Comparability Determination for Japan: Certain Transaction-Level Requirements, 78890-78898 [2013-30977]
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Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices
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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
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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. 2013–30981 Filed 12–26–13; 8:45 am]
BILLING CODE 6351–01–P
COMMODITY FUTURES TRADING
COMMISSION
Comparability Determination for
Japan: Certain Transaction-Level
Requirements
Commodity Futures Trading
Commission.
ACTION: Notice of Comparability
Determination for Certain Requirements
under the Japanese Laws and
Regulations.
AGENCY:
The following is the analysis
and determination of the Commodity
Futures Trading Commission
(‘‘Commission’’) regarding certain parts
of a request by the Bank of TokyoMitsubishi UFJ, Ltd (‘‘BTMU’’) that the
Commission determine that laws and
regulations applicable in the 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) Swap trading
relationship documentation and (ii)
daily trading records (collectively, the
‘‘Business Conduct Requirements’’).
DATES:
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 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:
SUMMARY:
I. Introduction
On July 26, 2013, the Commission
published in the Federal Register its
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‘‘Interpretive Guidance and Policy
Statement Regarding Compliance with
Certain Swap Regulations’’
(‘‘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 (and foreign
branches of U.S. SDs and MSPs) in the
six jurisdictions with conditional relief
from certain requirements of
Commission regulations (those referred
to as ‘‘Transaction-Level Requirements’’
in the Guidance) until the earlier of
December 21, 2013, or 30 days following
the issuance of a substituted compliance
determination.3 However, the
Commission provided only transitional
relief from the real-time public reporting
requirements under part 43 of the
Commission’s regulations until
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).
3 The Transaction-Level Requirements under the
Exemptive Order consist of 17 CFR 37.12, 38.11,
23.202, 23.205, 23.400–451, 23.501, 23.502, 23.503,
23.504, 23.505, 23.506, 23.610, and parts 43 and 50
of the Commission’s regulations.
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September 30, 2013, stating that ‘‘it
would not be in the public interest to
further delay reporting under part 43 .
. . .’’ 4 Similarly, the Commission
provided transitional relief only until
October 10, 2013, from the clearing and
swap processing requirements (as
described in the Guidance), stating that,
‘‘[b]ecause SDs and MSPs have been
committed to clearing their [credit
default swaps] and interest rate swaps
for many years, and indeed have been
voluntarily clearing for many years, any
further delay of the Commission’s
clearing requirement is unwarranted.’’ 5
The Commission did not make any
comparability determination with
respect to clearing and swap processing
prior to October 10, 2013, or real-time
public reporting prior to September 30,
2013.
On September 20, 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 Transaction-Level Requirements,
including the Business Conduct
Requirements.6 (BTMU is referred to
herein as the ‘‘applicant’’). On
December 16, 2013, the application was
further supplemented with corrections
and additional materials. The following
is the Commission’s analysis and
determination regarding the Business
Conduct Requirements, as detailed
below.
In addition to the Business Conduct
Requirements described below, the
applicant also requested a comparability
determination with respect to law and
regulations applicable in Japan
governing trade execution, real-time
public reporting, clearing, and swap
processing.
With respect to trade execution and
real-time reporting, the Commission has
not made a comparability determination
at this time due to the Commission’s
view that although a legislative
framework for such requirements exists
in Japan, detailed regulations with
which to compare the requirements of
the Commission’s regulations on trade
execution and real-time public reporting
under such framework are still under
consideration in Japan. The Commission
may address these requests in a separate
notice at a later date, taking into account
further developments in the U.S. and
Japan.
4 See
id. at 43789.
5 See id. at 43790.
6 For purposes of this notice, the Business
Conduct Requirements consist of 17 CFR 23.202
and 23.504.
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With respect to clearing and swap
processing, this notice does not address
§ 50.2 (Treatment of swaps subject to a
clearing requirement), § 50.4 (Classes of
swaps required to be cleared), § 23.506
(Swap processing and clearing), or
§ 23.610 (Clearing member acceptance
for clearing).
The mandatory clearing requirement
in Japan, which is consistent with the
G20 commitments 7 and objectives, was
implemented in November 2012, ahead
of other G20 jurisdictions. Japan’s
clearing requirement, at its initial stage,
is applied to transactions between large
domestic financial institutions
registered under the Financial
Instruments and Exchange Act, No. 25
of 1948 (‘‘FIEA’’), who are members of
licensed clearing organizations 8, for (i)
certain credit default swaps (i.e., those
referencing iTraxx Japan—an
investment-grade index CDS from 50
Japanese firms); and (ii) certain interest
rate swaps (i.e., three month or six
month Japanese yen LIBOR interest rate
swaps). According to Japanese
authorities, the scope of entities and
products subject to the clearing
requirement in Japan will be expanded
over the next two years in a phased
manner.
While the Commission considers that
the legal framework in respect of
clearing and swap processing in Japan is
comparable to the U.S framework, it
also recognizes that there are differences
in the scope of entities and products
between its clearing requirement under
section 2(h)(1)(A) of the CEA and § 50.2
(‘‘the CEA clearing requirement’’) and
the Japanese FIEA clearing requirement,
due to differences in market structures
and conditions. Due to such differences,
the Commission has not made a
comparability determination with
respect to §§ 50.2, 50.4, 23.506, or
23.610 at this time. The Commission
may address these requests in a separate
notice at a later date, taking into account
further developments in the U.S. and
Japan.
The Commission notes that its
Division of Clearing and Risk has
granted certain no-action relief from the
CEA clearing requirement to qualified
7 In 2009, leaders of the Group of 20 (‘‘G20’’)—
whose membership includes Japan, the United
States, and 18 other countries—agreed that: (i) OTC
derivatives contracts should be reported to trade
repositories; (ii) all standardized OTC derivatives
contracts should be cleared through central
counterparties and traded on exchanges or
electronic trading platforms, where appropriate, by
the end of 2012; and (iii) non-centrally cleared
contracts should be subject to higher capital
requirements.
8 Japan Securities Clearing Corporation (‘‘JSCC’’)
is currently the only licensed clearing organization
under the FIEA in Japan.
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clearing participants of JSCC. Pursuant
to such no-action relief, clearing
participants of JSCC that are subject to
Commission regulation 50.2, as well as
parents and affiliates of such
participants, may continue clearing yendenominated interest rate swaps at JSCC
instead of at a Commission-registered
derivatives clearing organization
(‘‘DCO’’). Further, JSCC is in the process
of registering with the Commission as a
DCO. Upon JSCC’s registration, a
Japanese SD could comply with both the
CEA and FIEA clearing requirements by
clearing relevant swaps at JSCC.
II. Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act 9
(‘‘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
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.10
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.11 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
9 Public
Law 111–203, 124 Stat. 1376 (2010).
U.S.C. 2(i).
11 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.)
10 7
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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 describes 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
established 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:
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In evaluating whether a particular category
of foreign regulatory requirement(s) is
comparable and comprehensive to the
applicable requirement(s) under the CEA and
Commission regulations, the Commission
will take into consideration all relevant
factors, including but not limited to, the
comprehensiveness of those requirement(s),
the scope and objectives of the relevant
regulatory requirement(s), the
comprehensiveness of the foreign regulator’s
supervisory compliance program, as well as
the home jurisdiction’s authority to support
and enforce its oversight of the registrant. 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).12
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.13
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
12 78
FR 45342–45345.
the Guidance, 78 FR 45342–44.
13 See
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MSP would be directly available to the
Commission and any U.S. prudential
regulator of the SD or MSP.14 The
Commission’s direct access to the books
and records required to be maintained
by SD or MSP registered with the
Commission is a core requirement of the
CEA 15 and the Commission’s
regulations,16 and is a condition to
registration.17
III. Regulation of SDs and MSPs in
Japan
As represented to the Commission by
the applicant, 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 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,18 Cabinet Office
14 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 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 a 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.
15 See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of
the CEA.
16 See e.g., §§ 23.203(b) and 23.606.
17 See supra note 13.
18 Order for Enforcement of the Banking Act and
Order for Enforcement of the Financial Instruments
and Exchange Act.
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Ordinance,19 Supervisory Guidelines 20
and Inspection Manuals.21 The
Securities and Exchange Surveillance
Commission (‘‘SESC’’) is within the
JFSA 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, the Supervisory
Guideline for banks, and the Inspection
Manual for banks, while FIBOs are
subject to the FIEA, relevant laws and
regulations for FIBOs, Supervisory
Guideline 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 22—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 applicant is a licensed bank in
Japan that is also registered as an RFI
under the supervision of the JFSA. In
addition, the applicant is a member of
several self-regulatory organizations,
including the Japanese Securities
19 Cabinet Office Ordinance on Financial
Instruments Business (‘‘FIB Ordinance’’) and
Cabinet Office Ordinance on Regulation of OTC
Derivatives Transaction.
20 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’’).
21 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.
22 See Article 2(8)(iv) of the FIEA.
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Dealers Association (‘‘JSDA’’). The JSDA
is a ‘‘Financial Instruments Firms
Association’’ authorized under FIEA by
the Prime Minister of Japan.23
IV. Comparable and
Comprehensiveness Standard
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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.24
In making its comparability
determinations, the Commission may
include conditions that take into
account timing and other issues related
to coordinating the implementation of
reform efforts across jurisdictions.25
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.26
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
23 Because the applicant’s request and the
Commission’s 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.
24 78 FR 45343.
25 78 FR 45343.
26 78 FR 45343.
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to be identical).27 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
made 28 and that the non-U.S. SD or
non-U.S. MSP, U.S. bank that is a 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.
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.29 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 swap 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.30
27 78
FR 45343.
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.
29 78 FR 45343.
30 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
28 A
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Finally, the Commission generally
will 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 31 of SDs and
MSPs 32 in the relevant jurisdictions.33
Further, as stated in the Guidance, the
Commission expects that an applicant
would notify the Commission of any
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.
31 ‘‘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 Part 23 (17 CFR Part 23) are
limited in scope to the swaps activities of SDs and
MSPs.
32 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 solely responsible for determining
whether it is legally required to comply with the
laws and regulations found comparable. Currently,
there are no MSPs organized outside the U.S. and
the Commission therefore cautions any nonfinancial 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.
33 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.
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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.34
The Guidance provided a detailed
discussion of the Commission’s policy
regarding the availability of substituted
compliance 35 for the Business Conduct
Requirements.
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 36 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.’’37
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
any potential issues related to
cooperation and information sharing.
34 78
FR 45345.
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.
36 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.
37 78 FR 45344.
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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,38 provide for
notification upon the occurrence of
specified events, memorialize
understandings related to on-site
visits,39 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
Business Conduct Requirements in the
‘‘risk mitigation and transparency’’
category 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 Business
Conduct Requirements that the
applicant submitted for a comparability
38 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’’).
39 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’’).
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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 to and as
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 release.
As was stated in the Guidance, the
Commission understands 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. Swap Trading Relationship
Documentation (§ 23.504)
Commission Requirement: Section
4s(i) of the CEA requires each SD and
MSP to conform to Commission
standards for the timely and accurate
confirmation, processing, netting,
documentation, and valuation of
swaps.40 Pursuant to this requirement,
the Commission adopted § 23.504.
Pursuant to § 23.504(a), SDs and
MSPs must have policies and
procedures reasonably designed to
ensure that the SD or MSP enters into
swap trading relationship
documentation with each counterparty
prior to executing any swap with such
counterparty. Such requirement does
not apply to cleared swaps.
Pursuant to § 23.504(b), SDs and
MSPs must, at a minimum, document
terms relating to:
• Payment obligations;
• Netting of payments;
• Events of default or other
termination events;
• Netting of obligations upon
termination;
• Transfer of rights/obligations;
40 See
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• Governing law;
• Valuation—must be able to value
swaps in a predictable and objective
manner—complete and independently
verifiable methodology for valuation;
• Dispute resolution procedures; and
• Credit support arrangements with
initial/variation margin at least as high
as set for SD/MSPs or prudential
regulator (identifying haircuts and class
of eligible assets).
Regulatory Objective: Through
Commission regulation 23.504, the
Commission seeks to reduce the legal,
operational, counterparty credit, and
market risk that can arise from
undocumented swaps or undocumented
terms of swaps. Inadequate
documentation of swap transactions is
more likely to result in collateral and
legal disputes, thereby exposing
counterparties to significant
counterparty credit risk.
In particular, documenting
agreements regarding valuation is
critical because, as the Commission has
noted, the ability to determine
definitively the value of a swap at any
given time lies at the center of many of
the OTC derivatives market reforms
contained in the Dodd-Frank Act and is
a cornerstone of risk management. With
respect to other SDs/MSPs and financial
entities, or upon request of any other
counterparty, the regulation requires
agreement on the process (including
alternatives and dispute resolution
procedures) for determining the value of
each swap for the duration of such swap
for purposes of complying with the
Commission’s margin and risk
management requirements, with such
valuations based on objective criteria to
the extent practicable.
Comparable Japanese Law and
Regulations: The applicant has
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(i) of the CEA and
Commission regulation 23.504.
Article 37–3 of the FIEA and Article
99 of the FIB Ordinance requires RFIs/
FIBOs that intend to conclude a swap
transaction to deliver to their customer
documentation that outlines all relevant
terms of the swap transaction. Such
documentation must be delivered prior
to execution in order to ‘‘ensure that the
customer can make a decision on
whether to conclude the contract with a
full understanding on the content…of
the contract.’’ In addition to describing
all relevant terms of the transactions,
the pre-execution documentation must
identify:
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• How the obligations arising from
the swap transactions will be
performed;
• Settlement terms;
• Events on default or termination;
• The name or trade name of the
designated dispute resolution
organization (if any), or the details of
the grievances settlement procedures
and dispute resolution measures; and
• The types of and computation
method of the amount of customer
margins or other guarantee money
which a customer is required to deposit
regarding the swap transactions, the
types of an prices applicable to
properties, etc. which may be deposited
as customer margins or other guarantee
money and matters equivalent thereto,
and how customer margins or other
guarantee money will be deposited by or
returned to the customer.
II–1–2.1(5)(i) and (ii) of the Inspection
Manual for FIBOs requires RFIs/FIBOs
to develop internal controls to verify
compliance with these documentation
requirements, including a system to
verify that the written documents were
issued before the agreements were
concluded. Such internal controls must
be approved by the RFI’s/FIBO’s board
of directors. In addition, pursuant to
IV(1) of the Checklist for Business Risk
Management (Governance) of the
Inspection Manual for banks, banks are
required to develop an external audit
system to review the effectiveness of
these internal controls on at least an
annual basis. II–1–1.4(1) of the
Inspection Manual for FIBOs requires a
RFI/FIBO’s board of directors to
establish an internal audit system to
verify the appropriateness and
effectiveness of these internal controls
by setting up a highly independent
internal audit division.
Commission Determination: The
Japanese standards specified above
require OTC derivative contracts
entered into between RFIs/FIBOs and
their customers to be confirmed in
writing, which corresponds to the
requirements of Commission regulation
23.504(b)(2).
Pursuant to the FIEA, RFIs and FIBOs
are required to document the
computation method of the customer
margins or other guarantee money that
the customer is required to deposit
regarding the swap transactions. This
corresponds with Commission
regulation 23.504(b)(3) and (b)(4)(i),
which requires SDs and MSPs to engage
in daily valuation with other SDs and
MSPs, and financial entities.
Under the Japanese standards, when
concluding OTC derivative contracts
with each other, counterparties must
have agreed detailed procedures and
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processes in relation to: (a)
identification, recording, and
monitoring of disputes relating to the
recognition or valuation of the contracts
and to the exchange of collateral
between counterparties, and (b) the
resolution of disputes in a timely
manner. These aspects of the Japanese
standards correspond to the valuation
documentation requirements under
Commission regulation 23.504(b)(4),
which also require use of market
transactions for valuations to the extent
practicable, or other objective criteria,
and an agreement on detailed processes
for valuation dispute resolution for
purposes of complying with margin
requirements.
Generally identical in intent to
§ 23.504(b)(2), (3), and (4), the Japanese
confirmation and valuation
documentation requirements are
designed to reduce the legal,
operational, counterparty credit, and
market risk that can arise from
undocumented transactions or terms,
reducing the risk of collateral and legal
disputes, and exposure of counterparties
to significant counterparty credit risk.
Moreover, generally identical in
intent to § 23.504(a)(2), (b)(1), (c), and
(d), the Japanese standards require that
SDs and MSPs establish policies and
procedures, including audit procedures,
approved in writing by senior
management of the SD or MSP,
reasonably designed to ensure that they
have entered into swap trading
relationship documentation in
compliance with appropriate standards
with each counterparty prior to or
contemporaneously with entering into a
swap transaction with such
counterparty.
Based on the foregoing and the
representations of the applicant, the
Commission finds the confirmation and
valuation documentation requirements
of the Japanese standards specified
above are comparable to and as
comprehensive as the swap trading
relationship documentation
requirements of Commission regulations
23.504(a)(2), (b)(1), (2), (3), and (4), (c),
and (d).
The foregoing comparability
determination does not extend to the
requirement that such documentation
include notice of the status of the
counterparty under the orderly
liquidation procedures of Title II of the
Dodd-Frank Act, and the effect of
clearing on swaps executed
bilaterally.41
41 See
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§ 23.504(b)(5) and (6).
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B. Daily Trading Records (§ 23.202)
Commission Requirement: Section
4s(g)(1) of the CEA and Commission
regulation 23.202 generally require that
SDs and MSPs retain daily trading
records for swaps and related cash and
forward transactions, including:
• Documents on which transaction
information is originally recorded;
• All information necessary to
conduct a comprehensive and accurate
trade reconstruction;
• Pre-execution trade information
including records of all oral and written
communications concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices that lead to the
execution of a swap or related cash and
forward transactions, whether
communicated by phone, fax, instant
messaging, chat rooms, email, mobile
device, or other digital or electronic
media;
• Reliable timing date for the
initiation of a trade;
• A record of the time, to the nearest
minute using Coordinated Universal
Time (UTC), of each quotation provided
or received prior to trade execution;
• Execution trade information
including the terms of each swap and
related cash or forward transaction,
terms regarding payment or settlement,
initial and variation margin
requirements, option premiums, and
other cash flows;
• The trade ticket for each swap and
related cash or forward transaction;
• The date and time of execution of
each swap and related cash or forward
transaction to the nearest minute using
UTC;
• The identity of the counterparty
and the date and title of the agreement
to which each swap is subject, including
any swap trading relationship
documentation and credit support
arrangements;
• The product name and identifier,
the price at which the swap was
executed, and the fees, commissions
and other expenses applicable;
• Post-execution trade information
including records of confirmation,
termination, novation, amendment,
assignment, netting, compression,
reconciliation, valuation, margining,
collateralization, and central clearing;
• The time of confirmation to the
nearest minute using UTC;
• Ledgers of payments and interest
received, moneys borrowed and loaned,
daily swap valuations, and daily
calculation of current and potential
future exposure for each counterparty;
• Daily calculation of initial and
variation margin requirements;
• Daily calculation of the value of
collateral, including haircuts;
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• Transfers of collateral, including
substitutions, and the types of collateral
transferred; and
• Credits and debits for each
counterparty’s account.
Daily trading records must be
maintained in a form and manner
identifiable and searchable by
transaction and counterparty, and
records of swaps must be maintained for
the duration of the swap plus five years,
and voice recordings for one year.
Records must be ‘‘readily accessible’’ for
the first two years of the five year
retention period (consistent with § 1.31).
Regulatory Objective: Through
§ 23.202, the Commission seeks to
ensure that an SD’s or MSP’s records
include all information necessary to
conduct a comprehensive and accurate
trade reconstruction for each swap,
which necessarily requires the records
to be identifiable by transaction and
counterparty. Complete and accurate
trade reconstruction is critical for both
regulatory oversight and investigations
of illegal activity pursuant to the
Commission’s enforcement authority.
The Commission believes that a
comprehensive and accurate trade
reconstruction requires records of preexecution, execution, and postexecution trade information.
Comparable Japanese Law and
Regulations: The applicant has
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(g) of the CEA and
Commission regulation 23.202.
Article 156–64(1) and (2) of the FIEA,
II–2–1 2.(1)(iv) of the FIBO Inspection
Manual, and II.1.1(3)(iii) of the
Checklist for Customer Protection
Management, requires a RFI/FIBO to
retain records for swaps and related
cash and forward transactions,
including:
• Documents prior to the conclusion
of a contract that outline the terms of a
swap transaction;
• 24-hour audio recordings of trading
by dealers;
• Order tickets for each swap and
related cash or forward transactions;
• The date and time the order was
accepted and the date and time the
order was filled, both of which must be
recorded by time of day, of each swap
and related cash or forward transaction;
• Product name (items to be listed in
the books and documents may be
entered using codes, brevity codes or
any other symbols that have been
standardized by the relevant RFI/FIBO);
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• Price at which the swap was
executed, and the fees, commissions
and other expenses applicable;
• Documents upon conclusion of a
contract that contain an outline of swap
transactions, the name of the customer,
as well as trading daily books and
customer account ledgers that contain
transaction histories;
• Ledgers of the customer fees,
margin transaction payment interest,
margin transactions receipt interest,
security borrowing fee or security
lending fee;
• Guarantee money on deposit,
customer margin, trade margin or other
matters regarding collateral property
(the distinction between cash or
security, etc. deposited as margin, date
of receipt or date of return, issue name,
volume or amount of money); and
• Debit or credit of money and
balances of all accounts.
Pursuant to the OTC Derivative
Ordinance, FIEA Enforcement Order,
FIB Ordinance, and the Supervisory
Guideline for FIBOs, records of swaps of
RFIs/FIBOs must be in writing and
maintained for a period from 5 to 10
years, depending on the specific record
at issue. III–16(iv) of the Checklist for
Market Risk Management of the
Inspection Manual for banks assesses
whether voice recordings are
maintained for all traders on a 24-hour
basis, recorded tapes are stored for a
prescribed period of time, and retained
‘‘under the control of an organization
segregated from the market and backoffice divisions.’’.
III–2-(1)(viii) in Exhibit 1 of the
Checklist for Operational Risk
Management of the Inspection Manual
for banks and II–2–1.2(1) of the
Inspection Manual for FIBOs assesses
whether documentary evidence such as
transaction data are stored for a period
specified by the internal rules and
operational procedures, etc., but at least
one year.
In addition, 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
designated parent company of a FIBO
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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.
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 record pre-execution trade
information, communicated by not only
telephone but also other forms of
communication comparable to those
listed in § 23.202(a)(1) and (b)(1).
Commission Determination: The
Commission finds that compliance with
Japanese standards would enable the
relevant competent authority to conduct
a comprehensive and accurate trade
reconstruction for each swap, which the
Commission finds generally meets the
regulatory objective of § 23.202.
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 applicant, the
Commission hereby determines that the
daily trading records requirements of
Japan’s standards are comparable to and
as comprehensive as § 23.202.
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
Transaction-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.
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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
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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 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 DoddFrank Act4 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.
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 crossborder implementation of over-thecounter derivatives reforms.5 The ODRG
specifically agreed that a flexible,
outcomes-based approach, based on a
broad category-by-category basis, should
3 CEA
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.
PO 00000
Frm 00088
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78897
section 2(i); 7 U.S.C. 2(i).
VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Public Law 111–203,
124 Stat. 1376 (2010).
5 http://www.cftc.gov/PressRoom/PressReleases/
pr6678–13.
4 Title
E:\FR\FM\27DEN1.SGM
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Federal Register / Vol. 78, No. 249 / Friday, December 27, 2013 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
form the basis of comparability
determinations.6
However, instead of following this
approach, the Commission has made its
comparability determinations on a ruleby-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.
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
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.
VerDate Mar<15>2010
23:48 Dec 26, 2013
Jkt 232001
(‘‘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 agreedupon 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.
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. 2013–30977 Filed 12–26–13; 8:45 am]
9 Exemptive
Order Regarding Compliance With
Certain Swap Regulations, 78 FR 43785 (Jul. 22,
2013).
10 http://www.cftc.gov/PressRoom/Speeches
Testimony/opaomalia-29.
11 http://www.cftc.gov/PressRoom/
SpeechesTestimony/omaliastatement071213b.
PO 00000
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BILLING CODE 6351–01–P
E:\FR\FM\27DEN1.SGM
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]]>Agencies
[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]
[Notices]
[Pages 78890-78898]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30977]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Comparability Determination for Japan: Certain Transaction-Level
Requirements
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Comparability Determination for Certain Requirements
under the Japanese Laws and Regulations.
-----------------------------------------------------------------------
SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding certain
parts of a request by the Bank of Tokyo-Mitsubishi UFJ, Ltd (``BTMU'')
that the Commission determine that laws and regulations applicable in
the 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) Swap trading
relationship documentation and (ii) daily trading records
(collectively, the ``Business Conduct Requirements'').
DATES:
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 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'' (``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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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 (and foreign branches of U.S.
SDs and MSPs) in the six jurisdictions with conditional relief from
certain requirements of Commission regulations (those referred to as
``Transaction-Level Requirements'' in the Guidance) until the earlier
of December 21, 2013, or 30 days following the issuance of a
substituted compliance determination.\3\ However, the Commission
provided only transitional relief from the real-time public reporting
requirements under part 43 of the Commission's regulations until
[[Page 78891]]
September 30, 2013, stating that ``it would not be in the public
interest to further delay reporting under part 43 . . . .'' \4\
Similarly, the Commission provided transitional relief only until
October 10, 2013, from the clearing and swap processing requirements
(as described in the Guidance), stating that, ``[b]ecause SDs and MSPs
have been committed to clearing their [credit default swaps] and
interest rate swaps for many years, and indeed have been voluntarily
clearing for many years, any further delay of the Commission's clearing
requirement is unwarranted.'' \5\ The Commission did not make any
comparability determination with respect to clearing and swap
processing prior to October 10, 2013, or real-time public reporting
prior to September 30, 2013.
---------------------------------------------------------------------------
\2\ 78 FR 43785 (July 22, 2013).
\3\ The Transaction-Level Requirements under the Exemptive Order
consist of 17 CFR 37.12, 38.11, 23.202, 23.205, 23.400-451, 23.501,
23.502, 23.503, 23.504, 23.505, 23.506, 23.610, and parts 43 and 50
of the Commission's regulations.
\4\ See id. at 43789.
\5\ See id. at 43790.
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On September 20, 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 Transaction-Level Requirements, including the
Business Conduct Requirements.\6\ (BTMU is referred to herein as the
``applicant''). On December 16, 2013, the application was further
supplemented with corrections and additional materials. The following
is the Commission's analysis and determination regarding the Business
Conduct Requirements, as detailed below.
---------------------------------------------------------------------------
\6\ For purposes of this notice, the Business Conduct
Requirements consist of 17 CFR 23.202 and 23.504.
---------------------------------------------------------------------------
In addition to the Business Conduct Requirements described below,
the applicant also requested a comparability determination with respect
to law and regulations applicable in Japan governing trade execution,
real-time public reporting, clearing, and swap processing.
With respect to trade execution and real-time reporting, the
Commission has not made a comparability determination at this time due
to the Commission's view that although a legislative framework for such
requirements exists in Japan, detailed regulations with which to
compare the requirements of the Commission's regulations on trade
execution and real-time public reporting under such framework are still
under consideration in Japan. The Commission may address these requests
in a separate notice at a later date, taking into account further
developments in the U.S. and Japan.
With respect to clearing and swap processing, this notice does not
address Sec. 50.2 (Treatment of swaps subject to a clearing
requirement), Sec. 50.4 (Classes of swaps required to be cleared),
Sec. 23.506 (Swap processing and clearing), or Sec. 23.610 (Clearing
member acceptance for clearing).
The mandatory clearing requirement in Japan, which is consistent
with the G20 commitments \7\ and objectives, was implemented in
November 2012, ahead of other G20 jurisdictions. Japan's clearing
requirement, at its initial stage, is applied to transactions between
large domestic financial institutions registered under the Financial
Instruments and Exchange Act, No. 25 of 1948 (``FIEA''), who are
members of licensed clearing organizations \8\, for (i) certain credit
default swaps (i.e., those referencing iTraxx Japan--an investment-
grade index CDS from 50 Japanese firms); and (ii) certain interest rate
swaps (i.e., three month or six month Japanese yen LIBOR interest rate
swaps). According to Japanese authorities, the scope of entities and
products subject to the clearing requirement in Japan will be expanded
over the next two years in a phased manner.
---------------------------------------------------------------------------
\7\ In 2009, leaders of the Group of 20 (``G20'')--whose
membership includes Japan, the United States, and 18 other
countries--agreed that: (i) OTC derivatives contracts should be
reported to trade repositories; (ii) all standardized OTC
derivatives contracts should be cleared through central
counterparties and traded on exchanges or electronic trading
platforms, where appropriate, by the end of 2012; and (iii) non-
centrally cleared contracts should be subject to higher capital
requirements.
\8\ Japan Securities Clearing Corporation (``JSCC'') is
currently the only licensed clearing organization under the FIEA in
Japan.
---------------------------------------------------------------------------
While the Commission considers that the legal framework in respect
of clearing and swap processing in Japan is comparable to the U.S
framework, it also recognizes that there are differences in the scope
of entities and products between its clearing requirement under section
2(h)(1)(A) of the CEA and Sec. 50.2 (``the CEA clearing requirement'')
and the Japanese FIEA clearing requirement, due to differences in
market structures and conditions. Due to such differences, the
Commission has not made a comparability determination with respect to
Sec. Sec. 50.2, 50.4, 23.506, or 23.610 at this time. The Commission
may address these requests in a separate notice at a later date, taking
into account further developments in the U.S. and Japan.
The Commission notes that its Division of Clearing and Risk has
granted certain no-action relief from the CEA clearing requirement to
qualified clearing participants of JSCC. Pursuant to such no-action
relief, clearing participants of JSCC that are subject to Commission
regulation 50.2, as well as parents and affiliates of such
participants, may continue clearing yen-denominated interest rate swaps
at JSCC instead of at a Commission-registered derivatives clearing
organization (``DCO''). Further, JSCC is in the process of registering
with the Commission as a DCO. Upon JSCC's registration, a Japanese SD
could comply with both the CEA and FIEA clearing requirements by
clearing relevant swaps at JSCC.
II. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act \9\ (``Dodd-Frank Act'' or ``Dodd-
Frank''), which, in Title VII, established a new regulatory framework
for swaps.
---------------------------------------------------------------------------
\9\ 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.\10\
---------------------------------------------------------------------------
\10\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------
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.\11\ 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).
---------------------------------------------------------------------------
\11\ 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.)
---------------------------------------------------------------------------
To provide guidance as to the Commission's views regarding the
scope
[[Page 78892]]
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 describes 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 established 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
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).\12\
---------------------------------------------------------------------------
\12\ 78 FR 45342-45345.
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.\13\
---------------------------------------------------------------------------
\13\ See the Guidance, 78 FR 45342-44.
---------------------------------------------------------------------------
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.\14\ The
Commission's direct access to the books and records required to be
maintained by SD or MSP registered with the Commission is a core
requirement of the CEA \15\ and the Commission's regulations,\16\ and
is a condition to registration.\17\
---------------------------------------------------------------------------
\14\ 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 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 a 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.
\15\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the
CEA.
\16\ See e.g., Sec. Sec. 23.203(b) and 23.606.
\17\ See supra note 13.
---------------------------------------------------------------------------
III. Regulation of SDs and MSPs in Japan
As represented to the Commission by the applicant, 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
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,\18\
Cabinet Office Ordinance,\19\ Supervisory Guidelines \20\ and
Inspection Manuals.\21\ The Securities and Exchange Surveillance
Commission (``SESC'') is within the JFSA and has promulgated, among
other things, the Inspection Manual for FIBOs.
---------------------------------------------------------------------------
\18\ Order for Enforcement of the Banking Act and Order for
Enforcement of the Financial Instruments and Exchange Act.
\19\ Cabinet Office Ordinance on Financial Instruments Business
(``FIB Ordinance'') and Cabinet Office Ordinance on Regulation of
OTC Derivatives Transaction.
\20\ 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'').
\21\ 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.
---------------------------------------------------------------------------
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, the Supervisory Guideline for banks, and the
Inspection Manual for banks, while FIBOs are subject to the FIEA,
relevant laws and regulations for FIBOs, Supervisory Guideline 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
\22\--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.
---------------------------------------------------------------------------
\22\ See Article 2(8)(iv) of the FIEA.
---------------------------------------------------------------------------
The applicant is a licensed bank in Japan that is also registered
as an RFI under the supervision of the JFSA. In addition, the applicant
is a member of several self-regulatory organizations, including the
Japanese Securities
[[Page 78893]]
Dealers Association (``JSDA''). The JSDA is a ``Financial Instruments
Firms Association'' authorized under FIEA by the Prime Minister of
Japan.\23\
---------------------------------------------------------------------------
\23\ Because the applicant's request and the Commission's
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.
---------------------------------------------------------------------------
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.\24\ In making its comparability determinations, the Commission
may include conditions that take into account timing and other issues
related to coordinating the implementation of reform efforts across
jurisdictions.\25\
---------------------------------------------------------------------------
\24\ 78 FR 45343.
\25\ 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.\26\
---------------------------------------------------------------------------
\26\ 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).\27\ 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.
---------------------------------------------------------------------------
\27\ 78 FR 45343.
---------------------------------------------------------------------------
In doing its comparability analysis the Commission may determine
that no comparability determination can be made \28\ and that the non-
U.S. SD or non-U.S. MSP, U.S. bank that is a 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.
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\28\ 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.
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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.\29\ 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 swap 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.\30\
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\29\ 78 FR 45343.
\30\ 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 generally will 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 \31\ of SDs and MSPs \32\ in the
relevant jurisdictions.\33\ Further, as stated in the Guidance, the
Commission expects that an applicant would notify the Commission of any
[[Page 78894]]
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.\34\
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\31\ ``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 Part 23 (17 CFR Part 23) are limited
in scope to the swaps activities of SDs and MSPs.
\32\ 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 solely responsible for
determining whether it is legally required to comply with 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.
\33\ 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.
\34\ 78 FR 45345.
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The Guidance provided a detailed discussion of the Commission's
policy regarding the availability of substituted compliance \35\ for
the Business Conduct Requirements.
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\35\ 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.
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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 \36\ 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.''\37\
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\36\ 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.
\37\ 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,\38\ provide
for notification upon the occurrence of specified events, memorialize
understandings related to on-site visits,\39\ and include protections
related to the use and confidentiality of non-public information shared
pursuant to the arrangement.
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\38\ 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. Sec. 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'').
\39\ 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'').
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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
Business Conduct Requirements in the ``risk mitigation and
transparency'' category 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 Business
Conduct Requirements that the applicant 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 to and as 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 release.
As was stated in the Guidance, the Commission understands 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. Swap Trading Relationship Documentation (Sec. 23.504)
Commission Requirement: Section 4s(i) of the CEA requires each SD
and MSP to conform to Commission standards for the timely and accurate
confirmation, processing, netting, documentation, and valuation of
swaps.\40\ Pursuant to this requirement, the Commission adopted Sec.
23.504.
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\40\ See 7 U.S.C. Sec. 6s(i).
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Pursuant to Sec. 23.504(a), SDs and MSPs must have policies and
procedures reasonably designed to ensure that the SD or MSP enters into
swap trading relationship documentation with each counterparty prior to
executing any swap with such counterparty. Such requirement does not
apply to cleared swaps.
Pursuant to Sec. 23.504(b), SDs and MSPs must, at a minimum,
document terms relating to:
Payment obligations;
Netting of payments;
Events of default or other termination events;
Netting of obligations upon termination;
Transfer of rights/obligations;
[[Page 78895]]
Governing law;
Valuation--must be able to value swaps in a predictable
and objective manner--complete and independently verifiable methodology
for valuation;
Dispute resolution procedures; and
Credit support arrangements with initial/variation margin
at least as high as set for SD/MSPs or prudential regulator
(identifying haircuts and class of eligible assets).
Regulatory Objective: Through Commission regulation 23.504, the
Commission seeks to reduce the legal, operational, counterparty credit,
and market risk that can arise from undocumented swaps or undocumented
terms of swaps. Inadequate documentation of swap transactions is more
likely to result in collateral and legal disputes, thereby exposing
counterparties to significant counterparty credit risk.
In particular, documenting agreements regarding valuation is
critical because, as the Commission has noted, the ability to determine
definitively the value of a swap at any given time lies at the center
of many of the OTC derivatives market reforms contained in the Dodd-
Frank Act and is a cornerstone of risk management. With respect to
other SDs/MSPs and financial entities, or upon request of any other
counterparty, the regulation requires agreement on the process
(including alternatives and dispute resolution procedures) for
determining the value of each swap for the duration of such swap for
purposes of complying with the Commission's margin and risk management
requirements, with such valuations based on objective criteria to the
extent practicable.
Comparable Japanese Law and Regulations: The applicant has
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(i) of the CEA and
Commission regulation 23.504.
Article 37-3 of the FIEA and Article 99 of the FIB Ordinance
requires RFIs/FIBOs that intend to conclude a swap transaction to
deliver to their customer documentation that outlines all relevant
terms of the swap transaction. Such documentation must be delivered
prior to execution in order to ``ensure that the customer can make a
decision on whether to conclude the contract with a full understanding
on the content[hellip]of the contract.'' In addition to describing all
relevant terms of the transactions, the pre-execution documentation
must identify:
How the obligations arising from the swap transactions
will be performed;
Settlement terms;
Events on default or termination;
The name or trade name of the designated dispute
resolution organization (if any), or the details of the grievances
settlement procedures and dispute resolution measures; and
The types of and computation method of the amount of
customer margins or other guarantee money which a customer is required
to deposit regarding the swap transactions, the types of an prices
applicable to properties, etc. which may be deposited as customer
margins or other guarantee money and matters equivalent thereto, and
how customer margins or other guarantee money will be deposited by or
returned to the customer.
II-1-2.1(5)(i) and (ii) of the Inspection Manual for FIBOs requires
RFIs/FIBOs to develop internal controls to verify compliance with these
documentation requirements, including a system to verify that the
written documents were issued before the agreements were concluded.
Such internal controls must be approved by the RFI's/FIBO's board of
directors. In addition, pursuant to IV(1) of the Checklist for Business
Risk Management (Governance) of the Inspection Manual for banks, banks
are required to develop an external audit system to review the
effectiveness of these internal controls on at least an annual basis.
II-1-1.4(1) of the Inspection Manual for FIBOs requires a RFI/FIBO's
board of directors to establish an internal audit system to verify the
appropriateness and effectiveness of these internal controls by setting
up a highly independent internal audit division.
Commission Determination: The Japanese standards specified above
require OTC derivative contracts entered into between RFIs/FIBOs and
their customers to be confirmed in writing, which corresponds to the
requirements of Commission regulation 23.504(b)(2).
Pursuant to the FIEA, RFIs and FIBOs are required to document the
computation method of the customer margins or other guarantee money
that the customer is required to deposit regarding the swap
transactions. This corresponds with Commission regulation 23.504(b)(3)
and (b)(4)(i), which requires SDs and MSPs to engage in daily valuation
with other SDs and MSPs, and financial entities.
Under the Japanese standards, when concluding OTC derivative
contracts with each other, counterparties must have agreed detailed
procedures and processes in relation to: (a) identification, recording,
and monitoring of disputes relating to the recognition or valuation of
the contracts and to the exchange of collateral between counterparties,
and (b) the resolution of disputes in a timely manner. These aspects of
the Japanese standards correspond to the valuation documentation
requirements under Commission regulation 23.504(b)(4), which also
require use of market transactions for valuations to the extent
practicable, or other objective criteria, and an agreement on detailed
processes for valuation dispute resolution for purposes of complying
with margin requirements.
Generally identical in intent to Sec. 23.504(b)(2), (3), and (4),
the Japanese confirmation and valuation documentation requirements are
designed to reduce the legal, operational, counterparty credit, and
market risk that can arise from undocumented transactions or terms,
reducing the risk of collateral and legal disputes, and exposure of
counterparties to significant counterparty credit risk.
Moreover, generally identical in intent to Sec. 23.504(a)(2),
(b)(1), (c), and (d), the Japanese standards require that SDs and MSPs
establish policies and procedures, including audit procedures, approved
in writing by senior management of the SD or MSP, reasonably designed
to ensure that they have entered into swap trading relationship
documentation in compliance with appropriate standards with each
counterparty prior to or contemporaneously with entering into a swap
transaction with such counterparty.
Based on the foregoing and the representations of the applicant,
the Commission finds the confirmation and valuation documentation
requirements of the Japanese standards specified above are comparable
to and as comprehensive as the swap trading relationship documentation
requirements of Commission regulations 23.504(a)(2), (b)(1), (2), (3),
and (4), (c), and (d).
The foregoing comparability determination does not extend to the
requirement that such documentation include notice of the status of the
counterparty under the orderly liquidation procedures of Title II of
the Dodd-Frank Act, and the effect of clearing on swaps executed
bilaterally.\41\
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\41\ See Sec. 23.504(b)(5) and (6).
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[[Page 78896]]
B. Daily Trading Records (Sec. 23.202)
Commission Requirement: Section 4s(g)(1) of the CEA and Commission
regulation 23.202 generally require that SDs and MSPs retain daily
trading records for swaps and related cash and forward transactions,
including:
Documents on which transaction information is originally
recorded;
All information necessary to conduct a comprehensive and
accurate trade reconstruction;
Pre-execution trade information including records of all
oral and written communications concerning quotes, solicitations, bids,
offers, instructions, trading, and prices that lead to the execution of
a swap or related cash and forward transactions, whether communicated
by phone, fax, instant messaging, chat rooms, email, mobile device, or
other digital or electronic media;
Reliable timing date for the initiation of a trade;
A record of the time, to the nearest minute using
Coordinated Universal Time (UTC), of each quotation provided or
received prior to trade execution;
Execution trade information including the terms of each
swap and related cash or forward transaction, terms regarding payment
or settlement, initial and variation margin requirements, option
premiums, and other cash flows;
The trade ticket for each swap and related cash or forward
transaction;
The date and time of execution of each swap and related
cash or forward transaction to the nearest minute using UTC;
The identity of the counterparty and the date and title of
the agreement to which each swap is subject, including any swap trading
relationship documentation and credit support arrangements;
The product name and identifier, the price at which the
swap was executed, and the fees, commissions and other expenses
applicable;
Post-execution trade information including records of
confirmation, termination, novation, amendment, assignment, netting,
compression, reconciliation, valuation, margining, collateralization,
and central clearing;
The time of confirmation to the nearest minute using UTC;
Ledgers of payments and interest received, moneys borrowed
and loaned, daily swap valuations, and daily calculation of current and
potential future exposure for each counterparty;
Daily calculation of initial and variation margin
requirements;
Daily calculation of the value of collateral, including
haircuts;
Transfers of collateral, including substitutions, and the
types of collateral transferred; and
Credits and debits for each counterparty's account.
Daily trading records must be maintained in a form and manner
identifiable and searchable by transaction and counterparty, and
records of swaps must be maintained for the duration of the swap plus
five years, and voice recordings for one year. Records must be
``readily accessible'' for the first two years of the five year
retention period (consistent with Sec. 1.31).
Regulatory Objective: Through Sec. 23.202, the Commission seeks to
ensure that an SD's or MSP's records include all information necessary
to conduct a comprehensive and accurate trade reconstruction for each
swap, which necessarily requires the records to be identifiable by
transaction and counterparty. Complete and accurate trade
reconstruction is critical for both regulatory oversight and
investigations of illegal activity pursuant to the Commission's
enforcement authority. The Commission believes that a comprehensive and
accurate trade reconstruction requires records of pre-execution,
execution, and post-execution trade information.
Comparable Japanese Law and Regulations: The applicant has
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(g) of the CEA and
Commission regulation 23.202.
Article 156-64(1) and (2) of the FIEA, II-2-1 2.(1)(iv) of the FIBO
Inspection Manual, and II.1.1(3)(iii) of the Checklist for Customer
Protection Management, requires a RFI/FIBO to retain records for swaps
and related cash and forward transactions, including:
Documents prior to the conclusion of a contract that
outline the terms of a swap transaction;
24-hour audio recordings of trading by dealers;
Order tickets for each swap and related cash or forward
transactions;
The date and time the order was accepted and the date and
time the order was filled, both of which must be recorded by time of
day, of each swap and related cash or forward transaction;
Product name (items to be listed in the books and
documents may be entered using codes, brevity codes or any other
symbols that have been standardized by the relevant RFI/FIBO);
Price at which the swap was executed, and the fees,
commissions and other expenses applicable;
Documents upon conclusion of a contract that contain an
outline of swap transactions, the name of the customer, as well as
trading daily books and customer account ledgers that contain
transaction histories;
Ledgers of the customer fees, margin transaction payment
interest, margin transactions receipt interest, security borrowing fee
or security lending fee;
Guarantee money on deposit, customer margin, trade margin
or other matters regarding collateral property (the distinction between
cash or security, etc. deposited as margin, date of receipt or date of
return, issue name, volume or amount of money); and
Debit or credit of money and balances of all accounts.
Pursuant to the OTC Derivative Ordinance, FIEA Enforcement Order,
FIB Ordinance, and the Supervisory Guideline for FIBOs, records of
swaps of RFIs/FIBOs must be in writing and maintained for a period from
5 to 10 years, depending on the specific record at issue. III-16(iv) of
the Checklist for Market Risk Management of the Inspection Manual for
banks assesses whether voice recordings are maintained for all traders
on a 24-hour basis, recorded tapes are stored for a prescribed period
of time, and retained ``under the control of an organization segregated
from the market and back-office divisions.''.
III-2-(1)(viii) in Exhibit 1 of the Checklist for Operational Risk
Management of the Inspection Manual for banks and II-2-1.2(1) of the
Inspection Manual for FIBOs assesses whether documentary evidence such
as transaction data are stored for a period specified by the internal
rules and operational procedures, etc., but at least one year.
In addition, 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 designated
parent company of a FIBO
[[Page 78897]]
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.
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 record pre-execution trade information, communicated by not only
telephone but also other forms of communication comparable to those
listed in Sec. 23.202(a)(1) and (b)(1).
Commission Determination: The Commission finds that compliance with
Japanese standards would enable the relevant competent authority to
conduct a comprehensive and accurate trade reconstruction for each
swap, which the Commission finds generally meets the regulatory
objective of Sec. 23.202.
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 applicant,
the Commission hereby determines that the daily trading records
requirements of Japan's standards are comparable to and as
comprehensive as Sec. 23.202.
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
Transaction-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.
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\1\ Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,
2013).
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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.
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\2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
\3\ CEA section 2(i); 7 U.S.C. 2(i).
\4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
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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
[[Page 78898]]
form the basis of comparability determinations.\6\
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\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.''
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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.
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\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).
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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.
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\8\ Yen-denominated interest rate swaps are subject to the
mandatory clearing requirement in both the U.S. and Japan.
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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.
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\9\ Exemptive Order Regarding Compliance With Certain Swap
Regulations, 78 FR 43785 (Jul. 22, 2013).
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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.
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\10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.
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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.
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\11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.
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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. 2013-30977 Filed 12-26-13; 8:45 am]
BILLING CODE 6351-01-P
