverage Delegated 
Regulation'').
    \52\ PRA Rulebook, CRR Firms, Liquidity Coverage Requirement--UK 
Designated Investment Firms Part.
---------------------------------------------------------------------------

    The Applicants also represented that in addition to UK CRR and the 
PRA Rulebook, the Banking Act 2009 and its related secondary 
legislation, through which the UK transposed the Bank Recovery and 
Resolution Directive (``BRRD''), include relevant UK capital 
requirements.\53\ Specifically, pursuant to the Banking Act 2009 and 
its secondary legislation, the Bank of

[[Page 58540]]

England, in its role as resolution authority, requires certain 
investment firms, including PRA-designated UK nonbank SDs, to satisfy a 
firm-specific minimum requirement for own funds and eligible 
liabilities (``MREL'').\54\
---------------------------------------------------------------------------

    \53\ Directive 2014/59/EU of the European Parliament and of the 
Council of 15 May 2014 establishing a framework for the recovery and 
resolution of credit institutions and investment firms and amending 
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 
2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/
36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of 
the European Parliament and of the Council. UK Application, p. 7.
    \54\ Banking Act 2009, Section 3A (4) and (4B); Bank Recovery 
and Resolution (No 2) Order 2014, Statutory Instrument No. 3348 
(``Bank Recovery and Resolution (No 2) Order 2014''), Part 9.
---------------------------------------------------------------------------

    UK CRR, Capital Requirements Regulations 2013, Capital Requirements 
(Capital Buffers and Macro-prudential Measures) Regulations 2014, 
Liquidity Coverage Delegated Regulation, relevant provisions of Banking 
Act 2009 and its secondary legislation, and relevant parts of the PRA 
Rulebook are referred to hereafter as the ``UK PRA Capital Rules.''
    The Applicants further represented that with respect to supervisory 
financial reporting, the framework applicable to PRA-designated UK 
nonbank SDs is also based on the EU requirements. In addition, the 
framework comprises PRA-specific rules for matters not addressed by the 
EU-based requirements. Specifically, Commission Implementing Regulation 
(EU) 680/2014,\55\ which was initially retained in UK law following 
Brexit, supplemented CRR with implementing technical standards (``CRR 
Reporting ITS'') specifying, among other things, uniform formats and 
frequencies for the financial and capital requirements reporting 
required under CRR.\56\ CRR Reporting ITS included templates for the 
common reporting (``COREP'') and the financial reporting (``FINREP'') 
that specify the contents of the EU-based supervisory reporting 
requirements. As part of the regulatory reforms that followed Brexit 
and sought to implement Basel standards, the PRA incorporated the 
entire body of the UK version of COREP and FINREP requirements into the 
PRA Rulebook to create a single source for reporting requirements for 
firms.\57\ For PRA-designated UK nonbank SDs that are not subject to 
the EU-based FINREP requirements, the PRA Rulebook includes PRA-
specific requirements.\58\
---------------------------------------------------------------------------

    \55\ Commission Implementing Regulation (EU) 680/2014 of 16 
April 2014 laying down implementing technical standards with regard 
to supervisory reporting of institutions according to Regulation 
(EU) No 575/2013 of the European Parliament and of the Council.
    \56\ UK Application, p. 24 and Responses to Staff Questions 
dated October 5, 2023.
    \57\ PRA Rulebook, CRR Firms, Reporting (CRR) Part.
    \58\ PRA Rulebook, CRR Firms, Regulatory Reporting Part.
---------------------------------------------------------------------------

    The Applicants also represented that the Companies Act 2006 
contains provisions related to financial reporting, including a mandate 
that entities of a certain size be required to prepare annual audited 
financial statements and a strategic report.\59\ UK CRR, relevant 
provisions of the PRA Rulebook, and relevant provisions of the 
Companies Act 2006, are collectively referred to hereafter as the ``UK 
PRA Financial Reporting Rules.''
---------------------------------------------------------------------------

    \59\ UK Application, p.7. Companies Act 2006, Part 15 and 16. 
The Companies Act 2006 is available here: https://www.legislation.gov.uk/ukpga/2006/46/contents.
---------------------------------------------------------------------------

    The Applicants also noted that the U.S. Securities and Exchange 
Commission (``SEC'') has issued orders permitting an SEC-registered 
nonbank security-based swap dealer domiciled in the UK (``UK nonbank 
SBSD'') \60\ to satisfy SEC capital \61\ and financial reporting 
requirements via substituted compliance with applicable UK capital and 
financial reporting.\62\ The UK Order conditioned substituted 
compliance for capital requirements on a UK nonbank SBSD complying with 
specified laws and regulations, including relevant parts of UK CRR and 
the PRA Rulebook, and also maintaining total liquid assets in an amount 
that exceeds the UK nonbank SBSD's total liabilities by at least $100 
million and by at least $20 million after applying certain deductions 
to the value of the liquid assets to reflect market, credit, and other 
potential risks to the value of the assets.\63\
---------------------------------------------------------------------------

    \60\ All six of the PRA-designated UK nonbank SDs currently 
registered with the Commission are also UK nonbank SBSDs.
    \61\ Section 15F(e)(1)(B) of the Exchange Act (15 U.S.C. 78o-10) 
directs the SEC to adopt capital rules for security-based swap 
dealers (``SBSDs'') that do not have a prudential regulator.
    \62\ 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 United Kingdom, 86 FR 
43318 (July 30, 2021) (``Final UK Order''); 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) (``Amended UK Order,'' 
together with the Final UK Order, ``UK Order''); and Order 
Specifying the Manner and Format of Filing Unaudited Financial and 
Operational Information by Security-Based Swap Dealers and Major 
Security-Based Swap Participants that are not U.S. Persons and are 
Relying on Substituted Compliance with Respect to Rule 18a-7, 86 FR 
59208 (Oct. 26, 2021) (``SEC Order on Manner and Format of Filing 
Unaudited Financial and Operational Information'').
    \63\ The conditioning of the UK substituted compliance order on 
UK nonbank SBSDs maintaining liquid assets in an amount that exceeds 
the UK nonbank SBSD's total liabilities by at least $100 million and 
by at least $20 million after applying certain deductions to the 
value of the liquid assets reflects that the SEC's capital rule for 
nonbank SBSDs is a liquidity-based requirement and that the SEC 
capital requirements are not based on the Basel standards. 17 CFR 
240.18a-1(a)(1) (requiring a SBSD to maintain, in relevant part, net 
capital of $20 million or, if approved to use capital models, $100 
million of tentative net capital and $20 million of net capital).
---------------------------------------------------------------------------

D. Proposed Comparability Determination and Proposed Comparability 
Order for PRA-Designated UK Nonbank Swap Dealers

    On February 5, 2024, the Commission published the 2024 Proposal, 
seeking comment on the Application and the Commission's proposed 
Comparability Determination and related Comparability Order.\64\ The 
2024 Proposal set forth the Commission's preliminary Comparability 
Determination and proposed Comparability Order providing that, based on 
its review of the UK Application and applicable UK laws and/or rules, 
the Commission preliminarily found that the UK PRA Capital Rules and 
the UK PRA 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.\65\ The Commission, however, noted that 
there were certain differences between the UK PRA Capital Rules and 
CFTC Capital Rules and certain differences between the UK PRA Financial 
Reporting Rules and the CFTC Financial Reporting Rules. As such, the 
Commission proposed certain conditions to the Comparability Order.\66\ 
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 PRA-designated UK nonbank SDs for ongoing 
compliance with the Comparability

[[Page 58541]]

Order.\67\ The Commission further stated that, in its preliminary view, 
the identified differences would not be inconsistent with providing a 
substituted compliance framework for PRA-designated UK nonbank SDs 
subject to the conditions specified in the proposed Comparability 
Order.\68\
---------------------------------------------------------------------------

    \64\ 2024 Proposal, 89 FR 8026 (Feb. 5, 2024).
    \65\ Id. Consistent with the process specified in Section I.B. 
above for conducting Comparability Determinations, the Commission 
provided the Applicants with an opportunity to review for factual 
accuracy and completeness the Commission's description of relevant 
UK laws and regulations on which the proposed Comparability 
Determination and proposed Comparability Order were based. The 
Commission has relied on the Applicants' review, and has 
incorporated feedback and corrections received from the Applicants. 
As previously noted, a Comparability Determination and Comparability 
Order based on an inaccurate description of foreign laws and 
regulations may not be valid.
    \66\ See 2024 Proposal at 8058-8061.
    \67\ NFA is a registered futures association (``RFA'') 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 
an RFA, 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 
PRA-designated UK 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 an RFA.
    \68\ Id.
---------------------------------------------------------------------------

    The proposed Comparability Order was limited to the comparison of 
the UK PRA 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.\69\ As noted by 
the Commission in the 2024 Proposal, the Applicants have not requested, 
nor has the Commission performed, a comparison of the UK PRA Capital 
Rules to the Commission's TNW Approach or NLA Approach.\70\
---------------------------------------------------------------------------

    \69\ Id. As described in the 2024 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 2024 Proposal at 8031-8033, 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.
    \70\ See 2024 Proposal at 8035-8036.
---------------------------------------------------------------------------

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

    The public comment period on the UK Application, the proposed 
Comparability Determination, and the proposed Comparability Order ended 
on March 24, 2024. The Commission received comments from the following 
four interested parties: Michael Ravnitzky (``Ravnitzky''); William J. 
Harrington (``Harrington''); Better Markets, Inc. (``Better Markets''); 
and the Applicants.\71\
---------------------------------------------------------------------------

    \71\ Letters from: Michael Ravnitzky (``Ravnitzky Letter''); 
Dennis M. Kelleher, Co-founder, President and CEO, and Cantrell 
Dumas, Director of Derivatives Policy, Better Markets (March 24, 
2024) (``Better Markets Letter''); and Stephanie Webster, General 
Counsel, IIB, Steven Kennedy, Global Head of Public Policy, ISDA, 
and Kyle L. Brandon, Managing Director, Head of Derivatives Policy, 
SIFMA (March 24, 2024) (``Applicants' Letter''); Letter from William 
J. Harrington dated March 24, 2024 (``Harrington 03/24/2024 
Letter'') and supporting material. The comment letters and related 
documents for the 2024 Proposal are available at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7478.
---------------------------------------------------------------------------

    The Applicants filed a comment letter generally expressing support 
for the proposed Comparability Determination and 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 UK PRA Capital Rules and UK PRA Financial Reporting 
Rules.\72\ The Applicants also included several technical comments, 
further discussed in section II. below, on the proposed conditions 
requiring PRA-designated UK nonbank SDs to file a notice with the 
Commission and NFA upon the occurrence of certain events. Finally, the 
Applicants recommended that the Commission refine the condition 
defining the scope of the UK PRA Capital Rules to specify that only the 
MREL-related provisions of the Banking Act 2009 would be considered 
part of UK PRA Capital Rules.\73\ In support of their request, the 
Applicants stated that the reference to the Banking Act 2009 is 
included only because it imposes MREL on PRA-designated UK nonbank 
SDs.\74\ The Commission notes that in the process leading to this 
Comparability Determination, the Commission has considered the Banking 
Act 2009 more broadly, including as it relates to the powers conferred 
to the PRA in its role as resolution authority. With respect to the 
definition of the UK PRA Capital Rules with which a PRA-designated UK 
nonbank SD must comply, however, the Commission believes that referring 
to the Banking Act 2009 only to the extent it imposes MREL on PRA-
designated UK nonbank SDs is appropriate. Accordingly, the Commission 
has adjusted the language in final Condition 4 consistent with the 
Applicants' recommendation.
---------------------------------------------------------------------------

    \72\ Applicants' Letter at p. 2.
    \73\ Id. at p. 4.
    \74\ Id.
---------------------------------------------------------------------------

    Conversely, two commenters disagreed with the CFTC's proposed 
Comparability Determination and proposed Comparability Order.\75\ 
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.'' \76\ Better Markets further 
asserted that in an attempt to restore London to its status of a global 
financial center in the post-Brexit environment, both major political 
parties in the UK are promising ``light touch'' regulation and 
incentivizing regulatory arbitrage.\77\
---------------------------------------------------------------------------

    \75\ Better Markets Letter at p. 3-5; Harrington 03/24/2024 
Letter at p. 4 (asserting, as further discussed below, that the 
Commission should condition the Comparability Determination on a 
prohibition against PRA-designated UK nonbank SDs' entering into 
swap contracts with certain specified features).
    \76\ Better Markets Letter at p. 5.
    \77\ Id.
---------------------------------------------------------------------------

    The Commission does not believe that the principles-based, holistic 
assessment that it conducted on the comparability of the UK PRA Capital 
Rules and UK PRA 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 UK PRA Capital Rules and UK PRA 
Financial Reporting Rules are designed with the objective of ensuring 
overall safety and soundness of the PRA-designated UK nonbank SDs in a

[[Page 58542]]

manner that is comparable with the Commission's overall objective of 
ensuring the safety and soundness of nonbank SDs.
    As stated in the 2024 Proposal, due to the detailed and complex 
nature of the capital frameworks, differences in how jurisdictions 
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.\78\ 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.'' \79\
---------------------------------------------------------------------------

    \78\ See 2024 Proposal at 8036.
    \79\ 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.\80\ 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.'' \81\ The Commission 
emphasized that in this context, ``comparable does not necessarily mean 
identical.'' \82\ 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).\83\ 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.'' \84\
---------------------------------------------------------------------------

    \80\ Interpretative Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013) (``Guidance'').
    \81\ Guidance at 45343.
    \82\ Id.
    \83\ Id.
    \84\ See e.g., Comparability Determination for the European 
Union: Certain Entity-Level Requirements, 78 FR 78923 (December 27, 
2013) at 78926.
---------------------------------------------------------------------------

    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.\85\ 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.\86\ 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.\87\ 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.
---------------------------------------------------------------------------

    \85\ 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).
    \86\ Id.
    \87\ Id.
---------------------------------------------------------------------------

    With respect to the UK Application, the process leading to the 
Commission's Comparability Determination involved Commission staff 
reviewing relevant UK laws, rules, and regulations cited in the UK 
Application. Staff verified the assertions and citations contained in 
the UK Application regarding the specific UK PRA Capital Rules and UK 
PRA Financial Reporting Rules to the relevant UK laws, rules, and 
regulations.\88\
---------------------------------------------------------------------------

    \88\ Staff also reviewed various documents relevant to the 
proposed Comparability Determination and proposed Comparability 
Order published by the PRA.
---------------------------------------------------------------------------

    Commission staff also evaluated the comparability of the UK PRA 
Capital Rules and UK PRA 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 PRA-designated UK nonbank SDs and how such process 
addresses risk, including market risk and credit risk of the PRA-
designated UK 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 PRA-designated UK nonbank SD's 
minimum capital requirements; (iii) the financial reports and other 
financial information submitted by a PRA-designated UK nonbank SD to 
the PRA, and whether such information provides the PRA with the means 
necessary to effectively monitor the financial condition of the PRA-
designated UK nonbank SD; and (iv) the regulatory notices and other 
communications between a PRA-designated UK nonbank SD and the PRA that 
address potential adverse financial or operational issues that may 
impact the firm.\89\ With respect to the ability of the PRA to 
supervise and enforce compliance with the UK PRA Capital Rules and UK 
PRA Financial Reporting Rules, the Commission's assessment included a 
review of the PRA's surveillance program for monitoring compliance by 
PRA-designated UK nonbank SDs with the UK PRA Capital Rules and the UK 
PRA Financial Reporting Rules, and the disciplinary process imposed on 
firms that fail to comply with such requirements.\90\ In conducting its 
assessment of the PRA's

[[Page 58543]]

regulatory and supervisory framework, the Commission did not identify 
elements supporting Better Markets' assertion that the framework is 
characterized by ``light touch'' regulation.\91\
---------------------------------------------------------------------------

    \89\ 2024 Proposal at 8036-8058.
    \90\ Id. at 8057-8058.
    \91\ For a further discussion of the Commission's assessment of 
the PRA's supervision and enforcement powers, see Section II.F. 
below. In addition, in its policy statement discussing the 
forthcoming implementation of Basel 3.1 standards, the PRA noted 
that despite some adjustments to the international standards, the 
PRA considers that its policy and rules proposals align with the 
international framework. In this regard, the PRA expressed the view 
that alignment with international standards in turn supports the 
UK's competitiveness, including relative standing of the UK as a 
global financial center, by ``strengthening key stakeholders' 
confidence in the UK banking system'' and ``assuring regulators in 
other jurisdictions of UK's authorities' commitment to robust 
standards.'' See PRA, PS17/23--Implementation of the Basel 3.1 
Standards Near-Final Part 1, December 12, 2023, available here: 
https://www.bankofengland.co.uk/news/2023/december/pra-publishes-first-of-two-policy-statements-for-basel-3-1-standards-implementation.
---------------------------------------------------------------------------

    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 UK PRA Capital 
Rules and UK PRA 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 UK PRA 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 UK PRA capital and financial reporting requirements for 
PRA-designated UK nonbank SDs do not satisfy the test for an order 
granting substituted compliance as the PRA's regulatory framework 
governing capital and financial reporting is not comparable to the 
corresponding CFTC requirements.\92\ 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 gaps in the UK PRA framework'' and as a ``de facto 
admission that the regulations are not comparable and that the [UK 
Application] should be denied.'' \93\ Better Markets claimed that the 
Commission proposed 12 filing requirements that must be met as a 
condition for the comparability determination, and stated that the 
Commission was not issuing a comparability finding, but was engaging in 
a ``de facto rewriting'' of the PRA's laws and rules in the form of 
conditions.\94\
---------------------------------------------------------------------------

    \92\ Better Markets Letter at p. 5.
    \93\ Id.
    \94\ Id. at p. 4.
---------------------------------------------------------------------------

    Conversely, another commenter, Ravnitzky, noted that the ``CFTC 
need not be limited to finding a binary yes or no answer to the 
comparability determination'' and ``has the flexibility to grant 
conditional substituted compliance.'' \95\ In this regard, Ravnitzky 
recommended that the Commission exercise its authority ``to make a 
flexible and nuanced decision, and strive to impose only the necessary 
conditions for approving the UK PRA rules as substitutes, to minimize 
the regulatory burden while achieving the necessary risk reduction.'' 
\96\
---------------------------------------------------------------------------

    \95\ Ravnitzky Letter at p. 6.
    \96\ Id.
---------------------------------------------------------------------------

    The Commission disagrees that the inclusion of conditions in the 
Comparability Order precludes a finding of comparability with respect 
to the UK PRA Capital Rules and UK PRA 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.\97\
---------------------------------------------------------------------------

    \97\ 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.\98\ In this regard, the Commission has stated that certain 
conditions included in a Comparability Order may be designed to ensure 
the Commission's direct access to books and records required to be 
maintained by an SD registered with the Commission.\99\ Other 
conditions may address areas where the foreign jurisdiction lacks 
analogous requirements.\100\ The inclusion of conditions in a 
Comparability Order was contemplated as an integral part of the 
Commission's holistic, principles-based approach to conducting 
comparability assessments and is not inconsistent with a grant of 
substituted compliance.
---------------------------------------------------------------------------

    \98\ 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.
    \99\ Comparability Determination for the European Union: Certain 
Transaction Level Requirements, 78 FR 78878 (December 27, 2013) at 
78880.
    \100\ Guidance at 45343.
---------------------------------------------------------------------------

    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 2024 Proposal are clearly of the nature contemplated by 
Commission Regulation 23.106(a)(5).
    The Commission also does not believe that the inclusion of the 
conditions in the Comparability Order reflects a ``rewriting'' of the 
UK laws and regulations as asserted by Better Markets. Consistent with 
the Commission's policy described above, a majority of the conditions 
contained in the Comparability Order are designed to ensure that: (i) 
the PRA-designated UK nonbank SD is eligible for substituted compliance 
based on the UK laws and regulations that were reviewed by the 
Commission in performing the comparability assessment, and (ii) the 
Commission and NFA receive timely financial information and notices to 
effectively monitor a PRA-designated nonbank SD's compliance with 
relevant UK capital and financial reporting rules and to assess the 
ongoing safety and soundness of the PRA-designated UK nonbank SD. 
Specifically, there are 25 conditions in the final Comparability Order. 
Six conditions set forth criteria that a PRA-designated UK nonbank SD 
must meet to be eligible for substituted compliance pursuant to the 
Comparability Order.\101\ The six

[[Page 58544]]

conditions ensure that only PRA-designated UK nonbank SDs that are 
within the scope of, and comply with, the UK PRA Capital Rules and UK 
PRA Financial Reporting Rules that were part of the Commission's 
comparability assessment may apply for substituted compliance. Ten 
additional conditions require PRA-designated UK nonbank SDs within the 
scope of the Comparability Order to provide notice to the Commission 
and NFA of certain defined events,\102\ and a further two conditions 
require PRA-designated nonbank SDs to file with the Commission and NFA 
copies of certain unaudited and audited financial reports that the 
firms provide to the PRA.\103\ In addition, two additional conditions 
reflect administrative matters necessary to implement the substituted 
compliance framework.\104\ Lastly, five conditions impose obligations 
on PRA-designated UK nonbank SDs that align with certain of the 
Commission's requirements for nonbank SDs. The five conditions require 
a PRA-designated UK nonbank SD to: (i) maintain common equity tier 1 
capital denominated in GBP equal to or in excess of the equivalent of 
$20 million (Condition 7); (ii) prepare and keep current financial 
books and records (Condition 9); (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 12); (iv) file a 
monthly report listing the custodians holding margin posted by, and 
collected by, the PRA-designated UK nonbank SD, the amount of margin 
held by each custodian, and the aggregate amount of margin required to 
be posted and collected by the PRA-designated UK nonbank SD (Condition 
14); 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 13).
---------------------------------------------------------------------------

    \101\ The six criteria provide that the PRA-designated UK 
nonbank SD: (i) is not subject to capital rules of a U.S. prudential 
regulator (Condition 1); (ii) is organized and domiciled in the UK 
(Condition 2); (iii) is licensed as an investment firm and 
designated for prudential supervision by the PRA (Condition 3); (iv) 
is subject to the UK CRR, CRD provisions as implemented in the UK, 
the Liquidity Coverage Delegated Regulation, the provisions of the 
Banking Act 2009 and its secondary legislation related to the MREL, 
and the rules of the PRA as reflected in the PRA Rulebook (Condition 
4); (v) satisfies at all times applicable UK CRR and PRA Rulebook 
capital ratios, leverage ratios, and capital conservation buffer 
ratios, and maintains a liquidity risk management program as 
required under the PRA Rulebook (Condition 5); and (vi) is subject 
to and complies with the UK financial reporting requirements that 
are part of the Commission's comparability assessment (Condition 6).
    \102\ The ten conditions require a PRA-designated UK nonbank SD 
to provide notice to the Commission in the event that the firm: (i) 
is informed by the PRA that the firm has failed to comply with any 
component of the UK PRA Capital Rules or UK PRA Financial Reporting 
Rules (Condition 15); (ii) fails to maintain common equity tier 1 
capital denominated in GBP in an equivalent amount of at least $20 
million (Condition 16); (iii) breaches its combined capital buffer 
requirement and is required to file a capital conservation plan with 
the PRA (Condition 17); (iv) is required by the PRA to maintain 
additional capital or additional liquidity (Condition 18); (v) fails 
to meet the required MREL (Condition 19); (vi) experiences a 30 
percent or more decrease in its excess regulatory capital (Condition 
20); (vii) fails to make or keep current financial books and records 
(Condition 21); (viii) 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 22); 
(ix) changes its fiscal year-end date (Condition 23); and (x) is 
subject to material changes to the UK PRA Capital Rules, UK PRA 
Financial Reporting Rules, or the supervisory authority of the PRA 
(Condition 24).
    \103\ The two conditions provide that a PRA-designated UK 
nonbank SD must file with the Commission and NFA: (i) a copy of SEC 
Form X-17A-5 (``FOCUS Report'') that the PRA-designated UK nonbank 
SD files with the SEC or copies of certain financial reporting 
templates that the PRA-designated UK nonbank SD is required to 
submit to the PRA pursuant to PRA Rulebook rules, as applicable 
(Condition 10), and (ii) copies of its annual audited accounts and 
strategic report that are required to be prepared and published 
pursuant to Parts 15 and 16 of Companies Act 2006 (Condition 11).
    \104\ One of the administrative conditions provides that a PRA-
designated UK nonbank SD must provide a notice to the Commission of 
its intent to comply with the Comparability Order and the UK PRA 
Capital Rules and UK PRA Financial Reporting Rules in lieu of the 
CFTC Capital Rules and CFTC Financial Reporting Rules. The notice 
must include the PRA-designated UK nonbank SD's representation that 
the firm is organized and domiciled in the UK, is a licensed 
investment firm designated for prudential supervision by the PRA, 
and is subject to and complies with the UK PRA Capital Rules and the 
UK PRA Financial Reporting Rules (Condition 8). The second 
administrative condition provides that a PRA-designated UK nonbank 
SD must file any documents with the Commission and NFA via 
electronic transmission (Condition 25).
---------------------------------------------------------------------------

    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 UK PRA capital and financial reporting 
framework, but rather to ensure that the Commission and NFA receive 
information to conduct ongoing monitoring of PRA-designated UK nonbank 
SDs for compliance with relevant capital and financial reporting 
requirements and to assess the firm's overall safety and soundness. As 
discussed above, in issuing the Comparability Order, the Commission is 
not ceding its supervisory and enforcement authorities. The 
Comparability Order permits PRA-designated UK nonbank SDs to satisfy 
the Commission's capital and financial reporting requirements by 
complying with certain UK laws and/or regulations 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 ongoing oversight, including potential examination, of PRA-
designated UK nonbank SDs that operate under a Comparability Order to 
ensure compliance with the Comparability Order, including its 
conditions.\105\ 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 PRA-designated UK nonbank SDs. The Commission may also initiate an 
enforcement action against a PRA-designated UK nonbank SD that fails to 
comply with the conditions of the Comparability Order.
---------------------------------------------------------------------------

    \105\ As the Commission stated in the 2024 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 2024 
Proposal at 8029. 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 
regulatory obligation on PRA-designated UK 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.\106\ 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].'' \107\
---------------------------------------------------------------------------

    \106\ Guidance at 45343.
    \107\ 17 CFR 23.106(a)(5).
---------------------------------------------------------------------------

    Better Markets further stated that, if the Commission grants 
substituted compliance with regard to materially

[[Page 58545]]

different regulatory requirements, it must make a well-supported, 
evidence-based determination that those different requirements 
nevertheless will, in fact, lead to comparable regulatory 
outcomes.\108\ In this connection, Better Markets stated that if the 
Commission grants the Comparability Determination and Comparability 
Order, it must, at a minimum, clearly and specifically set forth the 
desired regulatory outcome and provide a detailed, evidence-based 
explanation as to how the jurisdiction's different legal requirements 
nonetheless lead to that regulatory outcome.\109\ Better Markets 
further 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 it believes is presently effective 
will continue to be effective.'' \110\ Better Markets further asserted 
that to fulfill its obligation to protect the U.S. financial system, 
the CFTC must ensure, on an ongoing basis, that each grant of 
substituted compliance remains appropriate over time by requiring, at a 
minimum, each order of substituted compliance, and each MOU with a 
foreign regulatory authority, 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.\111\
---------------------------------------------------------------------------

    \108\ Better Markets at p. 10.
    \109\ Id.
    \110\ Id.
    \111\ Id. at p. 11.
---------------------------------------------------------------------------

    Although the Commission disagrees that the UK PRA Capital Rules and 
the UK PRA 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 clearly states the desired regulatory outcomes, 
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 2024 
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 UK PRA Capital Rules and UK 
PRA 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, PRA-designated UK 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 
PRA-designated UK nonbank SDs' ongoing compliance with the conditions 
set forth in the final Comparability Order. In addition, the final 
Comparability Order requires a PRA-designated UK nonbank SD, or an 
entity acting on its behalf, to inform the Commission of changes to the 
relevant UK PRA Capital Rules and UK PRA Financial Reporting Rules so 
that the Commission may assess the continued effectiveness of the 
Comparability Order in ensuring that the relevant UK laws and 
regulations have the comparable regulatory objectives of the CEA and 
Commission regulations of ensuring the safety and soundness of nonbank 
SDs.\112\ Commission staff will also monitor the PRA-designated UK 
nonbank SDs directly as part of its supervisory program and will 
discuss with the firms any proposed or pending revisions to specific 
rules cited in the final Comparability Order. Lastly, in addition to 
assessing the effectiveness of the Comparability Order as a result of 
revisions or proposed revisions to the UK laws, regulations, or 
supervisory regime administered by the PRA, 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.\113\
---------------------------------------------------------------------------

    \112\ Condition 24 of the final Comparability Order requires a 
PRA-designated UK nonbank SD, or an entity acting on its behalf, to 
notify the Commission of any material changes to the information 
submitted in its application, including, but not limited to, 
proposed and final material changes to the UK PRA Capital Rules or 
UK PRA Financial Reporting Rules and proposed and final material 
changes to the PRA's supervisory authority or supervisory regime 
over PRA-designated UK nonbank SDs. The Commission notes that it 
made certain non-substantive, clarifying changes to the language of 
final Condition 24 as compared to proposed Condition 24.
    \113\ 2024 Proposal at 8036 (n. 128).
---------------------------------------------------------------------------

    Another commenter, Harrington, stated that the Commission must 
condition the Comparability Order on an ``outright prohibition against 
regulated entities providing [swap contracts that include a ``flip 
clause''].'' \114\ 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.\115\ 
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

[[Page 58546]]

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.\116\ Harrington argued that swap contracts with a flip 
clause incentivize SDs to ``self-sabotage by under-sourcing 
themselves.'' \117\ Harrington recognized, however, that the CFTC 
margin requirements for uncleared swap transactions address his 
concerns associated with the inclusion of a flip clause.\118\ 
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.\119\
---------------------------------------------------------------------------

    \114\ Harrington 03/24/2024 Letter at p. 4. Harrington also 
referenced the following two separate submissions to the Commission 
and noted that these submissions support the Harrington 03/24/2024 
Letter: a letter dated October 20, 2022 (``Harrington 10/20/2022 
Letter''), submitted in connection with the Commission's Notice of 
Proposed Order and Request for Comment on an Application for a 
Capital Comparability Determination From the Financial Services 
Agency of Japan, 87 FR 48092, (August 8, 2022) and a letter dated 
August 28, 2023 (``Harrington 08/28/2023 Letter''), submitted in 
connection with the Commission's 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). Harrington 03/24/2024 Letter at 
p.7.
    \115\ William J. Harrington, Submission to the U.S. Securities 
and Exchange Commission Re: File No. S7-08-12 (Nov. 19, 2018) at 
p.8.
    \116\ 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).
    \117\ Harrington 03/24/2024 Letter at p. 8.
    \118\ Harrington 03/24/2024 Letter at p. 21 (noting that ``[the 
CFTC margin requirements] render the flip-clause-contract 
commercially impracticable in the U.S.'' and that ``U.S. swap margin 
rules, including the CFTC swap margin rule, have greatly benefited 
U.S. persons by subduing financial sector credit exposures that 
might otherwise draw bailouts or other U.S. government support'').
    \119\ Harrington 03/24/2024 Letter at p. 25 (arguing that ``U.K. 
and other non-U.S. swap margin and capital rules perpetuate the 
flip-clause-swap-contract by allowing [asset-backed securities] 
issuers, other structured debt issuers, banks, and swap dealers to 
under-resource their [respective] contract exposures via both 
exemptions from margin posting and see-no-evil capital rules that 
treat the contract as `plain vanilla'.'')
---------------------------------------------------------------------------

    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 UK PRA Capital Rules, 
uncollateralized exposures from uncleared swap transactions would 
generate a higher counterparty credit risk amount than the exposures 
resulting from transactions under which the counterparties have posted 
collateral.\120\ 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 UK PRA Capital 
Rules.
---------------------------------------------------------------------------

    \120\ 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 PRA 
Rulebook, CRR Firms, Counterparty Credit Risk Part, Article 276 and 
UK CRR, Article 285 (setting forth rules for the recognition and 
treatment of collateral in calculating the PRA-designated UK nonbank 
SD's counterparty credit risk exposure).
---------------------------------------------------------------------------

    Finally, one commenter, Ravnitzky, noted that due to differences in 
how the respective jurisdictions define the regulatory categories of 
registrants involved in swap dealing activity (i.e., differences 
between the term ``swap dealer'' as defined under the Commission's 
regulations and the term ``investment firm'' as defined under the PRA's 
framework), it may be ``unclear or inconsistent which entities can use 
substituted compliance under the [proposed Comparability Order].'' 
\121\ The Commission notes, as discussed above, that the Comparability 
Order will apply with respect to UK-domiciled, PRA-designated 
investment firms that are registered with the Commission as SDs and not 
subject to regulation by a U.S. prudential regulator. In this regard, 
the Commission believes that proposed Conditions 1 through 4, which the 
Commission adopts without material changes, clearly define the scope of 
entities that may request to rely on the Comparability Order.
---------------------------------------------------------------------------

    \121\ Ravnitzky Letter at p. 4.
---------------------------------------------------------------------------

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

    The following section provides the Commission's comparative 
analysis of the UK PRA Capital Rules and the UK PRA Financial Reporting 
Rules with the corresponding CFTC Capital Rules and CFTC Financial 
Reporting Rules, as described in the 2024 Proposal, further modified to 
address comments received. As emphasized in the 2024 Proposal, the 
capital and financial reporting regimes are complex structures 
comprised of a number of interrelated regulatory components.\122\ 
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.
---------------------------------------------------------------------------

    \122\ See 2024 Proposal at 8036.
---------------------------------------------------------------------------

    The Commission performed the analysis by assessing the 
comparability of the UK PRA Capital Rules for PRA-designated UK nonbank 
SDs as set forth in the UK Application and in certain applicable UK 
laws and regulations with the Commission's Bank-Based Approach for 
nonbank SDs. The Commission understands that all PRA-designated UK 
nonbank SDs addressed by the UK Application, as of the date of the 
final Comparability Determination, are subject to a bank-based capital 
approach under the UK PRA Capital Rules. Accordingly, when the 
Commission makes its final determination herein about the comparability 
of the UK PRA Capital Rules with the CFTC Capital Rules, the 
determination pertains to the comparability of the UK PRA 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 UK Application, including, but not limited to, proposed and 
final material changes to the UK PRA Capital Rules or UK PRA Financial 
Reporting Rules, as well as any proposed and final material changes to 
the PRA's supervisory authority or supervisory regime over PRA-
designated UK nonbank SDs, will require notification to the Commission 
and NFA pursuant to Condition 24 of the final Comparability Order.\123\ 
Therefore, if there are subsequent material changes to the UK PRA 
Capital Rules, UK PRA Financial Reporting Rules, or PRA's supervisory 
authority or 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.\124\
---------------------------------------------------------------------------

    \123\ Condition 24 of the final Comparability Order. The 
Commission notes that it made certain non-substantive, clarifying 
changes to the language of final Condition 24 as compared to 
proposed Condition 24.
    \124\ See 2024 Proposal at 8036. As stated in the 2024 Proposal, 
the Commission may also amend or supplement the final 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., (n. 128). As noted in the 2024 Proposal, 
the Commission is aware that the PRA is considering changes to the 
UK PRA Capital Rules to implement Basel 3.1 standards. See PRA, 
PS17/23--Implementation of the Basel 3.1 Standards Near-Final Part 
1, December 12, 2023, available here: https://www.bankofengland.co.uk/news/2023/december/pra-publishes-first-of-two-policy-statements-for-basel-3-1-standards-implementation. If the 
PRA proceeds with the implementation of the Basel 3.1 standards as 
proposed, the regulatory changes would be applicable after July 1, 
2025 with a 4.5-year transitional period ending on January 1, 2030. 
The Commission will monitor progress on the PRA's proposed 
regulatory changes and may amend or supplement the Comparability 
Order. As noted, the Commission requires notification of any 
material changes to the UK PRA Capital Rules, including any Basel 
3.1 implementing provisions.

---------------------------------------------------------------------------

[[Page 58547]]

A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial 
Reporting Rules and UK PRA Capital Rules and UK PRA Financial Reporting 
Rules

1. Preliminary Determination
    As reflected in the 2024 Proposal and discussed above, the 
Commission preliminarily determined that the overall objectives of the 
UK PRA 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.\125\ The Commission further noted that the UK PRA 
Capital Rules and CFTC Capital Rules are 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.\126\
---------------------------------------------------------------------------

    \125\ See 2024 Proposal at 8037.
    \126\ The BCBS's mandate is to strengthen the regulation, 
supervision, and practices of banks with the purpose of enhancing 
financial stability. See Basel Committee Charter available on the 
Bank for International Settlement website: www.bis.org/bcbs/charter.htm. See 2024 Proposal at 8037.
---------------------------------------------------------------------------

    The Commission also preliminarily found that the UK PRA 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. The Commission observed that 
the UK PRA Capital Rules and CFTC Capital Rules provide for a 
comparable approach to the calculation of market risk and credit risk 
exposures using standardized or internal model-based approaches.\127\ 
In addition, as discussed in the 2024 Proposal, the UK PRA 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.\128\
---------------------------------------------------------------------------

    \127\ 2024 Proposal at 8039-8047.
    \128\ Id.
---------------------------------------------------------------------------

    Finally, the Commission preliminarily noted that the UK PRA 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.\129\ As discussed in the 2024 Proposal and in section II.B. 
below, both the UK PRA 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.\130\
---------------------------------------------------------------------------

    \129\ 2024 Proposal at 8039.
    \130\ Id.
---------------------------------------------------------------------------

    The Commission further stated that it preliminarily found the UK 
PRA Financial Reporting Rules to be comparable in purpose and effect to 
the CFTC Financial Reporting Rules as both the PRA 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.\131\ As discussed in the 2024 Proposal, 
in addition to providing the CFTC and the PRA 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 the PRA with information regarding potential changes in a 
nonbank SD's risk profile by disclosing changes in account balances 
reported over a period of time.\132\ 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.\133\
---------------------------------------------------------------------------

    \131\ Id. at 8037.
    \132\ Id.
    \133\ Id.
---------------------------------------------------------------------------

    In assessing the comparability between the CFTC Financial Reporting 
Rules and the UK PRA 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 the PRA 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 the PRA with an 
opportunity to address such issues with the nonbank SD before they 
develop to a state where the financial condition of the firm is 
impaired such that it may no longer hold a sufficient amount of 
qualifying regulatory capital to absorb decreases in the value of firm 
assets, 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.\134\
---------------------------------------------------------------------------

    \134\ 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 
Financial Reporting Rules and the UK PRA Capital Rules and Financial 
Reporting Rules and stated that the differences mandated denial of the 
request for a comparability determination.\135\ Better Markets further 
stated that the nature and number of conditions that the Commission 
deemed necessary to impose are inconsistent with a finding of 
comparability.\136\ In this connection, Better Markets also noted that 
the imposition of conditions will exacerbate complexity as the 
Commission will have to monitor compliance with the conditions, 
including reviewing the financial reports of the PRA-designated UK 
nonbank SDs and tracking developments in the UK PRA regulatory regime 
more generally.\137\ Finally, Better Markets asserted that the proposed 
Comparability Order failed to provide sufficient analysis as to exactly 
how and why the Commission concluded that the UK and U.S. frameworks 
would produce ``comparable outcomes.'' \138\
---------------------------------------------------------------------------

    \135\ Better Markets Letter at p. 15.
    \136\ Id. at p. 11.
    \137\ Id. at p. 16.
    \138\ Id. at p. 11.

---------------------------------------------------------------------------

[[Page 58548]]

    As described herein and in the 2024 Proposal, Commission staff has 
engaged in a detailed, comprehensive study and evaluation of the UK PRA 
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 PRA has a comprehensive oversight program for monitoring PRA-
designated UK nonbank SDs' compliance with relevant UK PRA 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 PRA-designated UK nonbank SDs that are subject to the laws and 
regulations assessed under the Comparability Determination are eligible 
for substituted compliance; (ii) the PRA-designated UK nonbank SDs are 
subject to supervision by the PRA; and (iii) the PRA-designated UK 
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 PRA-designated UK 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, oversight of the PRA-designated UK 
nonbank SDs consistent with the conduct of oversight of U.S.-domiciled 
nonbank SDs. In light of the Commission's ultimate conclusion that the 
UK PRA 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 
``exacerbate complexity'' 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 UK PRA 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, as described above, instead of conducting a 
line-by-line assessment or comparison of the UK PRA Capital and 
Financial Reporting Rules and the CFTC Capital and Financial Reporting 
Rules, it has applied in the assessment set forth in the 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 UK PRA Capital and Financial 
Reporting Rules.

B. Nonbank Swap Dealer Qualifying Capital

1. Preliminary Determination
    As discussed in the 2024 Proposal, the Commission preliminarily 
determined that the UK PRA Capital Rules are comparable in purpose and 
effect to the CFTC Capital Rules with regard to the types and 
characteristics of a nonbank SD's equity that qualifies as regulatory 
capital in meeting its minimum requirements.\139\ The Commission 
explained that the UK PRA 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.\140\ The Commission observed that the UK PRA 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 UK PRA 
Capital Rules and the CFTC Capital Rules emphasizing high quality 
capital instruments.\141\
---------------------------------------------------------------------------

    \139\ See 2024 Proposal at 8039.
    \140\ Id.
    \141\ 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.\142\ 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.\143\ Additional tier 1 capital is generally 
composed of equity instruments such as preferred stock and certain 
hybrid securities that may be converted to common stock if triggering 
events occur and may have a preference in distributions over common 
equity tier 1 capital in the event of an insolvency.\144\ 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.\145\ Subordinated debt must meet 
certain conditions to qualify as tier 2 capital under the CFTC Capital 
Rules.\146\
---------------------------------------------------------------------------

    \142\ 17 CFR 23.101(a)(1)(i) and 2024 Proposal at 8037-8038. 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. 12 CFR 217.20.
    \143\ 12 CFR 217.20(b).
    \144\ 12 CFR 217.20(c).
    \145\ 12 CFR 217.20(d).
    \146\ 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 UK 
PRA Capital Rules require a PRA-designated nonbank SD to maintain an 
amount of regulatory capital (i.e., equity capital and qualifying 
subordinated debt) equal to or greater than 8 percent of the PRA-
designated UK nonbank SD's total risk exposure, which is calculated as 
the sum of the firm's: (i) capital charges for market risk; (ii) risk-
weighted exposure amounts for credit risk; (iii) capital charges for 
settlement risk; (iv) credit valuation adjustment (``CVA'') risk of 
over-the-counter (``OTC'') derivatives instruments; and (v) capital 
charges for operational risk. The UK PRA Capital Rules limit the 
composition of regulatory capital to

[[Page 58549]]

common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital in a manner consistent with the BCBS framework. Specifically, 
the UK PRA Capital Rules provide that a PRA-designated UK nonbank SD's 
regulatory capital may be composed of: (i) common equity tier 1 capital 
instruments, which generally include the PRA-designated UK nonbank SD's 
common equity (stock), retained earnings, and accumulated other 
comprehensive income; (ii) additional tier 1 capital instruments, which 
includes other forms of capital instruments and certain long-term 
convertible debt instruments; and (iii) tier 2 capital instruments, 
which include other reserves, hybrid capital instruments, and certain 
qualifying subordinated term debt.\147\ Capital instruments that 
qualify as common equity tier 1 capital under the UK PRA Capital Rules 
include instruments that: (i) are issued directly by the PRA-designated 
UK nonbank SD; (ii) are paid in full and not funded directly or 
indirectly by the PRA-designated UK nonbank SD; and (iii) are 
perpetual.\148\ In addition, the principal amount of the common equity 
tier 1 capital instruments may not be reduced or repaid, except in the 
liquidation of the PRA-designated UK nonbank SD.\149\ Furthermore, to 
qualify as additional tier 1 capital, the capital instruments must meet 
certain conditions including: (i) the instruments are issued directly 
by the PRA-designated UK nonbank SD and paid in full; (ii) the 
instruments are not owned by the PRA-designated UK nonbank SD or its 
subsidiaries; (iii) the purchase of the instruments is not funded 
directly or indirectly by the PRA-designated UK nonbank SD; (iv) the 
instruments rank below tier 2 instruments in the event of the 
insolvency of the PRA-designated UK nonbank SD; (v) the instruments are 
not secured or guaranteed by the PRA-designated UK nonbank SD or an 
affiliate; (vi) the instruments are perpetual and do not include an 
incentive for the PRA-designated UK nonbank SD to redeem them; and 
(vii) distributions under the instruments are pursuant to defined terms 
and may be cancelled under the full discretion of the PRA-designated UK 
nonbank SD.\150\ Lastly, subordinated debt instruments must meet 
certain conditions to qualify as tier 2 regulatory capital under the UK 
PRA Capital Rules, including that the: (i) loans are not granted by the 
PRA-designated UK nonbank SD or its subsidiaries; (ii) claims on the 
principal amount of the subordinated loans under the provisions 
governing the subordinated loan agreement rank below any claim from 
eligible liabilities instruments (i.e., certain non-capital 
instruments), meaning that they are effectively subordinated to claims 
of all non-subordinated creditors of the PRA-designated UK nonbank SD; 
(iii) subordinated loans are not secured, or subject to a guarantee 
that enhances the seniority of the claim, by the PRA-designated UK 
nonbank SD, its subsidiaries, or affiliates; (iv) loans have an 
original maturity of at least five years; and (v) provisions governing 
the loans do not include any incentive for the principal amount to be 
repaid by the PRA-designated UK nonbank SD prior to the loans' 
maturity.\151\
---------------------------------------------------------------------------

    \147\ 2024 Proposal at 8038.
    \148\ Id. and UK CRR, Articles 26 and 28.
    \149\ Id.
    \150\ Id. and UK CRR, Articles 51-52.
    \151\ Id. and UK CRR, Article 63.
---------------------------------------------------------------------------

    Based on its comparative assessment, the Commission preliminarily 
found that the types and characteristics of the equity instruments that 
qualify as common equity tier 1 capital and additional tier 1 capital 
under the UK PRA 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.\152\ Specifically, the Commission noted that the UK PRA Capital 
Rules' common equity tier 1 capital and additional tier 1 capital 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.\153\
---------------------------------------------------------------------------

    \152\ See 2024 Proposal at 8039.
    \153\ Id.
---------------------------------------------------------------------------

    The Commission also found subordinated debt under the UK PRA 
Capital Rules comparable to tier 2 capital under the CFTC Capital 
Rules.\154\ Specifically, the Commission noted that the qualifying 
conditions imposed on subordinated debt instruments are comparable 
under the UK PRA 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 debt lenders' claims for repayment on 
the debt to other creditors of the nonbank SD and by limiting or 
restricting repayment of the subordinated loans if such repayments 
result in the nonbank SD's equity falling below certain defined 
thresholds.\155\ The Commission preliminarily concluded that these 
terms and conditions provided assurances that the subordinated debt is 
appropriate to be recognized as regulatory capital available to a 
nonbank SD to meet its obligations and to absorb business losses and 
decreases in the value of firm assets and increases in the value of 
firm liabilities.\156\
---------------------------------------------------------------------------

    \154\ Id.
    \155\ Id.
    \156\ Id.
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
    The Commission did not receive comments regarding its preliminary 
determination that the UK PRA Capital Rules are comparable in purpose 
and effect to the CFTC Capital Rules with regard to the types and 
characteristics of a nonbank SD's equity and subordinated debt that 
qualifies as regulatory capital in meeting its minimum requirements. In 
conclusion, the Commission finds that the UK PRA 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 UK PRA 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 qualifies as regulatory capital to meet minimum

[[Page 58550]]

capital requirements under the UK PRA Capital Rules.

C. Nonbank Swap Dealer Minimum Capital Requirement

1. Introduction to Nonbank Swap Dealer Minimum Capital Requirements
    As reflected in the 2024 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; \157\ and (iv) the amount of capital 
required by NFA.\158\
---------------------------------------------------------------------------

    \157\ 17 CFR 23.101(a)(1)(i). See also 2024 Proposal at 8039. 
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.
    \158\ 17 CFR 23.101(a)(1)(i)(D). See also 2024 Proposal at 8039. 
Commission Regulation 23.101(a)(1)(i)(D) 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 
registered with the Commission as a 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 UK PRA Capital Rules, consistent with the BCBS 
framework, require each PRA-designated UK nonbank SD to maintain 
sufficient levels of capital to satisfy the following, expressed as a 
percentage of the PRA-designated UK nonbank SD's ``total risk exposure 
amount'' (i.e., the sum of the PRA-designated UK nonbank SD's risk-
weighted assets and exposures): (i) a common equity tier 1 capital 
ratio of 4.5 percent; (ii) a tier 1 capital ratio of 6 percent; and 
(iii) a total capital ratio of 8 percent. Furthermore, PRA-designated 
UK nonbank SDs must maintain a capital conservation buffer composed of 
common equity tier 1 capital in an amount equal to 2.5 percent of the 
firm's total risk exposure. The common equity tier 1 capital used to 
meet the capital conservation buffer must be separate and in addition 
to the 4.5 percent of common equity tier 1 capital required to meet its 
core 8 percent capital requirement.\159\ As explained in the 2024 
Proposal, the ``total risk exposure amount'' is calculated as the sum 
of the PRA-designated UK nonbank SD's: (i) capital requirements for 
market risk; (ii) risk-weighted exposure amounts for credit risk; (iii) 
capital requirements for CVA risk of OTC derivatives; and (iv) capital 
requirements for operational risk.\160\ Capital charges for market risk 
and credit risk are computed based on a PRA-designated UK nonbank SD's 
on-balance sheet and off-balance sheet exposures, weighted according to 
risk.\161\
---------------------------------------------------------------------------

    \159\ See 2024 Proposal at 8041-8042.
    \160\ Id. at 8042.
    \161\ Id.
---------------------------------------------------------------------------

2. Preliminary Determination and Comment Analysis
    While noting certain differences in the minimum capital 
requirements and calculation of regulatory capital between the UK PRA 
Capital Rules and the CFTC Capital Rules, the Commission preliminarily 
found that the UK PRA Capital Rules and CFTC Capital Rules achieve, 
subject to the 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.\162\ 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 UK 
PRA Capital Rules' requirements.
---------------------------------------------------------------------------

    \162\ Id. at 8045.
---------------------------------------------------------------------------

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 CFTC's $20 million 
fixed-dollar minimum capital requirement is intended to ensure that 
each nonbank SD maintains a level of regulatory capital, without regard 
to the level of the firm's dealing and other activities, sufficient to 
meet its obligations to swap market participants given the firm's 
status as a CFTC-registered nonbank SD and to help ensure the safety 
and soundness of the nonbank SD.\163\ In comparison, the UK PRA Capital 
Rules also contain a requirement that a PRA-designated UK nonbank SD 
maintain a fixed amount of minimum initial capital of GBP 750,000.\164\
---------------------------------------------------------------------------

    \163\ 85 FR 57462 at 57492.
    \164\ 2024 Proposal at 8045.
---------------------------------------------------------------------------

    The Commission, in the 2024 Proposal, recognized that the $20 
million fixed-dollar minimum capital required under the CFTC Capital 
Rules is substantially higher than the GBP 750,000 minimum base capital 
required under the UK PRA Capital Rules. Therefore, the Commission 
preliminarily proposed a condition that each PRA-designated UK nonbank 
SD would be required to maintain, at all times, a minimum amount of 
common equity tier 1 capital, as defined in Article 26 of UK CRR, 
denominated in GBP equal to or in excess of the equivalent of $20 
million.\165\
---------------------------------------------------------------------------

    \165\ Id. The Commission also noted that the six current PRA-
designated UK nonbank SDs maintain common equity tier 1 capital in 
amounts in excess of the equivalent of $20 million based on 
financial filings made with the Commission. Id. (note 255).
---------------------------------------------------------------------------

    One commenter, Better Markets, argued that the establishment in the 
UK PRA Capital Rules of a base level requirement that is substantially 
lower than the CFTC Capital Rules' fixed amount minimum requirement 
``demonstrates a fatal lack of comparability.'' \166\ Better Markets 
further stated that to compensate for this gap, the Commission proposed 
a condition requiring PRA-designated UK nonbank SDs to maintain a 
minimum amount of common equity tier 1 capital denominated in GBP equal 
to or in excess of the equivalent of $20 million.\167\
---------------------------------------------------------------------------

    \166\ Better Markets Letter at p. 13.
    \167\ Id.
---------------------------------------------------------------------------

    As noted above, the Commission recognized the material difference 
in the requirement under the UK PRA 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 PRA-

[[Page 58551]]

designated UK nonbank SD may not avail itself of substituted compliance 
unless it maintains a minimum amount of common equity tier 1 capital 
denominated in GBP equal to or excess of the equivalent of $20 million. 
Furthermore, the imposition of conditions in a Comparability Order, as 
discussed in section I.E. above, is authorized by Commission Regulation 
23.106(a)(5), which provides that the Commission may issue terms and 
conditions as it deems appropriate. In addition, as further noted in 
section I.E. above, the Guidance also provides that the Commission may 
impose conditions as part of the substituted compliance process to 
address a lack of comparable and comprehensive regulation in a home 
jurisdiction.\168\ In this connection, the Commission concludes that 
requiring PRA-designated UK nonbank SDs to maintain an amount of 
regulatory capital in the form of common equity tier 1 items, as 
defined in Article 26 of UK CRR, equal to or in excess of the 
equivalent of $20 million will impose an equally stringent standard to 
the analogue requirement under the CFTC Capital Rules and will 
appropriately address the substantially lower minimum fixed amount 
capital requirement under the UK PRA Capital Rules.
---------------------------------------------------------------------------

    \168\ Guidance at 45343.
---------------------------------------------------------------------------

    In conclusion, the Commission finds that the UK PRA Capital Rules 
and the CFTC Capital Rules, with the imposition of the condition for 
PRA-designated UK nonbank SDs to maintain a minimum level of common 
equity tier 1 capital in an amount equivalent to at least $20 million, 
are comparable in purpose and effect and achieve comparable 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.\169\ Risk-weighted assets are a nonbank SD's on-balance 
sheet and off-balance sheet market risk and credit risk exposures, 
including exposures associated with proprietary swap, security-based 
swap, equity, and futures positions, weighted according to risk. The 
requirements and capital ratios set forth in prong (ii) are based on 
the Federal Reserve Board's capital requirements for bank holding 
companies and are consistent with the BCBS framework. The requirement 
for each nonbank SD to maintain regulatory capital in an amount that 
equals or exceeds 8 percent of the firm's total risk-weighted assets is 
intended to help ensure that the nonbank SD's level of capital is 
sufficient to absorb decreases in the value of the firm's assets and 
increases in the value of the firm's liabilities, and to cover 
unexpected losses resulting from the firm's business activities, 
including losses resulting from uncollateralized defaults from swap 
counterparties, without the nonbank SD becoming insolvent.\170\
---------------------------------------------------------------------------

    \169\ 17 CFR 23.101(a)(1)(i)(B).
    \170\ See generally 85 FR 57462 at 57530.
---------------------------------------------------------------------------

    The UK PRA Capital Rules contain capital requirements for PRA-
designated UK nonbank SDs that the Commission preliminarily found 
comparable to the requirements in prong (ii) of the CFTC Capital 
Requirements.\171\ Specifically, the UK PRA Capital Rules require a 
PRA-designated UK nonbank SD to maintain: (i) common equity tier 1 
capital equal to at least 4.5 percent of the PRA-designated UK nonbank 
SD's total risk exposure amount; (ii) total tier 1 capital (i.e., 
common equity tier 1 capital plus additional tier 1 capital) equal to 
at least 6 percent of the PRA-designated UK nonbank SD's total risk 
exposure amount; and (iii) total capital (i.e., an aggregate amount of 
common equity tier 1 capital, additional tier 1 capital, and tier 2 
capital) equal to at least 8 percent of the PRA-designated UK nonbank 
SD's total risk exposure amount. The UK PRA Capital Rules further 
require each PRA-designated UK nonbank SD to maintain an additional 
capital conservation buffer equal to 2.5 percent of the PRA-designated 
UK nonbank SD's total risk exposure amount, which must be met with 
common equity tier 1 capital. Thus, a PRA-designated UK nonbank SD is 
effectively required to maintain total qualifying regulatory capital in 
an amount equal to or in excess of 10.5 percent of the market risk, 
credit risk, CVA risk, settlement risk, and operational risk of the 
firm (i.e., total capital requirement of 8 percent of risk-weighted 
assets and an additional 2.5 percent of risk-weighted assets as a 
capital conservation buffer), which is a higher capital ratio than the 
8 percent required of nonbank SDs under prong (ii) of the CFTC Capital 
Rules.\172\
---------------------------------------------------------------------------

    \171\ See 2024 Proposal at 8046.
    \172\ Id. and UK CRR Articles 26, 28, 50-52, 61-63 and 92, and 
PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2 Capital 
Conservation Buffer.
---------------------------------------------------------------------------

    The Commission also preliminarily found that the UK PRA Capital 
Rules and the CFTC Capital Rules are comparable with respect to the 
approaches used in the calculation of risk-weighted asset amounts for 
market risk and credit risk in determining the nonbank SD's risk-
weighted assets.\173\ In that regard, 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.\174\
---------------------------------------------------------------------------

    \173\ See 2024 Proposal at 8046.
    \174\ Id.
---------------------------------------------------------------------------

    As the Commission observed, the standardized approaches to 
calculating risk-weighted asset amounts for market risk and credit risk 
under both sets of 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.\175\
---------------------------------------------------------------------------

    \175\ 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'').\176\ The standardized market risk charges under Commission 
Regulation 1.17 and SEC Rule 18a-1 are calculated as a standardized or 
table-based percentage of the market value or notional value of the 
nonbank SD's marketable securities and derivatives positions, with the 
percentages applied

[[Page 58552]]

to the market value or notional value increasing as the expected or 
anticipated risk of the positions increases.\177\ For example, 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.\178\ 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.\179\
---------------------------------------------------------------------------

    \176\ Id. at 8040 and paragraph (3) of the definition of the 
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
    \177\ See 2024 Proposal at 8040, 17 CFR 1.17(c)(5), and 17 CFR 
240.18a-1(c)(1).
    \178\ 17 CFR 1.17(c)(5)(iii).
    \179\ 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.\180\
---------------------------------------------------------------------------

    \180\ 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 UK PRA Capital Rules 
require a PRA-designated UK nonbank SD to calculate its standardized 
risk-weighted asset amounts for market risk by multiplying the notional 
or carrying amount of net positions by risk-weighting factors, which 
are based on the underlying market risk of each asset or exposure and 
increase as the expected risk of the positions increases.\181\ The 
Commission further explained that a PRA-designated UK nonbank SD is 
required to calculate market risk requirements for debt instruments and 
equity instruments separately, by computing each category as the sum of 
specific risk and general risk of the positions.\182\ As further 
discussed in the 2024 Proposal, the UK PRA Capital Rules also require 
PRA-designated UK nonbank SDs to include in their risk-weighted assets 
market risk exposures to certain foreign currency and gold positions. 
Specifically, a PRA-designated UK nonbank SD with net positions in 
foreign exchange and gold that exceed 2 percent of the firm's total 
capital must calculate capital requirements for foreign exchange 
risk.\183\ The capital requirement for foreign exchange risk under the 
standardized approach is 8 percent of the PRA-designated UK nonbank 
SD's net positions in foreign exchange and gold.\184\ The UK PRA 
Capital Rules further require PRA-designated UK nonbank SDs to include 
exposures to commodity positions in calculating the firm's risk-
weighted assets. The standardized calculation of commodity risk 
exposures may follow one of three approaches depending on type of 
position or exposure. The first is the sum of a flat percentage rate 
for net positions, with netting allowed among tightly defined sets, 
plus another flat percentage rate for the gross position.\185\ The 
other two standardized approaches are based on maturity-ladders, where 
unmatched portions of each maturity band (i.e., portions that do not 
net out to zero) are charged at a step-up rate in comparison to the 
base charges for matched portions.\186\
---------------------------------------------------------------------------

    \181\ See 2024 Proposal at 8042.
    \182\ Id. and UK CRR, Article 326. As indicated in Article 326 
of UK CRR, securitizations are treated as debt instruments for 
market risk requirements.
    \183\ 2024 Proposal at 8042 and UK CRR, Article 351.
    \184\ Id.
    \185\ 2024 Proposal at 8042 and UK CRR, Article 360.
    \186\ 2024 Proposal at 8042 and UK CRR, Article 359-361.
---------------------------------------------------------------------------

    With respect to standardized risk-weighted asset amounts for credit 
risk, 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.\187\ 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.\188\ A nonbank SD with off-balance sheet exposures is 
required to calculate a risk-weighted 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.\189\
---------------------------------------------------------------------------

    \187\ 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 2024 Proposal at 8040.
    \188\ 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 2024 Proposal at 8040.
    \189\ 12 CFR 217.33. See also discussion in 2024 Proposal at 
8040.
---------------------------------------------------------------------------

    In comparison, the Commission noted that the UK PRA Capital Rules 
require a PRA-designated UK nonbank SD to calculate its standardized 
risk-weighted asset amounts for credit risk in a manner aligned with 
the Commission's Bank-Based Approach and the BCBS framework by taking 
the carrying value or notional value of each of the PRA-designated UK 
nonbank SD's on-balance sheet and off-balance sheet exposures, making 
certain additional credit risk adjustments, and then applying specific 
risk weights based on the type of counterparty and the asset's credit 
quality.\190\ For instance, exposures to the ECB, the UK government, 
and the Bank of England, carry a zero percent risk weight; exposures to 
other central governments and central banks may carry risk weights 
between 0 and 150, depending on the credit rating available for the 
central government or central bank; and exposures to banks, PRA-
designated investment firms, or other businesses may carry risk weights 
between 20 percent and 150 percent depending on the credit ratings 
available for the entity or, for exposures to banks and investment 
firms, for the central government of the jurisdiction in which the 
entity is incorporated.\191\ If no credit rating is available, the PRA-
designated UK nonbank SD must generally apply a 100 percent risk 
weight, meaning the total accounting value of the exposure is 
used.\192\
---------------------------------------------------------------------------

    \190\ 2024 Proposal at 8043 and UK CRR, Articles 111 and 113(1).
    \191\ 2024 Proposal at 8043 and UK CRR, Articles 114-122.
    \192\ 2024 Proposal at 8043 and UK CRR, Articles 121(2) and 
122(2).
---------------------------------------------------------------------------

    With respect to counterparty credit risk for derivatives positions, 
the Commission explained that under the CFTC Capital Rules, a nonbank 
SD may compute standardized credit risk

[[Page 58553]]

exposures, using either the current exposure method (``CEM'') or the 
standardized approach for measuring counterparty credit risk (``SA-
CCR'').\193\ 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.\194\ 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.\195\ In comparison, the UK PRA Capital Rules require a PRA-
designated UK nonbank SD that is not approved to use credit risk models 
to calculate its exposure using the SA-CCR.\196\ The exposure amount 
under the SA-CCR is computed, under both the UK PRA Capital Rules and 
the Commission's Bank-Based Approach, as the sum of the replacement 
cost of the contract and the potential future exposure of the contract, 
multiplied by a factor of 1.4.\197\
---------------------------------------------------------------------------

    \193\ 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 OTC 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 2024 Proposal at 8040.
    \194\ 12 CFR 217.34.
    \195\ 12 CFR 217.132(c).
    \196\ 2024 Proposal at 8043, UK CRR, Articles 92(3)(f), and PRA 
Rulebook, CRR Firms, Counterparty Credit Risk (CRR) Part, Chapter 3 
Counterparty Credit Risk (Part Three, Title Two, Chapter Six CRR). 
As noted in the 2024 Proposal, PRA-designated UK nonbank SDs with 
smaller-sized derivatives business may also use a ``simplified 
standardized approach to counterparty credit risk'' or an ``original 
exposure method'' as simpler methods for calculating exposure 
values. PRA Rulebook, CRR Firms, Counterparty Credit Risk (CRR) 
Part, Chapter 3 Counterparty Credit Risk (Part Three, Title Two, 
Chapter Six CRR), Articles 281-282. To use either of these 
alternative methods, an entity's on-and off-balance sheet 
derivatives business must be equal to or less than 10 percent of the 
entity's total assets and GBP 260 million or 5 percent of the 
entity's total assets and GBP 88 million, respectively. PRA 
Rulebook, CRR Firms, Counterparty Credit Risk (CRR) Part, Chapter 3 
Counterparty Credit Risk (Part Three, Title Two, Chapter Six CRR), 
Article 273a.
    \197\ PRA Rulebook, CRR Firms, Counterparty Credit Risk (CRR) 
Part, Chapter 3 Counterparty Credit Risk (Part Three, Title Two, 
Chapter Six CRR), Article 274 and 12 CFR 217.132(c). See also 
discussion in 2024 Proposal at 8043.
---------------------------------------------------------------------------

    UK PRA Capital Rules also require a PRA-designated UK nonbank SD to 
include its exposures to settlement risk in its calculation of its 
risk-weighted assets.\198\ Consistent with the BCBS framework, the 
risk-weighted asset amount for settlement risk for transactions settled 
on a delivery-versus-payment basis is computed by multiplying the price 
difference to which a PRA-designated UK nonbank SD is exposed as a 
result of an unsettled transaction by a percentage factor that varies 
from 8 percent to 100 percent based on the number of working days after 
the settlement due date during which the transaction remains 
unsettled.\199\ The CFTC's Bank-Based Approach provides for a similar 
calculation methodology for risk-weighted asset amounts for unsettled 
transactions involving securities, foreign exchange instruments, and 
commodities.\200\
---------------------------------------------------------------------------

    \198\ 2024 Proposal at 8043 and UK CRR, Article 378 (indicating 
that if transactions in which debt instruments, equities, foreign 
currencies and commodities excluding repurchase transactions and 
securities or commodities lending and securities or commodities 
borrowing are unsettled after their delivery due dates, a PRA-
designated UK nonbank SD must calculate the price difference to 
which it is exposed).
    \199\ Id. The price difference to which a PRA-designated UK 
nonbank SD is exposed is the difference between the agreed 
settlement price for an instrument (i.e., a debt instrument, equity, 
foreign currency or commodity) and the instrument's current market 
value, where the difference could involve a loss for the firm. UK 
CRR, Article 378.
    \200\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted 
assets), 12 CFR 217.38 and 12 CFR 217.136.
---------------------------------------------------------------------------

    Consistent with the BCBS framework, a PRA-designated UK nonbank SD 
is also required to calculate a CVA risk-weighted asset amount for OTC 
derivative instruments to reflect the current market value of the 
credit risk of the counterparty to the PRA-designated UK nonbank 
SD.\201\ Risk-weighted asset amounts for CVA risk can be calculated 
following similar methodologies as those described in Subpart E of the 
Federal Reserve Board's part 217 regulations.\202\
---------------------------------------------------------------------------

    \201\ 2024 Proposal at 8043 and UK CRR, Articles 381 and 382(1).
    \202\ UK CRR, Articles 383-384 and 12 CFR 217.132(e)(5) and (6). 
Under the CFTC's Bank-Based Approach, nonbank SDs calculating their 
credit risk-weighted assets using the regulations in Subpart D of 
the Federal Reserve Board's Part 217 regulations do not calculate 
CVA of OTC derivatives instruments.
---------------------------------------------------------------------------

    As discussed in the 2024 Proposal, both the CFTC Capital Rules and 
the UK PRA Capital Rules also provide that, if approved by NFA or the 
PRA, respectively, nonbank SDs may also use internal models to 
calculate market and/or credit risk exposures.\203\ The Commission 
noted that the internal market and credit risk models under the UK PRA 
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, 
though with slightly different categorization, and including comparable 
model risk management requirements.\204\ In this regard, the Commission 
observed that both rule sets address the same types of risk, with 
similar allowed methodologies and under similar controls.\205\ The 
Commission also preliminarily determined that the UK PRA Capital Rules 
and the CFTC Capital Rules are comparable with respect to the 
requirement that nonbank SDs account for operational risk in computing 
their minimum capital requirements.\206\ In this connection, the 
Commission noted that the UK PRA Capital Rules require a PRA-designated 
UK nonbank SD to calculate an operational risk exposure as a component 
of the firm's total risk exposure amount.\207\ PRA-designated UK 
nonbank SDs may use either a standardized approach or, if the PRA-
designated UK nonbank has obtained regulatory permission, an internal 
approach based on the firm's own measurement systems, to calculate 
their risk-weighted asset amounts for

[[Page 58554]]

operational risk. The CFTC Capital Rules address operational risk both 
as a stand-alone, separate minimum capital requirement that a nonbank 
SD is required to meet under prong (iii) of the Bank-Based Approach and 
as a component of the calculation of risk-weighted assets for nonbank 
SDs that use Subpart E of the Federal Reserve Board's part 217 
regulations to calculate their credit risk-weighted assets via internal 
models.\208\
---------------------------------------------------------------------------

    \203\ See 2024 Proposal at 8040-8041 and 8043, respectively, for 
discussions of NFA and PRA model approvals. In discussing approval 
requirements for credit risk models as part of the general overview 
of the UK PRA Capital Rules, the Commission referred generally to 
counterparty credit risk exposures for ``OTC derivatives 
transactions.'' See 2024 Proposal at 8034-8035 (n. 115). For 
clarity, the Commission notes that the Internal Model Methodology 
for counterparty credit risk set out in UK CRR, Articles 283-294, 
can be used for the derivatives listed in Annex II of UK CRR, 
securities financing transactions, and long settlement transactions. 
PRA Rulebook, CRR Firms, Counterparty Credit Risk (CRR) Part, 
Article 273.
    \204\ See 2024 Proposal at 8046. For a discussion of the 
qualitative and quantitative requirements that models must meet 
under the CFTC Capital Rules and the UK PRA Capital Rules, see 2024 
Proposal at 8040-8041 and 8043-8044, respectively. In discussing 
model approval conditions, the Commission noted that PRA-designated 
UK nonbank SDs were not permitted to use internal models to 
calculate counterparty credit risk amounts for large exposures. See 
2024 Proposal at 8043 and 8044 (n. 217 and n. 237). The Commission 
notes that this statement is not correct with regard to securities 
financing transactions. PRA-designated UK nonbank SDs are allowed to 
use internal models to calculate exposure values for securities 
financing transactions. PRA Rulebook, CRR Firms, Large Exposures 
(CRR) Part, Chapter 4 Large Exposures (Part Four CRR), Article 390.
    \205\ See 2024 Proposal at 8046.
    \206\ Id.
    \207\ Id. and UK CRR, Article 92(3).
    \208\ Id. and 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100 
(definition of BHC equivalent risk-weighted assets).
---------------------------------------------------------------------------

    Only one commenter specifically addressed the Commission's 
comparative analysis of the minimum capital requirement based on risk-
weighted assets. The commenter, Ravnitzky, stated that the UK PRA 
Capital Rules and the CFTC Capital Rules differ in several areas, 
including in their approaches to calculating risk-weighted amounts for 
market risk and credit risk.\209\ Ravnitzky asserted that unlike the UK 
PRA Capital Rules, which use a standardized approach, the CFTC Capital 
Rules use a model-based approach to calculating risk-weighted 
amounts.\210\ The Commission notes that this description of the 
respective rule sets is not accurate. As discussed above, the currently 
applicable UK PRA Capital Rules and CFTC Capital Rules both incorporate 
standardized and model-based approaches to calculating market risk and 
credit risk amounts.\211\
---------------------------------------------------------------------------

    \209\ Ravnitzky Letter at pp. 3-4.
    \210\ Id.
    \211\ As noted in the 2024 Proposal, the Commission is aware 
that the PRA is considering changes to the UK PRA Capital Rules to 
implement Basel 3.1 standards. If the PRA proceeds with the 
implementation of the Basel 3.1 standards as proposed, the 
regulatory changes would be applicable after July 1, 2025 with a 
4.5-year transitional period ending on January 1, 2030. The 
Commission will monitor progress on the PRA's proposed regulatory 
changes and may amend or supplement the Comparability Order, as 
appropriate. 2024 Proposal at 8036 (n. 128).
---------------------------------------------------------------------------

    In conclusion, the Commission finds that the UK PRA 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. In this regard, the Commission finds 
that the UK PRA Capital Rules and the CFTC Capital rules have a 
comparable approach to the computation of market risk exposure amounts 
and credit risk exposure amounts for on-balance sheet and off-balance 
sheet exposures, which are intended to ensure 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 
swap margin amount associated with its uncleared swap transactions to 
address potential operational, legal, and liquidity risks.\212\
---------------------------------------------------------------------------

    \212\ 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 all 
of 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. 85 FR 57462 at 57485.
---------------------------------------------------------------------------

    The UK PRA Capital Rules differ from the CFTC Capital Rules in that 
they do not impose a capital requirement on PRA-designated UK nonbank 
SDs based on a percentage of the margin for uncleared swap 
transactions.\213\ In the 2024 Proposal, the Commission described, 
however, how certain UK PRA capital and liquidity requirements may 
compensate for the lack of direct analogue to the 8 percent uncleared 
swap margin amount requirement.\214\ Specifically, the Commission noted 
that under the UK PRA Capital Rules the total risk exposure amount is 
computed as the sum of the PRA-designated UK nonbank SD's risk-weighted 
asset amounts for market risk, credit risk, settlement risk, CVA risk 
of OTC derivatives instruments, and operational risk.\215\ Notably, the 
UK PRA Capital Rules require that PRA-designated UK nonbank SDs, 
including firms that do not use internal models, calculate capital 
charges for operational risk as a separate component of the total risk 
exposure amount. The UK PRA Capital Rules also impose separate 
liquidity requirements designed to ensure that the PRA-designated UK 
nonbank SDs can meet both short- and long-term obligations, in addition 
to the general requirement to maintain processes and systems for the 
identification of liquidity risk.\216\ In comparison, the Commission 
requires nonbank SDs to maintain a risk management program covering 
liquidity risk, among other risk categories, but does not have a 
distinct liquidity requirement.\217\
---------------------------------------------------------------------------

    \213\ See 2024 Proposal at 8046-8047.
    \214\ Id.
    \215\ Id. at 8047 and UK CRR, Article 92(3).
    \216\ Id. More specifically, the UK PRA Capital Rules impose 
separate liquidity buffers and ``stable funding'' requirements 
designed to ensure that PRA-designated UK nonbank SDs can cover both 
long-term obligations and short-term payment obligations under 
stressed conditions for 30 days. PRA Rulebook, CRR Firms, Liquidity 
(CRR) Part, Chapter 4 Liquidity (Part Six CRR), Article 412-413. In 
addition, PRA-designated UK nonbank SDs are required to maintain 
robust strategies, policies, processes, and systems for the 
identification of liquidity risk over an appropriate set of time 
horizons, including intra-day. PRA Rulebook, CRR Firms, Internal 
Liquidity Adequacy Assessment Part.
    \217\ See 2024 Proposal at 8047. Specifically, Commission 
Regulation 23.600(b) requires each SD to establish, document, 
maintain, and enforce a system of risk management policies and 
procedures designed to monitor and manage the risks related to 
swaps, and any products used to hedge swaps, including futures, 
options, swaps, security-based swaps, debt or equity securities, 
foreign currency, physical commodities, and other derivatives. The 
elements of the SD's risk management program are required to include 
the identification of risks and risk tolerance limits with respect 
to applicable risks, including operational, liquidity, and legal 
risk, together with a description of the risk tolerance limits set 
by the SD and the underlying methodology in written policies and 
procedures. 17 CFR 23.600.
---------------------------------------------------------------------------

    Addressing the Commission's request for comment on the 
comparability between the CFTC's capital requirement based on a 
percentage of the margin for uncleared swap transactions and the UK PRA 
Capital Rules' requirements with respect to operational risk and 
liquidity risk, one commenter, Better Markets, asserted that the 
requirement for PRA-designated UK nonbank SDs to hold qualifying 
regulatory capital to cover operational risk is not comparable to the 
CFTC's requirement for nonbank SDs to hold qualifying capital in an 
amount equal to at least 8 percent of the nonbank SD's uncleared swap 
margin amount.\218\ Better Markets further asserted that the proposed 
Comparability Determination fell short in furnishing an adequate 
analysis substantiating that the incorporation of an operational risk 
charge and the existence of separate liquidity requirements would 
genuinely yield an equivalent result.\219\ Furthermore, Better Markets 
argued that the Commission should have undertaken ``an examination to 
ascertain whether the PRA-designated UK nonbank SD's operational risk 
charge and liquidity requirements would adequately cover [its] 
cumulative amounts of uncleared swaps margin.'' \220\
---------------------------------------------------------------------------

    \218\ Better Markets Letter at p. 13.
    \219\ Id.
    \220\ Id.
---------------------------------------------------------------------------

    The Applicants offered a contrasting view in their comment letter, 
stating that, although the UK PRA Capital Rules do not ``have a direct 
analogue to the 8 percent uncleared swap margin requirement'' under the 
CFTC Capital

[[Page 58555]]

Rules, they have ``various other measures that achieve the same 
regulatory objective of ensuring that an SD maintains an amount of 
capital that is sufficient to cover the full range of risks a PRA-
designated UK nonbank SD may face.'' \221\ In support of the statement, 
the Applicants discussed, among other measures, the various categories 
of risk charges that a PRA-designated UK nonbank SD is required to 
include in its total risk exposure amount, as well as the capital 
conservation buffer, leverage ratio floor, and liquidity requirements 
that the UK PRA Capital Rules impose on PRA-designated UK nonbank 
SDs.\222\
---------------------------------------------------------------------------

    \221\ Applicants' Letter at p. 3.
    \222\ Id. at pp. 2-3. As discussed in the 2024 Proposal, the UK 
PRA Capital Rules impose a 3.35 percent leverage ratio floor on PRA-
designated UK nonbank SDs that hold significant amounts of non-UK 
assets, as an additional element of the capital requirements. 
Specifically, a PRA-designated UK nonbank SD that has non-UK assets 
equal to or greater than GBP 10 billion is required to maintain tier 
1 capital (i.e., an aggregate of common equity tier 1 capital and 
additional tier 1 capital) equal to or in excess of 3.35 percent of 
the firm's on-balance sheet and off-balance sheet exposures, 
including exposures on uncleared swaps but excluding certain 
exposures to central banks, without regard to any risk-weighting. 
See 2024 Proposal at 8034 and PRA Rulebook, CRR Firms, Leverage 
Ratio (CRR) Part, Chapter 3 Leverage Ratio (Part Seven CRR), Article 
429 et seq.
---------------------------------------------------------------------------

    The Commission finds that the additional categories of risk-
weighted asset amounts that PRA-designated UK nonbank SDs are required 
to include in the total risk-weighted assets amount, as well as the 
various regulatory measures seeking to ensure that PRA-designated UK 
nonbank SDs hold sufficient capital to cover the full range of risks 
that they may face, support the comparability of the UK PRA Capital 
Rules and the CFTC Capital Rules even in the absence of a separate 
capital requirement in the UK PRA Capital Rules requiring PRA-
designated UK nonbank SDs to have qualified capital equal to or greater 
than 8 percent of the amount of uncleared swap margin. The Commission 
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.\223\ 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.\224\ The Commission understands that other 
jurisdictions may adopt alternative measures to cover the same risks. 
As such, a strict comparison between the amounts that a PRA-designated 
UK nonbank SD holds to account for operational risk and liquidity risk 
pursuant to the UK PRA Capital Rules and the amount of uncleared swap 
margin that a PRA-designated UK nonbank SD would have been required to 
hold pursuant to the CFTC Capital Rules is not warranted. As discussed 
in section I.E. above, the Commission's analysis in ascertaining the 
comparability of a foreign jurisdiction's capital rules to the CFTC 
Capital Rules is focused on determining whether the foreign 
jurisdiction's rules have comparable regulatory objectives and achieve 
comparable outcomes. Following this standard of review, the Commission 
finds that the various measures that the UK PRA Capital Rules have 
established to help ensure that PRA-designated UK nonbank SDs hold 
sufficient capital to cover the full range of risks that they face have 
comparable objectives and achieve comparable outcomes.
---------------------------------------------------------------------------

    \223\ 85 FR 57462 at 57497.
    \224\ 85 FR 57462 at 57485 and 57497.
---------------------------------------------------------------------------

    In conclusion, the Commission finds that the UK PRA 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.\225\ The UK PRA 
Capital Rules address comparable risks albeit not through a requirement 
based on a UK nonbank SD's uncleared swap margin amount. In this 
regard, UK nonbank SDs are required to maintain a minimum level of 
regulatory capital based on an aggregate of the firm's total risk-
weighted asset amounts for market risk, credit risk, and operational 
risk. Accordingly, the Commission has determined that, notwithstanding 
the differences in approaches, the UK PRA Capital Rules and CFTC 
Capital Rules are comparable in purpose and effect in requiring nonbank 
SDs to maintain a minimum level of regulatory capital that addresses 
potential market risk, credit risk, and operational risk to help ensure 
the safety and soundness of the firm, and to ensure that the firm has 
sufficient capital to absorb decreases in firm assets, absorb increases 
in firm liabilities, and meet obligations to counterparties and 
creditors, without the firm becoming insolvent.
---------------------------------------------------------------------------

    \225\ See 2024 Proposal at 8040 (referencing 85 FR 57462).
---------------------------------------------------------------------------

3. Final Determination
    Based on its analysis of comments and its holistic assessment of 
the respective requirements discussed in sections 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 PRA-designated UK nonbank SDs must maintain a minimum 
level of regulatory capital in the form of common equity tier 1 capital 
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 2024 Proposal.\226\ Specifically, the 2024 
Proposal noted that the CFTC Financial Reporting Rules require nonbank 
SDs to file with the Commission and NFA periodic unaudited and annual 
audited financial reports.\227\ 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.\228\ 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

[[Page 58556]]

unaudited financial reports prepared as of the nonbank SD's year-end 
date.\229\ 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.\230\ 
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.\231\
---------------------------------------------------------------------------

    \226\ 2024 Proposal at 8047-8048.
    \227\ Id. and 17 CFR 23.105(d) and (e).
    \228\ Id. and 17 CFR 23.105(d)(2).
    \229\ Id. and 17 CFR 23.105(e)(4).
    \230\ Id. at 8048 and 17 CFR 23.105(f).
    \231\ 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; \232\ (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; \233\ and (iii) for nonbank SDs 
approved to use internal capital models, certain model metrics, such as 
aggregate value-at-risk (``VaR''), a graph reflecting the daily intra-
month VaR for each business line, and counterparty credit risk 
information.\234\
---------------------------------------------------------------------------

    \232\ 2024 Proposal at 8048, Regulation 23.105(l), and Schedule 
1 of Appendix B to Subpart E of Part 23 (``Schedule 1''). 17 CFR 
23.105(l) and 17 CFR Appendix B to Subpart E of Part 23. 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.
    \233\ 2024 Proposal 8048 and schedules 2, 3 and 4, respectively, 
of Appendix B to Subpart E of Part 23.
    \234\ 2024 Proposal 8048 and 17 CFR 23.105(k) and (l), and 
schedules 2, 3 and 4 of 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'').\235\ 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 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.\236\
---------------------------------------------------------------------------

    \235\ 2024 Proposal 8048 and 17 CFR 23.105(m).
    \236\ 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.\237\ 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.\238\
---------------------------------------------------------------------------

    \237\ Id.
    \238\ Id.
---------------------------------------------------------------------------

    The 2024 Proposal also detailed relevant financial reporting 
requirements of the UK PRA Financial Reporting Rules.\239\ The UK PRA 
Financial Reporting Rules require a PRA-designated UK nonbank SD to 
report information to the PRA concerning its capital and financial 
condition sufficient to provide a comprehensive view of the firm's risk 
profile, including information on the firm's capital requirements, 
leverage ratio, large exposures, and liquidity requirements.\240\ PRA-
designated UK nonbank SDs must follow the templates and instructions 
provided in the PRA Rulebook for purposes of the prudential 
requirements reporting referred to COREP.\241\ Under the COREP 
requirements, PRA-designated UK nonbank SDs are required to provide, on 
a quarterly basis,\242\ calculations in relation to the PRA-designated 
UK nonbank SD's capital and capital requirements,\243\ capital ratios 
and capital levels,\244\ and market risk,\245\ among other items.
---------------------------------------------------------------------------

    \239\ 2024 Proposal at 8048-8050.
    \240\ 2024 Proposal at 8048-8049 and PRA Rulebook, CRR Firms, 
Reporting (CRR) Part, Chapter 4 Reporting (Part Seven A CRR), Rule 
1.
    \241\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions.
    \242\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, 5 Reporting 
Requirements, Chapter 3 Format and Frequency of Reporting on Own 
Funds, Own Funds Requirements.
    \243\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Annex I, Templates C 01.00 and C 02.00.
    \244\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Annex I, Template C 03.00.
    \245\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Annex I, Template C 02.00.
---------------------------------------------------------------------------

    In addition to the prudential requirements reporting, Article 
430(3) of the Reporting (CRR) Part of the PRA Rulebook imposes 
financial information reporting on PRA-designated UK nonbank SDs that 
are subject to section 403(1) of the Companies Act 2006 (i.e., entities 
that are parent companies \246\ and report on a consolidated basis 
using UK-adopted International Financial Reporting Standards (IFRS) and 
that issue securities admitted to trading on a UK-regulated 
market).\247\ The relevant reporting templates and instructions, 
referred to as FINREP, are included in Chapter 6 of the Reporting (CRR) 
Part of the PRA Rulebook. Under the FINREP requirements, PRA-designated 
UK nonbank SDs subject to the requirements of Article 430(3) of the 
Reporting (CRR) Part of the PRA Rulebook are required to provide the 
following documents to the PRA, among other items: (i) on a quarterly 
basis, a balance sheet statement (or statement of financial position) 
that reflects the PRA-designated UK nonbank SD's financial condition; 
\248\ (ii) on a quarterly basis, a statement of profit or loss; \249\ 
(iii) on a quarterly basis, a breakdown of financial liabilities by 
product and by counterparty sector; \250\ (iv) on a quarterly basis, a 
listing of subordinated financial liabilities; \251\ and (v) on an 
annual basis, a statement of changes in equity.\252\
---------------------------------------------------------------------------

    \246\ A parent company (i.e., ``parent undertaking'') is defined 
in Companies Act 2006, Section 1162.
    \247\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4 
Reporting (Part Seven A CRR), Article 430, Rule 3. The International 
Accounting Standards Board is an independent, private-sector body 
that develops and approves IFRS.
    \248\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Templates 1.1., 1.2., and 1.3 at Annex 
III (for reporting according to IFRS) and Templates 1.1., 1.2., and 
1.3 at Annex IV (for reporting according to national accounting 
frameworks).
    \249\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 2 at Annex III (for reporting 
according to IFRS) and Template 2 at Annex IV (for reporting 
according to national accounting frameworks).
    \250\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 8.1 at Annex III (for reporting 
according to IFRS) and Template 8.1 at Annex IV (for reporting 
according to national accounting frameworks).
    \251\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 8.2 at Annex III (for reporting 
according to IFRS) and Template 8.2. at Template 8.2 at Annex IV 
(for reporting according to national accounting frameworks).
    \252\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 46 at Annex III (for reporting 
according to IFRS) and Template 46 at Annex IV (for reporting 
according to national accounting frameworks).
---------------------------------------------------------------------------

    Under the FINREP requirements, a PRA-designated UK nonbank SD 
subject to the requirements of Article 430(3) of the Reporting (CRR) 
Part of the PRA Rulebook is also required to provide the PRA with 
additional financial information, including a breakdown of

[[Page 58557]]

its loans and advances by product and type of counterparty,\253\ as 
well as detailed information regarding its derivatives trading 
activities,\254\ collateral, and guarantees.\255\
---------------------------------------------------------------------------

    \253\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Templates 5.1 and 6.1 at Annex III (for 
reporting according to IFRS) and Templates 5.1 and 6.1 at Annex IV 
(for reporting according to national accounting frameworks).
    \254\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 10 at Annex III (for reporting 
according to IFRS) and Template 10 at Annex IV (for reporting 
according to national accounting frameworks).
    \255\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6 
Templates and Instructions, Template 13 at Annex III (for reporting 
according to IFRS) and Template 13 at Annex IV (for reporting 
according to national accounting frameworks).
---------------------------------------------------------------------------

    For PRA-designated UK nonbank SD that are not subject to financial 
information reporting under Article 430(3) of the Reporting (CRR) Part 
of the PRA Rulebook, the Regulatory Reporting Part of the PRA Rulebook 
dictates the applicable reporting requirements.\256\ Specifically, as 
firms that fall into Regulated Activity Group 3 (``RAG 3''), PRA-
designated UK nonbank SDs are required to provide the following 
documents to the PRA, among other items: (i) on a quarterly basis, a 
balance sheet statement (or statement of financial position) that 
reflects the PRA-designated UK nonbank SD's financial condition; \257\ 
(ii) on a quarterly basis, a statement of profit or loss; \258\ and 
(iii) on an annual basis, an annual report and accounts.\259\ The 
Applicants represented that the six UK PRA-designated nonbank SDs 
currently registered with the Commission are designated as RAG 3 firms 
and are required to provide the aforementioned documents.\260\
---------------------------------------------------------------------------

    \256\ As indicated by the Applicants, the Regulatory Reporting 
Part of the PRA Rulebook applies to all PRA-designated UK nonbank 
SDs. See Responses to Staff Questions dated October 5, 2023.
    \257\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulated Activity Group 3, Rule 9.2 (referencing 
Templates 1.1., 1.2., and 1.3 at Annex III and Templates 1.1., 1.2., 
and 1.3 at Annex IV of Chapter 6 of the Reporting (CRR) Part) and 
Rule 9.3.
    \258\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulated Activity Group 3, Rule 9.2 (referencing Template 
2 at Annex III and Template 2 at Annex IV of Chapter 6 of the 
Reporting (CRR) Part) and Rule 9.3.
    \259\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulated Activity Group 3, Rule 9.2 and Rule 9.3.
    \260\ See Response to Staff Questions dated October 5, 2023. For 
the avoidance of doubt, as represented by the Applicants, the six 
PRA-designated UK nonbank SDs currently registered with the 
Commission are subject to the RAG 3 requirements in the Regulatory 
Reporting Part of the PRA Rulebook but are not subject the FINREP 
requirements set forth in Article 430(3) of the Reporting (CRR) Part 
of the PRA Rulebook. As such, the six PRA-designated UK nonbank SDs 
currently registered with the Commission are required to submit to 
the PRA only Templates 1 through 3 of FINREP.
---------------------------------------------------------------------------

    Furthermore, all PRA-designated UK nonbank SDs are required to 
prepare annual audited accounts and a strategic report (together, 
``annual audited financial report'') pursuant to Parts 15 and 16 of the 
Companies Act 2006.\261\ The audit of the accounts and report is 
required to be performed by one or more independent statutory auditors, 
which have the required skill, resources, and experience to perform 
their duties based on the complexity of the firm's business and the 
regulatory requirements to which the firm is subject.\262\ PRA-
designated UK nonbank SDs must submit the annual audited financial 
report to the PRA within 80 business days from the firm's accounting 
reference date.\263\ In addition, under generally applicable company 
law requirements, PRA-designated UK nonbank SDs are required to submit 
the annual audited financial report to the UK Registrar of 
Companies.\264\ The registrar makes the report available to the public 
on its website, free of charge.\265\
---------------------------------------------------------------------------

    \261\ Companies Act 2006, Sections 393 to 414D and 475. Section 
475 provides for an exemption from the audit requirement for certain 
entities (i.e., ``small companies'', qualifying ``subsidiary 
companies'' and ``dormant companies''.) None of the six PRA-
designated UK nonbank SD, however, falls into the exempt categories. 
See Responses to Staff Questions dated October 5, 2023.
    \262\ Companies Act 2006, Section 485 et seq.; see also PRA 
Rulebook, CRR Firms, Auditors Part, Rule 3 Auditors' Qualifications, 
and Rule 4 Auditors' Independence.
    \263\ PRA Rulebook, CRR Firms, Regulatory Reporting Part, 
Chapter 9 Regulatory Activity Group 3, Rules 9.1. and 9.4. The 
``accounting reference date'' is determined in accordance with 
Section 391 of the Companies Act 2006 and depending on the firm's 
date of incorporation.
    \264\ Companies Act 2006, Section 441. The deadline for filing 
the annual audited financial report with the UK Registrar of 
Companies is nine months from the firm's accounting reference date 
for private companies and six months from the firm's accounting 
reference date for public companies. Id., Articles 442 (setting 
forth the filing deadlines by category of firm) and 391 (defining 
the terms ``accounting reference period'' and ``accounting reference 
date'').
    \265\ Companies Act 2006, Sections 1080 and 1085. Information 
filed with the UK Registrar of Companies is available at: https://www.gov.uk/government/organisations/companies-house.
---------------------------------------------------------------------------

    The annual audited accounts must comprise, at a minimum, a balance 
sheet, a profit and loss statement, and notes about the accounts.\266\ 
The auditor's audit report must include: (i) a description of the 
annual accounts subject to the audit and the financial reporting 
framework that was applied in their preparation; (ii) a description of 
the scope of the audit, which must specify the auditing standards used 
to conduct the audit; (iii) an audit opinion stating whether the annual 
accounts give a true and fair view of the state of affairs and/or the 
profit and loss of the firm, as applicable, and whether the annual 
accounts have been prepared in accordance with the relevant financial 
reporting framework; and (iv) a reference to any matters emphasized by 
the auditor that did not qualify the audit opinion.\267\
---------------------------------------------------------------------------

    \266\ Companies Act 2006, Section 396.
    \267\ Id., Section 495.
---------------------------------------------------------------------------

    The strategic report is required to include a review of the 
development and performance of the PRA-designated UK nonbank SD's 
during the financial year and a description of the principal risks and 
uncertainties that the firm faces.\268\ The auditors are required to 
express an opinion on whether the strategic report is consistent with 
the accounts for the same financial year, and whether the strategic 
report has been prepared in accordance with applicable legal 
requirements.\269\ The opinion also must state whether the auditor has 
identified material misstatements in the strategic report and, if so, 
describe the misstatement.\270\
---------------------------------------------------------------------------

    \268\ Id., Section 414C.
    \269\ Id., Section 496.
    \270\ Id.
---------------------------------------------------------------------------

    In addition, as noted in the 2024 Proposal, the SEC's UK Order 
granting substituted compliance for financial reporting to UK nonbank 
SBSDs, as supplemented by the SEC Order on Manner and Format of Filing 
Unaudited Financial and Operational Information, require a UK nonbank 
SBSD to file an unaudited FOCUS Report with the SEC on a monthly 
basis.\271\ The FOCUS Report is required to include, among other 
statements and schedules: (i) a statement of financial condition; (ii) 
a statement of the UK nonbank SBSD's capital computation in accordance 
with home country Basel-based requirements; (iii) a statement of 
income/loss; and (iv) a statement of capital withdrawals.\272\ A UK 
nonbank SBSD is required to file its FOCUS Report with the SEC within 
35 calendar days of the month end.\273\
---------------------------------------------------------------------------

    \271\ See 2024 Proposal at 8050 and UK Order. See also SEC Order 
on Manner and Format of Filing Unaudited Financial and Operational 
Information.
    \272\ See, SEC Order on Manner and Format of Filing Unaudited 
Financial and Operational Information.
    \273\ Id.
---------------------------------------------------------------------------

    Based on its review of the UK Application and the relevant UK laws 
and regulations, the Commission preliminarily determined that, subject 
to the conditions specified in the 2024 Proposal, the UK PRA Financial 
Reporting Rules are comparable to CFTC Financial Reporting Rules in 
purpose and effect. The Commission noted that both sets of rules 
provide the PRA,

[[Page 58558]]

Commission, and NFA with financial information to monitor a nonbank 
SD's compliance with capital requirements, and to assess a nonbank SD's 
overall safety and soundness.\274\ Specifically, the Commission 
preliminarily found that the UK PRA Financial Reporting Rules impose 
reporting requirements that are comparable with respect to overall form 
and content to the CFTC Financial Reporting Rules.\275\ In this regard, 
both the CFTC Financial Reporting Rules and the UK PRA 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 PRA, 
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.\276\
---------------------------------------------------------------------------

    \274\ 2024 Proposal at 8050.
    \275\ Id.
    \276\ Id.
---------------------------------------------------------------------------

    The proposed conditions would ensure that the Commission and NFA 
receive appropriate and timely financial information from PRA-
designated UK nonbank SDs to monitor the firms' compliance with UK PRA 
capital requirements and to assess the firms' overall safety and 
soundness. The proposed conditions would require a PRA-designated UK 
nonbank SD to provide the Commission and NFA with copies of the 
relevant templates of the FINREP reports and COREP reports that 
correspond to the PRA-designated UK nonbank SD's statement of financial 
condition, statement of income/loss, and statement of regulatory 
capital, total risk exposure, and capital ratios. These templates 
consist of FINREP templates 1.1 (Balance Sheet Statement: assets), 1.2 
(Balance Sheet Statement: liabilities), 1.3 (Balance Sheet Statement: 
equity), and 2 (Statement of profit or loss), and COREP templates 1 
(Own Funds), 2 (Own Funds Requirements) and 3 (Capital Ratios). In 
addition, the Commission proposed to require PRA-designated UK nonbank 
SDs to submit to the Commission and NFA copies of the PRA-designated UK 
nonbank SD's annual audited financial report.\277\
---------------------------------------------------------------------------

    \277\ Id. at 8051.
---------------------------------------------------------------------------

    The proposed conditions would also require that the PRA-designated 
UK nonbank SD provide the reports and statements with balances 
converted to U.S. dollars.\278\ The Commission further recognized that 
the requirement to convert accounts denominated in British pound to 
U.S. dollars on the annual audited financial report may have an 
unintended impact on the opinion expressed by the independent auditor. 
The Commission, therefore, proposed to accept the annual audited 
financial report denominated in British pound.\279\
---------------------------------------------------------------------------

    \278\ Id. In the 2024 Proposal, the Commission proposed that the 
conversion of account balances from British pound to U.S. dollars 
would not be required to be subject to the audit of the independent 
auditor. A PRA-designated UK nonbank SD would be required report the 
exchange rate that it used to convert balances from British pound to 
U.S. dollars to the Commission and NFA as part of the financial 
reporting.
    \279\ Id.
---------------------------------------------------------------------------

    The proposed conditions also would require a PRA-designated UK 
nonbank SD to file with the Commission and NFA its: (i) FINREP reports 
and COREP reports within 35 calendar days of the end of each month; and 
(ii) annual audited financial report on the on the earlier of the date 
the report is filed with the PRA or the date the report is required to 
be filed with the PRA.\280\
---------------------------------------------------------------------------

    \280\ Id. The Commission noted that the UK PRA Financial 
Reporting Rules require PRA-designated UK nonbank SDs to submit the 
unaudited FINREP and COREP templates to PRA on a quarterly basis, 
whereas the CFTC Financial Reporting Rules contain a more frequent 
reporting requirement by requiring nonbank SDs that elect the Bank-
Based Approach to file unaudited financial information with the 
Commission and NFA on a monthly basis. In emphasizing the importance 
of financial statement reporting requirements for the Commission's 
and NFA's oversight and the Commission's experience in monitoring 
the financial conditions of registrants through the receipt of 
monthly financial statements, the Commission proposed to condition 
the Comparability Order on a more frequent reporting submission. See 
2024 Proposal at 8050-8051. The Commission also noted that PRA-
designated UK nonbank SDs are required to submit the annual audited 
financial report to the PRA within 80 business days of the firm's 
accounting reference date. See PRA Rulebook, Regulatory Reporting 
Part, Rule 9.1.
---------------------------------------------------------------------------

    The Commission also proposed a condition to require PRA-designated 
UK 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.\281\ The Commission explained that Schedule 1 provides the 
Commission and NFA with detailed information regarding the financial 
positions that a nonbank SD holds as of the end of each month, 
including the firm's swaps positions, which 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.\282\ The Commission proposed to 
require that Schedule 1 be filed by a PRA-designated UK nonbank SD 
along with the firm's monthly submission of selected FINREP and COREP 
templates.\283\ The Commission also proposed to require that Schedule 1 
be prepared with balances reported in U.S. dollars.
---------------------------------------------------------------------------

    \281\ 2024 Proposal at 8052. 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.
    \282\ 2024 Proposal at 8052.
    \283\ Id.
---------------------------------------------------------------------------

    The Commission further proposed that, in lieu of filing FINREP and 
COREP reports, PRA-designated UK nonbank SDs that are registered with 
the SEC as UK nonbank SBSDs could satisfy this condition by filing with 
the CFTC and NFA, on a monthly basis, copies of the unaudited FOCUS 
Reports that the PRA-designated UK nonbank SDs are required to file 
with the SEC pursuant to the SEC UK Order, as supplemented by the SEC 
Order on Manner and Format of Filing Unaudited Financial and 
Operational Information. The filing of a FOCUS Report was proposed as 
an elective option for the PRA-designated UK nonbank SD, as an 
alternative to the filing of unaudited FINREP templates, COREP 
templates, and Schedule 1 that such firms would otherwise be required 
to file with the Commission and NFA pursuant to the proposed 
Comparability Order. In this connection, the Commission noted that all 
six of the PRA-designated UK nonbank SDs are currently registered with 
the SEC as UK nonbank SBSDs and would be eligible to file copies of 
their monthly FOCUS Report with the Commission and NFA in lieu of the 
FINREP and COREP templates and Schedule 1. A PRA-designated UK nonbank 
SD electing to file copies of its monthly FOCUS Report would be 
required to submit the reports to the Commission and NFA within 35 
calendar days of the end of each month.
    Proposing that PRA-designated UK nonbank SDs that are registered 
with the SEC as UK nonbank SBSDs file the FOCUS Report in lieu of the 
FINREP and COREP templates and Schedule 1 as an elective option was 
consistent with Commission Regulation 23.105(d)(3), which at the time 
the 2024 Proposal was issued, provided that a nonbank SD or nonbank MSP 
that is also registered with the SEC as a broker or dealer, an SBSD, or 
a major security-based swap participant might elect to file a FOCUS 
Report in lieu of the financial reports required by the Commission. On 
April

[[Page 58559]]

30, 2024, the Commission amended Commission Regulation 23.105(d)(3) to 
mandate the filing of a FOCUS Report by such dually-registered 
entities, including dually-registered non-U.S. nonbank SDs, in lieu of 
the Commission's financial reports.\284\ As such, the Commission is 
also adopting as final a revised Condition 10 to require that PRA-
designated UK nonbank SDs registered as UK nonbank SBSDs comply with 
the requirement to file periodic financial statements by filing a copy 
of the FOCUS Report that the PRA-designated UK nonbank SDs are required 
to file with the SEC.
---------------------------------------------------------------------------

    \284\ See Capital and Financial Reporting Requirements of Swap 
Dealers and Major Swap Participants, 89 FR 45569 (May 23, 2024).
---------------------------------------------------------------------------

    The Commission also proposed a condition to require a PRA-
designated UK nonbank SD to submit with each set of selected FINREP and 
COREP templates, annual audited financial report, and the applicable 
Schedule 1, a statement by an authorized representative or 
representatives of the PRA-designated UK nonbank SD that to the best 
knowledge and belief of the person(s) the information contained in the 
respective reports and statements is true and correct, including the 
conversion of balances in the statements to U.S. dollars, as 
applicable.\285\ The statement by the authorized representative or 
representatives of the PRA-designated UK nonbank SD was intended to be 
a substitute of the oath or affirmation required of nonbank SDs under 
Commission Regulation 23.105(f),\286\ to ensure that reports and 
statements filed with the Commission and NFA are prepared and submitted 
by firm personnel with knowledge of the financial reporting of the firm 
who can attest to the accuracy of the reporting and conversion.\287\
---------------------------------------------------------------------------

    \285\ 2024 Proposal at 8052.
    \286\ 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.
    \287\ 2024 Proposal at 8052.
---------------------------------------------------------------------------

    The Commission noted that a Margin Report would assist the 
Commission and NFA in their assessment of the safety and soundness of 
the PRA-designated UK nonbank SDs by providing information regarding 
the firm's swap book and the extent to which it has uncollateralized 
exposures to counterparties or has not met its financial obligations to 
counterparties. The Commission explained that this information, along 
with the list of custodians holding both the firms' and counterparties' 
collateral for swap transactions, would assist with identifying 
potential financial impacts to the nonbank SD resulting from defaults 
on its swap transactions. The Commission further proposed to require a 
PRA-designated UK nonbank SD to file the Margin Report with the 
Commission and NFA within 35 calendar days of the end of each month, 
which corresponds with the proposed timeframe for the PRA-designated UK 
nonbank SD to file the selected FINREP and COREP templates or FOCUS 
Report, as applicable. The Commission also proposed to require the 
Margin Report to be provided with balances reported in U.S. dollars.
    The Commission's preliminary determination did not require a PRA-
designated UK nonbank SD to file the model metrics and counterparty 
credit exposure information required by Commission Regulations 
23.105(k) and (l) \288\ in recognition that NFA's current SD risk 
monitoring program requires all SDs, including PRA-designated UK 
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.\289\ 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 before collateral and net of collateral.\290\
---------------------------------------------------------------------------

    \288\ 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).
    \289\ 2024 Proposal at 8052-8053. As previously noted, however, 
the current six PRA-designated UK nonbank SDs will be required to 
include credit risk information set forth in Schedules 2-4 of 
Appendix B to Subpart E in the monthly FOCUS Report that the firms 
will be required to file with the Commission under Condition 10 of 
the final Comparability Order. In addition, as previously noted, 
each PRA-designated UK nonbank SD will be required to file Schedule 
1 under Condition 12 of the final Comparability Determination.
    \290\ See 2024 Proposal at 8053 and NFA Financial Requirements, 
Section 17--Swap Dealer and Major Swap Participant Reporting 
Requirements (``NFA Section 17 Rule''), available here: https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=SECTION%2017&Section=7, 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.
---------------------------------------------------------------------------

    Furthermore, the Commission recognized that although the UK PRA 
Financial Reporting Rules do not contain an analogue to the CFTC's 
requirements for nonbank SDs to file monthly model metric information 
and counterparty exposures information, the PRA has access to 
comparable information. More specifically, the Commission noted that, 
under the UK PRA Financial Reporting Rules, the PRA has broad powers to 
request any information necessary for the exercise of its 
functions.\291\ As such, the PRA has access to information allowing it 
to assess the ongoing performance of risk models and to monitor the 
PRA-designated UK nonbank SD's credit exposures, which may be comprised 
of credit exposures to primarily other UK and EU counterparties. In 
addition, the COREP reports, which PRA-designated UK nonbank SDs are 
required to file with the PRA on a quarterly basis, include information 
regarding the PRA-designated UK nonbank SD's risk exposure amounts, 
including risk-weighted exposure amounts for credit risk.\292\
---------------------------------------------------------------------------

    \291\ See 2024 Proposal at 8053 and FSMA, Part XI (indicating 
that the PRA has broad information gathering powers).
    \292\ See 2024 Proposal at 8053 and PRA Rulebook, CRR Firms, 
Reporting (CRR) Part, Chapter 6 Templates and Instructions, Annex I.
---------------------------------------------------------------------------

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. 
Better Markets expressed a general disagreement with the Commission's 
preliminary finding of comparability, arguing that the number and 
variety of conditions regarding financial reporting are the most 
compelling evidence that the requirements are not comparable.\293\ More 
generally, Better Markets asserted that the 2024 Proposal did not 
provide a sufficient analysis supporting the Commission's preliminary 
conclusion that the UK PRA and the U.S. financial

[[Page 58560]]

reporting frameworks would produce comparable outcomes.\294\
---------------------------------------------------------------------------

    \293\ Better Markets Letter at p. 14.
    \294\ Id. at p. 11.
---------------------------------------------------------------------------

    Better Markets also disagreed with the 2024 Proposal to the extent 
that the Commission proposed not to require PRA-designated UK nonbank 
SDs that have been approved by the PRA to use capital models to file 
the monthly model metric information required by Commission Regulation 
23.105(k) with the Commission or NFA.\295\ 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.\296\ As noted above, 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; (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.\297\ 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 UK and blindly accept the assessments resulting from the PRA-
designated UK nonbank SDs' use of internal models to calculate 
risk.\298\
---------------------------------------------------------------------------

    \295\ Id. at pp. 14-15.
    \296\ 17 CFR 23.105(k).
    \297\ 17 CFR 23.105(k)(1).
    \298\ Better Markets Letter at p.15.
---------------------------------------------------------------------------

    With respect to Better Markets' statement that the number and 
variety of conditions regarding financial reporting are the most 
compelling evidence that the requirements are not comparable, the 
Commission disagrees that the inclusion of conditions in the 
Comparability Order demonstrates that the UK PRA Financial Reporting 
Requirement are not comparable to CFTC Financial Reporting Requirements 
in achieving the overall objective of ensuring the safety and soundness 
of nonbank SDs. As discussed in section I.E. above, the conditions 
impose obligations on PRA-designated UK nonbank SDs to provide 
information to the Commission and NFA necessary for the effective 
oversight of the PRA-designated UK nonbank SDs on an ongoing basis. As 
also discussed in section I.E. above, Commission staff engaged in a 
thorough analysis of the UK PRA Capital Rules and UK PRA Financial 
Reporting Rules, which supports the Commission's conclusion that the 
respective regulatory frameworks would produce comparable outcomes.
    The Commission also does not agree that its approach is effectively 
deferring model oversight to the PRA or that it is otherwise 
``blindly'' accepting the internal model-based assessments of the PRA-
designated UK nonbank SDs. As noted above, pursuant to NFA rules, all 
registered SDs, including PRA-designated UK 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.\299\ 
Specifically, the risk metrics include: (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.\300\ As part of its regulatory oversight program, NFA uses 
the risk metrics information to identify firms that may pose heightened 
risk and to allocate 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.
---------------------------------------------------------------------------

    \299\ NFA Section 17 Rule, available here: https://www.nfa.futures.org/rulebooksql/rules.aspx?RuleID=SECTION%2017&Section=7, and NFA Notice I-17-10, 
available here: https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4817.
    \300\ See 2024 Proposal at 8053, NFA Section 17 Rule, 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. The Commission also notes that 
NFA, in its role of primary supervisor of nonbank SDs' risk management 
practices, has identified the risk data items listed in NFA Notice I-
17-10 as the most relevant risk metrics to be collected for oversight 
purposes. As such, the Commission finds 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 has the ability to request additional 
information from its registrants, including PRA-designated UK nonbank 
SDs, at any time. Finally, the Commission notes that the PRA, which 
will be conducting the initial approval and ongoing assessment of the 
performance of the PRA-designated UK 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 PRA deems relevant in the conduct of such approval and assessment. 
The Commission, therefore, concludes that it is not necessary to 
require PRA-designated UK nonbank SDs relying on the final 
Comparability Order to submit the model metric information and credit 
risk information mandated by Commission Regulations 23.105(k) and (l).
    Finally, the Applicants addressed the Commission's request for 
comment on the compliance dates for the reporting conditions that the 
proposed Comparability Order would impose on PRA-designated UK nonbank 
SDs.\301\ The Applicants requested that the Commission set the 
compliance date at least six months following the issue date of the 
final Comparability Order to allow PRA-designated UK nonbank SDs to 
adequately prepare for compliance with the reporting conditions imposed 
by the Comparability Order.\302\
---------------------------------------------------------------------------

    \301\ Applicants' Letter at p. 8.
    \302\ Id.
---------------------------------------------------------------------------

    The Commission believes that granting an additional period of time 
to allow PRA-designated UK nonbank SDs to develop and implement the 
necessary systems and processes for compliance with the Comparability 
Order is appropriate with respect to the new reporting obligations 
imposed on PRA-

[[Page 58561]]

designated UK nonbank SDs under the final Order. For other reporting 
obligations, for which a process already exists, such as the reports 
that PRA-designated UK nonbank SDs currently submit to the Commission 
and NFA pursuant to CFTC Staff Letter 22-10,\303\ prepare pursuant to 
the UK PRA Financial Reporting Rules, and/or submit to the SEC (i.e., 
FOCUS Reports), 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 
Condition 14, which requires PRA-designated UK nonbank SDs to file 
monthly Margin Reports with the Commission and NFA.
---------------------------------------------------------------------------

    \303\ 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 
MPD on August 17, 2022. CFTC Staff Letter No. 22-10, which extended 
the expiration of CFTC Letter 21-20, provides that MPD would not 
recommend an enforcement action to the Commission if a non-U.S. 
nonbank SD covered by the letter, 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.
---------------------------------------------------------------------------

    For purposes of clarity, the Commission also notes that PRA-
designated UK 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 PRA-designated UK nonbank SD uses to prepare 
general purpose financial statements in the UK. This clarification is 
consistent with proposed Condition 9, which the Commission adopts 
without modification in the final Comparability Order, requiring that 
the PRA-designated UK nonbank SD prepares and keeps current ledgers and 
other similar records ``in accordance with [the PRA Rulebook] and 
conforming with the applicable accounting principles.'' \304\ In taking 
the position that PRA-designated UK 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 the UK 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.\305\ In this regard, the Commission notes that PRA-
designated UK 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.\306\ The reports provide 
the Commission with appropriate information to assess the financial and 
operational condition of PRA-designated UK nonbank SDs, as well as the 
firms' compliance with the capital ratios imposed on PRA-designated UK 
nonbank SDs under the UK PRA Capital Rules.
---------------------------------------------------------------------------

    \304\ 2024 Proposal at 8059.
    \305\ Furthermore, the Commission's approach to permitting PRA-
designated UK 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. German Order at 59812 and SEC Order on Manner and Format of 
Filing Unaudited Financial and Operational Information 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 Order on 
Manner and Format of Filing Unaudited Financial and Operational 
Information 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. The 
Commission's approach to permitting PRA-designated UK nonbank SDs to 
maintain financial books and records, and file financial 
information, prepared in accordance with local accounting standards 
will also facilitate financial reporting by dually-registered PRA-
designated UK nonbank SDs--UK nonbank SBSDs. In such case, dually-
registered entities would not have to perform multiple calculations 
under different accounting standards or submit two different FOCUS 
Reports.
    \306\ 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.
---------------------------------------------------------------------------

    In summary, the Commission adopts the final Comparability Order and 
conditions substantially as proposed with respect to the comparability 
of the CFTC Financial Reporting Rules and UK PRA Financial Reporting 
Requirements, subject to the amendment in Condition 10 to mandate the 
filing by EU nonbank SDs registered as EU nonbank SBSDs of a copy of 
the FOCUS Report that such dually-registered PRA-designated UK nonbank 
SDs are required to file with the SEC. The Commission also specifies, 
in final Conditions 10, 12, and 14, that the conversion of balances to 
U.S. dollars must be done using a commercially reasonable and 
observable British pound/U.S. dollar spot rate as of the date of the 
respective report. Finally, the Commission also grants an additional 
compliance period for the new reporting obligations imposed on PRA-
designated UK nonbank SDs under the final Order set forth below.

E. Notice Requirements

1. Proposed Determination
    The Commission noted in the 2024 Proposal that the CFTC Financial 
Reporting Rules require nonbank SDs to provide the Commission and NFA 
with written notice of certain defined events.\307\ 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 with the SEC under applicable SEC Rules.\308\
---------------------------------------------------------------------------

    \307\ 2024 Proposal at 8053-8054 and 17 CFR 23.105(c).
    \308\ 17 CFR 23.105(c).
---------------------------------------------------------------------------

    The notices are part of the Commission's overall program of helping 
to ensure the safety and soundness of nonbank SDs and the

[[Page 58562]]

swaps markets in general.\309\ 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.\310\
---------------------------------------------------------------------------

    \309\ Id.
    \310\ See 2024 Proposal at 8053.
---------------------------------------------------------------------------

    The UK capital and resolution framework, in turn, require PRA-
designated UK nonbank SDs to provide certain notices to the PRA 
concerning the firm's compliance with relevant laws and 
regulations.\311\ The Commission noted that the UK PRA Financial 
Reporting Rules require a PRA-designated UK nonbank SD to provide 
notice to the PRA within five business days if the firm fails to meet 
its combined buffer requirement, which at a minimum consists of a 
capital conservation buffer of 2.5 percent of the PRA-designated UK 
nonbank SD's total risk exposure amount.\312\ To meet its capital 
buffer requirements, a PRA-designated UK nonbank SD must hold common 
equity tier 1 capital in addition to the minimum common equity tier 1 
ratio requirement of 4.5 percent of the firm's core capital requirement 
of 8 percent of the firm's total risk exposure amount.\313\ The notice 
to the PRA must be accompanied by a capital conservation plan that sets 
out how the PRA-designated UK nonbank SD will restore its capital 
levels.\314\ The capital conservation plan is required to include: (i) 
the ``maximum distributable amount'' calculated in accordance with the 
PRA rules; (ii) estimates of income and expenditures and a forecast 
balance sheet; (iii) measures to increase the capital ratios of the 
PRA-designated UK nonbank SD; and (iv) a plan and timeframe for the 
increase in the capital of the PRA-designated UK nonbank SD with the 
objective of meeting fully the combined buffer requirement.\315\ The 
PRA is required to assess the capital conservation plan and may approve 
the plan only if it considers that the plan would be reasonably likely 
to conserve or raise sufficient capital to enable the PRA-designated UK 
nonbank SD to meet its combined capital buffer requirement within a 
timeframe that the PRA considers to be appropriate.\316\ A PRA-
designated UK nonbank SD is required to notify the PRA as early as 
possible where it has identified a material risk to its ability to meet 
the combined buffer according to the capital conservation plan and 
timeframe approved by the PRA.\317\
---------------------------------------------------------------------------

    \311\ Id. at 8054.
    \312\ See 2024 Proposal at 8054 and PRA Rulebook, CRR Firms, 
Capital Buffers Part, Chapter 4 Capital Conservation Measures, Rule 
4.4. The combined capital buffer requirement is the total common 
equity tier 1 capital required to meet the sum of the capital 
conservation buffer and the institution-specific countercyclical 
capital buffer. PRA Rulebook, Capital Buffers Part, Chapter 1 
Application and Definitions, Rule 1.2.
    \313\ Id.
    \314\ See 2024 Proposal at 8054 and PRA Rulebook, CRR Firms, 
Capital Buffers Part, Chapter 4 Capital Conservation Measures, Rules 
4.4 and 4.5.
    \315\ See 2024 Proposal at 8054 and PRA Rulebook, CRR Firms, 
Capital Buffers Part, Chapter 4 Capital Conservation Measures, Rule 
4.5.
    \316\ See 2024 Proposal at 8054 and Supervisory Statement SS6/14 
Implementing Capital Buffers, Prudential Regulation Authority, 
January 2021 (``SS6/14''), available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2014/implementing-crdiv-capital-buffers-ss.
    \317\ Id.
---------------------------------------------------------------------------

    In addition, a PRA-designated UK nonbank SD must notify the PRA if 
the firm's management considers that the firm is failing or will in the 
near future fail to satisfy one or more of the ``threshold 
conditions,'' which are the minimum requirements that a PRA-designated 
UK nonbank SD must meet to be permitted to carry the regulated 
activities in which it engages.\318\ In broad terms, the PRA's 
threshold conditions include, among other things, requirements that the 
firm has appropriate financial resources and capacity to measure, 
monitor and manage risks.\319\
---------------------------------------------------------------------------

    \318\ See 2024 Proposal at 8054 and PRA Rulebook, CRR Firms, 
Notifications Part, Chapter 8 Specific Notifications, Rule 8.3.
    \319\ FSMA, Part 4A and Schedule 6.
---------------------------------------------------------------------------

    Emphasizing that the requirement for a nonbank SD to file notice 
with the Commission and NFA if the firm becomes undercapitalized or if 
the firm experiences a decrease of excess regulatory capital below 
defined levels is a central component of the Commission's and NFA's 
oversight program for nonbank SDs, the Commission proposed a condition 
to require a PRA-designated UK nonbank SD to file with the Commission 
and NFA copies of notices filed under the Capital Buffers Part of the 
PRA Rulebook by PRA-designated UK nonbank SDs alerting the PRA of a 
breach of the PRA-designated UK nonbank SD's combined capital 
buffer.\320\ The Commission proposed to require that the notice be 
filed by the PRA-designated UK nonbank SD within 24 hours of the filing 
of the notice with the PRA.
---------------------------------------------------------------------------

    \320\ See 2024 Proposal at 8055.
---------------------------------------------------------------------------

    The Commission, however, preliminarily determined that the 
requirement for a PRA-designated UK nonbank SD to provide notice of a 
breach of its capital buffer requirements to the PRA is not 
sufficiently comparable in purpose and effect to the CFTC notice 
provisions contained in Commission Regulation 23.105(c)(1) and 
(2),\321\ which require a nonbank SD to provide notice to the 
Commission and to NFA if the firm fails to meet its minimum capital 
requirement or if the firm's regulatory capital falls below 120 percent 
of its minimum capital requirement (``Early Warning Level''). The 
Commission noted that, in its preliminary view, the requirement for a 
PRA-designated UK nonbank SD to provide notice of a breach of its 
capital buffer requirements does not achieve a comparable outcome to 
the CFTC's Early Warning Level requirement due to the difference in the 
thresholds triggering a notice requirement in the respective rule sets. 
Therefore, the Commission proposed a condition to require a PRA-
designated UK nonbank SD to file a notice with the Commission and NFA 
if the firm's capital ratio does not equal or exceed 12.6 percent.\322\ 
The proposed condition would further require the PRA-designated UK 
nonbank SD to file the notice with the Commission and NFA within 24 
hours of when the firm knows or should have known that its regulatory 
capital was below 120 percent of its minimum capital requirement.\323\
---------------------------------------------------------------------------

    \321\ 17 CFR 23.105(c)(1) and (2).
    \322\ 2024 Proposal at 8055.
    \323\ Id.
---------------------------------------------------------------------------

    The Commission also noted that the UK PRA Financial Reporting Rules 
also do not contain an explicit requirement for a PRA-designated UK 
nonbank SD to notify the PRA if the firm fails to maintain current 
books and records, experiences a decrease in regulatory capital over 
levels previously reported, or fails to collect or post initial margin 
with uncleared swap counterparties that exceed certain threshold 
levels.\324\ The UK PRA Financial Reporting Rules also do not require a 
PRA-designated UK nonbank SD to provide the PRA with advance notice of 
equity withdrawals initiated by equity holders that exceed defined 
amounts or percentages of the firm's excess regulatory capital.\325\
---------------------------------------------------------------------------

    \324\ Id. at 8056.
    \325\ Commission Regulation 23.105(c)(5) requires a nonbank SD 
to provide written notice to the Commission and NFA two business 
days prior to the withdrawal of capital by action of the equity 
holders if the amount of the withdrawal exceeds 30 percent of the 
nonbank SD's excess regulatory capital. 17 CFR 23.105(c)(5).
---------------------------------------------------------------------------

    To ensure that the Commission and NFA receive prompt information 
concerning potential operational or financial issues that may adversely

[[Page 58563]]

impact the safety and soundness of a PRA-designated UK nonbank SD, the 
Commission proposed to condition the Comparability Order to require 
PRA-designated UK nonbank SDs to file certain notices mandated by 
Commission Regulation 23.105(c) with the Commission and NFA as 
discussed below. Pursuant to the proposed conditions, a PRA-designated 
UK nonbank SD would be required to file a notice the Commission and NFA 
if the firm fails to maintain current books and records with respect to 
its financial condition and financial reporting requirements.\326\ 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 PRA-designated UK nonbank SD's asset, 
liability, income, expense, and capital accounts in accordance with the 
accounting principles accepted by the relevant authorities.\327\ The 
Commission further stated that it preliminarily believed that the 
maintenance of current books and records is a fundamental and essential 
component of operating as a registered nonbank SD and that the failure 
to comply with such a requirement may indicate an inability of the firm 
to promptly and accurately record transactions and to ensure compliance 
with regulatory requirements, including regulatory capital 
requirements. As such, the Commission proposed to condition the 
proposed Order on a PRA-designated UK nonbank SD providing the 
Commission and NFA with a written notice within 24 hours if the firm 
fails to maintain books and records on a current basis.\328\
---------------------------------------------------------------------------

    \326\ 2024 Proposal at 8056.
    \327\ For comparison, see Commission Regulation 23.105(b), which 
similarly defines the term ``current books and records'' as used in 
the context of the Commission's requirements. 17 CFR 23.105(b).
    \328\ 2024 Proposal at 8056.
---------------------------------------------------------------------------

    The Commission further proposed to condition the Comparability 
Order on a PRA-designated UK 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 security-based swap positions that, in the aggregate, exceeds 
25 percent of the PRA-designated UK nonbank SD's minimum capital 
requirement; (ii) counterparties fail to post required initial margin 
or pay required variation margin to the PRA-designated UK nonbank SD 
for uncleared swap and security-based swap positions that, in the 
aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's 
minimum capital requirement; (iii) a PRA-designated UK nonbank SD fails 
to post required initial margin or pay required variation margin for 
uncleared swap and security-based swap positions to a single 
counterparty or group of counterparties under common ownership and 
control that, in the aggregate, exceeds 25 percent of the PRA-
designated UK nonbank SD's minimum capital requirement; and (iv) a PRA-
designated UK nonbank SD fails to post required initial margin or pay 
required variation margin to counterparties for uncleared swap and 
security-based swap positions that, in the aggregate, exceeds 50 
percent of the PRA-designated UK 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 PRA-designated UK nonbank SD and the 
PRA to obtain an understanding of the facts that have led to the 
failure to exchange material amounts of initial margin and variation 
margin in accordance with the applicable margin rules, and to assess 
whether there is a concern regarding the financial condition of the 
firm that may impair its ability to meet its financial obligations to 
customers, counterparties, creditors, and general market participants, 
or otherwise adversely impact the firm's safety and soundness.\329\
---------------------------------------------------------------------------

    \329\ Id.
---------------------------------------------------------------------------

    The Commission did not propose to require a PRA-designated UK 
nonbank SD to file notices with the Commission and NFA 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 PRA-
designated UK nonbank SD's capital levels are monitored by the PRA. As 
such, the Commission preliminarily considered that the separate 
reporting of the information to the Commission would be 
superfluous.\330\
---------------------------------------------------------------------------

    \330\ Id.
---------------------------------------------------------------------------

    The Commission proposed to require that a PRA-designated UK nonbank 
SD file any notices required under the Order with the Commission and 
NFA reflecting any balances, where applicable, 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.\331\
---------------------------------------------------------------------------

    \331\ Id.
---------------------------------------------------------------------------

    Based on its review of the UK Application and the relevant UK laws 
and regulations, and subject to the proposed conditions discussed above 
and specified in the proposed Comparability Order, the Commission 
preliminarily determined that the UK PRA Financial Reporting Rules 
related to notice provisions are comparable in purpose and effect to 
the notice provisions of the CFTC Financial Reporting Rules.\332\
---------------------------------------------------------------------------

    \332\ Id. at 8054-8057.
---------------------------------------------------------------------------

2. Comments and Final Determination
    With respect to the proposed requirements in Condition 20 that a 
PRA-designated UK nonbank SD file a notice with the Commission and NFA 
within 24 hours of when the firm knew or should have known that its 
regulatory capital fell below 120 percent of its minimum capital 
requirement, the Applicants asserted that the wording of the proposed 
condition raises practical challenges as it would require notification 
prior to the discovery of the relevant event.\333\ The Applicants 
recommended that the Commission amend the proposed condition to require 
notice within 24 hours of when the firm ``knew'' that its regulatory 
capital fell below 120 percent of the minimum capital requirement.\334\ 
Similarly, with respect to proposed Condition 21, which would require a 
PRA-designated UK nonbank SD to file a notice with the Commission and 
NFA within 24 hours if the firm fails to make or keep current the 
financial books and records, the Applicants recommended that the 
Commission amend the condition to require that a PRA-designated UK file 
a notice within 24 hours ``of when it knows it has failed to make or 
keep current the financial books and records.'' \335\ In addition, with 
respect to proposed Condition 20, the Applicants asserted that, 
pursuant to the condition, a PRA-designated UK nonbank SD would 
calculate the Early Warning Level by applying a buffer of 20 percent in 
excess capital, in the form of common equity tier 1 capital, on top of 
the firm's capital conservation buffer, which, at a minimum, equals 2.5 
percent of the firm's total risk exposure amount and must be met in the 
form of common equity tier 1 capital. In the Applicants' view, an 
aggregate notification trigger of 12.6 percent of total risk exposure 
amount would be too

[[Page 58564]]

high. The Applicants recommended that the Commission set the 
notification trigger at 120 percent of the minimum total capital 
requirement.\336\
---------------------------------------------------------------------------

    \333\ Applicants' Letter at p. 5.
    \334\ Id.
    \335\ Id.
    \336\ Applicants' Letter at p. 6.
---------------------------------------------------------------------------

    The Early Warning Level notice requirement is a central component 
of the Commission's and NFA's oversight programs. The Commission, 
however, recognizes that by requiring a PRA-designated UK nonbank SD to 
provide notice if its capital ratio falls below 120 percent of the 
firm's minimum capital requirement, as defined to comprise the 
applicable capital buffers, the Commission would be imposing a higher 
threshold level for the notice trigger than is currently applicable to 
nonbank SDs under the CFTC Capital Rules. To achieve the condition's 
goal of providing the Commission and NFA with information on decreases 
in capital that may indicate financial or operational challenges at the 
firm, the Commission is revising proposed Condition 20 to require 
instead that a PRA-designated UK nonbank SD provide notice to the 
Commission if it experiences a 30 percent or more decrease in its 
excess regulatory capital as compared to the last reported.\337\ The 
condition is consistent with the requirement applicable to nonbank SDs 
under Commission Regulation 23.105(c)(4).\338\ The Commission believes 
that this condition, combined with the condition requiring a PRA-
designated UK nonbank SD to file with the Commission and NFA copies of 
notices filed with the PRA of a breach of the PRA-designated UK nonbank 
SD's combined capital buffer, will provide a timely opportunity to the 
Commission and NFA to initiate conversations and fact finding with a 
PRA-designated UK nonbank SD that may be experiencing operational or 
financial issues that may adversely impact the firm's ability to meet 
its obligations to market participants, including customers or swap 
counterparties.
---------------------------------------------------------------------------

    \337\ For clarity, by ``excess regulatory capital,'' the 
Commission refers to the capital ratio by which the firm's capital 
exceeds the core capital ratio requirement of 8 percent of the 
firm's risk-weighted assets. For instance, if a firm maintains a 
capital ratio of 20 percent, its excess regulatory capital would be 
12 percent. In this example, 30 percent of the excess regulatory 
capital would equal 3.6 percent.
    \338\ 17 CFR 23.105(c)(4).
---------------------------------------------------------------------------

    In connection with the Applicants' general request that the 
Commission set the compliance date of the Comparability Order at least 
six months following the issuance of the final Order, the Commission 
believes, as stated above, that granting an additional period of time 
to allow PRA-designated UK nonbank SDs to establish and implement the 
necessary systems and processes to comply with the notice reporting 
obligations imposed by the Comparability Order is appropriate with 
respect to certain notice obligations. Specifically, the Commission 
understands that establishing a system and process for monitoring 
material decreases in excess regulatory capital as required by final 
Condition 20 or 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 22 
may take time.\339\ Conversely, the Commission does not believe that 
additional time is necessary for implementing a system and process of 
providing a notice to the Commission and NFA in connection with the 
occurrence of events that PRA-designated UK nonbank SDs currently 
monitor and/or report to the PRA. The Commission is also of the view 
that, given the nature of the notice obligation, PRA-designated UK 
nonbank SDs should be in a position to comply with all other notice 
obligations, including those requiring PRA-designated UK 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 common equity tier 1 equal or in 
excess of the U.S. dollar equivalent of $20 million, immediately upon 
effectiveness of the Comparability Order. Specifically, with respect to 
the requirement in Condition 21 that a PRA-designated UK nonbank SD 
notify the Commission and NFA if the firm fails to make or keep current 
the financial books and records, the Commission notes that maintaining 
current books and records of all financial transactions is a 
fundamental recordkeeping requirement for a registered nonbank SD, and 
is essential to provide management with the information necessary to 
ensure that transactions are timely and accurately reported and that 
the firm complies with capital and other regulatory requirements. The 
Commission finds that it is necessary for a nonbank SD to maintain 
internal controls and procedures to affirmatively monitor that 
financial books and records are being maintained on a current basis. 
The Commission also notes that the language of Condition 21 is 
consistent with the timing standard of Commission Regulation 
23.105(c)(3).\340\ As such, the Commission is adopting Condition 21 as 
proposed. The Commission, however, is setting a compliance date of 180 
calendar days after the publication of the final Comparability Order in 
the Federal Register with respect to the notice reporting obligations 
under final Conditions 20 and 22 of the Comparability Order.
---------------------------------------------------------------------------

    \339\ With regard to Condition 22, the Commission also notes, 
for clarity, 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. To the extent PRA-designated UK 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 22, MPD 
will discuss such inquiries with the PRA-designated UK nonbank SD 
during the confirmation process referenced in final Condition 8 of 
the Comparability Order.
    \340\ 17 CFR 23.105(c)(3).
---------------------------------------------------------------------------

    With respect to the notice requirement in final Condition 22, the 
Applicants also recommended that the Commission clarify the term 
``minimum capital requirement,'' used in connection with the thresholds 
triggering a notice requirement.\341\ In response, the Commission will 
amend the condition to indicate that, in the context of final Condition 
22, the PRA-designated UK nonbank SD's ``minimum capital requirement'' 
is the core capital requirement under the UK PRA Capital Rules, 
excluding capital buffers.
---------------------------------------------------------------------------

    \341\ Applicants' Letter at p. 7. The Applicants indicated that 
in the context of proposed Condition 22, they understand the term 
``minimum capital requirement'' to mean an amount equal to 8 percent 
of the PRA-designated UK nonbank SD's total risk exposure amount.
---------------------------------------------------------------------------

    Finally, the Applicants recommended that the Commission amend 
proposed Condition 24 to require that a PRA-designated UK nonbank SDs, 
or an entity acting on its behalf, notify the Commission and NFA of 
``material changes'' to the UK PRA Capital Rules or UK PRA Financial 
Reporting Rules instead of ``proposed or final material changes'' to 
the UK PRA Capital Rules or UK PRA Financial Reporting Rules.\342\ 
Separately, the Applicants noted that the language of proposed 
Condition 24 is confusing in that it differentiates between rules that 
are ``imposed on'' and those that ``apply to'' PRA-designated UK 
nonbank SDs.\343\ The Commission did not intend to distinguish between 
rules that are ``imposed on'' and rules that ``apply to'' PRA-
designated UK nonbank SDs and will use instead the defined terms ``UK 
PRA Capital Rules'' and ``UK PRA Financial Reporting Rules'' to address 
the potential for confusion. The

[[Page 58565]]

Commission, however, believes that it is necessary that the Commission 
and NFA receive an advance notice of potential material changes to the 
foreign jurisdiction's rules to allow the Commission a sufficient time 
to assess the potential impact of the proposed amendments and to 
address potential changes to the Comparability Determination and 
Comparability Order. As such, the Commission is adopting Condition 24 
as proposed with regard to the required notice of ``proposed and final 
material changes'' to the UK PRA Capital Rules and UK PRA Financial 
Reporting Rules.
---------------------------------------------------------------------------

    \342\ Applicants' Letter at p. 8.
    \343\ Applicants' Letter at p. 8.
---------------------------------------------------------------------------

    The Commission did not receive any comments with respect to the 
following proposed notice conditions: (i) the PRA-designated UK nonbank 
SD files notice with the Commission and NFA within 24 hours of being 
informed by the PRA that the firm is not in compliance with any 
component of the UK PRA Capital Rules or UK PRA Financial Reporting 
Rules (proposed Condition 15); (ii) the PRA-designated UK nonbank SD 
files notice with the Commission and NFA within 24 hours if the firm 
fails to maintain regulatory capital in the form of common equity tier 
1 capital, as defined in Article 26 of UK CRR, equal to or in excess of 
the U.S. dollar equivalent of $20 million (proposed Condition 16); 
(iii) the PRA-designated UK nonbank SD provides the Commission and NFA 
with notice within 24 hours of filing a capital conservation plan 
(proposed Condition 17); (iv) the PRA-designated UK nonbank SD files 
notice with the Commission and NFA within 24 hours of being required by 
the PRA to maintain additional capital or additional liquidity 
requirements, or to restrict its business operations, or to comply with 
certain other additional requirements that the PRA may impose pursuant 
to the UK PRA Capital Rules and the UK PRA Financial Reporting Rules 
(proposed Condition 18); (v) the PRA-designated UK nonbank SD files a 
notice with the Commission and NFA within 24 hours if it fails to 
maintain its MREL (proposed Condition 19); or (vi) the PRA-designated 
UK nonbank SD files notice of PRA 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 23).
    With regard to the proposed condition requiring that the PRA-
designated UK nonbank SD file a notice with the Commission and NFA 
within 24 hours of filing a capital conservation plan, the Commission 
will revise the condition to require that the notice be filed within 24 
hours of when the PRA-designated UK nonbank SD breaches its combined 
capital buffer requirement and is required to file a capital 
conservation plan. Thus, the Commission will help ensure that the PRA-
designated UK nonbank SD provides a timely notice within 24 hours of 
breaching its combined capital buffer requirement instead of 24 hours 
of filing the capital conservation plan, which may occur up to five 
business days after the breach of the combined buffer requirement.
    In conclusion, the Commission finds that the regulatory notice 
provisions of the UK PRA 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 outcomes, by providing timely notice to 
the PRA, 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 PRA and Commission's nonbank SD notice reporting requirements, 
subject to the revisions in final Conditions 17 and 20, and the 
clarifying changes to final Condition 24 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. Preliminary Determination
    In the 2024 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.\344\ The 2024 Proposal 
also noted that the Commission and NFA also conduct periodic 
examinations as part of the supervision of nonbank SDs, including 
routine onsite examinations of nonbank SDs' books, records, and 
operations to ensure compliance with CFTC and NFA requirements.\345\ In 
this regard, as noted in section I.E. above, section 17(p) 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.\346\
---------------------------------------------------------------------------

    \344\ 2024 Proposal at 8057.
    \345\ Id.
    \346\ 7 U.S.C. 21(p).
---------------------------------------------------------------------------

    The Commission also discussed 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 by being 
able 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.\347\ As discussed 
in the 2024 Proposal, the Commission and NFA also have the authority to 
require a nonbank SD to provide any additional financial and/or 
operational information as the Commission or NFA may specify to monitor 
the safety and soundness of the firm.\348\ 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.\349\
---------------------------------------------------------------------------

    \347\ 2024 Proposal at 8057.
    \348\ Commission Regulation 23.105(h) (17 CFR 23.105(h)). See 
also 2024 Proposal at 8057.
    \349\ 7 U.S.C. 6s(e).
---------------------------------------------------------------------------

    With respect to PRA-designated UK nonbank SDs, the Commission noted 
in the 2024 Proposal that the PRA conducts oversight of the firm's 
compliance with the UK PRA Capital Rules and the UK PRA Financial 
Reporting Rules. In this regard, the Commission noted that the PRA has 
supervision, audit, and investigation powers with respect to PRA-
designated UK nonbank SDs, which include the powers to obtain specified 
information reasonably required in connection with the exercise of the 
PRA's functions, the power to conduct or order investigations, and the 
power to impose sanctions on PRA-designated UK nonbank SDs that breach 
their regulatory obligations, including those deriving from the UK PRA 
Capital Rules

[[Page 58566]]

and the UK PRA Financial Reporting Rules.\350\
---------------------------------------------------------------------------

    \350\ 2024 Proposal at 8057 and FSMA, Parts 4A, XI, and XIV.
---------------------------------------------------------------------------

    The PRA also monitors the capital adequacy of PRA-designated UK 
nonbank SDs through supervisory measures on an ongoing basis. The 
monitoring includes assessing the notices and the capital conservation 
plan discussed in section II.E.1. above. In addition, the PRA is 
empowered with a variety of measures to address a PRA-designated UK 
nonbank SD's financial deterioration.\351\ Under its general 
supervisory powers, the PRA may impose new requirements to a PRA-
designated UK nonbank SD if the firm is failing, or likely to fail, to 
satisfy the threshold conditions for which the PRA is responsible.\352\ 
More specifically, a breach in a PRA-designated UK nonbank SD's capital 
buffers automatically triggers restrictions on the firm's ability to 
make certain distributions (e.g., pay certain dividends or employee 
bonuses).\353\ In addition, the PRA may impose administrative penalties 
or other administrative measures, including prudential charges, if a 
PRA-designated nonbank SD's liquidity position falls below the 
liquidity and stable funding requirements.\354\
---------------------------------------------------------------------------

    \351\ See 2024 Proposal at 8057 and PRA, The Prudential 
Regulation Authority's approach to banking supervision, July 2023, 
available at: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
    \352\ 2024 Proposal at 8057 and FSMA, Part 4A, Section 55M.
    \353\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4 
Capital Conservation Measures, Rule 4.3.
    \354\ Capital Requirements Regulations 2013, Regulation 35B and 
FSMA, Part XIV Disciplinary Measures (setting forth the PRA's 
disciplinary power with respect to all rules adopted under FSMA). 
The Applicants represented that ``CRR rules'' (i.e., general PRA 
rules applying to CRR firms, including PRA-designated UK nonbank 
SDs) are adopted pursuant to FSMA, Part 9D, and as such the PRA has 
power to impose disciplinary measures in connection with these 
rules. See Response to Staff Questions dated October 5, 2023.
---------------------------------------------------------------------------

    In case of non-compliance with the capital and liquidity 
thresholds, the PRA may also order PRA-designated UK nonbank SDs to 
comply with additional requirements, including: (i) maintaining 
additional capital in excess of the minimum requirements, if certain 
conditions are met; (ii) requiring that the PRA-designated UK nonbank 
SD submit a plan to restore compliance with applicable capital or 
liquidity thresholds; (iii) imposing restrictions on the business or 
operations of the PRA-designated UK nonbank SD; (iv) imposing 
restrictions or prohibitions on distributions or interest payments to 
shareholders or holders of additional tier 1 capital instruments; (v) 
requiring additional or more frequent reporting requirements; and (vi) 
imposing additional specific liquidity requirements.\355\ The PRA may 
also sanction the PRA-designated UK nonbank SD if the firm's capital or 
liquidity fall below the applicable thresholds or the PRA has evidence 
that the firm will breach such thresholds in the next 12 months.\356\ 
The PRA may also withdraw a PRA-designated UK nonbank SD's 
authorization if the firm no longer meets its minimum capital 
requirements.\357\
---------------------------------------------------------------------------

    \355\ FSMA, Parts 4A, Sections 55M and 55P, and Capital 
Requirements Regulation 2013, Regulation 35B.
    \356\ FSMA, Parts 4A and XIV.
    \357\ FSMA, Part 4A, Sections 55J-55K.
---------------------------------------------------------------------------

    In addition, if the capital and liquidity requirements are 
breached, the PRA may take early measures to intervene, such as 
requiring management to take certain actions, order members of 
management to be removed or replaced, or require changes to the firm's 
business strategy or legal or operational structure, among other 
measures.\358\
---------------------------------------------------------------------------

    \358\ Bank Recovery and Resolution (No. 2) Order 2014, Article 2 
(defining ``conditions for early intervention'' in case of breach of 
UK CRR requirements or requirements derived from CRD) and Part 8 
(laying down the procedure to be followed by the PRA to determine 
whether early intervention measures should be taken under FSMA). If 
additional requirements are met, it is also possible that the Bank 
of England, as the resolution authority, may assess the PRA-
designated UK nonbank SD as ``failing or likely to fail,'' 
triggering a resolution action, which could occur even before the 
firm actually breached its minimum capital requirements. Banking Act 
2009, Sections 4 to 83.
---------------------------------------------------------------------------

    Although the PRA generally has broad discretion as to what powers 
it may exercise, the UK PRA Capital Rules and the UK PRA Financial 
Reporting Rules specifically mandate that the PRA require PRA-
designated UK nonbank SDs to hold increased capital when: (i) risks or 
elements of risks are not covered by the capital requirements imposed 
by the UK PRA Capital Rules; (ii) the PRA-designated UK nonbank SD 
lacks robust governance arrangements, appropriate resolution and 
recovery plans, processes to manage large exposures or effective 
processes to maintain on an ongoing basis the amounts, types, and 
distribution of capital needed to cover the nature and level of risks 
to which it might be exposed; or (iii) the sole application of other 
administrative measures would be unlikely to timely and sufficiently 
improve the firm's arrangements and processes.\359\
---------------------------------------------------------------------------

    \359\ Capital Requirements Regulation 2013, Section 34.
---------------------------------------------------------------------------

    Based on its review of the Application and its analysis of the 
relevant laws and regulations, the Commission preliminarily found that 
the PRA has the necessary powers to supervise, investigate, and 
discipline PRA-designated UK nonbank SDs for compliance with the 
applicable capital and financial reporting requirements, and to detect 
and deter violations of, and ensure compliance with, the applicable UK 
capital and financial reporting requirements.\360\ Furthermore, the 
Commission noted that it retains supervision, examination, and 
enforcement authority over PRA-designated UK nonbank SDs that are 
covered by the Comparability Order.\361\ Specifically, the Commission 
noted that a non-U.S. nonbank SD that operates under substituted 
compliance 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.\362\ The ability of the Commission to exercise 
its enforcement authority over a PRA-designated UK nonbank SD is not 
conditioned upon a finding by the PRA of a violation of the UK PRA 
Capital Rules or UK PRA Financial Reporting Rules. In addition, as each 
PRA-designated UK nonbank SD is a member of NFA, the firm is subject to 
NFA membership rules, examination authority, and disciplinary 
process.\363\
---------------------------------------------------------------------------

    \360\ 2024 Proposal at 8058.
    \361\ 2024 Proposal at 8029.
    \362\ Id. See also 17 CFR 23.106(a)(4)(ii), which provides that 
all nonbank SDs, regardless of whether they rely on a Comparability 
Order or Comparability Determination, remain subject to the 
Commission's examination and enforcement authority.
    \363\ 7 U.S.C. 21(p).
---------------------------------------------------------------------------

2. Comment Analysis and Final Determination
    The Commission did not receive comments directly related to its 
analysis set forth in the proposed Comparability Determination and 
Comparability Order, or on its preliminary determination that the PRA 
has the necessary powers to supervise, investigate, and discipline PRA-
designated UK nonbank SDs for non-compliance with the applicable UK 
capital and financial reporting requirements. The Commission has 
reviewed its preliminary Comparability Determination and finds that the 
PRA-designated UK nonbank SDs are subject to a supervisory and 
enforcement framework that is comparable to the Commission's 
supervisory and enforcement framework for nonbank SDs.

[[Page 58567]]

    As detailed in section II.F.1. above, PRA-designated UK nonbank SDs 
are subject to direct supervision by the PRA in its capacity of 
prudential regulator. The PRA has supervision, audit, and investigation 
powers with respect to the six PRA-designated UK nonbank SDs currently 
registered with the Commission.
    The Commission's assessment of the PRA's supervisory programs 
included an evaluation of the PRA's authority to supervise PRA-
designated UK nonbank SDs based on applicable UK laws and regulations, 
as discussed in section II.F.1. above. This evaluation included an 
assessment of the financial reporting that PRA-designated UK nonbank 
SDs are required to provide to the PRA, the PRA's ability to conduct 
examinations, including onsite inspections of PRA-designated UK nonbank 
SDs, and the PRA's ability to impose sanctions or take other action to 
address noncompliance with applicable laws and regulations. Based upon 
its evaluation, the Commission preliminarily determined that the 
relevant UK laws and regulations are comparable in purpose and effect 
to the CEA and Commission regulations, and that the PRA has appropriate 
power to supervise PRA-designated UK nonbank SDs for compliance with 
the UK PRA Capital Rules and UK PRA Financial Reporting Rules. The 
Commission further determined, based on applicable UK laws and 
regulations, that the PRA has the ability to sanction PRA-designated UK 
nonbank SDs for failing to comply with regulatory requirements. 
Specifically, as discussed in section II.F.1. above, the PRA has the 
power to impose sanctions on the PRA-designated UK nonbank SD if the 
firm's capital or liquidity fall below the applicable thresholds,\364\ 
and may impose various requirements on PRA-designated UK nonbank SDs, 
including a requirement to hold additional capital if certain 
conditions are met.\365\ The PRA may also withdraw a PRA-designated UK 
nonbank SD's authorization to operate if the firm no longer meets its 
minimum capital requirements.\366\
---------------------------------------------------------------------------

    \364\ FSMA, Parts 4A and XIV.
    \365\ FSMA, Parts 4A, Sections 55M and 55P, and Capital 
Requirements Regulation 2013, Regulation 35B.
    \366\ FSMA, Part 4A, Sections 55J-55K.
---------------------------------------------------------------------------

    Furthermore, as discussed in this Comparability Determination, by 
issuing a Comparability Order, the Commission is not ceding its 
supervisory and enforcement authorities. PRA-designated UK 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. In this regard, PRA-designated UK nonbank SDs covered by 
a Comparability Order are required to directly provide the Commission 
with additional information upon the Commission's request to facilitate 
the ongoing supervision of such firms.\367\ 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.\368\ The ability to obtain information directly from PRA-
designated UK 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. PRA-designated UK nonbank 
SDs covered by a Comparability Order remain subject to the Commission's 
examination and enforcement authority with respect to all elements of 
the CEA and Commission regulations, including capital and financial 
reporting.\369\
---------------------------------------------------------------------------

    \367\ 17 CFR 23.105(h).
    \368\ NFA Section 17 Rule available at NFA's website: https://www.nfa.futures.org/rulebooksql/index.aspx.
    \369\ 17 CFR 23.106(a)(4)(ii).
---------------------------------------------------------------------------

    In addition, as detailed in section I.E. above, the conditions set 
forth in the Comparability Order reflect the fact that the Commission 
and NFA have a continuing obligation to conduct ongoing oversight, 
including potential examination, of PRA-designated UK nonbank SDs to 
ensure compliance with the Comparability Order and with relevant CEA 
requirements and Commission regulations. Specifically, the conditions 
require PRA-designated UK 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 PRA-designated UK nonbank SDs to maintain 
current books and records reflecting all transactions,\370\ the 
conditions further require each PRA-designated UK nonbank SD covered by 
the Comparability Order to file directly with the Commission and NFA: 
(i) monthly and annual financial reports; \371\ (ii) notice that the 
firm was informed by the PRA that it is not in compliance with the UK 
PRA Capital Rules and/or UK PRA Financial Reporting Rules; \372\ (iii) 
notice that the firm has experienced a decrease of 30 percent or more 
in its excess regulatory capital as compared to the last excess 
regulatory capital reported in filings with the Commission and NFA; 
\373\ (iv) notice that the firm has breached its combined capital 
buffer requirement and is required to file a capital conservation plan 
with the PRA; \374\ (v) notice that the firm has failed to maintain 
regulatory capital in the form of common equity tier 1 capital equal to 
or in excess of the U.S. dollar equivalent of $20 million; \375\ and 
(vi) notice that the firm has failed to maintain current financial 
books and records.\376\ The Comparability Order further requires the 
Applicants 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 UK PRA Capital 
Rules or UK PRA Financial Reporting Rules and proposed and final 
material changes to the PRA's supervisory authority or supervisory 
regime over PRA-designated UK nonbank SDs.\377\ 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 PRA-designated UK nonbank SDs, will allow the 
Commission and NFA to conduct ongoing oversight of such firms to assess 
their overall safety and soundness.
---------------------------------------------------------------------------

    \370\ Condition 9 of the final Comparability Order.
    \371\ Conditions 10 and 11 of the final Comparability Order.
    \372\ Condition 15 of the final Comparability Order.
    \373\ Condition 20 of the final Comparability Order.
    \374\ Condition 17 of the final Comparability Order.
    \375\ Condition 16 of the final Comparability Order.
    \376\ Condition 21 of the final Comparability Order.
    \377\ Condition 24 of the final Comparability Order.
---------------------------------------------------------------------------

    Although Commission Regulation 23.106 does not condition the 
issuance of a Comparability Order on the Commission and the authority 
or authorities in the relevant foreign jurisdiction having entered into 
a formal MOU or similar arrangement, the Commission recognizes the 
benefit that such an arrangement may provide. Specifically, although 
Commission staff may engage directly with PRA-designated UK nonbank SDs 
to obtain information regarding their financial and operational 
condition, it may not be able to exchange and discuss such firm-
specific information \378\ with the PRA or

[[Page 58568]]

reach shared expectations on procedures for conducting on-site 
examinations in the UK.\379\ Therefore, Commission staff will continue 
its engagement with PRA staff to negotiate and finalize an MOU or 
similar arrangement to facilitate the joint supervision of PRA-
designated UK nonbank SDs.
---------------------------------------------------------------------------

    \378\ The sharing of non-public information by CFTC staff would 
require assurances related to the use and treatment of such 
information in a manner consistent with Section 8(e) of the CEA, 7 
U.S.C. 12(e).
    \379\ For UK nonbank SDs regulated by the FCA, the Commission 
and the FCA are signatories to a supervisory MOU that covers 
information sharing and examinations. Memorandum of Understanding 
Concerning Cooperation and the Exchange of Information in the 
Context of Supervising Covered Firms (June 20, 2019).
---------------------------------------------------------------------------

III. Final Capital Comparability Determination and Comparability Order

A. Commission's Final Comparability Determination

    Based on the UK Application and the Commission's review of 
applicable UK laws and regulations, as well as the review of comments 
submitted in response to the Commission's request for comment on the UK 
Application and the proposed Comparability Determination and 
Comparability Order, the Commission finds that the UK PRA Capital Rules 
and the UK PRA 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 UK PRA 
Capital Rules and CFTC Capital Rules and certain differences between 
the UK PRA Financial Reporting Rules and the CFTC Financial Reporting 
Rules. The Comparability Order 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 rules sets are not inconsistent with 
providing a substituted compliance framework for PRA-designated UK 
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 UK PRA Capital Rules to the 
Bank-Based Approach contained within the CFTC Capital Rules. As noted 
previously, the Applicants have not requested, and the Commission has 
not performed, a comparison of the UK PRA Capital Rules to the 
Commission's NLA Approach or TNW Approach.

B. Order Providing Conditional Capital Comparability Determination for 
Certain PRA-Designated UK 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'') 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)), that is organized and domiciled in 
the United Kingdom (``UK'') and designated for prudential supervision 
by the UK Prudential Regulation Authority (``PRA''), may satisfy the 
capital requirements under section 4s(e) of the CEA and Commission 
Regulation 23.101(a)(1)(i) (17 CFR 23.101(a)(1)(i)) (``CFTC Capital 
Rules''), and the financial reporting rules under section 4s(f) of the 
CEA and Commission Regulation 23.105 (17 CFR 23.105) (``CFTC Financial 
Reporting Rules''), by complying with certain specified requirements of 
the UK 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 the UK and is domiciled 
in the UK;
    (3) The SD is licensed as an investment firm in the UK and is 
designated for prudential supervision by the PRA (``PRA-designated UK 
nonbank SD'');
    (4) The PRA-designated UK nonbank SD is subject to and complies 
with: Regulation (EU) No 575/2013 of the European Parliament and of the 
Council of 26 June 2013 on prudential requirements for credit 
institutions and amending Regulation (EU) No 648/2012 as restated and 
applicable in the UK (``UK CRR''), the provisions implementing the 
Directive 2013/36/EU of the European Parliament and of the Council of 
26 June 2013 on access to the activity of credit institutions and the 
prudential supervision of credit institutions, amending Directive 2002/
87/EC and repealing Directives 2006/48/EC and 2006/49/EC (``CRD''), 
including Capital Requirements Regulations 2013 and Capital 
Requirements (Capital Buffers and Macro-prudential Measures) 
Regulations 2014, Commission Delegated Regulation (EU) 2015/61 of 10 
October 2014 to supplement Regulation (EU) No 575/2013 of the European 
Parliament and the Council with regard to liquidity coverage 
requirement for Credit Institutions (``Liquidity Coverage Delegated 
Regulation''), the provisions of the Banking Act 2009 and its secondary 
legislation related to the minimum requirement for own funds and 
eligible liabilities (``MREL''), and the rules of the PRA as reflected 
in the PRA Rulebook (collectively the ``UK PRA Capital Rules'');
    (5) The PRA-designated UK nonbank SD satisfies at all times 
applicable capital ratio and leverage ratio requirements set forth in 
Article 92 of UK CRR and the rules in PRA Rulebook, CRR Firms, Leverage 
Ratio--Capital Requirements and Buffers Part, Chapter 3 Minimum 
Leverage Ratio, the capital conservation buffer requirements set forth 
in PRA Rulebook, CRR Firms, Capital Buffers Part, and applicable 
liquidity requirements set forth in PRA Rulebook, CRR Firms, Liquidity 
Coverage Requirement--UK Designated Investment Firms Part and PRA 
Rulebook, CRR Firms, Liquidity (CRR) Part, and otherwise complies with 
the requirements to maintain a liquidity risk management program as 
required under PRA Rulebook, CRR Firms, Internal Liquidity Adequacy 
Assessment Part;
    (6) The PRA-designated UK nonbank SD is subject to and complies 
with: Reporting (CRR) and Regulatory Reporting parts of the PRA 
Rulebook and the Companies Act 2006, Parts 15 and 16 (collectively and 
together with UK CRR, the ``UK PRA Financial Reporting Rules'');
    (7) The PRA-designated UK nonbank SD maintains at all times an 
amount of regulatory capital in the form of common equity tier 1 
capital as defined in Article 26 of UK CRR, equal to or in excess of 
the equivalent of $20 million in United States dollars (``U.S. 
dollars''). The PRA-designated UK nonbank SD shall use a commercially 
reasonable and observable British pound/U.S. dollar exchange rate to 
convert the value of the pound-denominated common equity tier 1 capital 
to U.S. dollars;
    (8) The PRA-designated UK nonbank SD has filed with the Commission 
a notice stating its intention to comply with the UK PRA Capital Rules 
and the UK PRA Financial Reporting Rules in lieu of the CFTC Capital 
Rules and the CFTC Financial Reporting Rules. The notice of intent must 
include the PRA-designated UK nonbank SD's representation that the firm 
is organized and domiciled in the UK, is a licensed investment firm 
designated for prudential supervision by the PRA, and

[[Page 58569]]

is subject to, and complies with, the UK PRA Capital Rules and UK PRA 
Financial Reporting Rules. A PRA-designated UK 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 PRA-designated UK nonbank SD may comply with 
the UK PRA Capital Rules and UK PRA Financial Reporting Rules in lieu 
of the CFTC Capital Rules and CFTC Reporting Rules. Each notice filed 
pursuant to this condition must be submitted to the Commission via 
email to the following address: [email protected];
    (9) The PRA-designated UK nonbank SD prepares and keeps current 
ledgers and other similar records in accordance with the PRA Rulebook, 
General Organisational Requirements Part, Rule 2.2 and Record Keeping 
Part, Rule 2.1 and 2.2, and conforming with the applicable accounting 
principles;
    (10) The PRA-designated UK nonbank SD files with the Commission and 
with the National Futures Association (``NFA'') a copy of templates 1.1 
(Balance Sheet Statement: assets), 1.2 (Balance Sheet Statement: 
liabilities), 1.3 (Balance Sheet Statement: equity), and 2 (Statement 
of profit or loss) of the financial reports (``FINREP'') that PRA-
designated UK nonbank SDs are required to submit pursuant to PRA 
Rulebook, CRR Firms, Regulatory Reporting Part, Chapter 9 Regulatory 
Activity Group 3, Rule 9.2, and templates 1 (Own Funds), 2 (Own Funds 
Requirements) and 3 (Capital Ratios) of the common reports (``COREP'') 
that PRA-designated UK nonbank SDs are required to submit pursuant to 
PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4 Reporting 
(Part Seven A CRR), Article 430 Reporting on Prudential Requirements 
and Financial Information, Rule 1. The FINREP and COREP templates must 
be provided with balances converted to U.S. dollars, using a 
commercially reasonable and observable British pound/U.S. dollar spot 
rate as of the date of the reports, and must be filed with the 
Commission and NFA within 35 calendar days of the end of each month. 
PRA-designated UK nonbank SDs that are registered as security-based 
swap dealers (``SBSDs'') with the U.S. Securities and Exchange 
Commission (``SEC'') must comply with this condition by filing with the 
Commission and NFA a copy of Form X-17A-5 (``FOCUS Report'') that the 
PRA-designated UK nonbank SD is required to file with the SEC or its 
designee pursuant to an order granting conditional substituted 
compliance with respect to Securities Exchange Act of 1934 Rule 18a-7. 
The copy of the FOCUS Report must be filed with the Commission and NFA 
within 35 calendar days after the end of each month in the manner, 
format and conditions specified by the SEC in Order Specifying the 
Manner and Format of Filing Unaudited Financial and Operational 
Information by Security-Based Swap Dealers and Major Security-Based 
Swap Participants that are not U.S. Persons and are Relying on 
Substituted Compliance with Respect to Rule 18a-7, 86 FR 59208 (Oct. 
26, 2021);
    (11) The PRA-designated UK nonbank SD files with the Commission and 
with NFA a copy of its annual audited accounts and strategic report 
(together, ``annual audited financial report'') that are required to be 
prepared and published pursuant to Parts 15 and 16 of Companies Act 
2006. The annual audited financial report may be reported in British 
pound. The annual audited financial report must be filed with the 
Commission and NFA on the earlier of the date the report is filed with 
the PRA or the date the report is required to be filed with the PRA 
pursuant to the UK PRA Financial Reporting Rules;
    (12) The PRA-designated UK 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 with balances reported in U.S. dollars, 
using a commercially reasonable and observable British pound/U.S. 
dollar spot rate as of the date of the report, and must be filed with 
the Commission and NFA within 35 calendar days of the end of each 
month. PRA-designated UK nonbank SDs that are registered as SBSDs must 
comply with this condition by filing with the Commission and NFA a copy 
of the FOCUS Report that they file with the SEC or its designee as set 
forth in Condition 10;
    (13) The PRA-designated UK nonbank SD submits with each set of 
FINREP and COREP templates, annual audited financial report, and 
Schedule 1 of appendix B to Subpart E of part 23 of the Commission's 
regulations, a statement by an authorized representative or 
representatives of the PRA-designated UK nonbank SD that to the best 
knowledge and belief of the representative or representatives, the 
information contained in the reports, including the conversion of 
balances in the reports to U.S. dollars, is true and correct;
    (14) The PRA-designated UK nonbank SD files a margin report 
containing the information specified in Commission Regulation 23.105(m) 
(17 CFR 23.105(m)) (``Margin Report'') with the Commission and with NFA 
within 35 calendar days of the end of each month. The Margin Report's 
balances must be reported in U.S. dollars, using a commercially 
reasonable and observable British pound/U.S. dollar spot rate as of the 
date of the report;
    (15) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours of being informed by the PRA that 
the firm is not in compliance with any component of the UK PRA Capital 
Rules or the UK PRA Financial Reporting Rules;
    (16) The PRA-designated UK nonbank SD files a notice within 24 
hours with the Commission and NFA if it fails to maintain regulatory 
capital in the form of common equity tier 1 capital as defined in 
Article 26 of UK CRR, equal to or in excess of the U.S. dollar 
equivalent of $20 million using a commercially reasonable and 
observable British pound/U.S. dollar exchange rate;
    (17) The PRA-designated UK nonbank SD provides the Commission and 
NFA with notice within 24 hours of breaching its combined capital 
buffer requirement and being required to file a capital conservation 
plan with the PRA pursuant to PRA Rulebook, CRR Firms, Capital Buffers 
Part, Chapter 4 Capital Conservation Measures, Rule 4.4;
    (18) The PRA-designated UK nonbank SD provides the Commission and 
NFA with notice within 24 hours if it is required by the PRA to 
maintain additional capital or additional liquidity requirements, or to 
restrict its business operations, or to comply with other requirements 
pursuant to Financial Services and Markets Act 2000, Part 4A or the 
Capital Requirements Regulation 2013, Regulation 35B;
    (19) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA within 24 hours if it fails to maintain its MREL, if 
the PRA-designated UK nonbank SD is subject to such requirement as set 
forth by the Bank of England pursuant to the Banking Act 2009, section 
3A and the Bank Recovery and Resolution (No. 2) Order 2014, Part 9;
    (20) The PRA-designated UK nonbank SD files a notice with the 
Commission and NFA if it experiences a 30 percent or more decrease in 
its excess regulatory capital as compared to that last reported in the 
financial information filed pursuant to Condition 10. The notice filed 
with Commission and NFA must be filed within two business days of the 
firm experiencing the 30 percent or

[[Page 58570]]

more decrease in excess regulatory capital;
    (21) The PRA-designated UK 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;
    (22) The PRA-designated UK 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 PRA-designated UK nonbank SD on 
uncleared swap and non-cleared security-based swap positions that, in 
the aggregate, exceeds 25 percent of the PRA-designated UK nonbank SD's 
minimum capital requirement; (ii) counterparties fail to post required 
initial margin or pay required variation margin to the PRA-designated 
UK nonbank SD for uncleared swap and non-cleared security-based swap 
positions that, in the aggregate, exceeds 50 percent of the PRA-
designated UK nonbank SD's minimum capital requirement; (iii) the PRA-
designated UK 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 PRA-designated UK nonbank SD's 
minimum capital requirement; or (iv) the PRA-designated UK 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 PRA-
designated UK nonbank SD's minimum capital requirement. For purposes of 
the calculation, the PRA-designated UK nonbank SD's minimum capital 
requirement is the core capital requirement under the UK PRA Capital 
Rules, excluding capital buffers;
    (23) The PRA-designated UK 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 PRA. 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 filed with the Commission and NFA at least 15 business 
days prior to the effective date of the PRA-designated UK nonbank SD's 
change in fiscal year-end;
    (24) The PRA-designated UK nonbank SD or an entity acting on its 
behalf notifies the Commission of any material changes to the 
information submitted in the application for Comparability 
Determination, including, but not limited to, proposed and final 
material changes to the UK PRA Capital Rules or UK PRA Financial 
Reporting Rules and proposed and final material changes to the PRA's 
supervisory authority or supervisory regime over PRA-designated UK 
nonbank SDs; and
    (25) Unless otherwise noted in the conditions above, the reports, 
notices, and other statements required to be filed by the PRA-
designated UK 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 14, 20, and 22, 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 United 
Kingdom Prudential Regulation Authority--Voting Summary and Chairman's 
and Commissioners' Statements

Appendix 1--Voting Summary

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

Appendix 2--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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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

[[Page 58571]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

Today's Final Comparability Determinations

    The Final Comparability Determinations will apply to 15 foreign 
nonbank SDs

[[Page 58572]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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--Statement of Commissioner Caroline D. Pham

    I am pleased to support 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 United Kingdom Prudential Regulatory 
Authority (UK PRA) (UK Final Order). The UK Final Order, on balance, 
reflects an appropriate approach by the CFTC to collaboration with 
non-U.S. regulators that is consistent with IOSCO's 2020 report on 
Good Practices on Processes for Deference.\1\
---------------------------------------------------------------------------

    \1\ IOSCO Report, ``Good Practices on Processes for Deference'' 
(June 2020), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD659.pdf.
---------------------------------------------------------------------------

    I would like to thank Amanda Olear, Thomas Smith, Rafael 
Martinez, Liliya Bozhanova, Joo Hong, and Justin McPhee from the 
CFTC's Market Participants Division for their truly hard work on the 
UK Final Order and for addressing my concerns regarding the 
conditions for notice requirements.\2\ I also thank the UK PRA for 
its assistance and support.
---------------------------------------------------------------------------

    \2\ Concurring Statement of Commissioner Caroline D. Pham 
Regarding Proposed Order and Request for Comment on an Application 
for a Capital Comparability Determination (Nov. 10, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement111022; 
Statement of Commissioner Caroline D. Pham in Support of Proposed 
Order and Request for Comment on Comparability Determination for UK 
PRA Swap Dealer Capital and Financial Reporting Requirements (Jan. 
24, 2024), https://www.cftc.gov/PressRoom/peechesTestimony/phamstatement012424.
---------------------------------------------------------------------------

    The CFTC's capital comparability determinations are the result 
of tireless efforts spanning over a decade since the global 
financial crisis. I commend the staff for working together with our 
regulatory counterparts around the world to promote regulatory 
cohesion and financial stability, and mitigate market fragmentation 
and systemic risk.

[FR Doc. 2024-15094 Filed 7-17-24; 8:45 am]
BILLING CODE 6351-01-P