Comparability Determination for Japan: Certain Entity-Level Requirements, 78910-78923 [2013-30976]

Download as PDF 78910 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices tkelley on DSK3SPTVN1PROD with NOTICES category-by-category basis, should form the basis of comparability determinations.6 However, instead of following this approach, the Commission has made its comparability determinations on a rule-byrule basis. For example, in Japan’s Comparability Determination for Transaction-Level Requirements, the Commission has made a positive comparability determination for some of the detailed requirements under the swap trading relationship documentation provisions, but not for other requirements.7 This detailed approach clearly contravenes the ODRG’s understanding. Second, in several areas, the Commission has declined to consider a request for a comparability determination, and has also failed to provide an analysis regarding the extent to which the other jurisdiction is, or is not, comparable. For example, the Commission has declined to address or provide any clarity regarding the European Union’s regulatory data reporting determination, even though the European Union’s reporting regime is set to begin on February 12, 2014. Although the Commission has provided some limited relief with respect to regulatory data reporting, the lack of clarity creates unnecessary uncertainty, especially when the European Union’s reporting regime is set to begin in less than two months. Similarly, Japan receives no consideration for its mandatory clearing requirement, even though the Commission considers Japan’s legal framework to be comparable to the U.S. framework. While the Commission has declined to provide even a partial comparability determination, at least in this instance the Commission has provided a reason: the differences in the scope of entities and products subject to the clearing requirement.8 Such treatment creates uncertainty and is contrary to increased global harmonization efforts. Third, in the Commission’s rush to meet the artificial deadline of December 21, 2013, as established in the Exemptive Order Regarding Compliance with Certain Swap Regulations (‘‘Exemptive Order’’),9 the Commission failed to complete an important piece of the cross-border regime, namely, supervisory memoranda of understanding (‘‘MOUs’’) between the Commission and fellow regulators. I have previously stated that these MOUs, if done right, can be a key part of the global harmonization effort because they provide mutually agreed-upon solutions for 6 http://www.cftc.gov/ucm/groups/public/ @newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings. Understanding number 2 states that ‘‘[a] flexible, outcomes-based approach should form the basis of final assessments regarding equivalence or substituted compliance.’’ 7 The Commission made a positive comparability determination for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3), (b)(4), (c), and (d), but not for Commission regulations 23.504(b)(5) and (b)(6). 8 Yen-denominated interest rate swaps are subject to the mandatory clearing requirement in both the U.S. and Japan. 9 Exemptive Order Regarding Compliance With Certain Swap Regulations, 78 FR 43785 (Jul. 22, 2013). VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 differences in regulatory regimes.10 Accordingly, I stated that the Commission should be able to review MOUs alongside the respective comparability determinations and vote on them at the same time. Without these MOUs, our fellow regulators are left wondering whether and how any differences, such as direct access to books and records, will be resolved. Finally, as I have consistently maintained, the substituted compliance process should allow other regulatory bodies to engage with the full Commission.11 While I am pleased that the Notices are being voted on by the Commission, the full Commission only gained access to the comment letters from foreign regulators on the Commission’s comparability determination draft proposals a few days ago. This is hardly a transparent process. Unclear Path Forward Looking forward to next steps, the Commission must provide answers to several outstanding questions regarding these comparability determinations. In doing so, the Commission must collaborate with foreign regulators to increase global harmonization. First, there is uncertainty surrounding the timing and outcome of the MOUs. Critical questions regarding information sharing, cooperation, supervision, and enforcement will remain unanswered until the Commission and our fellow regulators execute these MOUs. Second, the Commission has issued timelimited no-action relief for the swap data repository reporting requirements. These comparability determinations will be done as separate notices. However, the timing and process for these determinations remain uncertain. Third, the Commission has failed to provide clarity on the process for addressing the comparability determinations that it declined to undertake at this time. The Notices only state that the Commission may address these requests in a separate notice at a later date given further developments in the law and regulations of other jurisdictions. To promote certainty in the financial markets, the Commission must provide a clear path forward for market participants and foreign regulators. The following steps would be a better approach: (1) The Commission should extend the Exemptive Order to allow foreign regulators to further implement their regulatory regimes and coordinate with them to implement a harmonized substituted compliance process; (2) the Commission should implement a flexible, outcomes-based approach to the substituted compliance process and apply it similarly to all jurisdictions; and (3) the Commission should work closely with our fellow regulators to expeditiously implement MOUs that resolve regulatory differences and address regulatory oversight issues. 10 http://www.cftc.gov/PressRoom/ SpeechesTestimony/opaomalia-29. 11 http://www.cftc.gov/PressRoom/ SpeechesTestimony/omaliastatement071213b. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 Conclusion While I support the narrow comparability determinations that the Commission has made, it was my hope that the Commission would work with foreign regulators to implement a substituted compliance process that would increase the global harmonization effort. I am disappointed that the Commission has failed to implement such a process. I do believe that in the longer term, the swaps regulations of the major jurisdictions will converge. At this time, however, the Commission’s comparability determinations have done little to alleviate the burden of regulatory uncertainty and duplicative compliance with both U.S. and foreign regulations. The G–20 process delineated and put in place the swaps market reforms in G–20 member nations. It is then no surprise that the Commission must learn to coordinate with foreign regulators to minimize confusion and disruption in bringing much needed clarity to the swaps market. For all these shortcomings, I respectfully dissent from the Commission’s approval of the Notices. [FR Doc. 2013–30978 Filed 12–26–13; 8:45 am] BILLING CODE 6351–01–P COMMODITY FUTURES TRADING COMMISSION Comparability Determination for Japan: Certain Entity-Level Requirements Commodity Futures Trading Commission. ACTION: Notice of comparability determination for certain requirements under the laws of Japan. AGENCY: The following is the analysis and determination of the Commodity Futures Trading Commission (‘‘Commission’’) regarding certain parts of a joint request by the Bank of TokyoMitsubishi UFJ, Ltd (‘‘BTMU’’), Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd. that the Commission determine that laws and regulations applicable in Japan provide a sufficient basis for an affirmative finding of comparability with respect to the following regulatory obligations applicable to swap dealers (‘‘SDs’’) and major swap participants (‘‘MSPs’’) registered with the Commission: (i) Chief compliance officer; (ii) risk management; and (iii) swap data recordkeeping (collectively, the ‘‘Internal Business Conduct Requirements’’). DATES: Effective Date: This determination will become effective immediately upon publication in the Federal Register. SUMMARY: E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices Gary Barnett, Director, 202 418–5977, gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202–418–5949, ffisanich@ cftc.gov, and Jason Shafer, Special Counsel, 202–418–5097, jshafer@ cftc.gov, Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: FOR FURTHER INFORMATION CONTACT: tkelley on DSK3SPTVN1PROD with NOTICES I. Introduction On July 26, 2013, the Commission published in the Federal Register its ‘‘Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations’’ (the ‘‘Guidance’’).1 In the Guidance, the Commission set forth its interpretation of the manner in which it believes that section 2(i) of the Commodity Exchange Act (‘‘CEA’’) applies Title VII’s swap provisions to activities outside the U.S. and informed the public of some of the policies that it expects to follow, generally speaking, in applying Title VII and certain Commission regulations in contexts covered by section 2(i). Among other matters, the Guidance generally described the policy and procedural framework under which the Commission would consider a substituted compliance program with respect to Commission regulations applicable to entities located outside the U.S. Specifically, the Commission addressed a recognition program where compliance with a comparable regulatory requirement of a foreign jurisdiction would serve as a reasonable substitute for compliance with the attendant requirements of the CEA and the Commission’s regulations promulgated thereunder. In addition to the Guidance, on July 22, 2013, the Commission issued the Exemptive Order Regarding Compliance with Certain Swap Regulations (the ‘‘Exemptive Order’’).2 Among other things, the Exemptive Order provided time for the Commission to consider substituted compliance with respect to six jurisdictions where non-U.S. SDs are currently organized. In this regard, the Exemptive Order generally provided non-U.S. SDs and MSPs in the six jurisdictions with conditional relief 1 78 FR 45292 (July 26, 2013). The Commission originally published proposed and further proposed guidance on July 12, 2012 and January 7, 2013, respectively. See Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) and Further Proposed Guidance Regarding Compliance with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013). 2 78 FR 43785 (July 22, 2013). VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 from certain requirements of Commission regulations (those referred to as ‘‘Entity-Level Requirements’’ in the Guidance) until the earlier of December 21, 2013, or 30 days following the issuance of a substituted compliance determination.3 On June 24, 2013, BTMU submitted a request that the Commission determine that laws and regulations applicable in Japan provide a sufficient basis for an affirmative finding of comparability with respect to certain Entity-Level Requirements, including the Internal Business Conduct Requirements.4 BTMU provided Commission staff with a supplement on October 8, 2013. On October 29, 2013, the application was further supplemented with corrections and additional materials. On November 12, 2013, Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd. requested that they be permitted to rely upon BTMU’s submission as the basis for their request for a substituted compliance determination (BTMU, Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd., are referred to herein as, collectively, the ‘‘applicants’’). The following is the Commission’s analysis and determination regarding the Internal Business Conduct Requirements, as detailed below.5 II. Background On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act6 (‘‘Dodd-Frank Act’’ or ‘‘Dodd-Frank’’), which, in Title VII, established a new regulatory framework for swaps. Section 722(d) of the Dodd-Frank Act amended the CEA by adding section 2(i), which provides that the swap provisions of the CEA (including any CEA rules or regulations) apply to crossborder activities when certain conditions are met, namely, when such 3 The Entity-Level Requirements under the Exemptive Order consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the Commission’s regulations. 4 For purposes of this notice, the Internal Business Conduct Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 23.603, 23.605, and 23.606. The applicants subsequently submitted a separate application for the applicable Transaction-Level Requirements on September 20, 2013. This notice addresses only the Entity-Level Requirements. 5 This notice does not address swap data repository reporting (‘‘SDR Reporting’’). The Commission may provide a comparability determination with respect to the SDR Reporting requirement in a separate notice. 6 Public Law 111–203, 124 Stat. 1376 (2010). PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 78911 activities have a ‘‘direct and significant connection with activities in, or effect on, commerce of the United States’’ or when they contravene Commission rules or regulations as are necessary or appropriate to prevent evasion of the swap provisions of the CEA enacted under Title VII of the Dodd-Frank Act.7 In the three years since its enactment, the Commission has finalized 68 rules and orders to implement Title VII of the Dodd-Frank Act. The finalized rules include those promulgated under section 4s of the CEA, which address registration of SDs and MSPs and other substantive requirements applicable to SDs and MSPs. With few exceptions, the delayed compliance dates for the Commission’s regulations implementing such section 4s requirements applicable to SDs and MSPs have passed and new SDs and MSPs are now required to be in full compliance with such regulations upon registration with the Commission.8 Notably, the requirements under Title VII of the Dodd-Frank Act related to SDs and MSPs by their terms apply to all registered SDs and MSPs, irrespective of where they are located, albeit subject to the limitations of CEA section 2(i). To provide guidance as to the Commission’s views regarding the scope of the cross-border application of Title VII of the Dodd-Frank Act, the Commission set forth in the Guidance its interpretation of the manner in which it believes that Title VII’s swap provisions apply to activities outside the U.S. pursuant to section 2(i) of the CEA. Among other matters, the Guidance generally described the policy and procedural framework under which the Commission would consider a substituted compliance program with respect to Commission regulations applicable to entities located outside the U.S. Specifically, the Commission addressed a recognition program where compliance with a comparable regulatory requirement of a foreign jurisdiction would serve as a reasonable substitute for compliance with the attendant requirements of the CEA and the Commission’s regulations. With respect to the standards forming the basis for any determination of comparability (‘‘comparability determination’’ or ‘‘comparability finding’’), the Commission stated: In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the 77 U.S.C. 2(i). compliance dates are summarized on the Compliance Dates page of the Commission’s Web site. (http://www.cftc.gov/LawRegulation/ DoddFrankAct/ComplianceDates/index.htm.) 8 The E:\FR\FM\27DEN1.SGM 27DEN1 78912 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices 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. In this context, comparable does not necessarily mean identical. Rather, the Commission would evaluate whether the home jurisdiction’s regulatory requirement is comparable to and as comprehensive as the corresponding U.S. regulatory requirement(s).9 Upon a comparability finding, consistent with CEA section 2(i) and comity principles, the Commission’s policy generally is that eligible entities may comply with a substituted compliance regime, subject to any conditions the Commission places on its finding, and subject to the Commission’s retention of its examination authority and its enforcement authority.10 In this regard, the Commission notes that a comparability determination cannot be premised on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction, but rather on whether information relevant to the Commission’s oversight of an SD or MSP would be directly available to the Commission and any U.S. prudential regulator of the SD or MSP.11 The 9 78 FR 45342–45. the Guidance, 78 FR 45342–44. 11 Under §§ 23.203 and 23.606, all records required by the CEA and the Commission’s regulations to be maintained by a registered SD or MSP shall be maintained in accordance with Commission regulation 1.31 and shall be open for inspection by representatives of the Commission, the United States Department of Justice, or any applicable U.S. prudential regulator. In its Final Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted that an applicant for registration as an SD or MSP must file a Form 7–R with the National Futures Association and that Form 7–R was being modified at that time to address existing blocking, privacy, or secrecy laws of foreign jurisdictions that applied to the books and records of SDs and MSPs acting in those jurisdictions. See id. at 871–72 n. 107. The modifications to Form 7–R were a temporary measure intended to allow SDs and MSPs to apply for registration in a timely manner in recognition of the existence of the blocking, privacy, and secrecy laws. In the Guidance, the Commission clarified that the change to Form 7–R impacts the registration application only and does not modify the Commission’s authority under the CEA and its regulations to access records held by registered SDs and MSPs. Commission access to a registrant’s books and records is a fundamental regulatory tool necessary to properly monitor and examine each registrant’s compliance with the CEA and the regulations adopted pursuant thereto. The Commission has maintained an ongoing dialogue on a bilateral and multilateral basis with foreign tkelley on DSK3SPTVN1PROD with NOTICES 10 See VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 Commission’s direct access to the books and records required to be maintained by an SD or MSP registered with the Commission is a core requirement of the CEA12 and the Commission’s regulations,13 and is a condition to registration.14 III. Regulation of SDs and MSPs in Japan As represented to the Commission by the applicants, swap activities in Japan may be governed by the Banking Act of Japan, No. 59 of 1981 (‘‘Banking Act’’), covering banks and bank holding companies, and the Financial Instruments and Exchange Act, No. 25 of 1948 (‘‘FIEA’’), covering, among others, Financial Instrument Business Operators (‘‘FIBOs’’) and Registered Financial Institutions (‘‘RFIs’’). The Japanese Prime Minister delegated broad authority to implement these laws to the Japanese Financial Services Agency (‘‘JFSA’’). Pursuant to this authority, the JFSA has promulgated the Order for Enforcement,15 Cabinet Office Ordinance, 16 Supervisory Guidelines17 and Inspection Manuals.18 The Securities and Exchange Surveillance Commission (‘‘SESC’’) is within the JFS and has promulgated, among other things, the Inspection Manual for FIBOs. These requirements supplement the requirements of the Banking Act and FIEA with a more proscriptive direction as to the particular structural features or responsibilities that internal compliance functions must maintain. In general, banks are subject to the Banking Act, relevant laws and regulations for banks, Supervisory Guidelines for banks, and Inspection Manual for banks, while FIBOs are regulators and with registrants to address books and records access issues and may consider appropriate measures where requested to do so. 12 See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the CEA. 13 See e.g., §§ 23.203(b) and 23.606. 14 See supra note 10. 15 Order for Enforcement of the Banking Act and Order for Enforcement of the Financial Instruments and Exchange Act. 16 Cabinet Office Ordinance on Financial Instruments Business (‘‘FIB Ordinance’’) and Cabinet Office Ordinance on Regulation of OTC Derivatives Transaction. 17 Comprehensive Guideline for Supervision of Major Banks, etc.(‘‘Supervisory Guideline for banks’’) and Comprehensive Guideline for Supervision of Financial Instruments Business Operators, etc.(‘‘Supervisory Guideline for FIBOs’’). 18 Inspection Manual for Deposit Taking Institutions (‘‘Inspection Manual for banks’’), consisting of the Checklist for Business Management (Governance), Checklist for Legal Compliance, Checklist for Customer Protection Management, Checklist for Credit Risk Management, Checklist for Market Risk Management, Checklist for Liquidity Risk Management, Checklist for Operational Risk Management, etc. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 subject to the FIEA, relevant laws and regulations for FIBOs, Supervisory Guidelines for FIBOs, and Inspection Manual for FIBOs. Pursuant to Article 29 of the FIEA, any person that engages in trade activities that constitute ‘‘Financial Instruments Business’’—which, among other things, includes over-the-counter transactions in derivatives (‘‘OTC derivatives’’) or intermediary, brokerage (excluding brokerage for clearing of securities) or agency services therefor19—must register under the FIEA as a FIBO. Banks that conduct specified activities in the course of trade, including OTC derivatives must register under the FIEA as RFIs pursuant to Article 33–2 of the FIEA. Banks registered as RFIs are required to comply with relevant laws and regulations for FIBOs regarding specified activities. Failure to comply with any relevant laws and regulations, Supervisory Guidelines or Inspection Manuals would subject the applicant to potential sanctions or corrective measures. The applicants are each registered in Japan as RFIs or FIBOs under the supervision of the JFSA. In addition, each applicant is a member of several self-regulatory organizations, including the Japanese Securities Dealers Association (‘‘JSDA’’). The JSDA is a ‘‘Financial Instruments Firms Association’’ authorized under FIEA by the Prime Minister of Japan.20 IV. Comparable and Comprehensiveness Standard The Commission’s comparability analysis will be based on a comparison of specific foreign requirements against the specific related CEA provisions and Commission regulations as categorized and described in the Guidance. As explained in the Guidance, within the framework of CEA section 2(i) and principles of international comity, the Commission may make a comparability determination on a requirement-byrequirement basis, rather than on the basis of the foreign regime as a whole.21 In making its comparability determinations, the Commission may include conditions that take into account timing and other issues related 19 See Article 2(8)(iv) of the FIEA. the applicants’ request and the Commissions determinations herein are based on the comparability of Japanese requirements applicable to banks, FIBOs, and RFIs, an SD or MSP that is not a bank, FIBO, or RFI, or is otherwise not subject to the requirements applicable to banks, FIBOs, and RFIs upon which the Commission bases its determinations, may not be able to rely on the Commission’s comparability determinations herein. 21 78 FR 45343. 20 Because E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices to coordinating the implementation of reform efforts across jurisdictions.22 In evaluating whether a particular category of foreign regulatory requirement(s) is comparable and comprehensive to the corollary 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, and • The home jurisdiction’s authority to support and enforce its oversight of the registrant.23 In making a comparability determination, the Commission takes an ‘‘outcome-based’’ approach. An ‘‘outcome-based’’ approach means that when evaluating whether a foreign jurisdiction’s regulatory requirements are comparable to, and as comprehensive as, the corollary areas of the CEA and Commission regulations, the Commission ultimately focuses on regulatory outcomes (i.e., the home jurisdiction’s requirements do not have to be identical).24 This 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. In doing its comparability analysis the Commission may determine that no comparability determination can be made25 and that the non-U.S. SD or nonU.S. MSP, U.S. bank that is an SD or 22 78 FR 45343. FR 45343. 24 78 FR 45343. The Commission’s substituted compliance program would generally be available for SDR Reporting, as outlined in the Guidance, only if the Commission has direct access to all of the data elements that are reported to a foreign trade repository pursuant to the substituted compliance program. Thus, direct access to swap data is a threshold matter to be addressed in a comparability evaluation for SDR Reporting. Moreover, the Commission explains in the Guidance that, due to its technical nature, a comparability evaluation for SDR Reporting ‘‘will generally entail a detailed comparison and technical analysis.’’ A more particularized analysis will generally be necessary to determine whether data stored in a foreign trade repository provides for effective Commission use, in furtherance of the regulatory purposes of the DoddFrank Act. See 78 FR 45345. 25 A finding of comparability may not be possible for a number of reasons, including the fact that the foreign jurisdiction has not yet implemented or finalized particular requirements. tkelley on DSK3SPTVN1PROD with NOTICES 23 78 VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 MSP with respect to its foreign branches, or non-registrant, to the extent applicable under the Guidance, may be required to comply with the CEA and Commission regulations. The starting point in the Commission’s analysis is a consideration of the regulatory objectives of the foreign jurisdiction’s regulation of swaps and swap market participants. As stated in the Guidance, jurisdictions may not have swap specific regulations in some areas, and instead have regulatory or supervisory regimes that achieve comparable and comprehensive regulation to the DoddFrank Act requirements, but on a more general, entity-wide, or prudential, basis.26 In addition, portions of a foreign regulatory regime may have similar regulatory objectives, but the means by which these objectives are achieved with respect to swaps market activities may not be clearly defined, or may not expressly include specific regulatory elements that the Commission concludes are critical to achieving the regulatory objectives or outcomes required under the CEA and the Commission’s regulations. In these circumstances, the Commission will work with the regulators and registrants in these jurisdictions to consider alternative approaches that may result in a determination that substituted compliance applies.27 26 78 FR 45343. explained in the Guidance, such ‘‘approaches used will vary depending on the circumstances relevant to each jurisdiction. One example would include coordinating with the foreign regulators in developing appropriate regulatory changes or new regulations, particularly where changes or new regulations already are being considered or proposed by the foreign regulators or legislative bodies. As another example, the Commission may, after consultation with the appropriate regulators and market participants, include in its substituted compliance determination a description of the means by which certain swaps market participants can achieve substituted compliance within the construct of the foreign regulatory regime. The identification of the means by which substituted compliance is achieved would be designed to address the regulatory objectives and outcomes of the relevant Dodd-Frank Act requirements in a manner that does not conflict with a foreign regulatory regime and reduces the likelihood of inconsistent regulatory obligations. For example, the Commission may specify that [SDs] and MSPs in the jurisdiction undertake certain recordkeeping and documentation for swap activities that otherwise is only addressed by the foreign regulatory regime with respect to financial activities generally. In addition, the substituted compliance determination may include provisions for summary compliance and risk reporting to the Commission to allow the Commission to monitor whether the regulatory outcomes are being achieved. By using these approaches, in the interest of comity, the Commission would seek to achieve its regulatory objectives with respect to the Commission’s registrants that are operating in foreign jurisdictions in a manner that works in harmony with the regulatory interests of those jurisdictions.’’ 78 FR 45343–44. 27 As PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 78913 Finally, the Commission will generally rely on an applicant’s description of the laws and regulations of the foreign jurisdiction in making its comparability determination. The Commission considers an application to be a representation by the applicant that the laws and regulations submitted are in full force and effect, 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 swaps activities28 of SDs and MSPs29 in the relevant jurisdictions.30 Further, as stated in the Guidance, the Commission expects that an applicant would notify the Commission of any material changes to information submitted in support of a comparability determination (including, but not limited to, changes in the relevant supervisory or regulatory regime) as, depending on the nature of the change, the Commission’s comparability determination may no longer be valid.31 The Guidance provided a detailed discussion of the Commission’s policy regarding the availability of substituted 28 ‘‘Swaps activities’’ is defined in Commission regulation 23.600(a)(7) to mean, ‘‘with respect to a registrant, such registrant’s activities related to swaps and any product used to hedge such swaps, including, but not limited to, futures, options, other swaps or security-based swaps, debt or equity securities, foreign currency, physical commodities, and other derivatives.’’ The Commission’s regulations under 17 CFR Part 23 are limited in scope to the swaps activities of SDs and MSPs. 29 No SD or MSP that is not legally required to comply with a law or regulation determined to be comparable may voluntarily comply with such law or regulation in lieu of compliance with the CEA and the relevant Commission regulation. Each SD or MSP that seeks to rely on a comparability determination is responsible for determining whether it is subject to the laws and regulations found comparable. Currently, there are no MSPs organized outside the U.S. and the Commission therefore cautions any non-financial entity organized outside the U.S. and applying for registration as an MSP to carefully consider whether the laws and regulations determined to be comparable herein are applicable to such entity. 30 The Commission has provided the relevant foreign regulator(s) with opportunities to review and correct the applicant’s description of such laws and regulations on which the Commission will base its comparability determination. The Commission relies on the accuracy and completeness of such review and any corrections received in making its comparability determinations. A comparability determination based on an inaccurate description of foreign laws and regulations may not be valid. 31 78 FR 45345. E:\FR\FM\27DEN1.SGM 27DEN1 78914 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices compliance32 for the Internal Business Conduct Requirements.33 tkelley on DSK3SPTVN1PROD with NOTICES V. Supervisory Arrangement In the Guidance, the Commission stated that, in connection with a determination that substituted compliance is appropriate, it would expect to enter into an appropriate memorandum of understanding (‘‘MOU’’) or similar arrangement34 with the relevant foreign regulator(s). Although existing arrangements would indicate a foreign regulator’s ability to cooperate and share information, ‘‘going forward, the Commission and relevant foreign supervisor(s) would need to establish supervisory MOUs or other arrangements that provide for information sharing and cooperation in the context of supervising [SDs] and MSPs.’’35 The Commission is in the process of developing its registration and supervision regime for provisionallyregistered SDs and MSPs. This new initiative includes setting forth supervisory arrangements with authorities that have joint jurisdiction over SDs and MSPs that are registered with the Commission and subject to U.S. law. Given the developing nature of the Commission’s regime and the fact that the Commission has not negotiated prior supervisory arrangements with certain authorities, the negotiation of supervisory arrangements presents a unique opportunity to develop close working relationships between and among authorities, as well as highlight 32 See 78 FR 45348–50. The Commission notes that registrants and other market participants are responsible for determining whether substituted compliance is available pursuant to the Guidance based on the comparability determination contained herein (including any conditions or exceptions), and its particular status and circumstances. 33 This notice does not address § 23.608 (Restrictions on counterparty clearing relationships). The Commission declines to take up the request for a comparability determination with respect to this regulation due to the Commission’s view that there are not laws or regulations applicable in Japan to compare with the prohibitions and requirements of § 23.608. The Commission may provide a comparability determination with respect to this regulation at a later date in consequence of further developments in the law and regulations applicable in Japan. This notice also does not address capital adequacy because the Commission has not yet finalized rules for SDs and MSPs in this area, nor SDR Reporting. The Commission may provide a comparability determination with respect to these requirements at a later date or in a separate notice. 34 An MOU is one type of arrangement between or among regulators. Supervisory arrangements could include, as appropriate, cooperative arrangements that are memorialized and executed as addenda to existing MOUs or, for example, as independent bilateral arrangements, statements of intent, declarations, or letters. 35 78 FR 45344. VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 any potential issues related to cooperation and information sharing. Accordingly, the Commission is negotiating such a supervisory arrangement with each applicable foreign regulator of an SD or MSP. The Commission expects that the arrangement will establish expectations for ongoing cooperation, address direct access to information,36 provide for notification upon the occurrence of specified events, memorialize understandings related to on-site visits,37 and include protections related to the use and confidentiality of nonpublic information shared pursuant to the arrangement. These arrangements will establish a roadmap for how authorities will consult, cooperate, and share information. As with any such arrangement, however, nothing in these arrangements will supersede domestic laws or resolve potential conflicts of law, such as the application of domestic secrecy or blocking laws to regulated entities. VI. Comparability Determination and Analysis The following section describes the requirements imposed by specific sections of the CEA and the Commission’s regulations for the Internal Business Conduct Requirements that are the subject of this comparability determination, and the Commission’s regulatory objectives with respect to such requirements. Immediately following a description of the requirement(s) and regulatory objective(s) of the specific Internal Business Conduct Requirements that the 36 Section 4s(j)(3) and (4) of the CEA and Commission regulation 23.606 require a registered SD or MSP to make all records required to be maintained in accordance with Commission regulation 1.31 available promptly upon request to, among others, representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR 23.203. In the Guidance, the Commission states that it ‘‘reserves this right to access records held by registered [SDs] and MSPs, including those that are non-U.S. persons who may comply with the Dodd-Frank recordkeeping requirement through substituted compliance.’’ 78 FR 45345 n. 472; see also id. at 45342 n. 461 (affirming the Commission’s authority under the CEA and its regulations to access books and records held by registered SDs and MSPs as ‘‘a fundamental regulatory tool necessary to properly monitor and examine each registrant’s compliance with the CEA and the regulations adopted pursuant thereto’’). 37 The Commission retains its examination authority, both during the application process as well as upon and after registration of an SD or MSP. See 78 FR 45342 (stating Commission policy that ‘‘eligible entities may comply with a substituted compliance regime under certain circumstances, subject, however, to the Commission’s retention of its examination authority’’) and 45344 n. 471 (stating that the ‘‘Commission may, as it deems appropriate and necessary, conduct an on-site examination of the applicant’’). PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 applicants submitted for a comparability determination, the Commission provides a description of the foreign jurisdiction’s comparable laws, regulations, or rules and whether such laws, regulations, or rules meet the applicable regulatory objective. The Commission’s determinations in this regard and the discussion in this section are intended to inform the public of the Commission’s views regarding whether the foreign jurisdiction’s laws, regulations, or rules may be comparable and comprehensive as those requirements in the DoddFrank Act (and Commission regulations promulgated thereunder) and therefore, may form the basis of substituted compliance. In turn, the public (in the foreign jurisdiction, in the United States, and elsewhere) retains its ability to present facts and circumstances that would inform the determinations set forth in this notice. As was stated in the Guidance, the Commission recognizes the complex and dynamic nature of the global swap market and the need to take an adaptable approach to cross-border issues, particularly as it continues to work closely with foreign regulators to address potential conflicts with respect to each country’s respective regulatory regime. In this regard, the Commission may review, modify, or expand the determinations herein in light of comments received and future developments. A. Chief Compliance Officer (§ 3.3). Commission Requirement: Implementing section 4s(k) of the CEA, Commission regulation 3.3 generally sets forth the following requirements for SDs and MSPs: • An SD or MSP must designate an individual as Chief Compliance Officer (‘‘CCO’’); • The CCO must have the responsibility and authority to develop the regulatory compliance policies and procedures of the SD or MSP; • The CCO must report to the board of directors or the senior officer of the SD or MSP; • Only the board of directors or a senior officer may remove the CCO; • The CCO and the board of directors must meet at least once per year; • The CCO must have the background and skills appropriate for the responsibilities of the position; • The CCO must not be subject to disqualification from registration under sections 8a(2) or (3) of the CEA; • Each SD and MSP must include a designation of a CCO in its registration application; E:\FR\FM\27DEN1.SGM 27DEN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices • The CCO must administer the regulatory compliance policies of the SD or MSP; • The CCO must take reasonable steps to ensure compliance with the CEA and Commission regulations, and resolve conflicts of interest; • The CCO must establish procedures for detecting and remediating noncompliance issues; • The CCO must annually prepare and sign an ‘‘annual compliance report’’ containing: (i) A description of policies and procedures reasonably designed to ensure compliance; (ii) an assessment of the effectiveness of such policies and procedures; (iii) a description of material non-compliance issues and the action taken; (iv) recommendations of improvements in compliance policies; and (v) a certification by the CCO or chief executive officer that, to the best of such officer’s knowledge and belief, the annual report is accurate and complete under penalty of law; and • The annual compliance report must be furnished to the CFTC within 90 days after the end of the fiscal year of the SD or MSP, simultaneously with its annual financial condition report. Regulatory Objective: The Commission believes that compliance by SDs and MSPs with the CEA and the Commission’s rules greatly contributes to the protection of customers, orderly and fair markets, and the stability and integrity of the market intermediaries registered with the Commission. The Commission expects SDs and MSPs to strictly comply with the CEA and the Commission’s rules and to devote sufficient resources to ensuring such compliance. Thus, through its CCO rule, the Commission seeks to ensure firms have designated a qualified individual as CCO that reports directly to the board of directors or the senior officer of the firm and that has the independence, responsibility, and authority to develop and administer compliance policies and procedures reasonably designed to ensure compliance with the CEA and Commission regulations, resolve conflicts of interest, remediate noncompliance issues, and report annually to the Commission and the board or senior officer on compliance of the firm. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as section 4s(k) of the CEA and Commission regulation 3.3. The Banking Act, FIEA, Order for Enforcement, Cabinet Office Ordinance, VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 Supervisory Guidelines and Inspection Manuals for banks and FIBOs, collectively, require each bank and FIBO to: • Designate an individual to serve as a CCO in its registration application as a bank/FIBO; • Provide the CCO with the responsibility and authority to develop the regulatory compliance policies and procedures of the bank/FIBO; • Have the CCO report to the board of directors of the bank/FIBO; • Ensure the CCO has the background and skills appropriate for the position; • Ensure the CCO is not disqualified from registration; 38 • Have the CCO administer the regulatory compliance policies of the bank/FIBO; • Have the CCO take reasonable steps to ensure compliance and resolve conflicts of interest for the bank/FIBO; • Have the CCO detect and remediate non-compliance issues for the bank/ FIBO; • Report regulatory compliance status to the board of directors as necessary and appropriate on behalf of the bank/ FIBO; and • Submit an annual business report to JFSA which contains compliance facts, preventative and corrective actions taken, and other issues regarding the firm’s compliance framework. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 3.3 by seeking to ensure firms have designated a qualified individual as the compliance officer that reports directly to a sufficiently senior function of the firm and that has the independence, responsibility, and authority to develop and administer compliance policies and procedures reasonably designed to ensure compliance with the CEA and Commission regulations, resolve conflicts of interest, remediate noncompliance issues, and report annually on compliance of the firm. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the CCO requirements of the Japanese standards specified above are comparable to and as comprehensive as 38 See Article 29–4 of FIEA and Article 15–4 of the Order for Enforcement of FIEA, Article 33– 5(1)(iii) of FIEA; Article 33–3(1)(vii) of FIEA, Article 47(1)(i) of the FIB Ordinance, Article 33– 3(2)(iv) of FIEA, Article 47(1)(i)(ii) of the FIB Ordinance, and Article 4(2)(ii) of Banking Act. Pursuant to Article 33–5(1)(iii) of FIEA and its relevant provisions, RFIs are required to have a personnel structure sufficient to conduct RFI business in an appropriate manner. Accordingly, if the CCO is subject to disqualification, registration for the RFI would be refused. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 78915 § 3.3, with the exception of § 3.3(f) concerning certifying and furnishing an annual compliance report to the Commission. Notwithstanding that the Commission has not determined that the requirements of Japan’s laws and regulations are comparable to and as comprehensive as § 3.3(f), any SD or MSP to which both § 3.3 and the Japanese standards specified above are applicable would generally be deemed to be in compliance with § 3.3(f) if that SD or MSP complies with the Japanese standards specified above, subject to certifying and furnishing the Commission with the annual report required under the Japanese standards specified above in accordance with § 3.3(f). The Commission notes that it generally expects registrants to submit required reports to the Commission in the English language. B. Risk Management Duties (§§ 23.600— 23.609) Section 4s(j) of the CEA requires each SD and MSP to establish internal policies and procedures designed to, among other things, address risk management, monitor compliance with position limits, prevent conflicts of interest, and promote diligent supervision, as well as maintain business continuity and disaster recovery programs.39 The Commission adopted regulations 23.600, 23.601, 23.602, 23.603, 23.605, and 23.606 to implement the statute.40 The Commission also adopted regulation 23.609, which requires certain risk management procedures for SDs or MSPs that are clearing members of a derivatives clearing organization (‘‘DCO’’).41 Collectively, these requirements help to establish a robust and comprehensive internal risk management program for SDs and MSPs with respect to their swaps activities,42 39 7 U.S.C. § 6s(j). Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 20128 (April 3, 2012) (relating to risk management program, monitoring of position limits, business continuity and disaster recovery, conflicts of interest policies and procedures, and general information availability, respectively). 41 See Customer Documentation Rule, 77 FR 21278. Also, SDs must comply with Commission regulation 23.608, which prohibits SDs providing clearing services to customers from entering into agreements that would: (i) Disclose the identity of a customer’s original executing counterparty; (ii) limit the number of counterparties a customer may trade with; (iii) impose counterparty-based position limits; (iv) impair a customer’s access to execution of a trade on terms that have a reasonable relationship to the best terms available; or (v) prevent compliance with specified time frames for acceptance of trades into clearing. 42 ‘‘Swaps activities’’ is defined in Commission regulation 23.600(a)(7) to mean, ‘‘with respect to a 40 See E:\FR\FM\27DEN1.SGM Continued 27DEN1 78916 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices which is critical to effective systemic risk management for the overall swaps market. In making its comparability determination with regard to these risk management duties, the Commission will consider each regulation individually.43 1. Risk Management Program for SDs and MSPs (§ 23.600) tkelley on DSK3SPTVN1PROD with NOTICES Commission Requirement: Implementing section 4s(j)(2) of the CEA, Commission regulation 23.600 generally requires that: • Each SD or MSP must establish and enforce a risk management program consisting of a system of written risk management policies and procedures designed to monitor and manage the risks associated with the swap activities of the firm, including without limitation, market, credit, liquidity, foreign currency, legal, operational, and settlement risks, and furnish a copy of such policies and procedures to the CFTC upon application for registration and upon request; • The SD or MSP must establish a risk management unit independent from the business trading unit; • The risk management policies and procedures of the SD or MSP must be approved by the firm’s governing body; • Risk tolerance limits and exceptions therefrom must be reviewed and approved quarterly by senior management and annually by the governing body; • The risk management program must have a system for detecting breaches of risk tolerance limits and alerting supervisors and senior management, as appropriate; • The risk management program must account for risks posed by affiliates and be integrated at the consolidated entity level; • The risk management unit must provide senior management and the governing body with quarterly risk exposure reports and upon detection of registrant, such registrant’s activities related to swaps and any product used to hedge such swaps, including, but not limited to, futures, options, other swaps or security-based swaps, debt or equity securities, foreign currency, physical commodities, and other derivatives.’’ The Commission’s regulations under 17 CFR Part 23 are limited in scope to the swaps activities of SDs and MSPs. 43 As stated above, this notice does not address § 23.608 (Restrictions on counterparty clearing relationships). The Commission declines to take up the request for a comparability determination with respect to this regulation due to the Commission’s view that there are not laws or regulations applicable in Japan to compare with the prohibitions and requirements of § 23.608. The Commission may provide a comparability determination with respect to this regulation at a later date in consequence of further developments in the law and regulations applicable in Japan. VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 any material change in the risk exposure of the SD or MSP; • Risk exposure reports must be furnished to the CFTC within five business days following provision to senior management; • The risk management program must have a new product policy for assessing the risks of new products prior to engaging in such transactions; • The risk management program must have policies and procedures providing for trading limits, monitoring of trading, processing of trades, and separation of personnel in the trading unit from personnel in the risk management unit; and • The risk management program must be reviewed and tested at least annually and upon any material change in the business of the SD or MSP. Regulatory Objective: Through the required system of risk management, the Commission seeks to ensure that firms are adequately managing the risks of their swaps activities to prevent failure of the SD or MSP, which could result in losses to counterparties doing business with the SD or MSP, and systemic risk more generally. To this end, the Commission believes the risk management program of an SD or MSP must contain at least the following critical elements: • Identification of risk categories; • Establishment of risk tolerance limits for each category of risk and approval of such limits by senior management and the governing body; • An independent risk management unit to administer a risk management program; and • Periodic oversight of risk exposures by senior management and the governing body. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as section 4s(j)(2) of the CEA and Commission regulation 23.600. III–2–3–1–3(1) and III–3–7–1–2(1)(ii) of the Supervisory Guidelines and Inspection Manuals for banks and III– 1(1)(ii) of the Supervisory Guideline for FIBOs generally require the board of directors of a bank/FIBO to establish a comprehensive risk management program aligned with the bank’s/FIBO’s strategic target. The risk management program required by the Supervisory Guidelines and Inspectional Manuals must be designed to monitor and manage risk, including without limitation, market (including foreign PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 currency), credit, liquidity, legal, operational, and settlement risks.44 The review of a bank’s/FIBO’s overall risk management program must take into account how frequently the risk management division reports to the board of directors and whether reports are also filed on an as-needed basis. Pursuant to Article 19 of the Banking Act and Article 46–3 of the FIEA, a bank/FIBO must submit to the JFSA a business report referring to the risk management of derivative transactions annually within three months after the end of year period. In addition, pursuant to Article 24 of the Banking Act and Article 56–2 of the FIEA, JFSA requires a bank/FIBO to report to JFSA on a quarterly basis the data of derivative transactions such as the volume and profit and loss amounts within fifty days after the end of every quarter period. Pursuant to the above Supervisory Guidelines and Inspection Manuals, a bank/FIBO must arrange for the approval of new products in a manner befitting the scale and nature of its business. III–1(1)(iv) of the Supervisory Guidelines for FIBOs and III–2–3–1– 3(5)(6) of the Supervisory Guidelines for banks require JSFA to evaluate whether a bank’s/FIBO’s risk management program established a sufficient internal audit system. As part of this oversight, a bank/FIBO must receive an external audit by corporate auditors at least once a year. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 23.600 by requiring a system of risk management that seeks to ensure that firms are adequately managing the risks of their swaps activities to prevent failure of the SD or MSP, which could result in losses to counterparties doing business with the SD or MSP, and systemic risk more generally. Specifically, the Commission finds that the Japanese standards specified above comprehensively require SDs and MSPs to establish risk management programs containing the following critical elements: • Identification of risk categories; • Establishment of risk tolerance limits for each category of risk and approval of such limits by senior management and the governing body; 44 See, e.g. Supervisory Guideline: Checklist for Comprehensive Risk Management, Checklist for Business Management, Checklist for Legal Compliance, Checklist for Market Risk Management, Checklist for Credit Risk Management, Checklist for Liquidity Risk Management, and Checklist for Operational Risk Management. E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices tkelley on DSK3SPTVN1PROD with NOTICES • An independent risk management unit to administer a risk management program; and • Periodic oversight of risk exposures by senior management and the governing body. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the risk management program requirements of Japan’s laws and regulations, as specified above, are comparable to and as comprehensive as § 23.600, with the exception of § 23.600(c)(2) concerning the requirement that each SD and MSP produce a quarterly risk exposure report and provide such report to its senior management, governing body, and the Commission. Notwithstanding that the Commission has not determined that the requirements of Japan’s laws and regulations are comparable to and as comprehensive as § 23.600(c)(2), any SD or MSP to which both § 23.600 and the Japanese standards specified above are applicable would generally be deemed to be in compliance with § 23.600(c)(2) if that SD or MSP complies with the Japanese standards specified above, subject to compliance with the requirement that it produce quarterly risk exposure reports and provide such reports to its senior management, governing body, and the Commission in accordance with § 23.600(c)(2). The Commission notes that it generally expects reports furnished to the Commission by registrants to be in the English language. 2. Monitoring of Position Limits (§ 23.601) Commission Requirement: Implementing section 4s(j)(1) of the CEA, Commission regulation 23.601 requires each SD or MSP to establish and enforce written policies and procedures that are reasonably designed to monitor for, and prevent violations of, applicable position limits established by the Commission, a designated contract market (‘‘DCM’’), or a swap execution facility (‘‘SEF’’).45 The policies and procedures must include an early warning system and provide for escalation of violations to senior management (including the firm’s governing body). Regulatory Objective: Generally, position limits are implemented to ensure market integrity, fairness, 45 The setting of position limits by the Commission, a DCM, or a SEF is subject to requirements under the CEA and Commission regulations other than § 23.601. The setting of position limits and compliance with such limits is not subject to the Commission’s substituted compliance regime. VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 orderliness, and accurate pricing in the commodity markets. Commission regulation 23.601 thus seeks to ensure that SDs and MSPs have established the necessary policies and procedures to monitor the trading of the firm to prevent violations of applicable position limits established by the Commission, a DCM, or a SEF. As part of its Risk Management Program, § 23.601 is intended to ensure that established position limits are not breached by the SD or MSP. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as section 4s(j)(1) of the CEA and Commission regulation 23.601. IV–2–3 of the Supervisory Guidelines for FIBOs and III–2–3–3–2(2)(vii) and (viii) of the Supervisory Guideline for banks of the Inspection Manuals generally require a bank/FIBO to establish internal position limits, risk limits, and loss limits for all financial products, including derivatives. The policies established by the bank/FIBO must provide a system to provide ‘‘alarm points’’ to the board of directors. Moreover, in accordance with Article 29–2 of the Business Rules of Japan Securities Clearing Corporation (‘‘JSCC’’) with respect to listed products, JSCC can take an appropriate action against clearing participants (RFIs or FIBOs) if JSCC finds their position is excessive compared with their net assets. Therefore, clearing participants have to monitor their positions in relation to their net assets. CCP’s Business Rules, which are subject to JFSA’s approval, are legally binding requirements. The applicants represent that the position limits set internally by banks and FIBOs may not exceed position limits set by applicable law, including position limits set by the Commission, SEFs, or DCMs.46 Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 23.601 by requiring SDs and MSPs to establish necessary policies and procedures to monitor the trading of the firm to prevent violations of applicable position limits established by applicable laws and regulations, including those of the Commission, a DCM, or a SEF. 46 See III–3–10 of the Supervisory Guideline for banks and IV–5–2(i) of the Supervisory Guideline for FIBOs for rules regarding management of overseas business by banks and FIBOs. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 78917 Specifically, the Commission finds that the Japanese standards specified above, while not specific to the issue of position limit compliance, nevertheless comprehensively require SDs and MSPs to monitor for regulatory compliance generally, which includes monitoring for compliance with position limits set pursuant to applicable law and the responsibility of senior management (including the board of directors) for such compliance. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the compliance monitoring requirements of the Japanese standards, as specified above, are comparable to and as comprehensive as § 23.601. For the avoidance of doubt, the Commission notes that this determination may not be relied on to relieve an SD or MSP from its obligation to strictly comply with any applicable position limit established by the Commission, a DCM, or a SEF. 3. Diligent Supervision (§ 23.602) Commission Requirement: Commission regulation 23.602 implements section 4s(h)(1)(B) of the CEA and requires each SD and MSP to establish a system to diligently supervise all activities relating to its business performed by its partners, members, officers, employees, and agents. The system must be reasonably designed to achieve compliance with the CEA and CFTC regulations. Commission regulation 23.602 requires that the supervisory system must specifically designate qualified persons with authority to carry out the supervisory responsibilities of the SD or MSP for all activities relating to its business as an SD or MSP. Regulatory Objective: The Commission’s diligent supervision rule seeks to ensure that SDs and MSPs strictly comply with the CEA and the Commission’s rules. To this end, through § 23.602, the Commission seeks to ensure that each SD and MSP not only establishes the necessary policies and procedures that would lead to compliance with the CEA and Commission regulations, but also establishes an effective system of internal oversight and enforcement of such policies and procedures to ensure that such policies and procedures are diligently followed. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as E:\FR\FM\27DEN1.SGM 27DEN1 78918 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices section 4s(h)(1)(B) of the CEA and Commission regulation 23.602. III–1–2–1–(2)(xi) and III–1–2–1– (2)(xiii) of the Supervisory Guideline for banks, the Checklist for Business Management (Governance) of the Bank Inspection Manual, III–1(1)(ii)C and IV– 1–2–(1)(i) of the Supervisory Guideline for FIBOs, and II–1–1–3(3) and II–2–1 of the FIBO Inspection Manual generally require a bank/FIBO to ensure appropriate officers and employees are in place in order to properly conduct business, and to establish legal compliance and internal control systems. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 23.602 because such standards seek to ensure that SDs and MSPs strictly comply with applicable law, which would include the CEA and the Commission’s regulations.47 Through the Supervisory Guidelines and Inspection Manuals, Japan’s laws and regulations seek to ensure that each SD and MSP not only establishes the necessary policies and procedures that would lead to compliance with applicable law, which would include the CEA and Commission regulations, but also establishes an effective system of internal oversight and enforcement of such policies and procedures to ensure that such policies and procedures are diligently followed. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the internal supervision requirements set forth in the Japanese standards, as specified above, are comparable to and as comprehensive as § 23.602. tkelley on DSK3SPTVN1PROD with NOTICES 4. Business Continuity and Disaster Recovery (§ 23.603) Commission Requirement: To ensure the proper functioning of the swaps markets and the prevention of systemic risk more generally, Commission regulation 23.603 requires each SD and MSP, as part of its risk management program, to establish a business continuity and disaster recovery plan that includes procedures for, and the maintenance of, back-up facilities, systems, infrastructure, personnel, and other resources to achieve the timely recovery of data and documentation and to resume operations generally within the next business day after the disruption. 47 See III–3–10 of the Supervisory Guideline for banks and IV–5–2(i) of the Supervisory Guideline for FIBOs for rules regarding management of overseas business by banks and FIBOs. VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 Regulatory Objective: Commission regulation 23.603 is intended to ensure that any market disruption affecting SDs and MSPs, whether caused by natural disaster or otherwise, is minimized in length and severity. To that end, this requirement seeks to ensure that entities adequately plan for disruptions and devote sufficient resources capable of carrying out an appropriate plan within one business day, if necessary. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as Commission regulation 23.603. IV–3–1–6 of the Supervisory Guideline for FIBOs and sections III–6– 1 and III–6–2(2)(i)(iii)–(v) of the Supervisory Guideline for banks require a bank/FIBO to establish a crisis management manual and a business continuity and disaster recovery plan that include procedures for, and the maintenance of, back-up facilities, systems, infrastructure, personnel, and other resources to achieve the timely recovery of data and documentation and to resume operations. Pursuant to III–8–2–(2)–(v) of the Supervisory Guideline for banks, JFSA requires banks to resume operation within the day of the event, especially for important settlement functions. Pursuant to IV–3–1–6(2) of the Supervisory Guideline for FIBOs, JFSA checks whether a FIBO’s business continuity plan ensures quick recovery from damage caused by acts of terrorism, large-scale disasters, etc., as well as continuance of the minimum necessary business operations and services for the maintenance of the functions of the financial system. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 23.603 because such standards seek to ensure that any market disruption affecting SDs and MSPs, whether caused by natural disaster or otherwise, is minimized in length and severity. To that end, the Commission finds that the Japanese standards specified above seek to ensure that entities adequately plan for disruptions and devote sufficient resources capable of carrying out an appropriate plan in a timely manner. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the business continuity and disaster recovery requirements of the Japanese standards, as specified above, are PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 comparable to and as comprehensive as § 23.603. 5. Conflicts of Interest (§ 23.605) Commission Requirement: Section 4s(j)(5) of the CEA and Commission regulation 23.605(c) generally require each SD or MSP to establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity or swap are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision. In addition, section 4s(j)(5) of the CEA and Commission regulation 23.605(d)(1) generally prohibits an SD or MSP from directly or indirectly interfering with or attempting to influence the decision of any clearing unit of any affiliated clearing member of a derivatives clearing organization (DCO) to provide clearing services and activities to a particular customer, including: • Whether to offer clearing services to a particular customer; • Whether to accept a particular customer for clearing derivatives; • Whether to submit a customer’s transaction to a particular DCO; • Whether to set or adjust risk tolerance levels for a particular customer; or • Whether to set a customer’s fees based on criteria other than those generally available and applicable to other customers. Commission regulation 23.605(d)(2) generally requires each SD or MSP to create and maintain an appropriate informational partition between business trading units of the SD or MSP and clearing units of any affiliated clearing member of a DCO to reasonably ensure compliance with the Act and the prohibitions set forth in § 23.605(d)(1) outlined above. The Commission observes that § 23.605(d) works in tandem with Commission regulation 1.71, which requires FCMs that are clearing members of a DCO and affiliated with an SD or MSP to create and maintain an appropriate informational partition between business trading units of the SD or MSP and clearing units of the FCM to reasonably ensure compliance with the Act and the prohibitions set forth in § 1.71(d)(1), which are the same as the prohibitions set forth in § 23.605(d)(1) outlined above. Finally, § 23.605(e) requires that each SD or MSP have policies and procedures that mandate the disclosure E:\FR\FM\27DEN1.SGM 27DEN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices to counterparties of material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a swap execution facility or designated contract market (DCM) or to clear a derivative through a DCO. Regulatory Objective: Commission regulation 23.605(c) seeks to ensure that research provided to the general public by an SD or MSP is unbiased and free from the influence of the interests of an SD or MSP arising from the SD’s or MSP’s trading business. In addition, the § 23.605(d) (working in tandem with § 1.71) seeks to ensure open access to the clearing of swaps by requiring that access to and the provision of clearing services provided by an affiliate of an SD or MSP are not influenced by the interests of an SD’s or MSP’s trading business. Finally, § 23.605(e) seeks to ensure equal access to trading venues and clearinghouses, as well as orderly and fair markets, by requiring that each SD and MSP disclose to counterparties any material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM, or to clear a derivative through a DCO. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as Commission regulation 23.605. Regulations Concerning the Handling of Analysts Reports have been developed by the JSDA to require JSDA members to appropriately manage the content of any unpublished analyst report that is considered to have a material impact on investors (to include the presentation of any conflicts) and to establish an appropriate compensation system to ensure the independence of the opinions of analysts. More generally, FIEA and the Financial Instruments Business Ordinance require a FIBO/RFI to conduct business ‘‘in good faith and fairly to customers.’’ Specifically, I.2.(3)(iv) of the Checklist for Legal Compliance of the Bank Inspection Manual and II–1–2–1(4)(iii) of the FIBO Inspection Manual require each bank/ FIBO to establish firewalls and take other measures to block the flow of information when necessary. Article 70– 3(1)(ii)(d) of the Financial Instruments Business Ordinance and IV–1–3(3)(i)C of the Supervisory Guidelines for FIBOs require a FIBO/RFI to develop a control environment wherein it can choose or combine appropriate method(s), for example, notifying the customer of a VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 conflict risk to establish a system for protection of customers. The JFSA has informed the Commission that, in the process of its oversight and enforcement of the foregoing Japanese standards for FIBOs and RFIs, any SD or MSP would be subject to such standards and required to resolve or mitigate conflicts of interests in the provision of clearing services by a clearing member of a DCO that is an affiliate of the SD or MSP, or the decision of a counterparty to execute a derivative on a SEF or DCM, or clear a derivative through a DCO, through appropriate information firewalls and disclosures. Commission Determination: The Commission finds that the Japanese standards specified above with respect to conflicts of interest that may arise in producing or distributing research are generally identical in intent to § 23.605(c) because such standards seek to ensure that research provided to the general public by an SD is unbiased and free from the influence of the interests of an SD arising from the SD’s trading business. With respect to conflicts of interest that may arise in the provision of clearing services by an affiliate of an SD or MSP, the Commission further finds that although the general conflicts of interest prevention requirements under the Japanese standards specified above do not require with specificity that access to and the provision of clearing services provided by an affiliate of an SD or MSP not be improperly influenced by the interests of an SD’s or MSP’s trading business, such general requirements would require prevention and remediation of such improper influence when recognized or discovered. Thus such standards would ensure open access to clearing. Finally, although not as specific as the requirements of § 23.605(e) (Undue influence on counterparties), the Commission finds that the general disclosure requirements of the Japanese standards specified above would ensure equal access to trading venues and clearinghouses by requiring that each SD and MSP disclose to counterparties any material incentives or conflicts of interest regarding the decision of a counterparty to execute a derivative on a SEF or DCM, or to clear a derivative through a DCO. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the requirements found in Japan’s laws and regulations specified above in relation to conflicts of interest are comparable to and as comprehensive as § 23.605. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 78919 6. Availability of Information for Disclosure and Inspection (§ 23.606) Commission Requirement: Commission regulation 23.606 implements sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to disclose to the Commission, and an SD’s or MSP’s U.S. prudential regulator (if any) comprehensive information about its swap activities, and to establish and maintain reliable internal data capture, processing, storage, and other operational systems sufficient to capture, process, record, store, and produce all information necessary to satisfy its duties under the CEA and Commission regulations. Such systems must be designed to provide such information to the Commission and an SD’s or MSP’s U.S. prudential regulator within the time frames set forth in the CEA and Commission regulations and upon request. Regulatory Objective: Commission regulation 23.606 seeks to ensure that each SD and MSP captures and maintains comprehensive information about their swap activities, and is able to retrieve and disclose such information to the Commission and its U.S. prudential regulator, if any, as necessary for compliance with the CEA and the Commission’s regulations and for purposes of Commission oversight, as well as oversight by the SD’s or MSP’s U.S. prudential regulator, if any. The Commission observes that it would be impossible to meet the regulatory objective of § 23.606 unless the required information is available to the Commission and any U.S. prudential regulator under the foreign legal regime. Thus, a comparability determination with respect to the information access provisions of § 23.606 would be premised on whether the relevant information would be available to the Commission and any U.S. prudential regulator of the SD or MSP, not on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as Commission regulation 23.606. Under the JFSA annual supervisory policies for banks and FIBOs for program year 2013, a bank/FIBO is required to enhance their management information systems through various initiatives such as implementing BCBS ’’Principles for effective risk data E:\FR\FM\27DEN1.SGM 27DEN1 tkelley on DSK3SPTVN1PROD with NOTICES 78920 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices aggregation and risk reporting,’’ which enable banks/FIBOs to meet the information requests of relevant regulators. III–3–3(6) of Supervisory Guideline for FIBOs states that each FIBO must maintain electronic media storage systems that can accommodate internal audits and be responsive to client referrals and questions. Moreover, III.1.(6) of the Checklist for Market Risk Management of the Bank Inspection Manual requires that records be readily available for reconciliation with trade tickets, etc. III–3–10–2(3) (iv) of Supervisory Guideline for banks specifically requires banks to have the personnel and systems to respond in a timely and appropriate manner to inspections and supervision provided by overseas regulatory authorities. In view of maintaining direct dialog and smooth communications with the relevant overseas regulatory authorities, this provision ensures the establishment of a reporting system which enables timely and appropriate reporting. Similarly, IV–5–2(i) of Supervisory Guideline for FIBOs would ensure the availability of information to a regulator promptly upon request. Under this provision, the JFSA assesses whether a parent company of a FIBO ensures group-wide compliance with the relevant laws, regulations and rules of each country in which it does business by establishing an appropriate control environment for legal compliance in accordance with the size of its overseas bases and the characteristics of its business operations. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 23.606 because such standards seek to ensure that each SD and MSP captures and stores comprehensive information about their swap activities, and are able to retrieve and disclose such information as necessary for compliance with applicable law and for purposes of regulatory oversight. In addition, the Commission finds that the Japanese standards specified above would ensure Commission access to the required books and records of SDs and MSPs by requiring personnel and systems necessary to respond in a timely and appropriate manner to inspections and supervision provided by overseas regulatory authorities. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the requirements of the Japanese standards with respect to the availability of information for inspection and VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 disclosure, as specified above, are comparable to, and as comprehensive as, § 23.606. 7. Clearing Member Risk Management (§ 23.609) Commission Requirement: Commission regulation 23.609 generally requires each SD or MSP that is a clearing member of a DCO to: • Establish risk-based limits based on position size, order size, margin requirements, or similar factors; • Screen orders for compliance with the risk-based limits; • Monitor for adherence to the riskbased limits intra-day and overnight; • Conduct stress tests under extreme but plausible conditions of all positions at least once per week; • Evaluate its ability to meet initial margin requirements at least once per week; • Evaluate its ability to meet variation margin requirements in cash at least once per week; • Evaluate its ability to liquidate positions it clears in an orderly manner, and estimate the cost of liquidation; and • Test all lines of credit at least once per year. Regulatory Objective: Through Commission regulation § 23.609, the Commission seeks to ensure the financial integrity of the markets and the clearing system, to avoid systemic risk, and to protect customer funds. Effective risk management by SDs and MSPs that are clearing members is essential to achieving these objectives. A failure of risk management can cause a clearing member to become insolvent and default to a DCO. Such default can disrupt the markets and the clearing system and harm customers. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as Commission regulation 23.609. III–2–3–2–1–2 (9) and (10)(i) of the Supervisory Guideline for banks and III.(8) and (9)(i) of the Checklist for Credit Risk Management of the Inspection Manual for banks generally require a bank to properly manage the credit risks of major counterparties to derivatives transactions, as well as the risks associated with the clearing of derivatives transactions with a central counterparty. More specifically, the Supervisory Guidelines for banks require a bank to properly manage the risks associated with cleared derivative transactions with central counterparties (‘‘CCPs’’), including the inherent risk of PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 transactions with a CCP, the risk associated with material defects of regulations or supervisory schemes to which a CCP is subject, and the risk of loss of the bank’s contribution to the default fund of a CCP. IV–2–4 of the Supervisory Guideline for FIBOs and I–2-(4) of the Inspection Manual for FIBOs require FIBOs to properly manage counterparty risk. Counterparty risk is the risk of incurring losses due to a failure by a counterparty to fulfill its contractual obligations. The JFSA evaluates a FIBO on whether it properly manages counterparty risk by developing a comprehensive control environment for risk management, properly recognizing and evaluating the risks, conducting internal screening when a new product or a new business is introduced and establishing a system of checks and balances based on the clear allocation of roles and responsibilities. The JFSA strives to identify and keep track of the status of a FIBO’s counterparty risk and its risk management through monthly offsite monitoring reports and hearings based thereon and, when necessary, requiring FIBOs to submit a report based on Article 56–2(1) of the FIEA and urge it to make improvement efforts. The foregoing requirements apply to bank and FIBO risk management as clearing members. In addition, if FIBOs/RFIs are clearing members of the JSCC, in accordance with the business rules of the JSCC, they are required to develop an appropriate structure for management of the risk of loss. Finally, the JFSA has represented to the Commission that, in the process of its oversight and enforcement of the foregoing Japanese standards for banks, FIBOs, and RFIs, any SD or MSP subject to such standards that is a clearing member of a DCO would be required to comply with clearing member risk management requirements comparable to Commission regulation 23.609. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to § 23.609 because such standards seek to ensure the financial integrity of the markets and the clearing system, to avoid systemic risk, and to protect customer funds. The Commission notes that the Japanese standards specified above are not as specific as § 23.609 with respect to ensuring that SDs and MSPs that are clearing members of a DCO establish detailed procedures and limits for clearing member risk management purposes. Nevertheless, the Commission finds that the general requirements E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices under the Japanese standards, implemented in the context of clearing member risk management and pursuant to the representations of the JFSA, meet the Commission’s regulatory objective specified above. Based on the foregoing and the representations above, the Commission hereby determines that the clearing member risk management requirements of the Japanese standards specified above are comparable to and as comprehensive as § 23.609. tkelley on DSK3SPTVN1PROD with NOTICES C. Swap Data Recordkeeping (§§ 23.201 and 23.203) Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the CEA, and Commission regulation 23.201 generally require SDs and MSPs to retain records of each transaction, each position held, general business records (including records related to complaints and sales and marketing materials), records related to governance, financial records, records of data reported to SDRs, and records of real-time reporting data along with a record of the date and time the SD or MSP made such reports. Transaction records must be kept in a form and manner identifiable and searchable by transaction and counterparty. Commission regulation 23.203, requires SDs and MSPs to maintain records of a swap transaction until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of five years after such date. Records must be ‘‘readily accessible’’ for the first 2 years of the 5 year retention period (consistent with § 1.31). The Commission notes that the comparability determination below with respect to §§ 23.201 and 23.203 encompasses both swap data recordkeeping generally and swap data recordkeeping relating to complaints and marketing and sales materials in accordance with § 23.201(b)(3) and (4).48 Regulatory Objective: Through the Commission’s regulations requiring SDs and MSPs to keep comprehensive records of their swap transactions and related data, the Commission seeks to ensure the effectiveness of the internal controls of SDs and MSPs, and transparency in the swaps market for regulators and market participants. The Commission’s regulations require SDs and MSPs to keep swap data in a level of detail sufficient to enable regulatory authorities to understand an 48 See the Guidance for a discussion of the availability of substituted compliance with respect to swap data recordkeeping, 78 FR 45332–33. VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 SD’s or MSP’s swaps business and to assess its swaps exposure. By requiring comprehensive records of swap data, the Commission seeks to ensure that SDs and MSPs employ effective risk management, and strictly comply with Commission regulations. Further, such records facilitate effective regulatory oversight. The Commission observes that it would be impossible to meet the regulatory objective of §§ 23.201 and 23.203 unless the required information is available to the Commission and any U.S. prudential regulator under the foreign legal regime. Thus, a comparability determination with respect to the information access provisions of § 23.203 would be premised on whether the relevant information would be available to the Commission and any U.S. prudential regulator of the SD or MSP, not on whether an SD or MSP must disclose comprehensive information to its regulator in its home jurisdiction. Comparable Japanese Law and Regulations: The applicants have represented to the Commission that the following provisions of law and regulations applicable in Japan are in full force and effect in Japan, and comparable to and as comprehensive as sections 4s(f)(1)(B) and 4s(g)(1) of the CEA and §§ 23.201 and 23.203. A FIBO/RFI is required by provisions set forth in the FIEA, the OTC Derivatives Ordinance, and the Financial Instruments Business Ordinance to retain all records related to swaps transactions. Articles 371, 381, 394, 396, and 436 of the Company Act require governance records including minutes of board of directors and audit reports of auditors to be retained for ten years. Also, Article 432, 435, and 444 of the Company Act require financial records including financial statements, business reports, and annexed detailed statements to be retained for five years. Articles 12–3 and 52–71 of the Banking Act and Articles 37–7 and 156– 48 of the FIEA further require each bank/FIBO to prepare and maintain records as part of its ‘‘complaint processing procedures.’’ Specific details regarding the storage of records detailing customer complaints are set forth in III–3–5–2–2(5)(ii) of the Supervisory Guideline for banks, II– 2.1(3–4) and III–2.1(4) of the Checklist for Customer Protection Management of the Bank Inspection Manual, III–2–5 of the Supervisory Guideline for FIBOs, and II–1–2–1(7) of the FIBO Inspection Manual. Article 37 of the FIEA and Article 72 of the Financial Instruments Business PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 78921 Ordinance require maintenance of records regarding marketing and sales materials. III–3–3(6) of Supervisory Guideline for FIBOs states that each FIBO must maintain electronic media storage systems that can accommodate internal audits and be responsive to client referrals and questions. Moreover, III.1.(6) of the Checklist for Market Risk Management of the Bank Inspection Manual requires the records be readily available for reconciliation with trade tickets, etc. FIEA and the Financial Instruments Business Ordinance generally require records to be kept for a minimum of five years, but certain records must be maintained from seven to ten years. III– 1(vi) of the Checklist for Market Risk Management of the Bank Inspection Manual assesses whether voice recordings are maintained for all traders on a 24-hour basis and retained ‘‘under the control of an organization segregated from the market and back-office divisions.’’ III–3–10–2(3) (iv) of Supervisory Guideline for banks specifically requires banks to have the personnel and systems to respond in a timely and appropriate manner to inspections and supervision provided by overseas regulatory authorities. In view of maintaining direct dialog and smooth communications with the relevant overseas regulatory authorities, this provision ensures the establishment of a reporting system which enables timely and appropriate reporting. Similarly, IV–5–2(i) of Supervisory Guideline for FIBOs would ensure the availability of information to a regulator promptly upon request. Under this provision, the JFSA assesses whether a parent company of a FIBO ensures group-wide compliance with the relevant laws, regulations and rules of each country in which it does business by establishing an appropriate control environment for legal compliance in accordance with the size of its overseas bases and the characteristics of its business operations. Commission Determination: The Commission finds that the Japanese standards specified above are generally identical in intent to §§ 23.201 and 23.203 because such standards seek to ensure the effectiveness of the internal controls of SDs and MSPs, and transparency in the swaps market for regulators and market participants. In addition, the Commission finds that the Japanese standards specified above require SDs and MSPs to keep swap data in a level of detail sufficient to enable regulatory authorities to understand an SD’s or MSP’s swaps E:\FR\FM\27DEN1.SGM 27DEN1 78922 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices business and to assess its swaps exposure. Further, the Commission finds that the Japanese standards specified above, by requiring comprehensive records of swap data, seek to ensure that SDs and MSPs employ effective risk management, seek to ensure that SDs and MSPs strictly comply with applicable regulatory requirements (including the CEA and Commission regulations), and that such records facilitate effective regulatory oversight. Finally, the Commission finds that the Japanese standards specified above would ensure Commission access to the required books and records of SDs and MSPs by requiring personnel and systems necessary to respond in a timely and appropriate manner to inspections and supervision provided by overseas regulatory authorities. Based on the foregoing and the representations of the applicants, the Commission hereby determines that the Japanese requirements with respect to swap data recordkeeping, as specified above, are comparable to, and as comprehensive as, §§ 23.201 and 23.203. Issued in Washington, DC on December 20, 2013, by the Commission. Melissa D. Jurgens, Secretary of the Commission. Appendices to Comparability Determination for Japan: Certain Entity-Level Requirements Appendix 1—Commission Voting Summary On this matter, Chairman Gensler and Commissioners Chilton and Wetjen voted in the affirmative. Commissioner O’Malia voted in the negative. tkelley on DSK3SPTVN1PROD with NOTICES Appendix 2—Statement of Chairman Gary Gensler and Commissioners Chilton and Wetjen We support the Commission’s approval of broad comparability determinations that will be used for substituted compliance purposes. For each of the six jurisdictions that has registered swap dealers, we carefully reviewed each regulatory provision of the foreign jurisdictions submitted to us and compared the provision’s intended outcome to the Commission’s own regulatory objectives. The resulting comparability determinations for entity-level requirements permit non-U.S. swap dealers to comply with regulations in their home jurisdiction as a substitute for compliance with the relevant Commission regulations. These determinations reflect the Commission’s commitment to coordinating our efforts to bring transparency to the swaps market and reduce its risks to the public. The comparability findings for the entity-level requirements are a testament to the comparability of these regulatory systems as VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 we work together in building a strong international regulatory framework. In addition, we are pleased that the Commission was able to find comparability with respect to swap-specific transactionlevel requirements in the European Union and Japan. The Commission attained this benchmark by working cooperatively with authorities in Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland to reach mutual agreement. The Commission looks forward to continuing to collaborate with both foreign authorities and market participants to build on this progress in the months and years ahead. Appendix 3—Dissenting Statement of Commissioner Scott D. O’Malia I respectfully dissent from the Commodity Futures Trading Commission’s (‘‘Commission’’) approval of the Notices of Comparability Determinations for Certain Requirements under the laws of Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland (collectively, ‘‘Notices’’). While I support the narrow comparability determinations that the Commission has made, moving forward, the Commission must collaborate with foreign regulators to harmonize our respective regimes consistent with the G–20 reforms. However, I cannot support the Notices because they: (1) Are based on the legally unsound cross-border guidance (‘‘Guidance’’); 1 (2) are the result of a flawed substituted compliance process; and (3) fail to provide a clear path moving forward. If the Commission’s objective for substituted compliance is to develop a narrow rule-byrule approach that leaves unanswered major regulatory gaps between our regulatory framework and foreign jurisdictions, then I believe that the Commission has successfully achieved its goal today. Determinations Based on Legally Unsound Guidance As I previously stated in my dissent, the Guidance fails to articulate a valid statutory foundation for its overbroad scope and inconsistently applies the statute to different activities.2 Section 2(i) of the Commodity Exchange Act (‘‘CEA’’) states that the Commission does not have jurisdiction over foreign activities unless ‘‘those activities have a direct and significant connection with activities in, or effect on, commerce of the United States * * *’’ 3 However, the Commission never properly articulated how and when this limiting standard on the Commission’s extraterritorial reach is met, which would trigger the application of Title VII of the Dodd-Frank Act 4 and any Commission regulations promulgated thereunder to swap activities that are outside 1 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26, 2013). 2 http://www.cftc.gov/PressRoom/ SpeechesTestimony/omaliastatement071213b. 3 CEA section 2(j); 7 U.S.C. 2(j). 4 Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 of the United States. Given this statutorily unsound interpretation of the Commission’s extraterritorial authority, the Commission often applies CEA section 2(i) inconsistently and arbitrarily to foreign activities. Accordingly, because the Commission is relying on the legally deficient Guidance to make its substituted compliance determinations, and for the reasons discussed below, I cannot support the Notices. The Commission should have collaborated with foreign regulators to agree on and implement a workable regime of substituted compliance, and then should have made determinations pursuant to that regime. Flawed Substituted Compliance Process Substituted compliance should not be a case of picking a set of foreign rules identical to our rules, determining them to be ‘‘comparable,’’ but then making no determination regarding rules that require extensive gap analysis to assess to what extent each jurisdiction is, or is not, comparable based on overall outcomes of the regulatory regimes. While I support the narrow comparability determinations that the Commission has made, I am concerned that in a rush to provide some relief, the Commission has made substituted compliance determinations that only afford narrow relief and fail to address major regulatory gaps between our domestic regulatory framework and foreign jurisdictions. I will address a few examples below. First, earlier this year, the OTC Derivatives Regulators Group (‘‘ODRG’’) agreed to a number of substantive understandings to improve the cross-border implementation of over-the-counter derivatives reforms.5 The ODRG specifically agreed that a flexible, outcomes-based approach, based on a broad category-by-category basis, should form the basis of comparability determinations.6 However, instead of following this approach, the Commission has made its comparability determinations on a rule-byrule basis. For example, in Japan’s Comparability Determination for Transaction-Level Requirements, the Commission has made a positive comparability determination for some of the detailed requirements under the swap trading relationship documentation provisions, but not for other requirements.7 This detailed approach clearly contravenes the ODRG’s understanding. Second, in several areas, the Commission has declined to consider a request for a comparability determination, and has also failed to provide an analysis regarding the extent to which the other jurisdiction is, or 5 http://www.cftc.gov/PressRoom/PressReleases/ pr6678–13. 6 http://www.cftc.gov/ucm/groups/public/@ newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings. Understanding number 2 states that ‘‘[a] flexible, outcomes-based approach should form the basis of final assessments regarding equivalence or substituted compliance.’’ 7 The Commission made a positive comparability determination for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3), (b)(4), (c), and (d), but not for Commission regulations 23.504(b)(5) and (b)(6). E:\FR\FM\27DEN1.SGM 27DEN1 Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices is not, comparable. For example, the Commission has declined to address or provide any clarity regarding the European Union’s regulatory data reporting determination, even though the European Union’s reporting regime is set to begin on February 12, 2014. Although the Commission has provided some limited relief with respect to regulatory data reporting, the lack of clarity creates unnecessary uncertainty, especially when the European Union’s reporting regime is set to begin in less than two months. Similarly, Japan receives no consideration for its mandatory clearing requirement, even though the Commission considers Japan’s legal framework to be comparable to the U.S. framework. While the Commission has declined to provide even a partial comparability determination, at least in this instance the Commission has provided a reason: the differences in the scope of entities and products subject to the clearing requirement.8 Such treatment creates uncertainty and is contrary to increased global harmonization efforts. Third, in the Commission’s rush to meet the artificial deadline of December 21, 2013, as established in the Exemptive Order Regarding Compliance with Certain Swap Regulations (‘‘Exemptive Order’’),9 the Commission failed to complete an important piece of the cross-border regime, namely, supervisory memoranda of understanding (‘‘MOUs’’) between the Commission and fellow regulators. I have previously stated that these MOUs, if done right, can be a key part of the global harmonization effort because they provide mutually agreed-upon solutions for differences in regulatory regimes.10 Accordingly, I stated that the Commission should be able to review MOUs alongside the respective comparability determinations and vote on them at the same time. Without these MOUs, our fellow regulators are left wondering whether and how any differences, such as direct access to books and records, will be resolved. Finally, as I have consistently maintained, the substituted compliance process should allow other regulatory bodies to engage with the full Commission.11 While I am pleased that the Notices are being voted on by the Commission, the full Commission only gained access to the comment letters from foreign regulators on the Commission’s comparability determination draft proposals a few days ago. This is hardly a transparent process. tkelley on DSK3SPTVN1PROD with NOTICES Unclear Path Forward Looking forward to next steps, the Commission must provide answers to several outstanding questions regarding these comparability determinations. In doing so, 8 Yen-denominated interest rate swaps are subject to the mandatory clearing requirement in both the U.S. and Japan. 9 Exemptive Order Regarding Compliance With Certain Swap Regulations, 78 FR 43785 (Jul. 22, 2013). 10 http://www.cftc.gov/PressRoom/ SpeechesTestimony/opaomalia-29. 11 http://www.cftc.gov/PressRoom/ SpeechesTestimony/omaliastatement071213b. VerDate Mar<15>2010 23:48 Dec 26, 2013 Jkt 232001 the Commission must collaborate with foreign regulators to increase global harmonization. First, there is uncertainty surrounding the timing and outcome of the MOUs. Critical questions regarding information sharing, cooperation, supervision, and enforcement will remain unanswered until the Commission and our fellow regulators execute these MOUs. Second, the Commission has issued timelimited no-action relief for the swap data repository reporting requirements. These comparability determinations will be done as separate notices. However, the timing and process for these determinations remain uncertain. Third, the Commission has failed to provide clarity on the process for addressing the comparability determinations that it declined to undertake at this time. The Notices only state that the Commission may address these requests in a separate notice at a later date given further developments in the law and regulations of other jurisdictions. To promote certainty in the financial markets, the Commission must provide a clear path forward for market participants and foreign regulators. The following steps would be a better approach: (1) The Commission should extend the Exemptive Order to allow foreign regulators to further implement their regulatory regimes and coordinate with them to implement a harmonized substituted compliance process; (2) the Commission should implement a flexible, outcomes-based approach to the substituted compliance process and apply it similarly to all jurisdictions; and (3) the Commission should work closely with our fellow regulators to expeditiously implement MOUs that resolve regulatory differences and address regulatory oversight issues. Conclusion While I support the narrow comparability determinations that the Commission has made, it was my hope that the Commission would work with foreign regulators to implement a substituted compliance process that would increase the global harmonization effort. I am disappointed that the Commission has failed to implement such a process. I do believe that in the longer term, the swaps regulations of the major jurisdictions will converge. At this time, however, the Commission’s comparability determinations have done little to alleviate the burden of regulatory uncertainty and duplicative compliance with both U.S. and foreign regulations. The G–20 process delineated and put in place the swaps market reforms in G–20 member nations. It is then no surprise that the Commission must learn to coordinate with foreign regulators to minimize confusion and disruption in bringing much needed clarity to the swaps market. For all these shortcomings, I respectfully dissent from the Commission’s approval of the Notices. [FR Doc. 2013–30976 Filed 12–26–13; 8:45 am] BILLING CODE 6351–01–P PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 78923 COMMODITY FUTURES TRADING COMMISSION Comparability Determination for the European Union: Certain Entity-Level Requirements Commodity Futures Trading Commission. ACTION: Notice of Comparability Determination for Certain Requirements under the European Market Infrastructure Regulation. AGENCY: The following is the analysis and determination of the Commodity Futures Trading Commission (‘‘Commission’’) regarding certain parts of a joint request by the European Commission (‘‘EC’’) and the European Securities and Markets Authority (‘‘ESMA’’) that the Commission determine that laws and regulations applicable in the European Union (‘‘EU’’) provide a sufficient basis for an affirmative finding of comparability with respect to the following regulatory obligations applicable to swap dealers (‘‘SDs’’) and major swap participants (‘‘MSPs’’) registered with the Commission: (i) Chief compliance officer; (ii) risk management; and (iii) swap data recordkeeping; (collectively, the ‘‘Internal Business Conduct Requirements’’). SUMMARY: Effective Date: This determination will become effective immediately upon publication in the Federal Register. FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202–418–5977, gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202–418–5949, ffisanich@ cftc.gov, and Ellie Jester, Special Counsel, 202–418–5874, ajester@ cftc.gov, Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: DATES: I. Introduction On July 26, 2013, the Commission published in the Federal Register its ‘‘Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations’’ (the ‘‘Guidance’’).1 In the Guidance, the 1 78 FR 45292 (July 26, 2013). The Commission originally published proposed and further proposed guidance on July 12, 2012 and January 7, 2013, respectively. See Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) and Further Proposed Guidance Regarding Compliance with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013). E:\FR\FM\27DEN1.SGM 27DEN1

Agencies

[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78910-78923]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30976]


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COMMODITY FUTURES TRADING COMMISSION


Comparability Determination for Japan: Certain Entity-Level 
Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of comparability determination for certain requirements 
under the laws of Japan.

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SUMMARY: The following is the analysis and determination of the 
Commodity Futures Trading Commission (``Commission'') regarding certain 
parts of a joint request by the Bank of Tokyo-Mitsubishi UFJ, Ltd 
(``BTMU''), Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan 
Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd. that 
the Commission determine that laws and regulations applicable in Japan 
provide a sufficient basis for an affirmative finding of comparability 
with respect to the following regulatory obligations applicable to swap 
dealers (``SDs'') and major swap participants (``MSPs'') registered 
with the Commission: (i) Chief compliance officer; (ii) risk 
management; and (iii) swap data recordkeeping (collectively, the 
``Internal Business Conduct Requirements'').

DATES: Effective Date: This determination will become effective 
immediately upon publication in the Federal Register.

[[Page 78911]]


FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202 418-5977, 
gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202-418-5949, 
ffisanich@cftc.gov, and Jason Shafer, Special Counsel, 202-418-5097, 
jshafer@cftc.gov, Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    On July 26, 2013, the Commission published in the Federal Register 
its ``Interpretive Guidance and Policy Statement Regarding Compliance 
with Certain Swap Regulations'' (the ``Guidance'').\1\ In the Guidance, 
the Commission set forth its interpretation of the manner in which it 
believes that section 2(i) of the Commodity Exchange Act (``CEA'') 
applies Title VII's swap provisions to activities outside the U.S. and 
informed the public of some of the policies that it expects to follow, 
generally speaking, in applying Title VII and certain Commission 
regulations in contexts covered by section 2(i). Among other matters, 
the Guidance generally described the policy and procedural framework 
under which the Commission would consider a substituted compliance 
program with respect to Commission regulations applicable to entities 
located outside the U.S. Specifically, the Commission addressed a 
recognition program where compliance with a comparable regulatory 
requirement of a foreign jurisdiction would serve as a reasonable 
substitute for compliance with the attendant requirements of the CEA 
and the Commission's regulations promulgated thereunder.
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    \1\ 78 FR 45292 (July 26, 2013). The Commission originally 
published proposed and further proposed guidance on July 12, 2012 
and January 7, 2013, respectively. See Cross-Border Application of 
Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 
(July 12, 2012) and Further Proposed Guidance Regarding Compliance 
with Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013).
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    In addition to the Guidance, on July 22, 2013, the Commission 
issued the Exemptive Order Regarding Compliance with Certain Swap 
Regulations (the ``Exemptive Order'').\2\ Among other things, the 
Exemptive Order provided time for the Commission to consider 
substituted compliance with respect to six jurisdictions where non-U.S. 
SDs are currently organized. In this regard, the Exemptive Order 
generally provided non-U.S. SDs and MSPs in the six jurisdictions with 
conditional relief from certain requirements of Commission regulations 
(those referred to as ``Entity-Level Requirements'' in the Guidance) 
until the earlier of December 21, 2013, or 30 days following the 
issuance of a substituted compliance determination.\3\
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    \2\ 78 FR 43785 (July 22, 2013).
    \3\ The Entity-Level Requirements under the Exemptive Order 
consist of 17 CFR 1.31, 3.3, 23.201, 23.203, 23.600, 23.601, 23.602, 
23.603, 23.605, 23.606, 23.608, 23.609, and parts 45 and 46 of the 
Commission's regulations.
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    On June 24, 2013, BTMU submitted a request that the Commission 
determine that laws and regulations applicable in Japan provide a 
sufficient basis for an affirmative finding of comparability with 
respect to certain Entity-Level Requirements, including the Internal 
Business Conduct Requirements.\4\ BTMU provided Commission staff with a 
supplement on October 8, 2013. On October 29, 2013, the application was 
further supplemented with corrections and additional materials. On 
November 12, 2013, Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan 
Securities Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd. 
requested that they be permitted to rely upon BTMU's submission as the 
basis for their request for a substituted compliance determination 
(BTMU, Goldman Sachs Japan Co., Ltd., Merrill Lynch Japan Securities 
Co., Ltd., and Morgan Stanley MUFG Securities Co., Ltd., are referred 
to herein as, collectively, the ``applicants''). The following is the 
Commission's analysis and determination regarding the Internal Business 
Conduct Requirements, as detailed below.\5\
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    \4\ For purposes of this notice, the Internal Business Conduct 
Requirements consist of 17 CFR 3.3, 23.201, 23.203, 23.600, 23.601, 
23.602, 23.603, 23.605, and 23.606. The applicants subsequently 
submitted a separate application for the applicable Transaction-
Level Requirements on September 20, 2013. This notice addresses only 
the Entity-Level Requirements.
    \5\ This notice does not address swap data repository reporting 
(``SDR Reporting''). The Commission may provide a comparability 
determination with respect to the SDR Reporting requirement in a 
separate notice.
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II. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act\6\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework 
for swaps.
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    \6\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    Section 722(d) of the Dodd-Frank Act amended the CEA by adding 
section 2(i), which provides that the swap provisions of the CEA 
(including any CEA rules or regulations) apply to cross-border 
activities when certain conditions are met, namely, when such 
activities have a ``direct and significant connection with activities 
in, or effect on, commerce of the United States'' or when they 
contravene Commission rules or regulations as are necessary or 
appropriate to prevent evasion of the swap provisions of the CEA 
enacted under Title VII of the Dodd-Frank Act.\7\ In the three years 
since its enactment, the Commission has finalized 68 rules and orders 
to implement Title VII of the Dodd-Frank Act. The finalized rules 
include those promulgated under section 4s of the CEA, which address 
registration of SDs and MSPs and other substantive requirements 
applicable to SDs and MSPs. With few exceptions, the delayed compliance 
dates for the Commission's regulations implementing such section 4s 
requirements applicable to SDs and MSPs have passed and new SDs and 
MSPs are now required to be in full compliance with such regulations 
upon registration with the Commission.\8\ Notably, the requirements 
under Title VII of the Dodd-Frank Act related to SDs and MSPs by their 
terms apply to all registered SDs and MSPs, irrespective of where they 
are located, albeit subject to the limitations of CEA section 2(i).
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    \7\ 7 U.S.C. 2(i).
    \8\ The compliance dates are summarized on the Compliance Dates 
page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.)
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    To provide guidance as to the Commission's views regarding the 
scope of the cross-border application of Title VII of the Dodd-Frank 
Act, the Commission set forth in the Guidance its interpretation of the 
manner in which it believes that Title VII's swap provisions apply to 
activities outside the U.S. pursuant to section 2(i) of the CEA. Among 
other matters, the Guidance generally described the policy and 
procedural framework under which the Commission would consider a 
substituted compliance program with respect to Commission regulations 
applicable to entities located outside the U.S. Specifically, the 
Commission addressed a recognition program where compliance with a 
comparable regulatory requirement of a foreign jurisdiction would serve 
as a reasonable substitute for compliance with the attendant 
requirements of the CEA and the Commission's regulations. With respect 
to the standards forming the basis for any determination of 
comparability (``comparability determination'' or ``comparability 
finding''), the Commission stated:

    In evaluating whether a particular category of foreign 
regulatory requirement(s) is comparable and comprehensive to the

[[Page 78912]]

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. In 
this context, comparable does not necessarily mean identical. 
Rather, the Commission would evaluate whether the home 
jurisdiction's regulatory requirement is comparable to and as 
comprehensive as the corresponding U.S. regulatory 
requirement(s).\9\
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    \9\ 78 FR 45342-45.

    Upon a comparability finding, consistent with CEA section 2(i) and 
comity principles, the Commission's policy generally is that eligible 
entities may comply with a substituted compliance regime, subject to 
any conditions the Commission places on its finding, and subject to the 
Commission's retention of its examination authority and its enforcement 
authority.\10\
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    \10\ See the Guidance, 78 FR 45342-44.
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    In this regard, the Commission notes that a comparability 
determination cannot be premised on whether an SD or MSP must disclose 
comprehensive information to its regulator in its home jurisdiction, 
but rather on whether information relevant to the Commission's 
oversight of an SD or MSP would be directly available to the Commission 
and any U.S. prudential regulator of the SD or MSP.\11\ The 
Commission's direct access to the books and records required to be 
maintained by an SD or MSP registered with the Commission is a core 
requirement of the CEA\12\ and the Commission's regulations,\13\ and is 
a condition to registration.\14\
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    \11\ Under Sec. Sec.  23.203 and 23.606, all records required by 
the CEA and the Commission's regulations to be maintained by a 
registered SD or MSP shall be maintained in accordance with 
Commission regulation 1.31 and shall be open for inspection by 
representatives of the Commission, the United States Department of 
Justice, or any applicable U.S. prudential regulator.
    In its Final Exemptive Order Regarding Compliance with Certain 
Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted 
that an applicant for registration as an SD or MSP must file a Form 
7-R with the National Futures Association and that Form 7-R was 
being modified at that time to address existing blocking, privacy, 
or secrecy laws of foreign jurisdictions that applied to the books 
and records of SDs and MSPs acting in those jurisdictions. See id. 
at 871-72 n. 107. The modifications to Form 7-R were a temporary 
measure intended to allow SDs and MSPs to apply for registration in 
a timely manner in recognition of the existence of the blocking, 
privacy, and secrecy laws. In the Guidance, the Commission clarified 
that the change to Form 7-R impacts the registration application 
only and does not modify the Commission's authority under the CEA 
and its regulations to access records held by registered SDs and 
MSPs. Commission access to a registrant's books and records is a 
fundamental regulatory tool necessary to properly monitor and 
examine each registrant's compliance with the CEA and the 
regulations adopted pursuant thereto. The Commission has maintained 
an ongoing dialogue on a bilateral and multilateral basis with 
foreign regulators and with registrants to address books and records 
access issues and may consider appropriate measures where requested 
to do so.
    \12\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the 
CEA.
    \13\ See e.g., Sec. Sec.  23.203(b) and 23.606.
    \14\ See supra note 10.
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III. Regulation of SDs and MSPs in Japan

    As represented to the Commission by the applicants, swap activities 
in Japan may be governed by the Banking Act of Japan, No. 59 of 1981 
(``Banking Act''), covering banks and bank holding companies, and the 
Financial Instruments and Exchange Act, No. 25 of 1948 (``FIEA''), 
covering, among others, Financial Instrument Business Operators 
(``FIBOs'') and Registered Financial Institutions (``RFIs''). The 
Japanese Prime Minister delegated broad authority to implement these 
laws to the Japanese Financial Services Agency (``JFSA''). Pursuant to 
this authority, the JFSA has promulgated the Order for Enforcement,\15\ 
Cabinet Office Ordinance, \16\ Supervisory Guidelines\17\ and 
Inspection Manuals.\18\ The Securities and Exchange Surveillance 
Commission (``SESC'') is within the JFS and has promulgated, among 
other things, the Inspection Manual for FIBOs.
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    \15\ Order for Enforcement of the Banking Act and Order for 
Enforcement of the Financial Instruments and Exchange Act.
    \16\ Cabinet Office Ordinance on Financial Instruments Business 
(``FIB Ordinance'') and Cabinet Office Ordinance on Regulation of 
OTC Derivatives Transaction.
    \17\ Comprehensive Guideline for Supervision of Major Banks, 
etc.(``Supervisory Guideline for banks'') and Comprehensive 
Guideline for Supervision of Financial Instruments Business 
Operators, etc.(``Supervisory Guideline for FIBOs'').
    \18\ Inspection Manual for Deposit Taking Institutions 
(``Inspection Manual for banks''), consisting of the Checklist for 
Business Management (Governance), Checklist for Legal Compliance, 
Checklist for Customer Protection Management, Checklist for Credit 
Risk Management, Checklist for Market Risk Management, Checklist for 
Liquidity Risk Management, Checklist for Operational Risk 
Management, etc.
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    These requirements supplement the requirements of the Banking Act 
and FIEA with a more proscriptive direction as to the particular 
structural features or responsibilities that internal compliance 
functions must maintain.
    In general, banks are subject to the Banking Act, relevant laws and 
regulations for banks, Supervisory Guidelines for banks, and Inspection 
Manual for banks, while FIBOs are subject to the FIEA, relevant laws 
and regulations for FIBOs, Supervisory Guidelines for FIBOs, and 
Inspection Manual for FIBOs.
    Pursuant to Article 29 of the FIEA, any person that engages in 
trade activities that constitute ``Financial Instruments Business''--
which, among other things, includes over-the-counter transactions in 
derivatives (``OTC derivatives'') or intermediary, brokerage (excluding 
brokerage for clearing of securities) or agency services therefor\19\--
must register under the FIEA as a FIBO. Banks that conduct specified 
activities in the course of trade, including OTC derivatives must 
register under the FIEA as RFIs pursuant to Article 33-2 of the FIEA. 
Banks registered as RFIs are required to comply with relevant laws and 
regulations for FIBOs regarding specified activities. Failure to comply 
with any relevant laws and regulations, Supervisory Guidelines or 
Inspection Manuals would subject the applicant to potential sanctions 
or corrective measures.
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    \19\ See Article 2(8)(iv) of the FIEA.
---------------------------------------------------------------------------

    The applicants are each registered in Japan as RFIs or FIBOs under 
the supervision of the JFSA. In addition, each applicant is a member of 
several self-regulatory organizations, including the Japanese 
Securities Dealers Association (``JSDA''). The JSDA is a ``Financial 
Instruments Firms Association'' authorized under FIEA by the Prime 
Minister of Japan.\20\
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    \20\ Because the applicants' request and the Commissions 
determinations herein are based on the comparability of Japanese 
requirements applicable to banks, FIBOs, and RFIs, an SD or MSP that 
is not a bank, FIBO, or RFI, or is otherwise not subject to the 
requirements applicable to banks, FIBOs, and RFIs upon which the 
Commission bases its determinations, may not be able to rely on the 
Commission's comparability determinations herein.
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IV. Comparable and Comprehensiveness Standard

    The Commission's comparability analysis will be based on a 
comparison of specific foreign requirements against the specific 
related CEA provisions and Commission regulations as categorized and 
described in the Guidance. As explained in the Guidance, within the 
framework of CEA section 2(i) and principles of international comity, 
the Commission may make a comparability determination on a requirement-
by-requirement basis, rather than on the basis of the foreign regime as 
a whole.\21\ In making its comparability determinations, the Commission 
may include conditions that take into account timing and other issues 
related

[[Page 78913]]

to coordinating the implementation of reform efforts across 
jurisdictions.\22\
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    \21\ 78 FR 45343.
    \22\ 78 FR 45343.
---------------------------------------------------------------------------

    In evaluating whether a particular category of foreign regulatory 
requirement(s) is comparable and comprehensive to the corollary 
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, and
     The home jurisdiction's authority to support and enforce 
its oversight of the registrant.\23\
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    \23\ 78 FR 45343.
---------------------------------------------------------------------------

    In making a comparability determination, the Commission takes an 
``outcome-based'' approach. An ``outcome-based'' approach means that 
when evaluating whether a foreign jurisdiction's regulatory 
requirements are comparable to, and as comprehensive as, the corollary 
areas of the CEA and Commission regulations, the Commission ultimately 
focuses on regulatory outcomes (i.e., the home jurisdiction's 
requirements do not have to be identical).\24\ This 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.
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    \24\ 78 FR 45343. The Commission's substituted compliance 
program would generally be available for SDR Reporting, as outlined 
in the Guidance, only if the Commission has direct access to all of 
the data elements that are reported to a foreign trade repository 
pursuant to the substituted compliance program. Thus, direct access 
to swap data is a threshold matter to be addressed in a 
comparability evaluation for SDR Reporting. Moreover, the Commission 
explains in the Guidance that, due to its technical nature, a 
comparability evaluation for SDR Reporting ``will generally entail a 
detailed comparison and technical analysis.'' A more particularized 
analysis will generally be necessary to determine whether data 
stored in a foreign trade repository provides for effective 
Commission use, in furtherance of the regulatory purposes of the 
Dodd-Frank Act. See 78 FR 45345.
---------------------------------------------------------------------------

    In doing its comparability analysis the Commission may determine 
that no comparability determination can be made\25\ and that the non-
U.S. SD or non-U.S. MSP, U.S. bank that is an SD or MSP with respect to 
its foreign branches, or non-registrant, to the extent applicable under 
the Guidance, may be required to comply with the CEA and Commission 
regulations.
---------------------------------------------------------------------------

    \25\ A finding of comparability may not be possible for a number 
of reasons, including the fact that the foreign jurisdiction has not 
yet implemented or finalized particular requirements.
---------------------------------------------------------------------------

    The starting point in the Commission's analysis is a consideration 
of the regulatory objectives of the foreign jurisdiction's regulation 
of swaps and swap market participants. As stated in the Guidance, 
jurisdictions may not have swap specific regulations in some areas, and 
instead have regulatory or supervisory regimes that achieve comparable 
and comprehensive regulation to the Dodd-Frank Act requirements, but on 
a more general, entity-wide, or prudential, basis.\26\ In addition, 
portions of a foreign regulatory regime may have similar regulatory 
objectives, but the means by which these objectives are achieved with 
respect to swaps market activities may not be clearly defined, or may 
not expressly include specific regulatory elements that the Commission 
concludes are critical to achieving the regulatory objectives or 
outcomes required under the CEA and the Commission's regulations. In 
these circumstances, the Commission will work with the regulators and 
registrants in these jurisdictions to consider alternative approaches 
that may result in a determination that substituted compliance 
applies.\27\
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    \26\ 78 FR 45343.
    \27\ As explained in the Guidance, such ``approaches used will 
vary depending on the circumstances relevant to each jurisdiction. 
One example would include coordinating with the foreign regulators 
in developing appropriate regulatory changes or new regulations, 
particularly where changes or new regulations already are being 
considered or proposed by the foreign regulators or legislative 
bodies. As another example, the Commission may, after consultation 
with the appropriate regulators and market participants, include in 
its substituted compliance determination a description of the means 
by which certain swaps market participants can achieve substituted 
compliance within the construct of the foreign regulatory regime. 
The identification of the means by which substituted compliance is 
achieved would be designed to address the regulatory objectives and 
outcomes of the relevant Dodd-Frank Act requirements in a manner 
that does not conflict with a foreign regulatory regime and reduces 
the likelihood of inconsistent regulatory obligations. For example, 
the Commission may specify that [SDs] and MSPs in the jurisdiction 
undertake certain recordkeeping and documentation for swap 
activities that otherwise is only addressed by the foreign 
regulatory regime with respect to financial activities generally. In 
addition, the substituted compliance determination may include 
provisions for summary compliance and risk reporting to the 
Commission to allow the Commission to monitor whether the regulatory 
outcomes are being achieved. By using these approaches, in the 
interest of comity, the Commission would seek to achieve its 
regulatory objectives with respect to the Commission's registrants 
that are operating in foreign jurisdictions in a manner that works 
in harmony with the regulatory interests of those jurisdictions.'' 
78 FR 45343-44.
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    Finally, the Commission will generally rely on an applicant's 
description of the laws and regulations of the foreign jurisdiction in 
making its comparability determination. The Commission considers an 
application to be a representation by the applicant that the laws and 
regulations submitted are in full force and effect, 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 swaps activities\28\ of SDs and MSPs\29\ in the 
relevant jurisdictions.\30\ Further, as stated in the Guidance, the 
Commission expects that an applicant would notify the Commission of any 
material changes to information submitted in support of a comparability 
determination (including, but not limited to, changes in the relevant 
supervisory or regulatory regime) as, depending on the nature of the 
change, the Commission's comparability determination may no longer be 
valid.\31\
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    \28\ ``Swaps activities'' is defined in Commission regulation 
23.600(a)(7) to mean, ``with respect to a registrant, such 
registrant's activities related to swaps and any product used to 
hedge such swaps, including, but not limited to, futures, options, 
other swaps or security-based swaps, debt or equity securities, 
foreign currency, physical commodities, and other derivatives.'' The 
Commission's regulations under 17 CFR Part 23 are limited in scope 
to the swaps activities of SDs and MSPs.
    \29\ No SD or MSP that is not legally required to comply with a 
law or regulation determined to be comparable may voluntarily comply 
with such law or regulation in lieu of compliance with the CEA and 
the relevant Commission regulation. Each SD or MSP that seeks to 
rely on a comparability determination is responsible for determining 
whether it is subject to the laws and regulations found comparable. 
Currently, there are no MSPs organized outside the U.S. and the 
Commission therefore cautions any non-financial entity organized 
outside the U.S. and applying for registration as an MSP to 
carefully consider whether the laws and regulations determined to be 
comparable herein are applicable to such entity.
    \30\ The Commission has provided the relevant foreign 
regulator(s) with opportunities to review and correct the 
applicant's description of such laws and regulations on which the 
Commission will base its comparability determination. The Commission 
relies on the accuracy and completeness of such review and any 
corrections received in making its comparability determinations. A 
comparability determination based on an inaccurate description of 
foreign laws and regulations may not be valid.
    \31\ 78 FR 45345.
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    The Guidance provided a detailed discussion of the Commission's 
policy regarding the availability of substituted

[[Page 78914]]

compliance\32\ for the Internal Business Conduct Requirements.\33\
---------------------------------------------------------------------------

    \32\ See 78 FR 45348-50. The Commission notes that registrants 
and other market participants are responsible for determining 
whether substituted compliance is available pursuant to the Guidance 
based on the comparability determination contained herein (including 
any conditions or exceptions), and its particular status and 
circumstances.
    \33\ This notice does not address Sec.  23.608 (Restrictions on 
counterparty clearing relationships). The Commission declines to 
take up the request for a comparability determination with respect 
to this regulation due to the Commission's view that there are not 
laws or regulations applicable in Japan to compare with the 
prohibitions and requirements of Sec.  23.608. The Commission may 
provide a comparability determination with respect to this 
regulation at a later date in consequence of further developments in 
the law and regulations applicable in Japan.
    This notice also does not address capital adequacy because the 
Commission has not yet finalized rules for SDs and MSPs in this 
area, nor SDR Reporting. The Commission may provide a comparability 
determination with respect to these requirements at a later date or 
in a separate notice.
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V. Supervisory Arrangement

    In the Guidance, the Commission stated that, in connection with a 
determination that substituted compliance is appropriate, it would 
expect to enter into an appropriate memorandum of understanding 
(``MOU'') or similar arrangement\34\ with the relevant foreign 
regulator(s). Although existing arrangements would indicate a foreign 
regulator's ability to cooperate and share information, ``going 
forward, the Commission and relevant foreign supervisor(s) would need 
to establish supervisory MOUs or other arrangements that provide for 
information sharing and cooperation in the context of supervising [SDs] 
and MSPs.''\35\
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    \34\ An MOU is one type of arrangement between or among 
regulators. Supervisory arrangements could include, as appropriate, 
cooperative arrangements that are memorialized and executed as 
addenda to existing MOUs or, for example, as independent bilateral 
arrangements, statements of intent, declarations, or letters.
    \35\ 78 FR 45344.
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    The Commission is in the process of developing its registration and 
supervision regime for provisionally-registered SDs and MSPs. This new 
initiative includes setting forth supervisory arrangements with 
authorities that have joint jurisdiction over SDs and MSPs that are 
registered with the Commission and subject to U.S. law. Given the 
developing nature of the Commission's regime and the fact that the 
Commission has not negotiated prior supervisory arrangements with 
certain authorities, the negotiation of supervisory arrangements 
presents a unique opportunity to develop close working relationships 
between and among authorities, as well as highlight any potential 
issues related to cooperation and information sharing.
    Accordingly, the Commission is negotiating such a supervisory 
arrangement with each applicable foreign regulator of an SD or MSP. The 
Commission expects that the arrangement will establish expectations for 
ongoing cooperation, address direct access to information,\36\ provide 
for notification upon the occurrence of specified events, memorialize 
understandings related to on-site visits,\37\ and include protections 
related to the use and confidentiality of non-public information shared 
pursuant to the arrangement.
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    \36\ Section 4s(j)(3) and (4) of the CEA and Commission 
regulation 23.606 require a registered SD or MSP to make all records 
required to be maintained in accordance with Commission regulation 
1.31 available promptly upon request to, among others, 
representatives of the Commission. See also 7 U.S.C. 6s(f); 17 CFR 
23.203. In the Guidance, the Commission states that it ``reserves 
this right to access records held by registered [SDs] and MSPs, 
including those that are non-U.S. persons who may comply with the 
Dodd-Frank recordkeeping requirement through substituted 
compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461 
(affirming the Commission's authority under the CEA and its 
regulations to access books and records held by registered SDs and 
MSPs as ``a fundamental regulatory tool necessary to properly 
monitor and examine each registrant's compliance with the CEA and 
the regulations adopted pursuant thereto'').
    \37\ The Commission retains its examination authority, both 
during the application process as well as upon and after 
registration of an SD or MSP. See 78 FR 45342 (stating Commission 
policy that ``eligible entities may comply with a substituted 
compliance regime under certain circumstances, subject, however, to 
the Commission's retention of its examination authority'') and 45344 
n. 471 (stating that the ``Commission may, as it deems appropriate 
and necessary, conduct an on-site examination of the applicant'').
---------------------------------------------------------------------------

    These arrangements will establish a roadmap for how authorities 
will consult, cooperate, and share information. As with any such 
arrangement, however, nothing in these arrangements will supersede 
domestic laws or resolve potential conflicts of law, such as the 
application of domestic secrecy or blocking laws to regulated entities.

VI. Comparability Determination and Analysis

    The following section describes the requirements imposed by 
specific sections of the CEA and the Commission's regulations for the 
Internal Business Conduct Requirements that are the subject of this 
comparability determination, and the Commission's regulatory objectives 
with respect to such requirements. Immediately following a description 
of the requirement(s) and regulatory objective(s) of the specific 
Internal Business Conduct Requirements that the applicants submitted 
for a comparability determination, the Commission provides a 
description of the foreign jurisdiction's comparable laws, regulations, 
or rules and whether such laws, regulations, or rules meet the 
applicable regulatory objective.
    The Commission's determinations in this regard and the discussion 
in this section are intended to inform the public of the Commission's 
views regarding whether the foreign jurisdiction's laws, regulations, 
or rules may be comparable and comprehensive as those requirements in 
the Dodd-Frank Act (and Commission regulations promulgated thereunder) 
and therefore, may form the basis of substituted compliance. In turn, 
the public (in the foreign jurisdiction, in the United States, and 
elsewhere) retains its ability to present facts and circumstances that 
would inform the determinations set forth in this notice.
    As was stated in the Guidance, the Commission recognizes the 
complex and dynamic nature of the global swap market and the need to 
take an adaptable approach to cross-border issues, particularly as it 
continues to work closely with foreign regulators to address potential 
conflicts with respect to each country's respective regulatory regime. 
In this regard, the Commission may review, modify, or expand the 
determinations herein in light of comments received and future 
developments.

A. Chief Compliance Officer (Sec.  3.3).

    Commission Requirement: Implementing section 4s(k) of the CEA, 
Commission regulation 3.3 generally sets forth the following 
requirements for SDs and MSPs:
     An SD or MSP must designate an individual as Chief 
Compliance Officer (``CCO'');
     The CCO must have the responsibility and authority to 
develop the regulatory compliance policies and procedures of the SD or 
MSP;
     The CCO must report to the board of directors or the 
senior officer of the SD or MSP;
     Only the board of directors or a senior officer may remove 
the CCO;
     The CCO and the board of directors must meet at least once 
per year;
     The CCO must have the background and skills appropriate 
for the responsibilities of the position;
     The CCO must not be subject to disqualification from 
registration under sections 8a(2) or (3) of the CEA;
     Each SD and MSP must include a designation of a CCO in its 
registration application;

[[Page 78915]]

     The CCO must administer the regulatory compliance policies 
of the SD or MSP;
     The CCO must take reasonable steps to ensure compliance 
with the CEA and Commission regulations, and resolve conflicts of 
interest;
     The CCO must establish procedures for detecting and 
remediating non-compliance issues;
     The CCO must annually prepare and sign an ``annual 
compliance report'' containing: (i) A description of policies and 
procedures reasonably designed to ensure compliance; (ii) an assessment 
of the effectiveness of such policies and procedures; (iii) a 
description of material non-compliance issues and the action taken; 
(iv) recommendations of improvements in compliance policies; and (v) a 
certification by the CCO or chief executive officer that, to the best 
of such officer's knowledge and belief, the annual report is accurate 
and complete under penalty of law; and
     The annual compliance report must be furnished to the CFTC 
within 90 days after the end of the fiscal year of the SD or MSP, 
simultaneously with its annual financial condition report.
    Regulatory Objective: The Commission believes that compliance by 
SDs and MSPs with the CEA and the Commission's rules greatly 
contributes to the protection of customers, orderly and fair markets, 
and the stability and integrity of the market intermediaries registered 
with the Commission. The Commission expects SDs and MSPs to strictly 
comply with the CEA and the Commission's rules and to devote sufficient 
resources to ensuring such compliance. Thus, through its CCO rule, the 
Commission seeks to ensure firms have designated a qualified individual 
as CCO that reports directly to the board of directors or the senior 
officer of the firm and that has the independence, responsibility, and 
authority to develop and administer compliance policies and procedures 
reasonably designed to ensure compliance with the CEA and Commission 
regulations, resolve conflicts of interest, remediate noncompliance 
issues, and report annually to the Commission and the board or senior 
officer on compliance of the firm.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as section 4s(k) of the CEA and 
Commission regulation 3.3.
    The Banking Act, FIEA, Order for Enforcement, Cabinet Office 
Ordinance, Supervisory Guidelines and Inspection Manuals for banks and 
FIBOs, collectively, require each bank and FIBO to:
     Designate an individual to serve as a CCO in its 
registration application as a bank/FIBO;
     Provide the CCO with the responsibility and authority to 
develop the regulatory compliance policies and procedures of the bank/
FIBO;
     Have the CCO report to the board of directors of the bank/
FIBO;
     Ensure the CCO has the background and skills appropriate 
for the position;
     Ensure the CCO is not disqualified from registration; \38\
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    \38\ See Article 29-4 of FIEA and Article 15-4 of the Order for 
Enforcement of FIEA, Article 33-5(1)(iii) of FIEA; Article 33-
3(1)(vii) of FIEA, Article 47(1)(i) of the FIB Ordinance, Article 
33-3(2)(iv) of FIEA, Article 47(1)(i)(ii) of the FIB Ordinance, and 
Article 4(2)(ii) of Banking Act. Pursuant to Article 33-5(1)(iii) of 
FIEA and its relevant provisions, RFIs are required to have a 
personnel structure sufficient to conduct RFI business in an 
appropriate manner. Accordingly, if the CCO is subject to 
disqualification, registration for the RFI would be refused.
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     Have the CCO administer the regulatory compliance policies 
of the bank/FIBO;
     Have the CCO take reasonable steps to ensure compliance 
and resolve conflicts of interest for the bank/FIBO;
     Have the CCO detect and remediate non-compliance issues 
for the bank/FIBO;
     Report regulatory compliance status to the board of 
directors as necessary and appropriate on behalf of the bank/FIBO; and
     Submit an annual business report to JFSA which contains 
compliance facts, preventative and corrective actions taken, and other 
issues regarding the firm's compliance framework.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
3.3 by seeking to ensure firms have designated a qualified individual 
as the compliance officer that reports directly to a sufficiently 
senior function of the firm and that has the independence, 
responsibility, and authority to develop and administer compliance 
policies and procedures reasonably designed to ensure compliance with 
the CEA and Commission regulations, resolve conflicts of interest, 
remediate noncompliance issues, and report annually on compliance of 
the firm.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the CCO requirements of the 
Japanese standards specified above are comparable to and as 
comprehensive as Sec.  3.3, with the exception of Sec.  3.3(f) 
concerning certifying and furnishing an annual compliance report to the 
Commission.
    Notwithstanding that the Commission has not determined that the 
requirements of Japan's laws and regulations are comparable to and as 
comprehensive as Sec.  3.3(f), any SD or MSP to which both Sec.  3.3 
and the Japanese standards specified above are applicable would 
generally be deemed to be in compliance with Sec.  3.3(f) if that SD or 
MSP complies with the Japanese standards specified above, subject to 
certifying and furnishing the Commission with the annual report 
required under the Japanese standards specified above in accordance 
with Sec.  3.3(f). The Commission notes that it generally expects 
registrants to submit required reports to the Commission in the English 
language.

B. Risk Management Duties (Sec. Sec.  23.600--23.609)

    Section 4s(j) of the CEA requires each SD and MSP to establish 
internal policies and procedures designed to, among other things, 
address risk management, monitor compliance with position limits, 
prevent conflicts of interest, and promote diligent supervision, as 
well as maintain business continuity and disaster recovery 
programs.\39\ The Commission adopted regulations 23.600, 23.601, 
23.602, 23.603, 23.605, and 23.606 to implement the statute.\40\ The 
Commission also adopted regulation 23.609, which requires certain risk 
management procedures for SDs or MSPs that are clearing members of a 
derivatives clearing organization (``DCO'').\41\ Collectively, these 
requirements help to establish a robust and comprehensive internal risk 
management program for SDs and MSPs with respect to their swaps 
activities,\42\

[[Page 78916]]

which is critical to effective systemic risk management for the overall 
swaps market. In making its comparability determination with regard to 
these risk management duties, the Commission will consider each 
regulation individually.\43\
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    \39\ 7 U.S.C. Sec.  6s(j).
    \40\ See Final Swap Dealer and MSP Recordkeeping Rule, 77 FR 
20128 (April 3, 2012) (relating to risk management program, 
monitoring of position limits, business continuity and disaster 
recovery, conflicts of interest policies and procedures, and general 
information availability, respectively).
    \41\ See Customer Documentation Rule, 77 FR 21278. Also, SDs 
must comply with Commission regulation 23.608, which prohibits SDs 
providing clearing services to customers from entering into 
agreements that would: (i) Disclose the identity of a customer's 
original executing counterparty; (ii) limit the number of 
counterparties a customer may trade with; (iii) impose counterparty-
based position limits; (iv) impair a customer's access to execution 
of a trade on terms that have a reasonable relationship to the best 
terms available; or (v) prevent compliance with specified time 
frames for acceptance of trades into clearing.
    \42\ ``Swaps activities'' is defined in Commission regulation 
23.600(a)(7) to mean, ``with respect to a registrant, such 
registrant's activities related to swaps and any product used to 
hedge such swaps, including, but not limited to, futures, options, 
other swaps or security-based swaps, debt or equity securities, 
foreign currency, physical commodities, and other derivatives.'' The 
Commission's regulations under 17 CFR Part 23 are limited in scope 
to the swaps activities of SDs and MSPs.
    \43\ As stated above, this notice does not address Sec.  23.608 
(Restrictions on counterparty clearing relationships). The 
Commission declines to take up the request for a comparability 
determination with respect to this regulation due to the 
Commission's view that there are not laws or regulations applicable 
in Japan to compare with the prohibitions and requirements of Sec.  
23.608. The Commission may provide a comparability determination 
with respect to this regulation at a later date in consequence of 
further developments in the law and regulations applicable in Japan.
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1. Risk Management Program for SDs and MSPs (Sec.  23.600)
    Commission Requirement: Implementing section 4s(j)(2) of the CEA, 
Commission regulation 23.600 generally requires that:
     Each SD or MSP must establish and enforce a risk 
management program consisting of a system of written risk management 
policies and procedures designed to monitor and manage the risks 
associated with the swap activities of the firm, including without 
limitation, market, credit, liquidity, foreign currency, legal, 
operational, and settlement risks, and furnish a copy of such policies 
and procedures to the CFTC upon application for registration and upon 
request;
     The SD or MSP must establish a risk management unit 
independent from the business trading unit;
     The risk management policies and procedures of the SD or 
MSP must be approved by the firm's governing body;
     Risk tolerance limits and exceptions therefrom must be 
reviewed and approved quarterly by senior management and annually by 
the governing body;
     The risk management program must have a system for 
detecting breaches of risk tolerance limits and alerting supervisors 
and senior management, as appropriate;
     The risk management program must account for risks posed 
by affiliates and be integrated at the consolidated entity level;
     The risk management unit must provide senior management 
and the governing body with quarterly risk exposure reports and upon 
detection of any material change in the risk exposure of the SD or MSP;
     Risk exposure reports must be furnished to the CFTC within 
five business days following provision to senior management;
     The risk management program must have a new product policy 
for assessing the risks of new products prior to engaging in such 
transactions;
     The risk management program must have policies and 
procedures providing for trading limits, monitoring of trading, 
processing of trades, and separation of personnel in the trading unit 
from personnel in the risk management unit; and
     The risk management program must be reviewed and tested at 
least annually and upon any material change in the business of the SD 
or MSP.
    Regulatory Objective: Through the required system of risk 
management, the Commission seeks to ensure that firms are adequately 
managing the risks of their swaps activities to prevent failure of the 
SD or MSP, which could result in losses to counterparties doing 
business with the SD or MSP, and systemic risk more generally. To this 
end, the Commission believes the risk management program of an SD or 
MSP must contain at least the following critical elements:
     Identification of risk categories;
     Establishment of risk tolerance limits for each category 
of risk and approval of such limits by senior management and the 
governing body;
     An independent risk management unit to administer a risk 
management program; and
     Periodic oversight of risk exposures by senior management 
and the governing body.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as section 4s(j)(2) of the CEA 
and Commission regulation 23.600.
    III-2-3-1-3(1) and III-3-7-1-2(1)(ii) of the Supervisory Guidelines 
and Inspection Manuals for banks and III-1(1)(ii) of the Supervisory 
Guideline for FIBOs generally require the board of directors of a bank/
FIBO to establish a comprehensive risk management program aligned with 
the bank's/FIBO's strategic target. The risk management program 
required by the Supervisory Guidelines and Inspectional Manuals must be 
designed to monitor and manage risk, including without limitation, 
market (including foreign currency), credit, liquidity, legal, 
operational, and settlement risks.\44\
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    \44\ See, e.g. Supervisory Guideline: Checklist for 
Comprehensive Risk Management, Checklist for Business Management, 
Checklist for Legal Compliance, Checklist for Market Risk 
Management, Checklist for Credit Risk Management, Checklist for 
Liquidity Risk Management, and Checklist for Operational Risk 
Management.
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    The review of a bank's/FIBO's overall risk management program must 
take into account how frequently the risk management division reports 
to the board of directors and whether reports are also filed on an as-
needed basis. Pursuant to Article 19 of the Banking Act and Article 46-
3 of the FIEA, a bank/FIBO must submit to the JFSA a business report 
referring to the risk management of derivative transactions annually 
within three months after the end of year period. In addition, pursuant 
to Article 24 of the Banking Act and Article 56-2 of the FIEA, JFSA 
requires a bank/FIBO to report to JFSA on a quarterly basis the data of 
derivative transactions such as the volume and profit and loss amounts 
within fifty days after the end of every quarter period.
    Pursuant to the above Supervisory Guidelines and Inspection 
Manuals, a bank/FIBO must arrange for the approval of new products in a 
manner befitting the scale and nature of its business. III-1(1)(iv) of 
the Supervisory Guidelines for FIBOs and III-2-3-1-3(5)(6) of the 
Supervisory Guidelines for banks require JSFA to evaluate whether a 
bank's/FIBO's risk management program established a sufficient internal 
audit system. As part of this oversight, a bank/FIBO must receive an 
external audit by corporate auditors at least once a year.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
23.600 by requiring a system of risk management that seeks to ensure 
that firms are adequately managing the risks of their swaps activities 
to prevent failure of the SD or MSP, which could result in losses to 
counterparties doing business with the SD or MSP, and systemic risk 
more generally. Specifically, the Commission finds that the Japanese 
standards specified above comprehensively require SDs and MSPs to 
establish risk management programs containing the following critical 
elements:
     Identification of risk categories;
     Establishment of risk tolerance limits for each category 
of risk and approval of such limits by senior management and the 
governing body;

[[Page 78917]]

     An independent risk management unit to administer a risk 
management program; and
     Periodic oversight of risk exposures by senior management 
and the governing body.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the risk management program 
requirements of Japan's laws and regulations, as specified above, are 
comparable to and as comprehensive as Sec.  23.600, with the exception 
of Sec.  23.600(c)(2) concerning the requirement that each SD and MSP 
produce a quarterly risk exposure report and provide such report to its 
senior management, governing body, and the Commission.
    Notwithstanding that the Commission has not determined that the 
requirements of Japan's laws and regulations are comparable to and as 
comprehensive as Sec.  23.600(c)(2), any SD or MSP to which both Sec.  
23.600 and the Japanese standards specified above are applicable would 
generally be deemed to be in compliance with Sec.  23.600(c)(2) if that 
SD or MSP complies with the Japanese standards specified above, subject 
to compliance with the requirement that it produce quarterly risk 
exposure reports and provide such reports to its senior management, 
governing body, and the Commission in accordance with Sec.  
23.600(c)(2). The Commission notes that it generally expects reports 
furnished to the Commission by registrants to be in the English 
language.
2. Monitoring of Position Limits (Sec.  23.601)
    Commission Requirement: Implementing section 4s(j)(1) of the CEA, 
Commission regulation 23.601 requires each SD or MSP to establish and 
enforce written policies and procedures that are reasonably designed to 
monitor for, and prevent violations of, applicable position limits 
established by the Commission, a designated contract market (``DCM''), 
or a swap execution facility (``SEF'').\45\ The policies and procedures 
must include an early warning system and provide for escalation of 
violations to senior management (including the firm's governing body).
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    \45\ The setting of position limits by the Commission, a DCM, or 
a SEF is subject to requirements under the CEA and Commission 
regulations other than Sec.  23.601. The setting of position limits 
and compliance with such limits is not subject to the Commission's 
substituted compliance regime.
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    Regulatory Objective: Generally, position limits are implemented to 
ensure market integrity, fairness, orderliness, and accurate pricing in 
the commodity markets. Commission regulation 23.601 thus seeks to 
ensure that SDs and MSPs have established the necessary policies and 
procedures to monitor the trading of the firm to prevent violations of 
applicable position limits established by the Commission, a DCM, or a 
SEF. As part of its Risk Management Program, Sec.  23.601 is intended 
to ensure that established position limits are not breached by the SD 
or MSP.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as section 4s(j)(1) of the CEA 
and Commission regulation 23.601.
    IV-2-3 of the Supervisory Guidelines for FIBOs and III-2-3-3-
2(2)(vii) and (viii) of the Supervisory Guideline for banks of the 
Inspection Manuals generally require a bank/FIBO to establish internal 
position limits, risk limits, and loss limits for all financial 
products, including derivatives. The policies established by the bank/
FIBO must provide a system to provide ``alarm points'' to the board of 
directors. Moreover, in accordance with Article 29-2 of the Business 
Rules of Japan Securities Clearing Corporation (``JSCC'') with respect 
to listed products, JSCC can take an appropriate action against 
clearing participants (RFIs or FIBOs) if JSCC finds their position is 
excessive compared with their net assets. Therefore, clearing 
participants have to monitor their positions in relation to their net 
assets. CCP's Business Rules, which are subject to JFSA's approval, are 
legally binding requirements.
    The applicants represent that the position limits set internally by 
banks and FIBOs may not exceed position limits set by applicable law, 
including position limits set by the Commission, SEFs, or DCMs.\46\
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    \46\ See III-3-10 of the Supervisory Guideline for banks and IV-
5-2(i) of the Supervisory Guideline for FIBOs for rules regarding 
management of overseas business by banks and FIBOs.
---------------------------------------------------------------------------

    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
23.601 by requiring SDs and MSPs to establish necessary policies and 
procedures to monitor the trading of the firm to prevent violations of 
applicable position limits established by applicable laws and 
regulations, including those of the Commission, a DCM, or a SEF. 
Specifically, the Commission finds that the Japanese standards 
specified above, while not specific to the issue of position limit 
compliance, nevertheless comprehensively require SDs and MSPs to 
monitor for regulatory compliance generally, which includes monitoring 
for compliance with position limits set pursuant to applicable law and 
the responsibility of senior management (including the board of 
directors) for such compliance.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the compliance monitoring 
requirements of the Japanese standards, as specified above, are 
comparable to and as comprehensive as Sec.  23.601. For the avoidance 
of doubt, the Commission notes that this determination may not be 
relied on to relieve an SD or MSP from its obligation to strictly 
comply with any applicable position limit established by the 
Commission, a DCM, or a SEF.
3. Diligent Supervision (Sec.  23.602)
    Commission Requirement: Commission regulation 23.602 implements 
section 4s(h)(1)(B) of the CEA and requires each SD and MSP to 
establish a system to diligently supervise all activities relating to 
its business performed by its partners, members, officers, employees, 
and agents. The system must be reasonably designed to achieve 
compliance with the CEA and CFTC regulations. Commission regulation 
23.602 requires that the supervisory system must specifically designate 
qualified persons with authority to carry out the supervisory 
responsibilities of the SD or MSP for all activities relating to its 
business as an SD or MSP.
    Regulatory Objective: The Commission's diligent supervision rule 
seeks to ensure that SDs and MSPs strictly comply with the CEA and the 
Commission's rules. To this end, through Sec.  23.602, the Commission 
seeks to ensure that each SD and MSP not only establishes the necessary 
policies and procedures that would lead to compliance with the CEA and 
Commission regulations, but also establishes an effective system of 
internal oversight and enforcement of such policies and procedures to 
ensure that such policies and procedures are diligently followed.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as

[[Page 78918]]

section 4s(h)(1)(B) of the CEA and Commission regulation 23.602.
    III-1-2-1-(2)(xi) and III-1-2-1-(2)(xiii) of the Supervisory 
Guideline for banks, the Checklist for Business Management (Governance) 
of the Bank Inspection Manual, III-1(1)(ii)C and IV-1-2-(1)(i) of the 
Supervisory Guideline for FIBOs, and II-1-1-3(3) and II-2-1 of the FIBO 
Inspection Manual generally require a bank/FIBO to ensure appropriate 
officers and employees are in place in order to properly conduct 
business, and to establish legal compliance and internal control 
systems.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
23.602 because such standards seek to ensure that SDs and MSPs strictly 
comply with applicable law, which would include the CEA and the 
Commission's regulations.\47\
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    \47\ See III-3-10 of the Supervisory Guideline for banks and IV-
5-2(i) of the Supervisory Guideline for FIBOs for rules regarding 
management of overseas business by banks and FIBOs.
---------------------------------------------------------------------------

    Through the Supervisory Guidelines and Inspection Manuals, Japan's 
laws and regulations seek to ensure that each SD and MSP not only 
establishes the necessary policies and procedures that would lead to 
compliance with applicable law, which would include the CEA and 
Commission regulations, but also establishes an effective system of 
internal oversight and enforcement of such policies and procedures to 
ensure that such policies and procedures are diligently followed.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the internal supervision 
requirements set forth in the Japanese standards, as specified above, 
are comparable to and as comprehensive as Sec.  23.602.
4. Business Continuity and Disaster Recovery (Sec.  23.603)
    Commission Requirement: To ensure the proper functioning of the 
swaps markets and the prevention of systemic risk more generally, 
Commission regulation 23.603 requires each SD and MSP, as part of its 
risk management program, to establish a business continuity and 
disaster recovery plan that includes procedures for, and the 
maintenance of, back-up facilities, systems, infrastructure, personnel, 
and other resources to achieve the timely recovery of data and 
documentation and to resume operations generally within the next 
business day after the disruption.
    Regulatory Objective: Commission regulation 23.603 is intended to 
ensure that any market disruption affecting SDs and MSPs, whether 
caused by natural disaster or otherwise, is minimized in length and 
severity. To that end, this requirement seeks to ensure that entities 
adequately plan for disruptions and devote sufficient resources capable 
of carrying out an appropriate plan within one business day, if 
necessary.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as Commission regulation 23.603.
    IV-3-1-6 of the Supervisory Guideline for FIBOs and sections III-6-
1 and III-6-2(2)(i)(iii)-(v) of the Supervisory Guideline for banks 
require a bank/FIBO to establish a crisis management manual and a 
business continuity and disaster recovery plan that include procedures 
for, and the maintenance of, back-up facilities, systems, 
infrastructure, personnel, and other resources to achieve the timely 
recovery of data and documentation and to resume operations.
    Pursuant to III-8-2-(2)-(v) of the Supervisory Guideline for banks, 
JFSA requires banks to resume operation within the day of the event, 
especially for important settlement functions. Pursuant to IV-3-1-6(2) 
of the Supervisory Guideline for FIBOs, JFSA checks whether a FIBO's 
business continuity plan ensures quick recovery from damage caused by 
acts of terrorism, large-scale disasters, etc., as well as continuance 
of the minimum necessary business operations and services for the 
maintenance of the functions of the financial system.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
23.603 because such standards seek to ensure that any market disruption 
affecting SDs and MSPs, whether caused by natural disaster or 
otherwise, is minimized in length and severity. To that end, the 
Commission finds that the Japanese standards specified above seek to 
ensure that entities adequately plan for disruptions and devote 
sufficient resources capable of carrying out an appropriate plan in a 
timely manner.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the business continuity and 
disaster recovery requirements of the Japanese standards, as specified 
above, are comparable to and as comprehensive as Sec.  23.603.
5. Conflicts of Interest (Sec.  23.605)
    Commission Requirement: Section 4s(j)(5) of the CEA and Commission 
regulation 23.605(c) generally require each SD or MSP to establish 
structural and institutional safeguards to ensure that the activities 
of any person within the firm relating to research or analysis of the 
price or market for any commodity or swap are separated by appropriate 
informational partitions within the firm from the review, pressure, or 
oversight of persons whose involvement in pricing, trading, or clearing 
activities might potentially bias their judgment or supervision.
    In addition, section 4s(j)(5) of the CEA and Commission regulation 
23.605(d)(1) generally prohibits an SD or MSP from directly or 
indirectly interfering with or attempting to influence the decision of 
any clearing unit of any affiliated clearing member of a derivatives 
clearing organization (DCO) to provide clearing services and activities 
to a particular customer, including:
     Whether to offer clearing services to a particular 
customer;
     Whether to accept a particular customer for clearing 
derivatives;
     Whether to submit a customer's transaction to a particular 
DCO;
     Whether to set or adjust risk tolerance levels for a 
particular customer; or
     Whether to set a customer's fees based on criteria other 
than those generally available and applicable to other customers.
    Commission regulation 23.605(d)(2) generally requires each SD or 
MSP to create and maintain an appropriate informational partition 
between business trading units of the SD or MSP and clearing units of 
any affiliated clearing member of a DCO to reasonably ensure compliance 
with the Act and the prohibitions set forth in Sec.  23.605(d)(1) 
outlined above.
    The Commission observes that Sec.  23.605(d) works in tandem with 
Commission regulation 1.71, which requires FCMs that are clearing 
members of a DCO and affiliated with an SD or MSP to create and 
maintain an appropriate informational partition between business 
trading units of the SD or MSP and clearing units of the FCM to 
reasonably ensure compliance with the Act and the prohibitions set 
forth in Sec.  1.71(d)(1), which are the same as the prohibitions set 
forth in Sec.  23.605(d)(1) outlined above.
    Finally, Sec.  23.605(e) requires that each SD or MSP have policies 
and procedures that mandate the disclosure

[[Page 78919]]

to counterparties of material incentives or conflicts of interest 
regarding the decision of a counterparty to execute a derivative on a 
swap execution facility or designated contract market (DCM) or to clear 
a derivative through a DCO.
    Regulatory Objective: Commission regulation 23.605(c) seeks to 
ensure that research provided to the general public by an SD or MSP is 
unbiased and free from the influence of the interests of an SD or MSP 
arising from the SD's or MSP's trading business.
    In addition, the Sec.  23.605(d) (working in tandem with Sec.  
1.71) seeks to ensure open access to the clearing of swaps by requiring 
that access to and the provision of clearing services provided by an 
affiliate of an SD or MSP are not influenced by the interests of an 
SD's or MSP's trading business.
    Finally, Sec.  23.605(e) seeks to ensure equal access to trading 
venues and clearinghouses, as well as orderly and fair markets, by 
requiring that each SD and MSP disclose to counterparties any material 
incentives or conflicts of interest regarding the decision of a 
counterparty to execute a derivative on a SEF or DCM, or to clear a 
derivative through a DCO.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as Commission regulation 23.605.
    Regulations Concerning the Handling of Analysts Reports have been 
developed by the JSDA to require JSDA members to appropriately manage 
the content of any unpublished analyst report that is considered to 
have a material impact on investors (to include the presentation of any 
conflicts) and to establish an appropriate compensation system to 
ensure the independence of the opinions of analysts.
    More generally, FIEA and the Financial Instruments Business 
Ordinance require a FIBO/RFI to conduct business ``in good faith and 
fairly to customers.'' Specifically, I.2.(3)(iv) of the Checklist for 
Legal Compliance of the Bank Inspection Manual and II-1-2-1(4)(iii) of 
the FIBO Inspection Manual require each bank/FIBO to establish 
firewalls and take other measures to block the flow of information when 
necessary. Article 70-3(1)(ii)(d) of the Financial Instruments Business 
Ordinance and IV-1-3(3)(i)C of the Supervisory Guidelines for FIBOs 
require a FIBO/RFI to develop a control environment wherein it can 
choose or combine appropriate method(s), for example, notifying the 
customer of a conflict risk to establish a system for protection of 
customers.
    The JFSA has informed the Commission that, in the process of its 
oversight and enforcement of the foregoing Japanese standards for FIBOs 
and RFIs, any SD or MSP would be subject to such standards and required 
to resolve or mitigate conflicts of interests in the provision of 
clearing services by a clearing member of a DCO that is an affiliate of 
the SD or MSP, or the decision of a counterparty to execute a 
derivative on a SEF or DCM, or clear a derivative through a DCO, 
through appropriate information firewalls and disclosures.
    Commission Determination: The Commission finds that the Japanese 
standards specified above with respect to conflicts of interest that 
may arise in producing or distributing research are generally identical 
in intent to Sec.  23.605(c) because such standards seek to ensure that 
research provided to the general public by an SD is unbiased and free 
from the influence of the interests of an SD arising from the SD's 
trading business.
    With respect to conflicts of interest that may arise in the 
provision of clearing services by an affiliate of an SD or MSP, the 
Commission further finds that although the general conflicts of 
interest prevention requirements under the Japanese standards specified 
above do not require with specificity that access to and the provision 
of clearing services provided by an affiliate of an SD or MSP not be 
improperly influenced by the interests of an SD's or MSP's trading 
business, such general requirements would require prevention and 
remediation of such improper influence when recognized or discovered. 
Thus such standards would ensure open access to clearing.
    Finally, although not as specific as the requirements of Sec.  
23.605(e) (Undue influence on counterparties), the Commission finds 
that the general disclosure requirements of the Japanese standards 
specified above would ensure equal access to trading venues and 
clearinghouses by requiring that each SD and MSP disclose to 
counterparties any material incentives or conflicts of interest 
regarding the decision of a counterparty to execute a derivative on a 
SEF or DCM, or to clear a derivative through a DCO.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the requirements found in Japan's 
laws and regulations specified above in relation to conflicts of 
interest are comparable to and as comprehensive as Sec.  23.605.
6. Availability of Information for Disclosure and Inspection (Sec.  
23.606)
    Commission Requirement: Commission regulation 23.606 implements 
sections 4s(j)(3) and (4) of the CEA, and requires each SD and MSP to 
disclose to the Commission, and an SD's or MSP's U.S. prudential 
regulator (if any) comprehensive information about its swap activities, 
and to establish and maintain reliable internal data capture, 
processing, storage, and other operational systems sufficient to 
capture, process, record, store, and produce all information necessary 
to satisfy its duties under the CEA and Commission regulations. Such 
systems must be designed to provide such information to the Commission 
and an SD's or MSP's U.S. prudential regulator within the time frames 
set forth in the CEA and Commission regulations and upon request.
    Regulatory Objective: Commission regulation 23.606 seeks to ensure 
that each SD and MSP captures and maintains comprehensive information 
about their swap activities, and is able to retrieve and disclose such 
information to the Commission and its U.S. prudential regulator, if 
any, as necessary for compliance with the CEA and the Commission's 
regulations and for purposes of Commission oversight, as well as 
oversight by the SD's or MSP's U.S. prudential regulator, if any.
    The Commission observes that it would be impossible to meet the 
regulatory objective of Sec.  23.606 unless the required information is 
available to the Commission and any U.S. prudential regulator under the 
foreign legal regime. Thus, a comparability determination with respect 
to the information access provisions of Sec.  23.606 would be premised 
on whether the relevant information would be available to the 
Commission and any U.S. prudential regulator of the SD or MSP, not on 
whether an SD or MSP must disclose comprehensive information to its 
regulator in its home jurisdiction.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as Commission regulation 23.606.
    Under the JFSA annual supervisory policies for banks and FIBOs for 
program year 2013, a bank/FIBO is required to enhance their management 
information systems through various initiatives such as implementing 
BCBS ''Principles for effective risk data

[[Page 78920]]

aggregation and risk reporting,'' which enable banks/FIBOs to meet the 
information requests of relevant regulators.
    III-3-3(6) of Supervisory Guideline for FIBOs states that each FIBO 
must maintain electronic media storage systems that can accommodate 
internal audits and be responsive to client referrals and questions. 
Moreover, III.1.(6) of the Checklist for Market Risk Management of the 
Bank Inspection Manual requires that records be readily available for 
reconciliation with trade tickets, etc.
    III-3-10-2(3) (iv) of Supervisory Guideline for banks specifically 
requires banks to have the personnel and systems to respond in a timely 
and appropriate manner to inspections and supervision provided by 
overseas regulatory authorities. In view of maintaining direct dialog 
and smooth communications with the relevant overseas regulatory 
authorities, this provision ensures the establishment of a reporting 
system which enables timely and appropriate reporting.
    Similarly, IV-5-2(i) of Supervisory Guideline for FIBOs would 
ensure the availability of information to a regulator promptly upon 
request. Under this provision, the JFSA assesses whether a parent 
company of a FIBO ensures group-wide compliance with the relevant laws, 
regulations and rules of each country in which it does business by 
establishing an appropriate control environment for legal compliance in 
accordance with the size of its overseas bases and the characteristics 
of its business operations.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
23.606 because such standards seek to ensure that each SD and MSP 
captures and stores comprehensive information about their swap 
activities, and are able to retrieve and disclose such information as 
necessary for compliance with applicable law and for purposes of 
regulatory oversight.
    In addition, the Commission finds that the Japanese standards 
specified above would ensure Commission access to the required books 
and records of SDs and MSPs by requiring personnel and systems 
necessary to respond in a timely and appropriate manner to inspections 
and supervision provided by overseas regulatory authorities.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the requirements of the Japanese 
standards with respect to the availability of information for 
inspection and disclosure, as specified above, are comparable to, and 
as comprehensive as, Sec.  23.606.
7. Clearing Member Risk Management (Sec.  23.609)
    Commission Requirement: Commission regulation 23.609 generally 
requires each SD or MSP that is a clearing member of a DCO to:
     Establish risk-based limits based on position size, order 
size, margin requirements, or similar factors;
     Screen orders for compliance with the risk-based limits;
     Monitor for adherence to the risk-based limits intra-day 
and overnight;
     Conduct stress tests under extreme but plausible 
conditions of all positions at least once per week;
     Evaluate its ability to meet initial margin requirements 
at least once per week;
     Evaluate its ability to meet variation margin requirements 
in cash at least once per week;
     Evaluate its ability to liquidate positions it clears in 
an orderly manner, and estimate the cost of liquidation; and
     Test all lines of credit at least once per year.
    Regulatory Objective: Through Commission regulation Sec.  23.609, 
the Commission seeks to ensure the financial integrity of the markets 
and the clearing system, to avoid systemic risk, and to protect 
customer funds. Effective risk management by SDs and MSPs that are 
clearing members is essential to achieving these objectives. A failure 
of risk management can cause a clearing member to become insolvent and 
default to a DCO. Such default can disrupt the markets and the clearing 
system and harm customers.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as Commission regulation 23.609.
    III-2-3-2-1-2 (9) and (10)(i) of the Supervisory Guideline for 
banks and III.(8) and (9)(i) of the Checklist for Credit Risk 
Management of the Inspection Manual for banks generally require a bank 
to properly manage the credit risks of major counterparties to 
derivatives transactions, as well as the risks associated with the 
clearing of derivatives transactions with a central counterparty. More 
specifically, the Supervisory Guidelines for banks require a bank to 
properly manage the risks associated with cleared derivative 
transactions with central counterparties (``CCPs''), including the 
inherent risk of transactions with a CCP, the risk associated with 
material defects of regulations or supervisory schemes to which a CCP 
is subject, and the risk of loss of the bank's contribution to the 
default fund of a CCP.
    IV-2-4 of the Supervisory Guideline for FIBOs and I-2-(4) of the 
Inspection Manual for FIBOs require FIBOs to properly manage 
counterparty risk. Counterparty risk is the risk of incurring losses 
due to a failure by a counterparty to fulfill its contractual 
obligations.
    The JFSA evaluates a FIBO on whether it properly manages 
counterparty risk by developing a comprehensive control environment for 
risk management, properly recognizing and evaluating the risks, 
conducting internal screening when a new product or a new business is 
introduced and establishing a system of checks and balances based on 
the clear allocation of roles and responsibilities.
    The JFSA strives to identify and keep track of the status of a 
FIBO's counterparty risk and its risk management through monthly 
offsite monitoring reports and hearings based thereon and, when 
necessary, requiring FIBOs to submit a report based on Article 56-2(1) 
of the FIEA and urge it to make improvement efforts.
    The foregoing requirements apply to bank and FIBO risk management 
as clearing members.
    In addition, if FIBOs/RFIs are clearing members of the JSCC, in 
accordance with the business rules of the JSCC, they are required to 
develop an appropriate structure for management of the risk of loss.
    Finally, the JFSA has represented to the Commission that, in the 
process of its oversight and enforcement of the foregoing Japanese 
standards for banks, FIBOs, and RFIs, any SD or MSP subject to such 
standards that is a clearing member of a DCO would be required to 
comply with clearing member risk management requirements comparable to 
Commission regulation 23.609.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to Sec.  
23.609 because such standards seek to ensure the financial integrity of 
the markets and the clearing system, to avoid systemic risk, and to 
protect customer funds.
    The Commission notes that the Japanese standards specified above 
are not as specific as Sec.  23.609 with respect to ensuring that SDs 
and MSPs that are clearing members of a DCO establish detailed 
procedures and limits for clearing member risk management purposes. 
Nevertheless, the Commission finds that the general requirements

[[Page 78921]]

under the Japanese standards, implemented in the context of clearing 
member risk management and pursuant to the representations of the JFSA, 
meet the Commission's regulatory objective specified above.
    Based on the foregoing and the representations above, the 
Commission hereby determines that the clearing member risk management 
requirements of the Japanese standards specified above are comparable 
to and as comprehensive as Sec.  23.609.

C. Swap Data Recordkeeping (Sec. Sec.  23.201 and 23.203)

    Commission Requirement: Sections 4s(f)(1)(B) and 4s(g)(1) of the 
CEA, and Commission regulation 23.201 generally require SDs and MSPs to 
retain records of each transaction, each position held, general 
business records (including records related to complaints and sales and 
marketing materials), records related to governance, financial records, 
records of data reported to SDRs, and records of real-time reporting 
data along with a record of the date and time the SD or MSP made such 
reports. Transaction records must be kept in a form and manner 
identifiable and searchable by transaction and counterparty.
    Commission regulation 23.203, requires SDs and MSPs to maintain 
records of a swap transaction until the termination, maturity, 
expiration, transfer, assignment, or novation date of the transaction, 
and for a period of five years after such date. Records must be 
``readily accessible'' for the first 2 years of the 5 year retention 
period (consistent with Sec.  1.31).
    The Commission notes that the comparability determination below 
with respect to Sec. Sec.  23.201 and 23.203 encompasses both swap data 
recordkeeping generally and swap data recordkeeping relating to 
complaints and marketing and sales materials in accordance with Sec.  
23.201(b)(3) and (4).\48\
---------------------------------------------------------------------------

    \48\ See the Guidance for a discussion of the availability of 
substituted compliance with respect to swap data recordkeeping, 78 
FR 45332-33.
---------------------------------------------------------------------------

    Regulatory Objective: Through the Commission's regulations 
requiring SDs and MSPs to keep comprehensive records of their swap 
transactions and related data, the Commission seeks to ensure the 
effectiveness of the internal controls of SDs and MSPs, and 
transparency in the swaps market for regulators and market 
participants.
    The Commission's regulations require SDs and MSPs to keep swap data 
in a level of detail sufficient to enable regulatory authorities to 
understand an SD's or MSP's swaps business and to assess its swaps 
exposure.
    By requiring comprehensive records of swap data, the Commission 
seeks to ensure that SDs and MSPs employ effective risk management, and 
strictly comply with Commission regulations. Further, such records 
facilitate effective regulatory oversight.
    The Commission observes that it would be impossible to meet the 
regulatory objective of Sec. Sec.  23.201 and 23.203 unless the 
required information is available to the Commission and any U.S. 
prudential regulator under the foreign legal regime. Thus, a 
comparability determination with respect to the information access 
provisions of Sec.  23.203 would be premised on whether the relevant 
information would be available to the Commission and any U.S. 
prudential regulator of the SD or MSP, not on whether an SD or MSP must 
disclose comprehensive information to its regulator in its home 
jurisdiction.
    Comparable Japanese Law and Regulations: The applicants have 
represented to the Commission that the following provisions of law and 
regulations applicable in Japan are in full force and effect in Japan, 
and comparable to and as comprehensive as sections 4s(f)(1)(B) and 
4s(g)(1) of the CEA and Sec. Sec.  23.201 and 23.203.
    A FIBO/RFI is required by provisions set forth in the FIEA, the OTC 
Derivatives Ordinance, and the Financial Instruments Business Ordinance 
to retain all records related to swaps transactions.
    Articles 371, 381, 394, 396, and 436 of the Company Act require 
governance records including minutes of board of directors and audit 
reports of auditors to be retained for ten years. Also, Article 432, 
435, and 444 of the Company Act require financial records including 
financial statements, business reports, and annexed detailed statements 
to be retained for five years.
    Articles 12-3 and 52-71 of the Banking Act and Articles 37-7 and 
156-48 of the FIEA further require each bank/FIBO to prepare and 
maintain records as part of its ``complaint processing procedures.'' 
Specific details regarding the storage of records detailing customer 
complaints are set forth in III-3-5-2-2(5)(ii) of the Supervisory 
Guideline for banks, II-2.1(3-4) and III-2.1(4) of the Checklist for 
Customer Protection Management of the Bank Inspection Manual, III-2-5 
of the Supervisory Guideline for FIBOs, and II-1-2-1(7) of the FIBO 
Inspection Manual.
    Article 37 of the FIEA and Article 72 of the Financial Instruments 
Business Ordinance require maintenance of records regarding marketing 
and sales materials.
    III-3-3(6) of Supervisory Guideline for FIBOs states that each FIBO 
must maintain electronic media storage systems that can accommodate 
internal audits and be responsive to client referrals and questions. 
Moreover, III.1.(6) of the Checklist for Market Risk Management of the 
Bank Inspection Manual requires the records be readily available for 
reconciliation with trade tickets, etc.
    FIEA and the Financial Instruments Business Ordinance generally 
require records to be kept for a minimum of five years, but certain 
records must be maintained from seven to ten years. III-1(vi) of the 
Checklist for Market Risk Management of the Bank Inspection Manual 
assesses whether voice recordings are maintained for all traders on a 
24-hour basis and retained ``under the control of an organization 
segregated from the market and back-office divisions.''
    III-3-10-2(3) (iv) of Supervisory Guideline for banks specifically 
requires banks to have the personnel and systems to respond in a timely 
and appropriate manner to inspections and supervision provided by 
overseas regulatory authorities. In view of maintaining direct dialog 
and smooth communications with the relevant overseas regulatory 
authorities, this provision ensures the establishment of a reporting 
system which enables timely and appropriate reporting.
    Similarly, IV-5-2(i) of Supervisory Guideline for FIBOs would 
ensure the availability of information to a regulator promptly upon 
request. Under this provision, the JFSA assesses whether a parent 
company of a FIBO ensures group-wide compliance with the relevant laws, 
regulations and rules of each country in which it does business by 
establishing an appropriate control environment for legal compliance in 
accordance with the size of its overseas bases and the characteristics 
of its business operations.
    Commission Determination: The Commission finds that the Japanese 
standards specified above are generally identical in intent to 
Sec. Sec.  23.201 and 23.203 because such standards seek to ensure the 
effectiveness of the internal controls of SDs and MSPs, and 
transparency in the swaps market for regulators and market 
participants.
    In addition, the Commission finds that the Japanese standards 
specified above require SDs and MSPs to keep swap data in a level of 
detail sufficient to enable regulatory authorities to understand an 
SD's or MSP's swaps

[[Page 78922]]

business and to assess its swaps exposure.
    Further, the Commission finds that the Japanese standards specified 
above, by requiring comprehensive records of swap data, seek to ensure 
that SDs and MSPs employ effective risk management, seek to ensure that 
SDs and MSPs strictly comply with applicable regulatory requirements 
(including the CEA and Commission regulations), and that such records 
facilitate effective regulatory oversight.
    Finally, the Commission finds that the Japanese standards specified 
above would ensure Commission access to the required books and records 
of SDs and MSPs by requiring personnel and systems necessary to respond 
in a timely and appropriate manner to inspections and supervision 
provided by overseas regulatory authorities.
    Based on the foregoing and the representations of the applicants, 
the Commission hereby determines that the Japanese requirements with 
respect to swap data recordkeeping, as specified above, are comparable 
to, and as comprehensive as, Sec. Sec.  23.201 and 23.203.

    Issued in Washington, DC on December 20, 2013, by the 
Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendices to Comparability Determination for Japan: Certain Entity-
Level Requirements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and 
Wetjen voted in the affirmative. Commissioner O'Malia voted in the 
negative.

Appendix 2--Statement of Chairman Gary Gensler and Commissioners 
Chilton and Wetjen

    We support the Commission's approval of broad comparability 
determinations that will be used for substituted compliance 
purposes. For each of the six jurisdictions that has registered swap 
dealers, we carefully reviewed each regulatory provision of the 
foreign jurisdictions submitted to us and compared the provision's 
intended outcome to the Commission's own regulatory objectives. The 
resulting comparability determinations for entity-level requirements 
permit non-U.S. swap dealers to comply with regulations in their 
home jurisdiction as a substitute for compliance with the relevant 
Commission regulations.
    These determinations reflect the Commission's commitment to 
coordinating our efforts to bring transparency to the swaps market 
and reduce its risks to the public. The comparability findings for 
the entity-level requirements are a testament to the comparability 
of these regulatory systems as we work together in building a strong 
international regulatory framework.
    In addition, we are pleased that the Commission was able to find 
comparability with respect to swap-specific transaction-level 
requirements in the European Union and Japan.
    The Commission attained this benchmark by working cooperatively 
with authorities in Australia, Canada, the European Union, Hong 
Kong, Japan, and Switzerland to reach mutual agreement. The 
Commission looks forward to continuing to collaborate with both 
foreign authorities and market participants to build on this 
progress in the months and years ahead.

Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia

    I respectfully dissent from the Commodity Futures Trading 
Commission's (``Commission'') approval of the Notices of 
Comparability Determinations for Certain Requirements under the laws 
of Australia, Canada, the European Union, Hong Kong, Japan, and 
Switzerland (collectively, ``Notices''). While I support the narrow 
comparability determinations that the Commission has made, moving 
forward, the Commission must collaborate with foreign regulators to 
harmonize our respective regimes consistent with the G-20 reforms.
    However, I cannot support the Notices because they: (1) Are 
based on the legally unsound cross-border guidance (``Guidance''); 
\1\ (2) are the result of a flawed substituted compliance process; 
and (3) fail to provide a clear path moving forward. If the 
Commission's objective for substituted compliance is to develop a 
narrow rule-by-rule approach that leaves unanswered major regulatory 
gaps between our regulatory framework and foreign jurisdictions, 
then I believe that the Commission has successfully achieved its 
goal today.
---------------------------------------------------------------------------

    \1\ Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26, 
2013).
---------------------------------------------------------------------------

Determinations Based on Legally Unsound Guidance

    As I previously stated in my dissent, the Guidance fails to 
articulate a valid statutory foundation for its overbroad scope and 
inconsistently applies the statute to different activities.\2\ 
Section 2(i) of the Commodity Exchange Act (``CEA'') states that the 
Commission does not have jurisdiction over foreign activities unless 
``those activities have a direct and significant connection with 
activities in, or effect on, commerce of the United States * * *'' 
\3\ However, the Commission never properly articulated how and when 
this limiting standard on the Commission's extraterritorial reach is 
met, which would trigger the application of Title VII of the Dodd-
Frank Act \4\ and any Commission regulations promulgated thereunder 
to swap activities that are outside of the United States. Given this 
statutorily unsound interpretation of the Commission's 
extraterritorial authority, the Commission often applies CEA section 
2(i) inconsistently and arbitrarily to foreign activities.
---------------------------------------------------------------------------

    \2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
    \3\ CEA section 2(j); 7 U.S.C. 2(j).
    \4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    Accordingly, because the Commission is relying on the legally 
deficient Guidance to make its substituted compliance 
determinations, and for the reasons discussed below, I cannot 
support the Notices. The Commission should have collaborated with 
foreign regulators to agree on and implement a workable regime of 
substituted compliance, and then should have made determinations 
pursuant to that regime.

Flawed Substituted Compliance Process

    Substituted compliance should not be a case of picking a set of 
foreign rules identical to our rules, determining them to be 
``comparable,'' but then making no determination regarding rules 
that require extensive gap analysis to assess to what extent each 
jurisdiction is, or is not, comparable based on overall outcomes of 
the regulatory regimes. While I support the narrow comparability 
determinations that the Commission has made, I am concerned that in 
a rush to provide some relief, the Commission has made substituted 
compliance determinations that only afford narrow relief and fail to 
address major regulatory gaps between our domestic regulatory 
framework and foreign jurisdictions. I will address a few examples 
below.
    First, earlier this year, the OTC Derivatives Regulators Group 
(``ODRG'') agreed to a number of substantive understandings to 
improve the cross-border implementation of over-the-counter 
derivatives reforms.\5\ The ODRG specifically agreed that a 
flexible, outcomes-based approach, based on a broad category-by-
category basis, should form the basis of comparability 
determinations.\6\
---------------------------------------------------------------------------

    \5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.
    \6\ http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings. 
Understanding number 2 states that ``[a] flexible, outcomes-based 
approach should form the basis of final assessments regarding 
equivalence or substituted compliance.''
---------------------------------------------------------------------------

    However, instead of following this approach, the Commission has 
made its comparability determinations on a rule-by-rule basis. For 
example, in Japan's Comparability Determination for Transaction-
Level Requirements, the Commission has made a positive comparability 
determination for some of the detailed requirements under the swap 
trading relationship documentation provisions, but not for other 
requirements.\7\ This detailed approach clearly contravenes the 
ODRG's understanding.
---------------------------------------------------------------------------

    \7\ The Commission made a positive comparability determination 
for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3), 
(b)(4), (c), and (d), but not for Commission regulations 
23.504(b)(5) and (b)(6).
---------------------------------------------------------------------------

    Second, in several areas, the Commission has declined to 
consider a request for a comparability determination, and has also 
failed to provide an analysis regarding the extent to which the 
other jurisdiction is, or

[[Page 78923]]

is not, comparable. For example, the Commission has declined to 
address or provide any clarity regarding the European Union's 
regulatory data reporting determination, even though the European 
Union's reporting regime is set to begin on February 12, 2014. 
Although the Commission has provided some limited relief with 
respect to regulatory data reporting, the lack of clarity creates 
unnecessary uncertainty, especially when the European Union's 
reporting regime is set to begin in less than two months.
    Similarly, Japan receives no consideration for its mandatory 
clearing requirement, even though the Commission considers Japan's 
legal framework to be comparable to the U.S. framework. While the 
Commission has declined to provide even a partial comparability 
determination, at least in this instance the Commission has provided 
a reason: the differences in the scope of entities and products 
subject to the clearing requirement.\8\ Such treatment creates 
uncertainty and is contrary to increased global harmonization 
efforts.
---------------------------------------------------------------------------

    \8\ Yen-denominated interest rate swaps are subject to the 
mandatory clearing requirement in both the U.S. and Japan.
---------------------------------------------------------------------------

    Third, in the Commission's rush to meet the artificial deadline 
of December 21, 2013, as established in the Exemptive Order 
Regarding Compliance with Certain Swap Regulations (``Exemptive 
Order''),\9\ the Commission failed to complete an important piece of 
the cross-border regime, namely, supervisory memoranda of 
understanding (``MOUs'') between the Commission and fellow 
regulators.
---------------------------------------------------------------------------

    \9\ Exemptive Order Regarding Compliance With Certain Swap 
Regulations, 78 FR 43785 (Jul. 22, 2013).
---------------------------------------------------------------------------

    I have previously stated that these MOUs, if done right, can be 
a key part of the global harmonization effort because they provide 
mutually agreed-upon solutions for differences in regulatory 
regimes.\10\ Accordingly, I stated that the Commission should be 
able to review MOUs alongside the respective comparability 
determinations and vote on them at the same time. Without these 
MOUs, our fellow regulators are left wondering whether and how any 
differences, such as direct access to books and records, will be 
resolved.
---------------------------------------------------------------------------

    \10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
---------------------------------------------------------------------------

    Finally, as I have consistently maintained, the substituted 
compliance process should allow other regulatory bodies to engage 
with the full Commission.\11\ While I am pleased that the Notices 
are being voted on by the Commission, the full Commission only 
gained access to the comment letters from foreign regulators on the 
Commission's comparability determination draft proposals a few days 
ago. This is hardly a transparent process.
---------------------------------------------------------------------------

    \11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
---------------------------------------------------------------------------

Unclear Path Forward

    Looking forward to next steps, the Commission must provide 
answers to several outstanding questions regarding these 
comparability determinations. In doing so, the Commission must 
collaborate with foreign regulators to increase global 
harmonization.
    First, there is uncertainty surrounding the timing and outcome 
of the MOUs. Critical questions regarding information sharing, 
cooperation, supervision, and enforcement will remain unanswered 
until the Commission and our fellow regulators execute these MOUs.
    Second, the Commission has issued time-limited no-action relief 
for the swap data repository reporting requirements. These 
comparability determinations will be done as separate notices. 
However, the timing and process for these determinations remain 
uncertain.
    Third, the Commission has failed to provide clarity on the 
process for addressing the comparability determinations that it 
declined to undertake at this time. The Notices only state that the 
Commission may address these requests in a separate notice at a 
later date given further developments in the law and regulations of 
other jurisdictions. To promote certainty in the financial markets, 
the Commission must provide a clear path forward for market 
participants and foreign regulators.
    The following steps would be a better approach: (1) The 
Commission should extend the Exemptive Order to allow foreign 
regulators to further implement their regulatory regimes and 
coordinate with them to implement a harmonized substituted 
compliance process; (2) the Commission should implement a flexible, 
outcomes-based approach to the substituted compliance process and 
apply it similarly to all jurisdictions; and (3) the Commission 
should work closely with our fellow regulators to expeditiously 
implement MOUs that resolve regulatory differences and address 
regulatory oversight issues.

Conclusion

    While I support the narrow comparability determinations that the 
Commission has made, it was my hope that the Commission would work 
with foreign regulators to implement a substituted compliance 
process that would increase the global harmonization effort. I am 
disappointed that the Commission has failed to implement such a 
process.
    I do believe that in the longer term, the swaps regulations of 
the major jurisdictions will converge. At this time, however, the 
Commission's comparability determinations have done little to 
alleviate the burden of regulatory uncertainty and duplicative 
compliance with both U.S. and foreign regulations.
    The G-20 process delineated and put in place the swaps market 
reforms in G-20 member nations. It is then no surprise that the 
Commission must learn to coordinate with foreign regulators to 
minimize confusion and disruption in bringing much needed clarity to 
the swaps market. For all these shortcomings, I respectfully dissent 
from the Commission's approval of the Notices.

[FR Doc. 2013-30976 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P