Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican Comision Nacional Bancaria y de Valores, 76374-76402 [2022-26758]
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Federal Register / Vol. 87, No. 238 / Tuesday, December 13, 2022 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Chapter I
Notice of Proposed Order and Request
for Comment on an Application for a
Capital Comparability Determination
Submitted on Behalf of Nonbank Swap
Dealers Subject to Regulation by the
Mexican Comision Nacional Bancaria y
de Valores
Commodity Futures Trading
Commission.
ACTION: Proposed order and request for
comment.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is soliciting public comment
on a joint request submitted by Morgan
Stanley Mexico, Casa de Bolsa, S.A. de
C.V., Goldman Sachs Mexico, Casa de
Bolsa, S.A. de C.V., and Casa de Bolsa
Finamex, S.A. de C.V. requesting that
the Commission determine that the
capital and financial reporting laws and
regulations of Mexico applicable to
CFTC-registered swap dealers organized
and domiciled in Mexico, and licensed
with the Mexican Banking and
Securities Commission (Comision
Nacional Bancaria y de Valores) as
broker-dealers (casa de bolsa), provide a
sufficient basis for an affirmative
finding of comparability with respect to
the Commission’s swap dealer capital
and financial reporting requirements
adopted under the Commodity
Exchange Act. The Commission also is
soliciting public comment on a
proposed order providing for the
conditional availability of substituted
compliance in connection with the
application.
SUMMARY:
Comments must be received on
or before February 13, 2023.
ADDRESSES: You may submit comments,
identified by ‘‘Mexico Swap Dealer
Capital Comparability Determination’’,
by any of the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this proposed order
and follow the instructions on the
Public Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. To avoid
possible delays with mail or in-person
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deliveries, submissions through the
CFTC Comments Portal are encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish the
Commission to consider information
that you believe is exempt from
disclosure under the Freedom of
Information Act (‘‘FOIA’’), a petition for
confidential treatment of the exempt
information may be submitted according
to the procedures established in
Commission Regulation 145.9.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the proposed
determination and order will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the FOIA.
FOR FURTHER INFORMATION CONTACT:
Amanda L. Olear, Director, 202–418–
5283, aolear@cftc.gov; Thomas Smith,
Deputy Director, 202–418–5495,
tsmith@cftc.gov; Rafael Martinez,
Associate Director, 202–418–5462,
rmartinez@cftc.gov; Joshua Beale,
Associate Director, 202–418–5446,
jbeale@cftc.gov; Warren Gorlick,
Associate Director, 202–418–5195,
wgorlick@cftc.gov; Jennifer Bauer,
Special Counsel, 202–418–5472,
jbauer@cftc.gov; Carmen MoncadaTerry, Special Counsel, 202–418–5795,
cmoncadaterry@cftc.gov; Liliya
Bozhanova, Special Counsel, 202–418–
6232, lbozhanova@cftc.gov; Justin
McPhee, Risk Analyst, 202–418–6223,
jmchpee@cftc.gov, Market Participants
Division; Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street NW, Washington, DC
20581.
SUPPLEMENTARY INFORMATION: The
Commission is soliciting public
comment on an application dated
September 28, 2021 (the ‘‘Mexico
Application’’) and submitted jointly by
Morgan Stanley Mexico, Casa de Bolsa,
S.A. de C.V., Goldman Sachs Mexico,
1 17 CFR 145.9. Commission regulations referred
to in this document are found at 17 CFR chapter
I, and are accessible on the Commission’s website
at: https://www.cftc.gov/LawRegulation/Commodity
ExchangeAct/index.htm.
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Casa de Bolsa, S.A. de C.V., and Casa de
Bolsa Finamex, S.A. de C.V. (the
‘‘Applicants’’).2 The Applicants’ Mexico
Application requests that the
Commission issue an order finding that
registered nonbank 3 swap dealers
(‘‘SDs’’) organized and domiciled in
Mexico (‘‘Mexican nonbank SDs’’) may
satisfy certain capital and financial
reporting requirements under the
Commodity Exchange Act (‘‘CEA’’) 4 by
being subject to, and complying with,
comparable capital and financial
reporting requirements under Mexican
laws and regulations. The Commission
also is soliciting public comment on a
proposed order that would permit
Mexican nonbank SDs, subject to certain
conditions, to comply with certain
CFTC SD capital and financial reporting
requirements in the manner set forth in
the proposed order.
I. Introduction
A. Regulatory Background—Swap
Dealer and Major Swap Participant
Capital and Financial Reporting
Requirements
Section 4s(e) of the CEA 5 directs the
Commission and ‘‘prudential
regulators’’ 6 to impose capital
requirements on all SDs and major swap
participants (‘‘MSPs’’) registered with
the Commission. Section 4s(e) of the
CEA also directs the Commission and
prudential regulators to adopt
regulations imposing initial and
variation margin requirements on swaps
entered into by SDs and MSPs that are
not cleared by a registered derivatives
clearing organization (‘‘uncleared
swaps’’).
Section 4s(e) applies a bifurcated
approach with respect to the above
Congressional directives, requiring each
SD and MSP that is subject to the
regulation of a prudential regulator
(‘‘bank SD’’ and ‘‘bank MSP,’’
2 The Mexico Application was submitted by Colin
D. Lloyd, Cleary Gottlieb Steen & Hamilton LLP, on
behalf of the Applicants. The Mexico Application
is available on the Commission’s website at: https://
www.cftc.gov/LawRegulation/DoddFrankAct/
CDSCP/index.htm.
3 As discussed in Section I.A. immediately below,
the U.S. prudential regulators have capital
jurisdiction over registered swap dealers that are
subject to their regulation (‘‘bank SDs’’) and the
Commission has capital jurisdiction over registered
SDs that are not subject to the regulation of a U.S.
prudential regulator (i.e., nonbank SDs).
4 7 U.S.C. 1 et seq. The CEA may be accessed
through the Commission’s website, www.cftc.gov.
5 7 U.S.C. 6s(e).
6 The term ‘‘prudential regulators’’ is defined in
the CEA to mean the Board of Governors of the
Federal Reserve System (‘‘Federal Reserve Board’’);
the Office of the Comptroller of the Currency; the
Federal Deposit Insurance Corporation; the Farm
Credit Administration; and the Federal Housing
Finance Agency. See 7 U.S.C. 1a(39).
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Federal Register / Vol. 87, No. 238 / Tuesday, December 13, 2022 / Proposed Rules
respectively) to meet the minimum
capital requirements and uncleared
swaps margin requirements adopted by
the applicable prudential regulator, and
requiring each SD and MSP that is not
subject to the regulation of a prudential
regulator (‘‘nonbank SD’’ and ‘‘nonbank
MSP,’’ respectively) to meet the
minimum capital requirements and
uncleared swaps margin requirements
adopted by the Commission.7 Therefore,
the Commission’s authority to impose
capital requirements and margin
requirements for uncleared swap
transactions extends to nonbank SDs
and nonbank MSPs, including nonbank
subsidiaries of bank holding companies
regulated by the Federal Reserve Board.8
The prudential regulators
implemented Section 4s(e) in 2015 by
amending existing capital requirements
applicable to bank SDs and bank MSPs
to incorporate swap transactions into
their respective bank capital
frameworks, and by adopting rules
imposing initial and variation margin
requirements on bank SDs and bank
MSPs that engage in uncleared swap
transactions.9 The Commission adopted
final rules imposing initial and variation
margin obligations on nonbank SDs and
nonbank MSPs for uncleared swap
transactions on January 6, 2016.10 The
Commission also approved final capital
requirements for nonbank SDs and
nonbank MSPs on July 24, 2020, which
were published in the Federal Register
on September 15, 2020 with a
compliance date of October 6, 2021
(‘‘CFTC Capital Rules’’).11
Section 4s(f) of the CEA addresses SD
and MSP financial reporting
requirements.12 Section 4s(f) of the CEA
authorizes the Commission to adopt
rules imposing financial condition
reporting obligations on all SDs and
MSPs (i.e., nonbank SDs, nonbank
MSPs, bank SDs, and bank MSPs).
Specifically, Section 4s(f)(1)(A) of the
CEA provides, in relevant part, that each
registered SD and MSP must make
financial condition reports as required
by regulations adopted by the
Commission.13 The Commission’s
financial reporting obligations were
adopted with the Commission’s
nonbank SD and nonbank MSP capital
77
U.S.C. 6s(e)(2).
U.S.C. 6s(e)(1) and (2).
9 See Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30,
2015).
10 See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81
FR 636 (Jan. 6, 2016).
11 See Capital Requirements of Swap Dealers and
Major Swap Participants, 85 FR 57462 (Sept. 15,
2020).
12 7 U.S.C. 6s(f).
13 7 U.S.C. 6s(f)(1)(A).
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requirements, and also had a
compliance date of October 6, 2021
(‘‘CFTC Financial Reporting Rules’’).14
B. Commission Capital Comparability
Determinations for Non-U.S. Nonbank
Swap Dealers and Non-U.S. Nonbank
Major Swap Participants
Regulation 23.106 establishes a
substituted compliance framework
whereby the Commission may
determine that compliance by a nonU.S. domiciled nonbank SD or non-U.S.
domiciled nonbank MSP with its home
country’s capital and financial reporting
requirements will satisfy all or parts of
the CFTC Capital Rules and all or parts
of the CFTC Financial Reporting Rules
(such a determination referred to as a
‘‘Capital Comparability
Determination’’).15 The availability of
such substituted compliance is
conditioned upon the Commission
issuing a determination that the relevant
foreign jurisdiction’s capital adequacy
and financial reporting requirements,
and related financial recordkeeping
requirements, for non-U.S. nonbank SDs
and/or non-U.S. nonbank MSPs are
comparable to the corresponding CFTC
Capital Rules and CFTC Financial
Reporting Rules. The Commission will
issue a Capital Comparability
Determination in the form of a
Commission order (‘‘Capital
Comparability Determination Order’’).16
The Commission’s approach for
conducting a comparability
determination with respect to the CFTC
Capital Rules and the CFTC Financial
Reporting Rules is a principles-based,
holistic approach that focuses on
14 See
85 FR 57462.
CFR 23.106. Regulation 23.106(a)(1)
provides that a request for a Capital Comparability
Determination may be submitted by a non-U.S.
nonbank SD or a non-U.S. nonbank MSP, a trade
association or other similar group on behalf of its
SD or MSP members, or a foreign regulatory
authority that has direct supervisory authority over
one or more non-U.S. nonbank SDs or non-U.S.
nonbank MSPs. Commission regulations provide
that any non-U.S. nonbank SD or non-U.S. nonbank
MSP that is dually-registered with the Commission
as a futures commission merchant (‘‘FCM’’) is
subject to the capital requirements of Regulation
1.17 and may not petition the Commission for a
Capital Comparability Determination. See 17 CFR
23.101(a)(5) and (b)(4), respectively. Furthermore,
non-U.S. bank SDs and non-U.S. bank MSPs may
not petition the Commission for a Capital
Comparability Determination with respect to their
respective financial reporting requirements under
Regulation 23.105(p) (17 CFR 23.105(p)).
Commission staff has issued, however, a timelimited no-action letter stating the Market
Participants Division will not recommend
enforcement action against a non-U.S. bank SD that
files with the Commission certain financial
information that is provided to its home country
regulator in lieu of certain financial reports required
by Regulation 23.105(p). See CFTC Staff Letter 21–
18, issued on August 31, 2021.
16 17 CFR 23.106(a)(3).
15 17
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76375
whether the applicable foreign
jurisdiction’s capital and financial
reporting requirements achieve
comparable outcomes to the
corresponding CFTC requirements.17 In
this regard, the approach is not a lineby-line assessment or comparison of a
foreign jurisdiction’s regulatory
requirements with the Commission’s
requirements.18 In performing the
analysis, the Commission recognizes
that jurisdictions may adopt differing
approaches to achieving comparable
outcomes, and the Commission will
focus on whether the foreign
jurisdiction’s capital and financial
reporting requirements are comparable
to the Commission’s in purpose and
effect, and not whether they are
comparable in every aspect or contain
identical elements.
A person requesting a Capital
Comparability Determination is required
to submit an application to the
Commission containing: (i) a
description of the objectives of the
relevant foreign jurisdiction’s capital
adequacy and financial reporting
requirements applicable to entities that
are subject to the CFTC Capital Rules
and the CFTC Financial Reporting
Rules; (ii) a description (including
specific legal and regulatory provisions)
of how the relevant foreign
jurisdiction’s capital adequacy and
financial reporting requirements address
the elements of the CFTC Capital Rules
and CFTC Financial Reporting Rules,
including, at a minimum, the
methodologies for establishing and
calculating capital adequacy
requirements and whether such
methodologies comport with any
international standards; and (iii) a
description of the ability of the relevant
foreign regulatory authority to supervise
and enforce compliance with the
relevant foreign jurisdiction’s capital
adequacy and financial reporting
requirements. The applicant must also
submit, upon request, such other
information and documentation as the
Commission deems necessary to
evaluate the comparability of the capital
adequacy and financial reporting
requirements of the foreign
jurisdiction.19
The Commission may consider all
relevant factors in making a Capital
Comparability Determination,
including: (i) the scope and objectives of
the relevant foreign jurisdiction’s capital
and financial reporting requirements;
(ii) whether the relevant foreign
17 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462
at 57521.
18 See 85 FR 57521.
19 17 CFR 23.106(a)(2).
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jurisdiction’s capital and financial
reporting requirements achieve
comparable outcomes to the
Commission’s corresponding capital
requirements and financial reporting
requirements; (iii) the ability of the
relevant foreign regulatory authority or
authorities to supervise and enforce
compliance with the relevant foreign
jurisdiction’s capital adequacy and
financial reporting requirements; and
(iv) any other facts or circumstances the
Commission deems relevant, including
whether the Commission and foreign
regulatory authority or authorities have
a memorandum of understanding
(‘‘MOU’’) or similar arrangement that
would facilitate supervisory
cooperation.20
In performing the comparability
assessment for foreign nonbank SDs, the
Commission’s review will include the
extent to which the foreign
jurisdiction’s requirements address: (i)
the process of establishing minimum
capital requirements for nonbank SDs
and how such process addresses risk,
including market risk and credit risk of
the nonbank SD’s on-balance sheet and
off-balance sheet exposures; (ii) the
types of equity and debt instruments
that qualify as regulatory capital in
meeting minimum requirements; (iii)
the financial reports and other financial
information submitted by a nonbank SD
to its relevant regulatory authority and
whether such information provides the
regulatory authority with the means
necessary to effectively monitor the
financial condition of the nonbank SD;
and (iv) the regulatory notices and other
communications between a nonbank SD
and its foreign regulatory authority that
address potential adverse financial or
operational issues that may impact the
firm. With respect to the ability of the
relevant foreign regulatory authority to
supervise and enforce compliance with
the foreign jurisdiction’s capital
adequacy and financial reporting
requirements, the Commission’s review
will include a review of the foreign
jurisdiction’s surveillance program for
monitoring nonbank SDs’ compliance
with such capital adequacy and
financial reporting requirements, and
the disciplinary process imposed on
firms that fail to comply with such
requirements.
In performing the comparability
assessment for a foreign nonbank
MSP,21 the Commission’s review will
include the extent to which the foreign
20 See 17 CFR 23.106(a)(3) and 85 FR 57520–
57522.
21 Regulation 23.101(b) requires a nonbank MSP
to maintain positive tangible net worth. There are
no MSPs currently registered with the Commission.
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jurisdiction’s requirements address: (1)
the process of establishing minimum
capital requirements for a nonbank MSP
and how such process establishes a
minimum level of capital to ensure the
safety and soundness of the nonbank
MSP; (ii) the financial reports and other
financial information submitted by a
nonbank MSP to its relevant regulatory
authority and whether such information
provides the regulatory authority with
the means necessary to effectively
monitor the financial condition of the
nonbank MSP; and (iii) the regulatory
notices and other communications
between a nonbank MSP and its foreign
regulatory authority that address
potential adverse financial or
operational issues that may impact the
firm. With respect to the ability of the
relevant foreign regulatory authority to
supervise and enforce compliance with
the foreign jurisdiction’s capital
adequacy and financial reporting
requirements, the Commission’s review
will include a review of the foreign
jurisdiction’s surveillance program for
monitoring a nonbank MSP’s
compliance with such capital adequacy
and financial reporting requirements,
and the disciplinary process imposed on
an MSP that fails to comply with such
requirements.
Regulation 23.106 further provides
that the Commission may impose any
terms or conditions that it deems
appropriate in issuing a Capital
Comparability Determination.22 Any
specific terms or conditions with
respect to capital adequacy or financial
reporting requirements will be set forth
in the Commission’s Capital
Comparability Determination Order. As
a general condition to all Capital
Comparability Determination Orders,
the Commission expects to require
notification from applicants of any
material changes to information
submitted by the applicants in support
of a comparability finding, including,
but not limited to, changes in the
relevant foreign jurisdiction’s
supervisory or regulatory regime.
The Commission’s capital adequacy
and financial reporting requirements are
designed to address and manage risks
that arise from a firm’s operation as a SD
or MSP. Given their functions, both sets
of requirements and rules must be
applied on an entity-level basis
(meaning that the rules apply on a firmwide basis, irrespective of the type of
transactions involved) to effectively
address risk to the firm as a whole.
Therefore, in order to rely on a Capital
Comparability Determination, a
nonbank SD or nonbank MSP domiciled
22 See
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in the foreign jurisdiction and subject to
supervision by the relevant regulatory
authority (or authorities) in the foreign
jurisdiction must file a notice with the
Commission of its intent to comply with
the applicable capital adequacy and
financial reporting requirements of the
foreign jurisdiction set forth in the
Capital Comparability Determination in
lieu of all or parts of the CFTC Capital
Rules and/or CFTC Financial Reporting
Rules.23 Notices must be filed
electronically with the Commission’s
Market Participants Division (‘‘MPD’’).24
The filing of a notice by a non-U.S.
nonbank SD or non-U.S. nonbank MSP
provides MPD staff, acting pursuant to
authority delegated by the
Commission,25 with the opportunity to
engage with the firm and to obtain
representations that it is subject to, and
complies with, the laws and regulations
cited in the Capital Comparability
Determination and that it will comply
with any listed conditions. MPD will
issue a letter under its delegated
authority from the Commission
confirming that the non-U.S. nonbank
SD or non-U.S. nonbank MSP may
comply with foreign laws and
regulations cited in the Capital
Comparability Determination in lieu of
complying with the CFTC Capital Rules
and CFTC Financial Reporting Rules
upon MPD’s determination that the firm
is subject to and complies with the
applicable foreign laws and regulations,
is subject to the jurisdiction of the
applicable foreign regulatory authority
(or authorities), and can meet all of the
conditions in the Capital Comparability
Determination.
Each non-U.S. nonbank SD and/or
non-U.S. nonbank MSP that receives, in
accordance with the applicable
Commission Capital Comparability
Determination Order, confirmation from
the Commission that it may comply
with a foreign jurisdiction’s capital
adequacy and/or financial reporting
requirements will be deemed by the
Commission to be in compliance with
the corresponding CFTC Capital Rules
and/or CFTC Financial Reporting
Rules.26 Accordingly, if a nonbank SD
or nonbank MSP fails to comply with
the foreign jurisdiction’s capital
adequacy and/or financial reporting
requirements, the Commission may
initiate an action for a violation of the
corresponding CFTC Capital Rules and/
23 17
CFR 23.106(a)(4).
must be filed in electronic form to the
following email address:
MPDFinancialRequirements@cftc.gov.
25 See 17 CFR 140.91(a)(11).
26 17 CFR 23.106(a)(4)(ii). Confirmation will be
issued by MPD under authority delegated by the
Commission. See 17 CFR 140.91(a)(11).
24 Notices
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or CFTC Financial Reporting Rules.27 In
addition, a non-U.S. nonbank SD or
non-U.S. nonbank MSP that receives
confirmation of its ability to use
substituted compliance remains subject
to the Commission’s examination and
enforcement authority.28
The Commission will consider an
application for a Capital Comparability
Determination to be a representation by
the applicant that the laws and
regulations of the foreign jurisdiction
that are submitted in support of the
application are finalized and in force,
that the description of such laws and
regulations is accurate and complete,
and that, unless otherwise noted, the
scope of such laws and regulations
encompasses the relevant non-U.S.
nonbank SDs and/or non-U.S. nonbank
MSPs domiciled in the foreign
jurisdiction.29 A non-U.S. nonbank SD
or non-U.S. nonbank MSP that is not
legally required to comply with a
foreign jurisdiction’s laws or regulations
determined to be comparable in a
Capital Comparability Determination
may not voluntarily comply with such
laws or regulations in lieu of
compliance with the CFTC Capital
Rules or the CFTC Financial Reporting
rules. Each non-U.S. nonbank SD or
non-U.S. nonbank MSP that seeks to
rely on a Capital Comparability
Determination Order is responsible for
determining whether it is subject to the
foreign laws and regulations found
comparable in Capital Comparability
Determination and the Capital
Comparability Determination Order.
C. Mexico Application for a Capital
Comparability Determination for
Mexico-Domiciled Nonbank Swap
Dealers
The Applicants submitted the Mexico
Application to request that the
Commission issue a Capital
Comparability Determination finding
that compliance with the capital
requirements of Mexico and the
financial reporting requirements of
Mexico, as specified in the Mexico
Application, by a Mexican nonbank SD
satisfies corresponding CFTC Capital
Rules and the CFTC Financial Reporting
Rules applicable to a nonbank SD under
27 Id.
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28 Id.
29 The Commission has provided the Applicants
with an opportunity to review for accuracy and
completeness, and comment on, the Commission’s
description of relevant Mexican laws and
regulations on which this proposed Capital
Comparability Determination is based. The
Commission relies on this review and any
corrections received from the Applicants in making
its proposal. A comparability determination based
on an inaccurate description of foreign laws and
regulations may not be valid.
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sections 4s(e) through (f) of the CEA and
Regulations 23.101 and 23.105.30
The Applicants have represented that
the Securities Market Law (Ley del
Mercado de Valores, the ‘‘Law’’) 31 and
the General Provisions Applicable to
Broker-Dealers (Disposiciones de
Caracter General Aplicables a las Casa
de Bolsa the ‘‘General Provisions’’) 32
issued by the Mexican Banking and
Securities Commission (‘‘Mexican
Commission’’) 33 contain the capital
adequacy requirements (‘‘Mexican
Capital Rules’’) and financial reporting
requirements (‘‘Mexican Financial
Reporting Rules’’) that apply to brokerdealers,34 including Mexican nonbank
SDs.35 The Law and General Provisions
impose mandatory capital and liquidity
requirements that address quantifiable
discretionary risks (credit risk, liquidity
risk, and market risk), quantifiable nondiscretionary risks (legal risk,
operational risk, and technological risk),
and non-quantifiable risks.36 The
30 Mexico
Application, p. 1.
in the Federal Official Gazette
(Diario Oficial de la Federacion) on December 30,
2005, as amended.
32 Published in the Federal Official Gazette on
September 6, 2004, as amended.
33 The Applicants represented that the Mexican
Commission is a governmental agency that is part
of the Ministry of Finance, and has independent
technical and executive powers. The Applicants
further represented that the Mexican Commission is
in charge of the supervision and regulation of
financial entities, such as Mexican nonbank SDs,
with the purpose of ensuring their stability and
sound performance, as well as maintaining a safe
and sound financial system. The Mexico
Application provides that: (i) the scope of the
Mexican Commission’s authority includes
inspection, supervision, prevention, and correction
powers; (ii) the primary financial entities regulated
by the Mexican Commission are commercial banks,
national development banks, regulated multiple
purpose financial institutions, and broker-dealers,
such as Mexican nonbank SDs; and (iii) the
Mexican Commission is also in charge of granting
and revoking broker-dealer licenses in Mexico. See,
Mexico Application, p. 4 (footnote 10).
34 The Applicants represented that pursuant to
the provisions set forth in Article 113 of the Law,
broker-dealers, such as Mexican nonbank SDs,
among other entities, are the only financial
institutions that may conduct securities
intermediation transactions. Under Article 2 of the
Law, securities intermediation is defined as the
customary and professional performance of any of
the following activities in Mexico: (i) actions for the
purpose of facilitating the contact between the
supply and demand of securities; (ii) the execution
of transactions with securities for the account of
third parties as commission agent, attorney-in-fact,
or in any other capacity, participating in the
relevant legal transactions either personally or on
behalf of third parties; and (iii) the negotiation of
securities on an intermediary’s own account with
the general public or with other intermediaries
acting on their own account or on behalf of third
parties. The organization and operation of brokerdealers, such as Mexican nonbank SDs, is governed
by the Law and General Provisions. See Mexico
Application, p. 4 (footnote 11).
35 Mexico Application, p. 4.
36 Id.
31 Published
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Applicants currently are the only
Mexican nonbank SDs registered with
the Commission as SDs, and they
represent that they are licensed with the
Mexican Commission as broker-dealers
subject to the Mexican Capital Rules
and Mexican Financial Reporting Rules.
II. General Overview of Commission
and Mexican Nonbank Swap Dealer
Capital Rules
A. General Overview of the CFTC
Nonbank Swap Dealer Capital Rules
The CFTC Capital Rules provide
nonbank SDs with three alternative
capital approaches: (i) the Tangible Net
Worth Capital Approach (‘‘TNW
Approach’’); (ii) the Net Liquid Assets
Capital Approach (‘‘NLA Approach’’);
and (iii) the Bank-Based Capital
Approach (‘‘Bank-Based Approach’’).37
Nonbank SDs that are ‘‘predominantly
engaged in non-financial activities’’ may
elect the TNW Approach.38 The TNW
Approach requires a nonbank SD to
maintain a level of ‘‘tangible net
worth’’ 39 equal to or greater than the
higher of: (i) $20 million plus the
amount of the nonbank SD’s ‘‘market
risk exposure requirement’’ 40 and
37 17
CFR 23.101.
CFR 23.101(a)(2). The term ‘‘predominantly
engaged in non-financial activities’’ is defined in
Regulation 23.100 (17 CFR 23.100) and generally
provides that: (i) the nonbank SD’s, or its parent
entity’s, annual gross financial revenues for either
of the previous two completed fiscal years
represents less than 15 percent of the nonbank SD’s
or the nonbank SD’s parent’s, annual gross revenues
for all operations (i.e., commercial and financial) for
such years, and (ii) the nonbank SD’s, or its parent
entity’s, total financial assets at the end of its two
most recently completed fiscal years represents less
than 15 percent of the nonbank SD’s, or its parent’s,
total consolidated financial and nonfinancial assets
as of the end of such years.
39 The term ‘‘tangible net worth’’ is defined in
Regulation 23.100 and generally means the net
worth (i.e., assets less liabilities) of a nonbank SD,
computed in accordance with applicable
accounting principles, with assets further reduced
by a nonbank SD’s recorded goodwill and other
intangible assets.
40 The terms ‘‘market risk exposure’’ and ‘‘market
risk exposure requirement’’ are defined in
Regulation 23.100 (17 CFR 23.100) and generally
mean the risk of loss in a financial position or
portfolio of financial positions resulting from
movements in market prices and other factors.
Market risk exposure is the sum of: (i) general
market risks including changes in the market value
of a particular asset that result from broad market
movements, which may include an additive for
changes in market value under stressed conditions;
(ii) specific risk, which includes risks that affect the
market value of a specific instrument but do not
materially alter broad market conditions; (iii)
incremental risk, which means the risk of loss on
a position that could result from the failure of an
obligor to make timely payments of principal and
interest; and (iv) comprehensive risk, which is the
measure of all material price risks of one or more
portfolios of correlation trading positions.
38 17
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‘‘credit risk exposure requirement’’ 41
associated with the nonbank SD’s swap
and related hedge positions that are part
of the nonbank SD’s swap dealing
activities; (ii) 8 percent of the nonbank
SD’s ‘‘uncleared swap margin’’
amount; 42 or (iii) the amount of capital
required by a registered futures
association of which the nonbank SD is
a member.43 The TNW Approach is
intended to ensure the safety and
soundness of a qualifying nonbank SD
by requiring the firm to maintain a
minimum level of tangible net worth
that is based on the nonbank SD’s swap
dealing activities to provide a sufficient
level of capital to absorb losses resulting
from its swap dealing and other
business activities.
The TNW approach requires a
nonbank SD to compute its market risk
exposure requirement and credit risk
exposure requirement using
standardized capital charges set forth in
Securities and Exchange Commission
(‘‘SEC’’) Rule 18a–1 44 that are
applicable to entities registered with the
SEC as security-based swap dealers
(‘‘SBSDs’’) or standardized capital
charges set forth in Regulation 1.17
applicable to entities registered as FCMs
or entities dually-registered as an FCM
and nonbank SD.45 Nonbank SDs that
have received Commission or NFA
approval pursuant to Regulation 23.102
may use internal models to compute
market risk and/or credit risk capital
charges in lieu of the SEC or CFTC
standardized capital charges.46
A nonbank SD that elects the NLA
Approach is required to maintain ‘‘net
capital’’ in an amount that equals or
exceeds the greater of: (i) $20 million;
(ii) 2 percent of the nonbank SD’s
uncleared swap margin amount; or (iii)
41 The term ‘‘credit risk exposure requirement’’ is
defined in Regulation 23.100 (17 CFR 23.100) and
generally reflects the amount at risk if a
counterparty defaults before the final settlement of
a swap transaction’s cash flows.
42 The term ‘‘uncleared swap margin’’ is defined
in Regulation 23.100 (17 CFR 23.100) to generally
mean the amount of initial margin that a nonbank
SD would be required to collect from each
counterparty for each outstanding swap position of
the nonbank SD. A nonbank SD must include all
swap positions in the calculation of the uncleared
swap margin amount, including swaps that are
exempt or excluded from the scope of the
Commission’s uncleared swap margin regulations.
A nonbank SD must compute the uncleared swap
margin amount in accordance with the
Commission’s margin rules for uncleared swaps.
See 17 CFR 23.154.
43 The National Futures Association (‘‘NFA’’) is
currently the only entity that is a registered futures
association. The Commission will refer to NFA in
this document when referring to the requirements
or obligations of a registered futures association.
44 17 CFR 240.18a–1.
45 17 CFR 23.101(a)(2)(ii)(A).
46 Id.
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the amount of capital required by
NFA.47 The NLA Approach is intended
to ensure the safety and soundness of a
nonbank SD by requiring the firm to
maintain at all times at least one dollar
of highly liquid assets to cover each
dollar of the nonbank SD’s liabilities.
A nonbank SD is required to reduce
the value of its highly liquid assets by
the market risk exposure requirement
and/or the credit risk exposure
requirement in computing its net
capital.48 A nonbank SD that does not
have Commission or NFA approval to
use internal models must compute its
market risk exposure requirement and/
or credit risk exposure requirement
using the standardized capital charges
contained in SEC Rule 18a–1 as
modified by the Commission’s rule.49
A nonbank SD that has obtained
Commission or NFA approval, may use
internal market risk and/or credit risk
models to compute market risk and/or
credit risk capital charges in lieu of the
standardized capital charges.50 A
nonbank SD that is approved to use
internal market risk and/or credit risk
models is further required to maintain a
minimum of $100 million of ‘‘tentative
net capital.’’ 51
The Commission’s NLA Approach is
consistent with the SEC’s SBSD capital
rule, and is based on the Commission’s
capital rule for FCMs and the SEC’s
capital rule for securities broker-dealers
(‘‘BDs’’). The quantitative and
qualitative requirements for NLA
Approach internal market and credit
risk models are also consistent with the
quantitative and qualitative
requirements of the Commission’s BankBased Approach as described below.
The Commission’s Bank-Based
Approach for computing regulatory
capital for nonbank SDs is based on
certain capital requirements imposed by
the Federal Reserve Board for bank
holding companies.52 The Bank-Based
Approach also is consistent with the
Basel Committee on Banking
Supervision’s (‘‘BCBS’’) international
framework for bank capital
47 17
CFR 23.101(a)(1)(ii)(A). ‘‘Net capital’’
consists of a nonbank SD’s highly liquid assets
(subject to haircuts) less all of the firm’s liabilities,
excluding certain qualified subordinated debt. See
17 CFR 240.18a–1 for the calculation of ‘‘net
capital.’’
48 See 17 CFR 240.18a–1(c) and (d).
49 See 17 CFR 23.101(a)(1)(ii).
50 See 17 CFR 23.102.
51 17 CFR 23.101(a)(1)(ii)(A)(1). The term
‘‘tentative net capital’’ is defined in Regulation
23.101(a)(1)(ii)(A)(1) by reference to SEC Rule 18a–
1 and generally means a nonbank SD’s net capital
prior to deducting market risk and credit risk
capital charges.
52 See 17 CFR 23.101(a)(1)(i).
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requirements.53 The Bank-Based
Approach requires a nonbank SD to
maintain regulatory capital equal to or
in excess of each of the following
requirements: (i) $20 million of common
equity tier 1 capital; (ii) an aggregate of
common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital
(including qualifying subordinated debt)
equal to or greater than 8 percent of the
nonbank SD’s risk-weighted assets
(provided that common equity tier 1
capital comprises at least 6.5 percent of
the 8-percent minimum requirement);
(iii) an aggregate of common equity tier
1 capital, additional tier 1 capital, and
tier 2 capital equal to or greater than 8
percent of the nonbank SD’s uncleared
swap margin amount; and (iv) an
amount of capital required by NFA.54
The Bank-Based Approach is intended
to ensure that the safety and soundness
of a nonbank SD by requiring the firm
to maintain at all times qualifying
capital in an amount sufficient to absorb
unexpected losses, expenses, decrease
in firm assets, or increases in firm
liabilities without the firm becoming
insolvent.
The terms used in the Commission’s
Bank-Based Approach are defined by
reference to regulations of the Federal
Reserve Board.55 Specifically, the term
‘‘common equity tier 1 capital’’ is
defined for purposes of the CFTC
Capital Rules to generally mean the sum
of a nonbank SD’s common stock
instruments and any related surpluses,
retained earnings, and accumulated
other comprehensive income.56 The
term ‘‘additional tier 1 capital’’ is
defined to include the nonbank SD’s
common equity tier 1 capital and further
includes such additional equity
instruments as preferred stock.57 The
term ‘‘tier 2 capital’’ is defined to
include certain types of instruments that
include both debt and equity
characteristics (e.g., certain perpetual
preferred stock instruments and
subordinated term debt instruments).58
Subordinated debt also must meet
certain requirements to qualify as tier 2
53 The BCBS is the primary global standard-setter
for the prudential regulation of banks and provides
a forum for cooperation on banking supervisory
matters. Institutions represented on the BCBS
include the Federal Reserve Board, the European
Central Bank, Deutsche Bundesbank, Bank of
England, Bank of France, Bank of Japan, Banco de
Mexico, and Bank of Canada.
54 17 CFR 23.101(a)(1)(i).
55 Id. Regulation 23.101(a)(1)(i) references Federal
Reserve Board Rule 217.20 (12 CFR 217.20) for
purposes of defining the terms used in establishing
the minimum capital requirements under the BankBased Approach.
56 See 12 CFR 217.20(b).
57 See 12 CFR 217.20(c).
58 See 12 CFR 217.20(d).
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capital, including that the term of the
subordinated debt instrument is for a
minimum of one year (with the
exception of approved revolving
subordinated debt agreements which
may have a maturity term that is less
than one year), and the debt instrument
is an effective subordination of the
rights of the lender to receive any
payment, including accrued interest, to
other creditors.59
Common equity tier 1 capital,
additional tier 1 capital, and tier 2
capital are unencumbered and generally
long-term or permanent forms of capital
that help ensure that a nonbank SD will
be able to absorb losses resulting from
its operations and maintain confidence
in the nonbank SD as a going concern.
In addition, in setting an equity ratio
requirement, this limits the amount of
asset growth and leverage a nonbank SD
can incur, as a nonbank SD must fund
its asset growth with a certain
percentage of regulatory capital.
A nonbank SD also must compute its
risk-weighted assets using standardized
capital charges or, if approved, internal
models. Risk-weighting assets involves
adjusting the notional or carrying value
of each asset based on the inherent risk
of the asset. Less risky assets are
adjusted to lower values (i.e., have less
risk-weight) than more risky assets. As
a result, nonbank SDs are required to
hold lower levels of regulatory capital
for less risky assets and higher levels of
regulatory capital for riskier assets.
Nonbank SDs not approved to use
internal models to risk-weight their
assets must compute market risk capital
charges using the standardized charges
contained in Regulation 1.17 and SEC
Rule 18a–1, and must compute their
credit risk charges using the
standardized capital charges set forth in
regulations of the Federal Reserve Board
for bank holding companies contained
in Subpart D of 17 CFR part 217.60
Standardized market risk charges are
computed under Regulation 1.17 and
SEC Rule 18a–1 by multiplying, as
appropriate to the specific asset
schedule, the notional value or market
value of the nonbank SD’s proprietary
financial positions (such as swaps,
security-based swaps, futures, equities,
and U.S. Treasuries) by fixed
percentages set forth in the Regulation
or Rule.61 Standardized credit risk
charges require the nonbank SD to
59 The subordinated debt must meet the
requirements set forth in SEC Rule 18a–1d (17 CFR
240.18a–1d). See 17 CFR 23.101(a)(1)(i)(B).
60 See 17 CFR 23.101(a)(1)(i)(B) and the definition
of the term BHC risk-weighted assets in 17 CFR
23.100.
61 See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3–
1(c)(2).
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multiply on-balance sheet and offbalance sheet exposures (such as
receivables from counterparties, debt
instruments, and exposures from
derivatives) by predefined percentages
set forth in the applicable Federal
Reserve Board regulations contained in
Subpart D of 17 CFR part 217.
A nonbank SD also may apply to the
Commission or NFA for approval to use
internal models to compute market risk
exposure and/or credit risk exposure for
purposes of determining its total riskweighted assets.62 Nonbank SDs
approved to use internal models for the
calculation of credit risk or market risk,
or both, must follow the model
requirements set forth in Federal
Reserve Board regulations for bank
holding companies codified in Subpart
E and F, respectively, of 17 CFR part
217.63 Credit risk and market risk
capital charges computed with internal
models require the estimation of
potential losses, with a certain degree of
likelihood, within a specified time
period, of a portfolio of assets. Internal
models allow for consideration of
potential co-movement of prices across
assets in the portfolio, leading to offsets
of gains and losses. Internal credit risk
models can also further include
estimation of the likelihood of default of
counterparties.
B. General Overview of Mexican Capital
Rules for Mexican Nonbank SDs
The Mexican Capital Rules impose
bank-like capital requirements on a
Mexican nonbank SD that are consistent
with the BCBS framework for
international bank-based capital
standards.64 The Mexican Capital Rules
are intended to require each Mexican
nonbank SD to hold a sufficient amount
of qualifying equity and subordinated
debt to absorb decreases in the value of
firm assets, increases in the value of
firm liabilities, and to cover losses from
business activities, including possible
counterparty defaults and margin
collateral shortfalls associated with
swap dealing activities, without the firm
becoming insolvent.65
The Mexican Capital Rules require
each Mexican nonbank SD to hold and
maintain: (i) common equity tier 1
capital equal to at least 4.5 percent of
the Mexican nonbank SD’s riskweighted assets; (ii) total tier 1 capital
(i.e., common equity tier 1 capital plus
62 See
17 CFR 23.102.
SDs electing the Bank-Based
Approach that have been approved to use internal
credit risk models may also be required to include
a calculation of operational risk in its risk-weighted
assets calculation.
64 See Mexico Application, p. 9.
65 See Mexico Application, pp. 4–5.
63 Nonbank
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additional tier 1 capital) equal to at least
6 percent of the Mexican nonbank SD’s
risk-weighted assets; (iii) total capital
(i.e., an aggregate amount of common
equity tier 1 capital, additional tier 1
capital, and tier 2 capital) equal to at
least 8 percent of the Mexican nonbank
SD’s risk-weighted assets; and (iv) a
capital conservation buffer 66 equal to
2.5 percent of the Mexican nonbank
SD’s risk-weighted assets, which must
be met with common equity tier 1
capital.67 Therefore, a Mexican nonbank
SD is effectively required to maintain
total qualifying regulatory capital equal
to or greater than 10.5 percent of the
firm’s risk-weighted assets, with
common equity tier 1 capital comprising
a minimum of 7 percent of the 10.5
percent total.68 The Mexican Capital
Rules also restrict the types of equity
instruments that qualify as regulatory
capital as follows: (i) common equity
tier 1 capital may be comprised of
retained earnings and common equity
instruments; (ii) additional tier 1 capital
may be comprised of other capital
instruments and certain long-term
convertible subordinated debt
instruments; and (iii) tier 2 capital may
include certain subordinated debt
instruments.69
The amount of regulatory capital
required to be held by a Mexican
nonbank SD is determined by
calculating and aggregating the firm’s
total risk exposures, including market
risk, credit risk, and operational risk.70
The methods of calculating such
exposures are based on the BCBS bank
capital framework.71
Mexican nonbank SDs compute the
capital charges for market risk exposure
and credit risk exposure using
66 See
Mexico Application, p. 5.
172 and 173 of the Law and Article 162
of the General Provisions. Notably, the Mexico
Capital Rules employ different terminology to refer
to the components of total capital than the CFTC
Capital Rules and the BCBS bank capital
framework. For example, the Mexican Capital Rules
refer to total capital as ‘‘net capital,’’ common
equity tier 1 capital as ‘‘fundamental capital,’’ and
the 8 percent requirement is described as a
‘‘capitalization index’’ requirement. For ease of
reference between the capital regimes, and to avoid
confusion, this Capital Comparability
Determination and the proposed Capital
Comparability Determination Order use the same
terminology that is used in the Commission’s BankBased Approach and in the BCBS bank capital
framework.
68 As noted above, the total capital requirement is
the sum of the capital requirement equal to 8
percent of the firm’s risk-weighted assets, plus the
capital conservation buffer of 2.5 percent of the
firm’s risk-weighted assets.
69 Article 162 Bis and 162 Bis 1 of the General
Provisions.
70 Mexican Application, p. 9.
71 Id.
67 Articles
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standardized approaches.72 In this
regard, the Mexican Capital Rules do
not permit Mexican nonbank SDs to use
internal models to compute credit risk
charges.73 Also, although the Mexican
Capital Rules permit a Mexican
nonbank SD to calculate market risk
charges using internal models that
comply with guidelines issued by the
Mexican Commission, no Mexican
nonbank SD is currently approved to
use internal market risk models nor do
any Mexican nonbank SDs have model
applications pending with the Mexican
Commission.74 Therefore, the
Commission, in performing this Capital
Comparability Determination and in
proposing the Capital Comparability
Determination Order, has not reviewed
or evaluated the use of internal models
to compute market risk or credit risk
charges under the Mexican Capital
Rules. Accordingly, any Mexican
nonbank SD that subsequently obtains
the approval of the Mexican
Commission to use internal models to
compute market risk or credit risk
charges, and seeks to use such models
in lieu of the standardized charges set
forth in the Mexican Capital Rules in
meeting the CFTC capital requirements,
may do so only after the Commission
has reviewed and evaluated whether the
Mexican Capital Rules impose
conditions and requirements on the use
of models that are comparable in
purpose and effect as the conditions and
requirements imposed on the use of
models under the CFTC Capital Rules,
and whether the use of the models
under the Mexican Capital Rules and
the CFTC Capital Rules achieve
comparable outcomes. The Commission
is further proposing to condition the
order to require a Mexican nonbank SD
to notify the Commission and NFA at
the time it initiates the process to
request approval to use internal models
for capital purposes. The request to use
internal market or credit risk models in
lieu of standardized capital charges may
require the Commission to amend an
existing Capital Comparability
Determination Order.
Standardized market risk and credit
risk charges are calculated under the
Mexican Capital Rules using a
methodology that is consistent with the
BCBS bank capital framework for
standardized market risk and credit risk
charges. With respect to market risk, the
Mexican Capital Rules require a
Mexican nonbank SD to multiply the
market value or carrying value of its onbalance sheet and off-balance sheet
72 Article
150 Bis of the General Provisions.
Application, p. 11.
74 Id., p. 9 (footnote 23).
73 Mexican
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market exposures by standard
percentages established by the Mexican
Commission and set forth in the
Mexican Capital Rules.75 With respect
to credit risk, the Mexican Capital Rules
require the assignment of a scheduled
risk-weight 76 to each counterparty
based on external risk assessments. For
derivatives positions, the Mexican
Capital Rules provide for the exposures
to be computed based on the
instruments underlying the derivatives
positions 77 with strict limitations on the
recognition of offsetting risks.78 The
resulting market risk exposure amount
and credit risk exposure amount are
multiplied by a factor of 12.5 to cancel
the effect of the 8 percent multiplication
factor applied to all of the Mexican
nonbank SD’s risk-weighted assets,
which effectively requires a Mexican
nonbank SD to hold qualifying
regulatory capital equal to or greater
than 100 percent of the total amount of
its market risk and credit risk
exposures.79
A Mexican nonbank SD calculates its
capital charges for operational risk
exposure using the basic method set
forth in the General Provisions.80 The
basic method calculates operational risk
exposure as an amount equal to 15
percent of Mexican nonbank SD’s
average annual net positive income for
the last three years,81 taking into
account insurance coverage for
operational risk, subject to strict
limitations and conditions.82 The
amount of the operational risk exposure
is also subject to a floor equal to 5
percent and a ceiling equal to 15 percent
of the monthly average sum of market
risk and credit risk exposure amounts,
calculated over the prior 36 months, on
a rolling basis.83 The resulting
operational risk exposure amount is also
multiplied by a factor of 12.5 to cancel
the effect of the 8 percent multiplication
factor applied to all of the Mexican
nonbank SD’s risk-weighted assets,
which effectively requires a Mexican
nonbank SD to hold qualifying
regulatory capital equal to or greater
than 100 percent of its total operational
risk exposure amount.84
75 Articles 150 to 158 Bis of the General
Provisions.
76 Articles 159, 160 and 161 of the General
Provisions.
77 Article 151 of the General Provisions.
78 Article 152 of the General Provisions.
79 Articles 158 Bis and 161 of the General
Provisions.
80 Article 161 Bis of the General Provisions.
81 Article 161 Bis 1 of the General Provisions.
82 Article 161 Bis 2 of the General Provisions.
83 Article 161 Bis 3 of the General Provisions.
84 Article 161 Bis 5 of the General Provisions.
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The Mexican Capital Rules also
impose liquidity requirements on
Mexican nonbank SDs in addition to
minimum capital requirements.85 The
liquidity provisions require each
Mexican nonbank SD to hold or invest
at least 20 percent of its total capital in
any of the following: (i) bank deposits;
(ii) highly liquid debt securities
registered in Mexico; (iii) shares of debt
investment funds; (iv) reserve funds
created to maintain funds available to
cover contingencies, as set forth by the
applicable regulation issued by selfregulatory organizations (organismos
autorregulatorios), such as the securities
central clearinghouse (Contraparte
Central de Valores De Mexico, S.A. de
C.V.) and the central derivatives
clearinghouse (Asigna, Compensacion y
Liquidacion F/30430),86 as well as the
Mexican Association of Securities
Intermediaries (Asociacion Mexicana de
Intermediarios Bursatiles, A.C. or
AMIB); 87 and (v) high and medium
marketability shares to which a market
value discount of 20 percent and 25
percent, respectively, is applied,
provided that they are registered as
‘‘trading’’ or ‘‘available for sale’’
securities.88
A Mexican nonbank SD also must
follow specified procedures in
monitoring its liquidity to ensure that it
has sufficient liquid assets to meet
anticipated needs.89 When monitoring
and managing liquidity risk, a Mexican
nonbank SD must, among other things:
(i) measure, assess and monitor risk
caused by differences between forecast
cash flows on various dates; (ii)
consider the assets and liabilities of the
firm in Mexican pesos and foreign
currency; (iii) assess the diversification
of sources of financing to which the firm
has access; (iv) quantify the potential
loss from early or obligatory sale of
assets at an unusual discount in order
to meet immediate obligations; and (v)
estimate the potential loss if it is not
possible to renew liabilities or contract
others under normal conditions.90 The
liquidity requirements supplement the
minimum capital requirements by
obligating a Mexican nonbank SD to
maintain a defined amount of liquid
85 See
Article 146 of the General Provisions.
228 of the Law recognizes the stock
exchange and the securities central clearinghouse as
self-regulatory organizations and indicates that
other entities that comply with certain requirements
(such as Asigna and the AMIB) may be recognized
as self-regulatory organizations.
87 Reserve funds represent funds deposited with
a self-regulatory organization to cover potential
losses, and are not freely available to a Mexican
nonbank SD.
88 Article 146 of the General Provisions.
89 See Article 137 of the General Provisions.
90 Id.
86 Article
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assets to cover current liabilities and
other current obligations to
counterparties, including margin
obligations, and obligations to other
third parties.
III. Commission Analysis of the
Comparability of the Mexican Capital
Rules With CFTC Capital Rules, and
Mexican Financial Reporting Rules
With CFTC Financial Reporting Rules
The following section provides a
description and comparative analysis of
the regulatory requirements of the
Mexican Capital Rules and Mexican
Financial Reporting Rules to the CFTC
Capital Rules and CFTC Financial
Reporting Rules. Immediately following
a description of the requirement(s) of
the CFTC Capital Rules or the CFTC
Financial Reporting Rules for which a
comparability determination was
requested by the Applicants, the
Commission provides a description of
Mexico’s corresponding laws,
regulations, or rules. The Commission
then provides a comparative analysis of
the Mexican Capital Rules or the
Mexican Financial Reporting Rules with
the corresponding CFTC Capital Rules
or CFTC Financial Reporting Rules. The
Commission identifies any material
differences between the respective rules.
The Commission performed this
proposed Capital Comparability
Determination by assessing the
comparability of the Mexican Capital
Rules for Mexican nonbank SDs, as set
forth in the Mexico Application and in
the English language translation of
certain Mexican laws and regulations,
with the Commission’s Bank-Based
Approach. For clarity, the Commission
did not assess the comparability of the
Mexican Capital Rules to the
Commission’s TNW Approach or NLA
Approach as the Commission
understands that the Applicants, as of
the date of the Mexico Application, are
subject to the current bank-based capital
approach of the Mexican Capital Rules.
Accordingly, when the Commission
makes a preliminary determination
herein about the comparability of the
Mexican Capital Rules with the CFTC
Capital Rules, the determination
pertains to the comparability of the
Mexican Capital Rules with the BankBased Approach under the CFTC
Capital Rules.
As described below, it is proposed
that any material changes to the
Mexican Capital Rules will require
notification to the Commission.
Therefore, if there are subsequent
material changes to the Mexican Capital
Rules to include, for example, another
capital approach, the Commission will
review and assess the impact of such
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changes on the Capital Comparability
Determination Order as it is then in
effect, and may amend or supplement
the Order.91
In addition, although the BCBS bank
capital standards establish minimum
capital standards that are consistent
with the requirements of the
Commission’s Bank-Based Approach,
the Commission notes that consistency
with the BCBS standards is not
determinative of a finding of
comparability with the CFTC Capital
Rules. In the Commission’s view, a
foreign jurisdiction’s consistency with
the BCBS international bank capital
standards is an element in the
Commission’s comparability
assessment, but, in and of itself, it may
not be sufficient to demonstrate
comparability with the CFTC Capital
Rules without an assessment of the
individual elements of the foreign
jurisdiction’s capital framework.
Capital and financial reporting
regimes are complex structures
comprised of a number of interrelated
regulatory components. Differences in
how jurisdictions approach and
implement these regimes are expected,
even among jurisdictions that base their
requirements on the principles and
standards set forth in the BCBS
international bank capital framework.
Therefore, the Commission’s
comparability determination involves a
detailed assessment of the relevant
requirements of the foreign jurisdiction
and whether those requirements,
viewed in the aggregate, lead to an
outcome that is comparable to the
outcome of the CFTC’s corresponding
requirements. Consistent with this
approach, the Commission has grouped
the CFTC Capital Rules and CFTC
Financial Reporting Rules into key
categories that focus the analysis on
whether the Mexican capital and
financial reporting requirements are
comparable to the Commission’s SD
requirements in purpose and effect, and
not whether the Mexican requirements
meet every aspect or contain identical
elements as the Commission’s
requirements.
Specifically, as discussed in detail
below, the Commission used the
following key categories in its review: (i)
the quality of the equity and debt
instruments that qualify as regulatory
capital, and the extent to which the
regulatory capital represents committed
and permanent capital that would be
available to absorb unexpected losses or
91 The Commission also may amend or
supplement the Order to address any material
changes to the CFTC Capital Rules and CFTC
Financial Reporting Rules that are adopted after a
final Order is issued.
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76381
counterparty defaults; (ii) the process of
establishing minimum capital
requirements for a Mexican nonbank SD
and how such process addresses market
risk and credit risk of the firm’s onbalance sheet and off-balance sheet
exposures; (iii) the financial reports and
other financial information submitted
by a Mexican nonbank SD to its relevant
regulatory authorities to effectively
monitor the financial condition of the
firm; and (iv) the regulatory notices and
other communications between the
Mexican nonbank SD and its relevant
regulatory authorities that detail
potential adverse financial or
operational issues that may impact the
firm. The Commission also reviewed the
manner in which compliance by a
Mexican nonbank SD with the Mexican
Capital Rules and Mexican Financial
Reporting rules is monitored and
enforced. The Commission invites
public comment on all aspects of the
Mexico Application and on the
Commission’s Capital Comparability
Determination discussed below.
A. Regulatory Objectives of CFTC
Capital Rules and CFTC Financial
Reporting Rules and Mexican Capital
Rules and Mexican Financial Reporting
Rules
1. Regulatory Objectives of CFTC
Capital Rules and CFTC Financial
Reporting Rules
The regulatory objectives of the CFTC
Capital Rules and CFTC Financial
Reporting Rules are to further the
Congressional mandate to ensure the
safety and soundness of nonbank SDs to
mitigate the greater risk to nonbank SDs
and the financial system arising from
the use of swaps that are not cleared.92
A primary function of the nonbank SD’s
capital is to protect the solvency of the
firm from decreases in the value of firm
assets, increases in the value of firm
liabilities, and from losses, including
losses resulting from counterparty
defaults and margin collateral failures,
by requiring the firm to maintain an
appropriate level of quality capital,
including qualifying subordinated debt,
to absorb such losses without becoming
insolvent. With respect to swap
positions, capital and margin perform
complementary risk mitigation
functions by protecting nonbank SDs,
containing the amount of risk in the
financial system as a whole, and
reducing the potential for contagion
arising from uncleared swaps.
The objective of the CFTC Financial
Reporting Rules is to provide the
Commission with the means to monitor
92 See
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and assess a nonbank SD’s financial
condition, including the nonbank SD’s
compliance with minimum capital
requirements. The CFTC Financial
Reporting Rules are designed to provide
the Commission and NFA, which, along
with the Commission, oversees nonbank
SDs’ compliance with Commission
regulations, with a comprehensive view
of the financial health and activities of
the nonbank SD. The Commission’s
rules require nonbank SDs to file
financial information, including
periodic unaudited and annual audited
financial statements, specific financial
position information, and notices of
certain events that may indicate a
potential financial or operational issue
that may adversely impact the nonbank
SD’s ability to meet its obligations to
counterparties and other creditors in the
swaps market, or impact the firm’s
solvency.93
2. Regulatory Objective of Mexican
Capital Rules and Mexican Financial
Reporting Rules
The regulatory objective of the
Mexican Capital Rules is to ensure the
safety and soundness of Mexican
financial firms, including Mexican
nonbank SDs. The Mexican Capital
Rules are designed to preserve the
financial stability and solvency of a
Mexican nonbank SD by requiring the
firm to maintain a sufficient amount of
quality equity and subordinated debt to
absorb decreases in the value of firm
assets, increases in the value of firm
liabilities, and to cover losses from
business activities, including
counterparty defaults and margin
collateral shortfalls associated with the
firm’s swap dealing activities.94 The
Mexican Capital Rules also are designed
to ensure that a Mexican nonbank SD
can meet its financial obligations to
counterparties and other creditors
during stressed market conditions by
requiring each firm to maintain a
minimum of 20 percent of its total
capital in specified liquid assets.95
The objective of the Mexican
Financial Reporting Rules is to enable
the Mexican Commission and other
relevant Mexican regulatory authorities
to assess the financial condition and
safety and soundness of Mexican
nonbank SDs.96 The Mexican Financial
Reporting Rules aim to achieve this
objective by requiring each Mexican
nonbank SD to provide financial reports
and other financial position and capital
information to the Mexican Commission
93 See
17 CFR 23.105.
146 of the General Provisions.
94 Article
95 Id.
96 See
Article 173 of the Law.
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and Mexican Central Bank on a regular
basis.97 The financial reporting by a
Mexican nonbank SD provides the
Mexican Commission and Mexican
Central Bank with information
necessary to effectively monitor the
Mexican nonbank SD’s overall financial
condition and its ability to meet its
regulatory obligations as a Mexican
licensed broker-dealer.
3. Commission Analysis
The Commission has reviewed the
Mexico Application and the relevant
Mexican laws and regulations, and has
preliminarily determined that the
overall objectives of the Mexican Capital
Rules and CFTC Capital Rules are
comparable in that both sets of rules are
intended to ensure the safety and
soundness of nonbank SDs by
establishing a regulatory regime that
requires nonbank SDs to maintain a
sufficient amount of qualifying
regulatory capital to absorb losses,
including losses from swaps and other
trading activities, and to absorb
decreases in the value of firm assets and
increases in the value of firm liabilities
without the nonbank SDs becoming
insolvent. The Mexican Capital Rules
and CFTC Capital Rules are also based
on, and consistent with, the BCBS
international bank capital framework,
which was designed to ensure that
banking entities hold sufficient levels of
capital to absorb losses, decreases in the
value of assets, and increases in the
value of liabilities without the banks
becoming insolvent.98
The Mexican Capital Rules are
comparable in purpose and effect to the
CFTC Capital Rules in that both
regulatory approaches compute the
minimum capital requirements based on
the level of a nonbank SD’s on-balance
sheet and off-balance sheet exposures,
with the objective and purpose of
ensuring that the nonbank SD’s capital
is adequate to absorb losses resulting
from such exposures. The Mexican
Capital Rules and CFTC Capital Rules
also provide for a comparable approach
to the calculation of on-balance sheet
and off-balance sheet risk exposures
using non-model, standardized
approaches that result in comparable
risk exposure amounts. The Mexican
Capital Rules’ and CFTC Capital Rules’
requirements for identifying and
measuring on-balance sheet and off97 See Articles 201, 202, and 203 of the General
Provisions.
98 The BCBS’s mandate is to strengthen the
regulation, supervision and practices of banks with
the purpose of enhancing financial stability. See
Basel Committee Charter available on the Bank for
International Settlement website: www.bis.org/bcbs/
charter.htm.
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balance sheet exposures under
standardized approaches are also
consistent with the requirements set
forth under the BCBS international bank
capital framework for identifying and
measuring on-balance sheet and offbalance sheet exposures.
The Mexican Capital Rules and CFTC
Capital Rules achieve comparable
outcomes and are comparable in
purpose and effect in that both limit the
types of capital instruments that may
qualify as regulatory capital to cover the
on-balance sheet and off-balance sheet
risk exposures to high quality equity
capital and qualifying subordinated debt
instruments that meet conditions
designed to ensure that the holders of
the debt have effectively subordinated
their claims to other creditors of the
nonbank SD. Both the Mexican Capital
Rules and the CFTC Capital Rules
define high quality capital by the degree
to which the capital represents
permanent capital that is contributed, or
readily available to a nonbank SD, on an
unrestricted basis to absorb unexpected
losses, including losses from swaps
trading and other activities, decreases in
the value of firm assets, and increases in
the value of firm liabilities without the
nonbank SD becoming insolvent.
The Mexican Financial Reporting
Rules are also comparable in purpose
and effect with the CFTC Financial
Reporting Rules as both the Mexican
Commission and CFTC require nonbank
SDs to file periodic financial reports,
including unaudited financial reports
and an annual audited financial report,
detailing their financial operations and
demonstrating their compliance with
minimum capital requirements. In
addition to providing the CFTC and
Mexican Commission with information
necessary to comprehensively assess the
financial condition of a nonbank SD on
an ongoing basis, the financial reports
further provide the CFTC and Mexican
Commission with information regarding
potential changes in a nonbank SD’s risk
profile by disclosing changes in account
balances reported over a period of time.
Such changes in account balances may
indicate that the nonbank SD has
entered into new lines of business, has
increased its activity in an existing line
of business relative to other activities, or
has terminated a previous line of
business.
The prompt and effective monitoring
of the financial condition of nonbank
SDs through the receipt and review of
periodic financial reports supports the
Commission and Mexican Commission
in meeting their respective objectives of
ensuring the safety and soundness of
nonbank SDs. In this connection, the
early identification of potential financial
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collateral shortfalls, without the firm
becoming insolvent.
Common equity tier 1 capital is
generally composed of an entity’s
common stock instruments and any
related surpluses, retained earnings, and
accumulated other comprehensive
income, and is a more conservative or
permanent form of capital than
additional tier 1 and tier 2 capital.101
Additional tier 1 capital is generally
composed of equity instruments such as
preferred stock and certain hybrid
securities that may be converted to
common stock if triggering events
occur.102 Total tier 1 capital is
composed of common equity tier 1
capital and further includes additional
tier 1 capital.103 Tier 2 capital includes
certain types of instruments that include
B. Nonbank Swap Dealer Qualifying
both debt and equity characteristics
Capital
such as qualifying subordinated debt.104
Subordinated debt must meet certain
1. CFTC Capital Rules: Qualifying
conditions to qualify as tier 2 capital
Capital Under Bank-Based Approach
under the CFTC Capital Rules.
Specifically, subordinated debt
The CFTC Capital Rules require a
instruments must have a term of at least
nonbank SD electing the Bank-Based
Approach to maintain regulatory capital one year (with the exception of
approved revolving subordinated debt
in the form of common equity tier 1
capital, additional tier 1 capital, and tier agreements which may have a maturity
term that is less than one year), and
2 capital in amounts that meet certain
contain terms that effectively
stated minimum requirements set forth
in Regulation 23. 101.99 Common equity subordinate the rights of lenders to
receive any payments, including
tier 1 capital, additional tier 1 capital,
accrued interest, to other creditors of the
and tier 2 capital are composed of
firm.105
certain defined forms of equity of the
Common equity tier 1 capital,
nonbank SD, including common stock,
additional tier 1 capital, and tier 2
retained earnings, and qualifying
subordinated debt.100 The Commission’s capital are permitted to be included in
a nonbank SD’s regulatory capital and
requirement for a nonbank SD to
maintain a minimum amount of defined used to meet the firm’s minimum
qualifying capital and subordinated debt capital requirement due to their
characteristics of being permanent forms
is intended to ensure that the firm
of capital that are subordinate to the
maintains a sufficient amount of
regulatory capital to absorb decreases in claims of other creditors, which ensures
that a nonbank SD will have this
the value of the firm’s assets and
regulatory capital to absorb decreases in
increases in the value of the firm’s
the value of the firm’s assets and
liabilities, and to cover losses resulting
increases in the value of the firm’s
from the firm’s swap dealing and other
liabilities, and to cover losses from
activities, including possible
business activities, including swap
counterparty defaults and margin
dealing activities, without the firm
becoming insolvent.
99 See 17 CFR 23.101(a)(1)(i), which requires a
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issues provides the Commission and
Mexican Commission with an
opportunity to address such issues with
the nonbank SD before they develop to
a state where the financial condition of
the firm is impaired such that it may no
longer hold a sufficient amount of
qualifying regulatory capital to absorb
decreases in the value of firm assets or
increases in the value of firm liabilities,
or to cover losses from the firm’s
business activities, including the firm’s
swap dealing activities and obligations
to swap counterparties.
The Commission invites public
comment on its analysis above,
including comment on the Mexico
Application and relevant Mexican laws
and regulations.
nonbank SD electing the Bank-Based Approach to
maintain regulatory capital equal to or in excess of
each of the following: (i) $20 million of common
equity tier 1 capital; (ii) an aggregate of common
equity tier 1 capital, additional tier 1 capital, and
tier 2 capital (including qualifying subordinated
debt) equal to or greater than 8 percent of the
nonbank SD’s risk-weighted assets (provided that
common equity tier 1 capital comprises at least 6.5
percent of the 8 percent minimum requirement);
(iii) an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital equal to
or greater than 8 percent of the nonbank SD’s
uncleared swap margin amount; and (iv) an amount
of capital required by NFA.
100 The terms ‘‘common equity tier 1 capital,’’
‘‘additional tier 1 capital,’’ and ‘‘tier 2 capital’’ are
defined in the bank holding company regulations of
the Federal Reserve Board. See 12 CFR 217.20.
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2. Mexican Capital Rules: Qualifying
Capital
The Mexican Capital Rules require
each Mexican nonbank SD to maintain
a level of regulatory capital that equals
or exceeds 8 percent of the firm’s riskweighted assets, which is the sum of the
101 12
CFR 217.20.
102 Id.
103 Id.
104 Id.
105 The subordinated debt must meet the
requirements set forth in SEC Rule 18a–1d (17 CFR
240.18a–1d). See Regulation 23.101(a)(1)(i)(B); 17
CFR 23.101(a)(1)(i)(B).
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76383
Mexican nonbank SD’s market risk,
credit risk, and operational risk
charges.106 The Mexican Capital Rules
limit the composition of regulatory
capital to common equity tier 1 capital,
additional tier 1 capital, and tier 2
capital in a manner consistent with the
BCBS bank capital framework.107 In this
regard, the Mexican Capital Rules
provide that: (i) common equity tier 1
capital may generally be composed of
retained earnings and common equity
instruments; (ii) additional tier 1 capital
may include other capital instruments
and certain long-term convertible debt
instruments; and (iii) tier 2 capital may
include certain qualifying subordinated
debt instruments.108
Furthermore, with respect to tier 2
capital, qualifying subordinated debt
may not be short-term debt and the
Mexican nonbank SD must retain the
right to cancel the payment of interest
on the debt.109 Specifically, qualifying
subordinated debt under the Mexican
Capital Rules must have an initial
minimum term of 10 years and the
Mexican nonbank SD must have the
right to cancel interest payments,
subject to certain conditions, or to
convert the debt to common equity of
the firm.110 In addition, the proceeds
received by the Mexican nonbank SD
from the issuance of the subordinated
debt must be immediately available to
the firm for use as it deems appropriate,
with no restrictions.111
A Mexican nonbank SD must also
maintain a capital conservation buffer
equal to 2.5 percent of the firm’s riskweighted assets in addition to the
requirement to maintain qualifying
regulatory capital in excess of 8 percent
of its risk-weighted assets. The 2.5
percent capital conservation buffer must
be met with common equity tier 1
capital.112 Common equity tier 1 capital,
as noted above, is limited to the
Mexican nonbank SD’s common equity
and retained earnings, and represents a
more conservative or permanent form of
capital than equity instruments that
qualify as additional tier 1 capital and
tier 2 capital.
106 Articles 172 and 173 of the Law and Article
162 of the General Provisions.
107 See Article 162 of the General Provisions
(setting forth components of regulatory capital (i.e.,
capital fundamental, capital basico no fundamental,
and capital complementario) equivalent to common
equity tier 1 capital, additional tier capital and tier
2 capital).
108 Articles 162 Bis and 162 Bis 1 of the General
Provisions.
109 Articles 162 Bis and 163 of the General
Provisions.
110 Id.
111 Article 163 of the General Provisions.
112 Article 162 of the General Provisions.
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The Mexican Capital Rules also
impose different ratios for the various
components of regulatory capital that
are consistent with the BCBS bank
capital framework.113 In this regard, the
Mexican Capital Rules provide that a
Mexican nonbank SD’s minimum
regulatory capital must satisfy the
following requirements: (i) common
equity tier 1 capital must equal or
exceed 4.5 percent of the firm’s riskweighted assets; (ii) total tier 1 capital
(i.e., common equity tier 1 capital plus
additional tier 1 capital) must equal or
exceed 6 percent of the firm’s riskweighted assets; and (iii) total capital
(i.e., an aggregate amount of common
equity tier 1 capital, additional tier 1
capital, and tier 2 capital) must equal or
exceed 8 percent of the firm’s riskweighted assets. A Mexican nonbank SD
also must maintain a capital
conservation buffer of 2.5 percent of its
total risk-weighted assets that must be
met with common equity tier 1
capital.114 With the addition of the
capital conservation buffer, each
Mexican nonbank SD is required to
maintain minimum regulatory capital
that equals or exceeds 10.5 percent of
the firm’s risk-weighted assets, with
common equity tier 1 capital comprising
at least 7 percent of the 10.5 percent
minimum regulatory capital
requirement.
3. Commission Analysis
The Commission has reviewed the
Mexico Application and the relevant
Mexican laws and regulations, and has
preliminarily determined that the
Mexican Capital Rules are comparable
in purpose and effect to CFTC Capital
Rules with regard to the types and
characteristics of a nonbank SD’s equity
that qualifies as regulatory capital in
meeting its minimum requirements. The
Mexican Capital Rules and the CFTC
Capital Rules for nonbank SDs both
require a nonbank SD to maintain a
quantity of high-quality and permanent
capital, all defined in a manner that is
consistent with the BCBS international
bank capital framework, that based on
the firm’s activities and on-balance
sheet and off-balance sheet exposures, is
sufficient to absorb losses and decreases
in the value of the firm’s assets and
increases in the value of the firm’s
liabilities without resulting in the firm
becoming insolvent. Specifically, equity
instruments that qualify as common
equity tier 1 capital and additional tier
1 capital under the Mexican Capital
Rules and the CFTC Capital Rules have
similar characteristics (e.g., the equity
113 See
114 See
Id.
supra note 66.
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must be in the form of high-quality,
committed, and permanent capital) and
the equity instruments generally have
no priority to the distribution of firm
assets or income with respect to other
shareholders or creditors of the firm,
which makes this equity available to a
nonbank SD to absorb unexpected
losses, including counterparty defaults.
In addition, the Commission has
preliminarily determined that the
conditions imposed on subordinated
debt instruments under the Mexican
Capital Rules and the CFTC Capital
Rules are comparable and are designed
to ensure that the subordinated debt has
qualities that support its recognition by
a nonbank SD as equity for capital
purposes. The conditions include, in the
case of the CFTC Capital Rules,
regulatory requirements that effectively
subordinate the claims of debt holders
to interest and repayment of the debt to
the claims of other creditors of the
nonbank SD, and, in the case of the
Mexican Capital Rules, regulatory
requirements that provide Mexican
nonbank SDs with the right to cancel
scheduled interest payments and to
convert the debt to common equity of
the firm.115
Having reviewed the Mexico
Application and the relevant Mexican
laws and regulations, the Commission
has made a preliminary determination
that the Mexican Capital Rules and
CFTC Capital Rules impose comparable
requirements on Mexican nonbank SDs
with respect to the types and
characteristics of equity capital that
must be used to meet minimum
regulatory capital requirements. The
Commission invites public comment on
its analysis above, including comment
on the Mexico Application and the
relevant Mexican laws and regulations.
B. Nonbank Swap Dealer Minimum
Capital Requirement
1. CFTC Capital Rules: Nonbank SD
Minimum Capital Requirement
The CFTC Capital Rules require a
nonbank SD electing the Bank-Based
Approach to maintain regulatory capital
that satisfies each of the following
criteria: (i) an amount of common equity
tier 1 capital of at least $20 million; (ii)
an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier
2 capital in an amount equal to or in
excess of 8 percent of the nonbank SD’s
uncleared swap margin amount; (iii) an
aggregate amount of common equity tier
1 capital, additional tier 1 capital, and
tier 2 capital equal to or greater than 8
percent of the nonbank SD’s total risk115 See 17 CFR 240.18a–1d and Articles 162 and
162 Bis of the General Provisions.
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weighted assets, provided that common
equity tier 1 capital comprises at least
6.5 percent of the 8 percent; and (iv) the
amount of capital required by the
NFA.116
Prong (i) above requires each nonbank
SD electing the Bank-Based Approach to
maintain a minimum of $20 million of
common equity tier 1 capital in order to
operate as a nonbank SD. The
requirement that each nonbank SD
electing the CFTC Bank-Based
Approach maintain a minimum of $20
million of common equity tier 1 capital
is also consistent with the minimum
capital requirement for nonbank SDs
electing the NLA Approach and the
TNW Approach.117 The Commission
adopted this minimum requirement as it
believed that the role a nonbank SD
performs in the financial markets by
engaging in swap dealing activities
warranted a minimum level of capital,
stated as a fixed dollar amount that does
not fluctuate with the level of the firm’s
dealing activities, to help ensure that
the firm meets its financial
commitments to swap counterparties
and creditors without the firm becoming
insolvent.118
Prong (ii) above is a minimum capital
requirement that is based on the amount
of uncleared margin for swap
transactions entered into by the
nonbank SD and is computed on a
counterparty by counterparty basis. The
requirement for a nonbank SD to
maintain minimum capital equal to or
greater than 8 percent of the firm’s
uncleared swap margin provides a
capital floor based on a measure of the
risk and volume of the swap positions,
and the number of counterparties and
the complexity of operations, of the
nonbank SD. The intent of the minimum
capital requirement based on a
percentage of the nonbank SD’s
uncleared swap margin was to establish
a minimum capital requirement that
would help ensure that the nonbank SD
meets all of its obligations as a SD to
market participants, and to cover
potential operational risk, legal risk and
116 17 CFR 23.101(a)(1)(i). NFA has adopted the
CFTC minimum capital requirements for nonbank
SDs, but has not adopted additional capital
requirements at this time.
117 Nonbank SDs electing the NLA Approach are
subject to a minimum capital requirement that
includes a fixed minimum dollar amount of net
capital of $20 million. See 17 CFR
23.101(a)(1)(ii)(A)(1). Nonbank SDs electing the
TNW Approach are required to maintain levels of
tangible net worth that equals or exceeds $20
million plus the amount of the nonbank SDs’
market risk and credit risk associated with the
firms’ dealing activities. See 17 CFR
23.101(a)(2)(ii)(A).
118 See, e.g., 85 FR 57492.
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liquidity risk in addition to the risks
associated with its trading portfolio.119
Prong (iii) above is a minimum capital
requirement that is based on the Federal
Reserve Board’s capital requirements for
bank holding companies and is
consistent with the BCBS international
capital framework for banking
institutions. As noted above, a nonbank
SD under prong (iii) must maintain an
aggregate of common equity tier 1
capital, additional tier 1 capital, and tier
2 capital in an amount equal to or
greater than 8 percent of the nonbank
SD’s total risk-weighted assets, with
common equity tier 1 capital comprising
at least 6.5 percent of the 8 percent.
Risk-weighted assets are a nonbank SD’s
on-balance sheet and off-balance sheet
exposures, including proprietary swap,
security-based swap, equity, and futures
positions, weighted according to risk.
The Bank-Based Approach requires each
nonbank SD to maintain regulatory
capital in an amount that equals or
exceeds 8 percent of the firm’s total riskweighted assets to help ensure that the
nonbank SD’s level of capital is
sufficient to absorb decreases in the
value of the firm’s assets and increases
in the value of the firm’s liabilities, and
to cover unexpected losses resulting
from business activities, including
uncollateralized defaults from swap
counterparties, without the nonbank SD
becoming insolvent.
A nonbank SD must compute its riskweighted assets using standardized
market risk and credit risk charges,
unless the nonbank SD has been
approved by the Commission or NFA to
use internal models.120 For standardized
market risk charges, the Commission
incorporates by reference the
standardized market risk charges set
forth in Regulation 1.17 for FCMs and
SEC Rule 18a–1 for nonbank SBSDs.121
The standardized market risk charges
under Regulation 1.17 and SEC Rule
18a–1 are calculated as a percentage of
the market value or notional value of the
nonbank SD’s marketable securities and
derivatives positions, with the
percentages applied to the market value
or notional value increasing as the
expected or anticipated risk of the
positions increases.122 The resulting
total market risk exposure amount is
multiplied by a factor of 12.5 to cancel
the effect of the 8 percent multiplication
factor applied to all of the nonbank SD’s
119 See
85 FR 57462.
17 CFR 23.101(a)(1)(i)(B) and the
definition of the term BHC equivalent risk-weighted
assets in 17 CFR 23.100.
121 See paragraph (3) of the definition of the term
BHC equivalent risk-weighted assets in 17 CFR
23.100.
122 See 17 CFR 240.18a–1(c)(1).
120 See
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risk-weighted assets, which effectively
requires a nonbank SD to hold
qualifying regulatory capital equal to or
greater than 100 percent of the amount
of its market risk exposure.123
With respect to standardized credit
risk charges for exposures from nonderivatives positions, a nonbank SD
computes its on-balance sheet and offbalance sheet exposures in accordance
with the standardized credit risk
charges adopted by the Federal Reserve
Board and set forth in Subpart D of 12
CFR 217.124 Standardized credit risk
charges are computed by multiplying
the amount of the exposure by defined
counterparty credit risk factors that
range from 0 percent to 150 percent.125
A nonbank SD with off-balance sheet
exposures is required to calculate a
credit risk charge by multiplying each
exposure by a credit conversion factor
that ranges from 0 percent to 100
percent, depending on the type of
exposure.126
A nonbank SD may compute
standardized credit risk charges for
derivatives positions, including
uncleared swaps and non-cleared
security-based swaps, using either the
current exposure method (‘‘CEM’’) or
the standardized approach for
measuring counterparty credit risk
(‘‘SA–CCR’’).127 Both CEM and SA–CCR
are non-model, rules-based, approaches
to calculating counterparty credit risk
for derivatives positions. Credit risk
under CEM is the sum of: (i) the current
exposure (i.e., the positive mark-tomarket) of the derivatives contract; and
(ii) the potential future exposure, which
is calculated as the product of the
notional principal amount of the
derivatives contract multiplied by a
standard credit risk conversion factor
set forth in the rules of the Federal
123 See 17 CFR 23.100 (Definition of BHC
equivalent risk-weighted assets). As noted, a
nonbank SD is required to maintain qualifying
capital (i.e., an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital)
in an amount that exceeds 8 percent of its market
risk-weighted assets and credit-risk-weighted assets.
The regulations, however, require the nonbank SD
to effectively maintain qualifying capital in excess
of 100 percent of its market risk-weighted assets by
requiring the nonbank SD to multiply its marketrisk-weighted assets by 12.5.
124 See 17 CFR 23.101(a)(1)(i)(B) and the
paragraph (1) of the definition of the term BHC
equivalent risk-weighted assets in 17 CFR 23.100.
125 See 17 CFR 217.32.
126 See 17 CFR 217.33.
127 See 17 CFR 217.34. See also Regulation 23.100
(17 CFR 23.100) defining the term BHC Risk
Equivalent Amount, which provides that a nonbank
SD that does not have model approval may use
either CEM or SA–CCR to compute its exposures for
over-the-counter derivatives contracts with regard
to the status of its affiliate entities under the Federal
Reserve Board’s capital rules.
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Reserve Board.128 Credit risk under
SA–CCR is defined as the exposure at
default amount of a derivatives contract,
which is computed as the sum of: (i) the
replacement costs of the contract (i.e.,
the positive mark-to market); and (ii) the
potential futures exposure of the
contract multiplied by a factor of 1.4.129
A nonbank SD also may obtain the
approval of the Commission or NFA to
use internal models to compute market
risk and/or credit risk charges in lieu of
the standardized charges. A nonbank SD
seeking approval to use an internal
model is required to submit an
application to the Commission or
NFA.130 The application is required to
include, among other things, a list of
categories of positions that the nonbank
SD holds in its proprietary accounts and
a brief description of the methods that
the nonbank SD will use to calculate
deductions for market risk and/or credit
risk charges for such positions, as well
as a description of the mathematical
models used to compute market risk and
credit risk charges.
A nonbank SD approved by the
Commission or NFA to use internal
models to compute market risk is
required to comply with Subpart F of
the Federal Reserve Board’s Part 217
regulations (‘‘Subpart F’’).131 Subpart F
is based on models that are consistent
with the BCBS Basel 2.5 capital
framework.132 The Commission’s
qualitative and quantitative
requirements for internal capital models
also are comparable to the SEC’s
existing internal capital model
requirements for BDs and SBSDs,133
which are also broadly based on the
BCBS Basel 2.5 capital framework.
A nonbank SD approved to use
internal models to compute credit risk
is required to perform such computation
in accordance with Subpart E of the
Federal Reserve Board’s Part 217
128 See
12 CFR 217.34.
12 CFR 217.132(c).
130 See 17 CFR 23.102(c).
131 See paragraph (4) of the definition of BHC
equivalent risk-weighted assets in 17 CFR 23.100.
132 Compare 17 CFR 23.100 (providing for a
nonbank SD that is approved to use internal models
to calculate credit and market risk to calculate its
risk-weighted assets using Subparts E and F of 12
CFR part 217), Subpart F of 12 CFR, 17 CFR
23.101(a)(1)(ii) (providing for an SD that elects the
NLA Approach to calculate its net capital in
accordance with SEC Rule 18a–1) and Appendix A
to Subpart E of 17 CFR part 23, with Basel
Committee on Banking Supervision, Revisions to
the Basel II Market Risk Framework (2011), https://
www.bis.org/publ/bcbs193.pdf (describing the
revised internal model approach under Basel 2.5).
133 The SEC internal model requirements for
SBSDs are listed in 17 CFR 240.18a–1(d). See also
SEC FOCUS Report Part II, Computation of Net
Capital (Filer Authorized to Use Models) (providing
for inclusion of a market risk exposure section for
Basel 2.5 firms).
129 See
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regulations.134 These internal credit risk
modeling requirements are also based
on the Basel 2.5 capital framework or
the Basel 3 capital framework.
Under the Basel 2.5 capital
framework, nonbank SDs have
flexibility in developing their internal
models, but must follow certain
minimum standards. Internal market
risk and credit risk models must follow
a Value-at-Risk (‘‘VaR’’) structure to
compute, on a daily basis, a 99th
percentile, one-tailed confidence
interval for the potential losses resulting
from an instantaneous price shock
equivalent to a 10-day movement in
prices (unless a different time-frame is
specifically indicated). The simulation
of this price shock must be based on a
historical observation period of
minimum length of one year but there
is flexibility on the method used to
render simulations, such as variancecovariance matrices, historical
simulations, or Monte Carlo.
The Commission and the Basel
standards for internal models also have
requirements on the selection of
appropriate risk factors as well as on
data quality and update frequency.135
One specific concern is that internal
models must capture the non-linear
price characteristics of options
positions, including but not limited to,
relevant volatilities at different
maturities.136
In addition, BCBS standards for
market risk models include a series of
additive components for risks for which
the broad VaR is ill-suited or that may
need targeted calculation. These include
the calculation of a Stressed VaR
measure (with the same specifications
134 12 CFR 217 Subpart E. A nonbank SD is
provided with alternative approaches to computing
is capital under the Federal Reserve Board’s rules.
As noted when the Commission adopted the SD
capital rules, the Commission understands that
some alternatives may include charges or
deductions for risks not otherwise part of market
and credit risk models described or explicitly
required under the Commission’s rule (e.g.,
operational risk), however, the Commission was not
prepared to accept partial application of alternative
calculation methods or to compensate this
inclusion by reducing other charges calculated per
this rule outside of the market and credit risk
models. Therefore, such chargers or deductions
must be factored into the calculation of the nonbank
SD’s minimum capital requirements. See 85 FR
57462 at 57496.
135 See 17 CFR part 23, Appendix A to Subpart
E of Part 23, paragraph (i)(2)(iii), and Basel
Committee on Banking Supervision, Revisions to
the Basel II Market Risk Framework (2011),
paragraph 718(Lxxvi)(e), available at: https://
www.bis.org/publ/bcbs193.pdf.
136 The Commission’s requirement is set forth in
paragraph (i)(2)(iv)(A) of Appendix A to Subpart E
of 17 CFR part 23. See also Basel Committee on
Banking Supervision, Revisions to the Basel II
Market Risk Framework (2011), paragraph
718(Lxxvi)(h), available at: https://www.bis.org/
publ/bcbs193.pdf.
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as the VaR, but calibrated to historical
data from a continuous 12-month period
of significant financial stress relevant to
the firm’s portfolio); a Specific Risk
measure (which includes the effect of a
specific instrument); an Incremental
Risk measure (which addresses changes
in the credit rating of a specific obligor
which may appear as a reference in an
asset); and a Comprehensive Risk
measure (which addresses risk of
correlation trading positions).
2. Mexican Capital Rules: Mexican
Nonbank Swap Dealer Minimum Capital
Requirements
The Mexican Capital Rules impose
bank-like capital requirements on a
Mexican nonbank SD that, consistent
with the BCBS international bank
capital framework, require the Mexican
nonbank SD to hold a sufficient amount
of qualifying equity capital and
subordinated debt to absorb decreases in
the value of firm assets and increases in
the value of firm liabilities, and to cover
losses from its activities, including
possible counterparty defaults and
margin collateral shortfalls associated
with its swap dealing activities, without
the firm becoming insolvent.
Specifically, the Mexican Capital Rules
require each Mexican nonbank SD to
maintain qualifying regulatory capital to
satisfy the following capital ratios,
expressed as a percentage of the firm’s
total risk-weighted assets: (i) common
equity tier 1 capital equal to at least 4.5
percent of the firm’s risk-weighted
assets; (ii) total tier 1 capital (i.e.,
common equity tier 1 capital plus
additional tier 1 capital) equal to at least
6 percent of the firm’s risk-weighted
assets; (iii) total capital (i.e., an
aggregate amount of common equity tier
1 capital, additional tier 1 capital, and
tier 2 capital) equal to at least 8 percent
of the firm’s risk-weighted assets; and
(iv) an additional capital conservation
buffer of 2.5 percent of the firm’s riskweighted asset that must be met with
common equity tier 1 capital.137 Thus,
a Mexican nonbank SD is required to
maintain regulatory capital equal to at
least 10.5 percent of its total riskweighted assets, with common equity
tier 1 capital comprising at least 7
percent of the regulatory capital (4.5
percent of the core capital plus the 2.5
percent capital conservation buffer).
The Mexican nonbank SD’s riskweighted assets are calculated as the
sum of the firm’s market risk, credit
risk, and operational risk charges. The
risk charges are computed using
standardized (i.e., non-model)
137 Articles 172 and 173 of the Law and Article
162 of the General Provisions.
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approaches that are based on the same
principles and methodology as the
BCBS bank capital framework. The
Applicants also represent that a
Mexican nonbank SD is required to
compute its risk-weighted assets using
standardized approaches in a manner
similar to the standardized approaches
adopted by the Federal Reserve Board
for bank holding companies and set
forth in 12 CFR part 217 of the Federal
Reserve Board’s rules.138
A Mexican nonbank SD is required to
take a deduction from capital for market
risk based on standardized charges
published by the Mexican
Commission,139 which include market
risk deductions for interest rate, foreign
exchange, precious metals and equity
price risks.140 The Mexican Capital
Rules do not have market risk charges
specific to commodity price risk as
Mexican nonbank SDs are not permitted
to engage in physical commodity
transactions.141
For derivatives positions, a Mexican
nonbank SD is required to take
standardized market risk charges based
on the nature of the instrument
underlying the derivatives position.142
The market risk charges are based on
cumulative calculations for individual
derivatives positions with limited
recognition of offsets.143
The resulting total market risk
exposure amount, including market risk
exposure for derivative positions, is
multiplied by a factor of 12.5 to adjust
the 8 percent multiplication factor
applied to all of the Mexican nonbank
SD’s risk-weighted assets, which
effectively requires a Mexican nonbank
SD to hold qualifying regulatory capital
equal to or greater than 100 percent of
the firm’s market risk exposure amount.
The Mexican Capital Rules also
require a Mexican nonbank SD to
calculate credit risk exposure under a
standardized approach by taking the
accounting value of each of its onbalance sheet and off-balance sheet
positions and exposures, determining a
conversion value to credit risk
determined pursuant to Mexican
regulation,144 and then applying a
specific risk-weight based on the type of
issuer or counterparty, as applicable,
138 Mexican
Application, p. 7.
risk models may be used if authorized
by the Mexican Commission. The Mexican
Commission, however, has not authorized the use
of market risk models for any of the Mexican
nonbank SDs, and no Mexican nonbank SD is
currently seeking model authorization.
140 Article 150 Bis of the General Provisions.
141 See, Mexico Application, p. 10, footnote 26.
142 Article 151 of the General Provisions.
143 Article 152 of the General Provisions.
144 Article 160 of the General Provisions.
139 Market
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and the assets’ credit quality.145 The
resulting credit risk exposure amount is
also multiplied by a factor of 12.5 to
adjust the 8 percent multiplication
factor applied to all of the firm’s riskweighted assets, which effectively
requires the Mexican nonbank SD to
hold regulatory capital equal to or
greater than 100 percent of the firm’s
total credit risk exposure.
The Mexican Capital rules further
require a Mexican nonbank SD to retain
qualifying regulatory capital to cover
operational risk. Operational risk is
computed using the basic method set
forth in the Mexican Capital Rules.146
The basic method calculates operational
risk exposure as an amount equal to 15
percent of Mexican nonbank SD’s
average annual net positive income for
the last three years,147 taking into
account insurance coverage for
operational risk, subject to strict
limitations and conditions.148 The
amount of the operational risk exposure
is subject to a floor equal to 5 percent
and a ceiling equal to 15 percent of the
monthly average sum of market and
credit risk exposure amounts, calculated
over the prior 36 months, on a rolling
basis.149 The resulting operational risk
exposure amount is multiplied by a
factor of 12.5 to adjust the effect of the
8 percent multiplication factor applied
to all of the Mexican nonbank SD’s riskweighted assets, which effectively
requires a Mexican nonbank SD to hold
qualifying regulatory capital equal to or
greater than 100 percent of the amount
of its operational risk exposure.150
The Mexican Capital Rules also
require a Mexican nonbank SD to
comply with minimum paid-in capital
requirements depending on the services
or activities to be performed by the
firm.151 The minimum paid-in capital is
a fixed value of capital that a Mexican
nonbank SD is required to maintain.
The minimum paid-in-capital
requirement is indexed to Inflation
Indexed Units (‘‘UDIs’’), so a different
minimum capital is required each year
depending on the UDI equivalence. In
the context of the Mexican nonbank
SDs, which perform the broadest array
of activities, the requirement was
12,500,000 UDIs, which for 2022
145 Articles 159, 160, and 161 of the General
Provisions. Mexican nonbank SDs are required to
use a standardized approach to computing all credit
risk charges as the Mexican Capital Rules do not
authorize the use of internal credit risk models. See,
Mexico Application, p. 11.
146 Article 161 Bis of the General Provisions.
147 Article 161 Bis 1 of the General Provisions.
148 Article 161 Bis 2 of the General Provisions.
149 Article 161 Bis 3 of the General Provisions.
150 Article 161 Bis 5 of the General Provisions.
151 Article 10 of the General Provisions.
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equaled approximately MXN
$90,000,000 (or USD $4,300,000).152
In addition to the minimum paid-incapital requirement, the Mexican
Central Bank also imposes limits on a
Mexican nonbank SD’s overall
leverage.153 The leverage rules are based
principally on volume and
counterparties without regard to riskweighting.154
The Mexican Commission may also
require a Mexican nonbank SD to satisfy
additional capital requirements,
considering the composition of the
firm’s capital, the composition of the
firm’s assets, the efficiency of the firm’s
internal control systems, the firm’s
compliance with its remuneration
system and, in general, the firm’s
exposure and risk management.155 The
Mexican Commission also quarterly
publishes on its website the
classification of broker-dealers,
including Mexican nonbank SDs,
according to categories based on their
respective capital ratios as an additional
measure to incentivize firms to maintain
sufficient levels of capital.156
The Mexican Capital Rules also
impose liquidity requirements on
Mexican nonbank SDs 157 The liquidity
provisions require each Mexican
nonbank SD to invest or hold at least 20
percent of its total capital in defined
152 Considering an exchange rate per USD of MXN
$20.7882 as published by the Mexican Central Bank
in the Federal Official Gazette (Diario Oficial de la
Federacion) on July 12, 2022.
153 Section C.B1 of Circular 115/2002, issued by
the Mexican Central Bank on November 11, 2002,
as amended.
154 Id. Mexican nonbank SDs may not have
positions in securities and debt instruments
acquired with financing that exceed specified
limits, including issuer limits and global capital
thresholds.
155 Article 169 of the General Provisions.
156 Article 204 Bis 1, Article 204 Bis 2, and
Article 204 Bis 3 of the General Provisions. The
Mexican Commission classifies each broker-dealer
into categories based on the firm’s common equity
tier 1 capital ratio, basic capital ratio (i.e., common
equity tier 1 capital plus additional tier 1 capital
ratios), and total capital ratio as reported to the
Mexican Commission. The categories range from 1
to 5, with 1 being the highest classification category
and 5 being the lowest classification category. The
classification categories for common equity tier 1
capital ratios are: (i) less than 4.5%; (ii) equal to or
greater than 4.5% and less than 7%; and (iii) equal
to or greater than 7%. The classifications for the
basic capital ratio are: (i) less than 6%; (ii) equal
to or greater than 6% and less than 8.5%; and (iii)
equal to or greater than 8.%. The classifications for
a firm’s total capital ratio are: (i) less than 4.5%; (ii)
equal to or greater than 4.5% and less than 7%; (iii)
equal to or greater than 7% and less than 8%; (iv)
equal to or greater than 8% and less than 10.5%;
and (v) equal to or greater than 10.5%. The Mexican
Commission announces the classification categories
for each broker-dealer, including the Mexican
nonbank SDs, on a quarterly basis and makes the
classifications publicly available on the Mexican
Commission’s website.
157 See Article 146 of the General Provisions.
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cash accounts, investments, reserve
funds set forth by regulations of
applicable self-regulatory organizations
or clearing organizations.158
A Mexican nonbank SD also must
follow specified procedures in
monitoring its liquidity and to ensure
that it has sufficient liquid assets to
meet anticipated needs.159 When
monitoring and managing liquidity risk,
a Mexican nonbank SD must, among
other things: (i) measure, assess and
monitor risk caused by differences
between forecast cash flows on various
dates; (ii) consider the assets and
liabilities of the firm in Mexican pesos
and foreign currency; (iii) assess the
diversification of sources of financing to
which the firm has access; (iv) quantify
the potential loss from early or
obligatory sale of assets at an unusual
discount in order to meet immediate
obligations; and (v) estimate the
potential loss if it is not possible to
renew liabilities or contract others
under normal conditions.160 The
liquidity requirements supplement the
minimum capital requirements by
obligating a Mexican nonbank SD to
maintain a defined amount of liquid
assets to cover current liabilities and
other current obligations to
counterparties, including margin
obligations, and obligations to other
third parties.
Lastly, a Mexican nonbank SD is
required to conduct annual stress tests
to ensure that the firm retains sufficient
capital.161 The stress test assessments
are designed to determine whether a
Mexican nonbank SD’s capital would be
sufficient to cover losses under the
supervisory scenarios identified by the
Mexican Commission, whether the
Mexican nonbank SD would remain in
its current capital category, and whether
the Mexican nonbank SD would comply
with the minimum capital
requirements.162 To this end, a Mexican
nonbank SD must submit annually to
the Mexican Commission a report
containing the results of its stress test
assessments.163 A Mexican nonbank SD
also must file a preventive action plan
if the stress tests indicate that the firm’s
capital ratios are not sufficient.164
158 Article 228 of the Law recognizes the stock
exchange and the securities central clearinghouse as
self-regulatory organizations and indicates that
other entities that comply with certain requirements
may be recognized as self-regulatory organizations.
See, also, Article 146 of the General Provisions.
159 See Article 137 of the General Provisions.
160 Id.
161 Article 214 of the General Provisions.
162 See id.
163 Article 216 of the General Provisions.
164 Article 217 of the General Provisions.
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3. Commission Analysis
The Commission has reviewed the
Mexico Application and the relevant
Mexican laws and regulations, and has
preliminarily determined that the
Mexican Capital Rules are comparable
in purpose and effect to CFTC Capital
Rules with regard to the establishment
of a nonbank SD’s minimum capital
requirement and the calculation of the
nonbank SD’s amount of regulatory
capital. Although there are differences
in the minimum capital requirements
and calculation of regulatory capital
between the Mexican Capital Rules and
the CFTC Capital Rules, as discussed
below, the Commission preliminary
believes that the Mexican Capital Rules
and the CFTC Capital rules are designed
to ensure the safety and soundness of a
nonbank SD, and subject to the
proposed conditions discussed below,
will achieve comparable outcomes by
requiring the firm to maintain a
minimum level of qualifying regulatory
capital, including subordinated debt, to
absorb losses from the firm’s business
activities, including its swap dealing
activities, and decreases in the value of
the firm’s assets and increases in the
value of the firm’s liabilities, without
the nonbank SD becoming insolvent.
The CFTC Capital Rules require a
nonbank SD electing the Bank-Based
Approach to maintain regulatory capital
in an amount that meets or exceeds each
of the following requirements: (i) $20
million of common equity tier 1 capital;
(ii) 8 percent of the nonbank SD’s
uncleared swap margin amount; (iii) 8
percent of the nonbank SD’s riskweighted assets (with common equity
tier 1 capital comprising at least 6.5
percent of the 8 percent); and (iv) the
amount of capital required by NFA.165
Prong (i) of the CFTC Capital Rules
recited above requires each nonbank SD
electing the Bank-Based Approach to
maintain a minimum of $20 million of
common equity tier 1 capital. The
CFTC’s $20 million fixed-dollar
minimum capital requirement is
intended to ensure that each nonbank
SD maintains a level of regulatory
capital, without regard to the level of
the firm’s dealing and other activities,
sufficient to meet its obligations to swap
market participants given the firm’s
status as a CFTC-registered nonbank SD
and to help ensure the safety and
soundness of the nonbank SD.166
165 17 CFR 23.101(a)(1)(i). NFA has not adopted
additional capital requirements for nonbank SDs
and, therefore, an analysis of the comparability of
this element of the CFTC Capital Rules with the
Mexican Capital Rules is not applicable.
166 85 FR 57492.
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The Mexican Capital Rules also
contain a requirement that each
Mexican nonbank SD maintain a fixed
amount of minimum paid-in capital that
is based on the services or activities
performed by the firm.167 The minimum
paid-in capital requirement is a fixed
value of capital that is indexed annually
to UDIs. Mexican nonbank SDs that
performed the broadest array of
activities as of the year ending
December 31, 2021 were subject to a
minimum paid-in capital requirement
that equaled approximately MXN
$90,000,000 (or USD $4,300,000).168
The Mexican Capital Rules and the
CFTC Capital Rules both require
nonbank SDs to hold a minimum
amount of regulatory capital that is not
based on the risk-weighted assets of the
firms. The Commission, however,
preliminarily believes that CFTCregistered nonbank SDs should maintain
a minimum amount of $20 million of
common equity tier 1 capital
irrespective of the volume of its dealing
activities to help ensure that the firm
satisfies its regulatory obligations to
market participants, including meeting
its financial commitments to swap
counterparties and creditors, without
the firm becoming insolvent. The
Commission recognizes that the $20
million of common equity tier 1 capital
required under the CFTC Capital Rules
is substantially higher than the
estimated $4.3 million of minimum
paid-in capital required under the
Mexican Capital Rules and
preliminarily believes that the $20
million represents a more appropriate
level of minimum capital to help ensure
the safety and soundness of the nonbank
SD that is engaging in uncleared swap
transactions. Since the Commission
preliminarily finds fundamental capital,
as defined in Article 162 and Article
162 Bis of the General Provisions, to be
comparable to common equity tier 1
capital required under the CFTC Capital
Rules, the Commission is proposing to
condition the Capital Comparability
Determination Order to require each
Mexican nonbank SD to maintain, at all
times, a minimum level of $20 million
of fundamental capital.169 The proposed
167 Article
10 of the General Provisions.
an exchange rate per USD of MXN
$20.7882 as published by the Mexican Central Bank
in the Federal Official Gazette (Diario Oficial de la
Federacion) on July 12, 2022.
169 Each of the three current Mexican nonbank
SDs currently maintains fundamental capital in
excess of $20 million based on financial filings
made with the Commission. Therefore, the
Commission does not anticipate that the proposed
condition would have any material impact on the
Mexican nonbank SDs currently registered with the
Commission. Nonetheless, the Commission requests
comment on the proposed condition.
168 Considering
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condition would require each Mexican
nonbank SD to maintain an amount
denominated in pesos that is equivalent
to $20 million in U.S. dollars. The
Commission is also proposing that a
Mexican nonbank SD may convert the
peso-denominated amount of this
minimum capital requirement to the
U.S. dollar equivalent based on a
commercially reasonable and observed
exchange rate.
The Commission preliminarily
believes that the Mexican Capital Rules
and CFTC Capital Rules are also
comparable in that both impose
minimum capital requirements on
nonbank SDs that are based on the
BCBS bank capital framework, which
requires a banking entity to hold
qualifying capital, including
subordinated debt, in an amount in
excess of certain percentages of the
banking entity’s risk-weighted assets
(i.e., its on-balance sheet and off-balance
sheet exposures). In this regard, prong
(iii) of the CFTC Capital Rules recited
above requires each nonbank SD to
maintain an aggregate of common equity
tier 1 capital, additional tier 1 capital,
and tier 2 capital in an amount equal to
or greater than 8 percent of the nonbank
SD’s total risk-weighted assets, with
common equity tier 1 capital comprising
at least 6.5 percent of the 8 percent.170
Risk-weighted assets are a nonbank SD’s
on-balance sheet and off-balance sheet
market risk and credit risk exposures,
including exposures associated with
proprietary swap, security-based swap,
equity, and futures positions, weighted
according to risk. The requirements and
capital ratios set forth in prong (iii) are
based on the Federal Reserve Board’s
capital requirements for bank holding
companies and are consistent with the
BCBS international bank capital
adequacy framework. The requirement
for each nonbank SD to maintain
regulatory capital in an amount that
equals or exceeds 8 percent of the firm’s
total risk-weighted assets is intended to
help ensure that the nonbank SD’s level
of capital is sufficient to absorb
decreases in the value of the firm’s
assets and increases in the value of the
firm’s liabilities, and to cover
unexpected losses resulting from the
firm’s business activities, including
losses resulting from uncollateralized
defaults from swap counterparties,
without the nonbank SD becoming
insolvent.
The Mexican Capital Rules contain
capital requirements for Mexican
nonbank SDs that the Commission
preliminarily believes are comparable to
the requirements contained in prong
170 17
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(iii) of the CFTC Capital Rules.
Specifically, the Mexican Capital Rules
require each Mexican nonbank SD to
maintain: (i) common equity tier 1
capital equal to at least 4.5 percent of
the Mexican nonbank SD’s riskweighted assets; (ii) total tier 1 capital
(i.e., common equity tier 1 capital plus
additional tier 1 capital) equal to at least
6 percent of the Mexican nonbank SD’s
risk-weighted assets; and (iii) total
capital (i.e., an aggregate amount of
common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital) equal
to at least 8 percent of the Mexican
nonbanks SD’s risk-weighted assets.171
In addition, the Mexican Capital Rules
further require each Mexican nonbank
SD to maintain an additional capital
conservation buffer 172 equal to 2.5
percent of the Mexican nonbank SD’s
risk-weighted assets, which must be met
with common equity tier 1 capital.173
Thus, a Mexican nonbank SD is
effectively required to maintain total
qualifying regulatory capital equal to or
greater than 10.5 percent of the firm’s
risk-weighted assets, which is a higher
percentage than the 8 percent required
of nonbank SDs under prong (iii) of the
CFTC Capital Rules.174
The Commission also preliminarily
believes that the Mexican Capital Rules
and CFTC Capital Rules are comparable
with respect to the calculation of market
risk and credit risk in determining a
nonbank SD’s risk-weighted assets. As
noted above, Mexican nonbank SDs
currently are not authorized by the
Mexican Commission to use models to
compute market risk or credit risk
exposures and, therefore, must compute
their risk-weighted assets using
standardized market risk and credit risk
charges set forth in the Mexican Capital
Rules, which generally produce charges
that are higher than model-based
charges.175
171 Articles 172 and 173 of the Law and Article
162 of the General Provisions.
172 See Mexico Application, p. 5.
173 Articles 172 and 173 of the Law and Article
162 of the General Provisions.
174 As noted above, the total capital requirement
is the sum of the capital requirement equal to 8
percent of the firm’s risk-weighted assets, plus the
capital conservation buffer of 2.5 percent of the
firm’s risk-weighted assets. See Articles 162 and
162 Bis of the General Provisions.
175 For clarity, the Commission notes that it has
not reviewed or evaluated the use of internal
models to compute market or credit risk charges
under the Mexican Capital Rules. Therefore, a
Mexican nonbank SD that obtains the approval of
the Mexican Commission to use models to compute
market risk or credit risk charges and seeks to use
such models in lieu of the standardized charges,
may do so only after the Commission has reviewed
and evaluated the use of the subject models for
purpose of comparison to the corresponding CFTC
requirements.
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The Commission preliminarily
believes that the approach to computing
the standardized market risk and credit
risk charges set forth in the Mexican
Capital Rules is comparable to the
standardized approach set forth in the
CFTC Capital Rules, and is also
consistent with the approach for
calculating standardized market risk
and credit risk charges under the BCBS
bank capital framework. Specifically,
the standardized approaches under the
Mexican Capital Rules and CFTC
Capital Rules for calculating market and
credit risk follow the same structure that
is now the common global standard:
allocating assets to categories according
to risk and assigning each category a
risk-weight; allocating counterparties
according to risk assessments and
assigning each a risk factor; calculating
gross exposures based on valuation of
assets; calculating a net exposure
allowing offsets following well defined
procedures and subject to clear
limitations; adjusting the net exposure
by the market risk-weights; and finally,
for credit risk exposures, multiplying
the sum of net exposures to each
counterparty by their corresponding risk
factor.
The Mexican Capital Rules, however,
differ from the CFTC Capital Rules with
respect to a nonbank SD’s computation
of its market risk exposures and credit
risk exposures that are included in the
firm’s risk-weighted assets. As noted
above, the CFTC Capital Rules and
Mexican Capital Rules both require a
nonbank SD to maintain regulatory
capital equal to or greater than 100
percent of the firm’s market risk
exposure amount.176 The Mexican
Capital Rules, however, also require a
Mexican nonbank SD to maintain
regulatory capital equal to or greater
than 100 percent of its credit risk
exposure amount.177 The CFTC Capital
Rules only require a nonbank SD to
maintain regulatory capital equal to or
176 The CFTC Capital Rules and the Mexican
Capital Rules both require a nonbank SD to
maintain regulatory capital equal to or in excess of
8 percent of the firm’s total risk-weighted assets.
Both sets of rules further require that the nonbank
SD multiply its total market risk exposure amount
by a factor of 12.5 and add the resultant amount to
its total risk-weighted assets, which has the effect
of requiring the nonbank SD to hold regulatory
capital equal to or greater than 100 percent of its
market risk exposure amount.
177 The Mexican Capital Rules require a Mexican
nonbank SD to multiply its total credit risk
exposure amount by a factor of 12.5 and to add the
resultant amount to its total credit risk-weighted
assets, which has the effect of requiring the
Mexican nonbank SD to hold regulatory capital
equal to or greater than 100 percent of its credit risk
exposure amount. In contrast, the CFTC Capital
Rules require a nonbank SD to maintain regulatory
capital sufficient to cover 8 percent of its credit risk
exposure amount.
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greater than 8 percent of the firm’s total
credit risk exposure amount. The
difference in approaches to computing
risk-weighted assets would result in a
nonbank SD having a larger amount of
risk-weighted assets, and a higher
minimum capital requirement based on
risk-weighted assets, under the Mexican
Capital Rules as compared to the CFTC
Capital Rules.
The Commission also preliminarily
believes that the Mexican Capital Rules
and CFTC Capital Rules are comparable
in that nonbank SDs are required to
account for operational risk, in addition
to market risk and credit risk, in
computing their minimum capital
requirements. In this connection, the
Mexican Capital Rules require a
Mexican nonbank SD to calculate an
operational risk exposure amount equal
to 15 percent of a Mexican nonbank
SD’s average annual net positive income
for the last three years, on a rolling
basis.178 The Mexican nonbank SD is
then required to multiply the
operational risk exposure amount by a
factor of 12.5 and add the resultant
amount to the total operational riskweighted assets, which has the effect of
requiring the Mexican nonbank SD to
hold regulatory capital equal to or
greater than 100 percent of its
operational risk exposure amount.
The CFTC Capital Rules address
operational risk as a stand-alone,
separate minimum capital requirement
that a nonbank SD is required to meet
under prong (ii) of the Bank-Based
Approach recited above, and not as an
additional risk exposure element in the
calculation of the nonbank SD’s total
risk weighted assets.179 Specifically, the
CFTC Capital Rules require a nonbank
SD to maintain regulatory capital in an
amount equal to or greater than 8
percent of the firm’s total uncleared
swaps margin amount associated with
its uncleared swap transactions to
address potential operational, legal, and
liquidity risks.180 As noted above, the
178 The amount of the operational risk exposure
is also subject to a floor equal to 5 percent and a
ceiling equal to 15 percent of the monthly average
sum of market and credit risk exposure amounts,
calculated over the prior 36 months, also on a
rolling basis. See, Article 161 Bis 3 of the General
Provisions.
179 As noted in footnote 134 above, nonbank SDs
may be required to include operational risk in
computing its risk-weighted assets if they elect
certain alternatives set forth in the rules of Federal
Reserve Board.
180 The term ‘‘uncleared swap margin’’ is defined
by Regulation 23.100 (17 CFR 23.100) as the amount
of initial margin, computed in accordance with the
Commission’s margin rules for uncleared swaps (17
CFR 23.154), that a nonbank SD would be required
to collect from each counterparty for each
outstanding swap position of the nonbank SD. A
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Commission, in establishing the
requirement that a nonbank SD must
maintain a level of regulatory capital in
excess of 8 percent of the uncleared
swap margin amount associated with
the firm’s swap transactions, stated that
the intent of the requirement was to
establish a method of developing a
minimum amount of required capital for
a nonbank SD to meet its obligations as
a SD to market participants, and to
cover potential operational, legal, and
liquidity risks.181
CFTC rules also require a SD to
maintain a risk management program to
address certain risks associated with
operating as SD, including operational,
liquidity, legal, market, credit, foreign
currency, settlement, and other
applicable risks.182 Specifically, CFTC
Regulation 23.600(b) requires each SD to
establish, document, maintain, and
enforce a system of risk management
policies and procedures designed to
monitor and manage the risks related to
swaps, and any products used to hedge
swaps, including futures, options,
swaps, security-based swaps, debt or
equity securities, foreign currency,
physical commodities, and other
derivatives.183 The elements of the SD’s
risk management program are required
to include the identification of risks and
risk tolerance limits with respect to
applicable risks, including operational,
liquidity, and legal risk, together with a
description of the risk tolerance limits
set by the SD and the underlying
methodology in written policies and
procedures.184 With respect to
operational risk, the risk management
program must take into account, among
other operational risks: (i) secure and
reliable operating and information
systems with adequate, scalable
capacity; (ii) safeguards to detect,
identify, and promptly correct
deficiencies in operating and
information systems; and (iii) the
reconciliation of all data and
information in operating and
information systems.185
nonbank SD must include all swap positions in the
calculation of the uncleared swap margin amount,
including swaps that are exempt or excluded from
the scope of the Commission’s margin regulations
for uncleared swaps pursuant to Regulation 23.150
(17 CFR 23.150), exempt foreign exchange swaps or
foreign exchange forwards, or netting set of swaps
or foreign exchange swaps, for each counterparty,
as if that counterparty was an unaffiliated swap
dealer. Furthermore, in computing the uncleared
swap margin amount, a nonbank SD may not
exclude any de minis thresholds contained in
Regulation 23.151 (17 CFR 23.151).
181 See 85 FR 57462 at 57485.
182 17 CFR 23.600.
183 17 CFR 23.600(b).
184 17 CFR 23.600(c)(1).
185 17 CFR 23.600(c)(4)(vi).
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The Mexican Capital Rules and CFTC
rules also impose liquidity requirements
on Mexican nonbank SDs and nonbank
SDs, respectively. The Mexican Capital
Rules require Mexican nonbank SDs to
meet quantitative liquidity
requirements, which require a Mexican
nonbank SD to hold or invest at least 20
percent of the firm’s total capital in
liquid assets comprised of: (i) bank
deposits; (ii) highly liquid debt
securities registered in Mexico; (iii)
shares of debt investment funds; (iv)
reserve funds created to maintain funds
available to cover contingencies; and (v)
high and low marketability shares
subject to market value discounts of 20
and 25 percent, respectively.186
The CFTC Capital Rules do not
include a specific, quantifiable,
liquidity component. The CFTC rules,
however, address liquidity risks through
the SD risk management program.
Specifically, the SD’s risk management
program must take into account, among
other things, the daily measurement of
liquidity needs, the assessment of the
procedures to liquidate all non-cash
collateral in a timely manner without a
significant effect on price, and the
application of appropriate haircuts that
accurately reflect market risk and credit
risk of the noncash collateral.187
The CFTC SD risk management
requirements also address legal risk.
Regulation 23.600(c)(4)(v) requires a SD
to take into account, among other
things, determinations that transactions
and netting arrangements entered into
have a sound legal basis, and the
establishment of documentation
tracking procedures designed to ensure
the completeness of relevant
documentation and procedures to
resolve any documentation exceptions
on a timely basis.188
The Commission has reviewed the
Mexico Application and the relevant
Mexican laws and regulations, and has
preliminarily determined that the
Mexican Capital Rules are comparable
in purpose and effect to CFTC Capital
Rules with regard to the establishment
of a nonbank SD’s minimum capital
requirement and the calculation of the
nonbank SD’s amount of regulatory
capital to meet that requirement. As
previously noted, the Commission’s
approach for conducting a
comparability determination is a
principles-based, holistic approach that
focuses on whether the applicable
foreign jurisdiction’s capital
requirements for nonbank SDs achieve
comparable outcomes to the
146 of the General Provisions.
CFR 23.600(c)(4)(iii).
188 17 CFR 23.600(c)(4)(v).
corresponding CFTC requirements for
nonbank SDs.189 The focus of the
comparability determination is on
whether the foreign jurisdiction’s
capital requirements are comparable to
the Commission’s in purpose and effect,
and not on whether the foreign
jurisdiction’s capital requirements are
comparable in every aspect or contain
identical elements based on a line-byline assessment or comparison of the
foreign jurisdiction’s regulatory
requirements with the Commission’s
regulatory requirements.190 Although
there are differences between the
Mexican Capital Rules and the CFTC
Capital Rules, as discussed above, the
Commission preliminary believes that
the differences do not preclude a
finding that the Mexican Capital Rules
and CFTC Capital Rules, taken as a
whole, produce comparable regulatory
outcomes. In this connection, the
Commission preliminarily finds that,
subject to the proposed condition of a
$20 million capital requirement, as
discussed above, the Mexican Capital
Rules and CFTC Capital Rules are
comparable in purpose and effect, and
are designed to ensure that nonbank SDs
maintain appropriate levels of
regulatory capital in order to meet their
obligations as swap market participants
and to absorb losses, including
unexpected losses, without the firms
becoming insolvent.
The Commission invites comment on
the Mexico Application, Mexican laws
and regulations, and the Commission’s
analysis above regarding its preliminary
determination that, subject to the $20
million minimum capital requirement,
the Mexican Capital Rules and the CFTC
Capital Rules are comparable in purpose
and effect and achieve comparable
outcomes with respect to the minimum
regulatory capital requirements and the
calculation of regulatory capital for
nonbank SDs. The Commission also
specifically seeks public comment on
the question of whether the requirement
under the Mexican Capital Rules for a
Mexican nonbank SD to hold qualifying
capital in an amount equal to 15 percent
of its average annual net positive
income from the last three years, taking
into account insurance coverage for
operational risk, and subject to a floor
equal to 5 percent and a ceiling of 15
percent of the monthly average sum of
market risk and credit risk exposures
amounts, calculated over the prior 36
months, on a rolling basis, is sufficiently
comparable in purpose and effect to the
CFTC’s requirement for a nonbank SD to
hold qualifying capital in amount equal
186 Article
187 17
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189 See
85 FR 57520 and 57521.
190 Id.
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to at least 8 percent of the nonbank SD’s
uncleared swap margin amount.
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D. Nonbank Swap Dealer Financial
Reporting Requirements
1. CFTC Financial Recordkeeping and
Reporting Rules for Nonbank Swap
Dealers
The CFTC Financial Reporting Rules
imposes financial recordkeeping and
reporting requirements on nonbank SDs.
The CFTC Financial Reporting Rules
require each nonbank SD to prepare and
keep current ledgers or similar records
summarizing each transaction affecting
the nonbank SD’s asset, liability,
income, expense, and capital
accounts.191 The nonbank SD’s ledgers
and similar records must be prepared in
accordance with generally accepted
accounting principles as adopted in the
United States (‘‘U.S. GAAP’’), except
that if the nonbank SD is not otherwise
required to prepare financial statements
in accordance with U.S. GAAP, the
nonbank SD may prepare and maintain
its accounting records in accordance
with International Financial Reporting
Standards (‘‘IFRS’’) issued by the
International Accounting Standards
Board.192
The CFTC Financial Reporting Rules
also require each nonbank SD to prepare
and file with the Commission and with
NFA periodic unaudited and annual
audited financial statements.193 A
nonbank SD that elects the TNW
Approach is required to file unaudited
financial statements within 17 business
day of the close of each quarter, and its
annual audited financial statements
within 90 days of the end of its fiscal
year-end.194 A nonbank SD that elects
the NLA Approach or the Bank-Based
Approach is required to file unaudited
financial statements within 17 business
days of the end of each month, and to
file its annual audited financial
statements within 60 days of the end of
its fiscal year.195
The CFTC Financial Reporting Rules
provide that a nonbank SD’s unaudited
financial statements must include: (i) a
statement of financial condition; (ii) a
statement of income/loss; (iii) a
statement of changes in liabilities
subordinated to claims of general
creditors; (iv) a statement of changes in
ownership equity; (v) a statement
demonstrating compliance with and
calculation of the applicable regulatory
requirement; and (vi) such further
material information necessary to make
191 17
CFR 23.105(b).
192 Id.
193 17
CFR 23.105(d) and (e).
194 17 CFR 23.105(d)(1) and (e)(1).
195 Id.
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the required statements not
misleading.196 The annual audited
financial statements must include: (i) a
statement of financial condition; (ii) a
statement of income/loss; (iii) a
statement of cash flows; (iv) a statement
of changes in liabilities subordinated to
claims of general creditors; (v) a
statement of changes in ownership
equity; (vi) a statement demonstrating
compliance with and calculation of the
applicable regulatory requirement; (vii)
appropriate footnote disclosures; and
(viii) a reconciliation of any material
differences from the unaudited financial
report prepared as of the nonbank SD’s
year-end date.197
A nonbank SD that has obtained
approval from the Commission or NFA
to use internal capital models also must
submit certain model metrics, such as
aggregate VaR and counterparty credit
risk information, each month to the
Commission and NFA.198 A nonbank SD
also is required to provide the
Commission and NFA with a detailed
list of financial positions reported at fair
market value as part of its monthly
unaudited financial statements.199 Each
nonbank SD is also required to provide
information to the Commission and
NFA regarding its counterparty credit
concentration for the 15 largest
exposures in derivatives, a summary of
its derivatives exposures by internal
credit ratings, and the geographical
distribution of derivatives exposures for
the 10 largest countries.200
The CFTC Financial Reporting Rules
also require a nonbank SD to attach to
each unaudited and audited financial
report an oath or affirmation that to the
best knowledge and belief of the
individual making the affirmation the
information contained in the financial
report is true and correct.201 The
individual making the oath or
affirmation must be a duly authorized
officer if the nonbank SD is a
corporation, or one of the persons
specified in the regulation for business
organizations that are not
corporations.202
The CFTC Financial Reporting Rules
further require each nonbank SD to
make certain financial information
publicly available by posting the
information on its public website.203
196 17
CFR 23.105(d)(2).
CFR 23.105(e)(4).
198 17 CFR 23.105 (k) and (l) and Appendix B to
Subpart E of Part 23.
199 17 CFR 23.105(l) and Appendix B to Subpart
E of Part 23.
200 17 CFR 23.105(l) in Schedules 2, 3, and 4,
respectively.
201 17 CFR 23.105(f).
202 Id.
203 17 CFR 23.105(i).
197 17
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Specifically, a nonbank SD must post on
its website a statement of financial
condition and a statement detailing the
amount of the nonbank SD’s regulatory
capital and the minimum regulatory
capital requirement based on its audited
financial statements and based on its
unaudited financial statements that are
as of a date that is six months after the
nonbank SD’s audited financial
statements.204 Such public disclosure is
required to be made within 10 business
days of the filing of the audited
financial statements with the
Commission, and within 30 calendar
days of the filing of the unaudited
financial statements required with the
Commission.205 A nonbank SD also
must obtain written approval from NFA
to change the date of its fiscal year-end
for financial reporting.206
The CFTC Financial Reporting Rules
also require a nonbank SD to provide
the Commission and NFA with
information regarding the custodianship
of margin for uncleared swap
transactions (‘‘Margin Report’’).207 The
Margin Report contains: (i) the name
and address of each custodian holding
initial margin or variation margin that is
required for uncleared swaps subject to
the CFTC margin rules (‘‘uncleared
margin rules’’), on behalf of the nonbank
SD or its swap counterparties; (ii) the
amount of initial and variation margin
required by the uncleared margin rules
held by each custodian on behalf of the
nonbank SD and on behalf its swap
counterparties; and (iii) the aggregate
amount of initial margin that the
nonbank SD is required to collect from,
or post with, swap counterparties for
uncleared swap transactions subject to
the uncleared margin rules.208 The
Commission requires this information in
order to monitor the use of custodians
by nonbank SDs and their swap
counterparties. Such information assists
the Commission in monitoring the
safety and soundness of a nonbank SD
by monitoring whether the firm is
current with its swap counterparties
with respect to the posting and
collecting of margin required by the
uncleared margin rules. By requiring the
nonbank SD to report the required
amount of margin to be posted and
collected, and the amount of margin that
is actually posted and collected, the
Commission could identify potential
issues with the margin practices and
compliance by nonbank SDs that may
hinder the ability of the firm to meet its
204 Id.
205 Id.
206 17
207 17
CFR 23.105(g).
CFR 23.105(m).
208 Id.
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obligations to market participants. The
Margin Report also allows the
Commission to identify custodians used
by nonbank SDs and their
counterparties, which may permit the
Commission to assess potential market
issues, including a concentration of
custodial services by a limited number
of banks.
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2. Mexican Nonbank Swap Dealer
Financial Reporting Requirements
The Mexican Financial Reporting
Rules impose financial recordkeeping
and reporting requirements on Mexican
nonbank SDs that enable the Mexican
Commission to assess the financial
condition and safety and soundness of
the Mexican nonbank SDs. Consistent
with that purpose, a Mexican nonbank
SD must periodically report its financial
position and capital levels to the
Mexican Commission and other
Mexican regulatory authorities. The
reporting of financial position and
capital level information, along with
other reporting requirements, provide
the Mexican Commission with a
comprehensive view of the activities
and financial condition of each Mexican
nonbank SD.
Specifically, the Mexican Financial
Reporting Rules require a Mexican
nonbank SD to submit to the Mexican
Commission quarterly consolidated
financial reports and an annual
consolidated financial report.209 The
quarterly consolidated financial reports
must be for the quarters ending March,
June, and September of each year, and
must be filed with the Mexican
Commission within the month
following the last day of each quarter.210
The annual consolidated financial
report must be filed within 90 calendar
days of the Mexican nonbank SD’s fiscal
year end, and must contain an audit
report issued by an independent
external auditor.211 The quarterly and
annual financial reports are required to
be denominated in millions of Mexican
pesos and prepared in accordance with
the Accounting Criteria for BrokerDealers.212
The Mexican nonbank SD’s quarterly
consolidated financial reports and
annual audited consolidated financial
report must contain a balance sheet, a
statement of income/loss, a statement of
changes in equity, a statement of cash
flows, and a statement showing the
firm’s compliance with minimum
209 Article
203 of the General Provisions.
210 Id.
211 Id.
212 See Article 176 and Exhibit 5 of the General
Provisions.
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capital requirements.213 The annual
audited consolidated report also must
contain appropriate footnote disclosures
relating to, among other topics, nominal
amounts of derivatives contracts by type
of instrument and by underlying
valuation results, as well as the results
obtained in the assessment of the
adequacy of the firm’s regulatory capital
in relation to credit, market and
operational risk requirements.214 Each
quarterly and annual consolidated
financial report also must be approved
by the Mexican nonbank SD’s board of
directors and internal audit committee,
and signed by at least the chief
executive officer, the chief accountant,
and the internal auditor, or their
equivalent.215
In addition to the above consolidated
financial reports, each Mexican
nonbank SD must provide the Mexican
Commission, on a monthly basis, with
a balance sheet and income statement,
along with additional financial
information.216 Such reports are due
within 20 days following the end of the
respective month.217 On a quarterly
basis, each Mexican nonbank SD also
must provide the Mexican Commission
additional financial information
regarding deferred income taxes,
consolidation with respect to balance
sheet and income statements,
stockholders equity statements, and
cash flow statements.218
A Mexican nonbank SD licensed to
enter into derivatives transactions for its
own account is also required to file with
the Mexican Central Bank, during May
of each year, a written communication
issued by the Mexican nonbank SD’s
internal audit committee evidencing
compliance in the performance of its
derivatives transactions with each and
all applicable legal provisions and,
when required by the Mexican Central
Bank, a Mexican nonbank SD also must
provide the Mexican Central Bank with
all the information related to the
derivatives transactions performed by
the firm.219 Furthermore, a Mexican
nonbank SD licensed to perform
derivatives transactions is required to
file a report with the Mexican Central
Bank on a daily basis containing all the
derivatives transactions performed by
the Mexican nonbank SD.220
213 Article
180 of the General Provisions.
214 Id.
215 Articles
175, 176, and 179 of the General
Provisions.
216 Article 202 of the General Provisions.
217 Id.
218 Article 202 and Exhibit 9 of the General
Provisions.
219 Provision 3.1.3 of the Rule 4/2012 issued by
the Mexican Central Bank.
220 Mexico Application, p. 19.
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A Mexican nonbank SD is also
required to make certain financial
condition information publicly available
by posting the information on a publicly
accessible website. Specifically, a
Mexican nonbank SD is required to
provide its quarterly financial
statements to the general public along
with information related to the firm’s
regulatory capital structure, including
the main components of the firm’s
regulatory capital structure, the capital
adequacy level, and the amount of the
assets subject to risk.221 A Mexican
nonbank SD must also disclose its risk
level,222 according to the credit rating
issued by two credit rating agencies
authorized by the Mexican Commission,
including for such purposes both
ratings, in their notes to their financial
statements.223
3. Commission Analysis
The Commission has reviewed the
Mexico Application and the relevant
Mexican laws and regulations, and has
preliminarily determined that the
financial reporting requirements of the
Mexican Financial Reporting Rules,
subject to the conditions specified
below, are comparable to the CFTC
Financial Reporting Rules in purpose
and effect as they are intended to
provide the Mexican Commission and
Mexican Central Bank, as applicable,
and the Commission, respectively, with
financial information to monitor and
assess the financial condition of
nonbank SDs and their ongoing ability
to absorb decreases in the value of firm
assets and increases in the value of firm
liabilities, and to cover losses from
business activities, including swap
dealing activities, without the firm
becoming insolvent.
The Mexican Financial Reporting
Rules require each Mexican nonbank SD
to prepare and submit to the Mexican
Commission on a quarterly basis an
unaudited financial report, and on an
annual basis an audited financial report,
that includes: (i) a statement of financial
condition; (ii) a statement of profit and
loss; (iii) a statement of changes in
equity; (iv) a statement of cash flows;
and (v) a statement showing the firm’s
compliance with minimum capital
requirements. In addition, a Mexican
nonbank SD is required to file a
221 Article
180 of the General Provisions.
to Article 144 of the General
Provisions, broker-dealers shall make available to
investors, through notes in their annual financial
statements and on their websites, the information
related to the policies, methodologies, levels of risk
assumed and other relevant measures adopted for
the management of each type of risk, including
qualitative and quantitative information in
connection with such risks.
223 Article 169 Bis of the General Provisions.
222 Pursuant
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statement of financial condition and a
statement of profit/loss as of the end of
each month with the Mexican
Commission. The Commission
preliminarily finds that these financial
reporting requirements are comparable
with respect to overall form and content
to the CFTC Financial Reporting Rules,
which require each nonbank SD to file
monthly unaudited financial reports
with the Commission and NFA that
contain: (i) a statement of financial
condition; (ii) statement of profit/loss;
(iii) a statement of changes in liabilities
subordinated to the claims of general
creditors; (iv) a statement of changes in
ownership equity; and (v) a statement
demonstrating compliance with the
capital requirements. Accordingly, the
Commission has preliminarily
determined that a Mexican nonbank SD
may comply with the financial reporting
requirements contained in Regulations
23.105 by complying with the
corresponding Mexican Financial
Reporting Rules, subject to the
conditions set forth below.224
The Commission is proposing to
condition the Capital Comparability
Determination Order on a Mexican
nonbank SD providing the Commission
and NFA with copies of the monthly
financial information, including a copy
of its balance sheet and income
statement, that is filed with the Mexican
Commission pursuant to Article 202 and
Exhibit 9 of the General Provisions. It is
further proposed that a Mexican
nonbank SD must provide the
Commission and NFA with copies of its
quarterly consolidated financial reports
and annual audited financial reports
that are filed with the Mexican
Commission pursuant to Article 203 of
the General Provisions. In addition, the
Commission is proposing that the
Mexican nonbank SD also provide as
part of its monthly filing a statement of
regulatory capital. The Commission is
also proposing to condition the Capital
Comparability Determination Order on
the Mexican nonbank SD translating the
annual audited and unaudited monthly
and quarterly financial reports into the
English language with balances
contained in the unaudited financial
reports converted to U.S. dollars. The
annual audited financial report may be
presented in U.S. dollars or Mexican
pesos. The monthly financial
information and the unaudited and
audited financial reports must be filed
with the Commission and NFA within
224 A Mexican nonbank SD that qualifies and
elects to seek substituted compliance with Mexican
Capital Rules must also seek substituted
compliance with the Mexican Financial Reporting
Rules.
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15 business days of the earlier of the
date the respective reports are filed with
the Mexican Commission or the date
that the respective reports are required
to be filed with the Mexican
Commission.
The Commission is proposing to
impose these conditions as financial
reporting is a critical and central
component of the Commission’s
ongoing obligation to monitor and
assess the safety and soundness of
nonbank SDs as required under Section
4s(e) of the CEA. For nonbank SDs
registered with the Commission, it is
necessary for the Commission to
effectively monitor the ongoing
financial condition of all nonbank SDs,
including Mexican nonbank SDs, to
help ensure their safety and soundness
and their ability to meet their financial
obligations to customers, counterparties,
and creditors.
The Commission preliminarily
believes that its approach of requiring
Mexican nonbank SDs to provide the
Commission and NFA with copies of the
monthly financial information, and the
quarterly and annual financial reports,
that the firms currently file with the
Mexican Commission strikes an
appropriate balance of ensuring that the
Commission receives the financial
reporting necessary for the effective
monitoring of the financial condition of
the nonbank SDs, while also recognizing
the existing regulatory structure of the
Mexican Commission including its
financial reporting requirements. Under
the proposed conditions, the Mexican
nonbank SD would not be required to
prepare separate financial statements or
reports for filing with the Commission,
but would be required to translate its
current financial statements and reports
into the English language with balances
converted to U.S. dollars so that
Commission staff may properly
understand and efficiently analyze the
financial information. The proposed
conditions also provide the Mexican
nonbank SDs with 15 days from the date
the reports are provided to the Mexican
Commission to translate the documents
into English and to convert balances to
U.S. dollars.
The Commission is also proposing to
condition the Capital Comparability
Determination Order on a Mexican
nonbank SD filing with the Commission
and NFA, on a monthly basis, the
aggregate securities, commodities, and
swap positions information set forth in
Schedule 1 of Appendix B to Subpart E
of Part 23.225 The Commission is
225 Schedule 1 of Appendix B to Subpart E of Part
23 includes a nonbank SD’s holding of U.S.
Treasury securities, U.S. government agency debt
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proposing to require that Schedule 1 be
filed with the Commission and NFA as
part of the Mexican nonbank SD’s
monthly financial information that it
prepares pursuant to Article 202 and
Exhibit 9 of the General Provisions.
Schedule 1 provides the Commission
and NFA with detailed information
regarding the financial positions that a
nonbank SD holds as of the end of the
month, which will allow for closer
supervision and monitoring of the types
of investment and other activities that
the firm engages in, which will enhance
the Commission’s and NFA’s ability to
monitor the safety and soundness of the
firm.
The Commission is further proposing
to condition the Capital Comparability
Determination Order on a Mexican
nonbank SD submitting with each
monthly and quarterly financial report
and each annual audited financial
report, as well as the applicable
Schedule 1, a statement by an
authorized representative or
representatives of the Mexican nonbank
SD that to the best knowledge and belief
of the representative or representatives
the information contained in the
respective report is true and correct,
including the translation of the report
into the English language and
conversion of balances in the reports to
U.S. dollars. The statement by the
authorized representative or
representatives of the Mexican nonbank
SD would be in lieu of the oath or
affirmation required of nonbank SDs
under Regulation 23.105(f),226 and is
intended to ensure that reports filed
with the Commission and NFA are
prepared and submitted by firm
personnel with knowledge of the
financial reporting of the firm who can
attest to the accuracy of the reporting
and translation.
The Commission is further proposing
to condition the Capital Comparability
Determination Order on a Mexican
nonbank SD filing the Margin Report
specified in Regulation 23.105(m) with
the Commission and NFA. The Margin
Report is required to contain: (i) the
name and address of each custodian
holding initial margin or variation
margin on behalf of the nonbank SD or
its swap counterparties; (ii) the amount
of initial and variation margin held by
each custodian on behalf of the nonbank
SD and on behalf its swap
counterparties; and (iii) the aggregate
securities, foreign debt and equity securities, money
market instruments, corporate obligations, spot
commodities, cleared and uncleared swaps, cleared
and non-cleared security-based swaps, and cleared
and uncleared mixed swaps in addition to other
position information.
226 17 CFR 23.105(f).
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amount of initial margin that the
nonbank SD is required to collect from,
or post with, swap counterparties for
uncleared swap transactions.227
The Commission preliminarily
believes that receiving this margin
information from Mexican nonbank SDs
will assist in the Commission’s
assessment of the safety and soundness
of the Mexican nonbank SDs.
Specifically, the Margin Report would
provide the Commission with
information regarding a Mexican
nonbank SD’s swap book, the extent to
which it has uncollateralized exposures
to counterparties or has not met its
financial obligations to counterparties.
This information, along with the list of
custodians holding both the firm’s and
counterparties’ swaps collateral, is
expected to assist the Commission in
assessing and monitoring potential
financial impacts to the nonbank SD
resulting from defaults on its swap
transactions. The Commission is
proposing to require that the Margin
Report be filed with the Commission as
part of the Mexican nonbank SD’s
monthly financial information that it
prepares pursuant to Article 202 and
Exhibit 9 of the General Provisions.
Therefore, it is being proposed that each
Mexican nonbank SD must file a
monthly Margin Report within 15
business days of the earlier of the date
the monthly financial reports are filed
with the Mexican Commission or the
date that the respective reports are
required to be filed with the Mexican
Commission. The Commission is also
proposing that the Margin Report must
be prepared in the English language
with balances reported in U.S. dollars.
The Commission is not proposing to
require a Mexican nonbank SD to file
the monthly model metric information
contained in Regulation 23.105(k) with
the Commission or NFA.228 Regulation
23.105(k) requires a nonbank SD that
has obtained approval from the
Commission or NFA to use internal
capital models to submit to the
Commission and NFA each month
information regarding its risk exposures,
including VaR and credit risk exposure
information when applicable. This
information is not applicable as the
Mexican Commission, as previously
noted, has not approved the Mexican
nonbank SDs to use internal models to
compute market risk or credit risk.
The Commission is also not proposing
to require a Mexican nonbank SD to file
the monthly counterparty credit
exposure information specified in
Regulation 23.105(l) and Schedules 2, 3,
227 17
228 17
CFR 23.105(m).
CFR 23.105(k).
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and 4 of Appendix B to Subpart E of
part 23 with the Commission or NFA.
Regulation 23.105(l) requires each
nonbank SD to provide information to
the Commission and NFA regarding its
counterparty credit concentration for
the 15 largest exposures in derivatives,
a summary of its derivatives exposures
by internal credit ratings, and the
geographic distribution of derivatives
exposures for the 10 largest countries in
Schedules 2, 3, and 4, respectively. The
Commission preliminarily believes that,
under a substituted compliance regime,
the Mexican Commission is best
positioned to monitor a Mexican
nonbank SD’s credit exposures, which
may be comprised of credit exposures to
primarily other Mexican counterparties,
as part of the Mexican Commission’s
overall monitoring of the financial
condition of the firm.
Furthermore, the Commission, in
making the preliminary determination
to not require a Mexican nonbank SD to
file the counterparty exposures required
by Regulation 23.105(l), recognizes that
NFA’s current risk monitoring program
requires each bank SD and each
nonbank SD, including each Mexican
nonbank SD, to file risk metrics
addressing market risk and credit risk
with NFA on a monthly basis. NFA’s
risk metric information includes a list of
the 15 largest swaps counterparty
exposures providing for each
counterparty: (i) current exposure by
counterparty before collateral; and (ii)
current exposure by counterparty net of
collateral. The NFA risk metric
information also includes a SD’s total
current exposure before collateral for
the firm across all counterparties, as
well as, total current exposure net of
collateral.229 Although there are
differences in the information required
under Regulation 23.105(l), the NFA
risk metrics provide a level of
information that allows NFA to identify
SDs that may pose heightened risk and
to allocate appropriate NFA regulatory
oversight resources to such firms. The
Commission preliminarily believes that
the proposed financial statement
reporting set forth in the proposed
Capital Comparability Determination
Order, and the risk metric and
counterparty exposure information
currently reported by bank SDs and
nonbank SDs (including Mexican
nonbank SDs) under NFA rules, provide
the appropriate balance of recognizing
the comparability of the Mexican
Financial Reporting Rules to the CFTC
Financial Reporting Rules while also
ensuring that the Commission and NFA
receive sufficient data to monitor and
assess the overall financial condition of
nonbank Mexican SDs.
The Commission notes that the
proposed financial reporting conditions
in the Mexican Capital Comparability
Determination Order are consistent with
the proposed conditions set forth in the
Commission’s proposed Japan Capital
Comparability Determination Order,230
and reflects the Commission’s approach
in that proposal of permitting non-U.S.
nonbank SDs to meet their financial
statement reporting obligations to the
Commission by filing copies of existing
financial reports currently prepared for
home country regulators provided such
reports are translated into English and,
in certain circumstances, balances
expressed in U.S. dollars. The
Commission’s proposed conditions also
include certain financial information
and notices that the Commission
believes are necessary for effective
monitoring of Mexican nonbank SDs
that are not currently part of the
Mexican Commission’s supervision
regime.
The Commission invites public
comment on its analysis above,
including comment on the Mexico
Application and relevant Mexican
Financial Reporting Rules. The
Commission also invites comment on
the proposed conditions listed above
and on the Commission’s proposal not
to require Mexican nonbank SDs to
submit to the Commission and NFA the
information set forth in Regulation
23.105(l) outlined above. Are there
specific elements of the data required
under Regulations 23.105(l) that the
Commission should require of Mexican
nonbank SDs for purposes of monitoring
the financial condition of the firm?
The Commission requests comment
on the proposed filing dates for the
reports and information specified above.
Specifically, do the proposed filing
dates provide sufficient time for
Mexican nonbank SDs to prepare the
reports, translate the reports into
English, and, where required, convert
balances into U.S. dollars? If not, what
period of time should the Commission
consider imposing on one or more of the
reports?
The Commission also requests
specific comment regarding the setting
of compliance dates for the reporting
conditions that the proposed Capital
229 See NFA Financial Requirements, Section
17—Swap Dealer and Major Swap Participant
Reporting Requirements, and Notice to Members—
Monthly Risk Data Reporting for Swap Dealers (May
30, 2017).
230 See Notice of Proposed Order and Request for
Comment on an Application for a Capital
Comparability Determination from the Financial
Services Agency of Japan, 87 FR 48092 (Aug. 8,
2022).
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Comparability Determination Order
would impose on Mexican nonbank
SDs. In this connection, if the
Commission were to require Mexican
nonbank SDs to file the Margin Report
discussed above and included in the
proposed Order below, how much time
would Mexican nonbank SDs need to
develop new systems or processes to
capture information that is required?
Would Mexican nonbank SDs need a
period of time to develop any systems
or processes to meet any other reporting
conditions in the proposed Capital
Comparability Determination Order? If
so, what would be an appropriate
amount of time for a Mexican nonbank
SD to develop and implement such
systems or processes?
E. Notice Requirements
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1. CFTC Nonbank SD Notice Reporting
Requirements
The CFTC Financial Reporting Rules
require nonbank SDs to provide the
Commission and NFA with written
notice of certain defined events.231 The
notice provisions are intended to
provide the Commission and NFA with
an opportunity to assess whether the
information contained in the written
notices indicates the existence of actual
or potential financial and/or operational
issues at a nonbank SD, and, when
necessary, allow the Commission and
NFA to engage the nonbank SD in an
effort to minimize potential adverse
impacts on swap counterparties and the
larger swaps market. The notice
provisions are part of the Commission’s
overall program for helping to ensure
the safety and soundness of nonbank
SDs and the swaps markets in general.
The CFTC Financial Reporting Rules
require a nonbank SD to provide written
notice within specified timeframes if the
firm is: (i) undercapitalized; (ii) fails to
maintain capital at a level that is in
excess of 120 percent of its minimum
capital requirement; or (iii) fails to
maintain current books and records.232
A nonbank SD is also required to
provide written notice if the firm
experiences a 30 percent or more
decrease in excess regulatory capital
from its most recent financial report
filed with the Commission.233 A
nonbank SD also is required to provide
notice if the firm fails to post or collect
initial margin for uncleared swap and
non-cleared security-based swap
transactions or exchange variation
margin for uncleared swap or noncleared security-based swap
CFR 23.105(c).
CFR 23.105(c)(1), (2), and (3).
233 17 CFR 23.105(c)(4).
transactions as required by the
Commission’s uncleared swaps margin
rules or the SEC’s non-cleared securitybased swaps margin rules, respectively,
if the aggregate is equal to or greater
than: (i) 25 percent of the nonbank SD’s
required capital under Regulation
23.101 calculated for a single
counterparty or group of counterparties
that are under common ownership or
control; or (ii) 50 percent of the nonbank
SD’s required capital under Regulation
23.101 calculated for all of the firm’s
counterparties.234
The CFTC Financial Reporting Rules
further require a nonbank SD to provide
advance notice of an intention to
withdraw capital by an equity holder
that would exceed 30 percent of the
firm’s excess regulatory capital.235
Finally, a nonbank SD that is duallyregistered with the SEC as an SBSD or
major security based swap participant
(‘‘MSBSP’’) must file a copy of any
notice with the Commission and NFA
that the SBSD or MSBSP is required to
file with the SEC under SEC Rule 18a–
8 (17 CFR 240.18a–8).236 SEC Rule 18a–
8 requires SBSDs and MSBSPs to
provide written notice to the SEC for
comparable reporting events as the
CFTC Capital Rule in Regulation
23.105(c), including if a SBSD or
MSBSP is undercapitalized or fails to
maintain current books and records.
2. Mexican Nonbank Swap Dealer
Notices
The Mexican Financial Reporting
Rules do not include explicit notice
provisions that require a Mexican
nonbank SD to report certain predefined
events to the relevant Mexican
regulatory authorities. Specifically, the
Mexican Capital Rules do not include
provisions requiring a Mexican nonbank
SD to notify the Mexican Commission or
other relevant regulatory authority if the
firm fails to maintain current books and
records, fails to meet minimum capital
requirements, or experiences a decrease
in excess capital from a previous
amount reported by the Mexican
nonbank SD.
3. Commission Analysis
The Commission has reviewed the
Mexico Application and Mexican laws
and regulations, and has preliminarily
determined that the Mexican Financial
Reporting Rules related to notice
provisions are not comparable to the
notice requirements set forth in in
Regulation 23.105(c) of the CFTC
Financial Reporting Rules. Therefore,
231 17
234 17
232 17
235 17
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CFR 23.105(c)(7).
CFR 23.105(c)(5).
236 17 CFR 23.105(c)(6).
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the Commission is proposing to
condition the Capital Comparability
Determination Order to require Mexican
nonbank SDs to file certain notices
contained in Regulation 23.105(c) with
the Commission as discussed below.
The notice provisions contained in
Regulation 23.105(c) are intended to
provide the Commission and NFA with
information in a prompt manner
regarding actual or potential financial or
operational issues that may adversely
impact the safety and soundness of a
nonbank SD by impairing the nonbank
SD’s ability to meet its obligations to
counterparties, other creditors, and the
general swaps market. Upon the receipt
of a notice from a nonbank SD under
Regulation 23.105(c), the Commission
and NFA will initiate reviews of the
facts and circumstances that caused the
notice to be filed including, as
appropriate, engaging in conversations
with personnel of the nonbank SD. The
review of the facts and the interaction
with the nonbank SD provide the
Commission and NFA with information
to initiate an assessment of whether it
is necessary for the nonbank SD to take
remedial action to address potential
financial or operational issues, and
whether the remedial actions instituted
by the nonbank SD properly address the
issues that are the root cause of the
operational or financial issues. Such
actions may include the infusion of
additional capital into the firm and the
development and implementation of
additional internal controls to address
operational issues. The notice filings
further allow the Commission and NFA
to monitor the firm’s performance after
the implementation of remedial actions
to assess the effectiveness of such
actions.
As noted above, the Mexican
Financial Reporting Rules do not
include explicit, predefined notice
provisions that require a Mexican
nonbank SD to file prompt notice with
the Mexican Commission or other
relevant Mexican regulatory authority in
a manner that is comparable to the
notice provisions set forth in Regulation
23.105(c). Therefore, the Commission is
proposing to condition the Capital
Comparability Determination Order to
require Mexican nonbank SDs to file
certain defined notices with the
Commission and NFA. Specifically,
pursuant to the proposed conditions, a
Mexican nonbank SD would be required
to file a notice with the Commission and
NFA, within the timeframe set forth in
the proposed conditions, if the firm: (i)
failed to keep current books and
records; (ii) maintained regulatory
capital at a level that is below the
minimum capital requirement set by the
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Mexican Capital Rules; (iii) maintained
regulatory capital at a level that is below
120 percent of the minimum capital
requirement set by the Mexican Capital
Rules; (iv) experienced a 30 percent or
more reduction in the firm’s excess
regulatory capital from the amount
previously reported in its financial
forms filed with the Mexican
Commission pursuant to Article 202 and
Exhibit 9 of the General Provisions; and
(v) failed to exchange initial margin or
variation margin required under
Mexican law and/or regulations or
CFTC margin rules to be exchanged for
uncleared swaps and non-cleared
security-based swaps in amounts that
exceed defined thresholds.237
The Commission is proposing these
conditions so that it will be alerted to
the occurrence of any of the defined
events in a prompt manner, which will
allow the Commission to communicate
with the impacted Mexican nonbank SD
and NFA to assess the seriousness of the
matter and the effectiveness of any
actions that the Mexican nonbank SD
may have taken to remediate the matter.
As noted above, the notices are intended
to provide the Commission with ‘‘early
warning’’ of potential adverse financial
and operational issues at a nonbank SD.
The receipt of ‘‘early warning’’ notices
are an important component of the
Commission’s and NFA’s programs for
effectively overseeing the safety and
soundness of nonbank SDs.
The Commission invites public
comment on its analysis above,
including comment on the Mexico
Application and the relevant Mexican
Financial Reporting Rules. The
Commission also invites comment on
the proposed conditions to the Capital
Comparability Determination Order that
are listed above and set forth in the
proposed Order below.
The Commission requests comment
on the timeframes set forth in the
proposed conditions for Mexican
nonbank SDs to file notices with the
Commission and NFA. In this regard,
the proposed conditions would require
Mexican nonbank SDs to file certain
written notices with the Commission
within 24 hours of the occurrence of a
reportable event or of being alerted to a
reportable event by the Mexican
Commission. These notices would have
to be translated into English prior to
being filed with the Commission and
237 The Commission understands that the
Mexican Commission intends to issue final rules
addressing the margin requirements for uncleared
swaps by September 2022. The Mexican nonbank
SDs, however, are currently subject to the CFTC
margin requirements for uncleared swap
transactions as set forth in Regulation 23.160 for
cross-border transactions.
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NFA. The Commission request comment
on the issues Mexican nonbank SDs
may face meeting the filing
requirements given translation and
other issues.
The Commission requests specific
comment regarding the setting of
compliance dates for the notice
reporting conditions that the proposed
Capital Comparability Determination
Order would impose on Mexican
nonbank SDs.
F. Supervision and Enforcement
1. Commission and NFA Supervision
and Enforcement of Nonbank SDs
The Commission and NFA conduct
ongoing supervision of nonbank SDs to
assess their compliance with the CEA,
Commission regulations, and NFA rules
by reviewing financial reports, notices,
risk exposure reports, and other filings
that nonbank SDs are required to file
with the Commission and NFA. The
Commission and NFA also conduct
periodic examinations as part of their
supervision of nonbank SDs, including
routine on-site examinations of nonbank
SDs’ books, records, and operations to
ensure compliance with CFTC and NFA
requirements.238
As noted in section D.1 above,
financial reports filed by a nonbank SD
provide the Commission and NFA with
information necessary to ensure the
firm’s compliance with minimum
capital requirements and to assess the
firm’s overall safety and soundness and
its ability to meet its financial
obligations to customers, counterparties,
and creditors. A nonbank SD is also
required to provide written notice to the
Commission and NFA if certain defined
events occur, including that the firm is
undercapitalized or maintains a level of
capital that is less than 120 percent of
the firm’s minimum capital
requirements.239 The notice provisions,
as stated in section E.1 above, are
intended to provide the Commission
and NFA with information of potential
issues at a nonbank SD that may impact
the firm’s ability to maintain
compliance with the CEA and
Commission regulations. The
Commission and NFA also have the
authority to require a nonbank SD to
provide any additional financial and/or
238 Section 17(p)(2) of the CEA (7 U.S.C. 21(p)(2))
requires NFA as a registered futures association to
establish minimum capital and financial
requirements for non-bank SDs and to implement
a program to audit and enforce compliance with
such requirements. Section 17(p)(2) further
provides that NFA’s capital and financial
requirements may not be less stringent than the
capital and financial requirements imposed by the
Commission.
239 See 17 CFR 23.105(c).
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operational information on a daily basis
or at such other times as the
Commission or NFA may specify to
monitor the safety and soundness of the
firm.240
The Commission also has authority to
take disciplinary actions against a
nonbank SD for failing to comply with
the CEA and Commission regulations.
Section 4b–1(a) of the CEA 241 provides
the Commission with exclusive
authority to enforce the capital
requirements imposed on nonbank SDs
adopted under Section 4s(e) of the
CEA.242
2. Mexican Commission’s Supervision
and Enforcement of Mexican Nonbank
SDs
The Mexican Commission has
supervisory, inspection, and
surveillance powers,243 which include
the authority to require a Mexican
nonbank SD to provide the Mexican
Commission with all necessary
information and documentation to
verify the Mexican nonbank SD’s
compliance with Mexican Law and
General Provisions. The Mexican
Commission also has the authority to
require a Mexican nonbank SD to adopt
any necessary measures to correct
irregular activities, and the Mexican
Commission has the authority to
conduct all necessary on-site
inspections of a Mexican nonbank
SD.244
As noted in section D.2 above,
Mexican broker-dealers, including
Mexican nonbank SDs, are required to
submit financial reports to the Mexican
Commission detailing their financial
condition and operations. Specifically,
Mexican nonbank SDs are required to
submit to the Mexican Commission
monthly balance sheet and income
statements,245 as well as quarterly and
annual financial reports.246 In addition,
Mexican nonbank SDs must conduct
240 See
17 CFR 23.105(h).
U.S.C. 6b–1(a).
242 7 U.S.C. 6s(e).
243 Article 350 of the Law, Articles 5 and 19 of
the Mexican Commission Law and the Supervision
Regulations of the Mexican Commission.
244 Pursuant to Article 358 of the Law, the
Mexican Commission is entitled to provide foreign
financial authorities with all kinds of information
that it deems appropriate within the scope of its
competence, such as documents, records,
declarations and other evidence that the Mexican
Commission has in its possession by virtue of
having obtained the information it in the exercise
of its powers and duties; provided that the Mexican
Commission must have executed an agreement with
the relevant foreign financial authorities for the
exchange of information, in consideration of the
principle of reciprocity.
245 Article 202 and Exhibit 9 of the General
Provisions.
246 Article 203 of the General Provisions.
241 7
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annual stress tests and provide the
Mexican Commission with a report
containing the results of the stress test
assessments.247 The stress test
assessments are designed to determine,
among other things, whether a Mexican
nonbank SD’s capital would be
sufficient to cover losses under the
supervisory scenarios identified by the
Mexican Commission and whether the
firm would comply with the minimum
capital requirements.248 The financial
reports and stress test filed by each
Mexican nonbank SD provides the
Mexican Commission with information
necessary to monitor the firm’s
compliance with the Mexican Capital
Rules and to assess the firm’s overall
safety and soundness and its ability to
meet financial obligations to customers,
counterparties, and creditors.
The Mexican Commission also uses
financial reporting from Mexican
nonbank SDs as a component of its riskbases methodology in setting the
frequency and scope of its examinations
of Mexican nonbank SDs. The Mexican
Commission generally engages in
examinations of broker-dealers,
including Mexican nonbank SDs, as part
of its general supervision and oversight
program to assess firms’ compliance
with relevant laws and regulations.249
The Mexican Commission uses defined
risk metrics in its risk-based
methodology to assist with the selection
of firms to be examined each year. The
Mexican Commission generally
conducts an examination, including onsite visits, of each firm at least once
every two years. The Mexican
Commission will also conduct an
examination of a firm, including an onsite visit, to the extent that its daily,
routine surveillance indicates a need for
an immediate review. The Mexican
Commission also uses information
obtained from the Mexican Central Bank
regarding broker-dealers, including
Mexican nonbank SDs, in its
supervision process.
The Mexican Commission also may
impose fines against Mexican nonbank
SDs for failing to comply with relevant
Mexican laws and regulations. Fines
may range from approximately $130,000
to $432,000 for failing to maintain
sufficient regulatory capital in relation
to the risks in the Mexican nonbank
247 Article
214 of the General Provisions.
id. A Mexican nonbank SD also must file
a preventive action plan if the stress tests indicate
that the firm’s capital ratios are not sufficient. See,
Article 217 of the General Provisions.
249 Staff of the Mexican Commission provided an
overview of its broker-dealer surveillance program
to Commission staff on August 10, 2022.
SD’s operations.250 The Mexican
Commission may also impose fines
ranging from approximately $43,000 to
$432,000 if a Mexican nonbank SD fails
to comply with applicable information
or documentation requirements made by
the Mexican Commission, or if the
Mexican nonbank SD fails to provide
the Mexican Commission with required
periodic informational filings.251
In addition to imposing fines, the
Mexican Commission also may order a
Mexican nonbank SD that fails to
comply with the applicable regulatory
capital ratios, including the 2.5 percent
common equity tier 1 capital buffer, to
take corrective measures including the
following: 252 (i) a prohibition on
entering into transactions whose
execution would cause a total capital
ratio to be less than 8 percent of the
risk-weighted assets; (ii) a requirement
that the Mexican nonbank SD submit for
the approval of the Mexican
Commission a recovery capital plan,
previously approved by the board of
directors, which must contain at least:
the sources of the resources to increase
the capital and/or reduce the assets
subject to risk, the period in which the
Mexican nonbank SD will reach the
level of the regulatory capital required,
a calendar with the objectives that
would be achieved in each period, and
a detailed list of the information that the
Mexican nonbank SD must provide
periodically to the Mexican Commission
to enable the Mexican Commission to
monitor compliance of the Mexican
nonbank SD’s plan; (iii) a suspension of
the payment of dividends, as well as
any mechanism or acts involving a
transfer of patrimonial benefits; (iv) a
suspension of the programs of
acquisition of shares of the capital stock
of the Mexican nonbank SD; (v) a
suspension of payments of
compensation, extraordinary bonuses,
or other remuneration in addition to the
salary of the chief executive officer
(‘‘CEO’’) and officials of the two
hierarchical levels below the CEO, as
well as a requirement to refrain from
granting new compensation in the
future for the CEO and officials; (vi) an
engagement with external auditors or
other specialized third parties to carry
out special audits on specific issues;
and (vii) a limitation on the execution
of new transactions that may cause an
increase in risk-weighted assets and/or
cause greater impairment in the
248 See
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250 Article 392 paragraph III, subparagraph (v) of
the Law.
251 Article 392 paragraph I, subparagraph (a) of
the Law.
252 Articles 204 Bis 7 to 204 Bis 21 of the General
Provisions.
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76397
Mexican nonbank SD’s regulatory
capital ratios. Finally, the Mexican
Commission may revoke a Mexican
nonbank SD’s license to operate as a
broker-dealer if the firm fails to comply
with the above corrective measures or if
the firm reports losses that reduce its
capital to a level below the minimum
required.253
3. Commission Analysis
Based on the above, the Commission
preliminarily finds that the Mexican
Commission has the necessary powers
to supervise, investigate, and discipline
entities for compliance with its capital,
financial and reporting requirements,
and to detect and deter violations of,
and ensure compliance with, the
applicable capital and financial
reporting requirements in Mexico.254
The Commission also has a history of
regulatory cooperation with the
Mexican Commission and would expect
to communicate and consult with the
Mexican Commission regarding the
supervision of the financial and
operational condition of the Mexican
nonbank SDs. An appropriate MOU or
similar arrangement with the Mexican
Commission would facilitate
cooperation and information sharing in
the context of supervising the Mexican
nonbank SDs.255 Such an arrangement
would enhance communication with
respect to entities within the
arrangement’s scope (‘‘Covered Firms’’),
as appropriate, regarding: (i) general
supervisory issues, including regulatory,
oversight, or other related
developments; (ii) issues relevant to the
operations, activities, and regulation of
Covered Firms; and (iii) any other areas
of mutual supervisory interest, and
would anticipate periodic meetings to
discuss relevant functions and
regulatory oversight programs. The
arrangement also would provide for the
Commission and Mexican Commission
to inform each other of certain events,
including any material events that could
adversely impact the financial or
operational stability of a Covered Firm,
253 Article
153 of the Law.
the Commission and the Mexican
Commission are signatories to the IOSCO
Multilateral Memorandum of Understanding
Concerning Consultation and Cooperation and the
Exchange of Information (revised May 2012), which
covers primarily information sharing in the context
of enforcement matters.
255 The Commission entered into a Memorandum
of Understanding Concerning Cooperation and the
Exchange of Information Related to the Supervision
of Cross-Border Central Counterparties and Trade
Repositories (Aug. 31, 2016) with the Mexican
Commission and the Banco de Me´xico, which does
not include entities such as SDs within its scope.
See the Commission’s website at https://
www.cftc.gov/International/Memorandaof
Understanding/index.htm.
254 Both
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and would provide a procedure for any
on-site examinations of Covered Firms.
The Commission invites comment on
the Mexico Application, Mexican laws
and regulations, and the Commission’s
analysis above regarding its preliminary
determination that Mexican
Commission and CFTC have
supervision programs and enforcement
authority that are comparable in that the
purpose of the relevant programs and
authority is to ensure that nonbank SDs
maintain compliance with applicable
capital and financial reporting
requirements.
IV. Proposed Capital Comparability
Determination Order
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A. Commission’s Proposed
Comparability Determination
The Commission’s preliminary view,
based on the Mexico Application and
the Commission’s review of applicable
Mexican laws and regulations, is that
the Mexican Capital Rules and the
Mexican Financial Reporting Rules,
subject to the conditions set forth in the
proposed Capital Comparability
Determination Order below, achieve
comparable outcomes and are
comparable in purpose and effect to the
CFTC Capital Rules and CFTC Financial
Reporting Rules. In reaching this
preliminary conclusion, the
Commission recognizes that there are
certain differences between the Mexican
Capital Rules and CFTC Capital Rules
and certain differences between the
Mexican Financial Reporting Rules and
the CFTC Financial Reporting Rules.
The proposed Capital Comparability
Determination Order is subject to
proposed conditions that are
preliminarily deemed necessary to
promote consistency in regulatory
outcomes, or to reflect the scope of
substituted compliance that would be
available notwithstanding certain
differences. In the Commission’s
preliminary view, the differences
between the two rule sets would not be
inconsistent with providing a
substituted compliance framework for
Mexican nonbank SDs subject to the
conditions specified in the proposed
Order below.
Furthermore, the proposed Capital
Comparability Determination Order is
limited to the comparison of the
Mexican Capital Rules to the BankBased Approach under the CFTC
Capital Rules. As noted previously, the
Applicants have not requested, and the
Commission has not performed, a
comparison of the Mexican Capital
Rules to the Commission’s NLA
Approach or TNW Approach.
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B. Proposed Capital Comparability
Determination Order
The Commission invites comments on
all aspects of the Mexico Application,
relevant Mexican laws and regulations,
the Commission’s preliminary views
expressed above, the question of
whether requirements under the
Mexican Capital Rules are comparable
in purpose and effect to the
Commission’s requirement for a
nonbank SD to hold regulatory capital
equal to or greater than 8 percent of its
uncleared swap margin amount, and the
Commission’s proposed Capital
Comparability Determination Order,
including the proposed conditions
included in the proposed Order, set
forth below.
C. Proposed Order Providing
Conditional Capital Comparability
Determination for Mexican Nonbank
Swap Dealers
It is hereby determined and ordered,
pursuant to Commodity Futures Trading
Commission (‘‘CFTC’’ or
‘‘Commission’’) Regulation 23.106 (17
CFR 23.106) under the Commodity
Exchange Act (‘‘CEA’’) (7 U.S.C. 1 et
seq.) that a swap dealer (‘‘SD’’)
organized and domiciled in Mexico and
subject to the Commission’s capital and
financial reporting requirements under
Sections 4s(e) and (f) of the CEA (7
U.S.C. 6s(e) and (f)) may satisfy the
capital requirements under Section 4s(e)
of the CEA and Commission Regulation
23.101(a)(1)(i) (17 CFR 23.101(a)(1)(i))
(‘‘CFTC Capital Rules’’), and the
financial reporting rules under Section
4s(f) of the CEA and Commission
Regulation 23.105 (17 CFR 23.105)
(‘‘CFTC Financial Reporting Rules’’), by
complying with certain specified
Mexican laws and regulations cited
below and otherwise complying with
the following conditions, as amended or
superseded from time to time:
(1) The SD is not subject to regulation
by a prudential regulator defined in
Section 1a(39) of the CEA (7 U.S.C.
1a(39));
(2) The SD is organized under the
laws of Mexico and is domiciled in
Mexico (a ‘‘Mexican nonbank SD’’);
(3) The Mexican nonbank SD is a
licensed casa de bolsa (broker-dealer)
with the Mexican Comision Nacional
Bancaria y de Valores (Mexican Banking
and Securities Commission) (the
‘‘Mexican Commission’’);
(4) The Mexican nonbank SD is
subject to and complies with: Articles 2,
113, 153, 172, 173, 228, 350, 358, and
392 of the Ley del Mercado de Valores
(Securities Market Law) (referred to as
‘‘the Law’’); Articles 5 and 19 of the
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Mexican Commission Law, the
Supervision Regulations of the Mexican
Commission; Articles 10, 137, 144, 146,
150 through 158 Bis, 159, 160, 161, 161
Bis through 161 Bis 5, 162, 162 Bis, 162
Bis 1, 163, 163 Bis, 169, 169 Bis, 175,
176, 179, 180, 201, 202, 203, 204 Bis 1,
204 Bis 2, 204 Bis 3, 204 Bis 7 through
Bis 21, 214, 216, 217, Exhibits 5 and 9
of the Disposiciones de Caracter General
Aplicables a las Casa De Bolsa (‘‘General
Provisions Applicable to BrokerDealers’’); Section C.B1 of Circular 115/
2002, issued by the Mexican Central
Bank; and Provision 3.1.3 of Rule 4/
2012, issued by the Mexican Central
Bank (collectively, the ‘‘Mexican Capital
Rules’’ and ‘‘Mexican Financial
Reporting Rules,’’ as applicable);
(5) The Mexican nonbank SD
maintains at all times fundamental
capital, as defined in Article 162 and
Article 162 Bis of the General Provisions
Applicable to Broker-Dealers, equal to
or in excess of the equivalent of $20
million in United States dollars (‘‘U.S.
dollars’’). The Mexican nonbank SD
shall use a commercially reasonable and
observed peso/U.S. dollar exchange rate
to convert the value of the pesodenominated common equity tier 1
capital to U.S. dollars;
(6) The Mexican nonbank SD has filed
with the Commission a notice stating its
intention to comply with the applicable
Mexican Capital Rules and Mexican
Financial Reporting Rules in lieu of the
CFTC Capital Rules and CFTC Financial
Reporting Rules. The notice of intent
must include the Mexican nonbank SD’s
representations that the firm is
organized and domiciled in Mexico; is
a licensed casa de bolsa with the
Mexican Commission; and is subject to,
and complies with, the Mexican Capital
Rules and Mexican Financial Reporting
Rules. The Mexican nonbank SD may
not rely on this Capital Comparability
Determination Order until it receives
confirmation from Commission staff that
it may comply with the applicable
Mexican Capital Rules and Mexican
Financial Reporting Rules in lieu of the
CFTC Capital Rules and CFTC Financial
Reporting Rules. Each notice filed
pursuant to this condition must be
prepared in the English language and
submitted to the Commission via email
to the following address:
MPDFinancialRequirements@cftc.gov;
(7) The Mexican nonbank SD shall
provide notice to the Commission and
National Futures Association (‘‘NFA’’) if
at any time it initiates the process of
seeking the approval of the Mexican
Commission to use internal models to
compute market risk and/or credit risk.
The Mexican nonbank SD shall not use
internal models to compute its
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regulatory capital under the terms of
this Capital Comparability
Determination Order without the
authorization of the Commission or
NFA;
(8) The Mexican nonbank SD prepares
and keeps current ledgers and other
similar records in accordance with
accounting principles required by the
Mexican Commission;
(9) The Mexican nonbank SD files
with the Commission and with NFA a
copy of its quarterly financial report
filed with the Mexican Commission
pursuant to Article 203 of the General
Provisions Applicable to Broker-Dealers
and a copy of the monthly financial
information, including the monthly
balance sheet and income statement,
filed with the Mexican Commission
pursuant to Article 202 and Exhibit 9 of
the General Provisions Applicable to
Broker-Dealers. The Mexican nonbank
SD must also include with the monthly
information provided to the
Commission and NFA a statement of
regulatory capital as of each month end.
The quarterly financial report and
monthly financial information must be
translated into the English language and
balances must be converted to U.S.
dollars. The quarterly financial report
and monthly financial information must
be filed with the Commission and NFA
within 15 business days of the earlier of
the date the quarterly financial report
and monthly financial information are
filed with the Mexican Commission or
the date that the financial reports and
financial information are required to be
filed with the Mexican Commission;
(10) The Mexican nonbank SD files
with the Commission and with NFA a
copy of its audited annual financial
report that is required to be filed with
the Mexican Commission in accordance
with Article 203 of the General
Provisions Applicable to Broker-Dealers.
The audited annual report must be
translated into the English language.
The audited annual report must be filed
with the Commission and NFA within
15 business days of the earlier of the
date the audited annual report is filed
with the Mexican Commission or the
date that the audited annual report is
required to be filed with the Mexican
Commission;
(11) The Mexican nonbank SD files
Schedule 1 of Appendix B to Subpart E
of Part 23 of the Commission’s
regulations (17 CFR part 23 Subpart E—
Appendix B) with the Commission and
NFA on a monthly basis. Schedule 1
must be prepared in the English
language with balances reported in U.S.
dollars and must be filed with the
Commission and NFA together with the
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financial information set forth in
condition (9);
(12) The Mexican nonbank SD must
submit with the monthly financial
information, the quarterly financial
report, and the audited annual report
required under conditions (9)–(11) of
this Capital Comparability
Determination Order a statement by an
authorized representative or
representatives of the Mexican nonbank
SD that to the best knowledge and belief
of the representative or representatives
the information contained in the
reports, including the translation of the
reports into the English language and
the conversion of balances into the
reports to U.S. dollars (as applicable), is
true and correct. The statement must be
prepared in the English language;
(13) The Mexican nonbank SD files a
margin report containing the
information specified in Regulation
23.105(m) (17 CFR 23.105(m)) with the
Commission and with NFA.256 The
margin report must be filed together
with the monthly financial information
required by Article 202 and Exhibit 9 of
the General Provisions Applicable to
Broker-Dealers (condition 9). The
margin report must be in the English
language and balances reported in U.S.
dollars;
(14) The Mexican nonbank SD files a
notice with the Commission and NFA
within 24 hours of being informed by
the Mexican Commission that the firm
is not in compliance with any
component of the Mexican Capital Rules
or Mexican Financial Reporting Rules.
The notice must be prepared in the
English language;
(15) The Mexican nonbank SD files a
notice with the Commission and NFA
within 24 hours of when it knows that
its regulatory capital is below 120
percent of the minimum capital
requirement under the Mexican Capital
Rules. The notice must be prepared in
the English language;
(16) The Mexican nonbank SD files a
notice with the Commission and NFA if
it experiences a 30 percent or more
decrease in its excess regulatory capital
as compared to that last reported in the
financial information filed with the
Mexican Commission pursuant to
Article 202 and Exhibit 9 of the General
Provisions Applicable to Broker-Dealers.
The notice must be prepared in the
English language and filed within two
business days of the firm experiencing
the 30 percent or more decrease in
excess regulatory capital;
(17) The Mexican nonbank SD files a
notice with the Commission and NFA
within 24 hours of when it knows or
256 17
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76399
should have known that it has failed to
make or keep current the books and
records required by the Mexican
Commission. The notice must be
prepared in the English language;
(18) The Mexican nonbank SD files a
notice with the Commission and NFA
within 24 hours of the occurrence of any
of the following: (i) a single
counterparty, or group of counterparties
under common ownership or control,
fails to post required initial margin or
pay required variation margin to the
Mexican nonbank SD on uncleared
swap and security-based swap positions
that, in the aggregate, exceeds 25
percent of the Mexican nonbank SD’s
minimum capital requirement; (ii)
counterparties fail to post required
initial margin or pay required variation
margin to the Mexican nonbank SD for
uncleared swap and security-based
swap positions that, in the aggregate,
exceeds 50 percent of the Mexican
nonbank SD’s minimum capital
requirement; (iii) a Mexican nonbank
SD fails to post required initial margin
or pay required variation margin for
uncleared swap and security-based
swap positions to a single counterparty
or group of counterparties under
common ownership and control that, in
the aggregate, exceeds 25 percent of the
Mexican nonbank SD’s minimum
capital requirement; and (iv) the
Mexican nonbank SD fails to post
required initial margin or pay required
variation margin to counterparties for
uncleared swap and security-based
swap positions that, in the aggregate,
exceeds 50 percent of the Mexican
nonbank SD’s minimum capital
requirement. The notice must be
prepared in the English language;
(19) The Mexican nonbank SD files a
notice with the Commission and NFA of
a change in its fiscal year end approved
or permitted to go into effect by the
Mexican Commission. The notice
required by this condition will satisfy
the requirement for a nonbank SD to
obtain the approval of NFA for a change
in fiscal year end under Regulation
23.105(g) (17 CFR 23.105(g)). The notice
of change in fiscal year end must be
prepared in the English language and
filed with the Commission and NFA at
least 15 business days prior to the
effective date of the Mexican nonbank
SD’s change in fiscal year end;
(20) The Applicants notify the
Commission of any material changes to
the information submitted in their
application, including, but not limited
to, material changes to the Mexican
Capital Rules or Mexican Financial
Reporting Rules imposed on Mexican
nonbank SDs, the Mexican
Commission’s supervisory authority or
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Appendix 2—Statement of Support of
Chairman Rostin Behnam
Today the Commission will consider a
proposed order and request for comment on
an application for a capital comparability
determination submitted on behalf of three
nonbank 1 swap dealers that are domiciled in
Mexico and subject to regulation by the
Mexican Banking and Securities
Commission. These nonbank swap dealers
are Morgan Stanley Mexico, Casa de Bolsa,
S.A. de C.V.; Goldman Sachs Mexico, Casa de
Bolsa, S.A. de C.V.; and Casa de Bolsa
Finamex, S.A. de C.V. (Mexican nonbank
swap dealers). Today’s preliminary capital
comparability determination for Mexican
nonbank swap dealers is the second
proposed order and request for comment 2 to
come before the Commission since it adopted
its substituted compliance framework for
non-U.S. domiciled nonbank swap dealers in
July 2020.3
I support the Commission’s proposed order
and request for comment on its preliminary
determination that the Mexican nonbank
swap dealers organized and domiciled in
Mexico are subject to, and comply with,
capital and financial reporting requirements
in Mexico that are comparable to certain
capital and financial reporting requirements
under the Commodity Exchange Act and the
Commission’s regulations (Capital
Comparability Determination), subject to
certain conditions set forth in the proposed
order.
As CFTC provisionally-registered swap
dealers operate and manage risk globally, the
Commission’s supervisory framework must
acknowledge the realities of multijurisdictional operations. The Commission’s
approach to the proposed determination
focuses on whether the Mexico Banking and
Securities Commission’s capital and financial
reporting requirements achieve comparable
outcomes to the corresponding CFTC
requirements for nonbank swap dealers.4
Specifically, the Commission has also
considered the scope and objectives of
Mexico Banking and Securities Commission’s
capital adequacy and financial reporting
requirements; the ability of the Mexico
Banking and Securities Commission to
supervise and enforce compliance with its
capital and financial reporting requirements;
and other facts or circumstances the
Commission has deemed relevant for this
application.
Throughout its analysis, the Commission
has recognized that jurisdictions may adopt
unique approaches to achieving comparable
outcomes, and the Commission has focused
on how the Mexican Banking and Securities
Commission’s capital and financial reporting
requirements are comparable to its own in
purpose and effect, rather than whether each
are comparable in every particular aspect or
contain identical elements. In this regard, the
approach was not a line-by-line assessment
or comparison of the Mexican Banking and
Securities Commission’s regulatory
requirements with the Commission’s
requirements.5
Consistent with the Commission’s
authority to issue a Capital Comparability
Determination with terms and conditions it
deems appropriate, today’s proposed order
contains 21 conditions. These conditions aim
to ensure that the proposed order, if
finalized, would only apply to Mexican
nonbank swap dealers that are eligible for
substituted compliance and that these
Mexican nonbank swap dealers comply with
the Mexican Banking and Securities
Commission’s capital and financial reporting
requirements as well as certain additional
capital, margin, position, financial reporting,
recordkeeping, and regulatory notice
requirements.
1 The Commission has capital jurisdiction over
registered swap dealers that are not subject to the
regulation of a U.S. banking regulator (i.e., nonbank
swap dealers).
2 The Commission approved a Notice of Proposed
Order and Request for Comment on an Application
for a Capital Comparability Determination from the
Financial Services Agency of Japan at its July 27,
2022 open meeting. See 87 FR 48092 (Aug. 8, 2022).
3 See Capital Requirements of Swap Dealers and
Major Swap Participants, 85 FR 57462, 57520 (Sept.
15, 2020). Regulation 23.106 also sets forth the
Commission’s substituted compliance requirements
for major swap participants; however, there are not
any registered with the Commission.
4 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at
57521.
5 See 85 FR 57521.
supervisory regime over Mexican
nonbank SDs, and proposed or final
material changes to the Mexican Capital
Rules or Mexican Financial Reporting
Rules as they apply to Mexican nonbank
SDs. The notice must be prepared in the
English language; and
(21) Unless otherwise noted in the
conditions above, the reports, notices,
and other statements required to be filed
by Mexican nonbank SD with the
Commission or NFA pursuant to the
conditions of this Capital Comparability
Determination Order must be submitted
electronically to the Commission and
NFA in accordance with instructions
provided by the Commission or NFA.
Issued in Washington, DC, on December 5,
2022, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Notice of Proposed
Order and Request for Comment on an
Application for a Capital Comparability
Determination Submitted on Behalf of
Nonbank Swap Dealers Subject to
Regulation by the Mexican Comision
Nacional Bancaria y de Valores—
Commission Voting Summary,
Chairman’s Statement, and
Commissioners’ Statements
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Appendix 1—Commission Voting Summary
On this matter, Chairman Behnam and
Commissioners Johnson, Goldsmith Romero,
and Mersinger voted in the affirmative.
Commissioner Pham voted to concur. No
Commissioner voted in the negative.
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If the Commission, upon consideration of
the comments received, determines to issue
a favorable comparability determination, an
eligible Mexican nonbank swap dealer would
be required to file a notice of its intent to
comply with the Mexican Banking and
Securities Commission’s capital adequacy
and financial reporting rules in lieu of the
Commission’s requirements.6 The
Commission (or the Market Participants
Division through delegated authority) would
then be obligated to confirm to the Mexican
nonbank swap dealer that it may comply
with the foreign jurisdiction’s rules as well
as any conditions that would be adopted as
part of the final determination, and that, by
doing so, it would be deemed to be in
compliance with the Commission’s
corresponding capital adequacy and financial
reporting requirements.
I believe it is important to note that today’s
proposed Capital Comparability
Determination, if finalized, would not
compromise the Commission’s capital and
financial reporting requirements. Instead, it
recognizes the global nature of the swap
markets with dually-registered swap dealers
that operate in multiple jurisdictions that
mandate prudent capital and financial
reporting requirements. As I have said before,
a capital and financial reporting
comparability determination order of this
kind is not a compromise or deference to a
foreign regulatory authority. The Commission
would retain its enforcement authority and
examinations authority as well as obtain all
financial and event specific reporting to
maintain direct oversight of nonbank swap
dealers located in Mexico.
I look forward to the public’s submission
of comments and feedback on this proposed
determination and order.
Thank you to the hardworking staff in the
Market Participants Division for all of their
efforts to bring us here today, as well as the
support of our colleagues in the Office of the
General Counsel and the Office of
International Affairs.
Appendix 3—Statement of Support of
Commissioner Kristin N. Johnson
I support the Commission’s issuance of the
Notice of Proposed Order and Request for
Comment (Notice of Proposed Order and
Request for Comment) on the Application for
the Capital Comparability Determination
submitted on behalf of Nonbank Swap
Dealers subject to Regulation by the Mexican
Comisio´n Nacional Bancaria y de Valores
(Mexican Banking and Securities
Commission). The application of the
nonbank swap dealers Morgan Stanley
Mexico, Casa de Bolsa, S.A. de C.V.;
Goldman Sachs Mexico, Casa de Bolsa, S.A.
de C.V.; and Casa de Bolsa Finamex, S.A. de
C.V. (Mexican nonbank swap dealers)
domiciled in Mexico and subject to
regulation by the Mexican Banking and
Securities Commission seeking a capital
comparability determination for Mexican
nonbank swap dealers is the second
proposed order and request for comment to
come before the Commission since it adopted
its substituted compliance framework for
6 See
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17 CFR 23.106(a)(4).
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lotter on DSK11XQN23PROD with PROPOSALS3
non-U.S. domiciled nonbank swap dealers in
July 2020.1
Today, a little over a decade after the onset
of the financial crisis precipitated by events
in the bespoke, bilateral, over the counter
swaps market, we continue to vigilantly
monitor and surveil the risk management
activities among market participants. Our
efforts to coordinate and harmonize
regulation with regulators around the world
reinforces the adoption, implementation, and
enforcement of sound prudential and capital
requirements. These requirements aim to
ensure the integrity of entities operating in
these markets, to ensure rapid identification
and remediation of liquidity crises, and to
mitigate the threat of systemic risks that may
threaten the stability of domestic and global
financial markets.
Capital requirements play a critical role in
fostering the safety and soundness of
financial markets. As indicated in the
Commodity Exchange Act, capital
requirements protect market participants
against concerning risks that threaten the
integrity of individual market participants or
potentially trigger a domino effect of
cascading losses across financial markets.2
The Commission’s capital and financial
reporting requirements are critical to
ensuring the safety and soundness of our
markets.3 Ensuring necessary levels of
capital, as well as accurate and timely
reporting about financial conditions, helps to
protect swap dealers and the broader
financial markets ecosystem from shocks,
thereby ensuring resiliency.
Section 4s(e) of the CEA directs the
Commission and ‘‘prudential regulators’’ to
impose capital requirements on all swap
dealers (‘‘SDs’’) and major swap participants
(‘‘MSPs’’) registered with the Commission.4
Section 4s(e) of the CEA also directs the
Commission and prudential regulators to
adopt regulations imposing initial and
variation margin requirements on swaps
entered into by SDs and MSPs that are not
cleared by a registered derivatives clearing
organization. Applying the Congressional
directive, Section 4s(e) bifurcates the
oversight of bank affiliated and non-bank
affiliated SD and MSP. The Commission has
authority to impose capital requirements and
margin requirements for uncleared swap
transactions.5
Under Section 4s(f), the Commission may
adopt rules imposing financial condition
reporting obligations on all SDs and MSPs. In
accord with the same, the Commission has
adopted financial reporting obligations.
I support acknowledging market
participants’ compliance with the regulations
of foreign jurisdictions when the
requirements lead to an outcome that is
comparable to the outcome of complying
with the CFTC’s corresponding requirements.
Substituted compliance must not, however,
1 The Commission approved a Notice of Proposed
Order and Request for Comment on an Application
for a Capital Comparability Determination from the
Financial Services Agency of Japan at its July 27,
2022 open meeting. See 87 FR 48092 (Aug. 8, 2022).
2 7 U.S.C. 6s(e).
3 See 7 U.S.C. 6s(e); 17 CFR subpart E.
4 7 U.S.C. 6s(e).
5 7 U.S.C. 6s(e)(1) and (2).
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19:21 Dec 12, 2022
Jkt 259001
be confused with deference. To the contrary,
the swap dealers that qualify for substituted
compliance under regulation 23.106 must be
Commission registrants. The Proposed Order,
if approved, would ensure that relevant swap
dealers domiciled in Mexico remain subject
to the Commission’s examination and
enforcement authority over the firms.
Capital adequacy and financial reporting
are pillars of risk management oversight for
any business, and, for firms operating in our
markets, it is of the utmost importance that
rules governing these risk management tools
are effectively calibrated, continuously
assessed, and fit for purpose. The
Commission’s efforts in considering this
proposal reflect careful and thoughtful
evaluation of the comparability of relevant
standards and an attempt to coordinate our
efforts to bring transparency to the swaps
market and reduce its risks to the public. I
look forward to reviewing the comments that
the Commission will receive in response to
the Notice of Proposed Order and Request for
Comment and, in particular, comments
exploring proposed conditions.
Finally, I appreciate our colleagues in the
Market Participants Division and their
continuous collaboration with our fellow
regulator—the Comisio´n Nacional de
Bancaria y de Valores. I also want to thank
my fellow Commissioners for their support in
advancing this matter before the
Commission. Successfully implementing
comparability determinations requires
collaboration between the CFTC and its
partner regulators in other countries. The
economies of the United States and Mexico
are closely intertwined, and increased
collaboration can only be beneficial in
achieving our key goals of customer
protection and market integrity.
Appendix 4—Statement of Commissioner
Christy Goldsmith Romero
I support the Commission considering
efforts to safeguard the resilience of swap
dealers, including through the proposed
capital comparability determination for
Mexico. The proposal recognizes that strong
capital requirements are essential to ensure a
swap dealer’s safety and soundness, and that
cross-border coordination with a like-minded
regulator can promote financial stability. I
commend the staff for their hard work on
today’s proposal—and thank them for
working closely with me and my office on
changes to improve the proposal.
Lessons Learned From the 2008 Financial
Crisis
One of the lessons learned from the 2008
financial crisis was the need to protect our
markets from the serious risks posed by
inadequate amounts of capital that could
serve as a buffer against risk. Critical
financial reforms introduced by the DoddFrank Act included minimum capital
requirements for swap dealers. I note that
two of the three swap dealers in Mexico that
would be immediately subject to this
proposed determination are affiliates of two
of the largest recipients of Troubled Asset
Relief Program dollars.
Dodd-Frank Act reforms led to the CFTC
establishing capital requirements for
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Fmt 4701
Sfmt 4702
76401
nonbank swap dealers, implementing rules to
keep our markets safe. Requiring firms to
maintain a strong amount of high-quality
capital helps to ensure their resilience—their
ability to meet their financial commitments,
and continue to perform their critical market
making function, even when faced with
stress events in the market, unexpected
losses or decreases in the value of their
assets. This lowers the risk in the financial
system, and helps to ensure financial
stability.
Our capital rules are a critical pillar of the
Dodd-Frank Act’s reforms. Therefore, we
must ensure that our comparability
assessments are sound and do not increase
risk to U.S. markets.
The CFTC’s Second Substituted Compliance
Determination for Capital Requirements
The global nature of the 2008 financial
crisis also highlighted the need for the CFTC
to coordinate with foreign regulators, as swap
activities in a foreign jurisdiction may have
an impact in the United States. This is
particularly relevant here as two of the three
existing swap dealers are affiliates of large
U.S. financial institutions.
Today’s proposal is only the second
substituted compliance determination to be
considered for the CFTC’s capital rules,
following our proposal in July related to
swap dealers in Japan. Therefore, we should
proceed carefully, as what we do will
establish precedent.
Substituted compliance is not an all-ornothing proposition. The Commission can
impose any terms or conditions that it deems
appropriate, and can continue to require
direct compliance with certain of the CFTC’s
rules. That is what we are proposing to do
here in certain areas.
For example, I strongly support the
proposed condition for Mexican nonbank
swap dealers to comply with the CFTC’s $20
million minimum capital requirement—just
as we proposed to require for nonbank swap
dealers in Japan. This is one of the most
critical components of the CFTC’s capital
requirements. It helps to ensure that each
nonbank swap dealer maintains, at all times,
a fixed amount of the highest quality capital
to meet its financial obligations without
becoming insolvent. The minimum capital
requirement recognizes the significant role
that swap dealers play in our markets—with
extensive connections to other swap
counterparties and to each other—and helps
ensure their resilience.
Even with substituted compliance, the
CFTC must ensure that we receive—both on
a periodic, and event-driven, basis—the
information necessary to identify, evaluate
and address situations that may have an
adverse impact on firms or financial markets.
That is why I support the conditions in the
proposal that would require a nonbank swap
dealer in Mexico to notify the Commission of
undercapitalization and other events that
may indicate financial or operational issues.
I look forward to public comment on whether
allowing Mexican nonbank swap dealers to
submit financial reports that are required to
be prepared under Mexico’s rules will ensure
that the Commission has access to the
information needed to effectively monitor the
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financial health—including the capital
adequacy—of these firms.
The CFTC has a duty to ensure that our
comparability assessment is sound and that
the foreign regulator is like-minded, not only
in their rules but in their supervision,
oversight, and enforcement. Therefore, a
strong regulatory relationship with the
Mexican Banking and Securities Commission
(Comision Nacional Bancaria y de Valores)
(‘‘CNBV’’) and regular continued
coordination is important. I highlight, and
express my appreciation for, the CNBV’s
engagement with our staff. Continued
engagement will enhance our ability to work
together swiftly and effectively to address
any significant market stress events or other
circumstances that may threaten a firm’s
safety and soundness.
It is a priority for me to ensure that the
CFTC guards against complacency with postcrisis reforms, particularly after market
stresses from the pandemic and geopolitical
events. Our capital rules serve as critical
pillars of Dodd-Frank Act reforms to help
ensure the safety and resilience of the
markets and market participants from serious
risks and contagion. Substituted compliance
must leave U.S. markets and our economy at
no greater risk than full compliance with our
rules.
Appendix 5—Concurring Statement of
Commissioner Caroline D. Pham
lotter on DSK11XQN23PROD with PROPOSALS3
I respectfully concur with the notice of
proposed order and request for comment on
an application for a capital comparability
determination submitted on behalf of
nonbank swap dealers subject to regulation
by the Mexican Comision Nacional Bancaria
y de Valores (CNBV).
Today’s proposed order and request for
comment on a comparability determination
for three nonbank swap dealers by Mexican
CNBV marks yet another important step for
cross-border harmonization. It is worth
reiterating the progress that the world has
made since the 2008 financial crisis in
implementing this, among other, G20 global
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19:21 Dec 12, 2022
Jkt 259001
derivatives reforms.1 I would like to thank
staff in the CFTC’s Market Participants
Division for their hard work, continued
engagement with our global counterparts,
and commitment to providing substituted
compliance to continue implementing these
reforms.
The proposed determination and order
would permit, subject to several proposed
conditions, CFTC registered nonbank swap
dealers domiciled in Mexico to satisfy certain
Commission swap dealer capital and
financial reporting requirements via
substituted compliance with certain capital
and financial reporting requirements
established by the Mexican Banking and
Securities Commission (‘‘Mexican
Commission’’). CFTC staff met with Mexican
CNBV staff on several occasions to discuss
the application process and capital and
financial reporting requirements.
One of my guiding principles throughout
my career, both as a regulator and in the
private sector, is that markets work best
when there are clear and simple rules with
common standards. Ensuring that these rules
are harmonized minimizes operational
complexity that can otherwise increase risks
and costs. Without an approach that
appropriately recognizes the home country
regulations, trading and clearing becomes
more complex and therefore costlier and less
efficient for all market participants. Through
the hard work of CFTC staff, today’s order
takes a step in mitigating these potential
negative effects on the global and U.S.
markets. I am also pleased that the proposed
order recognizes that Mexico has
implemented rules that are consistent with
the Basel Committee for Banking Supervision
Framework for International Bank Based
Capital Standards. We must continue to
appropriately adhere to international
standards, because our markets are global
and we are not regulating in a vacuum.
I continue to believe that the CFTC should
take an outcomes-based approach to
substituted compliance, one that strikes a
balance of both recognizing the nature of
cross-border regulation of global markets and
that preserves access for U.S. persons to other
markets.2 From my hands on perspective
implementing policies, procedures, and
processes to comply with our rules, I
welcome comments, particularly on
operational issues with additional reporting
requirements given local governance and
regulatory requirements, differences in
financial reporting, or anything else
anticipated by market participants.
There’s just one small example that I
wanted to mention. Specifically, I’m unsure
as to how an entity can file a notice within
24 hours of when it ‘‘should have known’’
about a books and records issue. When you
are designing an escalation and self-reporting
process and have to start the clock ticking,
either you have identified an issue or you
have not. There is a specific time, and then
the deadline is 24 hours later. I am not sure
how you count 24 hours from ‘‘should have
known’’ because there is no specific time
from which to start the clock ticking. Perhaps
we mean ‘‘knows or reasonably suspects’’
there is an issue. That is one of the reasons
I am concurring in today’s proposal.
Nonetheless, I appreciate the careful
consideration by the staff and the
Commission of how to take a practical
approach to achieving appropriate oversight
and mitigation of risk to the United States
and the markets. I urge a pragmatic approach
with sufficient time to implement conditions
before any compliance date, and I appreciate
the thought that the staff have been putting
into that.
1 See Commissioner Pham ‘‘Concurring Statement
of Commissioner Caroline D. Pham Regarding
Proposed Swap Dealer Capital and Financial
Reporting Comparability Determination’’ (July 27,
2022); see also Financial Stability Board ‘‘OTC
Derivatives Market Reforms—Implementation
Progress in 2021’’ (Dec. 3, 2021), available at:
https://www.fsb.org/2021/12/otc-derivativesmarket-reforms-implementation-progress-in-2021/.
[FR Doc. 2022–26758 Filed 12–12–22; 8:45 am]
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BILLING CODE 6351–01–P
2 See Commissioner Pham ‘‘Concurring Statement
of Commissioner Caroline D. Pham Regarding
Proposed Swap Dealer Capital and Financial
Reporting Comparability Determination’’ (July 27,
2022).
E:\FR\FM\13DEP3.SGM
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]]>Agencies
[Federal Register Volume 87, Number 238 (Tuesday, December 13, 2022)]
[Proposed Rules]
[Pages 76374-76402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26758]
[[Page 76373]]
Vol. 87
Tuesday,
No. 238
December 13, 2022
Part III
Commodity Futures Trading Commission
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17 CFR Chapter I
Notice of Proposed Order and Request for Comment on an Application for
a Capital Comparability Determination Submitted on Behalf of Nonbank
Swap Dealers Subject to Regulation by the Mexican Comision Nacional
Bancaria y de Valores; Proposed Rule
Federal Register / Vol. 87, No. 238 / Tuesday, December 13, 2022 /
Proposed Rules
[[Page 76374]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican
Comision Nacional Bancaria y de Valores
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed order and request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is soliciting public comment on a joint request submitted by
Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Goldman Sachs
Mexico, Casa de Bolsa, S.A. de C.V., and Casa de Bolsa Finamex, S.A. de
C.V. requesting that the Commission determine that the capital and
financial reporting laws and regulations of Mexico applicable to CFTC-
registered swap dealers organized and domiciled in Mexico, and licensed
with the Mexican Banking and Securities Commission (Comision Nacional
Bancaria y de Valores) as broker-dealers (casa de bolsa), provide a
sufficient basis for an affirmative finding of comparability with
respect to the Commission's swap dealer capital and financial reporting
requirements adopted under the Commodity Exchange Act. The Commission
also is soliciting public comment on a proposed order providing for the
conditional availability of substituted compliance in connection with
the application.
DATES: Comments must be received on or before February 13, 2023.
ADDRESSES: You may submit comments, identified by ``Mexico Swap Dealer
Capital Comparability Determination'', by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this proposed order and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Commission Regulation 145.9.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to in this
document are found at 17 CFR chapter I, and are accessible on the
Commission's website at: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the proposed determination and order will be retained in
the public comment file and will be considered as required under the
Administrative Procedure Act and other applicable laws, and may be
accessible under the FOIA.
FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas Smith, Deputy Director, 202-418-5495,
[email protected]; Rafael Martinez, Associate Director, 202-418-5462,
[email protected]; Joshua Beale, Associate Director, 202-418-5446,
[email protected]; Warren Gorlick, Associate Director, 202-418-5195,
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472,
[email protected]; Carmen Moncada-Terry, Special Counsel, 202-418-5795,
[email protected]; Liliya Bozhanova, Special Counsel, 202-418-
6232, [email protected]; Justin McPhee, Risk Analyst, 202-418-6223,
[email protected], Market Participants Division; Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION: The Commission is soliciting public comment
on an application dated September 28, 2021 (the ``Mexico Application'')
and submitted jointly by Morgan Stanley Mexico, Casa de Bolsa, S.A. de
C.V., Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V., and Casa de
Bolsa Finamex, S.A. de C.V. (the ``Applicants'').\2\ The Applicants'
Mexico Application requests that the Commission issue an order finding
that registered nonbank \3\ swap dealers (``SDs'') organized and
domiciled in Mexico (``Mexican nonbank SDs'') may satisfy certain
capital and financial reporting requirements under the Commodity
Exchange Act (``CEA'') \4\ by being subject to, and complying with,
comparable capital and financial reporting requirements under Mexican
laws and regulations. The Commission also is soliciting public comment
on a proposed order that would permit Mexican nonbank SDs, subject to
certain conditions, to comply with certain CFTC SD capital and
financial reporting requirements in the manner set forth in the
proposed order.
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\2\ The Mexico Application was submitted by Colin D. Lloyd,
Cleary Gottlieb Steen & Hamilton LLP, on behalf of the Applicants.
The Mexico Application is available on the Commission's website at:
https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
\3\ As discussed in Section I.A. immediately below, the U.S.
prudential regulators have capital jurisdiction over registered swap
dealers that are subject to their regulation (``bank SDs'') and the
Commission has capital jurisdiction over registered SDs that are not
subject to the regulation of a U.S. prudential regulator (i.e.,
nonbank SDs).
\4\ 7 U.S.C. 1 et seq. The CEA may be accessed through the
Commission's website, www.cftc.gov.
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I. Introduction
A. Regulatory Background--Swap Dealer and Major Swap Participant
Capital and Financial Reporting Requirements
Section 4s(e) of the CEA \5\ directs the Commission and
``prudential regulators'' \6\ to impose capital requirements on all SDs
and major swap participants (``MSPs'') registered with the Commission.
Section 4s(e) of the CEA also directs the Commission and prudential
regulators to adopt regulations imposing initial and variation margin
requirements on swaps entered into by SDs and MSPs that are not cleared
by a registered derivatives clearing organization (``uncleared
swaps'').
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\5\ 7 U.S.C. 6s(e).
\6\ The term ``prudential regulators'' is defined in the CEA to
mean the Board of Governors of the Federal Reserve System (``Federal
Reserve Board''); the Office of the Comptroller of the Currency; the
Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency. See 7 U.S.C.
1a(39).
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Section 4s(e) applies a bifurcated approach with respect to the
above Congressional directives, requiring each SD and MSP that is
subject to the regulation of a prudential regulator (``bank SD'' and
``bank MSP,''
[[Page 76375]]
respectively) to meet the minimum capital requirements and uncleared
swaps margin requirements adopted by the applicable prudential
regulator, and requiring each SD and MSP that is not subject to the
regulation of a prudential regulator (``nonbank SD'' and ``nonbank
MSP,'' respectively) to meet the minimum capital requirements and
uncleared swaps margin requirements adopted by the Commission.\7\
Therefore, the Commission's authority to impose capital requirements
and margin requirements for uncleared swap transactions extends to
nonbank SDs and nonbank MSPs, including nonbank subsidiaries of bank
holding companies regulated by the Federal Reserve Board.\8\
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\7\ 7 U.S.C. 6s(e)(2).
\8\ 7 U.S.C. 6s(e)(1) and (2).
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The prudential regulators implemented Section 4s(e) in 2015 by
amending existing capital requirements applicable to bank SDs and bank
MSPs to incorporate swap transactions into their respective bank
capital frameworks, and by adopting rules imposing initial and
variation margin requirements on bank SDs and bank MSPs that engage in
uncleared swap transactions.\9\ The Commission adopted final rules
imposing initial and variation margin obligations on nonbank SDs and
nonbank MSPs for uncleared swap transactions on January 6, 2016.\10\
The Commission also approved final capital requirements for nonbank SDs
and nonbank MSPs on July 24, 2020, which were published in the Federal
Register on September 15, 2020 with a compliance date of October 6,
2021 (``CFTC Capital Rules'').\11\
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\9\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840 (Nov. 30, 2015).
\10\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
\11\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
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Section 4s(f) of the CEA addresses SD and MSP financial reporting
requirements.\12\ Section 4s(f) of the CEA authorizes the Commission to
adopt rules imposing financial condition reporting obligations on all
SDs and MSPs (i.e., nonbank SDs, nonbank MSPs, bank SDs, and bank
MSPs). Specifically, Section 4s(f)(1)(A) of the CEA provides, in
relevant part, that each registered SD and MSP must make financial
condition reports as required by regulations adopted by the
Commission.\13\ The Commission's financial reporting obligations were
adopted with the Commission's nonbank SD and nonbank MSP capital
requirements, and also had a compliance date of October 6, 2021 (``CFTC
Financial Reporting Rules'').\14\
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\12\ 7 U.S.C. 6s(f).
\13\ 7 U.S.C. 6s(f)(1)(A).
\14\ See 85 FR 57462.
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B. Commission Capital Comparability Determinations for Non-U.S. Nonbank
Swap Dealers and Non-U.S. Nonbank Major Swap Participants
Regulation 23.106 establishes a substituted compliance framework
whereby the Commission may determine that compliance by a non-U.S.
domiciled nonbank SD or non-U.S. domiciled nonbank MSP with its home
country's capital and financial reporting requirements will satisfy all
or parts of the CFTC Capital Rules and all or parts of the CFTC
Financial Reporting Rules (such a determination referred to as a
``Capital Comparability Determination'').\15\ The availability of such
substituted compliance is conditioned upon the Commission issuing a
determination that the relevant foreign jurisdiction's capital adequacy
and financial reporting requirements, and related financial
recordkeeping requirements, for non-U.S. nonbank SDs and/or non-U.S.
nonbank MSPs are comparable to the corresponding CFTC Capital Rules and
CFTC Financial Reporting Rules. The Commission will issue a Capital
Comparability Determination in the form of a Commission order
(``Capital Comparability Determination Order'').\16\
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\15\ 17 CFR 23.106. Regulation 23.106(a)(1) provides that a
request for a Capital Comparability Determination may be submitted
by a non-U.S. nonbank SD or a non-U.S. nonbank MSP, a trade
association or other similar group on behalf of its SD or MSP
members, or a foreign regulatory authority that has direct
supervisory authority over one or more non-U.S. nonbank SDs or non-
U.S. nonbank MSPs. Commission regulations provide that any non-U.S.
nonbank SD or non-U.S. nonbank MSP that is dually-registered with
the Commission as a futures commission merchant (``FCM'') is subject
to the capital requirements of Regulation 1.17 and may not petition
the Commission for a Capital Comparability Determination. See 17 CFR
23.101(a)(5) and (b)(4), respectively. Furthermore, non-U.S. bank
SDs and non-U.S. bank MSPs may not petition the Commission for a
Capital Comparability Determination with respect to their respective
financial reporting requirements under Regulation 23.105(p) (17 CFR
23.105(p)). Commission staff has issued, however, a time-limited no-
action letter stating the Market Participants Division will not
recommend enforcement action against a non-U.S. bank SD that files
with the Commission certain financial information that is provided
to its home country regulator in lieu of certain financial reports
required by Regulation 23.105(p). See CFTC Staff Letter 21-18,
issued on August 31, 2021.
\16\ 17 CFR 23.106(a)(3).
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The Commission's approach for conducting a comparability
determination with respect to the CFTC Capital Rules and the CFTC
Financial Reporting Rules is a principles-based, holistic approach that
focuses on whether the applicable foreign jurisdiction's capital and
financial reporting requirements achieve comparable outcomes to the
corresponding CFTC requirements.\17\ In this regard, the approach is
not a line-by-line assessment or comparison of a foreign jurisdiction's
regulatory requirements with the Commission's requirements.\18\ In
performing the analysis, the Commission recognizes that jurisdictions
may adopt differing approaches to achieving comparable outcomes, and
the Commission will focus on whether the foreign jurisdiction's capital
and financial reporting requirements are comparable to the Commission's
in purpose and effect, and not whether they are comparable in every
aspect or contain identical elements.
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\17\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
\18\ See 85 FR 57521.
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A person requesting a Capital Comparability Determination is
required to submit an application to the Commission containing: (i) a
description of the objectives of the relevant foreign jurisdiction's
capital adequacy and financial reporting requirements applicable to
entities that are subject to the CFTC Capital Rules and the CFTC
Financial Reporting Rules; (ii) a description (including specific legal
and regulatory provisions) of how the relevant foreign jurisdiction's
capital adequacy and financial reporting requirements address the
elements of the CFTC Capital Rules and CFTC Financial Reporting Rules,
including, at a minimum, the methodologies for establishing and
calculating capital adequacy requirements and whether such
methodologies comport with any international standards; and (iii) a
description of the ability of the relevant foreign regulatory authority
to supervise and enforce compliance with the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements.
The applicant must also submit, upon request, such other information
and documentation as the Commission deems necessary to evaluate the
comparability of the capital adequacy and financial reporting
requirements of the foreign jurisdiction.\19\
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\19\ 17 CFR 23.106(a)(2).
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The Commission may consider all relevant factors in making a
Capital Comparability Determination, including: (i) the scope and
objectives of the relevant foreign jurisdiction's capital and financial
reporting requirements; (ii) whether the relevant foreign
[[Page 76376]]
jurisdiction's capital and financial reporting requirements achieve
comparable outcomes to the Commission's corresponding capital
requirements and financial reporting requirements; (iii) the ability of
the relevant foreign regulatory authority or authorities to supervise
and enforce compliance with the relevant foreign jurisdiction's capital
adequacy and financial reporting requirements; and (iv) any other facts
or circumstances the Commission deems relevant, including whether the
Commission and foreign regulatory authority or authorities have a
memorandum of understanding (``MOU'') or similar arrangement that would
facilitate supervisory cooperation.\20\
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\20\ See 17 CFR 23.106(a)(3) and 85 FR 57520-57522.
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In performing the comparability assessment for foreign nonbank SDs,
the Commission's review will include the extent to which the foreign
jurisdiction's requirements address: (i) the process of establishing
minimum capital requirements for nonbank SDs and how such process
addresses risk, including market risk and credit risk of the nonbank
SD's on-balance sheet and off-balance sheet exposures; (ii) the types
of equity and debt instruments that qualify as regulatory capital in
meeting minimum requirements; (iii) the financial reports and other
financial information submitted by a nonbank SD to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank SD; and (iv) the regulatory
notices and other communications between a nonbank SD and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's review will include
a review of the foreign jurisdiction's surveillance program for
monitoring nonbank SDs' compliance with such capital adequacy and
financial reporting requirements, and the disciplinary process imposed
on firms that fail to comply with such requirements.
In performing the comparability assessment for a foreign nonbank
MSP,\21\ the Commission's review will include the extent to which the
foreign jurisdiction's requirements address: (1) the process of
establishing minimum capital requirements for a nonbank MSP and how
such process establishes a minimum level of capital to ensure the
safety and soundness of the nonbank MSP; (ii) the financial reports and
other financial information submitted by a nonbank MSP to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank MSP; and (iii) the regulatory
notices and other communications between a nonbank MSP and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's review will include
a review of the foreign jurisdiction's surveillance program for
monitoring a nonbank MSP's compliance with such capital adequacy and
financial reporting requirements, and the disciplinary process imposed
on an MSP that fails to comply with such requirements.
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\21\ Regulation 23.101(b) requires a nonbank MSP to maintain
positive tangible net worth. There are no MSPs currently registered
with the Commission.
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Regulation 23.106 further provides that the Commission may impose
any terms or conditions that it deems appropriate in issuing a Capital
Comparability Determination.\22\ Any specific terms or conditions with
respect to capital adequacy or financial reporting requirements will be
set forth in the Commission's Capital Comparability Determination
Order. As a general condition to all Capital Comparability
Determination Orders, the Commission expects to require notification
from applicants of any material changes to information submitted by the
applicants in support of a comparability finding, including, but not
limited to, changes in the relevant foreign jurisdiction's supervisory
or regulatory regime.
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\22\ See 17 CFR 23.106(a)(5).
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The Commission's capital adequacy and financial reporting
requirements are designed to address and manage risks that arise from a
firm's operation as a SD or MSP. Given their functions, both sets of
requirements and rules must be applied on an entity-level basis
(meaning that the rules apply on a firm-wide basis, irrespective of the
type of transactions involved) to effectively address risk to the firm
as a whole. Therefore, in order to rely on a Capital Comparability
Determination, a nonbank SD or nonbank MSP domiciled in the foreign
jurisdiction and subject to supervision by the relevant regulatory
authority (or authorities) in the foreign jurisdiction must file a
notice with the Commission of its intent to comply with the applicable
capital adequacy and financial reporting requirements of the foreign
jurisdiction set forth in the Capital Comparability Determination in
lieu of all or parts of the CFTC Capital Rules and/or CFTC Financial
Reporting Rules.\23\ Notices must be filed electronically with the
Commission's Market Participants Division (``MPD'').\24\ The filing of
a notice by a non-U.S. nonbank SD or non-U.S. nonbank MSP provides MPD
staff, acting pursuant to authority delegated by the Commission,\25\
with the opportunity to engage with the firm and to obtain
representations that it is subject to, and complies with, the laws and
regulations cited in the Capital Comparability Determination and that
it will comply with any listed conditions. MPD will issue a letter
under its delegated authority from the Commission confirming that the
non-U.S. nonbank SD or non-U.S. nonbank MSP may comply with foreign
laws and regulations cited in the Capital Comparability Determination
in lieu of complying with the CFTC Capital Rules and CFTC Financial
Reporting Rules upon MPD's determination that the firm is subject to
and complies with the applicable foreign laws and regulations, is
subject to the jurisdiction of the applicable foreign regulatory
authority (or authorities), and can meet all of the conditions in the
Capital Comparability Determination.
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\23\ 17 CFR 23.106(a)(4).
\24\ Notices must be filed in electronic form to the following
email address: [email protected].
\25\ See 17 CFR 140.91(a)(11).
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Each non-U.S. nonbank SD and/or non-U.S. nonbank MSP that receives,
in accordance with the applicable Commission Capital Comparability
Determination Order, confirmation from the Commission that it may
comply with a foreign jurisdiction's capital adequacy and/or financial
reporting requirements will be deemed by the Commission to be in
compliance with the corresponding CFTC Capital Rules and/or CFTC
Financial Reporting Rules.\26\ Accordingly, if a nonbank SD or nonbank
MSP fails to comply with the foreign jurisdiction's capital adequacy
and/or financial reporting requirements, the Commission may initiate an
action for a violation of the corresponding CFTC Capital Rules and/
[[Page 76377]]
or CFTC Financial Reporting Rules.\27\ In addition, a non-U.S. nonbank
SD or non-U.S. nonbank MSP that receives confirmation of its ability to
use substituted compliance remains subject to the Commission's
examination and enforcement authority.\28\
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\26\ 17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD
under authority delegated by the Commission. See 17 CFR
140.91(a)(11).
\27\ Id.
\28\ Id.
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The Commission will consider an application for a Capital
Comparability Determination to be a representation by the applicant
that the laws and regulations of the foreign jurisdiction that are
submitted in support of the application are finalized and in force,
that the description of such laws and regulations is accurate and
complete, and that, unless otherwise noted, the scope of such laws and
regulations encompasses the relevant non-U.S. nonbank SDs and/or non-
U.S. nonbank MSPs domiciled in the foreign jurisdiction.\29\ A non-U.S.
nonbank SD or non-U.S. nonbank MSP that is not legally required to
comply with a foreign jurisdiction's laws or regulations determined to
be comparable in a Capital Comparability Determination may not
voluntarily comply with such laws or regulations in lieu of compliance
with the CFTC Capital Rules or the CFTC Financial Reporting rules. Each
non-U.S. nonbank SD or non-U.S. nonbank MSP that seeks to rely on a
Capital Comparability Determination Order is responsible for
determining whether it is subject to the foreign laws and regulations
found comparable in Capital Comparability Determination and the Capital
Comparability Determination Order.
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\29\ The Commission has provided the Applicants with an
opportunity to review for accuracy and completeness, and comment on,
the Commission's description of relevant Mexican laws and
regulations on which this proposed Capital Comparability
Determination is based. The Commission relies on this review and any
corrections received from the Applicants in making its proposal. A
comparability determination based on an inaccurate description of
foreign laws and regulations may not be valid.
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C. Mexico Application for a Capital Comparability Determination for
Mexico-Domiciled Nonbank Swap Dealers
The Applicants submitted the Mexico Application to request that the
Commission issue a Capital Comparability Determination finding that
compliance with the capital requirements of Mexico and the financial
reporting requirements of Mexico, as specified in the Mexico
Application, by a Mexican nonbank SD satisfies corresponding CFTC
Capital Rules and the CFTC Financial Reporting Rules applicable to a
nonbank SD under sections 4s(e) through (f) of the CEA and Regulations
23.101 and 23.105.\30\
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\30\ Mexico Application, p. 1.
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The Applicants have represented that the Securities Market Law (Ley
del Mercado de Valores, the ``Law'') \31\ and the General Provisions
Applicable to Broker-Dealers (Disposiciones de Caracter General
Aplicables a las Casa de Bolsa the ``General Provisions'') \32\ issued
by the Mexican Banking and Securities Commission (``Mexican
Commission'') \33\ contain the capital adequacy requirements (``Mexican
Capital Rules'') and financial reporting requirements (``Mexican
Financial Reporting Rules'') that apply to broker-dealers,\34\
including Mexican nonbank SDs.\35\ The Law and General Provisions
impose mandatory capital and liquidity requirements that address
quantifiable discretionary risks (credit risk, liquidity risk, and
market risk), quantifiable non-discretionary risks (legal risk,
operational risk, and technological risk), and non-quantifiable
risks.\36\ The Applicants currently are the only Mexican nonbank SDs
registered with the Commission as SDs, and they represent that they are
licensed with the Mexican Commission as broker-dealers subject to the
Mexican Capital Rules and Mexican Financial Reporting Rules.
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\31\ Published in the Federal Official Gazette (Diario Oficial
de la Federacion) on December 30, 2005, as amended.
\32\ Published in the Federal Official Gazette on September 6,
2004, as amended.
\33\ The Applicants represented that the Mexican Commission is a
governmental agency that is part of the Ministry of Finance, and has
independent technical and executive powers. The Applicants further
represented that the Mexican Commission is in charge of the
supervision and regulation of financial entities, such as Mexican
nonbank SDs, with the purpose of ensuring their stability and sound
performance, as well as maintaining a safe and sound financial
system. The Mexico Application provides that: (i) the scope of the
Mexican Commission's authority includes inspection, supervision,
prevention, and correction powers; (ii) the primary financial
entities regulated by the Mexican Commission are commercial banks,
national development banks, regulated multiple purpose financial
institutions, and broker-dealers, such as Mexican nonbank SDs; and
(iii) the Mexican Commission is also in charge of granting and
revoking broker-dealer licenses in Mexico. See, Mexico Application,
p. 4 (footnote 10).
\34\ The Applicants represented that pursuant to the provisions
set forth in Article 113 of the Law, broker-dealers, such as Mexican
nonbank SDs, among other entities, are the only financial
institutions that may conduct securities intermediation
transactions. Under Article 2 of the Law, securities intermediation
is defined as the customary and professional performance of any of
the following activities in Mexico: (i) actions for the purpose of
facilitating the contact between the supply and demand of
securities; (ii) the execution of transactions with securities for
the account of third parties as commission agent, attorney-in-fact,
or in any other capacity, participating in the relevant legal
transactions either personally or on behalf of third parties; and
(iii) the negotiation of securities on an intermediary's own account
with the general public or with other intermediaries acting on their
own account or on behalf of third parties. The organization and
operation of broker-dealers, such as Mexican nonbank SDs, is
governed by the Law and General Provisions. See Mexico Application,
p. 4 (footnote 11).
\35\ Mexico Application, p. 4.
\36\ Id.
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II. General Overview of Commission and Mexican Nonbank Swap Dealer
Capital Rules
A. General Overview of the CFTC Nonbank Swap Dealer Capital Rules
The CFTC Capital Rules provide nonbank SDs with three alternative
capital approaches: (i) the Tangible Net Worth Capital Approach (``TNW
Approach''); (ii) the Net Liquid Assets Capital Approach (``NLA
Approach''); and (iii) the Bank-Based Capital Approach (``Bank-Based
Approach'').\37\
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\37\ 17 CFR 23.101.
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Nonbank SDs that are ``predominantly engaged in non-financial
activities'' may elect the TNW Approach.\38\ The TNW Approach requires
a nonbank SD to maintain a level of ``tangible net worth'' \39\ equal
to or greater than the higher of: (i) $20 million plus the amount of
the nonbank SD's ``market risk exposure requirement'' \40\ and
[[Page 76378]]
``credit risk exposure requirement'' \41\ associated with the nonbank
SD's swap and related hedge positions that are part of the nonbank SD's
swap dealing activities; (ii) 8 percent of the nonbank SD's ``uncleared
swap margin'' amount; \42\ or (iii) the amount of capital required by a
registered futures association of which the nonbank SD is a member.\43\
The TNW Approach is intended to ensure the safety and soundness of a
qualifying nonbank SD by requiring the firm to maintain a minimum level
of tangible net worth that is based on the nonbank SD's swap dealing
activities to provide a sufficient level of capital to absorb losses
resulting from its swap dealing and other business activities.
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\38\ 17 CFR 23.101(a)(2). The term ``predominantly engaged in
non-financial activities'' is defined in Regulation 23.100 (17 CFR
23.100) and generally provides that: (i) the nonbank SD's, or its
parent entity's, annual gross financial revenues for either of the
previous two completed fiscal years represents less than 15 percent
of the nonbank SD's or the nonbank SD's parent's, annual gross
revenues for all operations (i.e., commercial and financial) for
such years, and (ii) the nonbank SD's, or its parent entity's, total
financial assets at the end of its two most recently completed
fiscal years represents less than 15 percent of the nonbank SD's, or
its parent's, total consolidated financial and nonfinancial assets
as of the end of such years.
\39\ The term ``tangible net worth'' is defined in Regulation
23.100 and generally means the net worth (i.e., assets less
liabilities) of a nonbank SD, computed in accordance with applicable
accounting principles, with assets further reduced by a nonbank SD's
recorded goodwill and other intangible assets.
\40\ The terms ``market risk exposure'' and ``market risk
exposure requirement'' are defined in Regulation 23.100 (17 CFR
23.100) and generally mean the risk of loss in a financial position
or portfolio of financial positions resulting from movements in
market prices and other factors. Market risk exposure is the sum of:
(i) general market risks including changes in the market value of a
particular asset that result from broad market movements, which may
include an additive for changes in market value under stressed
conditions; (ii) specific risk, which includes risks that affect the
market value of a specific instrument but do not materially alter
broad market conditions; (iii) incremental risk, which means the
risk of loss on a position that could result from the failure of an
obligor to make timely payments of principal and interest; and (iv)
comprehensive risk, which is the measure of all material price risks
of one or more portfolios of correlation trading positions.
\41\ The term ``credit risk exposure requirement'' is defined in
Regulation 23.100 (17 CFR 23.100) and generally reflects the amount
at risk if a counterparty defaults before the final settlement of a
swap transaction's cash flows.
\42\ The term ``uncleared swap margin'' is defined in Regulation
23.100 (17 CFR 23.100) to generally mean the amount of initial
margin that a nonbank SD would be required to collect from each
counterparty for each outstanding swap position of the nonbank SD. A
nonbank SD must include all swap positions in the calculation of the
uncleared swap margin amount, including swaps that are exempt or
excluded from the scope of the Commission's uncleared swap margin
regulations. A nonbank SD must compute the uncleared swap margin
amount in accordance with the Commission's margin rules for
uncleared swaps. See 17 CFR 23.154.
\43\ The National Futures Association (``NFA'') is currently the
only entity that is a registered futures association. The Commission
will refer to NFA in this document when referring to the
requirements or obligations of a registered futures association.
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The TNW approach requires a nonbank SD to compute its market risk
exposure requirement and credit risk exposure requirement using
standardized capital charges set forth in Securities and Exchange
Commission (``SEC'') Rule 18a-1 \44\ that are applicable to entities
registered with the SEC as security-based swap dealers (``SBSDs'') or
standardized capital charges set forth in Regulation 1.17 applicable to
entities registered as FCMs or entities dually-registered as an FCM and
nonbank SD.\45\ Nonbank SDs that have received Commission or NFA
approval pursuant to Regulation 23.102 may use internal models to
compute market risk and/or credit risk capital charges in lieu of the
SEC or CFTC standardized capital charges.\46\
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\44\ 17 CFR 240.18a-1.
\45\ 17 CFR 23.101(a)(2)(ii)(A).
\46\ Id.
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A nonbank SD that elects the NLA Approach is required to maintain
``net capital'' in an amount that equals or exceeds the greater of: (i)
$20 million; (ii) 2 percent of the nonbank SD's uncleared swap margin
amount; or (iii) the amount of capital required by NFA.\47\ The NLA
Approach is intended to ensure the safety and soundness of a nonbank SD
by requiring the firm to maintain at all times at least one dollar of
highly liquid assets to cover each dollar of the nonbank SD's
liabilities.
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\47\ 17 CFR 23.101(a)(1)(ii)(A). ``Net capital'' consists of a
nonbank SD's highly liquid assets (subject to haircuts) less all of
the firm's liabilities, excluding certain qualified subordinated
debt. See 17 CFR 240.18a-1 for the calculation of ``net capital.''
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A nonbank SD is required to reduce the value of its highly liquid
assets by the market risk exposure requirement and/or the credit risk
exposure requirement in computing its net capital.\48\ A nonbank SD
that does not have Commission or NFA approval to use internal models
must compute its market risk exposure requirement and/or credit risk
exposure requirement using the standardized capital charges contained
in SEC Rule 18a-1 as modified by the Commission's rule.\49\
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\48\ See 17 CFR 240.18a-1(c) and (d).
\49\ See 17 CFR 23.101(a)(1)(ii).
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A nonbank SD that has obtained Commission or NFA approval, may use
internal market risk and/or credit risk models to compute market risk
and/or credit risk capital charges in lieu of the standardized capital
charges.\50\ A nonbank SD that is approved to use internal market risk
and/or credit risk models is further required to maintain a minimum of
$100 million of ``tentative net capital.'' \51\
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\50\ See 17 CFR 23.102.
\51\ 17 CFR 23.101(a)(1)(ii)(A)(1). The term ``tentative net
capital'' is defined in Regulation 23.101(a)(1)(ii)(A)(1) by
reference to SEC Rule 18a-1 and generally means a nonbank SD's net
capital prior to deducting market risk and credit risk capital
charges.
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The Commission's NLA Approach is consistent with the SEC's SBSD
capital rule, and is based on the Commission's capital rule for FCMs
and the SEC's capital rule for securities broker-dealers (``BDs''). The
quantitative and qualitative requirements for NLA Approach internal
market and credit risk models are also consistent with the quantitative
and qualitative requirements of the Commission's Bank-Based Approach as
described below.
The Commission's Bank-Based Approach for computing regulatory
capital for nonbank SDs is based on certain capital requirements
imposed by the Federal Reserve Board for bank holding companies.\52\
The Bank-Based Approach also is consistent with the Basel Committee on
Banking Supervision's (``BCBS'') international framework for bank
capital requirements.\53\ The Bank-Based Approach requires a nonbank SD
to maintain regulatory capital equal to or in excess of each of the
following requirements: (i) $20 million of common equity tier 1
capital; (ii) an aggregate of common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital (including qualifying subordinated
debt) equal to or greater than 8 percent of the nonbank SD's risk-
weighted assets (provided that common equity tier 1 capital comprises
at least 6.5 percent of the 8-percent minimum requirement); (iii) an
aggregate of common equity tier 1 capital, additional tier 1 capital,
and tier 2 capital equal to or greater than 8 percent of the nonbank
SD's uncleared swap margin amount; and (iv) an amount of capital
required by NFA.\54\ The Bank-Based Approach is intended to ensure that
the safety and soundness of a nonbank SD by requiring the firm to
maintain at all times qualifying capital in an amount sufficient to
absorb unexpected losses, expenses, decrease in firm assets, or
increases in firm liabilities without the firm becoming insolvent.
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\52\ See 17 CFR 23.101(a)(1)(i).
\53\ The BCBS is the primary global standard-setter for the
prudential regulation of banks and provides a forum for cooperation
on banking supervisory matters. Institutions represented on the BCBS
include the Federal Reserve Board, the European Central Bank,
Deutsche Bundesbank, Bank of England, Bank of France, Bank of Japan,
Banco de Mexico, and Bank of Canada.
\54\ 17 CFR 23.101(a)(1)(i).
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The terms used in the Commission's Bank-Based Approach are defined
by reference to regulations of the Federal Reserve Board.\55\
Specifically, the term ``common equity tier 1 capital'' is defined for
purposes of the CFTC Capital Rules to generally mean the sum of a
nonbank SD's common stock instruments and any related surpluses,
retained earnings, and accumulated other comprehensive income.\56\ The
term ``additional tier 1 capital'' is defined to include the nonbank
SD's common equity tier 1 capital and further includes such additional
equity instruments as preferred stock.\57\ The term ``tier 2 capital''
is defined to include certain types of instruments that include both
debt and equity characteristics (e.g., certain perpetual preferred
stock instruments and subordinated term debt instruments).\58\
Subordinated debt also must meet certain requirements to qualify as
tier 2
[[Page 76379]]
capital, including that the term of the subordinated debt instrument is
for a minimum of one year (with the exception of approved revolving
subordinated debt agreements which may have a maturity term that is
less than one year), and the debt instrument is an effective
subordination of the rights of the lender to receive any payment,
including accrued interest, to other creditors.\59\
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\55\ Id. Regulation 23.101(a)(1)(i) references Federal Reserve
Board Rule 217.20 (12 CFR 217.20) for purposes of defining the terms
used in establishing the minimum capital requirements under the
Bank-Based Approach.
\56\ See 12 CFR 217.20(b).
\57\ See 12 CFR 217.20(c).
\58\ See 12 CFR 217.20(d).
\59\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See 17 CFR
23.101(a)(1)(i)(B).
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Common equity tier 1 capital, additional tier 1 capital, and tier 2
capital are unencumbered and generally long-term or permanent forms of
capital that help ensure that a nonbank SD will be able to absorb
losses resulting from its operations and maintain confidence in the
nonbank SD as a going concern. In addition, in setting an equity ratio
requirement, this limits the amount of asset growth and leverage a
nonbank SD can incur, as a nonbank SD must fund its asset growth with a
certain percentage of regulatory capital.
A nonbank SD also must compute its risk-weighted assets using
standardized capital charges or, if approved, internal models. Risk-
weighting assets involves adjusting the notional or carrying value of
each asset based on the inherent risk of the asset. Less risky assets
are adjusted to lower values (i.e., have less risk-weight) than more
risky assets. As a result, nonbank SDs are required to hold lower
levels of regulatory capital for less risky assets and higher levels of
regulatory capital for riskier assets.
Nonbank SDs not approved to use internal models to risk-weight
their assets must compute market risk capital charges using the
standardized charges contained in Regulation 1.17 and SEC Rule 18a-1,
and must compute their credit risk charges using the standardized
capital charges set forth in regulations of the Federal Reserve Board
for bank holding companies contained in Subpart D of 17 CFR part
217.\60\
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\60\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the
term BHC risk-weighted assets in 17 CFR 23.100.
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Standardized market risk charges are computed under Regulation 1.17
and SEC Rule 18a-1 by multiplying, as appropriate to the specific asset
schedule, the notional value or market value of the nonbank SD's
proprietary financial positions (such as swaps, security-based swaps,
futures, equities, and U.S. Treasuries) by fixed percentages set forth
in the Regulation or Rule.\61\ Standardized credit risk charges require
the nonbank SD to multiply on-balance sheet and off-balance sheet
exposures (such as receivables from counterparties, debt instruments,
and exposures from derivatives) by predefined percentages set forth in
the applicable Federal Reserve Board regulations contained in Subpart D
of 17 CFR part 217.
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\61\ See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).
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A nonbank SD also may apply to the Commission or NFA for approval
to use internal models to compute market risk exposure and/or credit
risk exposure for purposes of determining its total risk-weighted
assets.\62\ Nonbank SDs approved to use internal models for the
calculation of credit risk or market risk, or both, must follow the
model requirements set forth in Federal Reserve Board regulations for
bank holding companies codified in Subpart E and F, respectively, of 17
CFR part 217.\63\ Credit risk and market risk capital charges computed
with internal models require the estimation of potential losses, with a
certain degree of likelihood, within a specified time period, of a
portfolio of assets. Internal models allow for consideration of
potential co-movement of prices across assets in the portfolio, leading
to offsets of gains and losses. Internal credit risk models can also
further include estimation of the likelihood of default of
counterparties.
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\62\ See 17 CFR 23.102.
\63\ Nonbank SDs electing the Bank-Based Approach that have been
approved to use internal credit risk models may also be required to
include a calculation of operational risk in its risk-weighted
assets calculation.
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B. General Overview of Mexican Capital Rules for Mexican Nonbank SDs
The Mexican Capital Rules impose bank-like capital requirements on
a Mexican nonbank SD that are consistent with the BCBS framework for
international bank-based capital standards.\64\ The Mexican Capital
Rules are intended to require each Mexican nonbank SD to hold a
sufficient amount of qualifying equity and subordinated debt to absorb
decreases in the value of firm assets, increases in the value of firm
liabilities, and to cover losses from business activities, including
possible counterparty defaults and margin collateral shortfalls
associated with swap dealing activities, without the firm becoming
insolvent.\65\
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\64\ See Mexico Application, p. 9.
\65\ See Mexico Application, pp. 4-5.
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The Mexican Capital Rules require each Mexican nonbank SD to hold
and maintain: (i) common equity tier 1 capital equal to at least 4.5
percent of the Mexican nonbank SD's risk-weighted assets; (ii) total
tier 1 capital (i.e., common equity tier 1 capital plus additional tier
1 capital) equal to at least 6 percent of the Mexican nonbank SD's
risk-weighted assets; (iii) total capital (i.e., an aggregate amount of
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital) equal to at least 8 percent of the Mexican nonbank SD's risk-
weighted assets; and (iv) a capital conservation buffer \66\ equal to
2.5 percent of the Mexican nonbank SD's risk-weighted assets, which
must be met with common equity tier 1 capital.\67\ Therefore, a Mexican
nonbank SD is effectively required to maintain total qualifying
regulatory capital equal to or greater than 10.5 percent of the firm's
risk-weighted assets, with common equity tier 1 capital comprising a
minimum of 7 percent of the 10.5 percent total.\68\ The Mexican Capital
Rules also restrict the types of equity instruments that qualify as
regulatory capital as follows: (i) common equity tier 1 capital may be
comprised of retained earnings and common equity instruments; (ii)
additional tier 1 capital may be comprised of other capital instruments
and certain long-term convertible subordinated debt instruments; and
(iii) tier 2 capital may include certain subordinated debt
instruments.\69\
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\66\ See Mexico Application, p. 5.
\67\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions. Notably, the Mexico Capital Rules employ
different terminology to refer to the components of total capital
than the CFTC Capital Rules and the BCBS bank capital framework. For
example, the Mexican Capital Rules refer to total capital as ``net
capital,'' common equity tier 1 capital as ``fundamental capital,''
and the 8 percent requirement is described as a ``capitalization
index'' requirement. For ease of reference between the capital
regimes, and to avoid confusion, this Capital Comparability
Determination and the proposed Capital Comparability Determination
Order use the same terminology that is used in the Commission's
Bank-Based Approach and in the BCBS bank capital framework.
\68\ As noted above, the total capital requirement is the sum of
the capital requirement equal to 8 percent of the firm's risk-
weighted assets, plus the capital conservation buffer of 2.5 percent
of the firm's risk-weighted assets.
\69\ Article 162 Bis and 162 Bis 1 of the General Provisions.
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The amount of regulatory capital required to be held by a Mexican
nonbank SD is determined by calculating and aggregating the firm's
total risk exposures, including market risk, credit risk, and
operational risk.\70\ The methods of calculating such exposures are
based on the BCBS bank capital framework.\71\
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\70\ Mexican Application, p. 9.
\71\ Id.
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Mexican nonbank SDs compute the capital charges for market risk
exposure and credit risk exposure using
[[Page 76380]]
standardized approaches.\72\ In this regard, the Mexican Capital Rules
do not permit Mexican nonbank SDs to use internal models to compute
credit risk charges.\73\ Also, although the Mexican Capital Rules
permit a Mexican nonbank SD to calculate market risk charges using
internal models that comply with guidelines issued by the Mexican
Commission, no Mexican nonbank SD is currently approved to use internal
market risk models nor do any Mexican nonbank SDs have model
applications pending with the Mexican Commission.\74\ Therefore, the
Commission, in performing this Capital Comparability Determination and
in proposing the Capital Comparability Determination Order, has not
reviewed or evaluated the use of internal models to compute market risk
or credit risk charges under the Mexican Capital Rules. Accordingly,
any Mexican nonbank SD that subsequently obtains the approval of the
Mexican Commission to use internal models to compute market risk or
credit risk charges, and seeks to use such models in lieu of the
standardized charges set forth in the Mexican Capital Rules in meeting
the CFTC capital requirements, may do so only after the Commission has
reviewed and evaluated whether the Mexican Capital Rules impose
conditions and requirements on the use of models that are comparable in
purpose and effect as the conditions and requirements imposed on the
use of models under the CFTC Capital Rules, and whether the use of the
models under the Mexican Capital Rules and the CFTC Capital Rules
achieve comparable outcomes. The Commission is further proposing to
condition the order to require a Mexican nonbank SD to notify the
Commission and NFA at the time it initiates the process to request
approval to use internal models for capital purposes. The request to
use internal market or credit risk models in lieu of standardized
capital charges may require the Commission to amend an existing Capital
Comparability Determination Order.
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\72\ Article 150 Bis of the General Provisions.
\73\ Mexican Application, p. 11.
\74\ Id., p. 9 (footnote 23).
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Standardized market risk and credit risk charges are calculated
under the Mexican Capital Rules using a methodology that is consistent
with the BCBS bank capital framework for standardized market risk and
credit risk charges. With respect to market risk, the Mexican Capital
Rules require a Mexican nonbank SD to multiply the market value or
carrying value of its on-balance sheet and off-balance sheet market
exposures by standard percentages established by the Mexican Commission
and set forth in the Mexican Capital Rules.\75\ With respect to credit
risk, the Mexican Capital Rules require the assignment of a scheduled
risk-weight \76\ to each counterparty based on external risk
assessments. For derivatives positions, the Mexican Capital Rules
provide for the exposures to be computed based on the instruments
underlying the derivatives positions \77\ with strict limitations on
the recognition of offsetting risks.\78\ The resulting market risk
exposure amount and credit risk exposure amount are multiplied by a
factor of 12.5 to cancel the effect of the 8 percent multiplication
factor applied to all of the Mexican nonbank SD's risk-weighted assets,
which effectively requires a Mexican nonbank SD to hold qualifying
regulatory capital equal to or greater than 100 percent of the total
amount of its market risk and credit risk exposures.\79\
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\75\ Articles 150 to 158 Bis of the General Provisions.
\76\ Articles 159, 160 and 161 of the General Provisions.
\77\ Article 151 of the General Provisions.
\78\ Article 152 of the General Provisions.
\79\ Articles 158 Bis and 161 of the General Provisions.
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A Mexican nonbank SD calculates its capital charges for operational
risk exposure using the basic method set forth in the General
Provisions.\80\ The basic method calculates operational risk exposure
as an amount equal to 15 percent of Mexican nonbank SD's average annual
net positive income for the last three years,\81\ taking into account
insurance coverage for operational risk, subject to strict limitations
and conditions.\82\ The amount of the operational risk exposure is also
subject to a floor equal to 5 percent and a ceiling equal to 15 percent
of the monthly average sum of market risk and credit risk exposure
amounts, calculated over the prior 36 months, on a rolling basis.\83\
The resulting operational risk exposure amount is also multiplied by a
factor of 12.5 to cancel the effect of the 8 percent multiplication
factor applied to all of the Mexican nonbank SD's risk-weighted assets,
which effectively requires a Mexican nonbank SD to hold qualifying
regulatory capital equal to or greater than 100 percent of its total
operational risk exposure amount.\84\
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\80\ Article 161 Bis of the General Provisions.
\81\ Article 161 Bis 1 of the General Provisions.
\82\ Article 161 Bis 2 of the General Provisions.
\83\ Article 161 Bis 3 of the General Provisions.
\84\ Article 161 Bis 5 of the General Provisions.
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The Mexican Capital Rules also impose liquidity requirements on
Mexican nonbank SDs in addition to minimum capital requirements.\85\
The liquidity provisions require each Mexican nonbank SD to hold or
invest at least 20 percent of its total capital in any of the
following: (i) bank deposits; (ii) highly liquid debt securities
registered in Mexico; (iii) shares of debt investment funds; (iv)
reserve funds created to maintain funds available to cover
contingencies, as set forth by the applicable regulation issued by
self-regulatory organizations (organismos autorregulatorios), such as
the securities central clearinghouse (Contraparte Central de Valores De
Mexico, S.A. de C.V.) and the central derivatives clearinghouse
(Asigna, Compensacion y Liquidacion F/30430),\86\ as well as the
Mexican Association of Securities Intermediaries (Asociacion Mexicana
de Intermediarios Bursatiles, A.C. or AMIB); \87\ and (v) high and
medium marketability shares to which a market value discount of 20
percent and 25 percent, respectively, is applied, provided that they
are registered as ``trading'' or ``available for sale'' securities.\88\
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\85\ See Article 146 of the General Provisions.
\86\ Article 228 of the Law recognizes the stock exchange and
the securities central clearinghouse as self-regulatory
organizations and indicates that other entities that comply with
certain requirements (such as Asigna and the AMIB) may be recognized
as self-regulatory organizations.
\87\ Reserve funds represent funds deposited with a self-
regulatory organization to cover potential losses, and are not
freely available to a Mexican nonbank SD.
\88\ Article 146 of the General Provisions.
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A Mexican nonbank SD also must follow specified procedures in
monitoring its liquidity to ensure that it has sufficient liquid assets
to meet anticipated needs.\89\ When monitoring and managing liquidity
risk, a Mexican nonbank SD must, among other things: (i) measure,
assess and monitor risk caused by differences between forecast cash
flows on various dates; (ii) consider the assets and liabilities of the
firm in Mexican pesos and foreign currency; (iii) assess the
diversification of sources of financing to which the firm has access;
(iv) quantify the potential loss from early or obligatory sale of
assets at an unusual discount in order to meet immediate obligations;
and (v) estimate the potential loss if it is not possible to renew
liabilities or contract others under normal conditions.\90\ The
liquidity requirements supplement the minimum capital requirements by
obligating a Mexican nonbank SD to maintain a defined amount of liquid
[[Page 76381]]
assets to cover current liabilities and other current obligations to
counterparties, including margin obligations, and obligations to other
third parties.
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\89\ See Article 137 of the General Provisions.
\90\ Id.
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III. Commission Analysis of the Comparability of the Mexican Capital
Rules With CFTC Capital Rules, and Mexican Financial Reporting Rules
With CFTC Financial Reporting Rules
The following section provides a description and comparative
analysis of the regulatory requirements of the Mexican Capital Rules
and Mexican Financial Reporting Rules to the CFTC Capital Rules and
CFTC Financial Reporting Rules. Immediately following a description of
the requirement(s) of the CFTC Capital Rules or the CFTC Financial
Reporting Rules for which a comparability determination was requested
by the Applicants, the Commission provides a description of Mexico's
corresponding laws, regulations, or rules. The Commission then provides
a comparative analysis of the Mexican Capital Rules or the Mexican
Financial Reporting Rules with the corresponding CFTC Capital Rules or
CFTC Financial Reporting Rules. The Commission identifies any material
differences between the respective rules.
The Commission performed this proposed Capital Comparability
Determination by assessing the comparability of the Mexican Capital
Rules for Mexican nonbank SDs, as set forth in the Mexico Application
and in the English language translation of certain Mexican laws and
regulations, with the Commission's Bank-Based Approach. For clarity,
the Commission did not assess the comparability of the Mexican Capital
Rules to the Commission's TNW Approach or NLA Approach as the
Commission understands that the Applicants, as of the date of the
Mexico Application, are subject to the current bank-based capital
approach of the Mexican Capital Rules. Accordingly, when the Commission
makes a preliminary determination herein about the comparability of the
Mexican Capital Rules with the CFTC Capital Rules, the determination
pertains to the comparability of the Mexican Capital Rules with the
Bank-Based Approach under the CFTC Capital Rules.
As described below, it is proposed that any material changes to the
Mexican Capital Rules will require notification to the Commission.
Therefore, if there are subsequent material changes to the Mexican
Capital Rules to include, for example, another capital approach, the
Commission will review and assess the impact of such changes on the
Capital Comparability Determination Order as it is then in effect, and
may amend or supplement the Order.\91\
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\91\ The Commission also may amend or supplement the Order to
address any material changes to the CFTC Capital Rules and CFTC
Financial Reporting Rules that are adopted after a final Order is
issued.
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In addition, although the BCBS bank capital standards establish
minimum capital standards that are consistent with the requirements of
the Commission's Bank-Based Approach, the Commission notes that
consistency with the BCBS standards is not determinative of a finding
of comparability with the CFTC Capital Rules. In the Commission's view,
a foreign jurisdiction's consistency with the BCBS international bank
capital standards is an element in the Commission's comparability
assessment, but, in and of itself, it may not be sufficient to
demonstrate comparability with the CFTC Capital Rules without an
assessment of the individual elements of the foreign jurisdiction's
capital framework.
Capital and financial reporting regimes are complex structures
comprised of a number of interrelated regulatory components.
Differences in how jurisdictions approach and implement these regimes
are expected, even among jurisdictions that base their requirements on
the principles and standards set forth in the BCBS international bank
capital framework. Therefore, the Commission's comparability
determination involves a detailed assessment of the relevant
requirements of the foreign jurisdiction and whether those
requirements, viewed in the aggregate, lead to an outcome that is
comparable to the outcome of the CFTC's corresponding requirements.
Consistent with this approach, the Commission has grouped the CFTC
Capital Rules and CFTC Financial Reporting Rules into key categories
that focus the analysis on whether the Mexican capital and financial
reporting requirements are comparable to the Commission's SD
requirements in purpose and effect, and not whether the Mexican
requirements meet every aspect or contain identical elements as the
Commission's requirements.
Specifically, as discussed in detail below, the Commission used the
following key categories in its review: (i) the quality of the equity
and debt instruments that qualify as regulatory capital, and the extent
to which the regulatory capital represents committed and permanent
capital that would be available to absorb unexpected losses or
counterparty defaults; (ii) the process of establishing minimum capital
requirements for a Mexican nonbank SD and how such process addresses
market risk and credit risk of the firm's on-balance sheet and off-
balance sheet exposures; (iii) the financial reports and other
financial information submitted by a Mexican nonbank SD to its relevant
regulatory authorities to effectively monitor the financial condition
of the firm; and (iv) the regulatory notices and other communications
between the Mexican nonbank SD and its relevant regulatory authorities
that detail potential adverse financial or operational issues that may
impact the firm. The Commission also reviewed the manner in which
compliance by a Mexican nonbank SD with the Mexican Capital Rules and
Mexican Financial Reporting rules is monitored and enforced. The
Commission invites public comment on all aspects of the Mexico
Application and on the Commission's Capital Comparability Determination
discussed below.
A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and Mexican Capital Rules and Mexican Financial
Reporting Rules
1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules
The regulatory objectives of the CFTC Capital Rules and CFTC
Financial Reporting Rules are to further the Congressional mandate to
ensure the safety and soundness of nonbank SDs to mitigate the greater
risk to nonbank SDs and the financial system arising from the use of
swaps that are not cleared.\92\ A primary function of the nonbank SD's
capital is to protect the solvency of the firm from decreases in the
value of firm assets, increases in the value of firm liabilities, and
from losses, including losses resulting from counterparty defaults and
margin collateral failures, by requiring the firm to maintain an
appropriate level of quality capital, including qualifying subordinated
debt, to absorb such losses without becoming insolvent. With respect to
swap positions, capital and margin perform complementary risk
mitigation functions by protecting nonbank SDs, containing the amount
of risk in the financial system as a whole, and reducing the potential
for contagion arising from uncleared swaps.
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\92\ See 7 U.S.C. 6s(e)(3)(A).
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The objective of the CFTC Financial Reporting Rules is to provide
the Commission with the means to monitor
[[Page 76382]]
and assess a nonbank SD's financial condition, including the nonbank
SD's compliance with minimum capital requirements. The CFTC Financial
Reporting Rules are designed to provide the Commission and NFA, which,
along with the Commission, oversees nonbank SDs' compliance with
Commission regulations, with a comprehensive view of the financial
health and activities of the nonbank SD. The Commission's rules require
nonbank SDs to file financial information, including periodic unaudited
and annual audited financial statements, specific financial position
information, and notices of certain events that may indicate a
potential financial or operational issue that may adversely impact the
nonbank SD's ability to meet its obligations to counterparties and
other creditors in the swaps market, or impact the firm's solvency.\93\
---------------------------------------------------------------------------
\93\ See 17 CFR 23.105.
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2. Regulatory Objective of Mexican Capital Rules and Mexican Financial
Reporting Rules
The regulatory objective of the Mexican Capital Rules is to ensure
the safety and soundness of Mexican financial firms, including Mexican
nonbank SDs. The Mexican Capital Rules are designed to preserve the
financial stability and solvency of a Mexican nonbank SD by requiring
the firm to maintain a sufficient amount of quality equity and
subordinated debt to absorb decreases in the value of firm assets,
increases in the value of firm liabilities, and to cover losses from
business activities, including counterparty defaults and margin
collateral shortfalls associated with the firm's swap dealing
activities.\94\ The Mexican Capital Rules also are designed to ensure
that a Mexican nonbank SD can meet its financial obligations to
counterparties and other creditors during stressed market conditions by
requiring each firm to maintain a minimum of 20 percent of its total
capital in specified liquid assets.\95\
---------------------------------------------------------------------------
\94\ Article 146 of the General Provisions.
\95\ Id.
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The objective of the Mexican Financial Reporting Rules is to enable
the Mexican Commission and other relevant Mexican regulatory
authorities to assess the financial condition and safety and soundness
of Mexican nonbank SDs.\96\ The Mexican Financial Reporting Rules aim
to achieve this objective by requiring each Mexican nonbank SD to
provide financial reports and other financial position and capital
information to the Mexican Commission and Mexican Central Bank on a
regular basis.\97\ The financial reporting by a Mexican nonbank SD
provides the Mexican Commission and Mexican Central Bank with
information necessary to effectively monitor the Mexican nonbank SD's
overall financial condition and its ability to meet its regulatory
obligations as a Mexican licensed broker-dealer.
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\96\ See Article 173 of the Law.
\97\ See Articles 201, 202, and 203 of the General Provisions.
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3. Commission Analysis
The Commission has reviewed the Mexico Application and the relevant
Mexican laws and regulations, and has preliminarily determined that the
overall objectives of the Mexican Capital Rules and CFTC Capital Rules
are comparable in that both sets of rules are intended to ensure the
safety and soundness of nonbank SDs by establishing a regulatory regime
that requires nonbank SDs to maintain a sufficient amount of qualifying
regulatory capital to absorb losses, including losses from swaps and
other trading activities, and to absorb decreases in the value of firm
assets and increases in the value of firm liabilities without the
nonbank SDs becoming insolvent. The Mexican Capital Rules and CFTC
Capital Rules are also based on, and consistent with, the BCBS
international bank capital framework, which was designed to ensure that
banking entities hold sufficient levels of capital to absorb losses,
decreases in the value of assets, and increases in the value of
liabilities without the banks becoming insolvent.\98\
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\98\ The BCBS's mandate is to strengthen the regulation,
supervision and practices of banks with the purpose of enhancing
financial stability. See Basel Committee Charter available on the
Bank for International Settlement website: www.bis.org/bcbs/charter.htm.
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The Mexican Capital Rules are comparable in purpose and effect to
the CFTC Capital Rules in that both regulatory approaches compute the
minimum capital requirements based on the level of a nonbank SD's on-
balance sheet and off-balance sheet exposures, with the objective and
purpose of ensuring that the nonbank SD's capital is adequate to absorb
losses resulting from such exposures. The Mexican Capital Rules and
CFTC Capital Rules also provide for a comparable approach to the
calculation of on-balance sheet and off-balance sheet risk exposures
using non-model, standardized approaches that result in comparable risk
exposure amounts. The Mexican Capital Rules' and CFTC Capital Rules'
requirements for identifying and measuring on-balance sheet and off-
balance sheet exposures under standardized approaches are also
consistent with the requirements set forth under the BCBS international
bank capital framework for identifying and measuring on-balance sheet
and off-balance sheet exposures.
The Mexican Capital Rules and CFTC Capital Rules achieve comparable
outcomes and are comparable in purpose and effect in that both limit
the types of capital instruments that may qualify as regulatory capital
to cover the on-balance sheet and off-balance sheet risk exposures to
high quality equity capital and qualifying subordinated debt
instruments that meet conditions designed to ensure that the holders of
the debt have effectively subordinated their claims to other creditors
of the nonbank SD. Both the Mexican Capital Rules and the CFTC Capital
Rules define high quality capital by the degree to which the capital
represents permanent capital that is contributed, or readily available
to a nonbank SD, on an unrestricted basis to absorb unexpected losses,
including losses from swaps trading and other activities, decreases in
the value of firm assets, and increases in the value of firm
liabilities without the nonbank SD becoming insolvent.
The Mexican Financial Reporting Rules are also comparable in
purpose and effect with the CFTC Financial Reporting Rules as both the
Mexican Commission and CFTC require nonbank SDs to file periodic
financial reports, including unaudited financial reports and an annual
audited financial report, detailing their financial operations and
demonstrating their compliance with minimum capital requirements. In
addition to providing the CFTC and Mexican Commission with information
necessary to comprehensively assess the financial condition of a
nonbank SD on an ongoing basis, the financial reports further provide
the CFTC and Mexican Commission with information regarding potential
changes in a nonbank SD's risk profile by disclosing changes in account
balances reported over a period of time. Such changes in account
balances may indicate that the nonbank SD has entered into new lines of
business, has increased its activity in an existing line of business
relative to other activities, or has terminated a previous line of
business.
The prompt and effective monitoring of the financial condition of
nonbank SDs through the receipt and review of periodic financial
reports supports the Commission and Mexican Commission in meeting their
respective objectives of ensuring the safety and soundness of nonbank
SDs. In this connection, the early identification of potential
financial
[[Page 76383]]
issues provides the Commission and Mexican Commission with an
opportunity to address such issues with the nonbank SD before they
develop to a state where the financial condition of the firm is
impaired such that it may no longer hold a sufficient amount of
qualifying regulatory capital to absorb decreases in the value of firm
assets or increases in the value of firm liabilities, or to cover
losses from the firm's business activities, including the firm's swap
dealing activities and obligations to swap counterparties.
The Commission invites public comment on its analysis above,
including comment on the Mexico Application and relevant Mexican laws
and regulations.
B. Nonbank Swap Dealer Qualifying Capital
1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach
The CFTC Capital Rules require a nonbank SD electing the Bank-Based
Approach to maintain regulatory capital in the form of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital in
amounts that meet certain stated minimum requirements set forth in
Regulation 23. 101.\99\ Common equity tier 1 capital, additional tier 1
capital, and tier 2 capital are composed of certain defined forms of
equity of the nonbank SD, including common stock, retained earnings,
and qualifying subordinated debt.\100\ The Commission's requirement for
a nonbank SD to maintain a minimum amount of defined qualifying capital
and subordinated debt is intended to ensure that the firm maintains a
sufficient amount of regulatory capital to absorb decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities, and to cover losses resulting from the firm's swap dealing
and other activities, including possible counterparty defaults and
margin collateral shortfalls, without the firm becoming insolvent.
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\99\ See 17 CFR 23.101(a)(1)(i), which requires a nonbank SD
electing the Bank-Based Approach to maintain regulatory capital
equal to or in excess of each of the following: (i) $20 million of
common equity tier 1 capital; (ii) an aggregate of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital
(including qualifying subordinated debt) equal to or greater than 8
percent of the nonbank SD's risk-weighted assets (provided that
common equity tier 1 capital comprises at least 6.5 percent of the 8
percent minimum requirement); (iii) an aggregate of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital equal
to or greater than 8 percent of the nonbank SD's uncleared swap
margin amount; and (iv) an amount of capital required by NFA.
\100\ The terms ``common equity tier 1 capital,'' ``additional
tier 1 capital,'' and ``tier 2 capital'' are defined in the bank
holding company regulations of the Federal Reserve Board. See 12 CFR
217.20.
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Common equity tier 1 capital is generally composed of an entity's
common stock instruments and any related surpluses, retained earnings,
and accumulated other comprehensive income, and is a more conservative
or permanent form of capital than additional tier 1 and tier 2
capital.\101\ Additional tier 1 capital is generally composed of equity
instruments such as preferred stock and certain hybrid securities that
may be converted to common stock if triggering events occur.\102\ Total
tier 1 capital is composed of common equity tier 1 capital and further
includes additional tier 1 capital.\103\ Tier 2 capital includes
certain types of instruments that include both debt and equity
characteristics such as qualifying subordinated debt.\104\
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\101\ 12 CFR 217.20.
\102\ Id.
\103\ Id.
\104\ Id.
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Subordinated debt must meet certain conditions to qualify as tier 2
capital under the CFTC Capital Rules. Specifically, subordinated debt
instruments must have a term of at least one year (with the exception
of approved revolving subordinated debt agreements which may have a
maturity term that is less than one year), and contain terms that
effectively subordinate the rights of lenders to receive any payments,
including accrued interest, to other creditors of the firm.\105\
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\105\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See Regulation
23.101(a)(1)(i)(B); 17 CFR 23.101(a)(1)(i)(B).
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Common equity tier 1 capital, additional tier 1 capital, and tier 2
capital are permitted to be included in a nonbank SD's regulatory
capital and used to meet the firm's minimum capital requirement due to
their characteristics of being permanent forms of capital that are
subordinate to the claims of other creditors, which ensures that a
nonbank SD will have this regulatory capital to absorb decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities, and to cover losses from business activities, including
swap dealing activities, without the firm becoming insolvent.
2. Mexican Capital Rules: Qualifying Capital
The Mexican Capital Rules require each Mexican nonbank SD to
maintain a level of regulatory capital that equals or exceeds 8 percent
of the firm's risk-weighted assets, which is the sum of the Mexican
nonbank SD's market risk, credit risk, and operational risk
charges.\106\ The Mexican Capital Rules limit the composition of
regulatory capital to common equity tier 1 capital, additional tier 1
capital, and tier 2 capital in a manner consistent with the BCBS bank
capital framework.\107\ In this regard, the Mexican Capital Rules
provide that: (i) common equity tier 1 capital may generally be
composed of retained earnings and common equity instruments; (ii)
additional tier 1 capital may include other capital instruments and
certain long-term convertible debt instruments; and (iii) tier 2
capital may include certain qualifying subordinated debt
instruments.\108\
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\106\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions.
\107\ See Article 162 of the General Provisions (setting forth
components of regulatory capital (i.e., capital fundamental, capital
basico no fundamental, and capital complementario) equivalent to
common equity tier 1 capital, additional tier capital and tier 2
capital).
\108\ Articles 162 Bis and 162 Bis 1 of the General Provisions.
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Furthermore, with respect to tier 2 capital, qualifying
subordinated debt may not be short-term debt and the Mexican nonbank SD
must retain the right to cancel the payment of interest on the
debt.\109\ Specifically, qualifying subordinated debt under the Mexican
Capital Rules must have an initial minimum term of 10 years and the
Mexican nonbank SD must have the right to cancel interest payments,
subject to certain conditions, or to convert the debt to common equity
of the firm.\110\ In addition, the proceeds received by the Mexican
nonbank SD from the issuance of the subordinated debt must be
immediately available to the firm for use as it deems appropriate, with
no restrictions.\111\
---------------------------------------------------------------------------
\109\ Articles 162 Bis and 163 of the General Provisions.
\110\ Id.
\111\ Article 163 of the General Provisions.
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A Mexican nonbank SD must also maintain a capital conservation
buffer equal to 2.5 percent of the firm's risk-weighted assets in
addition to the requirement to maintain qualifying regulatory capital
in excess of 8 percent of its risk-weighted assets. The 2.5 percent
capital conservation buffer must be met with common equity tier 1
capital.\112\ Common equity tier 1 capital, as noted above, is limited
to the Mexican nonbank SD's common equity and retained earnings, and
represents a more conservative or permanent form of capital than equity
instruments that qualify as additional tier 1 capital and tier 2
capital.
---------------------------------------------------------------------------
\112\ Article 162 of the General Provisions.
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[[Page 76384]]
The Mexican Capital Rules also impose different ratios for the
various components of regulatory capital that are consistent with the
BCBS bank capital framework.\113\ In this regard, the Mexican Capital
Rules provide that a Mexican nonbank SD's minimum regulatory capital
must satisfy the following requirements: (i) common equity tier 1
capital must equal or exceed 4.5 percent of the firm's risk-weighted
assets; (ii) total tier 1 capital (i.e., common equity tier 1 capital
plus additional tier 1 capital) must equal or exceed 6 percent of the
firm's risk-weighted assets; and (iii) total capital (i.e., an
aggregate amount of common equity tier 1 capital, additional tier 1
capital, and tier 2 capital) must equal or exceed 8 percent of the
firm's risk-weighted assets. A Mexican nonbank SD also must maintain a
capital conservation buffer of 2.5 percent of its total risk-weighted
assets that must be met with common equity tier 1 capital.\114\ With
the addition of the capital conservation buffer, each Mexican nonbank
SD is required to maintain minimum regulatory capital that equals or
exceeds 10.5 percent of the firm's risk-weighted assets, with common
equity tier 1 capital comprising at least 7 percent of the 10.5 percent
minimum regulatory capital requirement.
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\113\ See Id.
\114\ See supra note 66.
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3. Commission Analysis
The Commission has reviewed the Mexico Application and the relevant
Mexican laws and regulations, and has preliminarily determined that the
Mexican Capital Rules are comparable in purpose and effect to CFTC
Capital Rules with regard to the types and characteristics of a nonbank
SD's equity that qualifies as regulatory capital in meeting its minimum
requirements. The Mexican Capital Rules and the CFTC Capital Rules for
nonbank SDs both require a nonbank SD to maintain a quantity of high-
quality and permanent capital, all defined in a manner that is
consistent with the BCBS international bank capital framework, that
based on the firm's activities and on-balance sheet and off-balance
sheet exposures, is sufficient to absorb losses and decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities without resulting in the firm becoming insolvent.
Specifically, equity instruments that qualify as common equity tier 1
capital and additional tier 1 capital under the Mexican Capital Rules
and the CFTC Capital Rules have similar characteristics (e.g., the
equity must be in the form of high-quality, committed, and permanent
capital) and the equity instruments generally have no priority to the
distribution of firm assets or income with respect to other
shareholders or creditors of the firm, which makes this equity
available to a nonbank SD to absorb unexpected losses, including
counterparty defaults.
In addition, the Commission has preliminarily determined that the
conditions imposed on subordinated debt instruments under the Mexican
Capital Rules and the CFTC Capital Rules are comparable and are
designed to ensure that the subordinated debt has qualities that
support its recognition by a nonbank SD as equity for capital purposes.
The conditions include, in the case of the CFTC Capital Rules,
regulatory requirements that effectively subordinate the claims of debt
holders to interest and repayment of the debt to the claims of other
creditors of the nonbank SD, and, in the case of the Mexican Capital
Rules, regulatory requirements that provide Mexican nonbank SDs with
the right to cancel scheduled interest payments and to convert the debt
to common equity of the firm.\115\
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\115\ See 17 CFR 240.18a-1d and Articles 162 and 162 Bis of the
General Provisions.
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Having reviewed the Mexico Application and the relevant Mexican
laws and regulations, the Commission has made a preliminary
determination that the Mexican Capital Rules and CFTC Capital Rules
impose comparable requirements on Mexican nonbank SDs with respect to
the types and characteristics of equity capital that must be used to
meet minimum regulatory capital requirements. The Commission invites
public comment on its analysis above, including comment on the Mexico
Application and the relevant Mexican laws and regulations.
B. Nonbank Swap Dealer Minimum Capital Requirement
1. CFTC Capital Rules: Nonbank SD Minimum Capital Requirement
The CFTC Capital Rules require a nonbank SD electing the Bank-Based
Approach to maintain regulatory capital that satisfies each of the
following criteria: (i) an amount of common equity tier 1 capital of at
least $20 million; (ii) an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital in an amount equal to or
in excess of 8 percent of the nonbank SD's uncleared swap margin
amount; (iii) an aggregate amount of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital equal to or greater than
8 percent of the nonbank SD's total risk-weighted assets, provided that
common equity tier 1 capital comprises at least 6.5 percent of the 8
percent; and (iv) the amount of capital required by the NFA.\116\
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\116\ 17 CFR 23.101(a)(1)(i). NFA has adopted the CFTC minimum
capital requirements for nonbank SDs, but has not adopted additional
capital requirements at this time.
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Prong (i) above requires each nonbank SD electing the Bank-Based
Approach to maintain a minimum of $20 million of common equity tier 1
capital in order to operate as a nonbank SD. The requirement that each
nonbank SD electing the CFTC Bank-Based Approach maintain a minimum of
$20 million of common equity tier 1 capital is also consistent with the
minimum capital requirement for nonbank SDs electing the NLA Approach
and the TNW Approach.\117\ The Commission adopted this minimum
requirement as it believed that the role a nonbank SD performs in the
financial markets by engaging in swap dealing activities warranted a
minimum level of capital, stated as a fixed dollar amount that does not
fluctuate with the level of the firm's dealing activities, to help
ensure that the firm meets its financial commitments to swap
counterparties and creditors without the firm becoming insolvent.\118\
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\117\ Nonbank SDs electing the NLA Approach are subject to a
minimum capital requirement that includes a fixed minimum dollar
amount of net capital of $20 million. See 17 CFR
23.101(a)(1)(ii)(A)(1). Nonbank SDs electing the TNW Approach are
required to maintain levels of tangible net worth that equals or
exceeds $20 million plus the amount of the nonbank SDs' market risk
and credit risk associated with the firms' dealing activities. See
17 CFR 23.101(a)(2)(ii)(A).
\118\ See, e.g., 85 FR 57492.
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Prong (ii) above is a minimum capital requirement that is based on
the amount of uncleared margin for swap transactions entered into by
the nonbank SD and is computed on a counterparty by counterparty basis.
The requirement for a nonbank SD to maintain minimum capital equal to
or greater than 8 percent of the firm's uncleared swap margin provides
a capital floor based on a measure of the risk and volume of the swap
positions, and the number of counterparties and the complexity of
operations, of the nonbank SD. The intent of the minimum capital
requirement based on a percentage of the nonbank SD's uncleared swap
margin was to establish a minimum capital requirement that would help
ensure that the nonbank SD meets all of its obligations as a SD to
market participants, and to cover potential operational risk, legal
risk and
[[Page 76385]]
liquidity risk in addition to the risks associated with its trading
portfolio.\119\
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\119\ See 85 FR 57462.
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Prong (iii) above is a minimum capital requirement that is based on
the Federal Reserve Board's capital requirements for bank holding
companies and is consistent with the BCBS international capital
framework for banking institutions. As noted above, a nonbank SD under
prong (iii) must maintain an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital in an amount equal to or
greater than 8 percent of the nonbank SD's total risk-weighted assets,
with common equity tier 1 capital comprising at least 6.5 percent of
the 8 percent. Risk-weighted assets are a nonbank SD's on-balance sheet
and off-balance sheet exposures, including proprietary swap, security-
based swap, equity, and futures positions, weighted according to risk.
The Bank-Based Approach requires each nonbank SD to maintain regulatory
capital in an amount that equals or exceeds 8 percent of the firm's
total risk-weighted assets to help ensure that the nonbank SD's level
of capital is sufficient to absorb decreases in the value of the firm's
assets and increases in the value of the firm's liabilities, and to
cover unexpected losses resulting from business activities, including
uncollateralized defaults from swap counterparties, without the nonbank
SD becoming insolvent.
A nonbank SD must compute its risk-weighted assets using
standardized market risk and credit risk charges, unless the nonbank SD
has been approved by the Commission or NFA to use internal models.\120\
For standardized market risk charges, the Commission incorporates by
reference the standardized market risk charges set forth in Regulation
1.17 for FCMs and SEC Rule 18a-1 for nonbank SBSDs.\121\ The
standardized market risk charges under Regulation 1.17 and SEC Rule
18a-1 are calculated as a percentage of the market value or notional
value of the nonbank SD's marketable securities and derivatives
positions, with the percentages applied to the market value or notional
value increasing as the expected or anticipated risk of the positions
increases.\122\ The resulting total market risk exposure amount is
multiplied by a factor of 12.5 to cancel the effect of the 8 percent
multiplication factor applied to all of the nonbank SD's risk-weighted
assets, which effectively requires a nonbank SD to hold qualifying
regulatory capital equal to or greater than 100 percent of the amount
of its market risk exposure.\123\
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\120\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
\121\ See paragraph (3) of the definition of the term BHC
equivalent risk-weighted assets in 17 CFR 23.100.
\122\ See 17 CFR 240.18a-1(c)(1).
\123\ See 17 CFR 23.100 (Definition of BHC equivalent risk-
weighted assets). As noted, a nonbank SD is required to maintain
qualifying capital (i.e., an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital) in an amount
that exceeds 8 percent of its market risk-weighted assets and
credit-risk-weighted assets. The regulations, however, require the
nonbank SD to effectively maintain qualifying capital in excess of
100 percent of its market risk-weighted assets by requiring the
nonbank SD to multiply its market-risk-weighted assets by 12.5.
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With respect to standardized credit risk charges for exposures from
non-derivatives positions, a nonbank SD computes its on-balance sheet
and off-balance sheet exposures in accordance with the standardized
credit risk charges adopted by the Federal Reserve Board and set forth
in Subpart D of 12 CFR 217.\124\ Standardized credit risk charges are
computed by multiplying the amount of the exposure by defined
counterparty credit risk factors that range from 0 percent to 150
percent.\125\ A nonbank SD with off-balance sheet exposures is required
to calculate a credit risk charge by multiplying each exposure by a
credit conversion factor that ranges from 0 percent to 100 percent,
depending on the type of exposure.\126\
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\124\ See 17 CFR 23.101(a)(1)(i)(B) and the paragraph (1) of the
definition of the term BHC equivalent risk-weighted assets in 17 CFR
23.100.
\125\ See 17 CFR 217.32.
\126\ See 17 CFR 217.33.
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A nonbank SD may compute standardized credit risk charges for
derivatives positions, including uncleared swaps and non-cleared
security-based swaps, using either the current exposure method
(``CEM'') or the standardized approach for measuring counterparty
credit risk (``SA-CCR'').\127\ Both CEM and SA-CCR are non-model,
rules-based, approaches to calculating counterparty credit risk for
derivatives positions. Credit risk under CEM is the sum of: (i) the
current exposure (i.e., the positive mark-to-market) of the derivatives
contract; and (ii) the potential future exposure, which is calculated
as the product of the notional principal amount of the derivatives
contract multiplied by a standard credit risk conversion factor set
forth in the rules of the Federal Reserve Board.\128\ Credit risk under
SA-CCR is defined as the exposure at default amount of a derivatives
contract, which is computed as the sum of: (i) the replacement costs of
the contract (i.e., the positive mark-to market); and (ii) the
potential futures exposure of the contract multiplied by a factor of
1.4.\129\
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\127\ See 17 CFR 217.34. See also Regulation 23.100 (17 CFR
23.100) defining the term BHC Risk Equivalent Amount, which provides
that a nonbank SD that does not have model approval may use either
CEM or SA-CCR to compute its exposures for over-the-counter
derivatives contracts with regard to the status of its affiliate
entities under the Federal Reserve Board's capital rules.
\128\ See 12 CFR 217.34.
\129\ See 12 CFR 217.132(c).
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A nonbank SD also may obtain the approval of the Commission or NFA
to use internal models to compute market risk and/or credit risk
charges in lieu of the standardized charges. A nonbank SD seeking
approval to use an internal model is required to submit an application
to the Commission or NFA.\130\ The application is required to include,
among other things, a list of categories of positions that the nonbank
SD holds in its proprietary accounts and a brief description of the
methods that the nonbank SD will use to calculate deductions for market
risk and/or credit risk charges for such positions, as well as a
description of the mathematical models used to compute market risk and
credit risk charges.
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\130\ See 17 CFR 23.102(c).
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A nonbank SD approved by the Commission or NFA to use internal
models to compute market risk is required to comply with Subpart F of
the Federal Reserve Board's Part 217 regulations (``Subpart F'').\131\
Subpart F is based on models that are consistent with the BCBS Basel
2.5 capital framework.\132\ The Commission's qualitative and
quantitative requirements for internal capital models also are
comparable to the SEC's existing internal capital model requirements
for BDs and SBSDs,\133\ which are also broadly based on the BCBS Basel
2.5 capital framework.
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\131\ See paragraph (4) of the definition of BHC equivalent
risk-weighted assets in 17 CFR 23.100.
\132\ Compare 17 CFR 23.100 (providing for a nonbank SD that is
approved to use internal models to calculate credit and market risk
to calculate its risk-weighted assets using Subparts E and F of 12
CFR part 217), Subpart F of 12 CFR, 17 CFR 23.101(a)(1)(ii)
(providing for an SD that elects the NLA Approach to calculate its
net capital in accordance with SEC Rule 18a-1) and Appendix A to
Subpart E of 17 CFR part 23, with Basel Committee on Banking
Supervision, Revisions to the Basel II Market Risk Framework (2011),
https://www.bis.org/publ/bcbs193.pdf (describing the revised
internal model approach under Basel 2.5).
\133\ The SEC internal model requirements for SBSDs are listed
in 17 CFR 240.18a-1(d). See also SEC FOCUS Report Part II,
Computation of Net Capital (Filer Authorized to Use Models)
(providing for inclusion of a market risk exposure section for Basel
2.5 firms).
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A nonbank SD approved to use internal models to compute credit risk
is required to perform such computation in accordance with Subpart E of
the Federal Reserve Board's Part 217
[[Page 76386]]
regulations.\134\ These internal credit risk modeling requirements are
also based on the Basel 2.5 capital framework or the Basel 3 capital
framework.
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\134\ 12 CFR 217 Subpart E. A nonbank SD is provided with
alternative approaches to computing is capital under the Federal
Reserve Board's rules. As noted when the Commission adopted the SD
capital rules, the Commission understands that some alternatives may
include charges or deductions for risks not otherwise part of market
and credit risk models described or explicitly required under the
Commission's rule (e.g., operational risk), however, the Commission
was not prepared to accept partial application of alternative
calculation methods or to compensate this inclusion by reducing
other charges calculated per this rule outside of the market and
credit risk models. Therefore, such chargers or deductions must be
factored into the calculation of the nonbank SD's minimum capital
requirements. See 85 FR 57462 at 57496.
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Under the Basel 2.5 capital framework, nonbank SDs have flexibility
in developing their internal models, but must follow certain minimum
standards. Internal market risk and credit risk models must follow a
Value-at-Risk (``VaR'') structure to compute, on a daily basis, a 99th
percentile, one-tailed confidence interval for the potential losses
resulting from an instantaneous price shock equivalent to a 10-day
movement in prices (unless a different time-frame is specifically
indicated). The simulation of this price shock must be based on a
historical observation period of minimum length of one year but there
is flexibility on the method used to render simulations, such as
variance-covariance matrices, historical simulations, or Monte Carlo.
The Commission and the Basel standards for internal models also
have requirements on the selection of appropriate risk factors as well
as on data quality and update frequency.\135\ One specific concern is
that internal models must capture the non-linear price characteristics
of options positions, including but not limited to, relevant
volatilities at different maturities.\136\
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\135\ See 17 CFR part 23, Appendix A to Subpart E of Part 23,
paragraph (i)(2)(iii), and Basel Committee on Banking Supervision,
Revisions to the Basel II Market Risk Framework (2011), paragraph
718(Lxxvi)(e), available at: https://www.bis.org/publ/bcbs193.pdf.
\136\ The Commission's requirement is set forth in paragraph
(i)(2)(iv)(A) of Appendix A to Subpart E of 17 CFR part 23. See also
Basel Committee on Banking Supervision, Revisions to the Basel II
Market Risk Framework (2011), paragraph 718(Lxxvi)(h), available at:
https://www.bis.org/publ/bcbs193.pdf.
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In addition, BCBS standards for market risk models include a series
of additive components for risks for which the broad VaR is ill-suited
or that may need targeted calculation. These include the calculation of
a Stressed VaR measure (with the same specifications as the VaR, but
calibrated to historical data from a continuous 12-month period of
significant financial stress relevant to the firm's portfolio); a
Specific Risk measure (which includes the effect of a specific
instrument); an Incremental Risk measure (which addresses changes in
the credit rating of a specific obligor which may appear as a reference
in an asset); and a Comprehensive Risk measure (which addresses risk of
correlation trading positions).
2. Mexican Capital Rules: Mexican Nonbank Swap Dealer Minimum Capital
Requirements
The Mexican Capital Rules impose bank-like capital requirements on
a Mexican nonbank SD that, consistent with the BCBS international bank
capital framework, require the Mexican nonbank SD to hold a sufficient
amount of qualifying equity capital and subordinated debt to absorb
decreases in the value of firm assets and increases in the value of
firm liabilities, and to cover losses from its activities, including
possible counterparty defaults and margin collateral shortfalls
associated with its swap dealing activities, without the firm becoming
insolvent. Specifically, the Mexican Capital Rules require each Mexican
nonbank SD to maintain qualifying regulatory capital to satisfy the
following capital ratios, expressed as a percentage of the firm's total
risk-weighted assets: (i) common equity tier 1 capital equal to at
least 4.5 percent of the firm's risk-weighted assets; (ii) total tier 1
capital (i.e., common equity tier 1 capital plus additional tier 1
capital) equal to at least 6 percent of the firm's risk-weighted
assets; (iii) total capital (i.e., an aggregate amount of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital) equal to
at least 8 percent of the firm's risk-weighted assets; and (iv) an
additional capital conservation buffer of 2.5 percent of the firm's
risk-weighted asset that must be met with common equity tier 1
capital.\137\ Thus, a Mexican nonbank SD is required to maintain
regulatory capital equal to at least 10.5 percent of its total risk-
weighted assets, with common equity tier 1 capital comprising at least
7 percent of the regulatory capital (4.5 percent of the core capital
plus the 2.5 percent capital conservation buffer).
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\137\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions.
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The Mexican nonbank SD's risk-weighted assets are calculated as the
sum of the firm's market risk, credit risk, and operational risk
charges. The risk charges are computed using standardized (i.e., non-
model) approaches that are based on the same principles and methodology
as the BCBS bank capital framework. The Applicants also represent that
a Mexican nonbank SD is required to compute its risk-weighted assets
using standardized approaches in a manner similar to the standardized
approaches adopted by the Federal Reserve Board for bank holding
companies and set forth in 12 CFR part 217 of the Federal Reserve
Board's rules.\138\
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\138\ Mexican Application, p. 7.
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A Mexican nonbank SD is required to take a deduction from capital
for market risk based on standardized charges published by the Mexican
Commission,\139\ which include market risk deductions for interest
rate, foreign exchange, precious metals and equity price risks.\140\
The Mexican Capital Rules do not have market risk charges specific to
commodity price risk as Mexican nonbank SDs are not permitted to engage
in physical commodity transactions.\141\
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\139\ Market risk models may be used if authorized by the
Mexican Commission. The Mexican Commission, however, has not
authorized the use of market risk models for any of the Mexican
nonbank SDs, and no Mexican nonbank SD is currently seeking model
authorization.
\140\ Article 150 Bis of the General Provisions.
\141\ See, Mexico Application, p. 10, footnote 26.
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For derivatives positions, a Mexican nonbank SD is required to take
standardized market risk charges based on the nature of the instrument
underlying the derivatives position.\142\ The market risk charges are
based on cumulative calculations for individual derivatives positions
with limited recognition of offsets.\143\
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\142\ Article 151 of the General Provisions.
\143\ Article 152 of the General Provisions.
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The resulting total market risk exposure amount, including market
risk exposure for derivative positions, is multiplied by a factor of
12.5 to adjust the 8 percent multiplication factor applied to all of
the Mexican nonbank SD's risk-weighted assets, which effectively
requires a Mexican nonbank SD to hold qualifying regulatory capital
equal to or greater than 100 percent of the firm's market risk exposure
amount.
The Mexican Capital Rules also require a Mexican nonbank SD to
calculate credit risk exposure under a standardized approach by taking
the accounting value of each of its on-balance sheet and off-balance
sheet positions and exposures, determining a conversion value to credit
risk determined pursuant to Mexican regulation,\144\ and then applying
a specific risk-weight based on the type of issuer or counterparty, as
applicable,
[[Page 76387]]
and the assets' credit quality.\145\ The resulting credit risk exposure
amount is also multiplied by a factor of 12.5 to adjust the 8 percent
multiplication factor applied to all of the firm's risk-weighted
assets, which effectively requires the Mexican nonbank SD to hold
regulatory capital equal to or greater than 100 percent of the firm's
total credit risk exposure.
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\144\ Article 160 of the General Provisions.
\145\ Articles 159, 160, and 161 of the General Provisions.
Mexican nonbank SDs are required to use a standardized approach to
computing all credit risk charges as the Mexican Capital Rules do
not authorize the use of internal credit risk models. See, Mexico
Application, p. 11.
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The Mexican Capital rules further require a Mexican nonbank SD to
retain qualifying regulatory capital to cover operational risk.
Operational risk is computed using the basic method set forth in the
Mexican Capital Rules.\146\ The basic method calculates operational
risk exposure as an amount equal to 15 percent of Mexican nonbank SD's
average annual net positive income for the last three years,\147\
taking into account insurance coverage for operational risk, subject to
strict limitations and conditions.\148\ The amount of the operational
risk exposure is subject to a floor equal to 5 percent and a ceiling
equal to 15 percent of the monthly average sum of market and credit
risk exposure amounts, calculated over the prior 36 months, on a
rolling basis.\149\ The resulting operational risk exposure amount is
multiplied by a factor of 12.5 to adjust the effect of the 8 percent
multiplication factor applied to all of the Mexican nonbank SD's risk-
weighted assets, which effectively requires a Mexican nonbank SD to
hold qualifying regulatory capital equal to or greater than 100 percent
of the amount of its operational risk exposure.\150\
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\146\ Article 161 Bis of the General Provisions.
\147\ Article 161 Bis 1 of the General Provisions.
\148\ Article 161 Bis 2 of the General Provisions.
\149\ Article 161 Bis 3 of the General Provisions.
\150\ Article 161 Bis 5 of the General Provisions.
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The Mexican Capital Rules also require a Mexican nonbank SD to
comply with minimum paid-in capital requirements depending on the
services or activities to be performed by the firm.\151\ The minimum
paid-in capital is a fixed value of capital that a Mexican nonbank SD
is required to maintain. The minimum paid-in-capital requirement is
indexed to Inflation Indexed Units (``UDIs''), so a different minimum
capital is required each year depending on the UDI equivalence. In the
context of the Mexican nonbank SDs, which perform the broadest array of
activities, the requirement was 12,500,000 UDIs, which for 2022 equaled
approximately MXN $90,000,000 (or USD $4,300,000).\152\
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\151\ Article 10 of the General Provisions.
\152\ Considering an exchange rate per USD of MXN $20.7882 as
published by the Mexican Central Bank in the Federal Official
Gazette (Diario Oficial de la Federacion) on July 12, 2022.
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In addition to the minimum paid-in-capital requirement, the Mexican
Central Bank also imposes limits on a Mexican nonbank SD's overall
leverage.\153\ The leverage rules are based principally on volume and
counterparties without regard to risk-weighting.\154\
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\153\ Section C.B1 of Circular 115/2002, issued by the Mexican
Central Bank on November 11, 2002, as amended.
\154\ Id. Mexican nonbank SDs may not have positions in
securities and debt instruments acquired with financing that exceed
specified limits, including issuer limits and global capital
thresholds.
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The Mexican Commission may also require a Mexican nonbank SD to
satisfy additional capital requirements, considering the composition of
the firm's capital, the composition of the firm's assets, the
efficiency of the firm's internal control systems, the firm's
compliance with its remuneration system and, in general, the firm's
exposure and risk management.\155\ The Mexican Commission also
quarterly publishes on its website the classification of broker-
dealers, including Mexican nonbank SDs, according to categories based
on their respective capital ratios as an additional measure to
incentivize firms to maintain sufficient levels of capital.\156\
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\155\ Article 169 of the General Provisions.
\156\ Article 204 Bis 1, Article 204 Bis 2, and Article 204 Bis
3 of the General Provisions. The Mexican Commission classifies each
broker-dealer into categories based on the firm's common equity tier
1 capital ratio, basic capital ratio (i.e., common equity tier 1
capital plus additional tier 1 capital ratios), and total capital
ratio as reported to the Mexican Commission. The categories range
from 1 to 5, with 1 being the highest classification category and 5
being the lowest classification category. The classification
categories for common equity tier 1 capital ratios are: (i) less
than 4.5%; (ii) equal to or greater than 4.5% and less than 7%; and
(iii) equal to or greater than 7%. The classifications for the basic
capital ratio are: (i) less than 6%; (ii) equal to or greater than
6% and less than 8.5%; and (iii) equal to or greater than 8.%. The
classifications for a firm's total capital ratio are: (i) less than
4.5%; (ii) equal to or greater than 4.5% and less than 7%; (iii)
equal to or greater than 7% and less than 8%; (iv) equal to or
greater than 8% and less than 10.5%; and (v) equal to or greater
than 10.5%. The Mexican Commission announces the classification
categories for each broker-dealer, including the Mexican nonbank
SDs, on a quarterly basis and makes the classifications publicly
available on the Mexican Commission's website.
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The Mexican Capital Rules also impose liquidity requirements on
Mexican nonbank SDs \157\ The liquidity provisions require each Mexican
nonbank SD to invest or hold at least 20 percent of its total capital
in defined cash accounts, investments, reserve funds set forth by
regulations of applicable self-regulatory organizations or clearing
organizations.\158\
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\157\ See Article 146 of the General Provisions.
\158\ Article 228 of the Law recognizes the stock exchange and
the securities central clearinghouse as self-regulatory
organizations and indicates that other entities that comply with
certain requirements may be recognized as self-regulatory
organizations. See, also, Article 146 of the General Provisions.
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A Mexican nonbank SD also must follow specified procedures in
monitoring its liquidity and to ensure that it has sufficient liquid
assets to meet anticipated needs.\159\ When monitoring and managing
liquidity risk, a Mexican nonbank SD must, among other things: (i)
measure, assess and monitor risk caused by differences between forecast
cash flows on various dates; (ii) consider the assets and liabilities
of the firm in Mexican pesos and foreign currency; (iii) assess the
diversification of sources of financing to which the firm has access;
(iv) quantify the potential loss from early or obligatory sale of
assets at an unusual discount in order to meet immediate obligations;
and (v) estimate the potential loss if it is not possible to renew
liabilities or contract others under normal conditions.\160\ The
liquidity requirements supplement the minimum capital requirements by
obligating a Mexican nonbank SD to maintain a defined amount of liquid
assets to cover current liabilities and other current obligations to
counterparties, including margin obligations, and obligations to other
third parties.
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\159\ See Article 137 of the General Provisions.
\160\ Id.
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Lastly, a Mexican nonbank SD is required to conduct annual stress
tests to ensure that the firm retains sufficient capital.\161\ The
stress test assessments are designed to determine whether a Mexican
nonbank SD's capital would be sufficient to cover losses under the
supervisory scenarios identified by the Mexican Commission, whether the
Mexican nonbank SD would remain in its current capital category, and
whether the Mexican nonbank SD would comply with the minimum capital
requirements.\162\ To this end, a Mexican nonbank SD must submit
annually to the Mexican Commission a report containing the results of
its stress test assessments.\163\ A Mexican nonbank SD also must file a
preventive action plan if the stress tests indicate that the firm's
capital ratios are not sufficient.\164\
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\161\ Article 214 of the General Provisions.
\162\ See id.
\163\ Article 216 of the General Provisions.
\164\ Article 217 of the General Provisions.
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[[Page 76388]]
3. Commission Analysis
The Commission has reviewed the Mexico Application and the relevant
Mexican laws and regulations, and has preliminarily determined that the
Mexican Capital Rules are comparable in purpose and effect to CFTC
Capital Rules with regard to the establishment of a nonbank SD's
minimum capital requirement and the calculation of the nonbank SD's
amount of regulatory capital. Although there are differences in the
minimum capital requirements and calculation of regulatory capital
between the Mexican Capital Rules and the CFTC Capital Rules, as
discussed below, the Commission preliminary believes that the Mexican
Capital Rules and the CFTC Capital rules are designed to ensure the
safety and soundness of a nonbank SD, and subject to the proposed
conditions discussed below, will achieve comparable outcomes by
requiring the firm to maintain a minimum level of qualifying regulatory
capital, including subordinated debt, to absorb losses from the firm's
business activities, including its swap dealing activities, and
decreases in the value of the firm's assets and increases in the value
of the firm's liabilities, without the nonbank SD becoming insolvent.
The CFTC Capital Rules require a nonbank SD electing the Bank-Based
Approach to maintain regulatory capital in an amount that meets or
exceeds each of the following requirements: (i) $20 million of common
equity tier 1 capital; (ii) 8 percent of the nonbank SD's uncleared
swap margin amount; (iii) 8 percent of the nonbank SD's risk-weighted
assets (with common equity tier 1 capital comprising at least 6.5
percent of the 8 percent); and (iv) the amount of capital required by
NFA.\165\
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\165\ 17 CFR 23.101(a)(1)(i). NFA has not adopted additional
capital requirements for nonbank SDs and, therefore, an analysis of
the comparability of this element of the CFTC Capital Rules with the
Mexican Capital Rules is not applicable.
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Prong (i) of the CFTC Capital Rules recited above requires each
nonbank SD electing the Bank-Based Approach to maintain a minimum of
$20 million of common equity tier 1 capital. The CFTC's $20 million
fixed-dollar minimum capital requirement is intended to ensure that
each nonbank SD maintains a level of regulatory capital, without regard
to the level of the firm's dealing and other activities, sufficient to
meet its obligations to swap market participants given the firm's
status as a CFTC-registered nonbank SD and to help ensure the safety
and soundness of the nonbank SD.\166\
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\166\ 85 FR 57492.
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The Mexican Capital Rules also contain a requirement that each
Mexican nonbank SD maintain a fixed amount of minimum paid-in capital
that is based on the services or activities performed by the firm.\167\
The minimum paid-in capital requirement is a fixed value of capital
that is indexed annually to UDIs. Mexican nonbank SDs that performed
the broadest array of activities as of the year ending December 31,
2021 were subject to a minimum paid-in capital requirement that equaled
approximately MXN $90,000,000 (or USD $4,300,000).\168\
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\167\ Article 10 of the General Provisions.
\168\ Considering an exchange rate per USD of MXN $20.7882 as
published by the Mexican Central Bank in the Federal Official
Gazette (Diario Oficial de la Federacion) on July 12, 2022.
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The Mexican Capital Rules and the CFTC Capital Rules both require
nonbank SDs to hold a minimum amount of regulatory capital that is not
based on the risk-weighted assets of the firms. The Commission,
however, preliminarily believes that CFTC-registered nonbank SDs should
maintain a minimum amount of $20 million of common equity tier 1
capital irrespective of the volume of its dealing activities to help
ensure that the firm satisfies its regulatory obligations to market
participants, including meeting its financial commitments to swap
counterparties and creditors, without the firm becoming insolvent. The
Commission recognizes that the $20 million of common equity tier 1
capital required under the CFTC Capital Rules is substantially higher
than the estimated $4.3 million of minimum paid-in capital required
under the Mexican Capital Rules and preliminarily believes that the $20
million represents a more appropriate level of minimum capital to help
ensure the safety and soundness of the nonbank SD that is engaging in
uncleared swap transactions. Since the Commission preliminarily finds
fundamental capital, as defined in Article 162 and Article 162 Bis of
the General Provisions, to be comparable to common equity tier 1
capital required under the CFTC Capital Rules, the Commission is
proposing to condition the Capital Comparability Determination Order to
require each Mexican nonbank SD to maintain, at all times, a minimum
level of $20 million of fundamental capital.\169\ The proposed
condition would require each Mexican nonbank SD to maintain an amount
denominated in pesos that is equivalent to $20 million in U.S. dollars.
The Commission is also proposing that a Mexican nonbank SD may convert
the peso-denominated amount of this minimum capital requirement to the
U.S. dollar equivalent based on a commercially reasonable and observed
exchange rate.
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\169\ Each of the three current Mexican nonbank SDs currently
maintains fundamental capital in excess of $20 million based on
financial filings made with the Commission. Therefore, the
Commission does not anticipate that the proposed condition would
have any material impact on the Mexican nonbank SDs currently
registered with the Commission. Nonetheless, the Commission requests
comment on the proposed condition.
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The Commission preliminarily believes that the Mexican Capital
Rules and CFTC Capital Rules are also comparable in that both impose
minimum capital requirements on nonbank SDs that are based on the BCBS
bank capital framework, which requires a banking entity to hold
qualifying capital, including subordinated debt, in an amount in excess
of certain percentages of the banking entity's risk-weighted assets
(i.e., its on-balance sheet and off-balance sheet exposures). In this
regard, prong (iii) of the CFTC Capital Rules recited above requires
each nonbank SD to maintain an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital in an amount
equal to or greater than 8 percent of the nonbank SD's total risk-
weighted assets, with common equity tier 1 capital comprising at least
6.5 percent of the 8 percent.\170\ Risk-weighted assets are a nonbank
SD's on-balance sheet and off-balance sheet market risk and credit risk
exposures, including exposures associated with proprietary swap,
security-based swap, equity, and futures positions, weighted according
to risk. The requirements and capital ratios set forth in prong (iii)
are based on the Federal Reserve Board's capital requirements for bank
holding companies and are consistent with the BCBS international bank
capital adequacy framework. The requirement for each nonbank SD to
maintain regulatory capital in an amount that equals or exceeds 8
percent of the firm's total risk-weighted assets is intended to help
ensure that the nonbank SD's level of capital is sufficient to absorb
decreases in the value of the firm's assets and increases in the value
of the firm's liabilities, and to cover unexpected losses resulting
from the firm's business activities, including losses resulting from
uncollateralized defaults from swap counterparties, without the nonbank
SD becoming insolvent.
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\170\ 17 CFR 23.101(a)(1)(B).
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The Mexican Capital Rules contain capital requirements for Mexican
nonbank SDs that the Commission preliminarily believes are comparable
to the requirements contained in prong
[[Page 76389]]
(iii) of the CFTC Capital Rules. Specifically, the Mexican Capital
Rules require each Mexican nonbank SD to maintain: (i) common equity
tier 1 capital equal to at least 4.5 percent of the Mexican nonbank
SD's risk-weighted assets; (ii) total tier 1 capital (i.e., common
equity tier 1 capital plus additional tier 1 capital) equal to at least
6 percent of the Mexican nonbank SD's risk-weighted assets; and (iii)
total capital (i.e., an aggregate amount of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital) equal to at
least 8 percent of the Mexican nonbanks SD's risk-weighted assets.\171\
In addition, the Mexican Capital Rules further require each Mexican
nonbank SD to maintain an additional capital conservation buffer \172\
equal to 2.5 percent of the Mexican nonbank SD's risk-weighted assets,
which must be met with common equity tier 1 capital.\173\ Thus, a
Mexican nonbank SD is effectively required to maintain total qualifying
regulatory capital equal to or greater than 10.5 percent of the firm's
risk-weighted assets, which is a higher percentage than the 8 percent
required of nonbank SDs under prong (iii) of the CFTC Capital
Rules.\174\
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\171\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions.
\172\ See Mexico Application, p. 5.
\173\ Articles 172 and 173 of the Law and Article 162 of the
General Provisions.
\174\ As noted above, the total capital requirement is the sum
of the capital requirement equal to 8 percent of the firm's risk-
weighted assets, plus the capital conservation buffer of 2.5 percent
of the firm's risk-weighted assets. See Articles 162 and 162 Bis of
the General Provisions.
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The Commission also preliminarily believes that the Mexican Capital
Rules and CFTC Capital Rules are comparable with respect to the
calculation of market risk and credit risk in determining a nonbank
SD's risk-weighted assets. As noted above, Mexican nonbank SDs
currently are not authorized by the Mexican Commission to use models to
compute market risk or credit risk exposures and, therefore, must
compute their risk-weighted assets using standardized market risk and
credit risk charges set forth in the Mexican Capital Rules, which
generally produce charges that are higher than model-based
charges.\175\
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\175\ For clarity, the Commission notes that it has not reviewed
or evaluated the use of internal models to compute market or credit
risk charges under the Mexican Capital Rules. Therefore, a Mexican
nonbank SD that obtains the approval of the Mexican Commission to
use models to compute market risk or credit risk charges and seeks
to use such models in lieu of the standardized charges, may do so
only after the Commission has reviewed and evaluated the use of the
subject models for purpose of comparison to the corresponding CFTC
requirements.
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The Commission preliminarily believes that the approach to
computing the standardized market risk and credit risk charges set
forth in the Mexican Capital Rules is comparable to the standardized
approach set forth in the CFTC Capital Rules, and is also consistent
with the approach for calculating standardized market risk and credit
risk charges under the BCBS bank capital framework. Specifically, the
standardized approaches under the Mexican Capital Rules and CFTC
Capital Rules for calculating market and credit risk follow the same
structure that is now the common global standard: allocating assets to
categories according to risk and assigning each category a risk-weight;
allocating counterparties according to risk assessments and assigning
each a risk factor; calculating gross exposures based on valuation of
assets; calculating a net exposure allowing offsets following well
defined procedures and subject to clear limitations; adjusting the net
exposure by the market risk-weights; and finally, for credit risk
exposures, multiplying the sum of net exposures to each counterparty by
their corresponding risk factor.
The Mexican Capital Rules, however, differ from the CFTC Capital
Rules with respect to a nonbank SD's computation of its market risk
exposures and credit risk exposures that are included in the firm's
risk-weighted assets. As noted above, the CFTC Capital Rules and
Mexican Capital Rules both require a nonbank SD to maintain regulatory
capital equal to or greater than 100 percent of the firm's market risk
exposure amount.\176\ The Mexican Capital Rules, however, also require
a Mexican nonbank SD to maintain regulatory capital equal to or greater
than 100 percent of its credit risk exposure amount.\177\ The CFTC
Capital Rules only require a nonbank SD to maintain regulatory capital
equal to or greater than 8 percent of the firm's total credit risk
exposure amount. The difference in approaches to computing risk-
weighted assets would result in a nonbank SD having a larger amount of
risk-weighted assets, and a higher minimum capital requirement based on
risk-weighted assets, under the Mexican Capital Rules as compared to
the CFTC Capital Rules.
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\176\ The CFTC Capital Rules and the Mexican Capital Rules both
require a nonbank SD to maintain regulatory capital equal to or in
excess of 8 percent of the firm's total risk-weighted assets. Both
sets of rules further require that the nonbank SD multiply its total
market risk exposure amount by a factor of 12.5 and add the
resultant amount to its total risk-weighted assets, which has the
effect of requiring the nonbank SD to hold regulatory capital equal
to or greater than 100 percent of its market risk exposure amount.
\177\ The Mexican Capital Rules require a Mexican nonbank SD to
multiply its total credit risk exposure amount by a factor of 12.5
and to add the resultant amount to its total credit risk-weighted
assets, which has the effect of requiring the Mexican nonbank SD to
hold regulatory capital equal to or greater than 100 percent of its
credit risk exposure amount. In contrast, the CFTC Capital Rules
require a nonbank SD to maintain regulatory capital sufficient to
cover 8 percent of its credit risk exposure amount.
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The Commission also preliminarily believes that the Mexican Capital
Rules and CFTC Capital Rules are comparable in that nonbank SDs are
required to account for operational risk, in addition to market risk
and credit risk, in computing their minimum capital requirements. In
this connection, the Mexican Capital Rules require a Mexican nonbank SD
to calculate an operational risk exposure amount equal to 15 percent of
a Mexican nonbank SD's average annual net positive income for the last
three years, on a rolling basis.\178\ The Mexican nonbank SD is then
required to multiply the operational risk exposure amount by a factor
of 12.5 and add the resultant amount to the total operational risk-
weighted assets, which has the effect of requiring the Mexican nonbank
SD to hold regulatory capital equal to or greater than 100 percent of
its operational risk exposure amount.
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\178\ The amount of the operational risk exposure is also
subject to a floor equal to 5 percent and a ceiling equal to 15
percent of the monthly average sum of market and credit risk
exposure amounts, calculated over the prior 36 months, also on a
rolling basis. See, Article 161 Bis 3 of the General Provisions.
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The CFTC Capital Rules address operational risk as a stand-alone,
separate minimum capital requirement that a nonbank SD is required to
meet under prong (ii) of the Bank-Based Approach recited above, and not
as an additional risk exposure element in the calculation of the
nonbank SD's total risk weighted assets.\179\ Specifically, the CFTC
Capital Rules require a nonbank SD to maintain regulatory capital in an
amount equal to or greater than 8 percent of the firm's total uncleared
swaps margin amount associated with its uncleared swap transactions to
address potential operational, legal, and liquidity risks.\180\ As
noted above, the
[[Page 76390]]
Commission, in establishing the requirement that a nonbank SD must
maintain a level of regulatory capital in excess of 8 percent of the
uncleared swap margin amount associated with the firm's swap
transactions, stated that the intent of the requirement was to
establish a method of developing a minimum amount of required capital
for a nonbank SD to meet its obligations as a SD to market
participants, and to cover potential operational, legal, and liquidity
risks.\181\
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\179\ As noted in footnote 134 above, nonbank SDs may be
required to include operational risk in computing its risk-weighted
assets if they elect certain alternatives set forth in the rules of
Federal Reserve Board.
\180\ The term ``uncleared swap margin'' is defined by
Regulation 23.100 (17 CFR 23.100) as the amount of initial margin,
computed in accordance with the Commission's margin rules for
uncleared swaps (17 CFR 23.154), that a nonbank SD would be required
to collect from each counterparty for each outstanding swap position
of the nonbank SD. A nonbank SD must include all swap positions in
the calculation of the uncleared swap margin amount, including swaps
that are exempt or excluded from the scope of the Commission's
margin regulations for uncleared swaps pursuant to Regulation 23.150
(17 CFR 23.150), exempt foreign exchange swaps or foreign exchange
forwards, or netting set of swaps or foreign exchange swaps, for
each counterparty, as if that counterparty was an unaffiliated swap
dealer. Furthermore, in computing the uncleared swap margin amount,
a nonbank SD may not exclude any de minis thresholds contained in
Regulation 23.151 (17 CFR 23.151).
\181\ See 85 FR 57462 at 57485.
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CFTC rules also require a SD to maintain a risk management program
to address certain risks associated with operating as SD, including
operational, liquidity, legal, market, credit, foreign currency,
settlement, and other applicable risks.\182\ Specifically, CFTC
Regulation 23.600(b) requires each SD to establish, document, maintain,
and enforce a system of risk management policies and procedures
designed to monitor and manage the risks related to swaps, and any
products used to hedge swaps, including futures, options, swaps,
security-based swaps, debt or equity securities, foreign currency,
physical commodities, and other derivatives.\183\ The elements of the
SD's risk management program are required to include the identification
of risks and risk tolerance limits with respect to applicable risks,
including operational, liquidity, and legal risk, together with a
description of the risk tolerance limits set by the SD and the
underlying methodology in written policies and procedures.\184\ With
respect to operational risk, the risk management program must take into
account, among other operational risks: (i) secure and reliable
operating and information systems with adequate, scalable capacity;
(ii) safeguards to detect, identify, and promptly correct deficiencies
in operating and information systems; and (iii) the reconciliation of
all data and information in operating and information systems.\185\
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\182\ 17 CFR 23.600.
\183\ 17 CFR 23.600(b).
\184\ 17 CFR 23.600(c)(1).
\185\ 17 CFR 23.600(c)(4)(vi).
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The Mexican Capital Rules and CFTC rules also impose liquidity
requirements on Mexican nonbank SDs and nonbank SDs, respectively. The
Mexican Capital Rules require Mexican nonbank SDs to meet quantitative
liquidity requirements, which require a Mexican nonbank SD to hold or
invest at least 20 percent of the firm's total capital in liquid assets
comprised of: (i) bank deposits; (ii) highly liquid debt securities
registered in Mexico; (iii) shares of debt investment funds; (iv)
reserve funds created to maintain funds available to cover
contingencies; and (v) high and low marketability shares subject to
market value discounts of 20 and 25 percent, respectively.\186\
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\186\ Article 146 of the General Provisions.
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The CFTC Capital Rules do not include a specific, quantifiable,
liquidity component. The CFTC rules, however, address liquidity risks
through the SD risk management program. Specifically, the SD's risk
management program must take into account, among other things, the
daily measurement of liquidity needs, the assessment of the procedures
to liquidate all non-cash collateral in a timely manner without a
significant effect on price, and the application of appropriate
haircuts that accurately reflect market risk and credit risk of the
noncash collateral.\187\
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\187\ 17 CFR 23.600(c)(4)(iii).
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The CFTC SD risk management requirements also address legal risk.
Regulation 23.600(c)(4)(v) requires a SD to take into account, among
other things, determinations that transactions and netting arrangements
entered into have a sound legal basis, and the establishment of
documentation tracking procedures designed to ensure the completeness
of relevant documentation and procedures to resolve any documentation
exceptions on a timely basis.\188\
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\188\ 17 CFR 23.600(c)(4)(v).
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The Commission has reviewed the Mexico Application and the relevant
Mexican laws and regulations, and has preliminarily determined that the
Mexican Capital Rules are comparable in purpose and effect to CFTC
Capital Rules with regard to the establishment of a nonbank SD's
minimum capital requirement and the calculation of the nonbank SD's
amount of regulatory capital to meet that requirement. As previously
noted, the Commission's approach for conducting a comparability
determination is a principles-based, holistic approach that focuses on
whether the applicable foreign jurisdiction's capital requirements for
nonbank SDs achieve comparable outcomes to the corresponding CFTC
requirements for nonbank SDs.\189\ The focus of the comparability
determination is on whether the foreign jurisdiction's capital
requirements are comparable to the Commission's in purpose and effect,
and not on whether the foreign jurisdiction's capital requirements are
comparable in every aspect or contain identical elements based on a
line-by-line assessment or comparison of the foreign jurisdiction's
regulatory requirements with the Commission's regulatory
requirements.\190\ Although there are differences between the Mexican
Capital Rules and the CFTC Capital Rules, as discussed above, the
Commission preliminary believes that the differences do not preclude a
finding that the Mexican Capital Rules and CFTC Capital Rules, taken as
a whole, produce comparable regulatory outcomes. In this connection,
the Commission preliminarily finds that, subject to the proposed
condition of a $20 million capital requirement, as discussed above, the
Mexican Capital Rules and CFTC Capital Rules are comparable in purpose
and effect, and are designed to ensure that nonbank SDs maintain
appropriate levels of regulatory capital in order to meet their
obligations as swap market participants and to absorb losses, including
unexpected losses, without the firms becoming insolvent.
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\189\ See 85 FR 57520 and 57521.
\190\ Id.
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The Commission invites comment on the Mexico Application, Mexican
laws and regulations, and the Commission's analysis above regarding its
preliminary determination that, subject to the $20 million minimum
capital requirement, the Mexican Capital Rules and the CFTC Capital
Rules are comparable in purpose and effect and achieve comparable
outcomes with respect to the minimum regulatory capital requirements
and the calculation of regulatory capital for nonbank SDs. The
Commission also specifically seeks public comment on the question of
whether the requirement under the Mexican Capital Rules for a Mexican
nonbank SD to hold qualifying capital in an amount equal to 15 percent
of its average annual net positive income from the last three years,
taking into account insurance coverage for operational risk, and
subject to a floor equal to 5 percent and a ceiling of 15 percent of
the monthly average sum of market risk and credit risk exposures
amounts, calculated over the prior 36 months, on a rolling basis, is
sufficiently comparable in purpose and effect to the CFTC's requirement
for a nonbank SD to hold qualifying capital in amount equal
[[Page 76391]]
to at least 8 percent of the nonbank SD's uncleared swap margin amount.
D. Nonbank Swap Dealer Financial Reporting Requirements
1. CFTC Financial Recordkeeping and Reporting Rules for Nonbank Swap
Dealers
The CFTC Financial Reporting Rules imposes financial recordkeeping
and reporting requirements on nonbank SDs. The CFTC Financial Reporting
Rules require each nonbank SD to prepare and keep current ledgers or
similar records summarizing each transaction affecting the nonbank SD's
asset, liability, income, expense, and capital accounts.\191\ The
nonbank SD's ledgers and similar records must be prepared in accordance
with generally accepted accounting principles as adopted in the United
States (``U.S. GAAP''), except that if the nonbank SD is not otherwise
required to prepare financial statements in accordance with U.S. GAAP,
the nonbank SD may prepare and maintain its accounting records in
accordance with International Financial Reporting Standards (``IFRS'')
issued by the International Accounting Standards Board.\192\
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\191\ 17 CFR 23.105(b).
\192\ Id.
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The CFTC Financial Reporting Rules also require each nonbank SD to
prepare and file with the Commission and with NFA periodic unaudited
and annual audited financial statements.\193\ A nonbank SD that elects
the TNW Approach is required to file unaudited financial statements
within 17 business day of the close of each quarter, and its annual
audited financial statements within 90 days of the end of its fiscal
year-end.\194\ A nonbank SD that elects the NLA Approach or the Bank-
Based Approach is required to file unaudited financial statements
within 17 business days of the end of each month, and to file its
annual audited financial statements within 60 days of the end of its
fiscal year.\195\
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\193\ 17 CFR 23.105(d) and (e).
\194\ 17 CFR 23.105(d)(1) and (e)(1).
\195\ Id.
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The CFTC Financial Reporting Rules provide that a nonbank SD's
unaudited financial statements must include: (i) a statement of
financial condition; (ii) a statement of income/loss; (iii) a statement
of changes in liabilities subordinated to claims of general creditors;
(iv) a statement of changes in ownership equity; (v) a statement
demonstrating compliance with and calculation of the applicable
regulatory requirement; and (vi) such further material information
necessary to make the required statements not misleading.\196\ The
annual audited financial statements must include: (i) a statement of
financial condition; (ii) a statement of income/loss; (iii) a statement
of cash flows; (iv) a statement of changes in liabilities subordinated
to claims of general creditors; (v) a statement of changes in ownership
equity; (vi) a statement demonstrating compliance with and calculation
of the applicable regulatory requirement; (vii) appropriate footnote
disclosures; and (viii) a reconciliation of any material differences
from the unaudited financial report prepared as of the nonbank SD's
year-end date.\197\
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\196\ 17 CFR 23.105(d)(2).
\197\ 17 CFR 23.105(e)(4).
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A nonbank SD that has obtained approval from the Commission or NFA
to use internal capital models also must submit certain model metrics,
such as aggregate VaR and counterparty credit risk information, each
month to the Commission and NFA.\198\ A nonbank SD also is required to
provide the Commission and NFA with a detailed list of financial
positions reported at fair market value as part of its monthly
unaudited financial statements.\199\ Each nonbank SD is also required
to provide information to the Commission and NFA regarding its
counterparty credit concentration for the 15 largest exposures in
derivatives, a summary of its derivatives exposures by internal credit
ratings, and the geographical distribution of derivatives exposures for
the 10 largest countries.\200\
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\198\ 17 CFR 23.105 (k) and (l) and Appendix B to Subpart E of
Part 23.
\199\ 17 CFR 23.105(l) and Appendix B to Subpart E of Part 23.
\200\ 17 CFR 23.105(l) in Schedules 2, 3, and 4, respectively.
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The CFTC Financial Reporting Rules also require a nonbank SD to
attach to each unaudited and audited financial report an oath or
affirmation that to the best knowledge and belief of the individual
making the affirmation the information contained in the financial
report is true and correct.\201\ The individual making the oath or
affirmation must be a duly authorized officer if the nonbank SD is a
corporation, or one of the persons specified in the regulation for
business organizations that are not corporations.\202\
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\201\ 17 CFR 23.105(f).
\202\ Id.
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The CFTC Financial Reporting Rules further require each nonbank SD
to make certain financial information publicly available by posting the
information on its public website.\203\ Specifically, a nonbank SD must
post on its website a statement of financial condition and a statement
detailing the amount of the nonbank SD's regulatory capital and the
minimum regulatory capital requirement based on its audited financial
statements and based on its unaudited financial statements that are as
of a date that is six months after the nonbank SD's audited financial
statements.\204\ Such public disclosure is required to be made within
10 business days of the filing of the audited financial statements with
the Commission, and within 30 calendar days of the filing of the
unaudited financial statements required with the Commission.\205\ A
nonbank SD also must obtain written approval from NFA to change the
date of its fiscal year-end for financial reporting.\206\
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\203\ 17 CFR 23.105(i).
\204\ Id.
\205\ Id.
\206\ 17 CFR 23.105(g).
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The CFTC Financial Reporting Rules also require a nonbank SD to
provide the Commission and NFA with information regarding the
custodianship of margin for uncleared swap transactions (``Margin
Report'').\207\ The Margin Report contains: (i) the name and address of
each custodian holding initial margin or variation margin that is
required for uncleared swaps subject to the CFTC margin rules
(``uncleared margin rules''), on behalf of the nonbank SD or its swap
counterparties; (ii) the amount of initial and variation margin
required by the uncleared margin rules held by each custodian on behalf
of the nonbank SD and on behalf its swap counterparties; and (iii) the
aggregate amount of initial margin that the nonbank SD is required to
collect from, or post with, swap counterparties for uncleared swap
transactions subject to the uncleared margin rules.\208\ The Commission
requires this information in order to monitor the use of custodians by
nonbank SDs and their swap counterparties. Such information assists the
Commission in monitoring the safety and soundness of a nonbank SD by
monitoring whether the firm is current with its swap counterparties
with respect to the posting and collecting of margin required by the
uncleared margin rules. By requiring the nonbank SD to report the
required amount of margin to be posted and collected, and the amount of
margin that is actually posted and collected, the Commission could
identify potential issues with the margin practices and compliance by
nonbank SDs that may hinder the ability of the firm to meet its
[[Page 76392]]
obligations to market participants. The Margin Report also allows the
Commission to identify custodians used by nonbank SDs and their
counterparties, which may permit the Commission to assess potential
market issues, including a concentration of custodial services by a
limited number of banks.
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\207\ 17 CFR 23.105(m).
\208\ Id.
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2. Mexican Nonbank Swap Dealer Financial Reporting Requirements
The Mexican Financial Reporting Rules impose financial
recordkeeping and reporting requirements on Mexican nonbank SDs that
enable the Mexican Commission to assess the financial condition and
safety and soundness of the Mexican nonbank SDs. Consistent with that
purpose, a Mexican nonbank SD must periodically report its financial
position and capital levels to the Mexican Commission and other Mexican
regulatory authorities. The reporting of financial position and capital
level information, along with other reporting requirements, provide the
Mexican Commission with a comprehensive view of the activities and
financial condition of each Mexican nonbank SD.
Specifically, the Mexican Financial Reporting Rules require a
Mexican nonbank SD to submit to the Mexican Commission quarterly
consolidated financial reports and an annual consolidated financial
report.\209\ The quarterly consolidated financial reports must be for
the quarters ending March, June, and September of each year, and must
be filed with the Mexican Commission within the month following the
last day of each quarter.\210\ The annual consolidated financial report
must be filed within 90 calendar days of the Mexican nonbank SD's
fiscal year end, and must contain an audit report issued by an
independent external auditor.\211\ The quarterly and annual financial
reports are required to be denominated in millions of Mexican pesos and
prepared in accordance with the Accounting Criteria for Broker-
Dealers.\212\
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\209\ Article 203 of the General Provisions.
\210\ Id.
\211\ Id.
\212\ See Article 176 and Exhibit 5 of the General Provisions.
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The Mexican nonbank SD's quarterly consolidated financial reports
and annual audited consolidated financial report must contain a balance
sheet, a statement of income/loss, a statement of changes in equity, a
statement of cash flows, and a statement showing the firm's compliance
with minimum capital requirements.\213\ The annual audited consolidated
report also must contain appropriate footnote disclosures relating to,
among other topics, nominal amounts of derivatives contracts by type of
instrument and by underlying valuation results, as well as the results
obtained in the assessment of the adequacy of the firm's regulatory
capital in relation to credit, market and operational risk
requirements.\214\ Each quarterly and annual consolidated financial
report also must be approved by the Mexican nonbank SD's board of
directors and internal audit committee, and signed by at least the
chief executive officer, the chief accountant, and the internal
auditor, or their equivalent.\215\
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\213\ Article 180 of the General Provisions.
\214\ Id.
\215\ Articles 175, 176, and 179 of the General Provisions.
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In addition to the above consolidated financial reports, each
Mexican nonbank SD must provide the Mexican Commission, on a monthly
basis, with a balance sheet and income statement, along with additional
financial information.\216\ Such reports are due within 20 days
following the end of the respective month.\217\ On a quarterly basis,
each Mexican nonbank SD also must provide the Mexican Commission
additional financial information regarding deferred income taxes,
consolidation with respect to balance sheet and income statements,
stockholders equity statements, and cash flow statements.\218\
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\216\ Article 202 of the General Provisions.
\217\ Id.
\218\ Article 202 and Exhibit 9 of the General Provisions.
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A Mexican nonbank SD licensed to enter into derivatives
transactions for its own account is also required to file with the
Mexican Central Bank, during May of each year, a written communication
issued by the Mexican nonbank SD's internal audit committee evidencing
compliance in the performance of its derivatives transactions with each
and all applicable legal provisions and, when required by the Mexican
Central Bank, a Mexican nonbank SD also must provide the Mexican
Central Bank with all the information related to the derivatives
transactions performed by the firm.\219\ Furthermore, a Mexican nonbank
SD licensed to perform derivatives transactions is required to file a
report with the Mexican Central Bank on a daily basis containing all
the derivatives transactions performed by the Mexican nonbank SD.\220\
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\219\ Provision 3.1.3 of the Rule 4/2012 issued by the Mexican
Central Bank.
\220\ Mexico Application, p. 19.
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A Mexican nonbank SD is also required to make certain financial
condition information publicly available by posting the information on
a publicly accessible website. Specifically, a Mexican nonbank SD is
required to provide its quarterly financial statements to the general
public along with information related to the firm's regulatory capital
structure, including the main components of the firm's regulatory
capital structure, the capital adequacy level, and the amount of the
assets subject to risk.\221\ A Mexican nonbank SD must also disclose
its risk level,\222\ according to the credit rating issued by two
credit rating agencies authorized by the Mexican Commission, including
for such purposes both ratings, in their notes to their financial
statements.\223\
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\221\ Article 180 of the General Provisions.
\222\ Pursuant to Article 144 of the General Provisions, broker-
dealers shall make available to investors, through notes in their
annual financial statements and on their websites, the information
related to the policies, methodologies, levels of risk assumed and
other relevant measures adopted for the management of each type of
risk, including qualitative and quantitative information in
connection with such risks.
\223\ Article 169 Bis of the General Provisions.
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3. Commission Analysis
The Commission has reviewed the Mexico Application and the relevant
Mexican laws and regulations, and has preliminarily determined that the
financial reporting requirements of the Mexican Financial Reporting
Rules, subject to the conditions specified below, are comparable to the
CFTC Financial Reporting Rules in purpose and effect as they are
intended to provide the Mexican Commission and Mexican Central Bank, as
applicable, and the Commission, respectively, with financial
information to monitor and assess the financial condition of nonbank
SDs and their ongoing ability to absorb decreases in the value of firm
assets and increases in the value of firm liabilities, and to cover
losses from business activities, including swap dealing activities,
without the firm becoming insolvent.
The Mexican Financial Reporting Rules require each Mexican nonbank
SD to prepare and submit to the Mexican Commission on a quarterly basis
an unaudited financial report, and on an annual basis an audited
financial report, that includes: (i) a statement of financial
condition; (ii) a statement of profit and loss; (iii) a statement of
changes in equity; (iv) a statement of cash flows; and (v) a statement
showing the firm's compliance with minimum capital requirements. In
addition, a Mexican nonbank SD is required to file a
[[Page 76393]]
statement of financial condition and a statement of profit/loss as of
the end of each month with the Mexican Commission. The Commission
preliminarily finds that these financial reporting requirements are
comparable with respect to overall form and content to the CFTC
Financial Reporting Rules, which require each nonbank SD to file
monthly unaudited financial reports with the Commission and NFA that
contain: (i) a statement of financial condition; (ii) statement of
profit/loss; (iii) a statement of changes in liabilities subordinated
to the claims of general creditors; (iv) a statement of changes in
ownership equity; and (v) a statement demonstrating compliance with the
capital requirements. Accordingly, the Commission has preliminarily
determined that a Mexican nonbank SD may comply with the financial
reporting requirements contained in Regulations 23.105 by complying
with the corresponding Mexican Financial Reporting Rules, subject to
the conditions set forth below.\224\
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\224\ A Mexican nonbank SD that qualifies and elects to seek
substituted compliance with Mexican Capital Rules must also seek
substituted compliance with the Mexican Financial Reporting Rules.
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The Commission is proposing to condition the Capital Comparability
Determination Order on a Mexican nonbank SD providing the Commission
and NFA with copies of the monthly financial information, including a
copy of its balance sheet and income statement, that is filed with the
Mexican Commission pursuant to Article 202 and Exhibit 9 of the General
Provisions. It is further proposed that a Mexican nonbank SD must
provide the Commission and NFA with copies of its quarterly
consolidated financial reports and annual audited financial reports
that are filed with the Mexican Commission pursuant to Article 203 of
the General Provisions. In addition, the Commission is proposing that
the Mexican nonbank SD also provide as part of its monthly filing a
statement of regulatory capital. The Commission is also proposing to
condition the Capital Comparability Determination Order on the Mexican
nonbank SD translating the annual audited and unaudited monthly and
quarterly financial reports into the English language with balances
contained in the unaudited financial reports converted to U.S. dollars.
The annual audited financial report may be presented in U.S. dollars or
Mexican pesos. The monthly financial information and the unaudited and
audited financial reports must be filed with the Commission and NFA
within 15 business days of the earlier of the date the respective
reports are filed with the Mexican Commission or the date that the
respective reports are required to be filed with the Mexican
Commission.
The Commission is proposing to impose these conditions as financial
reporting is a critical and central component of the Commission's
ongoing obligation to monitor and assess the safety and soundness of
nonbank SDs as required under Section 4s(e) of the CEA. For nonbank SDs
registered with the Commission, it is necessary for the Commission to
effectively monitor the ongoing financial condition of all nonbank SDs,
including Mexican nonbank SDs, to help ensure their safety and
soundness and their ability to meet their financial obligations to
customers, counterparties, and creditors.
The Commission preliminarily believes that its approach of
requiring Mexican nonbank SDs to provide the Commission and NFA with
copies of the monthly financial information, and the quarterly and
annual financial reports, that the firms currently file with the
Mexican Commission strikes an appropriate balance of ensuring that the
Commission receives the financial reporting necessary for the effective
monitoring of the financial condition of the nonbank SDs, while also
recognizing the existing regulatory structure of the Mexican Commission
including its financial reporting requirements. Under the proposed
conditions, the Mexican nonbank SD would not be required to prepare
separate financial statements or reports for filing with the
Commission, but would be required to translate its current financial
statements and reports into the English language with balances
converted to U.S. dollars so that Commission staff may properly
understand and efficiently analyze the financial information. The
proposed conditions also provide the Mexican nonbank SDs with 15 days
from the date the reports are provided to the Mexican Commission to
translate the documents into English and to convert balances to U.S.
dollars.
The Commission is also proposing to condition the Capital
Comparability Determination Order on a Mexican nonbank SD filing with
the Commission and NFA, on a monthly basis, the aggregate securities,
commodities, and swap positions information set forth in Schedule 1 of
Appendix B to Subpart E of Part 23.\225\ The Commission is proposing to
require that Schedule 1 be filed with the Commission and NFA as part of
the Mexican nonbank SD's monthly financial information that it prepares
pursuant to Article 202 and Exhibit 9 of the General Provisions.
Schedule 1 provides the Commission and NFA with detailed information
regarding the financial positions that a nonbank SD holds as of the end
of the month, which will allow for closer supervision and monitoring of
the types of investment and other activities that the firm engages in,
which will enhance the Commission's and NFA's ability to monitor the
safety and soundness of the firm.
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\225\ Schedule 1 of Appendix B to Subpart E of Part 23 includes
a nonbank SD's holding of U.S. Treasury securities, U.S. government
agency debt securities, foreign debt and equity securities, money
market instruments, corporate obligations, spot commodities, cleared
and uncleared swaps, cleared and non-cleared security-based swaps,
and cleared and uncleared mixed swaps in addition to other position
information.
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The Commission is further proposing to condition the Capital
Comparability Determination Order on a Mexican nonbank SD submitting
with each monthly and quarterly financial report and each annual
audited financial report, as well as the applicable Schedule 1, a
statement by an authorized representative or representatives of the
Mexican nonbank SD that to the best knowledge and belief of the
representative or representatives the information contained in the
respective report is true and correct, including the translation of the
report into the English language and conversion of balances in the
reports to U.S. dollars. The statement by the authorized representative
or representatives of the Mexican nonbank SD would be in lieu of the
oath or affirmation required of nonbank SDs under Regulation
23.105(f),\226\ and is intended to ensure that reports filed with the
Commission and NFA are prepared and submitted by firm personnel with
knowledge of the financial reporting of the firm who can attest to the
accuracy of the reporting and translation.
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\226\ 17 CFR 23.105(f).
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The Commission is further proposing to condition the Capital
Comparability Determination Order on a Mexican nonbank SD filing the
Margin Report specified in Regulation 23.105(m) with the Commission and
NFA. The Margin Report is required to contain: (i) the name and address
of each custodian holding initial margin or variation margin on behalf
of the nonbank SD or its swap counterparties; (ii) the amount of
initial and variation margin held by each custodian on behalf of the
nonbank SD and on behalf its swap counterparties; and (iii) the
aggregate
[[Page 76394]]
amount of initial margin that the nonbank SD is required to collect
from, or post with, swap counterparties for uncleared swap
transactions.\227\
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\227\ 17 CFR 23.105(m).
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The Commission preliminarily believes that receiving this margin
information from Mexican nonbank SDs will assist in the Commission's
assessment of the safety and soundness of the Mexican nonbank SDs.
Specifically, the Margin Report would provide the Commission with
information regarding a Mexican nonbank SD's swap book, the extent to
which it has uncollateralized exposures to counterparties or has not
met its financial obligations to counterparties. This information,
along with the list of custodians holding both the firm's and
counterparties' swaps collateral, is expected to assist the Commission
in assessing and monitoring potential financial impacts to the nonbank
SD resulting from defaults on its swap transactions. The Commission is
proposing to require that the Margin Report be filed with the
Commission as part of the Mexican nonbank SD's monthly financial
information that it prepares pursuant to Article 202 and Exhibit 9 of
the General Provisions. Therefore, it is being proposed that each
Mexican nonbank SD must file a monthly Margin Report within 15 business
days of the earlier of the date the monthly financial reports are filed
with the Mexican Commission or the date that the respective reports are
required to be filed with the Mexican Commission. The Commission is
also proposing that the Margin Report must be prepared in the English
language with balances reported in U.S. dollars.
The Commission is not proposing to require a Mexican nonbank SD to
file the monthly model metric information contained in Regulation
23.105(k) with the Commission or NFA.\228\ Regulation 23.105(k)
requires a nonbank SD that has obtained approval from the Commission or
NFA to use internal capital models to submit to the Commission and NFA
each month information regarding its risk exposures, including VaR and
credit risk exposure information when applicable. This information is
not applicable as the Mexican Commission, as previously noted, has not
approved the Mexican nonbank SDs to use internal models to compute
market risk or credit risk.
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\228\ 17 CFR 23.105(k).
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The Commission is also not proposing to require a Mexican nonbank
SD to file the monthly counterparty credit exposure information
specified in Regulation 23.105(l) and Schedules 2, 3, and 4 of Appendix
B to Subpart E of part 23 with the Commission or NFA. Regulation
23.105(l) requires each nonbank SD to provide information to the
Commission and NFA regarding its counterparty credit concentration for
the 15 largest exposures in derivatives, a summary of its derivatives
exposures by internal credit ratings, and the geographic distribution
of derivatives exposures for the 10 largest countries in Schedules 2,
3, and 4, respectively. The Commission preliminarily believes that,
under a substituted compliance regime, the Mexican Commission is best
positioned to monitor a Mexican nonbank SD's credit exposures, which
may be comprised of credit exposures to primarily other Mexican
counterparties, as part of the Mexican Commission's overall monitoring
of the financial condition of the firm.
Furthermore, the Commission, in making the preliminary
determination to not require a Mexican nonbank SD to file the
counterparty exposures required by Regulation 23.105(l), recognizes
that NFA's current risk monitoring program requires each bank SD and
each nonbank SD, including each Mexican nonbank SD, to file risk
metrics addressing market risk and credit risk with NFA on a monthly
basis. NFA's risk metric information includes a list of the 15 largest
swaps counterparty exposures providing for each counterparty: (i)
current exposure by counterparty before collateral; and (ii) current
exposure by counterparty net of collateral. The NFA risk metric
information also includes a SD's total current exposure before
collateral for the firm across all counterparties, as well as, total
current exposure net of collateral.\229\ Although there are differences
in the information required under Regulation 23.105(l), the NFA risk
metrics provide a level of information that allows NFA to identify SDs
that may pose heightened risk and to allocate appropriate NFA
regulatory oversight resources to such firms. The Commission
preliminarily believes that the proposed financial statement reporting
set forth in the proposed Capital Comparability Determination Order,
and the risk metric and counterparty exposure information currently
reported by bank SDs and nonbank SDs (including Mexican nonbank SDs)
under NFA rules, provide the appropriate balance of recognizing the
comparability of the Mexican Financial Reporting Rules to the CFTC
Financial Reporting Rules while also ensuring that the Commission and
NFA receive sufficient data to monitor and assess the overall financial
condition of nonbank Mexican SDs.
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\229\ See NFA Financial Requirements, Section 17--Swap Dealer
and Major Swap Participant Reporting Requirements, and Notice to
Members--Monthly Risk Data Reporting for Swap Dealers (May 30,
2017).
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The Commission notes that the proposed financial reporting
conditions in the Mexican Capital Comparability Determination Order are
consistent with the proposed conditions set forth in the Commission's
proposed Japan Capital Comparability Determination Order,\230\ and
reflects the Commission's approach in that proposal of permitting non-
U.S. nonbank SDs to meet their financial statement reporting
obligations to the Commission by filing copies of existing financial
reports currently prepared for home country regulators provided such
reports are translated into English and, in certain circumstances,
balances expressed in U.S. dollars. The Commission's proposed
conditions also include certain financial information and notices that
the Commission believes are necessary for effective monitoring of
Mexican nonbank SDs that are not currently part of the Mexican
Commission's supervision regime.
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\230\ See Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination from the
Financial Services Agency of Japan, 87 FR 48092 (Aug. 8, 2022).
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The Commission invites public comment on its analysis above,
including comment on the Mexico Application and relevant Mexican
Financial Reporting Rules. The Commission also invites comment on the
proposed conditions listed above and on the Commission's proposal not
to require Mexican nonbank SDs to submit to the Commission and NFA the
information set forth in Regulation 23.105(l) outlined above. Are there
specific elements of the data required under Regulations 23.105(l) that
the Commission should require of Mexican nonbank SDs for purposes of
monitoring the financial condition of the firm?
The Commission requests comment on the proposed filing dates for
the reports and information specified above. Specifically, do the
proposed filing dates provide sufficient time for Mexican nonbank SDs
to prepare the reports, translate the reports into English, and, where
required, convert balances into U.S. dollars? If not, what period of
time should the Commission consider imposing on one or more of the
reports?
The Commission also requests specific comment regarding the setting
of compliance dates for the reporting conditions that the proposed
Capital
[[Page 76395]]
Comparability Determination Order would impose on Mexican nonbank SDs.
In this connection, if the Commission were to require Mexican nonbank
SDs to file the Margin Report discussed above and included in the
proposed Order below, how much time would Mexican nonbank SDs need to
develop new systems or processes to capture information that is
required? Would Mexican nonbank SDs need a period of time to develop
any systems or processes to meet any other reporting conditions in the
proposed Capital Comparability Determination Order? If so, what would
be an appropriate amount of time for a Mexican nonbank SD to develop
and implement such systems or processes?
E. Notice Requirements
1. CFTC Nonbank SD Notice Reporting Requirements
The CFTC Financial Reporting Rules require nonbank SDs to provide
the Commission and NFA with written notice of certain defined
events.\231\ The notice provisions are intended to provide the
Commission and NFA with an opportunity to assess whether the
information contained in the written notices indicates the existence of
actual or potential financial and/or operational issues at a nonbank
SD, and, when necessary, allow the Commission and NFA to engage the
nonbank SD in an effort to minimize potential adverse impacts on swap
counterparties and the larger swaps market. The notice provisions are
part of the Commission's overall program for helping to ensure the
safety and soundness of nonbank SDs and the swaps markets in general.
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\231\ 17 CFR 23.105(c).
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The CFTC Financial Reporting Rules require a nonbank SD to provide
written notice within specified timeframes if the firm is: (i)
undercapitalized; (ii) fails to maintain capital at a level that is in
excess of 120 percent of its minimum capital requirement; or (iii)
fails to maintain current books and records.\232\ A nonbank SD is also
required to provide written notice if the firm experiences a 30 percent
or more decrease in excess regulatory capital from its most recent
financial report filed with the Commission.\233\ A nonbank SD also is
required to provide notice if the firm fails to post or collect initial
margin for uncleared swap and non-cleared security-based swap
transactions or exchange variation margin for uncleared swap or non-
cleared security-based swap transactions as required by the
Commission's uncleared swaps margin rules or the SEC's non-cleared
security-based swaps margin rules, respectively, if the aggregate is
equal to or greater than: (i) 25 percent of the nonbank SD's required
capital under Regulation 23.101 calculated for a single counterparty or
group of counterparties that are under common ownership or control; or
(ii) 50 percent of the nonbank SD's required capital under Regulation
23.101 calculated for all of the firm's counterparties.\234\
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\232\ 17 CFR 23.105(c)(1), (2), and (3).
\233\ 17 CFR 23.105(c)(4).
\234\ 17 CFR 23.105(c)(7).
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The CFTC Financial Reporting Rules further require a nonbank SD to
provide advance notice of an intention to withdraw capital by an equity
holder that would exceed 30 percent of the firm's excess regulatory
capital.\235\ Finally, a nonbank SD that is dually-registered with the
SEC as an SBSD or major security based swap participant (``MSBSP'')
must file a copy of any notice with the Commission and NFA that the
SBSD or MSBSP is required to file with the SEC under SEC Rule 18a-8 (17
CFR 240.18a-8).\236\ SEC Rule 18a-8 requires SBSDs and MSBSPs to
provide written notice to the SEC for comparable reporting events as
the CFTC Capital Rule in Regulation 23.105(c), including if a SBSD or
MSBSP is undercapitalized or fails to maintain current books and
records.
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\235\ 17 CFR 23.105(c)(5).
\236\ 17 CFR 23.105(c)(6).
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2. Mexican Nonbank Swap Dealer Notices
The Mexican Financial Reporting Rules do not include explicit
notice provisions that require a Mexican nonbank SD to report certain
predefined events to the relevant Mexican regulatory authorities.
Specifically, the Mexican Capital Rules do not include provisions
requiring a Mexican nonbank SD to notify the Mexican Commission or
other relevant regulatory authority if the firm fails to maintain
current books and records, fails to meet minimum capital requirements,
or experiences a decrease in excess capital from a previous amount
reported by the Mexican nonbank SD.
3. Commission Analysis
The Commission has reviewed the Mexico Application and Mexican laws
and regulations, and has preliminarily determined that the Mexican
Financial Reporting Rules related to notice provisions are not
comparable to the notice requirements set forth in in Regulation
23.105(c) of the CFTC Financial Reporting Rules. Therefore, the
Commission is proposing to condition the Capital Comparability
Determination Order to require Mexican nonbank SDs to file certain
notices contained in Regulation 23.105(c) with the Commission as
discussed below.
The notice provisions contained in Regulation 23.105(c) are
intended to provide the Commission and NFA with information in a prompt
manner regarding actual or potential financial or operational issues
that may adversely impact the safety and soundness of a nonbank SD by
impairing the nonbank SD's ability to meet its obligations to
counterparties, other creditors, and the general swaps market. Upon the
receipt of a notice from a nonbank SD under Regulation 23.105(c), the
Commission and NFA will initiate reviews of the facts and circumstances
that caused the notice to be filed including, as appropriate, engaging
in conversations with personnel of the nonbank SD. The review of the
facts and the interaction with the nonbank SD provide the Commission
and NFA with information to initiate an assessment of whether it is
necessary for the nonbank SD to take remedial action to address
potential financial or operational issues, and whether the remedial
actions instituted by the nonbank SD properly address the issues that
are the root cause of the operational or financial issues. Such actions
may include the infusion of additional capital into the firm and the
development and implementation of additional internal controls to
address operational issues. The notice filings further allow the
Commission and NFA to monitor the firm's performance after the
implementation of remedial actions to assess the effectiveness of such
actions.
As noted above, the Mexican Financial Reporting Rules do not
include explicit, predefined notice provisions that require a Mexican
nonbank SD to file prompt notice with the Mexican Commission or other
relevant Mexican regulatory authority in a manner that is comparable to
the notice provisions set forth in Regulation 23.105(c). Therefore, the
Commission is proposing to condition the Capital Comparability
Determination Order to require Mexican nonbank SDs to file certain
defined notices with the Commission and NFA. Specifically, pursuant to
the proposed conditions, a Mexican nonbank SD would be required to file
a notice with the Commission and NFA, within the timeframe set forth in
the proposed conditions, if the firm: (i) failed to keep current books
and records; (ii) maintained regulatory capital at a level that is
below the minimum capital requirement set by the
[[Page 76396]]
Mexican Capital Rules; (iii) maintained regulatory capital at a level
that is below 120 percent of the minimum capital requirement set by the
Mexican Capital Rules; (iv) experienced a 30 percent or more reduction
in the firm's excess regulatory capital from the amount previously
reported in its financial forms filed with the Mexican Commission
pursuant to Article 202 and Exhibit 9 of the General Provisions; and
(v) failed to exchange initial margin or variation margin required
under Mexican law and/or regulations or CFTC margin rules to be
exchanged for uncleared swaps and non-cleared security-based swaps in
amounts that exceed defined thresholds.\237\
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\237\ The Commission understands that the Mexican Commission
intends to issue final rules addressing the margin requirements for
uncleared swaps by September 2022. The Mexican nonbank SDs, however,
are currently subject to the CFTC margin requirements for uncleared
swap transactions as set forth in Regulation 23.160 for cross-border
transactions.
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The Commission is proposing these conditions so that it will be
alerted to the occurrence of any of the defined events in a prompt
manner, which will allow the Commission to communicate with the
impacted Mexican nonbank SD and NFA to assess the seriousness of the
matter and the effectiveness of any actions that the Mexican nonbank SD
may have taken to remediate the matter. As noted above, the notices are
intended to provide the Commission with ``early warning'' of potential
adverse financial and operational issues at a nonbank SD. The receipt
of ``early warning'' notices are an important component of the
Commission's and NFA's programs for effectively overseeing the safety
and soundness of nonbank SDs.
The Commission invites public comment on its analysis above,
including comment on the Mexico Application and the relevant Mexican
Financial Reporting Rules. The Commission also invites comment on the
proposed conditions to the Capital Comparability Determination Order
that are listed above and set forth in the proposed Order below.
The Commission requests comment on the timeframes set forth in the
proposed conditions for Mexican nonbank SDs to file notices with the
Commission and NFA. In this regard, the proposed conditions would
require Mexican nonbank SDs to file certain written notices with the
Commission within 24 hours of the occurrence of a reportable event or
of being alerted to a reportable event by the Mexican Commission. These
notices would have to be translated into English prior to being filed
with the Commission and NFA. The Commission request comment on the
issues Mexican nonbank SDs may face meeting the filing requirements
given translation and other issues.
The Commission requests specific comment regarding the setting of
compliance dates for the notice reporting conditions that the proposed
Capital Comparability Determination Order would impose on Mexican
nonbank SDs.
F. Supervision and Enforcement
1. Commission and NFA Supervision and Enforcement of Nonbank SDs
The Commission and NFA conduct ongoing supervision of nonbank SDs
to assess their compliance with the CEA, Commission regulations, and
NFA rules by reviewing financial reports, notices, risk exposure
reports, and other filings that nonbank SDs are required to file with
the Commission and NFA. The Commission and NFA also conduct periodic
examinations as part of their supervision of nonbank SDs, including
routine on-site examinations of nonbank SDs' books, records, and
operations to ensure compliance with CFTC and NFA requirements.\238\
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\238\ Section 17(p)(2) of the CEA (7 U.S.C. 21(p)(2)) requires
NFA as a registered futures association to establish minimum capital
and financial requirements for non-bank SDs and to implement a
program to audit and enforce compliance with such requirements.
Section 17(p)(2) further provides that NFA's capital and financial
requirements may not be less stringent than the capital and
financial requirements imposed by the Commission.
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As noted in section D.1 above, financial reports filed by a nonbank
SD provide the Commission and NFA with information necessary to ensure
the firm's compliance with minimum capital requirements and to assess
the firm's overall safety and soundness and its ability to meet its
financial obligations to customers, counterparties, and creditors. A
nonbank SD is also required to provide written notice to the Commission
and NFA if certain defined events occur, including that the firm is
undercapitalized or maintains a level of capital that is less than 120
percent of the firm's minimum capital requirements.\239\ The notice
provisions, as stated in section E.1 above, are intended to provide the
Commission and NFA with information of potential issues at a nonbank SD
that may impact the firm's ability to maintain compliance with the CEA
and Commission regulations. The Commission and NFA also have the
authority to require a nonbank SD to provide any additional financial
and/or operational information on a daily basis or at such other times
as the Commission or NFA may specify to monitor the safety and
soundness of the firm.\240\
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\239\ See 17 CFR 23.105(c).
\240\ See 17 CFR 23.105(h).
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The Commission also has authority to take disciplinary actions
against a nonbank SD for failing to comply with the CEA and Commission
regulations. Section 4b-1(a) of the CEA \241\ provides the Commission
with exclusive authority to enforce the capital requirements imposed on
nonbank SDs adopted under Section 4s(e) of the CEA.\242\
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\241\ 7 U.S.C. 6b-1(a).
\242\ 7 U.S.C. 6s(e).
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2. Mexican Commission's Supervision and Enforcement of Mexican Nonbank
SDs
The Mexican Commission has supervisory, inspection, and
surveillance powers,\243\ which include the authority to require a
Mexican nonbank SD to provide the Mexican Commission with all necessary
information and documentation to verify the Mexican nonbank SD's
compliance with Mexican Law and General Provisions. The Mexican
Commission also has the authority to require a Mexican nonbank SD to
adopt any necessary measures to correct irregular activities, and the
Mexican Commission has the authority to conduct all necessary on-site
inspections of a Mexican nonbank SD.\244\
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\243\ Article 350 of the Law, Articles 5 and 19 of the Mexican
Commission Law and the Supervision Regulations of the Mexican
Commission.
\244\ Pursuant to Article 358 of the Law, the Mexican Commission
is entitled to provide foreign financial authorities with all kinds
of information that it deems appropriate within the scope of its
competence, such as documents, records, declarations and other
evidence that the Mexican Commission has in its possession by virtue
of having obtained the information it in the exercise of its powers
and duties; provided that the Mexican Commission must have executed
an agreement with the relevant foreign financial authorities for the
exchange of information, in consideration of the principle of
reciprocity.
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As noted in section D.2 above, Mexican broker-dealers, including
Mexican nonbank SDs, are required to submit financial reports to the
Mexican Commission detailing their financial condition and operations.
Specifically, Mexican nonbank SDs are required to submit to the Mexican
Commission monthly balance sheet and income statements,\245\ as well as
quarterly and annual financial reports.\246\ In addition, Mexican
nonbank SDs must conduct
[[Page 76397]]
annual stress tests and provide the Mexican Commission with a report
containing the results of the stress test assessments.\247\ The stress
test assessments are designed to determine, among other things, whether
a Mexican nonbank SD's capital would be sufficient to cover losses
under the supervisory scenarios identified by the Mexican Commission
and whether the firm would comply with the minimum capital
requirements.\248\ The financial reports and stress test filed by each
Mexican nonbank SD provides the Mexican Commission with information
necessary to monitor the firm's compliance with the Mexican Capital
Rules and to assess the firm's overall safety and soundness and its
ability to meet financial obligations to customers, counterparties, and
creditors.
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\245\ Article 202 and Exhibit 9 of the General Provisions.
\246\ Article 203 of the General Provisions.
\247\ Article 214 of the General Provisions.
\248\ See id. A Mexican nonbank SD also must file a preventive
action plan if the stress tests indicate that the firm's capital
ratios are not sufficient. See, Article 217 of the General
Provisions.
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The Mexican Commission also uses financial reporting from Mexican
nonbank SDs as a component of its risk-bases methodology in setting the
frequency and scope of its examinations of Mexican nonbank SDs. The
Mexican Commission generally engages in examinations of broker-dealers,
including Mexican nonbank SDs, as part of its general supervision and
oversight program to assess firms' compliance with relevant laws and
regulations.\249\ The Mexican Commission uses defined risk metrics in
its risk-based methodology to assist with the selection of firms to be
examined each year. The Mexican Commission generally conducts an
examination, including on-site visits, of each firm at least once every
two years. The Mexican Commission will also conduct an examination of a
firm, including an on-site visit, to the extent that its daily, routine
surveillance indicates a need for an immediate review. The Mexican
Commission also uses information obtained from the Mexican Central Bank
regarding broker-dealers, including Mexican nonbank SDs, in its
supervision process.
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\249\ Staff of the Mexican Commission provided an overview of
its broker-dealer surveillance program to Commission staff on August
10, 2022.
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The Mexican Commission also may impose fines against Mexican
nonbank SDs for failing to comply with relevant Mexican laws and
regulations. Fines may range from approximately $130,000 to $432,000
for failing to maintain sufficient regulatory capital in relation to
the risks in the Mexican nonbank SD's operations.\250\ The Mexican
Commission may also impose fines ranging from approximately $43,000 to
$432,000 if a Mexican nonbank SD fails to comply with applicable
information or documentation requirements made by the Mexican
Commission, or if the Mexican nonbank SD fails to provide the Mexican
Commission with required periodic informational filings.\251\
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\250\ Article 392 paragraph III, subparagraph (v) of the Law.
\251\ Article 392 paragraph I, subparagraph (a) of the Law.
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In addition to imposing fines, the Mexican Commission also may
order a Mexican nonbank SD that fails to comply with the applicable
regulatory capital ratios, including the 2.5 percent common equity tier
1 capital buffer, to take corrective measures including the following:
\252\ (i) a prohibition on entering into transactions whose execution
would cause a total capital ratio to be less than 8 percent of the
risk-weighted assets; (ii) a requirement that the Mexican nonbank SD
submit for the approval of the Mexican Commission a recovery capital
plan, previously approved by the board of directors, which must contain
at least: the sources of the resources to increase the capital and/or
reduce the assets subject to risk, the period in which the Mexican
nonbank SD will reach the level of the regulatory capital required, a
calendar with the objectives that would be achieved in each period, and
a detailed list of the information that the Mexican nonbank SD must
provide periodically to the Mexican Commission to enable the Mexican
Commission to monitor compliance of the Mexican nonbank SD's plan;
(iii) a suspension of the payment of dividends, as well as any
mechanism or acts involving a transfer of patrimonial benefits; (iv) a
suspension of the programs of acquisition of shares of the capital
stock of the Mexican nonbank SD; (v) a suspension of payments of
compensation, extraordinary bonuses, or other remuneration in addition
to the salary of the chief executive officer (``CEO'') and officials of
the two hierarchical levels below the CEO, as well as a requirement to
refrain from granting new compensation in the future for the CEO and
officials; (vi) an engagement with external auditors or other
specialized third parties to carry out special audits on specific
issues; and (vii) a limitation on the execution of new transactions
that may cause an increase in risk-weighted assets and/or cause greater
impairment in the Mexican nonbank SD's regulatory capital ratios.
Finally, the Mexican Commission may revoke a Mexican nonbank SD's
license to operate as a broker-dealer if the firm fails to comply with
the above corrective measures or if the firm reports losses that reduce
its capital to a level below the minimum required.\253\
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\252\ Articles 204 Bis 7 to 204 Bis 21 of the General
Provisions.
\253\ Article 153 of the Law.
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3. Commission Analysis
Based on the above, the Commission preliminarily finds that the
Mexican Commission has the necessary powers to supervise, investigate,
and discipline entities for compliance with its capital, financial and
reporting requirements, and to detect and deter violations of, and
ensure compliance with, the applicable capital and financial reporting
requirements in Mexico.\254\
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\254\ Both the Commission and the Mexican Commission are
signatories to the IOSCO Multilateral Memorandum of Understanding
Concerning Consultation and Cooperation and the Exchange of
Information (revised May 2012), which covers primarily information
sharing in the context of enforcement matters.
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The Commission also has a history of regulatory cooperation with
the Mexican Commission and would expect to communicate and consult with
the Mexican Commission regarding the supervision of the financial and
operational condition of the Mexican nonbank SDs. An appropriate MOU or
similar arrangement with the Mexican Commission would facilitate
cooperation and information sharing in the context of supervising the
Mexican nonbank SDs.\255\ Such an arrangement would enhance
communication with respect to entities within the arrangement's scope
(``Covered Firms''), as appropriate, regarding: (i) general supervisory
issues, including regulatory, oversight, or other related developments;
(ii) issues relevant to the operations, activities, and regulation of
Covered Firms; and (iii) any other areas of mutual supervisory
interest, and would anticipate periodic meetings to discuss relevant
functions and regulatory oversight programs. The arrangement also would
provide for the Commission and Mexican Commission to inform each other
of certain events, including any material events that could adversely
impact the financial or operational stability of a Covered Firm,
[[Page 76398]]
and would provide a procedure for any on-site examinations of Covered
Firms.
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\255\ The Commission entered into a Memorandum of Understanding
Concerning Cooperation and the Exchange of Information Related to
the Supervision of Cross-Border Central Counterparties and Trade
Repositories (Aug. 31, 2016) with the Mexican Commission and the
Banco de M[eacute]xico, which does not include entities such as SDs
within its scope. See the Commission's website at https://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.
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The Commission invites comment on the Mexico Application, Mexican
laws and regulations, and the Commission's analysis above regarding its
preliminary determination that Mexican Commission and CFTC have
supervision programs and enforcement authority that are comparable in
that the purpose of the relevant programs and authority is to ensure
that nonbank SDs maintain compliance with applicable capital and
financial reporting requirements.
IV. Proposed Capital Comparability Determination Order
A. Commission's Proposed Comparability Determination
The Commission's preliminary view, based on the Mexico Application
and the Commission's review of applicable Mexican laws and regulations,
is that the Mexican Capital Rules and the Mexican Financial Reporting
Rules, subject to the conditions set forth in the proposed Capital
Comparability Determination Order below, achieve comparable outcomes
and are comparable in purpose and effect to the CFTC Capital Rules and
CFTC Financial Reporting Rules. In reaching this preliminary
conclusion, the Commission recognizes that there are certain
differences between the Mexican Capital Rules and CFTC Capital Rules
and certain differences between the Mexican Financial Reporting Rules
and the CFTC Financial Reporting Rules. The proposed Capital
Comparability Determination Order is subject to proposed conditions
that are preliminarily deemed necessary to promote consistency in
regulatory outcomes, or to reflect the scope of substituted compliance
that would be available notwithstanding certain differences. In the
Commission's preliminary view, the differences between the two rule
sets would not be inconsistent with providing a substituted compliance
framework for Mexican nonbank SDs subject to the conditions specified
in the proposed Order below.
Furthermore, the proposed Capital Comparability Determination Order
is limited to the comparison of the Mexican Capital Rules to the Bank-
Based Approach under the CFTC Capital Rules. As noted previously, the
Applicants have not requested, and the Commission has not performed, a
comparison of the Mexican Capital Rules to the Commission's NLA
Approach or TNW Approach.
B. Proposed Capital Comparability Determination Order
The Commission invites comments on all aspects of the Mexico
Application, relevant Mexican laws and regulations, the Commission's
preliminary views expressed above, the question of whether requirements
under the Mexican Capital Rules are comparable in purpose and effect to
the Commission's requirement for a nonbank SD to hold regulatory
capital equal to or greater than 8 percent of its uncleared swap margin
amount, and the Commission's proposed Capital Comparability
Determination Order, including the proposed conditions included in the
proposed Order, set forth below.
C. Proposed Order Providing Conditional Capital Comparability
Determination for Mexican Nonbank Swap Dealers
It is hereby determined and ordered, pursuant to Commodity Futures
Trading Commission (``CFTC'' or ``Commission'') Regulation 23.106 (17
CFR 23.106) under the Commodity Exchange Act (``CEA'') (7 U.S.C. 1 et
seq.) that a swap dealer (``SD'') organized and domiciled in Mexico and
subject to the Commission's capital and financial reporting
requirements under Sections 4s(e) and (f) of the CEA (7 U.S.C. 6s(e)
and (f)) may satisfy the capital requirements under Section 4s(e) of
the CEA and Commission Regulation 23.101(a)(1)(i) (17 CFR
23.101(a)(1)(i)) (``CFTC Capital Rules''), and the financial reporting
rules under Section 4s(f) of the CEA and Commission Regulation 23.105
(17 CFR 23.105) (``CFTC Financial Reporting Rules''), by complying with
certain specified Mexican laws and regulations cited below and
otherwise complying with the following conditions, as amended or
superseded from time to time:
(1) The SD is not subject to regulation by a prudential regulator
defined in Section 1a(39) of the CEA (7 U.S.C. 1a(39));
(2) The SD is organized under the laws of Mexico and is domiciled
in Mexico (a ``Mexican nonbank SD'');
(3) The Mexican nonbank SD is a licensed casa de bolsa (broker-
dealer) with the Mexican Comision Nacional Bancaria y de Valores
(Mexican Banking and Securities Commission) (the ``Mexican
Commission'');
(4) The Mexican nonbank SD is subject to and complies with:
Articles 2, 113, 153, 172, 173, 228, 350, 358, and 392 of the Ley del
Mercado de Valores (Securities Market Law) (referred to as ``the
Law''); Articles 5 and 19 of the Mexican Commission Law, the
Supervision Regulations of the Mexican Commission; Articles 10, 137,
144, 146, 150 through 158 Bis, 159, 160, 161, 161 Bis through 161 Bis
5, 162, 162 Bis, 162 Bis 1, 163, 163 Bis, 169, 169 Bis, 175, 176, 179,
180, 201, 202, 203, 204 Bis 1, 204 Bis 2, 204 Bis 3, 204 Bis 7 through
Bis 21, 214, 216, 217, Exhibits 5 and 9 of the Disposiciones de
Caracter General Aplicables a las Casa De Bolsa (``General Provisions
Applicable to Broker-Dealers''); Section C.B1 of Circular 115/2002,
issued by the Mexican Central Bank; and Provision 3.1.3 of Rule 4/2012,
issued by the Mexican Central Bank (collectively, the ``Mexican Capital
Rules'' and ``Mexican Financial Reporting Rules,'' as applicable);
(5) The Mexican nonbank SD maintains at all times fundamental
capital, as defined in Article 162 and Article 162 Bis of the General
Provisions Applicable to Broker-Dealers, equal to or in excess of the
equivalent of $20 million in United States dollars (``U.S. dollars'').
The Mexican nonbank SD shall use a commercially reasonable and observed
peso/U.S. dollar exchange rate to convert the value of the peso-
denominated common equity tier 1 capital to U.S. dollars;
(6) The Mexican nonbank SD has filed with the Commission a notice
stating its intention to comply with the applicable Mexican Capital
Rules and Mexican Financial Reporting Rules in lieu of the CFTC Capital
Rules and CFTC Financial Reporting Rules. The notice of intent must
include the Mexican nonbank SD's representations that the firm is
organized and domiciled in Mexico; is a licensed casa de bolsa with the
Mexican Commission; and is subject to, and complies with, the Mexican
Capital Rules and Mexican Financial Reporting Rules. The Mexican
nonbank SD may not rely on this Capital Comparability Determination
Order until it receives confirmation from Commission staff that it may
comply with the applicable Mexican Capital Rules and Mexican Financial
Reporting Rules in lieu of the CFTC Capital Rules and CFTC Financial
Reporting Rules. Each notice filed pursuant to this condition must be
prepared in the English language and submitted to the Commission via
email to the following address: [email protected];
(7) The Mexican nonbank SD shall provide notice to the Commission
and National Futures Association (``NFA'') if at any time it initiates
the process of seeking the approval of the Mexican Commission to use
internal models to compute market risk and/or credit risk. The Mexican
nonbank SD shall not use internal models to compute its
[[Page 76399]]
regulatory capital under the terms of this Capital Comparability
Determination Order without the authorization of the Commission or NFA;
(8) The Mexican nonbank SD prepares and keeps current ledgers and
other similar records in accordance with accounting principles required
by the Mexican Commission;
(9) The Mexican nonbank SD files with the Commission and with NFA a
copy of its quarterly financial report filed with the Mexican
Commission pursuant to Article 203 of the General Provisions Applicable
to Broker-Dealers and a copy of the monthly financial information,
including the monthly balance sheet and income statement, filed with
the Mexican Commission pursuant to Article 202 and Exhibit 9 of the
General Provisions Applicable to Broker-Dealers. The Mexican nonbank SD
must also include with the monthly information provided to the
Commission and NFA a statement of regulatory capital as of each month
end. The quarterly financial report and monthly financial information
must be translated into the English language and balances must be
converted to U.S. dollars. The quarterly financial report and monthly
financial information must be filed with the Commission and NFA within
15 business days of the earlier of the date the quarterly financial
report and monthly financial information are filed with the Mexican
Commission or the date that the financial reports and financial
information are required to be filed with the Mexican Commission;
(10) The Mexican nonbank SD files with the Commission and with NFA
a copy of its audited annual financial report that is required to be
filed with the Mexican Commission in accordance with Article 203 of the
General Provisions Applicable to Broker-Dealers. The audited annual
report must be translated into the English language. The audited annual
report must be filed with the Commission and NFA within 15 business
days of the earlier of the date the audited annual report is filed with
the Mexican Commission or the date that the audited annual report is
required to be filed with the Mexican Commission;
(11) The Mexican nonbank SD files Schedule 1 of Appendix B to
Subpart E of Part 23 of the Commission's regulations (17 CFR part 23
Subpart E--Appendix B) with the Commission and NFA on a monthly basis.
Schedule 1 must be prepared in the English language with balances
reported in U.S. dollars and must be filed with the Commission and NFA
together with the financial information set forth in condition (9);
(12) The Mexican nonbank SD must submit with the monthly financial
information, the quarterly financial report, and the audited annual
report required under conditions (9)-(11) of this Capital Comparability
Determination Order a statement by an authorized representative or
representatives of the Mexican nonbank SD that to the best knowledge
and belief of the representative or representatives the information
contained in the reports, including the translation of the reports into
the English language and the conversion of balances into the reports to
U.S. dollars (as applicable), is true and correct. The statement must
be prepared in the English language;
(13) The Mexican nonbank SD files a margin report containing the
information specified in Regulation 23.105(m) (17 CFR 23.105(m)) with
the Commission and with NFA.\256\ The margin report must be filed
together with the monthly financial information required by Article 202
and Exhibit 9 of the General Provisions Applicable to Broker-Dealers
(condition 9). The margin report must be in the English language and
balances reported in U.S. dollars;
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\256\ 17 CFR 23.105(m).
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(14) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of being informed by the Mexican Commission that
the firm is not in compliance with any component of the Mexican Capital
Rules or Mexican Financial Reporting Rules. The notice must be prepared
in the English language;
(15) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of when it knows that its regulatory capital is
below 120 percent of the minimum capital requirement under the Mexican
Capital Rules. The notice must be prepared in the English language;
(16) The Mexican nonbank SD files a notice with the Commission and
NFA if it experiences a 30 percent or more decrease in its excess
regulatory capital as compared to that last reported in the financial
information filed with the Mexican Commission pursuant to Article 202
and Exhibit 9 of the General Provisions Applicable to Broker-Dealers.
The notice must be prepared in the English language and filed within
two business days of the firm experiencing the 30 percent or more
decrease in excess regulatory capital;
(17) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of when it knows or should have known that it has
failed to make or keep current the books and records required by the
Mexican Commission. The notice must be prepared in the English
language;
(18) The Mexican nonbank SD files a notice with the Commission and
NFA within 24 hours of the occurrence of any of the following: (i) a
single counterparty, or group of counterparties under common ownership
or control, fails to post required initial margin or pay required
variation margin to the Mexican nonbank SD on uncleared swap and
security-based swap positions that, in the aggregate, exceeds 25
percent of the Mexican nonbank SD's minimum capital requirement; (ii)
counterparties fail to post required initial margin or pay required
variation margin to the Mexican nonbank SD for uncleared swap and
security-based swap positions that, in the aggregate, exceeds 50
percent of the Mexican nonbank SD's minimum capital requirement; (iii)
a Mexican nonbank SD fails to post required initial margin or pay
required variation margin for uncleared swap and security-based swap
positions to a single counterparty or group of counterparties under
common ownership and control that, in the aggregate, exceeds 25 percent
of the Mexican nonbank SD's minimum capital requirement; and (iv) the
Mexican nonbank SD fails to post required initial margin or pay
required variation margin to counterparties for uncleared swap and
security-based swap positions that, in the aggregate, exceeds 50
percent of the Mexican nonbank SD's minimum capital requirement. The
notice must be prepared in the English language;
(19) The Mexican nonbank SD files a notice with the Commission and
NFA of a change in its fiscal year end approved or permitted to go into
effect by the Mexican Commission. The notice required by this condition
will satisfy the requirement for a nonbank SD to obtain the approval of
NFA for a change in fiscal year end under Regulation 23.105(g) (17 CFR
23.105(g)). The notice of change in fiscal year end must be prepared in
the English language and filed with the Commission and NFA at least 15
business days prior to the effective date of the Mexican nonbank SD's
change in fiscal year end;
(20) The Applicants notify the Commission of any material changes
to the information submitted in their application, including, but not
limited to, material changes to the Mexican Capital Rules or Mexican
Financial Reporting Rules imposed on Mexican nonbank SDs, the Mexican
Commission's supervisory authority or
[[Page 76400]]
supervisory regime over Mexican nonbank SDs, and proposed or final
material changes to the Mexican Capital Rules or Mexican Financial
Reporting Rules as they apply to Mexican nonbank SDs. The notice must
be prepared in the English language; and
(21) Unless otherwise noted in the conditions above, the reports,
notices, and other statements required to be filed by Mexican nonbank
SD with the Commission or NFA pursuant to the conditions of this
Capital Comparability Determination Order must be submitted
electronically to the Commission and NFA in accordance with
instructions provided by the Commission or NFA.
Issued in Washington, DC, on December 5, 2022, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican
Comision Nacional Bancaria y de Valores--Commission Voting Summary,
Chairman's Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, and Mersinger voted in the affirmative.
Commissioner Pham voted to concur. No Commissioner voted in the
negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
Today the Commission will consider a proposed order and request
for comment on an application for a capital comparability
determination submitted on behalf of three nonbank \1\ swap dealers
that are domiciled in Mexico and subject to regulation by the
Mexican Banking and Securities Commission. These nonbank swap
dealers are Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V.;
Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V.; and Casa de Bolsa
Finamex, S.A. de C.V. (Mexican nonbank swap dealers). Today's
preliminary capital comparability determination for Mexican nonbank
swap dealers is the second proposed order and request for comment
\2\ to come before the Commission since it adopted its substituted
compliance framework for non-U.S. domiciled nonbank swap dealers in
July 2020.\3\
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\1\ The Commission has capital jurisdiction over registered swap
dealers that are not subject to the regulation of a U.S. banking
regulator (i.e., nonbank swap dealers).
\2\ The Commission approved a Notice of Proposed Order and
Request for Comment on an Application for a Capital Comparability
Determination from the Financial Services Agency of Japan at its
July 27, 2022 open meeting. See 87 FR 48092 (Aug. 8, 2022).
\3\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462, 57520 (Sept. 15, 2020). Regulation 23.106
also sets forth the Commission's substituted compliance requirements
for major swap participants; however, there are not any registered
with the Commission.
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I support the Commission's proposed order and request for
comment on its preliminary determination that the Mexican nonbank
swap dealers organized and domiciled in Mexico are subject to, and
comply with, capital and financial reporting requirements in Mexico
that are comparable to certain capital and financial reporting
requirements under the Commodity Exchange Act and the Commission's
regulations (Capital Comparability Determination), subject to
certain conditions set forth in the proposed order.
As CFTC provisionally-registered swap dealers operate and manage
risk globally, the Commission's supervisory framework must
acknowledge the realities of multi-jurisdictional operations. The
Commission's approach to the proposed determination focuses on
whether the Mexico Banking and Securities Commission's capital and
financial reporting requirements achieve comparable outcomes to the
corresponding CFTC requirements for nonbank swap dealers.\4\
Specifically, the Commission has also considered the scope and
objectives of Mexico Banking and Securities Commission's capital
adequacy and financial reporting requirements; the ability of the
Mexico Banking and Securities Commission to supervise and enforce
compliance with its capital and financial reporting requirements;
and other facts or circumstances the Commission has deemed relevant
for this application.
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\4\ 17 CFR 23.106(a)(3)(ii). See also 85 FR 57462 at 57521.
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Throughout its analysis, the Commission has recognized that
jurisdictions may adopt unique approaches to achieving comparable
outcomes, and the Commission has focused on how the Mexican Banking
and Securities Commission's capital and financial reporting
requirements are comparable to its own in purpose and effect, rather
than whether each are comparable in every particular aspect or
contain identical elements. In this regard, the approach was not a
line-by-line assessment or comparison of the Mexican Banking and
Securities Commission's regulatory requirements with the
Commission's requirements.\5\
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\5\ See 85 FR 57521.
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Consistent with the Commission's authority to issue a Capital
Comparability Determination with terms and conditions it deems
appropriate, today's proposed order contains 21 conditions. These
conditions aim to ensure that the proposed order, if finalized,
would only apply to Mexican nonbank swap dealers that are eligible
for substituted compliance and that these Mexican nonbank swap
dealers comply with the Mexican Banking and Securities Commission's
capital and financial reporting requirements as well as certain
additional capital, margin, position, financial reporting,
recordkeeping, and regulatory notice requirements.
If the Commission, upon consideration of the comments received,
determines to issue a favorable comparability determination, an
eligible Mexican nonbank swap dealer would be required to file a
notice of its intent to comply with the Mexican Banking and
Securities Commission's capital adequacy and financial reporting
rules in lieu of the Commission's requirements.\6\ The Commission
(or the Market Participants Division through delegated authority)
would then be obligated to confirm to the Mexican nonbank swap
dealer that it may comply with the foreign jurisdiction's rules as
well as any conditions that would be adopted as part of the final
determination, and that, by doing so, it would be deemed to be in
compliance with the Commission's corresponding capital adequacy and
financial reporting requirements.
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\6\ See 17 CFR 23.106(a)(4).
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I believe it is important to note that today's proposed Capital
Comparability Determination, if finalized, would not compromise the
Commission's capital and financial reporting requirements. Instead,
it recognizes the global nature of the swap markets with dually-
registered swap dealers that operate in multiple jurisdictions that
mandate prudent capital and financial reporting requirements. As I
have said before, a capital and financial reporting comparability
determination order of this kind is not a compromise or deference to
a foreign regulatory authority. The Commission would retain its
enforcement authority and examinations authority as well as obtain
all financial and event specific reporting to maintain direct
oversight of nonbank swap dealers located in Mexico.
I look forward to the public's submission of comments and
feedback on this proposed determination and order.
Thank you to the hardworking staff in the Market Participants
Division for all of their efforts to bring us here today, as well as
the support of our colleagues in the Office of the General Counsel
and the Office of International Affairs.
Appendix 3--Statement of Support of Commissioner Kristin N. Johnson
I support the Commission's issuance of the Notice of Proposed
Order and Request for Comment (Notice of Proposed Order and Request
for Comment) on the Application for the Capital Comparability
Determination submitted on behalf of Nonbank Swap Dealers subject to
Regulation by the Mexican Comisi[oacute]n Nacional Bancaria y de
Valores (Mexican Banking and Securities Commission). The application
of the nonbank swap dealers Morgan Stanley Mexico, Casa de Bolsa,
S.A. de C.V.; Goldman Sachs Mexico, Casa de Bolsa, S.A. de C.V.; and
Casa de Bolsa Finamex, S.A. de C.V. (Mexican nonbank swap dealers)
domiciled in Mexico and subject to regulation by the Mexican Banking
and Securities Commission seeking a capital comparability
determination for Mexican nonbank swap dealers is the second
proposed order and request for comment to come before the Commission
since it adopted its substituted compliance framework for
[[Page 76401]]
non-U.S. domiciled nonbank swap dealers in July 2020.\1\
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\1\ The Commission approved a Notice of Proposed Order and
Request for Comment on an Application for a Capital Comparability
Determination from the Financial Services Agency of Japan at its
July 27, 2022 open meeting. See 87 FR 48092 (Aug. 8, 2022).
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Today, a little over a decade after the onset of the financial
crisis precipitated by events in the bespoke, bilateral, over the
counter swaps market, we continue to vigilantly monitor and surveil
the risk management activities among market participants. Our
efforts to coordinate and harmonize regulation with regulators
around the world reinforces the adoption, implementation, and
enforcement of sound prudential and capital requirements. These
requirements aim to ensure the integrity of entities operating in
these markets, to ensure rapid identification and remediation of
liquidity crises, and to mitigate the threat of systemic risks that
may threaten the stability of domestic and global financial markets.
Capital requirements play a critical role in fostering the
safety and soundness of financial markets. As indicated in the
Commodity Exchange Act, capital requirements protect market
participants against concerning risks that threaten the integrity of
individual market participants or potentially trigger a domino
effect of cascading losses across financial markets.\2\ The
Commission's capital and financial reporting requirements are
critical to ensuring the safety and soundness of our markets.\3\
Ensuring necessary levels of capital, as well as accurate and timely
reporting about financial conditions, helps to protect swap dealers
and the broader financial markets ecosystem from shocks, thereby
ensuring resiliency.
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\2\ 7 U.S.C. 6s(e).
\3\ See 7 U.S.C. 6s(e); 17 CFR subpart E.
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Section 4s(e) of the CEA directs the Commission and ``prudential
regulators'' to impose capital requirements on all swap dealers
(``SDs'') and major swap participants (``MSPs'') registered with the
Commission.\4\ Section 4s(e) of the CEA also directs the Commission
and prudential regulators to adopt regulations imposing initial and
variation margin requirements on swaps entered into by SDs and MSPs
that are not cleared by a registered derivatives clearing
organization. Applying the Congressional directive, Section 4s(e)
bifurcates the oversight of bank affiliated and non-bank affiliated
SD and MSP. The Commission has authority to impose capital
requirements and margin requirements for uncleared swap
transactions.\5\
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\4\ 7 U.S.C. 6s(e).
\5\ 7 U.S.C. 6s(e)(1) and (2).
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Under Section 4s(f), the Commission may adopt rules imposing
financial condition reporting obligations on all SDs and MSPs. In
accord with the same, the Commission has adopted financial reporting
obligations.
I support acknowledging market participants' compliance with the
regulations of foreign jurisdictions when the requirements lead to
an outcome that is comparable to the outcome of complying with the
CFTC's corresponding requirements. Substituted compliance must not,
however, be confused with deference. To the contrary, the swap
dealers that qualify for substituted compliance under regulation
23.106 must be Commission registrants. The Proposed Order, if
approved, would ensure that relevant swap dealers domiciled in
Mexico remain subject to the Commission's examination and
enforcement authority over the firms.
Capital adequacy and financial reporting are pillars of risk
management oversight for any business, and, for firms operating in
our markets, it is of the utmost importance that rules governing
these risk management tools are effectively calibrated, continuously
assessed, and fit for purpose. The Commission's efforts in
considering this proposal reflect careful and thoughtful evaluation
of the comparability of relevant standards and an attempt to
coordinate our efforts to bring transparency to the swaps market and
reduce its risks to the public. I look forward to reviewing the
comments that the Commission will receive in response to the Notice
of Proposed Order and Request for Comment and, in particular,
comments exploring proposed conditions.
Finally, I appreciate our colleagues in the Market Participants
Division and their continuous collaboration with our fellow
regulator--the Comisi[oacute]n Nacional de Bancaria y de Valores. I
also want to thank my fellow Commissioners for their support in
advancing this matter before the Commission. Successfully
implementing comparability determinations requires collaboration
between the CFTC and its partner regulators in other countries. The
economies of the United States and Mexico are closely intertwined,
and increased collaboration can only be beneficial in achieving our
key goals of customer protection and market integrity.
Appendix 4--Statement of Commissioner Christy Goldsmith Romero
I support the Commission considering efforts to safeguard the
resilience of swap dealers, including through the proposed capital
comparability determination for Mexico. The proposal recognizes that
strong capital requirements are essential to ensure a swap dealer's
safety and soundness, and that cross-border coordination with a
like-minded regulator can promote financial stability. I commend the
staff for their hard work on today's proposal--and thank them for
working closely with me and my office on changes to improve the
proposal.
Lessons Learned From the 2008 Financial Crisis
One of the lessons learned from the 2008 financial crisis was
the need to protect our markets from the serious risks posed by
inadequate amounts of capital that could serve as a buffer against
risk. Critical financial reforms introduced by the Dodd-Frank Act
included minimum capital requirements for swap dealers. I note that
two of the three swap dealers in Mexico that would be immediately
subject to this proposed determination are affiliates of two of the
largest recipients of Troubled Asset Relief Program dollars.
Dodd-Frank Act reforms led to the CFTC establishing capital
requirements for nonbank swap dealers, implementing rules to keep
our markets safe. Requiring firms to maintain a strong amount of
high-quality capital helps to ensure their resilience--their ability
to meet their financial commitments, and continue to perform their
critical market making function, even when faced with stress events
in the market, unexpected losses or decreases in the value of their
assets. This lowers the risk in the financial system, and helps to
ensure financial stability.
Our capital rules are a critical pillar of the Dodd-Frank Act's
reforms. Therefore, we must ensure that our comparability
assessments are sound and do not increase risk to U.S. markets.
The CFTC's Second Substituted Compliance Determination for Capital
Requirements
The global nature of the 2008 financial crisis also highlighted
the need for the CFTC to coordinate with foreign regulators, as swap
activities in a foreign jurisdiction may have an impact in the
United States. This is particularly relevant here as two of the
three existing swap dealers are affiliates of large U.S. financial
institutions.
Today's proposal is only the second substituted compliance
determination to be considered for the CFTC's capital rules,
following our proposal in July related to swap dealers in Japan.
Therefore, we should proceed carefully, as what we do will establish
precedent.
Substituted compliance is not an all-or-nothing proposition. The
Commission can impose any terms or conditions that it deems
appropriate, and can continue to require direct compliance with
certain of the CFTC's rules. That is what we are proposing to do
here in certain areas.
For example, I strongly support the proposed condition for
Mexican nonbank swap dealers to comply with the CFTC's $20 million
minimum capital requirement--just as we proposed to require for
nonbank swap dealers in Japan. This is one of the most critical
components of the CFTC's capital requirements. It helps to ensure
that each nonbank swap dealer maintains, at all times, a fixed
amount of the highest quality capital to meet its financial
obligations without becoming insolvent. The minimum capital
requirement recognizes the significant role that swap dealers play
in our markets--with extensive connections to other swap
counterparties and to each other--and helps ensure their resilience.
Even with substituted compliance, the CFTC must ensure that we
receive--both on a periodic, and event-driven, basis--the
information necessary to identify, evaluate and address situations
that may have an adverse impact on firms or financial markets. That
is why I support the conditions in the proposal that would require a
nonbank swap dealer in Mexico to notify the Commission of
undercapitalization and other events that may indicate financial or
operational issues. I look forward to public comment on whether
allowing Mexican nonbank swap dealers to submit financial reports
that are required to be prepared under Mexico's rules will ensure
that the Commission has access to the information needed to
effectively monitor the
[[Page 76402]]
financial health--including the capital adequacy--of these firms.
The CFTC has a duty to ensure that our comparability assessment
is sound and that the foreign regulator is like-minded, not only in
their rules but in their supervision, oversight, and enforcement.
Therefore, a strong regulatory relationship with the Mexican Banking
and Securities Commission (Comision Nacional Bancaria y de Valores)
(``CNBV'') and regular continued coordination is important. I
highlight, and express my appreciation for, the CNBV's engagement
with our staff. Continued engagement will enhance our ability to
work together swiftly and effectively to address any significant
market stress events or other circumstances that may threaten a
firm's safety and soundness.
It is a priority for me to ensure that the CFTC guards against
complacency with post-crisis reforms, particularly after market
stresses from the pandemic and geopolitical events. Our capital
rules serve as critical pillars of Dodd-Frank Act reforms to help
ensure the safety and resilience of the markets and market
participants from serious risks and contagion. Substituted
compliance must leave U.S. markets and our economy at no greater
risk than full compliance with our rules.
Appendix 5--Concurring Statement of Commissioner Caroline D. Pham
I respectfully concur with the notice of proposed order and
request for comment on an application for a capital comparability
determination submitted on behalf of nonbank swap dealers subject to
regulation by the Mexican Comision Nacional Bancaria y de Valores
(CNBV).
Today's proposed order and request for comment on a
comparability determination for three nonbank swap dealers by
Mexican CNBV marks yet another important step for cross-border
harmonization. It is worth reiterating the progress that the world
has made since the 2008 financial crisis in implementing this, among
other, G20 global derivatives reforms.\1\ I would like to thank
staff in the CFTC's Market Participants Division for their hard
work, continued engagement with our global counterparts, and
commitment to providing substituted compliance to continue
implementing these reforms.
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\1\ See Commissioner Pham ``Concurring Statement of Commissioner
Caroline D. Pham Regarding Proposed Swap Dealer Capital and
Financial Reporting Comparability Determination'' (July 27, 2022);
see also Financial Stability Board ``OTC Derivatives Market
Reforms--Implementation Progress in 2021'' (Dec. 3, 2021), available
at: https://www.fsb.org/2021/12/otc-derivatives-market-reforms-implementation-progress-in-2021/.
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The proposed determination and order would permit, subject to
several proposed conditions, CFTC registered nonbank swap dealers
domiciled in Mexico to satisfy certain Commission swap dealer
capital and financial reporting requirements via substituted
compliance with certain capital and financial reporting requirements
established by the Mexican Banking and Securities Commission
(``Mexican Commission''). CFTC staff met with Mexican CNBV staff on
several occasions to discuss the application process and capital and
financial reporting requirements.
One of my guiding principles throughout my career, both as a
regulator and in the private sector, is that markets work best when
there are clear and simple rules with common standards. Ensuring
that these rules are harmonized minimizes operational complexity
that can otherwise increase risks and costs. Without an approach
that appropriately recognizes the home country regulations, trading
and clearing becomes more complex and therefore costlier and less
efficient for all market participants. Through the hard work of CFTC
staff, today's order takes a step in mitigating these potential
negative effects on the global and U.S. markets. I am also pleased
that the proposed order recognizes that Mexico has implemented rules
that are consistent with the Basel Committee for Banking Supervision
Framework for International Bank Based Capital Standards. We must
continue to appropriately adhere to international standards, because
our markets are global and we are not regulating in a vacuum.
I continue to believe that the CFTC should take an outcomes-
based approach to substituted compliance, one that strikes a balance
of both recognizing the nature of cross-border regulation of global
markets and that preserves access for U.S. persons to other
markets.\2\ From my hands on perspective implementing policies,
procedures, and processes to comply with our rules, I welcome
comments, particularly on operational issues with additional
reporting requirements given local governance and regulatory
requirements, differences in financial reporting, or anything else
anticipated by market participants.
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\2\ See Commissioner Pham ``Concurring Statement of Commissioner
Caroline D. Pham Regarding Proposed Swap Dealer Capital and
Financial Reporting Comparability Determination'' (July 27, 2022).
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There's just one small example that I wanted to mention.
Specifically, I'm unsure as to how an entity can file a notice
within 24 hours of when it ``should have known'' about a books and
records issue. When you are designing an escalation and self-
reporting process and have to start the clock ticking, either you
have identified an issue or you have not. There is a specific time,
and then the deadline is 24 hours later. I am not sure how you count
24 hours from ``should have known'' because there is no specific
time from which to start the clock ticking. Perhaps we mean ``knows
or reasonably suspects'' there is an issue. That is one of the
reasons I am concurring in today's proposal.
Nonetheless, I appreciate the careful consideration by the staff
and the Commission of how to take a practical approach to achieving
appropriate oversight and mitigation of risk to the United States
and the markets. I urge a pragmatic approach with sufficient time to
implement conditions before any compliance date, and I appreciate
the thought that the staff have been putting into that.
[FR Doc. 2022-26758 Filed 12-12-22; 8:45 am]
BILLING CODE 6351-01-P
