Capital and Financial Reporting Requirements for Swap Dealers and Major Swap Participants, 2554-2581 [2023-28649]
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2554
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
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Note 4 to paragraph (e): ‘‘Address’’ means
that verbiage other than what is shown can
be used as long as the meaning is the same
or information that is product-specific is
presented.
ddrumheller on DSK120RN23PROD with PROPOSALS1
§ 1243.7
Instructional literature.
(a) Instructions shall be provided with
the product and shall be easy to read
and understand and shall be in the
English language at a minimum. These
instructions shall include information
on assembly, maintenance, cleaning,
and use, where applicable.
(b) The instructions shall address the
following additional warnings:
(1) Read all instructions before using
this product.
(2) Keep instructions for future use.
(3) Do not use this this product if it
is damaged or broken.
(4) Instructions shall indicate the
manufacturer’s recommended maximum
weight, height, age, developmental
level, or combination thereof, of the
occupant for which the infant support
cushion is intended. If this product is
not intended for use by a child for a
specific reason, the instructions shall
state this limitation.
(c) The cautions and warnings in the
instructions shall meet the requirements
specified in § 1243.6(d)(4) though (6),
except that sections 6.4 and 7.2–7.6.3 of
ANSI Z535.4—2011 need not be
applied. However, the signal word and
safety alert symbol shall contrast with
the background of the signal word
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panel, and the cautions and warnings
shall contrast with the background of
the instructional literature.
Note 1 to paragraph (c): For example, the
signal word, safety alert symbol, and the
warnings may be black letters on a white
background, white letters on a black
background, navy blue letters on an off-white
background, or some other high-contrast
combination.
(d) Any instructions provided in
addition to those required by this
section shall not contradict or confuse
the meaning of the required information
or be otherwise misleading to the
consumer.
§ 1243.8
Incorporation by reference.
Certain material is incorporated by
reference into this part with the
approval of the Director of the Federal
Register under 5 U.S.C. 552(a) and 1
CFR part 51. All approved incorporation
by reference (IBR) material is available
for inspection at the U.S. Consumer
Product Safety Commission and at the
National Archives and Records
Administration (NARA). Contact the
U.S. Consumer Product Safety
Commission at: the Office of the
Secretary, U.S. Consumer Product
Safety Commission, 4330 East West
Highway, Bethesda, MD 20814; phone
(301) 504–7479; email: cpsc-os@
cpsc.gov. For information on the
availability of this material at NARA,
visit www.archives.gov/federal-register/
cfr/ibr-locations or email fr.inspection@
nara.gov. The material may be obtained
from the following sources:
(a) American National Standards
Institute (ANSI), 25 West 43rd Street,
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4th Floor, New York, NY 10036, USA;
phone: (212) 642–4900; website:
www.ansi.org (https://ibr.ansi.org/
Standards/nema.aspx).
(1) ANSI Z535.4–2011, American
National Standard for Product Safety
Signs and Labels, approved October 20,
2017; approved for § 1243.6.
(2) [Reserved]
(b) ASTM International, 100 Barr
Harbor Drive, P.O. Box CB700, West
Conshohocken, Pennsylvania 19428–
2959; phone: (800) 262–1373; website:
www.astm.org.
(1) ASTM D3359–23, Standard Test
Methods for Rating Adhesion by Tape
Test, approved [TBD]; approved for
§ 1243.5.
(2) [Reserved]
Alberta E. Mills,
Secretary, Consumer Product Safety
Commission.
[FR Doc. 2023–27324 Filed 1–12–24; 8:45 am]
BILLING CODE 6355–01–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 23
RIN 3038–AF33
Capital and Financial Reporting
Requirements for Swap Dealers and
Major Swap Participants
Commodity Futures Trading
Commission.
ACTION: Proposed rule.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
SUMMARY:
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(e) Warning statements. Each product
shall address the warning statements
shown on figure 13 to paragraph (d)(7)
of this section, at a minimum.
ddrumheller on DSK120RN23PROD with PROPOSALS1
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
‘‘CFTC’’) proposes to amend certain of
the Commission’s regulations that
impose minimum capital requirements
and financial reporting obligations on
swap dealers (‘‘SDs’’) and major swap
participants (‘‘MSPs’’). The Commission
proposes to do this by codifying parts of
staff interpretive letter 21–15 to SDs
addressing the Tangible Net Worth
Capital Approach for calculating capital
under the applicable Commission
regulation and no-action letter 21–18
(and its successor no-action letter 23–
11) regarding alternative financial
reporting by SDs subject to the capital
requirements of a prudential regulator
(together, ‘‘CFTC Letters’’). The
Commission is also proposing to amend
certain of its regulations applicable to
SDs, in areas including the required
timing of certain notifications, the
process for approval of subordinated
debt for capital, and the revision of
financial reporting forms to conform to
the rules. The proposed amendments
are intended to make it easier for SDs
to comply with the Commission’s
financial reporting obligations and
demonstrate compliance with minimum
capital requirements.
DATES: Comments must be received on
or before February 13, 2024.
ADDRESSES: You may submit comments,
which must be in writing and identified
by RIN 3038–AF33, by any of the
following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking 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 instruction as for Mail, above.
Please submit your comments using
only one of these methods. 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 only submit
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 in § 145.9 of the
Commission’s regulations. The
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Commission reserves the right, but shall
have no obligation, to review, prescreen,
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
rulemaking will be retained in the
public comment file and will be
considered as required under the
Administrative Procedure Act (APA)
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; Joshua Beale, Associate
Director, 202–418–5446, jbeale@
cftc.gov; Jennifer Bauer, Special
Counsel, 202–418–5472, jbauer@
cftc.gov; Maria Aguilar-Rocha, Attorney
Advisor, 202–418–5840, maguilarrocha@cftc.gov; Andrew Pai, Attorney
Advisor, 646–746–9893, apai@cftc.gov;
Market Participants Division; Lihong
McPhail, Research Economist, 202–418–
5722, lmcphail@cftc.gov, Office of the
Chief Economist; Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION: On
September 15, 2020, the Commission
published in the Federal Register final
rules adopting capital and financial
reporting requirements for SDs and
MSPs.1 The Final Rules accomplished
the Congressional mandate 2 directing
the Commission to adopt rules imposing
both capital requirements and initial
and variation margin requirements on
SDs and MSPs that are not subject to a
prudential regulator (‘‘nonbank SDs’’
and ‘‘nonbank MSPs’’, respectively).3
The Final Rules included amendments
to existing capital rules for futures
1 Capital Requirements of Swap Dealers and
Major Swap Participants, 85 FR 57462 (Sept. 15,
2020) (the ‘‘Final Rule’’ or the ‘‘Final Rules’’).
2 Section 4s(e) of the Commodity Exchange Act
(‘‘CEA’’ or the ‘‘Act’’), 7 U.S.C. 6s(e), which is
contained in section 731 of the Dodd-Frank Act,
requires the Commission to adopt minimum capital
and margin requirements for SDs and MSPs that are
not subject to a prudential regulator. Section 731 of
the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010) (the ‘‘Dodd-Frank Act’’). The text of the
Dodd-Frank Act is available at https://www.cftc.
gov/LawRegulation/OTCDERIVATIVES/index.htm.
3 The term ‘‘prudential regulator’’ is defined as
the Board of Governors of the Federal Reserve
System (‘‘Federal Reserve Board’’); the Office of the
Comptroller of the Currency (‘‘OCC’’); the Federal
Deposit Insurance Corporation (‘‘FDIC’’); the Farm
Credit Administration; and the Federal Housing
Finance Agency. Section 1a(39) of the CEA, 7 U.S.C.
1a(39).
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commission merchants (‘‘FCMs’’) to
provide explicit additional capital
requirements for proprietary positions
in swaps and security-based swaps that
are not cleared by a clearing
organization. The Final Rules also
included a detailed capital model
application process whereby eligible
nonbank SDs and nonbank MSPs could
apply to the Commission or a registered
futures association (‘‘RFA’’) of which
they are a member for approval. Further,
the Final Rules adopted a capital
comparability determination process for
certain eligible foreign domiciled
nonbank SDs and nonbank MSPs to seek
substituted compliance for the
Commission’s capital and financial
reporting requirements.4 Finally, the
Final Rules adopted detailed financial
reporting, recordkeeping and
notification requirements, including
limited financial reporting requirements
for SDs and MSPs subject to the capital
requirements of prudential regulators
(‘‘bank SDs’’ and ‘‘bank MSPs’’,
respectively).
The Commission initially proposed
capital and financial reporting
requirements for nonbank SDs and
nonbank MSPs, and financial reporting
requirements for bank SDs and bank
MSPs, in 2011.5 After extensive
comment, in 2016 the Commission reproposed the rules for comment.6 The
Commission received numerous
comments from a broad spectrum of
market participants in response to the
re-proposal.7 In addition, following the
2016 re-proposal, the SEC adopted a
final set of capital, margin and financial
reporting requirements for securitybased swap dealers and major security4 To date, the Commission has issued proposals
for substituted compliance for eligible nonbank SDs
domiciled in Japan, Mexico, and the European
Union for public comment. 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); 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, 87 FR 76374 (Dec. 13, 2022);
Notice of Proposed Order and Request for Comment
on an Application for a Capital Comparability
Determination Submitted on Behalf of Nonbank
Swap Dealers Domiciled in the French Republic
and Federal Republic of Germany and Subject to
Capital and Financial Reporting Requirements of
the European Union, 88 FR 41774 (June 27, 2023).
5 Capital Requirements of Swap Dealers and
Major Swap Participants, 76 FR 27802 (May 12,
2011).
6 Capital Requirements of Swap Dealers and
Major Swap Participants, 81 FR 91252 (Dec. 16,
2016) (the ‘‘2016 Capital Proposal’’).
7 The comment letters for the 2016 Capital
Proposal are available at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=1769 (the
public comment file).
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based swap participants (‘‘SBSDs’’ and
‘‘MSBSPs,’’ respectively).8 In December
2019, the Commission re-opened the
proposed rules for comment in light of
the SEC’s final rules, and requested
commenters to provide detailed data
and information regarding several
critical areas of the Commission’s
proposed approach.9
The Final Rules became effective
November 16, 2020.10 To address
concerns from commenters that a
sufficient period of time would be
necessary to develop policies,
procedures and systems to implement
the new financial reporting
requirements and to develop and obtain
approval to use capital models, the
Commission adopted an extended
compliance date of October 6, 2021
(‘‘Extended Compliance Date’’).11 The
Extended Compliance Date also
corresponded to the SEC’s compliance
date for SBSDs and MSBSPs, thus
permitting better coordination for
dually-registered entities.12
The Commission’s overall capital
approach in the Final Rules permits
nonbank SDs and MSPs to select one of
three methods to calculate their capital
requirements.13 Each method is
discussed in detail in the Final Rule and
determines the frequency and type of
financial reporting information to be
provided to the Commission by each
nonbank SD and nonbank MSP.14 Bank
SDs, which are not subject to the capital
requirements of the Commission, are
required to provide the Commission and
National Futures Association (‘‘NFA’’)
with limited financial information
regarding the capital and swap positions
of the firms. Bank SDs are required to
file the limited financial information
using CFTC forms that were intended to
be comparable with forms required by
the prudential regulators and consistent
with forms adopted by the SEC for
SBSDs subject to the capital rules of a
prudential regulator.15 Together, the
8 Capital, Margin and Segregation Requirements
for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital and
Segregation Requirements for Broker-Dealers, 84 FR
43872 (Aug. 22, 2019) (the ‘‘SEC Final Capital
Rule’’).
9 Capital Requirements of Swap Dealers and
Major Swap Participants, 84 FR 69664 (Dec. 19,
2019).
10 Final Rules, 85 FR at 57462.
11 Id. at 57525.
12 Id.
13 See generally id. at 57467. The three methods
discussed in detail in the Final Rules include the
Bank-Based Capital Approach, the Tangible Net
Worth Capital Approach, and the Net Liquid Assets
Capital Approach.
14 See generally id. at 57480–57502.
15 See generally id. at 57491–57498. This
approach is consistent with other Commission rules
that permit the acceptance of certain filings under
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financial reporting and notice
requirements included in the Final
Rules serve as the mechanism for the
Commission to monitor capital
compliance by nonbank SDs.
In the Final Rule, the Commission
also recognized the role of NFA as the
only RFA under the CEA. NFA is an
integral component of the Commission’s
registration and oversight program.
Specifically, the Commission has
authorized NFA to administer the
registration process for SDs and MSPs,16
and to approve the use of capital and
initial margin models. NFA also
conducts examinations of nonbank SDs
and nonbank MSPs to assess
compliance with Commission and NFA
rules.17 As such, the Final Rules
required that financial reports and
notices be filed with both the
Commission and the NFA,18 and
explicitly recognized NFA’s ability to
adopt standardized forms and processes
to carry out the Commission’s financial
reporting and notification requirements
for SDs.19
During the period leading up to the
Extended Compliance Date,
Commission, NFA, and SEC staff
collaborated to develop a process for the
collection of financial reports and to
respond to inquiries from industry
participants regarding compliance with
financial reporting and notice
obligations. On January 12, 2021,
Commission staff approved NFA’s
capital model application process.20 On
December 21, 2021, NFA adopted new
Financial Requirements Section 18 of its
rules, which in addition to including
capital rules largely modeled after those
adopted by the Commission in the Final
Rules, published newly developed
standardized financial reporting forms
FR–CSE–NLA and FR–CSE–BHC for use
by nonbank SDs that are not also
registered with the SEC.21
Prior to the Extended Compliance
Date, Commission staff also received
inquiries from market participants
regarding compliance with various
capital and financial reporting
the SEC adopted final rules in lieu of the
Commission’s own rules. See e.g., 17 CFR
1.10(b)(1), 23.105(d)(3), and (e)(5).
16 See generally Performance of Registration
Functions by National Futures Association with
Respect to Swap Dealers and Major Swap
Participants, 77 FR 2708 (Jan. 19, 2012).
17 Final Rules, 85 FR 57507–57510.
18 Id. at 57515.
19 Id. at 57518.
20 CFTC Letter No. 21–03, Jan. 12, 2021, available
at https://www.cftc.gov/csl/21-03/download.
21 NFA submitted these rules for Commission
review under section 17(j) of the CEA, 7 U.S.C.
21(j), on November 22, 2021, and the rules became
effective on December 21, 2021. NFA Notice to
Members I–21–45, available at https://www.nfa.
futures.org/news/newsNotice.asp?ArticleID=5437.
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obligations under the Final Rule. In
response, Commission staff issued eight
no-action and interpretative letters.22
Two letters, CFTC Letters No. 21–15 and
21–18,23 are discussed below in detail
and inform this proposed rulemaking. In
addition, the Commission is proposing
several other amendments that are the
result of Commission staff’s experience
implementing the Final Rule. These
amendments are intended to provide
technical and other clarifying changes
necessary to effectuate the Final Rule’s
purpose.
II. Proposed Amendments to
Commission Regulations
A. Codification of the CFTC Letters and
Other Amendments
1. Amendments to Tangible Net Worth
Capital Approach—CFTC Letter No. 21–
15
The Commission is proposing
amendments to definitions in
Commission regulation § 23.100 24 to
ensure that the Tangible Net Worth
Capital Approach may be utilized by
eligible nonbank SDs as intended in the
Final Rule. Prior to the Final Rules’
implementation date, several nonbank
SDs intending to elect the Tangible Net
Worth Capital Approach raised
concerns regarding the application of
the eligibility test to different corporate
structures. In response to concerns
raised, the Market Participants Division
(the ‘‘Division’’) issued interpretive
CFTC Letter No. 21–15 on June 29,
2021.25 In CFTC Letter No. 21–15, the
Division stated that the asset and
revenue tests for ‘‘predominantly
engaged in non-financial activities’’
could be assessed at the nonbank SD’s
22 CFTC Letter No. 21–15, June 29, 2021, available
at https://www.cftc.gov/csl/21-15/download; CFTC
Letter No. 21–18, Aug. 31, 2021, available at https://
www.cftc.gov/csl/21-18/download; CFTC Letter No.
21–20, Sept. 30, 2021, available at https://
www.cftc.gov/csl/21-20/download; CFTC Letter No.
21–21, Sept. 30, 2021, available at https://
www.cftc.gov/csl/21-21/download; CFTC Letter No.
21–22, Sept. 30, 2021, available at https://
www.cftc.gov/csl/21-22/download; CFTC Letter No.
21–23, Sept. 30, 2021, available at https://
www.cftc.gov/csl/21-23/download; CFTC Letter No.
22–01, Jan. 5, 2022, available at https://
www.cftc.gov/csl/22-01/download; CFTC Letter No.
22–02, Jan. 5, 2022, available at https://
www.cftc.gov/csl/22-02/download.
23 CFTC Letter No. 21–18 was time-limited and
set to expire on October 23, 2023. To permit time
for the Commission to issue a proposed rulemaking
and address any comments received, the Market
Participants Division extended the expiration of the
letter to the earlier of October 6, 2025, or the
adoption of any revised financial reporting
requirements for bank SDs under regulation
§ 23.105(p). CFTC Letter No. 23–11, July 10, 2023,
available at https://www.cftc.gov/csl/23-11/
download.
24 17 CFR 23.100.
25 CFTC Letter No. 21–15.
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entity level or ultimate parent level and,
further, such tests could be computed
under International Financial Reporting
Standards issued by the International
Accounting Standards Board (‘‘IFRS’’)
in lieu of generally accepted accounting
principles (‘‘GAAP’’) as adopted in the
United States if the entity was permitted
to use IFRS for financial reporting.26
The Division also confirmed that
supplemental position reporting for
nonbank SDs meeting these
qualifications may be filed on a
quarterly basis along with the financial
reports, as opposed to monthly.27 In the
Commission’s experience over the past
two years, the interpretation in CFTC
Letter No. 21–15 helped eligible
nonbank SDs better understand their
compliance obligations under the
Commission’s capital and financial
reporting requirements at the
implementation date of the Final Rules
by pointing out an obvious but
inadvertent mistake in the Final Rules.
Therefore, the Commission is now
proposing to modify the relevant
Commission regulations to more fully
align the Tangible Net Worth Capital
Approach with the Commission’s
intention as expressed in the preamble
to the Final Rules and consistent with
the terms of CFTC Letter No. 21–15.
The Commission is proposing to
amend the definition in Commission
regulation 23.100 of ‘‘predominantly
engaged in non-financial activities.’’ 28
This definition is one of the key
components, along with the definition
of ‘‘tangible net worth,’’ 29 in
determining the eligibility for electing
and the application of the Tangible Net
Worth Capital Approach.30 Eligibility
for this approach is conditioned upon a
nonbank SD meeting both a revenue and
asset-based test to determine if the
nonbank SD is predominantly engaged
in non-financial activities. The
proposed amendment would modify the
definition of ‘‘predominantly engaged in
non-financial activities’’ in Commission
regulation § 23.100 to explicitly permit
the satisfaction of both the revenue and
asset-based tests at the consolidated
parent level of the nonbank SD as
discussed in the preamble to the Final
Rules. That is, the proposed
amendments would clarify that the tests
26 Id.
at 3–6.
Compare 17 CFR 23.105(d) with 17 CFR
23.105(l), as the former includes monthly or
quarterly periodicity as opposed to the latter only
referring to monthly.
28 See 17 CFR 23.100 for the definition of the term
‘‘predominantly engaged in non-financial
activities.’’
29 See 17 CFR 23.100 for the definition of the term
‘‘tangible net worth.’’
30 84 FR 69664 at 69668.
27 Id.
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may be satisfied either at the level of the
nonbank SD or at the level of the
nonbank SD’s consolidated parent 31
rather than seeming to exclude the
consolidated parent of the nonbank SD
as questioned by some commenters.32
The Commission is also proposing to
amend the definition of ‘‘tangible net
worth’’ in Commission regulation
§ 23.100.33 Nonbank SDs electing the
Tangible Net Worth Capital Approach
are currently permitted to use IFRS for
their financial reporting obligations
under Commission regulation
§ 23.105.34 IFRS is permitted as an
acceptable reporting standard for all
nonbank SDs provided that they
otherwise do not prepare financial
statements in accordance with U.S.
GAAP.35 The definition of ‘‘tangible net
worth’’ in Commission regulation
§ 23.100, however, only references U.S.
GAAP, despite the permissive use of
IFRS as part of financial reporting
obligations under Commission
regulation § 23.105.36 The proposed
amendments to the definition of
‘‘tangible net worth’’ in Commission
regulation § 23.100 would clarify that
‘‘tangible net worth’’ may be determined
under either applicable accounting
standard, U.S. GAAP or IFRS. This
amendment would align and correct the
permitted use of IFRS in determining
eligibility for the approach with the
standard permitted and utilized by the
nonbank SD in preparation of its
financial statements. As discussed in
the Final Rule, the Commission is
generally comfortable with both U.S.
GAAP and IFRS accounting standards in
this context, especially as both
standards continue to move towards
greater convergence.37 The Commission
has preliminarily determined that
nonbank SDs utilizing the same
standard as is permitted for their
financial reporting comports with the
purpose of the eligibility test to
determine if a SD is predominantly
engaged in non-financial activities.
The Commission is also proposing to
amend Commission regulation
§ 23.105(l) 38 to require that each
nonbank SD and nonbank MSP file
Appendix B to Subpart E of Part 23
(‘‘Appendix B’’),39 which contains
aggregate securities, commodities, and
swap position information and certain
31 Final
Rules, 85 FR 57480.
at 57499.
33 See 17 CFR 23.100 for the definition of the term
‘‘tangible net worth.’’
34 17 CFR 23.105(d) and (e).
35 Id.
36 17 CFR 23.105.
37 Final Rules, 85 FR 57514.
38 17 CFR 23.105(l).
39 Appendix B to subpart E of part 23.
32 Id.
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2557
credit exposure information, with the
Commission and NFA on a quarterly
rather than a monthly basis. This
proposed amendment would align that
filing with the periodicity permitted as
part of the nonbank SD’s or nonbank
MSP’s routine financial report filings
required by Commission regulation
§ 23.105(d) and would clarify that the
information provided should be
consistent with those financial report
filings. Currently, Commission
regulation § 23.105(d) permits nonbank
SDs electing the Tangible Net Worth
Capital Approach to file required
financial reports quarterly, whereas
nonbank SDs electing either the Bank
Based Capital Approach or the Net
Liquid Asset Capital Approach are
required to file such information on a
monthly basis.40 The amendment would
make clear that all swap position and
credit information required in
Commission regulation § 23.105(l) and
Appendix B must be filed at the same
periodicity as routine financial
reporting required of the respective
nonbank SDs set forth within
Commission regulation § 23.105(d),
which could be either monthly or
quarterly depending on the approach
elected by the SD.
The Commission has already
determined that nonbank SDs electing
the Tangible Net Worth Capital
Approach may engage in a wide variety
of businesses and not be otherwise
subject to any financial reporting. Thus,
the Commission determined in the Final
Rule that such SDs need only file
financial reports quarterly and not
monthly and may take a longer period
of time to file audited financial
reports.41 Moreover, the Commission
intended the swap position and credit
information in Commission regulation
§ 23.105(l) and Appendix B to be filed
together with other financial
information required by Commission
regulation § 23.105(d) as this
information is supplementary to the
financial statements as a whole and
completes the routine financial
reporting package. This approach is also
consistent with how dually-registered
SDs with the SEC complete the SEC’s
Form X–17A–5 (‘‘FOCUS Report’’) Part
II.42 Thus, the proposed amendment is
consistent with previous Commission
determinations and harmonizes the
approach across different nonbank SDs.
40 17
CFR 23.105(d).
Rules, 85 FR 57514–57515.
42 SEC Form X–17A–5 FOCUS Report Part IIC,
available at https://www.sec.gov/manage-filings/
forms-index/form-x-17a-5-2c.
41 Final
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Request for Comment
Question 1. Do the proposed
amendments to Commission regulations
§§ 23.100 and 23.105(l) address the
compliance matters for entities electing
the Tangible Net Worth Capital
Approach?
2. Amendments to Bank SD Financial
Reporting Requirements—CFTC Letter
No. 21–18
The Commission is also proposing to
amend the financial reporting
requirements for bank SDs and bank
MSPs set forth in Commission
regulation § 23.105(p).43 The
Commission intended the bank SD and
bank MSP reporting requirements
contained in the Final Rules to be
consistent with the SEC requirements
for bank SBSDs and bank MSBSPs, to
maintain equivalent financial reporting
requirements for dually-registered
firms.44 Several bank SDs, however, did
not register as SBSDs, and therefore are
subject only to limited financial
reporting under the Commission’s
rules.45 In certain instances, the
financial reporting required by the
prudential regulators for these bank SDs
permit a longer period of time and
utilize a different format than that
adopted by the Commission.46 In
addition, some of these bank SDs are not
required to file financial reports with a
prudential regulator if the bank SDs are
domiciled outside the United States,
and may instead be subject only to
financial reporting of a home country
supervisor.
Following the adoption of
Commission regulation 23.105(p), bank
SDs requested relief from this
provision’s requirements.47 Bank SDs
43 17
CFR 23.105(p).
Rules, 85 FR 57463–57465.
45 17 CFR 23.105(p).
46 Commission regulation § 23.105(p) requires
bank SDs to report financial information within 30
calendar days of quarter-end. 17 CFR 23.105(p)(2).
The Instructions for Preparation of Consolidated
Reports of Condition and Income, Schedule RC–D,
available at https://www.ffiec.gov/pdf/FFIEC_forms/
FFIEC031_FFIEC041_202303_i.pdf, however,
permit a bank with more than one foreign office to
submit its FFIEC 031 forms within 35 calendar days
following quarter-end. Additionally, the SEC
extended the filing deadline of FOCUS Report Part
IIC for non-U.S. SBSDs subject to a prudential
regulator from 30 to 35 days following quarter end,
noting that ‘‘U.S. prudential regulators permit
certain U.S. banks to file their financial reports 35
days after the quarter end.’’ Order Specifying the
Manner and Format of Filing Unaudited Financial
and Operational Information by Security-Based
Swap Dealers and Major Security-Based Swap
Participants That Are Not U.S. Persons and Are
Relying on Substituted Compliance Determinations
With Respect to Rule 18a–7, 86 FR 59208 (October
26, 2021) at 59210.
47 ISDA–SIFMA Joint Letter, Aug. 20, 2021,
available at https://www.cftc.gov/LawRegulation/
CFTCStaffLetters/index.htm/.
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44 Final
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indicated that the financial reporting
filing deadline adopted by the
Commission preceded the financial
reporting filing deadline imposed by
prudential regulators.48 In addition,
although Appendix C to Subpart E of
Part 23 (‘‘Appendix C’’) 49 was intended
to capture line items on existing Federal
Financial Institutions Examination
Council (‘‘FFEIC’’) 50 Form 031 (‘‘Call
Report’’) provided to prudential
regulators, line items on the Call Report
had either been removed, added or
otherwise changed since the
Commission adopted Appendix C.51 As
a result, on August 31, 2021, the
Division issued a time-limited no-action
letter to bank SDs regarding compliance
with financial reporting requirements
under Commission regulation
§ 23.105(p).52 On July 11, 2023, the
Division extended the expiration date to
the earlier of October 6, 2025 or the
adoption of any revised financial
reporting and notification requirements
applicable to bank SDs.53
CFTC Letter No. 21–18, as extended
under CFTC Letter No. 23–11,54
articulates a position by the Division
that it would not recommend that the
Commission engage in an enforcement
action against bank SDs providing the
Commission with copies of financial
reports that are required by, and filed
with, their respective prudential or
home country regulators, in lieu of
complying with the substantive
requirements of Appendix C, subject to
certain conditions.55 CFTC Letter No.
21–18 also contains a no-action position
with respect to bank SDs filing
comparable Call Report schedules with
the Commission in lieu of Appendix C
in accordance with and within the
timeframe permitted by the prudential
regulators.56 CFTC Letter No. 21–18
further provides that the Division would
not recommend enforcement action
against certain foreign-domiciled bank
SDs (‘‘Non-U.S. bank SDs’’) that do not
provide financial reports to a prudential
regulator if they file with the
Commission balance sheet and
statement of regulatory capital
information in accordance with
applicable home country requirements,
48 Id.
at 3–4.
C to subpart E of part 23.
Financial Institutions Examination
Council, Consolidated Reports of Condition and
Income for a Bank with Domestic and Foreign
Offices—FFIEC 031, available at https://
www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_202203_
f.pdf.
51 ISDA–SIFMA Joint Letter at 3–4.
52 See generally CFTC Letter No. 21–18.
53 CFTC Letter No. 23–11.
54 See supra note 23.
55 CFTC Letter No. 21–18 at 4–5.
56 Id. at 4–5, Condition 1.
so long as the financial information is in
English, with balances converted to U.S.
dollars, and the financial information is
filed within 15 days of the earlier of the
date such financial information is filed
or required to be filed with the Non-U.S.
bank SDs’ applicable home country
regulator.57 Finally, the Division stated
that it would not recommend
enforcement action against duallyregistered foreign bank SDs filing
comparable SEC-required financial
reports and schedules with the
Commission.58
The Commission is proposing to
amend Commission regulation
§ 23.105(p) to add an exception to the
financial reporting requirements for
Non-U.S. bank SDs that do not submit
financial reports to a prudential
regulator. These Non-U.S. bank SDs
would be permitted to file with the
Commission financial reports that are
submitted to their respective home
country regulator, provided the
financial reports submitted to the
Commission are translated into English
with balances converted to U.S. dollars.
These Non-U.S. bank SDs, however,
would continue to be required to file
specific swap position information set
forth in Schedule 1 to Appendix C.
Finally, these Non-U.S. bank SDs would
be required to file with the Commission
such reports no later than 90 calendar
days following quarter-end.
The Commission is not proposing to
include the restriction in CFTC Letter
No. 21–18 that Non-U.S. bank SDs be
subject to home country capital
standards in a G–20 jurisdiction.59 The
Commission preliminarily believes that
such a requirement is moot at this time,
as to date, all registered Non-U.S. bank
SDs have met this criterion. Moreover,
this approach will provide greater
regulatory flexibility and permit
Commission staff the ability to evaluate
on a case-by-case basis each bank SD.
The Commission preliminary believes
that the required information in the
manner proposed will permit it to assess
the Non-U.S. bank SDs’ financial
position. Extending the time period to
90 days should permit these Non-U.S.
bank SDs to file financial reports with
the Commission no earlier than such
Non-U.S. bank SDs are required to
49 Appendix
50 Federal
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57 Id.
at 5, Conditions 2–4.
Condition 5. In comparison to the SEC’s
approach to similarly situated bank SBSDs, the
Commission’s capital comparability process
adopted in Commission regulation § 23.106 does
not extend to bank SDs. See 17 CFR 23.106.
59 Letter No. 21–18 is limited to eligible Non-U.S.
bank SDs subject to home country capital standards
in a G–20 jurisdiction or to capital standards
consistent with the Capital Accord of the Basel
Committee on Banking Supervision. CFTC Letter
No. 21–18 at 3–5.
58 Id.,
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ddrumheller on DSK120RN23PROD with PROPOSALS1
prepare such reports under home
country requirements. The Commission
proposes to adopt this approach because
the Commission is collecting such
reports in order to maintain the ability
to monitor the capital condition across
all SDs, although the Commission does
not establish the capital or margin
requirements of bank SDs.60
The Commission is further proposing
to amend Commission regulation
§ 23.105(p) to permit bank SDs to file
the relevant schedules under the Call
Report (Schedule RC and Schedule RC–
R), rather than replicating various line
items from within those reports on a
separately constructed balance sheet
and statement of regulatory capital
currently maintained in Appendix C.61
Schedule 1 of Appendix C, which
contains relevant swap, mixed swap and
security-based swaps position
information, would remain a required
schedule to be provided by all bank
SDs. This approach would permit the
Commission to collect necessary
financial information prepared in
accordance with prudential regulators’
guidance, while eliminating the
necessity that bank SDs familiarize
themselves with a new reporting form
and prevent the Commission from
having to routinely monitor and update
its form when prudential regulators
amend their schedules. These proposed
changes are consistent with the terms of
CFTC Letter No. 21–18, which have
resulted in the Commission and its staff
receiving the requisite information to
meaningfully oversee its population of
bank SDs since 2021. In addition, and
as mentioned above, the Commission
proposes to adopt this approach because
the Commission is collecting such
reports in order to maintain the ability
to monitor the capital condition across
all SDs.
60 Section 4s(f) of the CEA requires SDs and
MPSs, including those for which there is a
prudential regulator, to make any reports regarding
transactions and positions, as well as any reports
regarding financial condition, that the Commission
adopts by rule or regulation. 7 U.S.C. 6s(f).
61 As adopted, Appendix C contains three
schedules: 1. Statement of Financial Condition
(balance sheet); 2. Statement of Regulatory Capital;
and 3. Schedule 1. Both the Statement of Financial
Condition and Statement of Regulatory Capital
schedules within Appendix C are modeled off the
FOCUS Report Part IIC as adopted by the SEC for
bank SBSDs and contain specific line item
references corresponding to the Call Report. See
Final Rules, 85 FR at 57566–57569. Following
adoption of these schedules, changes were made to
the underlying Call Reports making the schedules
obsolete. The SEC has since proposed changes to
the FOCUS Report Part IIC to reflect these changes.
See generally Electronic Submission of Certain
Materials Under the Securities Exchange Act of
1934; Amendments Regarding the FOCUS Report,
88 FR 23920 (Apr. 18, 2023).
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Request for Comment
Question 2. Do the proposed
amendments to Commission regulations
in § 23.105(p) address compliance
matters identified in CFTC Letter No.
21–18 for bank SDs?
Question 3. Do the financial reporting
requirements as proposed to be
amended for Non-U.S. bank SDs permit
the Commission to monitor these
entities at timely intervals?
3. Amendments Regarding Financial
Reporting and Computation
Requirements of Swap Dealers
a. Amendments to Schedules in
Financial Reporting and Frequency of
Filings
The Commission is proposing to
amend the scope of Commission
regulation § 23.105(k) 62 and the heading
and scope of Commission regulation
§ 23.105(l), as well as the titles of certain
schedules included in Appendix B,63 to
further clarify that these reporting
obligations are applicable to all nonbank
SDs and nonbank MSPs. Commission
regulation § 23.105(k) lists both modelspecific information that nonbank SDs
must report as well as a description of
the same type of exposure information
as reflected in the schedules to
Appendix B. Commission regulation
§ 23.105(l), however, requires all
nonbank SDs, including those not
approved to use models, to complete the
Appendix B schedules on a monthly
basis. As a result, several nonbank SDs
have filed each of the schedules to
Appendix B without having received
capital model approval. Thus, in current
form, Commission regulations
§ 23.105(k) and (l), as well as, the titles
of Schedules 2–4 of Appendix B, could
more explicitly indicate that all of the
information within the schedules
included in Appendix B is required of
all nonbank SDs, including those not
authorized to use models.64 In addition,
as proposed to be amended, nonbank
SDs electing the Tangible Net Worth
Capital Approach and all MSPs must
62 17
CFR 23.105(k).
B is comprised of 4 individual
schedules: SCHEDULE 1—AGGREGATE
SECURITIES, COMMODITIES AND SWAPS
POSITIONS; SCHEDULE 2—CREDIT
CONCENTRATION REPORT FOR FIFTEEN
LARGEST EXPOSURES IN DERIVATIVES;
SCHEDULE 3—PORTFOLIO SUMMARY OF
DERIVATIVES EXPOSURES BY INTERNAL
CREDIT RATING; and SCHEDULE 4—
GEOGRAPHIC DISTRIBUTION OF DERIVATIVES
EXPOSURES FOR TEN LARGEST COUNTRIES.
64 To further complicate matters, the heading and
first paragraph to Commission regulation
§ 23.105(k) both indicate that this provision only
applies to SDs approved to use internal models to
calculate market risk and credit risk for calculating
capital under Commission regulation § 23.102(d).
63 Appendix
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2559
submit quarterly rather than monthly
financial reporting as Commission
regulation § 23.105(l) currently requires.
Each of the schedules included in
Appendix B is identical to
corresponding schedules found in SEC’s
FOCUS Report required to be completed
by both SBSDs and certain broker
dealers (‘‘BDs’’).65 To the extent
practicable, the Commission intends to
align financial reporting requirements,
including those listed in textual form in
Commission regulation § 23.105(k) and
in the finalized schedules part of
Appendix B, with the reporting
requirements finalized by the SEC
pertaining to SBSDs, MSBSPs, and
BDs.66 The information required under
Appendix B is nearly identical in all
material respects to corresponding
forms found in the SEC Form FOCUS
Report Part II and was intended to
ensure harmonization of the reporting
schedules across several registrants,
including those that are duallyregistered.67 This is also consistent with
the Commission’s general approach
permitting dually-registered BDs and
SBSDs to file SEC Form FOCUS Report
Part II in lieu of their requirements
under Commission regulations
§ 23.105(d) and (e), and for those duallyregistered SBSDs subject to the capital
rules of a prudential regulator under
Commission regulation § 23.105(p).68
In addition, NFA has adopted nearly
identical capital and financial reporting
requirements for its member nonbank
SDs and nonbank MSPs.69 The finalized
NFA rules also mandate the use of
comprehensive standardized forms for
financial reporting by member nonbank
SDs and nonbank MSPs that are not
otherwise able to file an SEC Form
FOCUS Report Part II.70 These new NFA
forms, FR–CSE–NLA and FR–CSE–BHC,
include each of the required schedules
found in Appendix B. Moreover, all the
information listed in textual form in
paragraph (k)(1)(v) of Commission
regulation § 23.105 can be found in
specific schedules found in Appendix
B.71 As such, the Commission has
65 See SEC Form X–17A–5 FOCUS Report Part
IIC, available at https://www.sec.gov/managefilings/forms-index/form-x-17a-5-2c.
66 See Final Rules, 85 FR 57519.
67 See 2016 Capital Proposal, 81 FR 91278.
68 As indicated in the Final Rule, the Commission
has a long history of permitting SEC registrants to
meet their financial statement filing obligations
with the Commission by submitting required SEC
forms in lieu of the CFTC’s forms, which reduces
the burden on dually-registered firms by not
requiring two separate financial reporting
requirements. See Final Rules, 85 FR 57515.
69 NFA section 18.
70 NFA section 18(e).
71 For example, Commission regulation
§ 23.105(k)(1)(v)(B) requires that all model-
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preliminarily determined that the
specific schedules found in Appendix
B, which is now part of NFA’s adopted
forms, should be the mechanism for
firms to provide the required
information listed in Commission
regulation § 23.105(k).72 In this
proposal, the Commission hopes to
eliminate any ambiguity that the Final
Rule may have caused. As discussed in
the Final Rule, the information in
Appendix B, which includes credit
exposure to swap transactions, is vital to
the Commission’s regulatory oversight
of SDs and the financial system.73 This
information provides valuable insight
into the risk exposures of nonbank SDs,
which is essential to performing
regulatory oversight of SDs. The
Commission proposes to make clear that
all nonbank SDs must complete all
schedules in Appendix B.
The Commission is therefore
proposing to amend Commission
regulation § 23.105(k) to require that the
information listed in Appendix B is
completed by all nonbank SDs and
nonbank MSPs as was intended, and is
consistent with that required by the SEC
and NFA. The Commission is further
proposing to amend Commission
regulation § 23.105(l) and the headings
of certain schedules in Appendix B to
further clarify that these schedules must
be reported at the same periodicity as
the financial reporting of each
respective nonbank SD, either monthly
or quarterly as applicable, and that all
of the schedules are required for all
nonbank SDs, not just those authorized
to use models.
Request for Comment
ddrumheller on DSK120RN23PROD with PROPOSALS1
Question 4. Will the proposed
amendments to Commission regulations
in § 23.105(k) and (l) and the related
changes to the headings of the schedules
contained in Appendix B facilitate
consistent and comprehensive swaps
positions and counterparty reporting for
all nonbank SDs under the Final Rules
and align with the same reporting
requirements of the SEC for dual
registrants?
approved SDs file the current exposure (including
commitments) listed by counterparty for the 15
largest exposures, which is also found in Schedule
2 to Appendix B. Similarly, the information listed
in textual form in Commission regulations
§ 23.105(k)(1)(i)–(v) corresponds verbatim to the
textual requirements found in SEC rule 18a–7(a)(3).
See 17 CFR 240.18a–7(a)(3).
72 As discussed in the Final Rule, the Commission
may (and subsequently has) approved additional
procedures developed by an RFA, which could
include standard forms or procedures necessary to
carry out the Commission’s filing requirements. See
Final Rules, 85 FR 57518.
73 Final Rules, 85 FR 57517.
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b. Changes to Public Disclosure
Requirements
The Commission is proposing to
amend Commission regulation
§ 23.105(i) 74 to align the public
disclosure of unaudited financial
information with the periodicity
permitted by routine financial filings in
Commission regulation § 23.105(d), and
to remove reference to a statement in
both the unaudited and audited
information disclosing the amounts of
minimum regulatory capital and the
amount of its minimum regulatory
capital requirement computed in
accordance with Commission regulation
§ 23.101.75
Paragraphs (i)(l)(ii) and (i)(2)(ii) of
Commission regulation § 23.105
currently require a nonbank SD or
nonbank MSP to publicly disclose on its
website a statement of the amount of the
nonbank SD’s or nonbank MSP’s
regulatory capital and its minimum
capital requirement.76 This information
is required to be disclosed as of the
nonbank SD’s or nonbank MSP’s fiscal
year end, and as of six months after the
firm’s fiscal year end. Following
adoption of the Final Rule, nonbank
SD’s requested clarification as to
whether the regulatory capital
information required by Commission
regulations § 23.105(i)(1)(ii) and (i)(2)(ii)
must be a schedule or, if the information
may be reported in a narrative format,
in the footnotes to the financial
statements.
The Commission is proposing to
revise Commission regulation
§ 23.105(i)(1)(i) 77 to include the
footnotes to the unaudited Statement of
Financial Condition in the required
disclosures. The Commission is also
proposing to revise Commission
regulations § 23.105(i)(1)(ii) and (i)(2)(ii)
to replace the word ‘‘statement’’ with
‘‘amounts’’ to indicate that required
capital information does not need to
exist in a standalone statement or form.
This is consistent with the
Commission’s intent, to the extent
practicable, to align its requirements
with those required of BDs and SBSDs
by the SEC.78 The Commission has
preliminarily determined that the
information contained in the footnotes
accompanying the financial statements
should ordinarily satisfy the
requirements for disclosing minimum
regulatory capital. However, the
Commission recognizes that not all
accounting standards permit, nor do the
74 17
CFR 23.105(i).
CFR 23.101.
76 17 CFR 23.105(i)(1)(ii) and (i)(2)(ii).
77 17 CFR 23.105(i)(1)(i).
78 See 17 CFR 240.18a–7(b).
respective reporting formats utilized by
firms always provide for, such
disclosure in footnote form. Some
disclosures may be presented in either
narrative or graphical formats. The
Commission’s sole intention is to ensure
that the public has the requisite
information, not to prescribe the format
of such disclosures made by the firm on
its website. Therefore, the Commission
is proposing to permit nonbank SDs and
their auditors to determine the format
for disclosure of this information.
Request for Comment
Question 5. The Commission requests
comment on whether nonbank SDs and
their auditors should be able to
determine the reporting format of the
requisite information in their public
disclosure? Should the Commission
instead specify a particular format? If
yes, which format and why?
c. Changes to Form 1–FR–FCM
The Commission is proposing to
amend Form 1–FR–FCM to add new
lines to the form to include the 2
percent of uncleared swap margin
capital requirement under Commission
regulation § 1.17(a)(1)(i)(B)(2).79 The
proposed capital requirement based on
2 percent of the uncleared swaps margin
would be added as new lines 22.A.vi
through vii. of the Statement of the
Computation of the Minimum Capital
Requirements (‘‘CFTC Minimum Net
Capital Requirements’’) on the Form 1–
FR–FCM.
The Commission is also proposing to
amend the Form 1–FR–FCM to add
swaps and security-based swaps
haircuts to the computation of net
capital. The specific market risk charges
for swaps and security-based swaps
would appear as new lines 16.D. of the
CFTC Minimum Net Capital
Requirements.
Under Commission regulation § 1.10,
all FCMs must submit a Form 1–FR–
FCM when they file for registration as
an FCM and periodically following
registration.80 The Form 1–FR–FCM
includes, among other things, the
computation of CFTC Minimum Net
Capital Requirements supplementary
schedule.81 In the Final Rule, the
Commission added a 2 percent of
uncleared swap margin capital
requirement to the risk-based net capital
requirement for FCMs which are also
registered as SDs (‘‘FCM–SDs’’), and
adopted specific market risk charges for
uncleared swaps in the FCM net capital
requirements in Commission regulation
75 17
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79 17
CFR 1.17(a)(1)(i)(B)(2).
CFR 1.10.
81 CFTC Form 1–FR–FCM at 6–8.
80 17
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§ 1.17.82 In addition, FCMs duallyregistered as BDs are permitted to file
the SEC’s FOCUS Report Part II in lieu
of the Commission’s Form 1–FR–FCM
in reporting net capital.83 The SEC has
recently proposed to amend its FOCUS
Report Part II to include the
Commission’s net capital changes
adopted for FCM–SDs, including the
addition of the 2 percent uncleared
swap margin to the risk-based net
capital requirement of FCM–SDs.84 The
Commission is proposing to amend its
form to more explicitly require
disclosure of the 2 percent amount and
to conform with the SEC’s proposal.
This information is important to the
Commission in monitoring the Final
Rules, as reporting the 2 percent amount
enables the Commission to confirm that
the FCM–SD is complying with its
capital requirement.
Request for Comment
Question 6. Do the proposed changes
to the Form 1–FR–FCM address the net
capital changes applicable to FCMs that
are also registered as SDs as were
adopted in the Final Rules?
ddrumheller on DSK120RN23PROD with PROPOSALS1
d. Additional Cross References To
Clarify Applicable Market and Credit
Risk Charges
The Commission is proposing to add
new language to Commission
regulations § 23.103(a)(1) and (c)(1) 85 to
clarify that the same standardized
market and credit risk charges are
applicable to nonbank SDs electing the
Tangible Net Worth Capital Approach as
are applicable to all other nonbank SDs
not approved to use models. Nonbank
SDs electing the Tangible Net Worth
Capital Approach and who have chosen
not to apply for approval to use models,
have questioned what the applicable
standardized credit risk charges are
under Commission regulation
§ 23.103.86 Commission regulation
§ 23.103(b) 87 provides that nonbank
SDs electing the Tangible Net Worth
Capital Approach or Net Liquid Assets
Capital Approach are required to
compute standardized market risk
charges contained in SEC Rule 18a–1 88
and Commission regulation § 1.17, as
82 17 CFR 1.17(a)(1)(i)(B)(2) and (c)(5)(iii). See
generally Final Rules, 85 FR 57473–57476 and
57562.
83 17 CFR 1.10(h).
84 See generally Electronic Filing of Certain Forms
and Other Filings Under the Securities Exchange
Act of 1934; Technical Amendments Regarding the
FOCUS Report, SEC Proposed Rule (Undated),
available at https://www.sec.gov/news/pressrelease/2023-58.
85 17 CFR 23.103(a)(1) and (c)(1).
86 17 CFR 23.103.
87 17 CFR 23.103(b).
88 17 CFR 240.18a–1.
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applicable. Commission regulation
§ 23.103(c) 89 also provides that a
nonbank SD electing the Net Liquid
Assets Capital Approach must compute
its standardized credit risk charge in
accordance with SEC Rule 18a–1 or
Commission regulation § 1.17, as
applicable, but fails to provide a
reference for nonbank SDs electing the
Tangible Net Worth Capital Approach.90
Because standardized credit risk charges
were intended to be the same for
nonbank SDs using the Tangible Net
Worth Capital Approach or the Net
Liquid Assets Capital Approach, the
Commission is proposing to amend
Commission regulations § 23.103(a)(1)
and (c)(1) to correct this omission. Thus,
the Commission proposes to amend
Commission regulations § 23.103(a)(1)
and (c)(1) to direct nonbank SDs
electing the Tangible Net Worth Capital
Approach to compute standardized
credit risk charges in accordance with
SEC Rule 18a–1 or Commission
regulation § 1.17, as applicable.
Similarly, nonbank SDs electing the
Bank-Based Capital Approach indicated
after the adoption of the Final Rules that
a cross reference in Commission
regulation § 23.102(d) 91 to the
calculation of market risk exposure and
credit risk exposure using internal
models, seems to be intended to reflect
the requirements applicable to such
nonbank SDs in the application to use
models in Commission regulation
§ 23.102(c).92 The Commission agrees
that this was the intention, and thus is
proposing to amend Commission
regulation § 23.102(d) to correct the
applicable cross reference in order to
make it clearer that either 12 CFR part
217 or Appendix A to Subpart E of Part
23 (‘‘Appendix A’’) 93 should be utilized
as applicable by the nonbank SD
depending on the respective capital
approach elected.94
Request for Comment
Question 7. Do the proposed
amendments to Commission regulations
§ 23.103(a)(1) and (c)(1) clarify the
applicable standardized credit risk
charge to be added to the $20 million
89 17
CFR 23.103(c).
electing to use the Tangible Net Worth
Capital Approach are required to meet a minimum
capital requirement which includes, among other
things, $20 million plus the amount of the SD’s
market risk exposure requirement and its credit risk
exposure requirement associated with the SD’s
swap and related hedge positions that are part of
the SD’s swap dealing activities. 17 CFR
23.101(a)(2)(ii)(A).
91 17 CFR 23.102(d).
92 17 CFR 23.102(c).
93 Appendix A to subpart E of part 23.
94 Final Rules, 85 FR 57506.
90 SDs
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2561
minimum requirement under
Commission regulation § 23.103(c)(3)? 95
Question 8. Does the proposed
amendment to Commission regulation
§ 23.102(d) clarify the applicable modelbased market and credit risk charges
applicable to nonbank SDs which have
applied to use such models under the
Bank-Based Capital Approach?
B. Other Amendments
1. Notice of Substantial Reduction in
Capital
The Commission adopted specific
notice requirements for nonbank SDs
and MSPs related to capital compliance
in the Final Rules. However, one of the
notice requirements contained in
Commission regulation § 23.105(c)(4),
which requires notice of a substantial
reduction in capital as compared to the
last reported in a financial report, did
not specify a timeframe for the notice
filing.96 The Commission has
preliminarily determined that
registrants should be able to file such a
notice within two business days after
the date of occurrence. Further, such an
approach is also consistent with that
applied to FCMs, which must notify the
Commission within two business days
following a substantial reduction in
capital.97 The Commission is proposing
to amend Commission regulation
§ 23.105(c)(4) to add a two-business day
reporting timeframe to the requirement
for a nonbank SD to file notice of a
substantial reduction in capital. The
Commission has preliminarily
determined that adding a reporting
timeframe to the notice requirement will
enhance compliance by providing
regulatory certainty to nonbank SDs
regarding when such a filing is due.
2. Subordinated Debt Approval
The nonbank SD capital requirements
for both the Bank-Based Capital
Approach and the Net Liquid Assets
Capital Approach permit the use of
subordinated debt as capital in order to
align with the permitted use of
subordinated debt under the FCM net
capital requirements.98 The
requirements for qualifying
subordinated debt were adopted by the
SEC in its capital rule for SBSDs and
were included by reference by the
Commission for other nonbank SDs in
the Bank-Based Capital Approach.99
Commission staff received questions
regarding the process for approving
subordinated debt for nonbank SDs not
95 17
CFR 23.103(c)(3).
CFR 23.105(c)(4).
97 17 CFR 1.12(g)(1).
98 17 CFR 1.17(h).
99 17 CFR 23.101(a)(1).
96 17
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also registered with the SEC because the
Final Rule did not articulate a process.
To address this omission, NFA adopted
Financial Requirements Rule Section
18(d).100 Under the existing framework,
NFA already approves subordinated
loan agreements for net capital
agreements for nonbank SDs that are not
dually-registered with the SEC.
Similarly, although nonbank SDs that
are dually-registered with the SEC are
able to obtain SEC approval on
subordinated debt,101 nonbank SDs that
elect either the Bank-Based Capital
Approach or the Net Liquid Assets
Capital Approach but are not registered
with the SEC, do not have an approval
process for the use of subordinated debt
under the Commission’s rules. As
discussed in the Final Rule,102 when
adopting the permissive use of
subordinated debt in establishing
minimum regulatory capital, the
Commission has long approved a
process for FCMs to obtain subordinated
debt approval from their Designated
Self-Regulatory Organizations
(‘‘DSROs’’), including the NFA.103
The Commission has preliminarily
determined to permit NFA to administer
the approval process for nonbank SDs
because of the NFA’s extensive history
and experience as a DSRO
administering a subordinated debt
approval program for FCMs. This would
also make the subordinated debt
approval process for nonbank SDs
consistent with the subordinated debt
approval process for FCMs. In addition,
NFA has already devoted substantial
efforts to obtain the personnel and other
resources necessary to perform the
review, approval and ongoing
assessment of nonbank SDs’ permitted
use of subordinated debt following the
100 See generally NFA Interpretative Notice 9078
(Feb. 18, 2021), available at https://www.nfa.
futures.org/rulebooksql/rules.aspx?Section
=9&RuleID=9078#:∼:text=In%20order%20to%20
permit%20these%20non-SEC%20registered%
20SD,NFA%27s%20pre-approval
%20of%20the%20subordinated%20debt%
20loan%20agreement.
101 Nonbanks SDs that are duly-registered as
SBSDs typically elect under Commission regulation
§ 23.101(a)(1)(ii) to maintain net capital by
complying with § 240.18a–1d, and are
independently subject to such requirements,
including the subordinated-debt approval process,
by their registration as a SBSD with the SEC. 17
CFR 240.18a–1d.
102 Final Rules, 85 FR 57495.
103 See Miscellaneous Rule Deletions,
Amendments or Clarifications, 57 FR 20633, 20634
(May 14, 1992). The subordinated debt approval
program for FCMs administered by NFA has been
in place for over 30 years. In addition, the NFA, as
the only registered futures association under the
CEA, is specifically required to adopt capital
requirements on its members, including SDs, and to
implement a program to audit and enforce the
compliance with such requirements in accordance
with section 17(p)(2) of the CEA, 7 U.S.C. 21(p)(2).
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adoption by NFA of Financial
Requirements Rule Section 18(d).104
Codifying that subordinated debt will be
approved for net capital requirements
either through the Commission or by an
RFA should remedy this omission from
the Final Rules and will sanction a
process that is consistent with the
current practice. The Commission
proposes to amend Commission
regulations § 23.101(a)(1)(i)(B) and
(a)(1)(ii)(C) 105 to establish that using
subordinated debt as regulatory capital
is subject to the approval of either an
RFA of which the nonbank SD is a
member or the Commission.
3. Statement of No Material Difference
The Commission proposes to amend
Commission regulation
§ 23.105(e)(4)(v) 106 for nonbank SDs
and nonbank MSPs to explicitly require
a statement, if applicable, that there are
no material differences between the
audited annual report and the
unaudited annual report of the same
date. Commission regulation § 23.105(e)
requires nonbank SDs and nonbank
MSPs to submit an annual audited
financial report with the Commission
and with NFA.107 Included with the
financial report is, among other things,
a reconciliation of any material
differences from the unaudited financial
reports prepared as of the nonbank SD’s
or nonbank MSP’s year-end date.108
For instances in which no material
differences exist between the unaudited
and audited year-end financial
statements, however, Commission
regulation § 1.10(d)(2)(vi) 109 requires
FCMs to include a statement indicating
that no such differences exist.
Commission regulation § 23.105(e) does
not currently provide for such a
statement in this parallel provision for
audits of nonbank SDs or nonbank
MSPs. The Commission is proposing to
amend Commission regulation
§ 23.105(e)(4)(v) so that when nonbank
SDs and nonbank MSPs file their
audited annual report, a statement that
there are no material differences
between the audited annual report and
the unaudited annual report is included,
if no such differences exist. This will
align the filing approach for auditors of
nonbank SDs and nonbank MSPs with
that of FCMs. Requiring an affirmative
statement that no material differences
exist when none are otherwise reported
should enhance the reliability of the
104 NFA
section 18(d).
CFR 23.101(a)(1)(i)(B) and (a)(1)(ii)(C).
106 17 CFR 23.105(e)(4)(v).
107 17 CFR 23.105(e).
108 17 CFR 23.105(e)(4)(v).
109 17 CFR 1.10(d)(2)(vi).
105 17
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annual reports filed by nonbank SDs
and nonbank MSPs and should
encourage auditors to more rigorously
assess the materiality of reporting any
discovered audit findings.
Request for Comment
Question 9. Are the regulations as
proposed to be amended fit for purpose?
If not, what changes would be necessary
to achieve the Commission’s objective
in obtaining timely financial reporting
of the capital position of nonbank SDs
and MSPs?
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (‘‘RF
Act’’) requires that Federal agencies
consider whether the regulations they
propose will have a significant
economic impact on a substantial
number of small entities, and if so,
provide a regulatory flexibility analysis
respecting the impact.110 Whenever an
agency publishes a general notice of
proposed rulemaking for any rule,
pursuant to the notice-and-comment
provisions of the Administrative
Procedure Act,111 a regulatory flexibility
analysis or certification typically is
required.112 This proposed rulemaking
would affect the obligations of SDs,
MSPs, and FCMs. The Commission has
previously determined that SDs, MSPs,
and FCMs are not small entities for
purposes of the RF Act.113 Therefore,
the requirements of the RF Act do not
apply to those entities.
Accordingly, for the reasons stated
above, the Commission has
preliminarily determined that this
proposed rulemaking will not have a
significant economic impact on a
substantial number of small entities.
Therefore, the Chairman, on behalf of
the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the
proposed Commission regulations being
published today by this Federal
Register release will not have a
significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 114 imposes certain
110 5
U.S.C. 601 et seq.
U.S.C. 553. The Administrative Procedure
Act is found at 5 U.S.C. 500 et seq.
112 See 5 U.S.C. 601(2), 603, 604 and 605.
113 Policy Statement and Establishment of
Definitions of ‘‘Small Entities’’ for Purposes of the
Regulatory Flexibility Act, 47 FR 18618 (Apr. 30,
1982) (FCMs) and Registration of Swap Dealers and
Major Swap Participants, 77 FR 2613, 2620 (Jan. 19,
2012) (SDs and MSPs).
114 44 U.S.C. 3501 et seq.
111 5
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requirements on Federal agencies
(including the Commission) in
connection with their conducting or
sponsoring any collection of
information as defined by the PRA.
These proposed rule amendments
would result in an amendment to
existing collection of information
‘‘Regulations and Forms Pertaining to
Financial Integrity of the Market Place;
Margin Requirements for SDs/MSPs’’ 115
as discussed below. The Commission,
therefore, is submitting this proposed
amendment to the Office of
Management and Budget (‘‘OMB’’) for
review and approval in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11.
The responses to this collection of
information are mandatory. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid control
number issued by OMB.
The Commission has preliminarily
determined that the rule amendments as
proposed do not impose any other new
collections of information that require
approval of OMB under the PRA.
2. Amended Information Collection
Requirements and Related Burden
Estimates 116
Currently, there are approximately
106 SDs and no MSPs registered with
the Commission that may be impacted
by this proposed rulemaking and, in
particular, the collection of information
discussed below.
Commission regulation § 23.105
requires that each SD and MSP maintain
certain specified records, report certain
financial information and notify or
request permission from the
Commission under certain specified
circumstances, in each case, as provided
in the Commission regulation. For
example, the Commission regulation
requires generally that SDs and MSPs
maintain current books and records,
provide notice to the Commission of
regulatory capital deficiencies and
related documentation, provide notice
of certain other events specified in the
rule, and file financial reports and
related materials with the Commission
(including the information in
Appendices B and C, as applicable).
Commission regulation § 23.105 also
requires the SD or MSP to furnish
information about its custodians that
hold margin for uncleared swap
115 OMB Control No. 3038–0024, available at
https://www.reginfo.gov/public/do/PRAOMBHistory?
ombControlNumber=3038-0024.
116 This discussion does not include information
collection requirements that are included under
other Commission regulations and related OMB
control numbers.
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transactions and the amounts of margin
so held, and for SDs approved to use
models (as discussed above), provide
additional information regarding such
models, as further described in
Commission regulation § 23.105(k).
The Commission estimates that there
are 31 SD firms which are required to
fulfill their financial reporting,
recordkeeping and notification
obligations under Commission
regulations § 23.105(a)–(n) 117 because
they are not subject to a prudential
regulator, not already registered as an
FCM, and not dually-registered as a
SBSD. The Commission does not
anticipate that its estimates of burden
associated with these obligations will
change as a result of any the
amendments to Commission regulation
§ 23.105 proposed herein.
Commission regulation § 23.105(p)
and its accompanying Appendix C
impose quarterly financial reporting and
notification obligations on SDs subject
to a prudential regulator. Approximately
55 of the 106 registered SDs are subject
to a prudential regulator. The
Commission has previously estimated
that these reporting and notification
requirements impose an on-going
burden of 33 hours annually. This
results in a total aggregate burden of
1,815 hours annually. The Commission
estimates this burden will remain
unchanged by the proposed
amendments to Commission regulation
§ 23.105(p), as the burden associated
with requirements to file quarterly
financial reporting and notifications
previously were based on these entities
filing their existing information
contained in Call Reports along with
Schedule 1 information, and under the
proposed amendments those remain the
obligations for bank SDs, except for
Non-U.S. bank SDs who will also still
file existing financial reporting
information as reported to their home
country supervisor, along with
Appendix C Schedule 1 information.
C. 15(b) Antitrust Laws
Section 15(b) of the CEA requires the
Commission to take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving the purposes of the CEA, in
issuing any order or adopting any
Commission rule or regulation
(including any exemption under section
4(c) or 4c(b)), or in requiring or
approving any bylaw, rule, or regulation
of a contract market or registered futures
117 17
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2563
association established pursuant to
section 17 of the CEA.118
The Commission believes that the
public interest to be protected by the
antitrust laws is generally to protect
competition. The Commission requests
comment on whether the proposed rule
implicates any other specific public
interest to be protected by the antitrust
laws.
The Commission has considered the
proposed rule to determine whether it is
anticompetitive and has preliminarily
identified no anticompetitive effects.
The Commission requests comment on
whether the proposed rule is
anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has
preliminarily determined that the
proposed rule is not anticompetitive
and has no anticompetitive effects, the
Commission has not identified any less
anticompetitive means of achieving the
purposes of the Act. The Commission
requests comment on whether there are
less anticompetitive means of achieving
the relevant purposes of the Act that
would otherwise be served by adopting
the proposed rule.
IV. Cost Benefit Considerations
A. Background
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its discretionary actions
before promulgating a regulation under
the CEA or issuing certain orders.119
Section 15(a) further specifies that the
costs and benefits shall be evaluated in
light of five broad areas of market and
public concern: (1) protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations
(collectively, the ‘‘Section 15(a)
Factors’’). In this cost benefit section,
the Commission discusses the costs and
benefits resulting from its discretionary
determinations with respect to the
Section 15(a) Factors.120
Section 4s(e) of the CEA, added by
section 731 of the Dodd-Frank Act,
provides the Commission with
mandatory and discretionary
rulemaking authority to adopt capital
requirements for nonbank SDs and
118 7
U.S.C. 19(b).
U.S.C. 19(a).
120 The Commission notes that the costs and
benefits considered in this proposed rulemaking,
and highlighted below, have informed the policy
choices described throughout this release.
119 7
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nonbank MSPs,121 as well as financial
reporting requirements for SDs and
MSPs.122 Section 4s(e) of the CEA
requires the Commission to adopt
minimum capital requirements for
nonbank SDs and nonbank MSPs that
are designed to help ensure their safety
and soundness and are appropriate for
the risk associated with the uncleared
swaps held by such nonbank SD or
nonbank MSP. In addition, section
4s(e)(2)(C) of the CEA, requires the
Commission to establish capital
requirements for nonbank SDs or
nonbank MSPs that account for the risks
associated with their entire swaps
portfolio and all other activities
conducted. Lastly, section 4s(e)(3)(D) of
the CEA provides that the Commission,
the prudential regulators, and the SEC,
must ‘‘to the maximum extent
practicable’’ establish and maintain
comparable capital rules. Accordingly,
this proposed rulemaking includes
certain capital and financial reporting
requirements related to SDs and MSPs.
The baseline for the Commission’s
consideration of the costs and benefits
of this proposed rulemaking is the
existing statutory and regulatory
framework applicable to SDs and MSPs,
including the capital and margin
requirements for SDs and MSPs under
subpart E of part 23. The Commission
recognizes, however, that to the extent
that SDs 123 have arranged their business
in reliance on Division interpretations
and no-action positions in CFTC Letters
No. 21–15 and 21–18, as extended
under CFTC Letter No. 23–11, the actual
costs and benefits of this proposed
rulemaking may be mitigated.
The Commission recognizes that the
proposed amendments may impose
costs. The Commission has endeavored
to assess the expected costs and benefits
of the proposed amendments in
quantitative terms, including PRArelated costs, where possible. In
situations where the Commission is
unable to quantify the costs and
benefits, the Commission identifies and
considers the costs and benefits of the
proposed rules in qualitative terms. The
lack of data and information to estimate
those costs and benefits is attributable
in part to the nature of the proposed
amendments, which are tailored
121 Section
4s(e)(2)(B) of the CEA, 7 U.S.C.
6s(e)(2)(B).
122 Section 4s(f) of the CEA, 7 U.S.C. 6s(f).
123 Currently, there are no MSPs registered with
the Commission and there have not been any MSPs
registered with the Commission for several years.
Thus, this section regarding the Commission’s
consideration of the costs and benefits of this
proposed rulemaking will only refer to SDs that
may have relied on CFTC Letters No. 21–15 and 21–
18 and may benefit from the compliance exceptions
set forth herein.
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financial reporting requirements based
on the specific businesses and types of
SDs registered with the Commission.
Further, SDs represent a wide diversity
of business models catering towards
different swap counterparties, from
financial end users to commercial
enterprises. As a result, the Commission
expects each SD to have developed its
corporate entity in a unique manner by
employing different corporate cost
structures, making it particularly
difficult to estimate the quantitative
impacts of both costs and benefits on
each SD.
B. Codification of the CFTC Letters and
Other Amendments
The Commission is proposing
technical amendments to its definitions
in Commission regulation § 23.100 for
‘‘predominantly engaged in nonfinancial activities’’ and ‘‘tangible net
worth.’’ Further, the Commission is
proposing to amend Commission
regulation § 23.105(p) to add exceptions
to the financial reporting requirements
for Non-U.S. bank SDs, and permitting
bank SDs to file the relevant schedules
under the Call Report (Schedule RC and
Schedule RC–R) instead of as required
by Appendix C. In addition, the
Commission is making a number of
clarifying amendments including: (1)
amending the heading and scope
provisions of Commission regulation
§ 23.105(k) and the titles of certain
schedules included in Appendix B; (2)
changing public disclosure
requirements under Commission
regulation § 23.105(i); (3) amending
Form 1–FR–FCM to more accurately
address net capital changes; (4) adding
language to Commission regulation
§ 23.103(a) and (c)(1) to clarify that
standardized charges are the same as
applicable to all SDs not using the BankBased Capital Approach; and (5)
amending the cross reference in
Commission regulation § 23.102(d) to
make clear that either 12 CFR part 217
or Appendix A should be utilized as
applicable by the nonbank SD
depending on the respective capital
approach elected.
1. Benefits
a. Amendments to Tangible Net Worth
Capital Approach—CFTC Letter No. 21–
15
The amendments to definitions of
‘‘predominantly engaged in nonfinancial activities’’ and ‘‘tangible net
worth’’ codifying CFTC Letter No. 21–15
are intended to ensure that the Tangible
Net Worth Capital Approach can be
utilized by certain nonbank SDs as was
originally intended in the Final Rule.
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These amendments are expected to
benefit certain nonbank SDs by ensuring
clear and effective compliance with
regulatory requirements under the
Tangible Net Worth Capital Approach as
amended, ultimately reducing
operational costs for such nonbank SDs.
In particular, nonbank SDs would no
longer be required to calculate asset and
revenue tests separately between the
entity and the ultimate parent level or
compute such tests under U.S. GAAP
even if such entity was permitted to use
IFRS. Further, these amendments would
allow nonbank SDs meeting such
qualifications to file their supplemental
position reports at the same time as
routine financial reporting for all
nonbank SDs set forth within
Commission regulation § 23.105(d).
b. Amendments to Bank SD Financial
Reporting Requirements—CFTC Letter
No. 21–18
Similarly, the amendments to
Commission regulation § 23.105(p)
codifying CFTC Letter No. 21–18, as
extended under CFTC Letter No. 23–11,
are expected to benefit bank SDs by
permitting: (1) Non-U.S. bank SDs to file
reports by their home country regulators
subject to certain conditions; (2) bank
SDs to file comparable Call Report
schedules in accordance with, and
within the timeframe permitted by, the
prudential regulators; (3) Non-U.S. bank
SDs to file balance sheet and statement
of regulatory capital information in
accordance with home country
requirements provided they are in
English, converted to U.S. dollars and
filed within 90 calendar days following
quarter-end; and (4) dually-registered
Non-U.S. bank SDs to file comparable
SEC-approved financial reports and
schedules. The Commission anticipates
that these amendments will eliminate
duplicative and superfluous reporting
and streamline financial reporting for
both Non-U.S. and dually-registered
bank SDs.
c. Amendments Regarding Financial
Reporting and Computation
Requirements of Swap Dealers
Lastly, the amendments regarding
financial reporting and computation
include: (1) amendments to the heading
and scope provision of Commission
regulation § 23.105(k) and (l); (2) titles
of certain schedules included in
Appendix B; (3) alignment of the public
disclosure of unaudited financial
information with the periodicity
permitted by routine financial filings in
Commission regulation § 23.105(d), and
to remove reference to a statement
disclosing the amounts of minimum
regulatory capital; (4) amending Form
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1–FR–FCM to add the 2 percent of
uncleared swap margin capital
requirement and swaps and securitybased swaps haircuts; and (5) addition
of clarifying language to Commission
regulations § 23.103(a)(1) and (c)(1) to
provide additional clarity to registrants
that the same standardized market and
credit risk charges are applicable to
nonbank SDs utilizing the Tangible Net
Worth Capital Approach as are
applicable to all other nonbank SDs if
not approved to use models. These
amendments are meant to clarify what
was originally intended in the Final
Rule or what is already included within
the existing Commission regulations, as
well as align the schedules as currently
required by the SEC and the NFA. The
Commission anticipates that these
amendments will remove uncertainty
amongst SDs about the type of form and
the extent of detail that they should be
reporting.
2. Costs
The Commission generally does not
anticipate any costs associated with the
above amendments as they are intended
to streamline and clarify existing
financial reporting and capital
requirements. Of the above, only the
amendments to Commission regulation
§ 23.105(l) would impose additional
financial reporting requirements on
nonbank SDs and nonbank MSPs not
approved to use models to file
Schedules 2–4 of Appendix B.
Currently, there are 8 nonbank SDs
not approved to use models that are not
currently filing Schedules 2–4 of
Appendix B but would be required to do
so under the amendments to
Commission regulation § 23.105(l). The
information required under Appendix B
is nearly identical in all material
respects to corresponding forms found
in the SEC Form FOCUS Report Part II,
as well as the capital and financial
reporting requirements by the NFA for
its member nonbank SDs and nonbank
MSPs. Thus, the Commission has
preliminarily determined that these
nonbank SDs already have developed
policies, procedures and systems to
aggregate, monitor, and track their swap
activities and risks as is required under
Schedules 2–4 of Appendix B. This
should mitigate some of the burdens of
the additional reporting and
recordkeeping requirements. Finally,
the amendments to Commission
regulation § 23.105(k) clarify that
nonbank SDs and nonbank MSPs
approved to use models may comply
with the requirements to provide
specific financial information required
by Commission regulation § 23.105(k)
by filing Appendix B. Such nonbank
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SDs and nonbank MSPs have already
been filing Appendix B with the
Commission, and thus the Commission
has preliminarily determined that the
amendments to Commission regulation
§ 23.105(k) would not impose any
additional burden for such nonbank SDs
and nonbank MSPs.
3. Section 15(a) Factors
The following is a discussion of the
cost and benefit considerations of this
proposed rulemaking, as it relates to the
five broad areas of market and public
concern identified in section 15(a) of the
CEA: (1) protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of swaps markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.
a. Protection of Market Participants and
the Public
The proposed rules are intended to
enhance the clarity of financial
reporting and computation requirements
by revising the language of the
regulations with respect to the type of
forms and the tests that SDs should be
using as part of their financial reporting
process. The changes to the
computation of Tangible Net Worth are
anticipated to benefit the public by
allowing investors to monitor tangible
net worth at the consolidated parent’s
level, and the financial reporting
requirements for both bank SDs and
nonbank SDs set out in this proposed
rulemaking should help the
Commission and market participants
monitor and assess the financial
condition of such SDs more accurately
and as was intended in the Final Rule.
These amendments are also intended to
harmonize financial reporting
requirements with those of the
prudential regulators, and the SEC,
through which market participants and
the Commission can gain a clearer and
more directly comparable
understanding of the financial reports
received. Clarifying rules should
safeguard both market participants and
the public by improving transparency
and reducing ambiguity.
Request for Comment
Question 10. Do the proposed
financial reporting and computation
requirements protect market
participants and the public? Please
explain.
b. Efficiency, Competitiveness, and
Financial Integrity of Swaps Markets
In this proposed rulemaking, the
Commission seeks to promote efficiency
PO 00000
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2565
and financial integrity of the swaps
market by streamlining many of the
financial reporting requirements. For
example, the amendments to
Commission regulation § 23.105(p)
permit certain bank SDs to file with the
Commission comparable Call Report
schedules in accordance with, and
within the timeframe permitted by, the
prudential regulators that they currently
file with the prudential regulators, or
comparable SEC-approved financial
reports and schedules, as applicable.
The proposed amendments to
Commission regulation § 23.105(p)
would also allow certain Non-U.S. bank
SDs to file with the Commission what
they currently file with their respective
home country regulators, subject to
certain conditions. In addition, the
amendments to Commission regulation
§ 23.105(k) are meant to ensure that the
information listed in Appendix B is
completed by all nonbank SDs and
nonbank MSPs as was intended, and is
consistent with that required by the SEC
and NFA, and the amendments to Form
1–FR–FCM are meant to harmonize with
the SEC’s requirements in its FOCUS
Report Part II. Harmonizing
requirements should foster a more level
playing field, ultimately promoting trust
and integrity within the market.
The Commission anticipates that
these amendments will promote greater
operational efficiencies for both bank
and nonbank SDs that are already
regulated, either prudentially or through
comparable foreign regulators, as they
may be able to avoid creating
duplicative compliance and operational
infrastructures. The proposed
amendments should allow the
Commission to monitor the financial
integrity of swaps markets more clearly
and efficiently, including in the case of
any default or financial contagion.
Request for Comment
Question 11. How might this proposal
affect market integrity? Is market
integrity adversely affected by the
proposed rules? If so, how might the
Commission mitigate any harmful
impact?
c. Price Discovery
The Commission anticipates that the
proposed amendments may enhance
price discovery. By clarifying financial
reporting and computation requirements
and harmonizing reporting practices, a
more efficient operating environment
would be created for SDs, which are
important intermediaries within the
swaps markets. This improved data
quality reported to regulators has the
potential to enhance supervision,
leading to improved market quality.
E:\FR\FM\16JAP1.SGM
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Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
Consequently, this could lead to a more
effective and accurate price discovery
process.
Request for Comment
Question 12. How might this
proposed rulemaking affect price
discovery? Please explain.
d. Sound Risk Management Practices
The Commission has preliminarily
determined that, as a result of the
proposed reporting and recordkeeping
requirements, SDs may more effectively
track their trading and risk exposure in
swaps and other financial activities. To
the extent that these SDs can better
monitor and track their risks, the
Commission anticipates that this should
help them better manage risk within the
entity.
Request for Comment
Question 13. How might this proposal
affect SD’s risk management practices?
Please explain.
e. Other Public Interest Considerations
The Commission has not identified
any additional public interest
considerations related to the costs and
benefits of the proposed rule.
ddrumheller on DSK120RN23PROD with PROPOSALS1
Request for Comment
Question 14. Are there other public
interest considerations that the
Commission should consider? Please
explain.
C. Other Amendments
The Commission is proposing a
number of clarifying amendments
intended to align with existing
Commission regulations, including: (1)
amending Commission regulation
§ 23.105(c)(4) to add a two business
days reporting timeframe to the
requirement for nonbank SD notice
filing of a substantial reduction in
capital; (2) amending Commission
regulations § 23.101(a)(1)(i)(B) and
(a)(1)(ii)(C) to establish that the use of
subordinated debt as regulatory capital
is subject to the approval of either an
RFA of which the nonbank SD is a
member, or the Commission; and (3)
amending Commission regulation
§ 23.105(e)(4)(v) for SDs and MSPs to
include an explicit statement, if
applicable, that there are no material
differences between the audited annual
report and the unaudited annual report
of the same date.
1. Benefits
a. Notice of Substantial Reduction in
Capital
The amendments to the notice
requirements in Commission regulation
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§ 23.105(c)(4) would add a two-business
days requirement for nonbank SDs for
notice of substantial reduction in
capital. The Commission has
preliminarily determined that adding a
reporting timeframe to the notice
requirement will enhance compliance
by providing regulatory certainty to
nonbank SDs of when such a filing is
due.
b. Subordinated Debt Approval
The amendments to Commission
regulation § 23.101(a)(1)(i)(B) would
establish that the use of subordinated
debt as regulatory capital is subject to
the approval of either an RFA of which
the nonbank SD is a member, or the
Commission. The amendments should
further provide regulatory clarity by
establishing the process for approving
subordinated debt for nonbank SDs,
which was not explicitly articulated in
the Final Rule and had led to
uncertainty among nonbank SDs.
c. Statement of No Material Difference
Lastly, the amendments to
Commission regulation § 23.105(e)(4)(v)
would require that the SDs and MSPs
include an explicit statement, if
applicable, of no material differences
between the audited and the unaudited
annual report of the same date. Doing so
should not only align the filing
approach for auditors of SDs with that
of FCMs, but also enhance the reliability
of such annual reports by encouraging
auditors to more rigorously assess the
materiality of reporting any discovered
audit findings.
2. Costs
The Commission does not anticipate
that compliance with the above
amendments will lead to any significant
costs. The amendments to Commission
regulations § 23.105(c)(4) and (e)(4)(v)
are meant to align the financial
reporting requirements of SDs with that
of FCMs, and based on the
Commission’s experience with existing
filings and discussions with registered
SDs, the Commission has preliminarily
determined that the registrants will be
able to file necessary information within
the timeframe provided. The
amendments to Commission regulation
§ 23.101(a)(1)(i)(B) are meant to
establish a process of approving
subordinated debt for nonbank SDs, and
as such they would not levy any
additional costs to the nonbank SDs.
3. Section 15(a) Factors
The following is a discussion of the
cost and benefit considerations of the
proposed rulemaking, as it relates to the
five broad areas of market and public
PO 00000
Frm 00052
Fmt 4702
Sfmt 4702
concern identified in section 15(a) of the
CEA: (1) protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of swaps markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations.
a. Protection of Market Participants and
the Public
The Commission anticipates that the
proposed amendment to Commission
regulation § 23.105(c)(4) should protect
market participants and the public
against possible market disruption by
requiring that all SDs file a notice of a
substantial reduction in capital within
two business days after such an incident
has occurred. Similarly, the
amendments to Commission regulation
§ 23.101(a)(1)(i)(B) should provide
market clarity on how subordinated
debt is approved for consideration as
capital, and the amendments to
Commission regulation § 23.105(e)(4)(v)
should allow the Commission and the
public to effectively monitor cases
where there are no material differences
between the audited and unaudited
annual report of the same date filed by
nonbank SDs and nonbank MSPs. These
amendments should enable market
participants to have better insights into
SD’s capital and financial positions.
This, in turn, should enhance the
protection of both market participants
and the public.
Request for Comment
Question 15. Do the proposed
financial reporting requirements protect
market participants and the public?
Please explain.
b. Efficiency, Competitiveness, and
Financial Integrity of Swaps Markets
The proposed amendments should
improve the accuracy and completeness
of nonbank SDs’ and nonbank MSPs’
financial reporting by imposing a twobusiness day deadline for notice of
substantial reduction in capital, and an
affirmative statement of no material
differences between the audited and
unaudited annual financial statement,
as applicable. The establishment of a
process for approving subordinated debt
should lead to increased efficiency in
how such subordinated debt is
monitored. Further, these amendments
are also intended to harmonize financial
reporting requirements with those of the
prudential regulators, as well as the
Commission’s existing framework
regarding FCMs. Harmonizing
requirements should foster a more level
playing field, ultimately promoting trust
and integrity within the market.
E:\FR\FM\16JAP1.SGM
16JAP1
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
Request for Comment
Question 16. Is market integrity
adversely affected by the proposed
rules? If so, how might the Commission
mitigate any harmful impact?
c. Price Discovery
ddrumheller on DSK120RN23PROD with PROPOSALS1
The Commission anticipates that the
proposed amendments may enhance
price discovery. By improving financial
reporting requirements for nonbank SDs
and nonbank MSPs, a more efficient
operating environment should be
created for SDs, which are important
intermediaries within the swaps
markets. This improved data quality
reported to regulators has the potential
to enhance supervision, leading to
improved market quality. Consequently,
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
2567
this could lead to a more effective and
accurate price discovery process.
management practices of nonbank SDs
and nonbank MSPs? Please explain.
Request for Comment
Question 17. How might this
proposed rulemaking affect price
discovery? Please explain.
e. Other Public Interest Considerations
d. Sound Risk Management Practices
The Commission anticipates that the
above amendments will lead to better
risk management practices among SDs
and MSPs, particularly by requiring
them to monitor for potential reduction
in capital and material differences
between the audited and the unaudited
annual financial statements.
Request for Comment
Question 18. How might this
proposed rulemaking affect risk
PO 00000
Frm 00053
Fmt 4702
Sfmt 4702
The Commission has not identified
any additional public interest
considerations related to the costs and
benefits of the proposed rule.
Request for Comment
Question 19. Are there other public
interest considerations that the
Commission should consider? Please
explain.
Note: The following appendix to this
preamble pertains to a form that does not
appear in the Code of Federal Regulations.
BILLING CODE 6351–01–P
E:\FR\FM\16JAP1.SGM
16JAP1
2568
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
Appendix to the Preamble—Proposed
Revisions to Selected Section of Form
1–FR–FCM: Statement of the
Computation of the Minimum Capital
Requirements
Appendix to the Preamble-Proposed Revisions to Selected Section of Form 1-FR-FCM:
Statement of the Computation of the Minimum Capital Requirements<PHOTO>
CFTC FORM 1.-FR.f'CM
STA'laENT OF THE COMPUTATION OF THE MINIMUM CAPITAL ReQUlREMENTS
ASOF
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PO 00000
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16JAP1
EP16JA24.046</GPH>
ddrumheller on DSK120RN23PROD with PROPOSALS1
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2569
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
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16. Charges against open commodity and cleared OTC derivatives positions in proprietary accounts and swaps
A.
Uncovered exchange-traded futures, cleared OTC derivatives positions and granted options contracts
8.
Ten percent (10%) of the market value of commodities which
underlie commodity options not traded on a contract market
carried long by the applicant or registrant which has value
and such value increased adjusted net capital (this charge
is limited to the value attributed to such options)
C.
D.
ddrumheller on DSK120RN23PROD with PROPOSALS1
!3350!
-----13360!
-------
!3370!
_ _ _ _ _ !3380!
Commodity options which are traded on contract markets and
carried long in proprietary accounts. Charge is the same as
would be applied if the applicant or registrant was the grantor
of the options (this charge is limited to the value attributed
to such options)
- - - - - - - !3390!
Haircuts on swaps and security-based swaps pursuant to
1.17(c)(5)(iii), (iv), (xv), and (xvi) (itemize to the subparagraph
level on separate page)
---~
17. Five percent (5%) of all unsecured receivables from foreign brokers
- - - - - - - !3410!
18. Deficiency in collateral for secured demand notes
- - - - - - - !3420!
19. Adjustment to eliminate benefits of consolidation (explain on separate page)
- - - - - - - !3430!
20. Total charges (add lines 7 through 19)
-------
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E:\FR\FM\16JAP1.SGM
16JAP1
!3440!
EP16JA24.047</GPH>
percentage of margin requirements applicable to such contracts
Less: equity in proprietary accounts included in liabilities
2570
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
Adjusted Net Capital Computation
21. Adjusted net capital (subtract line 20 from line 6)
!3500!
22. Adjusted Net capital required
A.
Risk Based Capital Requirement
Amount of Customer Risk
Maintenance Margin
ii
Enter 8% of line 22.A.i
Amount of Non-Customer Risk
iii
Maintenance Margin
iv
Enter 8% of line 22.A.iii
V
Enter the sum of 22.A.ii and 22.A.iv
vi
Total Uncleared Swap Margin, as applicable
vii
Enter 2% of line 22.A.vi
viii Enter the sum of 22.A.v and 22.A.vii
!3515!
!3525i
!3535i
!3545i
!3555i
~
~
~
B.
Minimum Dollar Amount Requirement
!3565i
C.
Other NFA Requirement
!3575i
D.
Adjusted Net Capital Requirement Enter the greater of lines 22.A.viii, 22.B. or 22.C
- - - - - - - !3600i
23. Excess adjusted net capital (line 21 less line 22.D.)
-------
!3610i
Computation of Early Warning Level
24. If the Minimum Adjusted Net Capital Requirement computed on line 22.D (Box 3600) is:
•
•
•
The Risk Based Requirement, enter 110% of line 22.A.viii. (XXXX), or
The Minimum Dollar Requirement of $1,000,000, for FCMs, or $20,000,000 for FCMs registered as SDs, enter 150% of line
22.B. (3565), or
The Minimum Dollar Requirement of $20,000,000 for FCMs offering or engaging in retail forex transactions
or Retail Foreign Exchange Dealers ("RFED"), enter 110% of line 22.B. (3565), or
•
Other NFA Requirement of $20,000,000 plus five percent of the FCM's offering or engaging in retail forex
transactions or RFED's total retail forex obligations in excess of
•
Any other NFA Requirement, enter 150% of line 22.C. (3575)
$10,000,000, enter 110% of line 22.C. (3575), or
This is your early warning capital level. If this amount is greater than the amount on line 21,
you must immediately notify your DSRO and the Commission pursuant to section 1.12 of the regulations.
Guaranteed Introducing Brokers
ddrumheller on DSK120RN23PROD with PROPOSALS1
BILLING CODE 6351–01–C
List of Subjects in 17 CFR Part 23
Reporting and recordkeeping
requirements, Swaps.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR part 23 as follows:
PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
*
1. The authority citation for part 23
continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b–1,
6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a,
18, 19, 21.
16:48 Jan 12, 2024
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2. Amend § 23.100 by adding, in
alphabetical order, a definition of the
term ‘‘Call Report’’ and revising the
definitions of the terms ‘‘Predominantly
engaged in non-financial activities’’ and
‘‘Tangible net worth’’ to read as follows:
■
§ 23.100 Definitions applicable to capital
requirements.
■
VerDate Sep<11>2014
Section 23.160 also issued under 7 U.S.C.
2(i); Sec. 721(b), Pub. L. 111–203, 124 Stat.
1641 (2010).
*
*
*
*
Call Report. This term means the
Federal Financial Institutions
Examination Council Form 031 that a
swap dealer or major swap participant
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for which there is a prudential regulator
is required to file with its applicable
prudential regulator.
*
*
*
*
*
Predominantly engaged in nonfinancial activities. A swap dealer is
predominantly engaged in non-financial
activities if:
(1) The swap dealer’s consolidated
annual gross financial revenues, or if the
swap dealer is a wholly owned
subsidiary, then the swap dealer’s
consolidated parent’s annual gross
financial revenues, in either of its two
most recently completed fiscal years
represents less than 15 percent of the
swap dealer’s or the swap dealer’s
E:\FR\FM\16JAP1.SGM
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EP16JA24.048</GPH>
25. List all lBs with which guarantee agreements have been entered into by the FCM and which are currently in effect.
See Attached.
ddrumheller on DSK120RN23PROD with PROPOSALS1
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
consolidated parent’s consolidated gross
revenue in that fiscal year (‘‘15%
revenue test’’), and
(2) The consolidated total financial
assets of the swap dealer, or if the swap
dealer is wholly owned subsidiary, then
the consolidated total financial assets of
the swap dealer’s parent, at the end of
its two most recently completed fiscal
years represents less than 15 percent of
the swap dealer’s or the swap dealer’s
consolidated parent’s consolidated total
assets as of the end of the fiscal year
(‘‘15% asset test’’).
(3) For purpose of computing the 15%
revenue test or the 15% asset test, a
swap dealer’s activities or swap dealer’s
parent’s activities shall be deemed
financial activities if such activities are
defined as financial activities under 12
CFR 242.3 and Appendix A to 12 CFR
242, including lending, investing for
others, safeguarding money or securities
for others, providing financial or
investment advisory services,
underwriting or making markets in
securities, providing securities
brokerage services, and engaging as
principal in investing and trading
activities; Provided, however, a swap
dealer or a swap dealer’s consolidated
parent may exclude from its financial
activities accounts receivable resulting
from non-financial activities.
*
*
*
*
*
Tangible net worth. This term means
the net worth of a swap dealer or major
swap participant as determined in
accordance with U.S. generally accepted
accounting principles, or International
Financial Reporting Standards issued by
the International Accounting Standards
Board if the swap dealer or major swap
participant is permitted under
§ 23.105(b) to prepare and maintain
books and records in accordance with
such standards, but in either case,
excluding goodwill and other intangible
assets. In determining net worth, all
long and short positions in swaps,
security-based swaps and related
positions must be marked to their
market value. A swap dealer or major
swap participant must include in its
computation of tangible net worth all
liabilities or obligations of a subsidiary
or affiliate that the swap dealer or major
swap participant guarantees, endorses,
or assumes either directly or indirectly.
*
*
*
*
*
■ 3. Amend § 23.101 by revising
paragraphs (a)(1)(i)(B), (a)(1)(ii)(B), and
(a)(1)(ii)(C), and adding paragraph
(a)(1)(ii)(D) to read as follows:
§ 23.101 Minimum financial requirements
for swap dealers and major swap
participants.
(a)(1) * * *
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
(i) * * *
(B) An aggregate of common equity
tier 1 capital, additional tier 1 capital,
and tier 2 capital, all as defined under
the bank holding company regulations
in 12 CFR 217.20, equal to or greater
than eight percent of the swap dealer’s
BHC equivalent risk-weighted assets;
provided, however, that the swap dealer
must maintain a minimum of common
equity tier 1 capital equal to six point
five percent of its BHC equivalent riskweighted assets; provided further, that
any capital that is subordinated debt
under 12 CFR 217.20 and that is
included in the swap dealer’s capital for
purposes of this paragraph (a)(1)(i)(B)
must qualify as subordinated debt under
§ 240.18a–1d of this title in accordance
with a qualification determination of the
Commission or a registered futures
association of which the swap dealer is
a member;
*
*
*
*
*
(ii) * * *
(B) A swap dealer that uses internal
models to compute market risk for its
proprietary positions under § 240.18a–
1(d) of this title must calculate the total
market risk as the sum of the VaR
measure, stressed VaR measure, specific
risk measure, comprehensive risk
measure, and incremental risk measure
of the portfolio of proprietary positions
in accordance with § 23.102 and
Appendix A to subpart E of this part;
(C) A swap dealer may recognize as a
current asset, receivables from thirdparty custodians that maintain the swap
dealer’s initial margin deposits
associated with uncleared swap and
security-based swap transactions
pursuant to the margin rules of the
Commission, the Securities and
Exchange Commission, a prudential
regulator, as defined in section 1a(39) of
the Act, or a foreign jurisdiction that has
received a margin Comparability
Determination under § 23.160; and
(D) The qualification of any
subordinated debt used to meet any
capital requirements shall be as
determined by the Commission or a
registered futures association of which
the swap dealer is a member.
*
*
*
*
*
■ 4. In § 23.102, revise paragraph (d) to
read as follows:
§ 23.102 Calculation of market risk
exposure requirement and credit risk
exposure requirement using internal
models.
*
*
*
*
*
(d) The Commission, or registered
futures association upon obtaining the
Commission’s determination that its
requirements and model approval
process are comparable to the
PO 00000
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Fmt 4702
Sfmt 4702
2571
Commission’s requirements and
process, may approve or deny the
application, or approve or deny an
amendment to the application, in whole
or in part, subject to any conditions or
limitations the Commission or
registered futures association may
require, if the Commission or registered
futures association finds the approval to
be appropriate in the public interest,
after determining, among other things,
whether the applicant has met the
requirements of this section. A swap
dealer that has received Commission or
registered futures association approval
to compute market risk exposure
requirements and credit risk exposure
requirements pursuant to internal
models must compute such charges in
accordance with paragraph (c) of this
section.
*
*
*
*
*
■ 5. In § 23.103, revise paragraphs (a)(1)
and (c)(1) to read as follows:
§ 23.103 Calculation of market risk
exposure requirement and credit risk
requirement when models are not
approved.
(a) * * *
(1) Computes its regulatory capital
requirements under § 23.101(a)(1)(ii) or
(a)(2), and
*
*
*
*
*
(c) * * *
(1) A swap dealer that computes
regulatory capital under
§ 23.101(a)(1)(ii) or (a)(2) shall compute
counterparty credit risk charges using
the applicable standardized credit risk
charges set forth in § 240.18a-1 of this
title and § 1.17 of this chapter for such
positions.
*
*
*
*
*
■ 6. In § 23.105, revise paragraphs (c)(2)
and (c)(4), (d)(2) through (d)(4), (e)(4)(v),
(e)(6), (i)(1)(i) and (ii), (i)(2)(ii), the
introductory text to (k)(1), (l), (p)(2), and
(p)(7) to read as follows:
§ 23.105 Financial recordkeeping,
reporting and notification requirements for
swap dealers and major swap participants.
*
*
*
*
*
(c) * * *
(2) A swap dealer or major swap
participant who knows or should have
known that its regulatory capital at any
time is less than 120 percent of its
minimum regulatory capital
requirement as determined under
§ 23.101, or less than the amounts
identified in § 1.12(b) of this chapter for
a swap dealer or major swap participant
that is also a futures commission
merchant, must provide written notice
to the Commission and to the registered
futures association of which it is a
E:\FR\FM\16JAP1.SGM
16JAP1
ddrumheller on DSK120RN23PROD with PROPOSALS1
2572
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
member to that effect within 24 hours of
such event.
*
*
*
*
*
(4) A swap dealer or major swap
participant must provide written notice
within two business days to the
Commission and to the registered
futures association of which it is a
member of a substantial reduction in
capital as compared to that last reported
in a financial report filed with the
Commission pursuant to this section.
The notice shall be provided if the swap
dealer or major swap participant
experiences a 30 percent or more
decrease in the amount of capital that
the swap dealer or major swap
participant holds in excess of its
regulatory capital requirement as
computed under § 23.101.
*
*
*
*
*
(d) * * *
(2) The financial reports required by
this section must be prepared in the
English language and be denominated in
United States dollars. The financial
reports shall include a statement of
financial condition, a statement of
income/loss, a statement of changes in
liabilities subordinated to the claims of
general creditors, a statement of changes
in ownership equity, a statement
demonstrating compliance with and
calculation of the applicable regulatory
capital requirement under § 23.101, and
such further material information as
may be necessary to make the required
statements not misleading. The monthly
or quarterly report and schedules must
be prepared in accordance with
generally accepted accounting
principles as established in the United
States; Provided, however, that a swap
dealer or major swap participant that is
not otherwise required to prepare
financial statements in accordance with
U.S. generally accepted accounting
principles, may prepare the monthly or
quarterly report and schedules required
by this section in accordance with
International Financial Reporting
Standards issued by the International
Accounting Standards Board.
(3) A swap dealer or major swap
participant that is also registered with
the Securities and Exchange
Commission as a broker or dealer,
security-based swap dealer, or a major
security-based swap participant and
files a monthly Form X–17A–5 FOCUS
Report Part II with the Securities and
Exchange Commission pursuant to
§ 240.18a–7 or 240.17a–5 of this title, as
applicable, must file such Form X–17A–
5 FOCUS Report Part II with the
Commission and with the registered
futures association in lieu of the
financial reports required under
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
paragraphs (d)(1) and (2) of the section.
The swap dealer or major swap
participant must file the form with the
Commission and registered futures
association when it files the Form X–
17A–5 FOCUS Report Part II with the
Securities and Exchange Commission,
provided, however, that the swap dealer
or major swap participant must file the
Form X–17A–5 FOCUS Report Part II
with the Commission and registered
futures association no later than 17
business days after the end of each
month.
(4) A swap dealer or major swap
participant that is also registered with
the Commission as a futures
commission merchant must file a Form
1–FR–FCM or such other form as the
futures commission merchant is
permitted to file under § 1.10 of this
chapter, in lieu of the monthly financial
reports required under paragraphs (d)(1)
and (2) of the section.
(e) * * *
(4) * * *
(v) A reconciliation of any material
differences from the unaudited financial
report prepared as of the swap dealer’s
or major swap participant’s year-end
date under paragraph (d) of this section
and the swap dealer’s or major swap
participant’s annual financial report
prepared under this paragraph (e) or, if
no material differences exist, a
statement so indicating; and
*
*
*
*
*
(6) A swap dealer or major swap
participant that is also registered with
the Commission as a futures
commission merchant must file an
audited Form 1–FR–FCM or such other
form as the futures commission
merchant is permitted to file under
§ 1.10 of this chapter, and must comply
with the requirements of § 1.16 of this
chapter, including filing a supplemental
accountant’s report on material
inadequacies concurrently with the
audited annual report, in lieu of the
annual financial report required under
this paragraph (e).
*
*
*
*
*
(i) * * *
(1) * * *
(i) The statement of financial
condition including applicable
footnotes; and
(ii) The amounts of the swap dealer’s
or major swap participant’s regulatory
capital and minimum regulatory capital
requirement, computed in accordance
with § 23.101.
(2) * * *
(ii) The amounts of the swap dealer’s
or major swap participant’s regulatory
capital as of the fiscal year end and its
minimum regulatory capital
PO 00000
Frm 00058
Fmt 4702
Sfmt 4702
requirement, computed in accordance
with § 23.101.
*
*
*
*
*
(k) * * *
(1) A swap dealer that has received
approval or filed an application for
provisional approval under § 23.102(d)
from the Commission, or from a
registered futures association of which
the swap dealer is a member, to use
internal models to compute its market
risk exposure requirement and credit
risk exposure requirement in computing
its regulatory capital under § 23.101
must file with the Commission and with
the registered futures association of
which the swap dealer is a member the
specific information contained in
Appendix B to subpart E of this part and
the following information within 17
business days of the end of each month
or quarter as applicable:
*
*
*
*
*
(l) Additional position and
counterparty reporting requirements for
swap dealers and major swap
participants not approved to use
models. A swap dealer or major swap
participant which is not subject to
paragraph (k) of this section must
provide the Commission and the
registered futures association of which
the swap dealer or major swap
participant is a member, the additional
specific information contained in
Appendix B to subpart E of this part on
a monthly or quarterly basis as
applicable to its required frequency of
financial reporting under paragraph (d)
of this section.
*
*
*
*
*
(p) * * *
(2) Financial report and position
information. (i) A swap dealer or major
swap participant that files a Call Report
with its applicable prudential regulator
shall file Schedule RC—Balance Sheet
and Schedule RC—R Regulatory Capital
from its Call Report filed with the
prudential regulator, and Schedule 1 of
Appendix C to subpart E of this part,
with the Commission on a quarterly
basis. The swap dealer or major swap
participant shall file the schedules with
the Commission on the date the Call
Report is due to be filed with the swap
dealer’s or major swap participant’s
prudential regulator.
(ii) A swap dealer or major swap
participant domiciled in a non-U.S.
jurisdiction that is not required to file a
Call Report by its applicable prudential
regulator shall file a statement of
financial condition and regulatory
capital information containing
comparable financial information as
required by Schedule RC—Balance
Sheet and Schedule RC—R Regulatory
E:\FR\FM\16JAP1.SGM
16JAP1
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
ddrumheller on DSK120RN23PROD with PROPOSALS1
Capital of the Call Report, and shall file
Schedule 1 of Appendix C to subpart E
of this part, with the Commission on a
quarterly basis. The statement of
financial condition, regulatory capital
information, and Schedule 1 of
Appendix C to subpart E of this part
shall be prepared and presented in
accordance with the accounting
standards approved by the swap dealer’s
or major swap participant’s home
country regulatory authorities, provided,
however, that the schedules and
information must be in the English
language with balances converted to
U.S. dollars. The swap dealer or major
swap participant shall file the statement
of financial condition, regulatory capital
information, and Schedule 1 of
Appendix C to subpart E of this part
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
with the Commission no later than 90
calendar days after the end of the swap
dealer’s or major swap participant’s
fiscal quarter.
*
*
*
*
*
(7) A swap dealer or major swap
participant that is subject to the capital
requirements of a prudential regulator
and is also registered with the Securities
and Exchange Commission as a securitybased swap dealer or a major securitybased swap participant and files a
quarterly Form X–17A–5 FOCUS Report
Part IIC with the Securities and
Exchange Commission pursuant to
§ 240.18a–7 of this title, must file such
Form X–17A–5 FOCUS Report Part IIC
with the Commission in lieu of the
financial reports required under
paragraphs (p)(2) of this section. The
PO 00000
Frm 00059
Fmt 4702
Sfmt 4702
2573
swap dealer or major swap participant
must file the form with the Commission
when it files the Form X–17A–5 FOCUS
Report Part IIC with the Securities and
Exchange Commission, provided,
however, that the swap dealer or major
swap participant must file the Form X–
17A–5 FOCUS Report Part IIC with the
Commission no later than 30 calendar
days from the date the report is made.
■ 7. In Appendix B to subpart E of part
23, revise the schedule headings of
Schedules 1, 2, 3, and 4, and republish
the schedules, to read as follows:
Appendix B to Subpart E of Part 23—
Swap Dealer and Major Swap
Participant Position Information
BILLING CODE 6351–01–P
E:\FR\FM\16JAP1.SGM
16JAP1
2574
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
SCHEDULE 1 -AGGREGATE SECURITIES, COMMODITIES, AND SWAPS POSITIONS
Reg. 23.105(k)
and (I)
Appendix
Items on this page to be reported by:
B
Swap Dealers (Authorized and not authorized to use models)
Major Swap Participants (Authorized and not authorized to use models)
Aggregate Securities Commodities and Swa~s Positions
LONG/BOUGHT
SHORT/SOLD
1. U.S. treasury securities ...
$
~$
2. U.S. government agency and U.S. government-sponsored enterprises ...
$
~$
~
~
A Mortgage-backed securities issued by U.S. government agency and
U.S. government-sponsored enterprises ..
$
1180011$
1180021
B. Debt securities issued by U.S. government agency and U.S.
government-sponsored enterprises ..
$
1180031 $
11800~
3. Securities issued by states and political subdivisions in the U.S.
$
~$
~
A Debt securities ..
$
~$
B. Equity securities ..
$
~$
5. Money market instruments ...
$
~$
~
~
~
~
~
~
~
~
~
~
4. Foreign securities
6. Private label mortgage backed securities ...
$
~$
7. other asset-backed securities ..
$
~$
8. Corporate obligations ...
$
~$
9. Stocks and warrants (other than arbitrage positions) ..
$
~$
10. Arbitrage ...
$
~$
11 Spot commodities ..
$
~$
12 Other securities and commodities ..
$
~$
A Equity ..
$
~$
B. Debt ..
$
~$
C. Other ...
$
~$
~
~
~
D. Total securities with no ready market ..
$
1127771 $
1127821
$
1127781 $
1127831
A Cleared ..
$
1121061$
11211~
B. Non-cleared ..
$
1121071$
1121151
A Cleared ..
$
1121081$
1121161
B. Non-cleared ..
$
1121091$
1121171
A Cleared ..
$
1121101$
1121181
B Non-cleared ..
1121191
13. Securities with no ready market
14. Total net securities and spot commodities (sum of Lines 1-12 and 13D) ..
15. Security-based swaps
16 Mixed swaps
$
1121111$
18 Other derivatives and options
$
~$
~
19 Counterparty netting ..
$
1127791 $
11278~
20 Cash collateral netting
$
1127801 $
1127851
21 Total denvat1ve receivables and payables (sum of Lines 15-20) .
$
1127811$
1127861
22 Total net securities, cornrnodities, and swaps positions
(surn of Lines 14 and 21) ..
$
~$
~
Name of firm:
As of
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
PO 00000
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Fmt 4702
Sfmt 4725
E:\FR\FM\16JAP1.SGM
16JAP1
EP16JA24.049</GPH>
ddrumheller on DSK120RN23PROD with PROPOSALS1
17. Swaps
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
2575
NOTE: The information required to be reported within this form is intended to be identical to that required to be reported by Security Based Swap Dealers and
Major Security Based Swap Participants under SEC FORM X-17a-5 FOCUS Report Part II. Please refer to FOCUS REPORT II INSTRUCTIONS and related
interpretations published by the SEC in the preparation of this form.
Reg. 23.105(k)
and (I)
Appendix
B
SCHEDULE 2-CREDIT CONCENTRATION REPORT FOR FIFTEEN LARGEST EXPOSURES IN DERIVATIVES
Swap Dealers (Authorized and not authorized to use models)
Major Swap Participants (Authorized and not authorized to use models)
Items on this page to be reported by:
I.
1.
00
$
$
$
00
fi2i3E
rl213i
2.
112m
$
3.
4.
00
li2i22
$
5.
Current Net Exposure
Current Net and
Potential Exposure
Margin Collected
$
~ $
l12fB:
$
~ $
lmTI
$
M2151
lrn5:
$
112161
$
l12IBi
$
11225c
$
112211
$
~ $
l12'i6i
$
W01
$
l12i3t
$
~ $
11217( $
li2fBE
li2iBE
$
$
f-i22o.
$
1122D
li221E
~ $
00
$
~ $
112m
$
li2fBj $
$
6.
lf2f2E
$
fi2i4c
$
$
w
$
li2f2E
li2i27
00
$
M2W
$
$
fi2i7:
$
$
l12i4;
$
li"215E
$
w
$
li2iBE
li2ffil
li2i9C
$
7.
H215E
li2'i5t
$
li2i4:
$
l12i71
$
112191
$
fi214i
fi2i4e
M214t
$
IT215l
lf2'i&
$
$
fi2i7E
$
l12f§; $
ffffi
l1mi
!Tm
fi"m
l1220i
fi"m
$
~
$
li2'i6'i
$
~ $
l12fg: $
!Tm
$
lm2E
$
~ $
fi2i7i
$
li2fgi $
8.
9.
$
$
$
11221s
Rmc
112221
$
~
$
li22Z
$
10.
w
$
11.
IT2f3c
$
12.
M2131
$
fi22TI
$
M222E
13.
~ $
~ $
lf2ill
$
112171
$
112191
$
112211
$
112n
14.
M2132
00
$
M214t
lf2'is,i
$
$
~ $
~ $
$
l12f§1 $
l12fgj $
$
li2i5c
M216E
$
fi2is;
$
li219E
$
178n
$
l78TI
$
l7aTI
$
ffi
fi"22TI
fi221i
l78i-:i
$
$
A2iB1
lrn81
M222E
Rms
M223C
Rm1
15.
~II other counterparties
rotals
II.
ddrumheller on DSK120RN23PROD with PROPOSALS1
Net Replacement
Value
$
$
[7a"ic $
$
By Current Net and Potential Exposure
Gross Replacement Value
Receivable
Payable
(Gross Gain)
(Gross Loss)
Net Replacement
Value
Current Net Exposure
$
$
$
Current Net and
Potential Exposure
Margin Collected
1.
$
$
$
2
$
$
$
3.
$
$
$
4
$
$
$
5.
$
$
$
$
6
$
$
7
$
$
8.
$
$
g
$
$
$
10.
$
$
$
11
$
$
$
12.
$
$
$
13.
$
$
$
14.
$
$
$
15.
$
$
$
$
$
$
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
PO 00000
Frm 00061
Fmt 4702
Sfmt 4725
E:\FR\FM\16JAP1.SGM
16JAP1
EP16JA24.050</GPH>
By Current Net Exposure
Gross Replacement Value
Receivable
Payable
Counterparty Identifier
(Gross Gain)
(Gross Loss)
2576
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
@s
[otals:
Name affirm: _ _ __
Asof: _ _ _ __
NOTE: The information required to be reported within this form is intended to be identical to that required to be reported by Security Based Swap Dealers and
Major Security Based Swap Participants under SEC FORM X-17a-5 FOCUS Report Part II. Please refer to FOCUS REPORT II INSTRUCTIONS and related
interpretations published by the SEC in the preparation of this form.
Appendix
SCHEDULE 3-PORTFOLIO SUMMARY OF DERIVATIVES EXPOSURES BY INTERNAL CREDIT RATING
Items on this page to be reported by:
Swap Dealers (Authorized and not authorized to use models)
Major Swap Participants (Authorized and not authorized to use models)
B
ln1emal Credit Rating
1.
~ $
2.
li235C
$
3.
112351
$
4.
~ $
fi23B6
fi'23B7
fi23B6
112423
$
fi"2424
M2425
M2426
M2427
M2428
M2429
M2430
$
fi'23Bg $
~ $
fi'23oo
$
6.
li235i
$
$
7.
Mm
Mm
$
$
10.
M235i
M235E
$
11'23§1
fi'23§2
11'23§3
11'23§4
11'23§5
11.
Mm
$
fi'23oo
$
12.
$
13.
!Tm
112361
14.
15.
~ $
ro $
9.
$
$
$
$
fi'24§g $
li2536$
$
li2537$
$
li2538$
$
N$
$
li2539$
$
N$
$
li2540$
li2576
li25Tl
li2578
$
fi'2467
fi'25oo
fi'2551
fi'2552
fi'25fil
fi'2554
fi'2555
fi'25oo
fi'25o'1
fi'25oo
fi'25oo
fi'251o
fi'251T
fi"2512
fi"2513
fi"2514
fi"2515
fi"2516
$
$
fi'2463
fi'2464
112573
112574
112575
$
li2541$
112579
$
li2542$
mm $
$
$
$
N$
$
fi'23§a $
fi'23§9 $
M2435
M2436
mill
M2438
M2439
ff2«o
$
~ $
$
fi'w1
fi'w2
fi'w3
fi'w4
$
W$
$
W$
$
fi'w7
20.
M236E
M236i
M236E
$
21.
~ $
22.
M237C
$
23.
112371
$
fi'2'4o1
$
ro $
ro $
$
fi'24o4
$
ro $
$
24.
mm
25.
~ $
26.
lrn7i
lm'n
$
fi"24oo
fi"24ii7
fi"24iia
fi"2'4oo
fi"2'4'f6
fi"24'ff
$
112412 $
M237E
1123n
$
30.
M237i
$
31.
~ $
32.
li23sc $
33.
112381
Mm
Ima:
112413
112414
112415
112416
M2417
M2418
M2419
M2420
VerDate Sep<11>2014
M$
$
18.
35.
li2535$
$
112434
$
34.
1125n
fi'23§7 $
$
29.
['i2534 $
$
fi24§7 $
fi24§B $
$
N$
Mm
27.
fi24oo
W$
li236i
$
$
$
$
$
16:48 Jan 12, 2024
Jkt 262001
$
$
$
$
$
$
$
$
$
$
$
li2583
$
li2546$
112584
$
li2547$
$
li2548$
$
li2549$
$
li2550$
$
li2551$
li2585
li2586
li2587
li258li
li2589
$
li2552$
li2soo
$
li2553$
li2591
112592
112593
112594
112595
112596
112597
112598
$
~$
IIB54 $
$
fi"251a
$
li2555$
$
fi"251§" $
li2556$
$
fi'252o
fi"252'f
$
li2557$
$
li2558$
11'2522
11'2523
$
li2559$
$
fi24Bo
fi24Bi"
fi24B2
fi24B3
fi24B4
fi24B5
fi24B6
$
li2560$
$
fi24s7
$
$
112561 $
$
112562 $
$
112563 $
$
mm $
112«5
112«6
$
$
mm $
$
112452"
112453"
$
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ddrumheller on DSK120RN23PROD with PROPOSALS1
Gross Replacement Value
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Frm 00062
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EP16JA24.051</GPH>
Reg. 23.105(k)
and (I)
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
2577
36.
Unrated
Totals:
Name of firm: _ _ __
Asof: _ _ _ _ __
NOTE: The information required to be reporled within this form is intended to be identical to that required to be reported by Security Based Swap Dealers and
Major Security Based Swap Participants under SEC FORMX-17a-5 FOCUS Report Part IL Please refer to FOCUS REPORT II INSTRUCTIONS and related
interprelations published by the SEC in the preparation of this form.
Reg. 23.105(k)
and (I)
Appendix
B
Country
SCI-EDULE 4- GEOGRAPHIC DISTRIBUTION OF DERIVATIVES EXPOSURES FOR TEN LARGEST COUNTRIES
Items on this page to be reported by:
Swap Dealers (Authorized and not authorized to use models)
Major Swap Participants (Authorized and not authorized to use models)
By Current Net Exposure
Gross Replacement Value
Receivable
Payable
Net Replacemenl Value
Current Net Exposure
Current Net and
Potential Exposure
By current Net and Potential Exposure
Gross Replacement Value
Receivable
Payable
Net Replacement Value
Curren! Nel Exposure
Current Net and
Polenlial Exposure
Margin Collected
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Totals:
II.
Country
Margin Collected
1.
2.
3.
4.
5.
6.
7.
B.
9.
10.
Totals:
Name of firm: _ _ __
Asof: _ _ _ _ __
NOTE: The information required to be reported within this form is intended lo be identical to that required lo be reported by Security Based Swap Dealers and
Major Security Based Swap Participants under SEC FORMX-17a-5 FOCUS Report Part IL Please refer lo FOCUS REPORT II INSTRUCTIONS and related
interprelations published by the SEC in the preparation of this form.
ddrumheller on DSK120RN23PROD with PROPOSALS1
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Security-Based Swap and Swap
Positions form to read as follows:
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Appendix C to Subpart E of Part 23—
Specific Position Information for Swap
Dealers and Major Swap Participants
Subject to the Capital Requirements of
a Prudential Regulator
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16JAP1
EP16JA24.052</GPH>
8. Amend Appendix C to subpart E of
part 23 by removing the Balance Sheet
and Regulatory Capital forms and
revising the Schedule 1—Aggregate
■
2578
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
Reg. 23.105(p)
Appendix
C
SCHEDULE 1 -AGGREGATE SECURITY-BASED SWAP AND SWAP POSITIONS
Items on this page to be reported by:
Bank SDs
Bank MSPs
Aggregate Positions
LONG/BOUGHT
1. Security-based swaps
A. Cleared
SHORT/SOLD
$
!12801! $
!1280~
$
!12802! $
~
$
!1280~
$
!12811!
$
!12804
$
!12812!
$
!1280~
$
[m]
$
!1280~
$
4. Other derivatives
$
!12807!
$
ll1m
ll1ill
5. Total (sum of Lines 1-4)
$
!1280@
$
~
B. Non-cleared
2. Mixed swaps
A. Cleared
B. Non-cleared
3. Swaps
A. Cleared
B. Non-cleared
Name of firm:
As of:
NOTE: The information required to be reported within this form is intended to be identical to that required to be reported by Security Based
Swap Dealers and Major Security Based Swap Participants under SEC FORM X-1 ?A-5 FOCUS Report Part IIC. Please refer to FOCUS
REPORT PART IIC INSTRUCTIONS and related interpretations published by the SEC in the preparation of this form.
Issued in Washington, DC, on December
22, 2023, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Capital and Financial
Reporting Requirements for Swap
Dealers and Major Swap Participants—
Commission Voting Summary,
Chairman’s Statement, and
Commissioners’ Statements
ddrumheller on DSK120RN23PROD with PROPOSALS1
Appendix 1—Commission Voting
Summary
On this matter, Chairman Behnam and
Commissioners Johnson, Goldsmith Romero,
Mersinger, and Pham voted in the
affirmative. No Commissioner voted in the
negative.
Appendix 2—Statement of Support of
Chairman Rostin Behnam
I support the proposed rule to amend
certain requirements in part 23 of the
Commission’s regulations to address specific
issues identified during the implementation
of the Commission’s 2020 final rule on
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capital and financial reporting requirements
for swap dealers (SDs) and major swap
participants (MSPs).1 The proposed rule
would codify interpretive CFTC Letter No.
21–15 2 regarding capital and financial
reporting requirements for nonbank SDs and
nonbank MSPs electing the tangible net
worth capital approach; 3 codify the timelimited no-action position in CFTC Letter No.
21–18 4 regarding financial reporting
requirements for bank SDs; clarify technical
aspects of the reporting requirements; and
update an FCM reporting form consistent
with net capital requirements previously
adopted by the Commission for FCMs. The
proposed amendments are not intended to
change the Commission’s capital approach.
This proposal is a testament to the
commitment I previously made for the
Commission to consider the codification of
various forms of relief previously provided
by CFTC Division staff through no-action
1 Capital Requirements of Swap Dealers and
Major Swap Participants, 85 FR 57462 (Sept. 15,
2020).
2 CFTC Letter No. 21–15, Jun. 29, 2021, available
at https://www.cftc.gov/csl/21-15/download.
3 See 17 CFR 23.101.
4 CFTC Letter No. 21–18, Aug. 31, 2021, available
at https://www.cftc.gov/csl/21-18/download.
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position letters.5 As staff letters only bind the
staff of the issuing Division with respect to
the specific facts, situations, and persons
addressed by the respective staff letters,6 it is
good government for the Commission to
clean-up its rule set where the Commission
determines that compliance with certain
regulations is impossible. Such Commission
action not only provides regulatory certainty
and clarity to our registrants with the benefit
of notice and public comment, but also
ensures the efficient use of staff resources to
fix an issue once instead of allocating time
to a series of no-action positions for the same
matter.
I look forward to hearing the public’s
comments on the proposed amendments to
the regulations and the relevant appendices
in part 23 of the Commission’s regulations.
I thank staff in the Market Participants
Division, Office of the General Counsel, and
the Office of the Chief Economist for all of
their work on the proposal.
5 Keynote Address of Chairman Rostin Behnam at
the ABA Business Law Section Derivatives &
Futures Law Committee Winter Meeting, (Feb. 3.
2023), https://www.cftc.gov/PressRoom/Speeches
Testimony/opabehnam31.
6 See, e.g., 17 CFR 140.99.
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BILLING CODE 6351–01–C
Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
Appendix 3—Statement of
Commissioner Kristin N. Johnson
The Commodity Futures Trading
Commission (Commission or CFTC) adopted
a proposal to amend certain of the
Commission’s part 23 regulations that impose
minimum capital requirements and financial
reporting obligations on swap dealers (SDs)
and major swap participants (MSPs)
(Proposed Amendments).1 I support the
amendments advanced by the Market
Participants Division (MPD).
Minimum capital requirements serve as a
cushion during times of severe market stress
to ensure our registrants’ safety and
soundness, protect the financial stability of
our financial system, and prevent a run on
our financial institutions. Financial
condition reporting provides the Commission
with visibility and insight into the business
and financial health of our registrants and
enables us to require corrective action and
prevent a failure of a single entity or group
of entities or segment of the derivatives
market, which could raise system risk
concerns.
ddrumheller on DSK120RN23PROD with PROPOSALS1
Dodd-Frank Act Reforms
The Commission introduced new capital
and financial reporting requirements for SDs
in 2020, as mandated by the Dodd-Frank Act
(2020 Capital Rule).2 Title VII of the DoddFrank Act amended the Commodity
Exchange Act (CEA) to establish a new
regulatory framework for swaps, regulated by
the Commission, and security-based swaps,
regulated by the Securities and Exchange
Commission (SEC), to reduce risk, increase
transparency, and promote market integrity
within the financial system. Section 4s(e) of
the CEA introduced minimum capital
requirements for SDs,3 and section 4s(f) of
the CEA created financial reporting and
recordkeeping requirements for all SDs.4
In the United States, the capital framework
is divided into three parallel regimes. SDs
subject to regulation by a prudential regulator
are required to comply with the minimum
capital requirements adopted by the
applicable prudential regulator,5 while SDs
not subject to regulation by a prudential
regulator are required to meet the minimum
capital requirements of the Commission, and
security-based swap dealers (SBSDs) and
major security-based swap participants
(MSBSPs) that do not have a prudential
regulator are required to comply with the
minimum capital requirements of the SEC.6
The prudential regulators or banking
agencies and the SEC have adopted capital
rules for swaps and security-based swaps.
In the adopting release for the 2020 Capital
Rule, the Commission indicated that it would
1 Since no MSP is currently registered with the
Commission, in this statement, I will refer to SDs
only.
2 Capital Requirements of Swap Dealers and
Major Swap Participants (Capital Requirements), 85
FR 57462 (Sept. 15, 2020); Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law
111–203, 124 Stat. 1376 (2010).
3 7 U.S.C. 6s(e).
4 7 U.S.C. 6s(f).
5 7 U.S.C. 6s(e)(1)(A).
6 Section 15F of the Exchange Act addresses
capital requirements for SBSDs/MSBSPs.
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consult with the prudential regulators and
the SEC to assess the capital adequacy of
SDs, MSPs, SBSDs, and MSBSPs, monitor the
implementation of the rule and data, and
consider modifications to the capital and
financial reporting requirements.7
With the Proposed Amendments, the
Commission seeks to make surgical changes
to the 2020 Capital Rule, including a number
of technical corrections, based on
consultation with the prudential regulators
and SEC, and based on market feedback on
the adoption and implementation of the 2020
Capital Rule. While the Proposed
Amendments are not adjusting the capital
components of the 2020 Capital Rule, all
regulations designed to mitigate known
systemic risk concerns in the swaps market
must be subject to careful evaluation.
I commend the Commission for taking
formal steps to engage in a rulemaking
process that invites Commission discussion
and public notice and comment on these
regulations, which ensure compliance with
the Dodd-Frank Act while remaining
practical and solutions-oriented. I strongly
encourage the Commission, however, to
begin a formal rulemaking process to address
several unresolved issues necessary to ensure
compliance with the Dodd-Frank Act and
these requirements.
Clarifying Capital Requirements for
Commercials
The Proposed Amendments codify
Interpretive Letter 21–15, which applies to
commercial non-bank SDs—typically entities
that primarily engage in agricultural and
energy swaps and provide services that are
important to the U.S. economy. The
Commission’s overall capital approach
permits non-bank SDs to select one of three
methods to calculate their capital
requirements, as permitted under the rule:
the net liquid assets capital approach; 8 the
bank-based capital requirements; 9 or the
tangible net worth capital approach.10
The Commission proposes to revise the
2020 Capital Rule so that the test to
determine tangible net worth may be applied
at the entity level or ultimate consolidated
parent level; so that International Financial
Reporting Standards (IFRS) accounting
standards or GAAP may be used; and so that
position and financial exposure reporting
occur at the same frequency as financial
reporting, which for SDs is quarterly.
The Proposed Rule minimizes disruption,
and clarifies the interpretation and
implementation of the tangible net worth test
for commercial non-bank SDs.
7 Capital
Requirements, 85 FR at 57465.
capital requirement that is consistent with the
SEC’s final capital regulations for SBSDs, as well as
the existing CFTC’s capital rules for FCMs, and the
existing SEC’s capital rules for broker-dealers.
9 A capital requirement that is consistent with the
prudential regulators’ capital requirements for bank
SDs and that is based on the existing Federal
Reserve Board capital requirements for bank
holding companies.
10 A capital requirement that is based on the SD’s
tangible net worth, if the SD or parent is
predominantly engaged in non-financial activities.
8A
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2579
Refining Financial Reporting Requirements
The Proposed Amendments address issues
presented in No-Action Letter (NAL) 21–18,
which was extended under NAL 23–11 and
applies to bank SDs, including non-U.S. bank
SDs. Non-U.S. bank SDs can file the
applicable financial reporting within 90 days
of the end of the financial reporting period
and the same forms (e.g., relating to balance
sheet and regulatory capital schedules) in the
same format as provided to home country
regulators (but in English and U.S. dollars).
Additionally, U.S. bank SDs can file the same
forms (e.g., relating to balance sheet and
regulatory capital schedules) under bank
regulators’ Call Report and within the same
timeframe as when filing with their
prudential regulator.
The Proposed Amendments allow the
Commission to collect information from bank
SDs as a comparative tool. Also, all SDs must
use Schedule 1 for position information,
which is similar to the SEC’s FOCUS report—
duplicative forms are eliminated.
MPD has demonstrated collaboration
working with the prudential regulators and
SEC in developing and harmonizing
processes, procedures, and forms for
financial reports and notifications—some of
which are adopted the Proposed
Amendments. Further, the 2020 Capital Rule
was an important initiative that
demonstrated the Commission’s recognition
of the complexity and interconnectedness of
the derivatives markets.
Technical Corrections
SD Exposure Reporting
The Proposed Amendments amend
Commission regulation to clarify that certain
supplemental schedules used to report SD
exposure are intended to be provided by all
non-bank SDs. These amendments are
necessary to align the reporting of similar
information collected by the SEC from SBSDs
and to provide the Commission and National
Futures Association with important
information regarding SD exposure across
several geographical locations and
counterparties. This information provides
valuable insight into the risk exposure of
non-bank SDs, which is essential to
performing the regulatory oversight of SDs.
Notice Requirements for Substantial
Reduction in Capital
The Commission should begin to review
notice requirements comprehensively in light
of greater, faster capabilities to comply,
notwithstanding the potential existence of
challenges for non-U.S. SDs in light of time
zone differences. The Proposed Amendments
require notification of a substantial reduction
of capital within two business days. The
2020 Capital Rule did not specify a
timeframe, and the Proposed Amendments
are consistent with the timeframe applicable
to FCMs.
Conclusion
In order to prevent the market instability
witnessed during the period when swaps
traded in bespoke, bilateral markets, the
Commission imposes capital requirements on
non-bank SDs, and imposes financial
reporting requirements on bank SDs as well
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Federal Register / Vol. 89, No. 10 / Tuesday, January 16, 2024 / Proposed Rules
as non-bank SDs. These regulations are
critical to the oversight of the swaps market.
I want to thank MPD and the Office of the
Chief Economist (OCE) for their excellent
work bringing forth this proposed
rulemaking, in particular Jennifer Bauer,
Maria Aguilar-Rocha, Andrew Pai, Joshua
Beale, Thomas Smith, and Amanda L. Olear
of MPD, and Lihong McPhail of OCE.
Appendix 4—Statement of Support of
Commissioner Caroline D. Pham
ddrumheller on DSK120RN23PROD with PROPOSALS1
I support the Notice of Proposed
Rulemaking on Capital and Financial
Reporting Requirements for Swap Dealers
and Major Swap Participants (Proposal)
because it addresses issues left outstanding
from implementing a rule by offering
pragmatic solutions that not only rectify the
problem at hand, but do so without imposing
unnecessary burdens or complications. I
would like to thank Andrew Pai, Maria
Aguilar-Rocha, Josh Beale, Tom Smith, and
Amanda Olear in the Market Participants
Division for their work on the Proposal. I
greatly appreciate the time staff took to
discuss my questions and concerns.
It is important to remember that most of
the CFTC’s provisionally-registered swap
dealers are subject to three or more regulatory
regimes.1 Of the CFTC’s 106 currently
provisionally registered swap dealers, most
are also registered with and supervised by
another agency or authority, such as a
prudential, functional, or market regulator.
This awareness must inform the
Commission’s approach when considering
any rule impacting swap dealers.2 Otherwise,
we risk missing the nuances associated with
the complex interplay or conflict that arises
between the various regulations.
Capital, the subject of today’s Proposal, is
one area in which the CFTC’s provisionallyregistered swap dealers are subject to
multiple regulatory regimes. By this point,
we know that the Dodd-Frank Wall Street
Reform and Consumer Protection Act (DoddFrank Act) mandated the Commission
establish capital requirements for swap
dealers and major swap participants,3 and
that the Commission adopted capital
requirements for nonbank swap dealers and
major swap participants,4 as well as financial
1 Statement of Commissioner Caroline D. Pham
on Risk Management Program for Swap Dealers and
Futures Commission Merchants Advance Notice of
Proposed Rulemaking (June 1, 2023).
2 See Concurring Statement of Commissioner
Caroline D. Pham Regarding Proposed Order and
Request for Comment on an Application for a
Capital Comparability Determination (June 2, 2022).
3 Section 731 of the Dodd-Frank Act added a new
section 4s to the Commodity Exchange Act (CEA)
to require the CFTC adopt rules establishing
minimum initial margin, variation margin and
capital requirements for swap dealers and major
swap participants. Under CEA section 4s(e), the
CFTC is required to adopt capital requirements for
swap dealers and major swap participants that are
not subject to the capital rules of the prudential
regulators, which include nonbank subsidiaries of
bank holding companies.
4 I.e., swap dealers and major swap participants
that are not subject to the capital requirements of
a prudential regulator, as opposed to swap dealers
and major swap participants for which there is a
prudential regulator.
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reporting requirements for bank swap dealers
and major swap participants, together with
nonbank swap dealers and major swap
participants.5
Therefore, when considering solutions to
challenges that have arisen while
implementing the capital rules, we must
remember that we are not a prudential
banking regulator like the Fed, OCC, or FDIC,
nor are we a primarily disclosures-based
market regulator like the SEC.6 Today’s
proposal offers a pragmatic solution to
challenges faced by our market participants
that respects the differences among the
financial regulators.
The extent of capitalization and reach of
financial reporting were decided years ago
and are not the subject of today’s Proposal.
Rather, today we consider, primarily, fixing
issues that arose when implementing the
capital and financial reporting rules,7 and
secondarily, miscellaneous technical changes
to make the rules more workable.
I support the entire Proposal, but will focus
my comments on the codification of: (1)
CFTC Staff Interpretative Letter No. 21–15 for
commercial swap dealers and major swap
participants electing the Tangible Net Worth
Capital Approach; 8 and (2) the time-limited,
no-action relief in CFTC Letter No. 21–18 9
regarding financial reporting requirements
for bank swap dealers and major swap
participants.10
Before I begin, I want to draw attention to
a bigger issue relating to capital for the
5 I.e., swap dealers and major swap participants
that are not subject to the capital requirements of
a prudential regulator, along with the swap dealers
and major swap participants for which there is a
prudential regulator. See Capital Requirements of
Swap Dealers and Major Swap Participants, 85 FR
57462 (Sept. 15, 2020).
6 Concurring Statement of Commissioner Caroline
D. Pham Regarding the CFTC Request for
Information on Climate-Related Financial Risk
(June 2, 2022). I reiterate the importance of keeping
our focus on our markets, products, and purpose to
avoid the risk of diluting our limited resources and
potentially straying from our core expertise and
responsibilities into areas already tasked to others.
7 During that time, staff worked to develop
processes, procedures, and forms to accept the
financial reports and notifications required by the
capital and financial reporting rules. In so doing,
CFTC staff received several compliance related
questions, and as a result, issued eight staff letters,
all available at the Commission’s website,
www.cftc.gov: CFTC Letter Numbers 21–15 (June 29,
2021); 21–18 (Aug. 31, 2021); 21–20 (Sept. 30,
2021); 21–21 (Sept. 30, 2021); 21–22 (Sept. 30,
2021); 21–23 (Sept. 30, 2021); 22–01 (Jan. 5, 2022);
22–02 (Jan. 5, 2022).
8 CFTC Letter No. 21–15 (June 29, 2021), https://
www.cftc.gov/csl/21-15/download.
9 Staff extended the relief in CFTC Letter No. 21–
18 until the earlier of October 6, 2025 or the
adoption of any revised financial reporting
requirements for bank swap dealers and major swap
participants under Regulation 23.105(p). CFTC
Letter No. 23–11 (July 10, 2023), available at https://
www.cftc.gov/csl/23-11/download.
10 CFTC Letter No. 21–18 (Aug. 31, 2021), https://
www.cftc.gov/csl/21-18/download. Bank swap
dealers and major swap participants have limited
financial reporting obligations, recognizing that
prudential regulators have an obligation to impose
their capital requirements and are primarily
responsible for monitoring bank swap dealer and
major swap participant capital under the CEA. 7
U.S.C. 6s(e)(2)(i).
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coming year. The broad impacts of the Basel
III Endgame are being widely reported and
discussed,11 including impact to CFTC swap
dealers and major swap participants.12 I am
deeply concerned about this issue for our
markets, which is why I expect that under
my sponsorship, the Global Markets
Advisory Committee (GMAC) will work on
offering actionable recommendations for the
Commission in this area. I encourage
everyone to watch the presentation made on
the subject at the recent November 6th
meeting via the meeting’s archived
webcast,13 and look forward to working with
the GMAC and all of you on the issue in
2024.
A. Codifying CFTC Letter No. 21–15
Nonbank swap dealers and major swap
participants can elect one of three
approaches to calculating their regulatory
capital.14 One option allows certain
qualifying nonbank swap dealers and major
swap participants to use a regulatory capital
approach that is based on the firm’s tangible
net worth.15 Generally, these nonbank swap
dealers and major swap participants have to
be ‘‘predominantly engaged in non-financial
activities’’ and maintain positive tangible net
worth according to U.S. generally accepted
accounting practices (GAAP) at all times.16
When the rules were being implemented,
nonbank swap dealers identified three
problems: (1) the rule’s preamble expanded
the definition of ‘‘predominantly engaged in
financial activities’’ to permit these nonbank
swap dealers and major swap participants to
meet the regulation’s tangible net worth test
directly or through its ultimate consolidated
parent entity, but the text of regulation
§ 23.100 was unclear about it; (2) regulation
§ 23.105(b) allowed books and records to be
maintained in accordance with International
Financial Reporting Standards (IFRS) but the
‘‘tangible net worth’’ definition in regulation
§ 23.100 only referenced U.S. GAAP; and (3)
there was an inconsistency in the timelines
of certain financial reports required by
regulation § 23.105(l).17
To fix these issues, the Commission is
proposing to adopt the remedies provided in
Letter No. 21–15: revise the definitions of
‘‘tangible net worth’’ and ‘‘predominantly
engaged in non-financial activities’’ and
regulation § 23.105 to clarify the test can be
applied at the parent or entity level, as well
as using U.S. GAAP or IFRS; and amend
regulation § 23.105(l) to clarify that position
and other related exposure reporting must be
11 Recent coverage has focused on what the
Federal Reserve Board supports and could look to
do. Victoria Guida, ‘‘Fed’s Waller: Support for Final
Basel Rule ‘a Possibility’ ’’ PoliticoPro (Nov. 28,
2023).
12 Luke Clancy, ‘‘US Basel Endgame Hits Clearing
with Op Risk Capital Charges’’ Risk.net (Sept. 25,
2023), https://www.risk.net/regulation/7957815/usbasel-endgame-hits-clearing-with-op-risk-capitalcharges.
13 The CFTC maintains the archived webcast at:
https://www.cftc.gov/PressRoom/Events/opaevent
gmac110623.
14 17 CFR 23.101.
15 17 CFR 23.101(a)(2).
16 Id.
17 CFTC Letter No. 21–15.
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made at the same frequency as financial
reporting, which in this instance is quarterly.
B. Codifying CFTC Letter No. 21–18
Bank swap dealers and major swap
participants must file unaudited quarterly
financial information with the CFTC within
30 calendar days of the end of their fiscal
quarter.18 The information should be
submitted via the specific forms in Appendix
C to subpart E of part 23. The Commission
intended that these forms would be identical
to those filed by banks with their prudential
regulator. However, when the capital and
financial reporting rules were being
implemented, it became evident that there
were some differences in the forms, as well
as with the timelines for filing.
ddrumheller on DSK120RN23PROD with PROPOSALS1
18 17 CFR 23.105(p)(2). The required financial
information consists of a statement of financial
condition, a statement of regulatory capital, and a
schedule of the aggregate positions in securitybased swaps, mixed swaps, swaps, and other
derivatives.
VerDate Sep<11>2014
16:48 Jan 12, 2024
Jkt 262001
Therefore, CFTC Letter No. 21–18 let bank
swap dealers and major swap participants
provide home country regulator reports and
comparable schedules on the prudential
regulators’ timeline; foreign bank swap
dealers and major swap participants provide
home country regulator balance sheets and
statements of regulatory capital information
as long as they are in English, USD, and
within 15 days of filing with home country
regulator; and SEC dually-registered foreign
bank swap dealers and major swap
participants file comparable SEC approved
financial reports and schedules.
To fix these issues, the Commission is
proposing to adopt the remedies provided in
CFTC Letter No. 21–18: amend regulation
§ 23.105(p) to allow foreign bank swap
dealers and major swap participants to file
the applicable financial reporting within 90
days of the end of the financial reporting
period; accept balance sheet and regulatory
capital schedules under prudential regulator
reports for U.S. bank swap dealers and major
swap participants; and to accept the filing of
PO 00000
Frm 00067
Fmt 4702
Sfmt 9990
2581
such schedules at the same time as filed with
prudential regulators. For foreign swap
dealers, the Commission is proposing to
permit the filing of a balance sheet and
statement of regulatory capital schedules in
the format provided to their home country
regulator, as long as they are in English and
converted to USD, and filed no later than 90
days following the reporting period end date.
I support this rule because codifying welltailored relief helps provide market certainty
while avoiding imposing unnecessary
burdens and creating compliance
complications. I also support this rule
because the Commission does so while also
continuing to respect the differences between
our rules and those of the other regulators
overseeing swap dealers on capital. It is a
laudable achievement. I again commend staff
in the Market Participants Division for their
hard work on this rule, and look forward to
reviewing the comments.
[FR Doc. 2023–28649 Filed 1–11–24; 8:45 am]
BILLING CODE 6351–01–P
E:\FR\FM\16JAP1.SGM
16JAP1
]]>Agencies
[Federal Register Volume 89, Number 10 (Tuesday, January 16, 2024)]
[Proposed Rules]
[Pages 2554-2581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28649]
=======================================================================
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AF33
Capital and Financial Reporting Requirements for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
[[Page 2555]]
``CFTC'') proposes to amend certain of the Commission's regulations
that impose minimum capital requirements and financial reporting
obligations on swap dealers (``SDs'') and major swap participants
(``MSPs''). The Commission proposes to do this by codifying parts of
staff interpretive letter 21-15 to SDs addressing the Tangible Net
Worth Capital Approach for calculating capital under the applicable
Commission regulation and no-action letter 21-18 (and its successor no-
action letter 23-11) regarding alternative financial reporting by SDs
subject to the capital requirements of a prudential regulator
(together, ``CFTC Letters''). The Commission is also proposing to amend
certain of its regulations applicable to SDs, in areas including the
required timing of certain notifications, the process for approval of
subordinated debt for capital, and the revision of financial reporting
forms to conform to the rules. The proposed amendments are intended to
make it easier for SDs to comply with the Commission's financial
reporting obligations and demonstrate compliance with minimum capital
requirements.
DATES: Comments must be received on or before February 13, 2024.
ADDRESSES: You may submit comments, which must be in writing and
identified by RIN 3038-AF33, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking 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 instruction as for
Mail, above.
Please submit your comments using only one of these methods.
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 only submit 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 in Sec. 145.9 of the Commission's regulations. The
Commission reserves the right, but shall have no obligation, to review,
prescreen, 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 rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act (APA) 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]; Joshua Beale, Associate Director, 202-418-5446,
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472,
[email protected]; Maria Aguilar-Rocha, Attorney Advisor, 202-418-5840,
[email protected]; Andrew Pai, Attorney Advisor, 646-746-9893,
[email protected]; Market Participants Division; Lihong McPhail, Research
Economist, 202-418-5722, [email protected], Office of the Chief
Economist; Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION: On September 15, 2020, the Commission
published in the Federal Register final rules adopting capital and
financial reporting requirements for SDs and MSPs.\1\ The Final Rules
accomplished the Congressional mandate \2\ directing the Commission to
adopt rules imposing both capital requirements and initial and
variation margin requirements on SDs and MSPs that are not subject to a
prudential regulator (``nonbank SDs'' and ``nonbank MSPs'',
respectively).\3\ The Final Rules included amendments to existing
capital rules for futures commission merchants (``FCMs'') to provide
explicit additional capital requirements for proprietary positions in
swaps and security-based swaps that are not cleared by a clearing
organization. The Final Rules also included a detailed capital model
application process whereby eligible nonbank SDs and nonbank MSPs could
apply to the Commission or a registered futures association (``RFA'')
of which they are a member for approval. Further, the Final Rules
adopted a capital comparability determination process for certain
eligible foreign domiciled nonbank SDs and nonbank MSPs to seek
substituted compliance for the Commission's capital and financial
reporting requirements.\4\ Finally, the Final Rules adopted detailed
financial reporting, recordkeeping and notification requirements,
including limited financial reporting requirements for SDs and MSPs
subject to the capital requirements of prudential regulators (``bank
SDs'' and ``bank MSPs'', respectively).
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\1\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020) (the ``Final Rule'' or
the ``Final Rules'').
\2\ Section 4s(e) of the Commodity Exchange Act (``CEA'' or the
``Act''), 7 U.S.C. 6s(e), which is contained in section 731 of the
Dodd-Frank Act, requires the Commission to adopt minimum capital and
margin requirements for SDs and MSPs that are not subject to a
prudential regulator. Section 731 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat.
1376 (2010) (the ``Dodd-Frank Act''). The text of the Dodd-Frank Act
is available at https://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\3\ The term ``prudential regulator'' is defined as the Board of
Governors of the Federal Reserve System (``Federal Reserve Board'');
the Office of the Comptroller of the Currency (``OCC''); the Federal
Deposit Insurance Corporation (``FDIC''); the Farm Credit
Administration; and the Federal Housing Finance Agency. Section
1a(39) of the CEA, 7 U.S.C. 1a(39).
\4\ To date, the Commission has issued proposals for substituted
compliance for eligible nonbank SDs domiciled in Japan, Mexico, and
the European Union for public comment. 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); 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, 87 FR 76374
(Dec. 13, 2022); Notice of Proposed Order and Request for Comment on
an Application for a Capital Comparability Determination Submitted
on Behalf of Nonbank Swap Dealers Domiciled in the French Republic
and Federal Republic of Germany and Subject to Capital and Financial
Reporting Requirements of the European Union, 88 FR 41774 (June 27,
2023).
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The Commission initially proposed capital and financial reporting
requirements for nonbank SDs and nonbank MSPs, and financial reporting
requirements for bank SDs and bank MSPs, in 2011.\5\ After extensive
comment, in 2016 the Commission re-proposed the rules for comment.\6\
The Commission received numerous comments from a broad spectrum of
market participants in response to the re-proposal.\7\ In addition,
following the 2016 re-proposal, the SEC adopted a final set of capital,
margin and financial reporting requirements for security-based swap
dealers and major security-
[[Page 2556]]
based swap participants (``SBSDs'' and ``MSBSPs,'' respectively).\8\ In
December 2019, the Commission re-opened the proposed rules for comment
in light of the SEC's final rules, and requested commenters to provide
detailed data and information regarding several critical areas of the
Commission's proposed approach.\9\
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\5\ Capital Requirements of Swap Dealers and Major Swap
Participants, 76 FR 27802 (May 12, 2011).
\6\ Capital Requirements of Swap Dealers and Major Swap
Participants, 81 FR 91252 (Dec. 16, 2016) (the ``2016 Capital
Proposal'').
\7\ The comment letters for the 2016 Capital Proposal are
available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1769 (the public comment file).
\8\ Capital, Margin and Segregation Requirements for Security-
Based Swap Dealers and Major Security-Based Swap Participants and
Capital and Segregation Requirements for Broker-Dealers, 84 FR 43872
(Aug. 22, 2019) (the ``SEC Final Capital Rule'').
\9\ Capital Requirements of Swap Dealers and Major Swap
Participants, 84 FR 69664 (Dec. 19, 2019).
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The Final Rules became effective November 16, 2020.\10\ To address
concerns from commenters that a sufficient period of time would be
necessary to develop policies, procedures and systems to implement the
new financial reporting requirements and to develop and obtain approval
to use capital models, the Commission adopted an extended compliance
date of October 6, 2021 (``Extended Compliance Date'').\11\ The
Extended Compliance Date also corresponded to the SEC's compliance date
for SBSDs and MSBSPs, thus permitting better coordination for dually-
registered entities.\12\
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\10\ Final Rules, 85 FR at 57462.
\11\ Id. at 57525.
\12\ Id.
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The Commission's overall capital approach in the Final Rules
permits nonbank SDs and MSPs to select one of three methods to
calculate their capital requirements.\13\ Each method is discussed in
detail in the Final Rule and determines the frequency and type of
financial reporting information to be provided to the Commission by
each nonbank SD and nonbank MSP.\14\ Bank SDs, which are not subject to
the capital requirements of the Commission, are required to provide the
Commission and National Futures Association (``NFA'') with limited
financial information regarding the capital and swap positions of the
firms. Bank SDs are required to file the limited financial information
using CFTC forms that were intended to be comparable with forms
required by the prudential regulators and consistent with forms adopted
by the SEC for SBSDs subject to the capital rules of a prudential
regulator.\15\ Together, the financial reporting and notice
requirements included in the Final Rules serve as the mechanism for the
Commission to monitor capital compliance by nonbank SDs.
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\13\ See generally id. at 57467. The three methods discussed in
detail in the Final Rules include the Bank-Based Capital Approach,
the Tangible Net Worth Capital Approach, and the Net Liquid Assets
Capital Approach.
\14\ See generally id. at 57480-57502.
\15\ See generally id. at 57491-57498. This approach is
consistent with other Commission rules that permit the acceptance of
certain filings under the SEC adopted final rules in lieu of the
Commission's own rules. See e.g., 17 CFR 1.10(b)(1), 23.105(d)(3),
and (e)(5).
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In the Final Rule, the Commission also recognized the role of NFA
as the only RFA under the CEA. NFA is an integral component of the
Commission's registration and oversight program. Specifically, the
Commission has authorized NFA to administer the registration process
for SDs and MSPs,\16\ and to approve the use of capital and initial
margin models. NFA also conducts examinations of nonbank SDs and
nonbank MSPs to assess compliance with Commission and NFA rules.\17\ As
such, the Final Rules required that financial reports and notices be
filed with both the Commission and the NFA,\18\ and explicitly
recognized NFA's ability to adopt standardized forms and processes to
carry out the Commission's financial reporting and notification
requirements for SDs.\19\
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\16\ See generally Performance of Registration Functions by
National Futures Association with Respect to Swap Dealers and Major
Swap Participants, 77 FR 2708 (Jan. 19, 2012).
\17\ Final Rules, 85 FR 57507-57510.
\18\ Id. at 57515.
\19\ Id. at 57518.
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During the period leading up to the Extended Compliance Date,
Commission, NFA, and SEC staff collaborated to develop a process for
the collection of financial reports and to respond to inquiries from
industry participants regarding compliance with financial reporting and
notice obligations. On January 12, 2021, Commission staff approved
NFA's capital model application process.\20\ On December 21, 2021, NFA
adopted new Financial Requirements Section 18 of its rules, which in
addition to including capital rules largely modeled after those adopted
by the Commission in the Final Rules, published newly developed
standardized financial reporting forms FR-CSE-NLA and FR-CSE-BHC for
use by nonbank SDs that are not also registered with the SEC.\21\
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\20\ CFTC Letter No. 21-03, Jan. 12, 2021, available at https://www.cftc.gov/csl/21-03/download.
\21\ NFA submitted these rules for Commission review under
section 17(j) of the CEA, 7 U.S.C. 21(j), on November 22, 2021, and
the rules became effective on December 21, 2021. NFA Notice to
Members I-21-45, available at https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5437.
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Prior to the Extended Compliance Date, Commission staff also
received inquiries from market participants regarding compliance with
various capital and financial reporting obligations under the Final
Rule. In response, Commission staff issued eight no-action and
interpretative letters.\22\ Two letters, CFTC Letters No. 21-15 and 21-
18,\23\ are discussed below in detail and inform this proposed
rulemaking. In addition, the Commission is proposing several other
amendments that are the result of Commission staff's experience
implementing the Final Rule. These amendments are intended to provide
technical and other clarifying changes necessary to effectuate the
Final Rule's purpose.
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\22\ CFTC Letter No. 21-15, June 29, 2021, available at https://www.cftc.gov/csl/21-15/download; CFTC Letter No. 21-18, Aug. 31,
2021, available at https://www.cftc.gov/csl/21-18/download; CFTC
Letter No. 21-20, Sept. 30, 2021, available at https://www.cftc.gov/csl/21-20/download; CFTC Letter No. 21-21, Sept. 30, 2021, available
at https://www.cftc.gov/csl/21-21/download; CFTC Letter No. 21-22,
Sept. 30, 2021, available at https://www.cftc.gov/csl/21-22/download; CFTC Letter No. 21-23, Sept. 30, 2021, available at
https://www.cftc.gov/csl/21-23/download; CFTC Letter No. 22-01, Jan.
5, 2022, available at https://www.cftc.gov/csl/22-01/download; CFTC
Letter No. 22-02, Jan. 5, 2022, available at https://www.cftc.gov/csl/22-02/download.
\23\ CFTC Letter No. 21-18 was time-limited and set to expire on
October 23, 2023. To permit time for the Commission to issue a
proposed rulemaking and address any comments received, the Market
Participants Division extended the expiration of the letter to the
earlier of October 6, 2025, or the adoption of any revised financial
reporting requirements for bank SDs under regulation Sec.
23.105(p). CFTC Letter No. 23-11, July 10, 2023, available at
https://www.cftc.gov/csl/23-11/download.
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II. Proposed Amendments to Commission Regulations
A. Codification of the CFTC Letters and Other Amendments
1. Amendments to Tangible Net Worth Capital Approach--CFTC Letter No.
21-15
The Commission is proposing amendments to definitions in Commission
regulation Sec. 23.100 \24\ to ensure that the Tangible Net Worth
Capital Approach may be utilized by eligible nonbank SDs as intended in
the Final Rule. Prior to the Final Rules' implementation date, several
nonbank SDs intending to elect the Tangible Net Worth Capital Approach
raised concerns regarding the application of the eligibility test to
different corporate structures. In response to concerns raised, the
Market Participants Division (the ``Division'') issued interpretive
CFTC Letter No. 21-15 on June 29, 2021.\25\ In CFTC Letter No. 21-15,
the Division stated that the asset and revenue tests for
``predominantly engaged in non-financial activities'' could be assessed
at the nonbank SD's
[[Page 2557]]
entity level or ultimate parent level and, further, such tests could be
computed under International Financial Reporting Standards issued by
the International Accounting Standards Board (``IFRS'') in lieu of
generally accepted accounting principles (``GAAP'') as adopted in the
United States if the entity was permitted to use IFRS for financial
reporting.\26\ The Division also confirmed that supplemental position
reporting for nonbank SDs meeting these qualifications may be filed on
a quarterly basis along with the financial reports, as opposed to
monthly.\27\ In the Commission's experience over the past two years,
the interpretation in CFTC Letter No. 21-15 helped eligible nonbank SDs
better understand their compliance obligations under the Commission's
capital and financial reporting requirements at the implementation date
of the Final Rules by pointing out an obvious but inadvertent mistake
in the Final Rules. Therefore, the Commission is now proposing to
modify the relevant Commission regulations to more fully align the
Tangible Net Worth Capital Approach with the Commission's intention as
expressed in the preamble to the Final Rules and consistent with the
terms of CFTC Letter No. 21-15.
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\24\ 17 CFR 23.100.
\25\ CFTC Letter No. 21-15.
\26\ Id. at 3-6.
\27\ Id. Compare 17 CFR 23.105(d) with 17 CFR 23.105(l), as the
former includes monthly or quarterly periodicity as opposed to the
latter only referring to monthly.
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The Commission is proposing to amend the definition in Commission
regulation 23.100 of ``predominantly engaged in non-financial
activities.'' \28\ This definition is one of the key components, along
with the definition of ``tangible net worth,'' \29\ in determining the
eligibility for electing and the application of the Tangible Net Worth
Capital Approach.\30\ Eligibility for this approach is conditioned upon
a nonbank SD meeting both a revenue and asset-based test to determine
if the nonbank SD is predominantly engaged in non-financial activities.
The proposed amendment would modify the definition of ``predominantly
engaged in non-financial activities'' in Commission regulation Sec.
23.100 to explicitly permit the satisfaction of both the revenue and
asset-based tests at the consolidated parent level of the nonbank SD as
discussed in the preamble to the Final Rules. That is, the proposed
amendments would clarify that the tests may be satisfied either at the
level of the nonbank SD or at the level of the nonbank SD's
consolidated parent \31\ rather than seeming to exclude the
consolidated parent of the nonbank SD as questioned by some
commenters.\32\
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\28\ See 17 CFR 23.100 for the definition of the term
``predominantly engaged in non-financial activities.''
\29\ See 17 CFR 23.100 for the definition of the term ``tangible
net worth.''
\30\ 84 FR 69664 at 69668.
\31\ Final Rules, 85 FR 57480.
\32\ Id. at 57499.
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The Commission is also proposing to amend the definition of
``tangible net worth'' in Commission regulation Sec. 23.100.\33\
Nonbank SDs electing the Tangible Net Worth Capital Approach are
currently permitted to use IFRS for their financial reporting
obligations under Commission regulation Sec. 23.105.\34\ IFRS is
permitted as an acceptable reporting standard for all nonbank SDs
provided that they otherwise do not prepare financial statements in
accordance with U.S. GAAP.\35\ The definition of ``tangible net worth''
in Commission regulation Sec. 23.100, however, only references U.S.
GAAP, despite the permissive use of IFRS as part of financial reporting
obligations under Commission regulation Sec. 23.105.\36\ The proposed
amendments to the definition of ``tangible net worth'' in Commission
regulation Sec. 23.100 would clarify that ``tangible net worth'' may
be determined under either applicable accounting standard, U.S. GAAP or
IFRS. This amendment would align and correct the permitted use of IFRS
in determining eligibility for the approach with the standard permitted
and utilized by the nonbank SD in preparation of its financial
statements. As discussed in the Final Rule, the Commission is generally
comfortable with both U.S. GAAP and IFRS accounting standards in this
context, especially as both standards continue to move towards greater
convergence.\37\ The Commission has preliminarily determined that
nonbank SDs utilizing the same standard as is permitted for their
financial reporting comports with the purpose of the eligibility test
to determine if a SD is predominantly engaged in non-financial
activities.
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\33\ See 17 CFR 23.100 for the definition of the term ``tangible
net worth.''
\34\ 17 CFR 23.105(d) and (e).
\35\ Id.
\36\ 17 CFR 23.105.
\37\ Final Rules, 85 FR 57514.
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The Commission is also proposing to amend Commission regulation
Sec. 23.105(l) \38\ to require that each nonbank SD and nonbank MSP
file Appendix B to Subpart E of Part 23 (``Appendix B''),\39\ which
contains aggregate securities, commodities, and swap position
information and certain credit exposure information, with the
Commission and NFA on a quarterly rather than a monthly basis. This
proposed amendment would align that filing with the periodicity
permitted as part of the nonbank SD's or nonbank MSP's routine
financial report filings required by Commission regulation Sec.
23.105(d) and would clarify that the information provided should be
consistent with those financial report filings. Currently, Commission
regulation Sec. 23.105(d) permits nonbank SDs electing the Tangible
Net Worth Capital Approach to file required financial reports
quarterly, whereas nonbank SDs electing either the Bank Based Capital
Approach or the Net Liquid Asset Capital Approach are required to file
such information on a monthly basis.\40\ The amendment would make clear
that all swap position and credit information required in Commission
regulation Sec. 23.105(l) and Appendix B must be filed at the same
periodicity as routine financial reporting required of the respective
nonbank SDs set forth within Commission regulation Sec. 23.105(d),
which could be either monthly or quarterly depending on the approach
elected by the SD.
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\38\ 17 CFR 23.105(l).
\39\ Appendix B to subpart E of part 23.
\40\ 17 CFR 23.105(d).
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The Commission has already determined that nonbank SDs electing the
Tangible Net Worth Capital Approach may engage in a wide variety of
businesses and not be otherwise subject to any financial reporting.
Thus, the Commission determined in the Final Rule that such SDs need
only file financial reports quarterly and not monthly and may take a
longer period of time to file audited financial reports.\41\ Moreover,
the Commission intended the swap position and credit information in
Commission regulation Sec. 23.105(l) and Appendix B to be filed
together with other financial information required by Commission
regulation Sec. 23.105(d) as this information is supplementary to the
financial statements as a whole and completes the routine financial
reporting package. This approach is also consistent with how dually-
registered SDs with the SEC complete the SEC's Form X-17A-5 (``FOCUS
Report'') Part II.\42\ Thus, the proposed amendment is consistent with
previous Commission determinations and harmonizes the approach across
different nonbank SDs.
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\41\ Final Rules, 85 FR 57514-57515.
\42\ SEC Form X-17A-5 FOCUS Report Part IIC, available at
https://www.sec.gov/manage-filings/forms-index/form-x-17a-5-2c.
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[[Page 2558]]
Request for Comment
Question 1. Do the proposed amendments to Commission regulations
Sec. Sec. 23.100 and 23.105(l) address the compliance matters for
entities electing the Tangible Net Worth Capital Approach?
2. Amendments to Bank SD Financial Reporting Requirements--CFTC Letter
No. 21-18
The Commission is also proposing to amend the financial reporting
requirements for bank SDs and bank MSPs set forth in Commission
regulation Sec. 23.105(p).\43\ The Commission intended the bank SD and
bank MSP reporting requirements contained in the Final Rules to be
consistent with the SEC requirements for bank SBSDs and bank MSBSPs, to
maintain equivalent financial reporting requirements for dually-
registered firms.\44\ Several bank SDs, however, did not register as
SBSDs, and therefore are subject only to limited financial reporting
under the Commission's rules.\45\ In certain instances, the financial
reporting required by the prudential regulators for these bank SDs
permit a longer period of time and utilize a different format than that
adopted by the Commission.\46\ In addition, some of these bank SDs are
not required to file financial reports with a prudential regulator if
the bank SDs are domiciled outside the United States, and may instead
be subject only to financial reporting of a home country supervisor.
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\43\ 17 CFR 23.105(p).
\44\ Final Rules, 85 FR 57463-57465.
\45\ 17 CFR 23.105(p).
\46\ Commission regulation Sec. 23.105(p) requires bank SDs to
report financial information within 30 calendar days of quarter-end.
17 CFR 23.105(p)(2). The Instructions for Preparation of
Consolidated Reports of Condition and Income, Schedule RC-D,
available at https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_202303_i.pdf, however, permit a bank with more
than one foreign office to submit its FFIEC 031 forms within 35
calendar days following quarter-end. Additionally, the SEC extended
the filing deadline of FOCUS Report Part IIC for non-U.S. SBSDs
subject to a prudential regulator from 30 to 35 days following
quarter end, noting that ``U.S. prudential regulators permit certain
U.S. banks to file their financial reports 35 days after the quarter
end.'' Order Specifying the Manner and Format of Filing Unaudited
Financial and Operational Information by Security-Based Swap Dealers
and Major Security-Based Swap Participants That Are Not U.S. Persons
and Are Relying on Substituted Compliance Determinations With
Respect to Rule 18a-7, 86 FR 59208 (October 26, 2021) at 59210.
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Following the adoption of Commission regulation 23.105(p), bank SDs
requested relief from this provision's requirements.\47\ Bank SDs
indicated that the financial reporting filing deadline adopted by the
Commission preceded the financial reporting filing deadline imposed by
prudential regulators.\48\ In addition, although Appendix C to Subpart
E of Part 23 (``Appendix C'') \49\ was intended to capture line items
on existing Federal Financial Institutions Examination Council
(``FFEIC'') \50\ Form 031 (``Call Report'') provided to prudential
regulators, line items on the Call Report had either been removed,
added or otherwise changed since the Commission adopted Appendix C.\51\
As a result, on August 31, 2021, the Division issued a time-limited no-
action letter to bank SDs regarding compliance with financial reporting
requirements under Commission regulation Sec. 23.105(p).\52\ On July
11, 2023, the Division extended the expiration date to the earlier of
October 6, 2025 or the adoption of any revised financial reporting and
notification requirements applicable to bank SDs.\53\
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\47\ ISDA-SIFMA Joint Letter, Aug. 20, 2021, available at
https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm/.
\48\ Id. at 3-4.
\49\ Appendix C to subpart E of part 23.
\50\ Federal Financial Institutions Examination Council,
Consolidated Reports of Condition and Income for a Bank with
Domestic and Foreign Offices--FFIEC 031, available at https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_202203_f.pdf.
\51\ ISDA-SIFMA Joint Letter at 3-4.
\52\ See generally CFTC Letter No. 21-18.
\53\ CFTC Letter No. 23-11.
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CFTC Letter No. 21-18, as extended under CFTC Letter No. 23-11,\54\
articulates a position by the Division that it would not recommend that
the Commission engage in an enforcement action against bank SDs
providing the Commission with copies of financial reports that are
required by, and filed with, their respective prudential or home
country regulators, in lieu of complying with the substantive
requirements of Appendix C, subject to certain conditions.\55\ CFTC
Letter No. 21-18 also contains a no-action position with respect to
bank SDs filing comparable Call Report schedules with the Commission in
lieu of Appendix C in accordance with and within the timeframe
permitted by the prudential regulators.\56\ CFTC Letter No. 21-18
further provides that the Division would not recommend enforcement
action against certain foreign-domiciled bank SDs (``Non-U.S. bank
SDs'') that do not provide financial reports to a prudential regulator
if they file with the Commission balance sheet and statement of
regulatory capital information in accordance with applicable home
country requirements, so long as the financial information is in
English, with balances converted to U.S. dollars, and the financial
information is filed within 15 days of the earlier of the date such
financial information is filed or required to be filed with the Non-
U.S. bank SDs' applicable home country regulator.\57\ Finally, the
Division stated that it would not recommend enforcement action against
dually-registered foreign bank SDs filing comparable SEC-required
financial reports and schedules with the Commission.\58\
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\54\ See supra note 23.
\55\ CFTC Letter No. 21-18 at 4-5.
\56\ Id. at 4-5, Condition 1.
\57\ Id. at 5, Conditions 2-4.
\58\ Id., Condition 5. In comparison to the SEC's approach to
similarly situated bank SBSDs, the Commission's capital
comparability process adopted in Commission regulation Sec. 23.106
does not extend to bank SDs. See 17 CFR 23.106.
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The Commission is proposing to amend Commission regulation Sec.
23.105(p) to add an exception to the financial reporting requirements
for Non-U.S. bank SDs that do not submit financial reports to a
prudential regulator. These Non-U.S. bank SDs would be permitted to
file with the Commission financial reports that are submitted to their
respective home country regulator, provided the financial reports
submitted to the Commission are translated into English with balances
converted to U.S. dollars. These Non-U.S. bank SDs, however, would
continue to be required to file specific swap position information set
forth in Schedule 1 to Appendix C. Finally, these Non-U.S. bank SDs
would be required to file with the Commission such reports no later
than 90 calendar days following quarter-end.
The Commission is not proposing to include the restriction in CFTC
Letter No. 21-18 that Non-U.S. bank SDs be subject to home country
capital standards in a G-20 jurisdiction.\59\ The Commission
preliminarily believes that such a requirement is moot at this time, as
to date, all registered Non-U.S. bank SDs have met this criterion.
Moreover, this approach will provide greater regulatory flexibility and
permit Commission staff the ability to evaluate on a case-by-case basis
each bank SD.
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\59\ Letter No. 21-18 is limited to eligible Non-U.S. bank SDs
subject to home country capital standards in a G-20 jurisdiction or
to capital standards consistent with the Capital Accord of the Basel
Committee on Banking Supervision. CFTC Letter No. 21-18 at 3-5.
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The Commission preliminary believes that the required information
in the manner proposed will permit it to assess the Non-U.S. bank SDs'
financial position. Extending the time period to 90 days should permit
these Non-U.S. bank SDs to file financial reports with the Commission
no earlier than such Non-U.S. bank SDs are required to
[[Page 2559]]
prepare such reports under home country requirements. The Commission
proposes to adopt this approach because the Commission is collecting
such reports in order to maintain the ability to monitor the capital
condition across all SDs, although the Commission does not establish
the capital or margin requirements of bank SDs.\60\
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\60\ Section 4s(f) of the CEA requires SDs and MPSs, including
those for which there is a prudential regulator, to make any reports
regarding transactions and positions, as well as any reports
regarding financial condition, that the Commission adopts by rule or
regulation. 7 U.S.C. 6s(f).
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The Commission is further proposing to amend Commission regulation
Sec. 23.105(p) to permit bank SDs to file the relevant schedules under
the Call Report (Schedule RC and Schedule RC-R), rather than
replicating various line items from within those reports on a
separately constructed balance sheet and statement of regulatory
capital currently maintained in Appendix C.\61\ Schedule 1 of Appendix
C, which contains relevant swap, mixed swap and security-based swaps
position information, would remain a required schedule to be provided
by all bank SDs. This approach would permit the Commission to collect
necessary financial information prepared in accordance with prudential
regulators' guidance, while eliminating the necessity that bank SDs
familiarize themselves with a new reporting form and prevent the
Commission from having to routinely monitor and update its form when
prudential regulators amend their schedules. These proposed changes are
consistent with the terms of CFTC Letter No. 21-18, which have resulted
in the Commission and its staff receiving the requisite information to
meaningfully oversee its population of bank SDs since 2021. In
addition, and as mentioned above, the Commission proposes to adopt this
approach because the Commission is collecting such reports in order to
maintain the ability to monitor the capital condition across all SDs.
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\61\ As adopted, Appendix C contains three schedules: 1.
Statement of Financial Condition (balance sheet); 2. Statement of
Regulatory Capital; and 3. Schedule 1. Both the Statement of
Financial Condition and Statement of Regulatory Capital schedules
within Appendix C are modeled off the FOCUS Report Part IIC as
adopted by the SEC for bank SBSDs and contain specific line item
references corresponding to the Call Report. See Final Rules, 85 FR
at 57566-57569. Following adoption of these schedules, changes were
made to the underlying Call Reports making the schedules obsolete.
The SEC has since proposed changes to the FOCUS Report Part IIC to
reflect these changes. See generally Electronic Submission of
Certain Materials Under the Securities Exchange Act of 1934;
Amendments Regarding the FOCUS Report, 88 FR 23920 (Apr. 18, 2023).
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Request for Comment
Question 2. Do the proposed amendments to Commission regulations in
Sec. 23.105(p) address compliance matters identified in CFTC Letter
No. 21-18 for bank SDs?
Question 3. Do the financial reporting requirements as proposed to
be amended for Non-U.S. bank SDs permit the Commission to monitor these
entities at timely intervals?
3. Amendments Regarding Financial Reporting and Computation
Requirements of Swap Dealers
a. Amendments to Schedules in Financial Reporting and Frequency of
Filings
The Commission is proposing to amend the scope of Commission
regulation Sec. 23.105(k) \62\ and the heading and scope of Commission
regulation Sec. 23.105(l), as well as the titles of certain schedules
included in Appendix B,\63\ to further clarify that these reporting
obligations are applicable to all nonbank SDs and nonbank MSPs.
Commission regulation Sec. 23.105(k) lists both model-specific
information that nonbank SDs must report as well as a description of
the same type of exposure information as reflected in the schedules to
Appendix B. Commission regulation Sec. 23.105(l), however, requires
all nonbank SDs, including those not approved to use models, to
complete the Appendix B schedules on a monthly basis. As a result,
several nonbank SDs have filed each of the schedules to Appendix B
without having received capital model approval. Thus, in current form,
Commission regulations Sec. 23.105(k) and (l), as well as, the titles
of Schedules 2-4 of Appendix B, could more explicitly indicate that all
of the information within the schedules included in Appendix B is
required of all nonbank SDs, including those not authorized to use
models.\64\ In addition, as proposed to be amended, nonbank SDs
electing the Tangible Net Worth Capital Approach and all MSPs must
submit quarterly rather than monthly financial reporting as Commission
regulation Sec. 23.105(l) currently requires.
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\62\ 17 CFR 23.105(k).
\63\ Appendix B is comprised of 4 individual schedules: SCHEDULE
1--AGGREGATE SECURITIES, COMMODITIES AND SWAPS POSITIONS; SCHEDULE
2--CREDIT CONCENTRATION REPORT FOR FIFTEEN LARGEST EXPOSURES IN
DERIVATIVES; SCHEDULE 3--PORTFOLIO SUMMARY OF DERIVATIVES EXPOSURES
BY INTERNAL CREDIT RATING; and SCHEDULE 4--GEOGRAPHIC DISTRIBUTION
OF DERIVATIVES EXPOSURES FOR TEN LARGEST COUNTRIES.
\64\ To further complicate matters, the heading and first
paragraph to Commission regulation Sec. 23.105(k) both indicate
that this provision only applies to SDs approved to use internal
models to calculate market risk and credit risk for calculating
capital under Commission regulation Sec. 23.102(d).
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Each of the schedules included in Appendix B is identical to
corresponding schedules found in SEC's FOCUS Report required to be
completed by both SBSDs and certain broker dealers (``BDs'').\65\ To
the extent practicable, the Commission intends to align financial
reporting requirements, including those listed in textual form in
Commission regulation Sec. 23.105(k) and in the finalized schedules
part of Appendix B, with the reporting requirements finalized by the
SEC pertaining to SBSDs, MSBSPs, and BDs.\66\ The information required
under Appendix B is nearly identical in all material respects to
corresponding forms found in the SEC Form FOCUS Report Part II and was
intended to ensure harmonization of the reporting schedules across
several registrants, including those that are dually-registered.\67\
This is also consistent with the Commission's general approach
permitting dually-registered BDs and SBSDs to file SEC Form FOCUS
Report Part II in lieu of their requirements under Commission
regulations Sec. 23.105(d) and (e), and for those dually-registered
SBSDs subject to the capital rules of a prudential regulator under
Commission regulation Sec. 23.105(p).\68\
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\65\ See SEC Form X-17A-5 FOCUS Report Part IIC, available at
https://www.sec.gov/manage-filings/forms-index/form-x-17a-5-2c.
\66\ See Final Rules, 85 FR 57519.
\67\ See 2016 Capital Proposal, 81 FR 91278.
\68\ As indicated in the Final Rule, the Commission has a long
history of permitting SEC registrants to meet their financial
statement filing obligations with the Commission by submitting
required SEC forms in lieu of the CFTC's forms, which reduces the
burden on dually-registered firms by not requiring two separate
financial reporting requirements. See Final Rules, 85 FR 57515.
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In addition, NFA has adopted nearly identical capital and financial
reporting requirements for its member nonbank SDs and nonbank MSPs.\69\
The finalized NFA rules also mandate the use of comprehensive
standardized forms for financial reporting by member nonbank SDs and
nonbank MSPs that are not otherwise able to file an SEC Form FOCUS
Report Part II.\70\ These new NFA forms, FR-CSE-NLA and FR-CSE-BHC,
include each of the required schedules found in Appendix B. Moreover,
all the information listed in textual form in paragraph (k)(1)(v) of
Commission regulation Sec. 23.105 can be found in specific schedules
found in Appendix B.\71\ As such, the Commission has
[[Page 2560]]
preliminarily determined that the specific schedules found in Appendix
B, which is now part of NFA's adopted forms, should be the mechanism
for firms to provide the required information listed in Commission
regulation Sec. 23.105(k).\72\ In this proposal, the Commission hopes
to eliminate any ambiguity that the Final Rule may have caused. As
discussed in the Final Rule, the information in Appendix B, which
includes credit exposure to swap transactions, is vital to the
Commission's regulatory oversight of SDs and the financial system.\73\
This information provides valuable insight into the risk exposures of
nonbank SDs, which is essential to performing regulatory oversight of
SDs. The Commission proposes to make clear that all nonbank SDs must
complete all schedules in Appendix B.
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\69\ NFA section 18.
\70\ NFA section 18(e).
\71\ For example, Commission regulation Sec. 23.105(k)(1)(v)(B)
requires that all model-approved SDs file the current exposure
(including commitments) listed by counterparty for the 15 largest
exposures, which is also found in Schedule 2 to Appendix B.
Similarly, the information listed in textual form in Commission
regulations Sec. 23.105(k)(1)(i)-(v) corresponds verbatim to the
textual requirements found in SEC rule 18a-7(a)(3). See 17 CFR
240.18a-7(a)(3).
\72\ As discussed in the Final Rule, the Commission may (and
subsequently has) approved additional procedures developed by an
RFA, which could include standard forms or procedures necessary to
carry out the Commission's filing requirements. See Final Rules, 85
FR 57518.
\73\ Final Rules, 85 FR 57517.
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The Commission is therefore proposing to amend Commission
regulation Sec. 23.105(k) to require that the information listed in
Appendix B is completed by all nonbank SDs and nonbank MSPs as was
intended, and is consistent with that required by the SEC and NFA. The
Commission is further proposing to amend Commission regulation Sec.
23.105(l) and the headings of certain schedules in Appendix B to
further clarify that these schedules must be reported at the same
periodicity as the financial reporting of each respective nonbank SD,
either monthly or quarterly as applicable, and that all of the
schedules are required for all nonbank SDs, not just those authorized
to use models.
Request for Comment
Question 4. Will the proposed amendments to Commission regulations
in Sec. 23.105(k) and (l) and the related changes to the headings of
the schedules contained in Appendix B facilitate consistent and
comprehensive swaps positions and counterparty reporting for all
nonbank SDs under the Final Rules and align with the same reporting
requirements of the SEC for dual registrants?
b. Changes to Public Disclosure Requirements
The Commission is proposing to amend Commission regulation Sec.
23.105(i) \74\ to align the public disclosure of unaudited financial
information with the periodicity permitted by routine financial filings
in Commission regulation Sec. 23.105(d), and to remove reference to a
statement in both the unaudited and audited information disclosing the
amounts of minimum regulatory capital and the amount of its minimum
regulatory capital requirement computed in accordance with Commission
regulation Sec. 23.101.\75\
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\74\ 17 CFR 23.105(i).
\75\ 17 CFR 23.101.
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Paragraphs (i)(l)(ii) and (i)(2)(ii) of Commission regulation Sec.
23.105 currently require a nonbank SD or nonbank MSP to publicly
disclose on its website a statement of the amount of the nonbank SD's
or nonbank MSP's regulatory capital and its minimum capital
requirement.\76\ This information is required to be disclosed as of the
nonbank SD's or nonbank MSP's fiscal year end, and as of six months
after the firm's fiscal year end. Following adoption of the Final Rule,
nonbank SD's requested clarification as to whether the regulatory
capital information required by Commission regulations Sec.
23.105(i)(1)(ii) and (i)(2)(ii) must be a schedule or, if the
information may be reported in a narrative format, in the footnotes to
the financial statements.
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\76\ 17 CFR 23.105(i)(1)(ii) and (i)(2)(ii).
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The Commission is proposing to revise Commission regulation Sec.
23.105(i)(1)(i) \77\ to include the footnotes to the unaudited
Statement of Financial Condition in the required disclosures. The
Commission is also proposing to revise Commission regulations Sec.
23.105(i)(1)(ii) and (i)(2)(ii) to replace the word ``statement'' with
``amounts'' to indicate that required capital information does not need
to exist in a standalone statement or form. This is consistent with the
Commission's intent, to the extent practicable, to align its
requirements with those required of BDs and SBSDs by the SEC.\78\ The
Commission has preliminarily determined that the information contained
in the footnotes accompanying the financial statements should
ordinarily satisfy the requirements for disclosing minimum regulatory
capital. However, the Commission recognizes that not all accounting
standards permit, nor do the respective reporting formats utilized by
firms always provide for, such disclosure in footnote form. Some
disclosures may be presented in either narrative or graphical formats.
The Commission's sole intention is to ensure that the public has the
requisite information, not to prescribe the format of such disclosures
made by the firm on its website. Therefore, the Commission is proposing
to permit nonbank SDs and their auditors to determine the format for
disclosure of this information.
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\77\ 17 CFR 23.105(i)(1)(i).
\78\ See 17 CFR 240.18a-7(b).
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Request for Comment
Question 5. The Commission requests comment on whether nonbank SDs
and their auditors should be able to determine the reporting format of
the requisite information in their public disclosure? Should the
Commission instead specify a particular format? If yes, which format
and why?
c. Changes to Form 1-FR-FCM
The Commission is proposing to amend Form 1-FR-FCM to add new lines
to the form to include the 2 percent of uncleared swap margin capital
requirement under Commission regulation Sec. 1.17(a)(1)(i)(B)(2).\79\
The proposed capital requirement based on 2 percent of the uncleared
swaps margin would be added as new lines 22.A.vi through vii. of the
Statement of the Computation of the Minimum Capital Requirements
(``CFTC Minimum Net Capital Requirements'') on the Form 1-FR-FCM.
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\79\ 17 CFR 1.17(a)(1)(i)(B)(2).
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The Commission is also proposing to amend the Form 1-FR-FCM to add
swaps and security-based swaps haircuts to the computation of net
capital. The specific market risk charges for swaps and security-based
swaps would appear as new lines 16.D. of the CFTC Minimum Net Capital
Requirements.
Under Commission regulation Sec. 1.10, all FCMs must submit a Form
1-FR-FCM when they file for registration as an FCM and periodically
following registration.\80\ The Form 1-FR-FCM includes, among other
things, the computation of CFTC Minimum Net Capital Requirements
supplementary schedule.\81\ In the Final Rule, the Commission added a 2
percent of uncleared swap margin capital requirement to the risk-based
net capital requirement for FCMs which are also registered as SDs
(``FCM-SDs''), and adopted specific market risk charges for uncleared
swaps in the FCM net capital requirements in Commission regulation
[[Page 2561]]
Sec. 1.17.\82\ In addition, FCMs dually-registered as BDs are
permitted to file the SEC's FOCUS Report Part II in lieu of the
Commission's Form 1-FR-FCM in reporting net capital.\83\ The SEC has
recently proposed to amend its FOCUS Report Part II to include the
Commission's net capital changes adopted for FCM-SDs, including the
addition of the 2 percent uncleared swap margin to the risk-based net
capital requirement of FCM-SDs.\84\ The Commission is proposing to
amend its form to more explicitly require disclosure of the 2 percent
amount and to conform with the SEC's proposal. This information is
important to the Commission in monitoring the Final Rules, as reporting
the 2 percent amount enables the Commission to confirm that the FCM-SD
is complying with its capital requirement.
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\80\ 17 CFR 1.10.
\81\ CFTC Form 1-FR-FCM at 6-8.
\82\ 17 CFR 1.17(a)(1)(i)(B)(2) and (c)(5)(iii). See generally
Final Rules, 85 FR 57473-57476 and 57562.
\83\ 17 CFR 1.10(h).
\84\ See generally Electronic Filing of Certain Forms and Other
Filings Under the Securities Exchange Act of 1934; Technical
Amendments Regarding the FOCUS Report, SEC Proposed Rule (Undated),
available at https://www.sec.gov/news/press-release/2023-58.
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Request for Comment
Question 6. Do the proposed changes to the Form 1-FR-FCM address
the net capital changes applicable to FCMs that are also registered as
SDs as were adopted in the Final Rules?
d. Additional Cross References To Clarify Applicable Market and Credit
Risk Charges
The Commission is proposing to add new language to Commission
regulations Sec. 23.103(a)(1) and (c)(1) \85\ to clarify that the same
standardized market and credit risk charges are applicable to nonbank
SDs electing the Tangible Net Worth Capital Approach as are applicable
to all other nonbank SDs not approved to use models. Nonbank SDs
electing the Tangible Net Worth Capital Approach and who have chosen
not to apply for approval to use models, have questioned what the
applicable standardized credit risk charges are under Commission
regulation Sec. 23.103.\86\ Commission regulation Sec. 23.103(b) \87\
provides that nonbank SDs electing the Tangible Net Worth Capital
Approach or Net Liquid Assets Capital Approach are required to compute
standardized market risk charges contained in SEC Rule 18a-1 \88\ and
Commission regulation Sec. 1.17, as applicable. Commission regulation
Sec. 23.103(c) \89\ also provides that a nonbank SD electing the Net
Liquid Assets Capital Approach must compute its standardized credit
risk charge in accordance with SEC Rule 18a-1 or Commission regulation
Sec. 1.17, as applicable, but fails to provide a reference for nonbank
SDs electing the Tangible Net Worth Capital Approach.\90\ Because
standardized credit risk charges were intended to be the same for
nonbank SDs using the Tangible Net Worth Capital Approach or the Net
Liquid Assets Capital Approach, the Commission is proposing to amend
Commission regulations Sec. 23.103(a)(1) and (c)(1) to correct this
omission. Thus, the Commission proposes to amend Commission regulations
Sec. 23.103(a)(1) and (c)(1) to direct nonbank SDs electing the
Tangible Net Worth Capital Approach to compute standardized credit risk
charges in accordance with SEC Rule 18a-1 or Commission regulation
Sec. 1.17, as applicable.
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\85\ 17 CFR 23.103(a)(1) and (c)(1).
\86\ 17 CFR 23.103.
\87\ 17 CFR 23.103(b).
\88\ 17 CFR 240.18a-1.
\89\ 17 CFR 23.103(c).
\90\ SDs electing to use the Tangible Net Worth Capital Approach
are required to meet a minimum capital requirement which includes,
among other things, $20 million plus the amount of the SD's market
risk exposure requirement and its credit risk exposure requirement
associated with the SD's swap and related hedge positions that are
part of the SD's swap dealing activities. 17 CFR
23.101(a)(2)(ii)(A).
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Similarly, nonbank SDs electing the Bank-Based Capital Approach
indicated after the adoption of the Final Rules that a cross reference
in Commission regulation Sec. 23.102(d) \91\ to the calculation of
market risk exposure and credit risk exposure using internal models,
seems to be intended to reflect the requirements applicable to such
nonbank SDs in the application to use models in Commission regulation
Sec. 23.102(c).\92\ The Commission agrees that this was the intention,
and thus is proposing to amend Commission regulation Sec. 23.102(d) to
correct the applicable cross reference in order to make it clearer that
either 12 CFR part 217 or Appendix A to Subpart E of Part 23
(``Appendix A'') \93\ should be utilized as applicable by the nonbank
SD depending on the respective capital approach elected.\94\
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\91\ 17 CFR 23.102(d).
\92\ 17 CFR 23.102(c).
\93\ Appendix A to subpart E of part 23.
\94\ Final Rules, 85 FR 57506.
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Request for Comment
Question 7. Do the proposed amendments to Commission regulations
Sec. 23.103(a)(1) and (c)(1) clarify the applicable standardized
credit risk charge to be added to the $20 million minimum requirement
under Commission regulation Sec. 23.103(c)(3)? \95\
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\95\ 17 CFR 23.103(c)(3).
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Question 8. Does the proposed amendment to Commission regulation
Sec. 23.102(d) clarify the applicable model-based market and credit
risk charges applicable to nonbank SDs which have applied to use such
models under the Bank-Based Capital Approach?
B. Other Amendments
1. Notice of Substantial Reduction in Capital
The Commission adopted specific notice requirements for nonbank SDs
and MSPs related to capital compliance in the Final Rules. However, one
of the notice requirements contained in Commission regulation Sec.
23.105(c)(4), which requires notice of a substantial reduction in
capital as compared to the last reported in a financial report, did not
specify a timeframe for the notice filing.\96\ The Commission has
preliminarily determined that registrants should be able to file such a
notice within two business days after the date of occurrence. Further,
such an approach is also consistent with that applied to FCMs, which
must notify the Commission within two business days following a
substantial reduction in capital.\97\ The Commission is proposing to
amend Commission regulation Sec. 23.105(c)(4) to add a two-business
day reporting timeframe to the requirement for a nonbank SD to file
notice of a substantial reduction in capital. The Commission has
preliminarily determined that adding a reporting timeframe to the
notice requirement will enhance compliance by providing regulatory
certainty to nonbank SDs regarding when such a filing is due.
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\96\ 17 CFR 23.105(c)(4).
\97\ 17 CFR 1.12(g)(1).
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2. Subordinated Debt Approval
The nonbank SD capital requirements for both the Bank-Based Capital
Approach and the Net Liquid Assets Capital Approach permit the use of
subordinated debt as capital in order to align with the permitted use
of subordinated debt under the FCM net capital requirements.\98\ The
requirements for qualifying subordinated debt were adopted by the SEC
in its capital rule for SBSDs and were included by reference by the
Commission for other nonbank SDs in the Bank-Based Capital
Approach.\99\ Commission staff received questions regarding the process
for approving subordinated debt for nonbank SDs not
[[Page 2562]]
also registered with the SEC because the Final Rule did not articulate
a process. To address this omission, NFA adopted Financial Requirements
Rule Section 18(d).\100\ Under the existing framework, NFA already
approves subordinated loan agreements for net capital agreements for
nonbank SDs that are not dually-registered with the SEC. Similarly,
although nonbank SDs that are dually-registered with the SEC are able
to obtain SEC approval on subordinated debt,\101\ nonbank SDs that
elect either the Bank-Based Capital Approach or the Net Liquid Assets
Capital Approach but are not registered with the SEC, do not have an
approval process for the use of subordinated debt under the
Commission's rules. As discussed in the Final Rule,\102\ when adopting
the permissive use of subordinated debt in establishing minimum
regulatory capital, the Commission has long approved a process for FCMs
to obtain subordinated debt approval from their Designated Self-
Regulatory Organizations (``DSROs''), including the NFA.\103\
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\98\ 17 CFR 1.17(h).
\99\ 17 CFR 23.101(a)(1).
\100\ See generally NFA Interpretative Notice 9078 (Feb. 18,
2021), available at https://www.nfa.futures.org/rulebooksql/
rules.aspx?Section=9&RuleID=9078#:~:text=In%20order%20to%20permit%20t
hese%20non-SEC%20registered%20SD,NFA%27s%20pre-
approval%20of%20the%20subordinated%20debt%20loan%20agreement.
\101\ Nonbanks SDs that are duly-registered as SBSDs typically
elect under Commission regulation Sec. 23.101(a)(1)(ii) to maintain
net capital by complying with Sec. 240.18a-1d, and are
independently subject to such requirements, including the
subordinated-debt approval process, by their registration as a SBSD
with the SEC. 17 CFR 240.18a-1d.
\102\ Final Rules, 85 FR 57495.
\103\ See Miscellaneous Rule Deletions, Amendments or
Clarifications, 57 FR 20633, 20634 (May 14, 1992). The subordinated
debt approval program for FCMs administered by NFA has been in place
for over 30 years. In addition, the NFA, as the only registered
futures association under the CEA, is specifically required to adopt
capital requirements on its members, including SDs, and to implement
a program to audit and enforce the compliance with such requirements
in accordance with section 17(p)(2) of the CEA, 7 U.S.C. 21(p)(2).
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The Commission has preliminarily determined to permit NFA to
administer the approval process for nonbank SDs because of the NFA's
extensive history and experience as a DSRO administering a subordinated
debt approval program for FCMs. This would also make the subordinated
debt approval process for nonbank SDs consistent with the subordinated
debt approval process for FCMs. In addition, NFA has already devoted
substantial efforts to obtain the personnel and other resources
necessary to perform the review, approval and ongoing assessment of
nonbank SDs' permitted use of subordinated debt following the adoption
by NFA of Financial Requirements Rule Section 18(d).\104\ Codifying
that subordinated debt will be approved for net capital requirements
either through the Commission or by an RFA should remedy this omission
from the Final Rules and will sanction a process that is consistent
with the current practice. The Commission proposes to amend Commission
regulations Sec. 23.101(a)(1)(i)(B) and (a)(1)(ii)(C) \105\ to
establish that using subordinated debt as regulatory capital is subject
to the approval of either an RFA of which the nonbank SD is a member or
the Commission.
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\104\ NFA section 18(d).
\105\ 17 CFR 23.101(a)(1)(i)(B) and (a)(1)(ii)(C).
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3. Statement of No Material Difference
The Commission proposes to amend Commission regulation Sec.
23.105(e)(4)(v) \106\ for nonbank SDs and nonbank MSPs to explicitly
require a statement, if applicable, that there are no material
differences between the audited annual report and the unaudited annual
report of the same date. Commission regulation Sec. 23.105(e) requires
nonbank SDs and nonbank MSPs to submit an annual audited financial
report with the Commission and with NFA.\107\ Included with the
financial report is, among other things, a reconciliation of any
material differences from the unaudited financial reports prepared as
of the nonbank SD's or nonbank MSP's year-end date.\108\
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\106\ 17 CFR 23.105(e)(4)(v).
\107\ 17 CFR 23.105(e).
\108\ 17 CFR 23.105(e)(4)(v).
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For instances in which no material differences exist between the
unaudited and audited year-end financial statements, however,
Commission regulation Sec. 1.10(d)(2)(vi) \109\ requires FCMs to
include a statement indicating that no such differences exist.
Commission regulation Sec. 23.105(e) does not currently provide for
such a statement in this parallel provision for audits of nonbank SDs
or nonbank MSPs. The Commission is proposing to amend Commission
regulation Sec. 23.105(e)(4)(v) so that when nonbank SDs and nonbank
MSPs file their audited annual report, a statement that there are no
material differences between the audited annual report and the
unaudited annual report is included, if no such differences exist. This
will align the filing approach for auditors of nonbank SDs and nonbank
MSPs with that of FCMs. Requiring an affirmative statement that no
material differences exist when none are otherwise reported should
enhance the reliability of the annual reports filed by nonbank SDs and
nonbank MSPs and should encourage auditors to more rigorously assess
the materiality of reporting any discovered audit findings.
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\109\ 17 CFR 1.10(d)(2)(vi).
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Request for Comment
Question 9. Are the regulations as proposed to be amended fit for
purpose? If not, what changes would be necessary to achieve the
Commission's objective in obtaining timely financial reporting of the
capital position of nonbank SDs and MSPs?
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RF Act'') requires that Federal
agencies consider whether the regulations they propose will have a
significant economic impact on a substantial number of small entities,
and if so, provide a regulatory flexibility analysis respecting the
impact.\110\ Whenever an agency publishes a general notice of proposed
rulemaking for any rule, pursuant to the notice-and-comment provisions
of the Administrative Procedure Act,\111\ a regulatory flexibility
analysis or certification typically is required.\112\ This proposed
rulemaking would affect the obligations of SDs, MSPs, and FCMs. The
Commission has previously determined that SDs, MSPs, and FCMs are not
small entities for purposes of the RF Act.\113\ Therefore, the
requirements of the RF Act do not apply to those entities.
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\110\ 5 U.S.C. 601 et seq.
\111\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 500 et seq.
\112\ See 5 U.S.C. 601(2), 603, 604 and 605.
\113\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982) (FCMs) and Registration of Swap Dealers
and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs
and MSPs).
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Accordingly, for the reasons stated above, the Commission has
preliminarily determined that this proposed rulemaking will not have a
significant economic impact on a substantial number of small entities.
Therefore, the Chairman, on behalf of the Commission, hereby certifies,
pursuant to 5 U.S.C. 605(b), that the proposed Commission regulations
being published today by this Federal Register release will not have a
significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995 (``PRA'') \114\ imposes certain
[[Page 2563]]
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. These proposed rule amendments would
result in an amendment to existing collection of information
``Regulations and Forms Pertaining to Financial Integrity of the Market
Place; Margin Requirements for SDs/MSPs'' \115\ as discussed below. The
Commission, therefore, is submitting this proposed amendment to the
Office of Management and Budget (``OMB'') for review and approval in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The responses to
this collection of information are mandatory. An agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number issued
by OMB.
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\114\ 44 U.S.C. 3501 et seq.
\115\ OMB Control No. 3038-0024, available at https://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0024.
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The Commission has preliminarily determined that the rule
amendments as proposed do not impose any other new collections of
information that require approval of OMB under the PRA.
2. Amended Information Collection Requirements and Related Burden
Estimates \116\
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\116\ This discussion does not include information collection
requirements that are included under other Commission regulations
and related OMB control numbers.
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Currently, there are approximately 106 SDs and no MSPs registered
with the Commission that may be impacted by this proposed rulemaking
and, in particular, the collection of information discussed below.
Commission regulation Sec. 23.105 requires that each SD and MSP
maintain certain specified records, report certain financial
information and notify or request permission from the Commission under
certain specified circumstances, in each case, as provided in the
Commission regulation. For example, the Commission regulation requires
generally that SDs and MSPs maintain current books and records, provide
notice to the Commission of regulatory capital deficiencies and related
documentation, provide notice of certain other events specified in the
rule, and file financial reports and related materials with the
Commission (including the information in Appendices B and C, as
applicable). Commission regulation Sec. 23.105 also requires the SD or
MSP to furnish information about its custodians that hold margin for
uncleared swap transactions and the amounts of margin so held, and for
SDs approved to use models (as discussed above), provide additional
information regarding such models, as further described in Commission
regulation Sec. 23.105(k).
The Commission estimates that there are 31 SD firms which are
required to fulfill their financial reporting, recordkeeping and
notification obligations under Commission regulations Sec. 23.105(a)-
(n) \117\ because they are not subject to a prudential regulator, not
already registered as an FCM, and not dually-registered as a SBSD. The
Commission does not anticipate that its estimates of burden associated
with these obligations will change as a result of any the amendments to
Commission regulation Sec. 23.105 proposed herein.
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\117\ 17 CFR 23.105(a) through (n).
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Commission regulation Sec. 23.105(p) and its accompanying Appendix
C impose quarterly financial reporting and notification obligations on
SDs subject to a prudential regulator. Approximately 55 of the 106
registered SDs are subject to a prudential regulator. The Commission
has previously estimated that these reporting and notification
requirements impose an on-going burden of 33 hours annually. This
results in a total aggregate burden of 1,815 hours annually. The
Commission estimates this burden will remain unchanged by the proposed
amendments to Commission regulation Sec. 23.105(p), as the burden
associated with requirements to file quarterly financial reporting and
notifications previously were based on these entities filing their
existing information contained in Call Reports along with Schedule 1
information, and under the proposed amendments those remain the
obligations for bank SDs, except for Non-U.S. bank SDs who will also
still file existing financial reporting information as reported to
their home country supervisor, along with Appendix C Schedule 1
information.
C. 15(b) Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\118\
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\118\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether the proposed rule implicates any other
specific public interest to be protected by the antitrust laws.
The Commission has considered the proposed rule to determine
whether it is anticompetitive and has preliminarily identified no
anticompetitive effects. The Commission requests comment on whether the
proposed rule is anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has preliminarily determined that the
proposed rule is not anticompetitive and has no anticompetitive
effects, the Commission has not identified any less anticompetitive
means of achieving the purposes of the Act. The Commission requests
comment on whether there are less anticompetitive means of achieving
the relevant purposes of the Act that would otherwise be served by
adopting the proposed rule.
IV. Cost Benefit Considerations
A. Background
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its discretionary actions before promulgating a
regulation under the CEA or issuing certain orders.\119\ Section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of five broad areas of market and public concern: (1) protection
of market participants and the public; (2) efficiency, competitiveness,
and financial integrity of futures markets; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations (collectively, the ``Section 15(a) Factors''). In this
cost benefit section, the Commission discusses the costs and benefits
resulting from its discretionary determinations with respect to the
Section 15(a) Factors.\120\
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\119\ 7 U.S.C. 19(a).
\120\ The Commission notes that the costs and benefits
considered in this proposed rulemaking, and highlighted below, have
informed the policy choices described throughout this release.
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Section 4s(e) of the CEA, added by section 731 of the Dodd-Frank
Act, provides the Commission with mandatory and discretionary
rulemaking authority to adopt capital requirements for nonbank SDs and
[[Page 2564]]
nonbank MSPs,\121\ as well as financial reporting requirements for SDs
and MSPs.\122\ Section 4s(e) of the CEA requires the Commission to
adopt minimum capital requirements for nonbank SDs and nonbank MSPs
that are designed to help ensure their safety and soundness and are
appropriate for the risk associated with the uncleared swaps held by
such nonbank SD or nonbank MSP. In addition, section 4s(e)(2)(C) of the
CEA, requires the Commission to establish capital requirements for
nonbank SDs or nonbank MSPs that account for the risks associated with
their entire swaps portfolio and all other activities conducted.
Lastly, section 4s(e)(3)(D) of the CEA provides that the Commission,
the prudential regulators, and the SEC, must ``to the maximum extent
practicable'' establish and maintain comparable capital rules.
Accordingly, this proposed rulemaking includes certain capital and
financial reporting requirements related to SDs and MSPs.
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\121\ Section 4s(e)(2)(B) of the CEA, 7 U.S.C. 6s(e)(2)(B).
\122\ Section 4s(f) of the CEA, 7 U.S.C. 6s(f).
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The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking is the existing statutory and
regulatory framework applicable to SDs and MSPs, including the capital
and margin requirements for SDs and MSPs under subpart E of part 23.
The Commission recognizes, however, that to the extent that SDs \123\
have arranged their business in reliance on Division interpretations
and no-action positions in CFTC Letters No. 21-15 and 21-18, as
extended under CFTC Letter No. 23-11, the actual costs and benefits of
this proposed rulemaking may be mitigated.
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\123\ Currently, there are no MSPs registered with the
Commission and there have not been any MSPs registered with the
Commission for several years. Thus, this section regarding the
Commission's consideration of the costs and benefits of this
proposed rulemaking will only refer to SDs that may have relied on
CFTC Letters No. 21-15 and 21-18 and may benefit from the compliance
exceptions set forth herein.
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The Commission recognizes that the proposed amendments may impose
costs. The Commission has endeavored to assess the expected costs and
benefits of the proposed amendments in quantitative terms, including
PRA-related costs, where possible. In situations where the Commission
is unable to quantify the costs and benefits, the Commission identifies
and considers the costs and benefits of the proposed rules in
qualitative terms. The lack of data and information to estimate those
costs and benefits is attributable in part to the nature of the
proposed amendments, which are tailored financial reporting
requirements based on the specific businesses and types of SDs
registered with the Commission. Further, SDs represent a wide diversity
of business models catering towards different swap counterparties, from
financial end users to commercial enterprises. As a result, the
Commission expects each SD to have developed its corporate entity in a
unique manner by employing different corporate cost structures, making
it particularly difficult to estimate the quantitative impacts of both
costs and benefits on each SD.
B. Codification of the CFTC Letters and Other Amendments
The Commission is proposing technical amendments to its definitions
in Commission regulation Sec. 23.100 for ``predominantly engaged in
non-financial activities'' and ``tangible net worth.'' Further, the
Commission is proposing to amend Commission regulation Sec. 23.105(p)
to add exceptions to the financial reporting requirements for Non-U.S.
bank SDs, and permitting bank SDs to file the relevant schedules under
the Call Report (Schedule RC and Schedule RC-R) instead of as required
by Appendix C. In addition, the Commission is making a number of
clarifying amendments including: (1) amending the heading and scope
provisions of Commission regulation Sec. 23.105(k) and the titles of
certain schedules included in Appendix B; (2) changing public
disclosure requirements under Commission regulation Sec. 23.105(i);
(3) amending Form 1-FR-FCM to more accurately address net capital
changes; (4) adding language to Commission regulation Sec. 23.103(a)
and (c)(1) to clarify that standardized charges are the same as
applicable to all SDs not using the Bank-Based Capital Approach; and
(5) amending the cross reference in Commission regulation Sec.
23.102(d) to make clear that either 12 CFR part 217 or Appendix A
should be utilized as applicable by the nonbank SD depending on the
respective capital approach elected.
1. Benefits
a. Amendments to Tangible Net Worth Capital Approach--CFTC Letter No.
21-15
The amendments to definitions of ``predominantly engaged in non-
financial activities'' and ``tangible net worth'' codifying CFTC Letter
No. 21-15 are intended to ensure that the Tangible Net Worth Capital
Approach can be utilized by certain nonbank SDs as was originally
intended in the Final Rule. These amendments are expected to benefit
certain nonbank SDs by ensuring clear and effective compliance with
regulatory requirements under the Tangible Net Worth Capital Approach
as amended, ultimately reducing operational costs for such nonbank SDs.
In particular, nonbank SDs would no longer be required to calculate
asset and revenue tests separately between the entity and the ultimate
parent level or compute such tests under U.S. GAAP even if such entity
was permitted to use IFRS. Further, these amendments would allow
nonbank SDs meeting such qualifications to file their supplemental
position reports at the same time as routine financial reporting for
all nonbank SDs set forth within Commission regulation Sec. 23.105(d).
b. Amendments to Bank SD Financial Reporting Requirements--CFTC Letter
No. 21-18
Similarly, the amendments to Commission regulation Sec. 23.105(p)
codifying CFTC Letter No. 21-18, as extended under CFTC Letter No. 23-
11, are expected to benefit bank SDs by permitting: (1) Non-U.S. bank
SDs to file reports by their home country regulators subject to certain
conditions; (2) bank SDs to file comparable Call Report schedules in
accordance with, and within the timeframe permitted by, the prudential
regulators; (3) Non-U.S. bank SDs to file balance sheet and statement
of regulatory capital information in accordance with home country
requirements provided they are in English, converted to U.S. dollars
and filed within 90 calendar days following quarter-end; and (4)
dually-registered Non-U.S. bank SDs to file comparable SEC-approved
financial reports and schedules. The Commission anticipates that these
amendments will eliminate duplicative and superfluous reporting and
streamline financial reporting for both Non-U.S. and dually-registered
bank SDs.
c. Amendments Regarding Financial Reporting and Computation
Requirements of Swap Dealers
Lastly, the amendments regarding financial reporting and
computation include: (1) amendments to the heading and scope provision
of Commission regulation Sec. 23.105(k) and (l); (2) titles of certain
schedules included in Appendix B; (3) alignment of the public
disclosure of unaudited financial information with the periodicity
permitted by routine financial filings in Commission regulation Sec.
23.105(d), and to remove reference to a statement disclosing the
amounts of minimum regulatory capital; (4) amending Form
[[Page 2565]]
1-FR-FCM to add the 2 percent of uncleared swap margin capital
requirement and swaps and security-based swaps haircuts; and (5)
addition of clarifying language to Commission regulations Sec.
23.103(a)(1) and (c)(1) to provide additional clarity to registrants
that the same standardized market and credit risk charges are
applicable to nonbank SDs utilizing the Tangible Net Worth Capital
Approach as are applicable to all other nonbank SDs if not approved to
use models. These amendments are meant to clarify what was originally
intended in the Final Rule or what is already included within the
existing Commission regulations, as well as align the schedules as
currently required by the SEC and the NFA. The Commission anticipates
that these amendments will remove uncertainty amongst SDs about the
type of form and the extent of detail that they should be reporting.
2. Costs
The Commission generally does not anticipate any costs associated
with the above amendments as they are intended to streamline and
clarify existing financial reporting and capital requirements. Of the
above, only the amendments to Commission regulation Sec. 23.105(l)
would impose additional financial reporting requirements on nonbank SDs
and nonbank MSPs not approved to use models to file Schedules 2-4 of
Appendix B.
Currently, there are 8 nonbank SDs not approved to use models that
are not currently filing Schedules 2-4 of Appendix B but would be
required to do so under the amendments to Commission regulation Sec.
23.105(l). The information required under Appendix B is nearly
identical in all material respects to corresponding forms found in the
SEC Form FOCUS Report Part II, as well as the capital and financial
reporting requirements by the NFA for its member nonbank SDs and
nonbank MSPs. Thus, the Commission has preliminarily determined that
these nonbank SDs already have developed policies, procedures and
systems to aggregate, monitor, and track their swap activities and
risks as is required under Schedules 2-4 of Appendix B. This should
mitigate some of the burdens of the additional reporting and
recordkeeping requirements. Finally, the amendments to Commission
regulation Sec. 23.105(k) clarify that nonbank SDs and nonbank MSPs
approved to use models may comply with the requirements to provide
specific financial information required by Commission regulation Sec.
23.105(k) by filing Appendix B. Such nonbank SDs and nonbank MSPs have
already been filing Appendix B with the Commission, and thus the
Commission has preliminarily determined that the amendments to
Commission regulation Sec. 23.105(k) would not impose any additional
burden for such nonbank SDs and nonbank MSPs.
3. Section 15(a) Factors
The following is a discussion of the cost and benefit
considerations of this proposed rulemaking, as it relates to the five
broad areas of market and public concern identified in section 15(a) of
the CEA: (1) protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of swaps markets;
(3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations.
a. Protection of Market Participants and the Public
The proposed rules are intended to enhance the clarity of financial
reporting and computation requirements by revising the language of the
regulations with respect to the type of forms and the tests that SDs
should be using as part of their financial reporting process. The
changes to the computation of Tangible Net Worth are anticipated to
benefit the public by allowing investors to monitor tangible net worth
at the consolidated parent's level, and the financial reporting
requirements for both bank SDs and nonbank SDs set out in this proposed
rulemaking should help the Commission and market participants monitor
and assess the financial condition of such SDs more accurately and as
was intended in the Final Rule. These amendments are also intended to
harmonize financial reporting requirements with those of the prudential
regulators, and the SEC, through which market participants and the
Commission can gain a clearer and more directly comparable
understanding of the financial reports received. Clarifying rules
should safeguard both market participants and the public by improving
transparency and reducing ambiguity.
Request for Comment
Question 10. Do the proposed financial reporting and computation
requirements protect market participants and the public? Please
explain.
b. Efficiency, Competitiveness, and Financial Integrity of Swaps
Markets
In this proposed rulemaking, the Commission seeks to promote
efficiency and financial integrity of the swaps market by streamlining
many of the financial reporting requirements. For example, the
amendments to Commission regulation Sec. 23.105(p) permit certain bank
SDs to file with the Commission comparable Call Report schedules in
accordance with, and within the timeframe permitted by, the prudential
regulators that they currently file with the prudential regulators, or
comparable SEC-approved financial reports and schedules, as applicable.
The proposed amendments to Commission regulation Sec. 23.105(p) would
also allow certain Non-U.S. bank SDs to file with the Commission what
they currently file with their respective home country regulators,
subject to certain conditions. In addition, the amendments to
Commission regulation Sec. 23.105(k) are meant to ensure that the
information listed in Appendix B is completed by all nonbank SDs and
nonbank MSPs as was intended, and is consistent with that required by
the SEC and NFA, and the amendments to Form 1-FR-FCM are meant to
harmonize with the SEC's requirements in its FOCUS Report Part II.
Harmonizing requirements should foster a more level playing field,
ultimately promoting trust and integrity within the market.
The Commission anticipates that these amendments will promote
greater operational efficiencies for both bank and nonbank SDs that are
already regulated, either prudentially or through comparable foreign
regulators, as they may be able to avoid creating duplicative
compliance and operational infrastructures. The proposed amendments
should allow the Commission to monitor the financial integrity of swaps
markets more clearly and efficiently, including in the case of any
default or financial contagion.
Request for Comment
Question 11. How might this proposal affect market integrity? Is
market integrity adversely affected by the proposed rules? If so, how
might the Commission mitigate any harmful impact?
c. Price Discovery
The Commission anticipates that the proposed amendments may enhance
price discovery. By clarifying financial reporting and computation
requirements and harmonizing reporting practices, a more efficient
operating environment would be created for SDs, which are important
intermediaries within the swaps markets. This improved data quality
reported to regulators has the potential to enhance supervision,
leading to improved market quality.
[[Page 2566]]
Consequently, this could lead to a more effective and accurate price
discovery process.
Request for Comment
Question 12. How might this proposed rulemaking affect price
discovery? Please explain.
d. Sound Risk Management Practices
The Commission has preliminarily determined that, as a result of
the proposed reporting and recordkeeping requirements, SDs may more
effectively track their trading and risk exposure in swaps and other
financial activities. To the extent that these SDs can better monitor
and track their risks, the Commission anticipates that this should help
them better manage risk within the entity.
Request for Comment
Question 13. How might this proposal affect SD's risk management
practices? Please explain.
e. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations related to the costs and benefits of the proposed rule.
Request for Comment
Question 14. Are there other public interest considerations that
the Commission should consider? Please explain.
C. Other Amendments
The Commission is proposing a number of clarifying amendments
intended to align with existing Commission regulations, including: (1)
amending Commission regulation Sec. 23.105(c)(4) to add a two business
days reporting timeframe to the requirement for nonbank SD notice
filing of a substantial reduction in capital; (2) amending Commission
regulations Sec. 23.101(a)(1)(i)(B) and (a)(1)(ii)(C) to establish
that the use of subordinated debt as regulatory capital is subject to
the approval of either an RFA of which the nonbank SD is a member, or
the Commission; and (3) amending Commission regulation Sec.
23.105(e)(4)(v) for SDs and MSPs to include an explicit statement, if
applicable, that there are no material differences between the audited
annual report and the unaudited annual report of the same date.
1. Benefits
a. Notice of Substantial Reduction in Capital
The amendments to the notice requirements in Commission regulation
Sec. 23.105(c)(4) would add a two-business days requirement for
nonbank SDs for notice of substantial reduction in capital. The
Commission has preliminarily determined that adding a reporting
timeframe to the notice requirement will enhance compliance by
providing regulatory certainty to nonbank SDs of when such a filing is
due.
b. Subordinated Debt Approval
The amendments to Commission regulation Sec. 23.101(a)(1)(i)(B)
would establish that the use of subordinated debt as regulatory capital
is subject to the approval of either an RFA of which the nonbank SD is
a member, or the Commission. The amendments should further provide
regulatory clarity by establishing the process for approving
subordinated debt for nonbank SDs, which was not explicitly articulated
in the Final Rule and had led to uncertainty among nonbank SDs.
c. Statement of No Material Difference
Lastly, the amendments to Commission regulation Sec.
23.105(e)(4)(v) would require that the SDs and MSPs include an explicit
statement, if applicable, of no material differences between the
audited and the unaudited annual report of the same date. Doing so
should not only align the filing approach for auditors of SDs with that
of FCMs, but also enhance the reliability of such annual reports by
encouraging auditors to more rigorously assess the materiality of
reporting any discovered audit findings.
2. Costs
The Commission does not anticipate that compliance with the above
amendments will lead to any significant costs. The amendments to
Commission regulations Sec. 23.105(c)(4) and (e)(4)(v) are meant to
align the financial reporting requirements of SDs with that of FCMs,
and based on the Commission's experience with existing filings and
discussions with registered SDs, the Commission has preliminarily
determined that the registrants will be able to file necessary
information within the timeframe provided. The amendments to Commission
regulation Sec. 23.101(a)(1)(i)(B) are meant to establish a process of
approving subordinated debt for nonbank SDs, and as such they would not
levy any additional costs to the nonbank SDs.
3. Section 15(a) Factors
The following is a discussion of the cost and benefit
considerations of the proposed rulemaking, as it relates to the five
broad areas of market and public concern identified in section 15(a) of
the CEA: (1) protection of market participants and the public; (2)
efficiency, competitiveness, and financial integrity of swaps markets;
(3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations.
a. Protection of Market Participants and the Public
The Commission anticipates that the proposed amendment to
Commission regulation Sec. 23.105(c)(4) should protect market
participants and the public against possible market disruption by
requiring that all SDs file a notice of a substantial reduction in
capital within two business days after such an incident has occurred.
Similarly, the amendments to Commission regulation Sec.
23.101(a)(1)(i)(B) should provide market clarity on how subordinated
debt is approved for consideration as capital, and the amendments to
Commission regulation Sec. 23.105(e)(4)(v) should allow the Commission
and the public to effectively monitor cases where there are no material
differences between the audited and unaudited annual report of the same
date filed by nonbank SDs and nonbank MSPs. These amendments should
enable market participants to have better insights into SD's capital
and financial positions. This, in turn, should enhance the protection
of both market participants and the public.
Request for Comment
Question 15. Do the proposed financial reporting requirements
protect market participants and the public? Please explain.
b. Efficiency, Competitiveness, and Financial Integrity of Swaps
Markets
The proposed amendments should improve the accuracy and
completeness of nonbank SDs' and nonbank MSPs' financial reporting by
imposing a two-business day deadline for notice of substantial
reduction in capital, and an affirmative statement of no material
differences between the audited and unaudited annual financial
statement, as applicable. The establishment of a process for approving
subordinated debt should lead to increased efficiency in how such
subordinated debt is monitored. Further, these amendments are also
intended to harmonize financial reporting requirements with those of
the prudential regulators, as well as the Commission's existing
framework regarding FCMs. Harmonizing requirements should foster a more
level playing field, ultimately promoting trust and integrity within
the market.
[[Page 2567]]
Request for Comment
Question 16. Is market integrity adversely affected by the proposed
rules? If so, how might the Commission mitigate any harmful impact?
c. Price Discovery
The Commission anticipates that the proposed amendments may enhance
price discovery. By improving financial reporting requirements for
nonbank SDs and nonbank MSPs, a more efficient operating environment
should be created for SDs, which are important intermediaries within
the swaps markets. This improved data quality reported to regulators
has the potential to enhance supervision, leading to improved market
quality. Consequently, this could lead to a more effective and accurate
price discovery process.
Request for Comment
Question 17. How might this proposed rulemaking affect price
discovery? Please explain.
d. Sound Risk Management Practices
The Commission anticipates that the above amendments will lead to
better risk management practices among SDs and MSPs, particularly by
requiring them to monitor for potential reduction in capital and
material differences between the audited and the unaudited annual
financial statements.
Request for Comment
Question 18. How might this proposed rulemaking affect risk
management practices of nonbank SDs and nonbank MSPs? Please explain.
e. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations related to the costs and benefits of the proposed rule.
Request for Comment
Question 19. Are there other public interest considerations that
the Commission should consider? Please explain.
Note: The following appendix to this preamble pertains to a
form that does not appear in the Code of Federal Regulations.
BILLING CODE 6351-01-P
[[Page 2568]]
Appendix to the Preamble--Proposed Revisions to Selected Section of
Form 1-FR-FCM: Statement of the Computation of the Minimum Capital
Requirements
[GRAPHIC] [TIFF OMITTED] TP16JA24.046
[[Page 2569]]
[GRAPHIC] [TIFF OMITTED] TP16JA24.047
[[Page 2570]]
[GRAPHIC] [TIFF OMITTED] TP16JA24.048
BILLING CODE 6351-01-C
List of Subjects in 17 CFR Part 23
Reporting and recordkeeping requirements, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 23 as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. Amend Sec. 23.100 by adding, in alphabetical order, a definition of
the term ``Call Report'' and revising the definitions of the terms
``Predominantly engaged in non-financial activities'' and ``Tangible
net worth'' to read as follows:
Sec. 23.100 Definitions applicable to capital requirements.
* * * * *
Call Report. This term means the Federal Financial Institutions
Examination Council Form 031 that a swap dealer or major swap
participant for which there is a prudential regulator is required to
file with its applicable prudential regulator.
* * * * *
Predominantly engaged in non-financial activities. A swap dealer is
predominantly engaged in non-financial activities if:
(1) The swap dealer's consolidated annual gross financial revenues,
or if the swap dealer is a wholly owned subsidiary, then the swap
dealer's consolidated parent's annual gross financial revenues, in
either of its two most recently completed fiscal years represents less
than 15 percent of the swap dealer's or the swap dealer's
[[Page 2571]]
consolidated parent's consolidated gross revenue in that fiscal year
(``15% revenue test''), and
(2) The consolidated total financial assets of the swap dealer, or
if the swap dealer is wholly owned subsidiary, then the consolidated
total financial assets of the swap dealer's parent, at the end of its
two most recently completed fiscal years represents less than 15
percent of the swap dealer's or the swap dealer's consolidated parent's
consolidated total assets as of the end of the fiscal year (``15% asset
test'').
(3) For purpose of computing the 15% revenue test or the 15% asset
test, a swap dealer's activities or swap dealer's parent's activities
shall be deemed financial activities if such activities are defined as
financial activities under 12 CFR 242.3 and Appendix A to 12 CFR 242,
including lending, investing for others, safeguarding money or
securities for others, providing financial or investment advisory
services, underwriting or making markets in securities, providing
securities brokerage services, and engaging as principal in investing
and trading activities; Provided, however, a swap dealer or a swap
dealer's consolidated parent may exclude from its financial activities
accounts receivable resulting from non-financial activities.
* * * * *
Tangible net worth. This term means the net worth of a swap dealer
or major swap participant as determined in accordance with U.S.
generally accepted accounting principles, or International Financial
Reporting Standards issued by the International Accounting Standards
Board if the swap dealer or major swap participant is permitted under
Sec. 23.105(b) to prepare and maintain books and records in accordance
with such standards, but in either case, excluding goodwill and other
intangible assets. In determining net worth, all long and short
positions in swaps, security-based swaps and related positions must be
marked to their market value. A swap dealer or major swap participant
must include in its computation of tangible net worth all liabilities
or obligations of a subsidiary or affiliate that the swap dealer or
major swap participant guarantees, endorses, or assumes either directly
or indirectly.
* * * * *
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3. Amend Sec. 23.101 by revising paragraphs (a)(1)(i)(B),
(a)(1)(ii)(B), and (a)(1)(ii)(C), and adding paragraph (a)(1)(ii)(D) to
read as follows:
Sec. 23.101 Minimum financial requirements for swap dealers and major
swap participants.
(a)(1) * * *
(i) * * *
(B) An aggregate of common equity tier 1 capital, additional tier 1
capital, and tier 2 capital, all as defined under the bank holding
company regulations in 12 CFR 217.20, equal to or greater than eight
percent of the swap dealer's BHC equivalent risk-weighted assets;
provided, however, that the swap dealer must maintain a minimum of
common equity tier 1 capital equal to six point five percent of its BHC
equivalent risk-weighted assets; provided further, that any capital
that is subordinated debt under 12 CFR 217.20 and that is included in
the swap dealer's capital for purposes of this paragraph (a)(1)(i)(B)
must qualify as subordinated debt under Sec. 240.18a-1d of this title
in accordance with a qualification determination of the Commission or a
registered futures association of which the swap dealer is a member;
* * * * *
(ii) * * *
(B) A swap dealer that uses internal models to compute market risk
for its proprietary positions under Sec. 240.18a-1(d) of this title
must calculate the total market risk as the sum of the VaR measure,
stressed VaR measure, specific risk measure, comprehensive risk
measure, and incremental risk measure of the portfolio of proprietary
positions in accordance with Sec. 23.102 and Appendix A to subpart E
of this part;
(C) A swap dealer may recognize as a current asset, receivables
from third-party custodians that maintain the swap dealer's initial
margin deposits associated with uncleared swap and security-based swap
transactions pursuant to the margin rules of the Commission, the
Securities and Exchange Commission, a prudential regulator, as defined
in section 1a(39) of the Act, or a foreign jurisdiction that has
received a margin Comparability Determination under Sec. 23.160; and
(D) The qualification of any subordinated debt used to meet any
capital requirements shall be as determined by the Commission or a
registered futures association of which the swap dealer is a member.
* * * * *
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4. In Sec. 23.102, revise paragraph (d) to read as follows:
Sec. 23.102 Calculation of market risk exposure requirement and
credit risk exposure requirement using internal models.
* * * * *
(d) The Commission, or registered futures association upon
obtaining the Commission's determination that its requirements and
model approval process are comparable to the Commission's requirements
and process, may approve or deny the application, or approve or deny an
amendment to the application, in whole or in part, subject to any
conditions or limitations the Commission or registered futures
association may require, if the Commission or registered futures
association finds the approval to be appropriate in the public
interest, after determining, among other things, whether the applicant
has met the requirements of this section. A swap dealer that has
received Commission or registered futures association approval to
compute market risk exposure requirements and credit risk exposure
requirements pursuant to internal models must compute such charges in
accordance with paragraph (c) of this section.
* * * * *
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5. In Sec. 23.103, revise paragraphs (a)(1) and (c)(1) to read as
follows:
Sec. 23.103 Calculation of market risk exposure requirement and
credit risk requirement when models are not approved.
(a) * * *
(1) Computes its regulatory capital requirements under Sec.
23.101(a)(1)(ii) or (a)(2), and
* * * * *
(c) * * *
(1) A swap dealer that computes regulatory capital under Sec.
23.101(a)(1)(ii) or (a)(2) shall compute counterparty credit risk
charges using the applicable standardized credit risk charges set forth
in Sec. 240.18a-1 of this title and Sec. 1.17 of this chapter for
such positions.
* * * * *
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6. In Sec. 23.105, revise paragraphs (c)(2) and (c)(4), (d)(2) through
(d)(4), (e)(4)(v), (e)(6), (i)(1)(i) and (ii), (i)(2)(ii), the
introductory text to (k)(1), (l), (p)(2), and (p)(7) to read as
follows:
Sec. 23.105 Financial recordkeeping, reporting and notification
requirements for swap dealers and major swap participants.
* * * * *
(c) * * *
(2) A swap dealer or major swap participant who knows or should
have known that its regulatory capital at any time is less than 120
percent of its minimum regulatory capital requirement as determined
under Sec. 23.101, or less than the amounts identified in Sec.
1.12(b) of this chapter for a swap dealer or major swap participant
that is also a futures commission merchant, must provide written notice
to the Commission and to the registered futures association of which it
is a
[[Page 2572]]
member to that effect within 24 hours of such event.
* * * * *
(4) A swap dealer or major swap participant must provide written
notice within two business days to the Commission and to the registered
futures association of which it is a member of a substantial reduction
in capital as compared to that last reported in a financial report
filed with the Commission pursuant to this section. The notice shall be
provided if the swap dealer or major swap participant experiences a 30
percent or more decrease in the amount of capital that the swap dealer
or major swap participant holds in excess of its regulatory capital
requirement as computed under Sec. 23.101.
* * * * *
(d) * * *
(2) The financial reports required by this section must be prepared
in the English language and be denominated in United States dollars.
The financial reports shall include a statement of financial condition,
a statement of income/loss, a statement of changes in liabilities
subordinated to the claims of general creditors, a statement of changes
in ownership equity, a statement demonstrating compliance with and
calculation of the applicable regulatory capital requirement under
Sec. 23.101, and such further material information as may be necessary
to make the required statements not misleading. The monthly or
quarterly report and schedules must be prepared in accordance with
generally accepted accounting principles as established in the United
States; Provided, however, that a swap dealer or major swap participant
that is not otherwise required to prepare financial statements in
accordance with U.S. generally accepted accounting principles, may
prepare the monthly or quarterly report and schedules required by this
section in accordance with International Financial Reporting Standards
issued by the International Accounting Standards Board.
(3) A swap dealer or major swap participant that is also registered
with the Securities and Exchange Commission as a broker or dealer,
security-based swap dealer, or a major security-based swap participant
and files a monthly Form X-17A-5 FOCUS Report Part II with the
Securities and Exchange Commission pursuant to Sec. 240.18a-7 or
240.17a-5 of this title, as applicable, must file such Form X-17A-5
FOCUS Report Part II with the Commission and with the registered
futures association in lieu of the financial reports required under
paragraphs (d)(1) and (2) of the section. The swap dealer or major swap
participant must file the form with the Commission and registered
futures association when it files the Form X-17A-5 FOCUS Report Part II
with the Securities and Exchange Commission, provided, however, that
the swap dealer or major swap participant must file the Form X-17A-5
FOCUS Report Part II with the Commission and registered futures
association no later than 17 business days after the end of each month.
(4) A swap dealer or major swap participant that is also registered
with the Commission as a futures commission merchant must file a Form
1-FR-FCM or such other form as the futures commission merchant is
permitted to file under Sec. 1.10 of this chapter, in lieu of the
monthly financial reports required under paragraphs (d)(1) and (2) of
the section.
(e) * * *
(4) * * *
(v) A reconciliation of any material differences from the unaudited
financial report prepared as of the swap dealer's or major swap
participant's year-end date under paragraph (d) of this section and the
swap dealer's or major swap participant's annual financial report
prepared under this paragraph (e) or, if no material differences exist,
a statement so indicating; and
* * * * *
(6) A swap dealer or major swap participant that is also registered
with the Commission as a futures commission merchant must file an
audited Form 1-FR-FCM or such other form as the futures commission
merchant is permitted to file under Sec. 1.10 of this chapter, and
must comply with the requirements of Sec. 1.16 of this chapter,
including filing a supplemental accountant's report on material
inadequacies concurrently with the audited annual report, in lieu of
the annual financial report required under this paragraph (e).
* * * * *
(i) * * *
(1) * * *
(i) The statement of financial condition including applicable
footnotes; and
(ii) The amounts of the swap dealer's or major swap participant's
regulatory capital and minimum regulatory capital requirement, computed
in accordance with Sec. 23.101.
(2) * * *
(ii) The amounts of the swap dealer's or major swap participant's
regulatory capital as of the fiscal year end and its minimum regulatory
capital requirement, computed in accordance with Sec. 23.101.
* * * * *
(k) * * *
(1) A swap dealer that has received approval or filed an
application for provisional approval under Sec. 23.102(d) from the
Commission, or from a registered futures association of which the swap
dealer is a member, to use internal models to compute its market risk
exposure requirement and credit risk exposure requirement in computing
its regulatory capital under Sec. 23.101 must file with the Commission
and with the registered futures association of which the swap dealer is
a member the specific information contained in Appendix B to subpart E
of this part and the following information within 17 business days of
the end of each month or quarter as applicable:
* * * * *
(l) Additional position and counterparty reporting requirements for
swap dealers and major swap participants not approved to use models. A
swap dealer or major swap participant which is not subject to paragraph
(k) of this section must provide the Commission and the registered
futures association of which the swap dealer or major swap participant
is a member, the additional specific information contained in Appendix
B to subpart E of this part on a monthly or quarterly basis as
applicable to its required frequency of financial reporting under
paragraph (d) of this section.
* * * * *
(p) * * *
(2) Financial report and position information. (i) A swap dealer or
major swap participant that files a Call Report with its applicable
prudential regulator shall file Schedule RC--Balance Sheet and Schedule
RC--R Regulatory Capital from its Call Report filed with the prudential
regulator, and Schedule 1 of Appendix C to subpart E of this part, with
the Commission on a quarterly basis. The swap dealer or major swap
participant shall file the schedules with the Commission on the date
the Call Report is due to be filed with the swap dealer's or major swap
participant's prudential regulator.
(ii) A swap dealer or major swap participant domiciled in a non-
U.S. jurisdiction that is not required to file a Call Report by its
applicable prudential regulator shall file a statement of financial
condition and regulatory capital information containing comparable
financial information as required by Schedule RC--Balance Sheet and
Schedule RC--R Regulatory
[[Page 2573]]
Capital of the Call Report, and shall file Schedule 1 of Appendix C to
subpart E of this part, with the Commission on a quarterly basis. The
statement of financial condition, regulatory capital information, and
Schedule 1 of Appendix C to subpart E of this part shall be prepared
and presented in accordance with the accounting standards approved by
the swap dealer's or major swap participant's home country regulatory
authorities, provided, however, that the schedules and information must
be in the English language with balances converted to U.S. dollars. The
swap dealer or major swap participant shall file the statement of
financial condition, regulatory capital information, and Schedule 1 of
Appendix C to subpart E of this part with the Commission no later than
90 calendar days after the end of the swap dealer's or major swap
participant's fiscal quarter.
* * * * *
(7) A swap dealer or major swap participant that is subject to the
capital requirements of a prudential regulator and is also registered
with the Securities and Exchange Commission as a security-based swap
dealer or a major security-based swap participant and files a quarterly
Form X-17A-5 FOCUS Report Part IIC with the Securities and Exchange
Commission pursuant to Sec. 240.18a-7 of this title, must file such
Form X-17A-5 FOCUS Report Part IIC with the Commission in lieu of the
financial reports required under paragraphs (p)(2) of this section. The
swap dealer or major swap participant must file the form with the
Commission when it files the Form X-17A-5 FOCUS Report Part IIC with
the Securities and Exchange Commission, provided, however, that the
swap dealer or major swap participant must file the Form X-17A-5 FOCUS
Report Part IIC with the Commission no later than 30 calendar days from
the date the report is made.
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7. In Appendix B to subpart E of part 23, revise the schedule headings
of Schedules 1, 2, 3, and 4, and republish the schedules, to read as
follows:
Appendix B to Subpart E of Part 23--Swap Dealer and Major Swap
Participant Position Information
BILLING CODE 6351-01-P
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8. Amend Appendix C to subpart E of part 23 by removing the Balance
Sheet and Regulatory Capital forms and revising the Schedule 1--
Aggregate Security-Based Swap and Swap Positions form to read as
follows:
Appendix C to Subpart E of Part 23--Specific Position Information for
Swap Dealers and Major Swap Participants Subject to the Capital
Requirements of a Prudential Regulator
[[Page 2578]]
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BILLING CODE 6351-01-C
Issued in Washington, DC, on December 22, 2023, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Capital and Financial Reporting Requirements for Swap
Dealers and Major Swap Participants--Commission Voting Summary,
Chairman's Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Behnam and Commissioners Johnson,
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
I support the proposed rule to amend certain requirements in
part 23 of the Commission's regulations to address specific issues
identified during the implementation of the Commission's 2020 final
rule on capital and financial reporting requirements for swap
dealers (SDs) and major swap participants (MSPs).\1\ The proposed
rule would codify interpretive CFTC Letter No. 21-15 \2\ regarding
capital and financial reporting requirements for nonbank SDs and
nonbank MSPs electing the tangible net worth capital approach; \3\
codify the time-limited no-action position in CFTC Letter No. 21-18
\4\ regarding financial reporting requirements for bank SDs; clarify
technical aspects of the reporting requirements; and update an FCM
reporting form consistent with net capital requirements previously
adopted by the Commission for FCMs. The proposed amendments are not
intended to change the Commission's capital approach.
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\1\ Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
\2\ CFTC Letter No. 21-15, Jun. 29, 2021, available at https://www.cftc.gov/csl/21-15/download.
\3\ See 17 CFR 23.101.
\4\ CFTC Letter No. 21-18, Aug. 31, 2021, available at https://www.cftc.gov/csl/21-18/download.
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This proposal is a testament to the commitment I previously made
for the Commission to consider the codification of various forms of
relief previously provided by CFTC Division staff through no-action
position letters.\5\ As staff letters only bind the staff of the
issuing Division with respect to the specific facts, situations, and
persons addressed by the respective staff letters,\6\ it is good
government for the Commission to clean-up its rule set where the
Commission determines that compliance with certain regulations is
impossible. Such Commission action not only provides regulatory
certainty and clarity to our registrants with the benefit of notice
and public comment, but also ensures the efficient use of staff
resources to fix an issue once instead of allocating time to a
series of no-action positions for the same matter.
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\5\ Keynote Address of Chairman Rostin Behnam at the ABA
Business Law Section Derivatives & Futures Law Committee Winter
Meeting, (Feb. 3. 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam31.
\6\ See, e.g., 17 CFR 140.99.
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I look forward to hearing the public's comments on the proposed
amendments to the regulations and the relevant appendices in part 23
of the Commission's regulations. I thank staff in the Market
Participants Division, Office of the General Counsel, and the Office
of the Chief Economist for all of their work on the proposal.
[[Page 2579]]
Appendix 3--Statement of Commissioner Kristin N. Johnson
The Commodity Futures Trading Commission (Commission or CFTC)
adopted a proposal to amend certain of the Commission's part 23
regulations that impose minimum capital requirements and financial
reporting obligations on swap dealers (SDs) and major swap
participants (MSPs) (Proposed Amendments).\1\ I support the
amendments advanced by the Market Participants Division (MPD).
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\1\ Since no MSP is currently registered with the Commission, in
this statement, I will refer to SDs only.
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Minimum capital requirements serve as a cushion during times of
severe market stress to ensure our registrants' safety and
soundness, protect the financial stability of our financial system,
and prevent a run on our financial institutions. Financial condition
reporting provides the Commission with visibility and insight into
the business and financial health of our registrants and enables us
to require corrective action and prevent a failure of a single
entity or group of entities or segment of the derivatives market,
which could raise system risk concerns.
Dodd-Frank Act Reforms
The Commission introduced new capital and financial reporting
requirements for SDs in 2020, as mandated by the Dodd-Frank Act
(2020 Capital Rule).\2\ Title VII of the Dodd-Frank Act amended the
Commodity Exchange Act (CEA) to establish a new regulatory framework
for swaps, regulated by the Commission, and security-based swaps,
regulated by the Securities and Exchange Commission (SEC), to reduce
risk, increase transparency, and promote market integrity within the
financial system. Section 4s(e) of the CEA introduced minimum
capital requirements for SDs,\3\ and section 4s(f) of the CEA
created financial reporting and recordkeeping requirements for all
SDs.\4\
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\2\ Capital Requirements of Swap Dealers and Major Swap
Participants (Capital Requirements), 85 FR 57462 (Sept. 15, 2020);
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public
Law 111-203, 124 Stat. 1376 (2010).
\3\ 7 U.S.C. 6s(e).
\4\ 7 U.S.C. 6s(f).
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In the United States, the capital framework is divided into
three parallel regimes. SDs subject to regulation by a prudential
regulator are required to comply with the minimum capital
requirements adopted by the applicable prudential regulator,\5\
while SDs not subject to regulation by a prudential regulator are
required to meet the minimum capital requirements of the Commission,
and security-based swap dealers (SBSDs) and major security-based
swap participants (MSBSPs) that do not have a prudential regulator
are required to comply with the minimum capital requirements of the
SEC.\6\ The prudential regulators or banking agencies and the SEC
have adopted capital rules for swaps and security-based swaps.
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\5\ 7 U.S.C. 6s(e)(1)(A).
\6\ Section 15F of the Exchange Act addresses capital
requirements for SBSDs/MSBSPs.
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In the adopting release for the 2020 Capital Rule, the
Commission indicated that it would consult with the prudential
regulators and the SEC to assess the capital adequacy of SDs, MSPs,
SBSDs, and MSBSPs, monitor the implementation of the rule and data,
and consider modifications to the capital and financial reporting
requirements.\7\
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\7\ Capital Requirements, 85 FR at 57465.
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With the Proposed Amendments, the Commission seeks to make
surgical changes to the 2020 Capital Rule, including a number of
technical corrections, based on consultation with the prudential
regulators and SEC, and based on market feedback on the adoption and
implementation of the 2020 Capital Rule. While the Proposed
Amendments are not adjusting the capital components of the 2020
Capital Rule, all regulations designed to mitigate known systemic
risk concerns in the swaps market must be subject to careful
evaluation.
I commend the Commission for taking formal steps to engage in a
rulemaking process that invites Commission discussion and public
notice and comment on these regulations, which ensure compliance
with the Dodd-Frank Act while remaining practical and solutions-
oriented. I strongly encourage the Commission, however, to begin a
formal rulemaking process to address several unresolved issues
necessary to ensure compliance with the Dodd-Frank Act and these
requirements.
Clarifying Capital Requirements for Commercials
The Proposed Amendments codify Interpretive Letter 21-15, which
applies to commercial non-bank SDs--typically entities that
primarily engage in agricultural and energy swaps and provide
services that are important to the U.S. economy. The Commission's
overall capital approach permits non-bank SDs to select one of three
methods to calculate their capital requirements, as permitted under
the rule: the net liquid assets capital approach; \8\ the bank-based
capital requirements; \9\ or the tangible net worth capital
approach.\10\
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\8\ A capital requirement that is consistent with the SEC's
final capital regulations for SBSDs, as well as the existing CFTC's
capital rules for FCMs, and the existing SEC's capital rules for
broker-dealers.
\9\ A capital requirement that is consistent with the prudential
regulators' capital requirements for bank SDs and that is based on
the existing Federal Reserve Board capital requirements for bank
holding companies.
\10\ A capital requirement that is based on the SD's tangible
net worth, if the SD or parent is predominantly engaged in non-
financial activities.
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The Commission proposes to revise the 2020 Capital Rule so that
the test to determine tangible net worth may be applied at the
entity level or ultimate consolidated parent level; so that
International Financial Reporting Standards (IFRS) accounting
standards or GAAP may be used; and so that position and financial
exposure reporting occur at the same frequency as financial
reporting, which for SDs is quarterly.
The Proposed Rule minimizes disruption, and clarifies the
interpretation and implementation of the tangible net worth test for
commercial non-bank SDs.
Refining Financial Reporting Requirements
The Proposed Amendments address issues presented in No-Action
Letter (NAL) 21-18, which was extended under NAL 23-11 and applies
to bank SDs, including non-U.S. bank SDs. Non-U.S. bank SDs can file
the applicable financial reporting within 90 days of the end of the
financial reporting period and the same forms (e.g., relating to
balance sheet and regulatory capital schedules) in the same format
as provided to home country regulators (but in English and U.S.
dollars). Additionally, U.S. bank SDs can file the same forms (e.g.,
relating to balance sheet and regulatory capital schedules) under
bank regulators' Call Report and within the same timeframe as when
filing with their prudential regulator.
The Proposed Amendments allow the Commission to collect
information from bank SDs as a comparative tool. Also, all SDs must
use Schedule 1 for position information, which is similar to the
SEC's FOCUS report--duplicative forms are eliminated.
MPD has demonstrated collaboration working with the prudential
regulators and SEC in developing and harmonizing processes,
procedures, and forms for financial reports and notifications--some
of which are adopted the Proposed Amendments. Further, the 2020
Capital Rule was an important initiative that demonstrated the
Commission's recognition of the complexity and interconnectedness of
the derivatives markets.
Technical Corrections
SD Exposure Reporting
The Proposed Amendments amend Commission regulation to clarify
that certain supplemental schedules used to report SD exposure are
intended to be provided by all non-bank SDs. These amendments are
necessary to align the reporting of similar information collected by
the SEC from SBSDs and to provide the Commission and National
Futures Association with important information regarding SD exposure
across several geographical locations and counterparties. This
information provides valuable insight into the risk exposure of non-
bank SDs, which is essential to performing the regulatory oversight
of SDs.
Notice Requirements for Substantial Reduction in Capital
The Commission should begin to review notice requirements
comprehensively in light of greater, faster capabilities to comply,
notwithstanding the potential existence of challenges for non-U.S.
SDs in light of time zone differences. The Proposed Amendments
require notification of a substantial reduction of capital within
two business days. The 2020 Capital Rule did not specify a
timeframe, and the Proposed Amendments are consistent with the
timeframe applicable to FCMs.
Conclusion
In order to prevent the market instability witnessed during the
period when swaps traded in bespoke, bilateral markets, the
Commission imposes capital requirements on non-bank SDs, and imposes
financial reporting requirements on bank SDs as well
[[Page 2580]]
as non-bank SDs. These regulations are critical to the oversight of
the swaps market.
I want to thank MPD and the Office of the Chief Economist (OCE)
for their excellent work bringing forth this proposed rulemaking, in
particular Jennifer Bauer, Maria Aguilar-Rocha, Andrew Pai, Joshua
Beale, Thomas Smith, and Amanda L. Olear of MPD, and Lihong McPhail
of OCE.
Appendix 4--Statement of Support of Commissioner Caroline D. Pham
I support the Notice of Proposed Rulemaking on Capital and
Financial Reporting Requirements for Swap Dealers and Major Swap
Participants (Proposal) because it addresses issues left outstanding
from implementing a rule by offering pragmatic solutions that not
only rectify the problem at hand, but do so without imposing
unnecessary burdens or complications. I would like to thank Andrew
Pai, Maria Aguilar-Rocha, Josh Beale, Tom Smith, and Amanda Olear in
the Market Participants Division for their work on the Proposal. I
greatly appreciate the time staff took to discuss my questions and
concerns.
It is important to remember that most of the CFTC's
provisionally-registered swap dealers are subject to three or more
regulatory regimes.\1\ Of the CFTC's 106 currently provisionally
registered swap dealers, most are also registered with and
supervised by another agency or authority, such as a prudential,
functional, or market regulator. This awareness must inform the
Commission's approach when considering any rule impacting swap
dealers.\2\ Otherwise, we risk missing the nuances associated with
the complex interplay or conflict that arises between the various
regulations.
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\1\ Statement of Commissioner Caroline D. Pham on Risk
Management Program for Swap Dealers and Futures Commission Merchants
Advance Notice of Proposed Rulemaking (June 1, 2023).
\2\ See Concurring Statement of Commissioner Caroline D. Pham
Regarding Proposed Order and Request for Comment on an Application
for a Capital Comparability Determination (June 2, 2022).
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Capital, the subject of today's Proposal, is one area in which
the CFTC's provisionally-registered swap dealers are subject to
multiple regulatory regimes. By this point, we know that the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) mandated the Commission establish capital requirements for swap
dealers and major swap participants,\3\ and that the Commission
adopted capital requirements for nonbank swap dealers and major swap
participants,\4\ as well as financial reporting requirements for
bank swap dealers and major swap participants, together with nonbank
swap dealers and major swap participants.\5\
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\3\ Section 731 of the Dodd-Frank Act added a new section 4s to
the Commodity Exchange Act (CEA) to require the CFTC adopt rules
establishing minimum initial margin, variation margin and capital
requirements for swap dealers and major swap participants. Under CEA
section 4s(e), the CFTC is required to adopt capital requirements
for swap dealers and major swap participants that are not subject to
the capital rules of the prudential regulators, which include
nonbank subsidiaries of bank holding companies.
\4\ I.e., swap dealers and major swap participants that are not
subject to the capital requirements of a prudential regulator, as
opposed to swap dealers and major swap participants for which there
is a prudential regulator.
\5\ I.e., swap dealers and major swap participants that are not
subject to the capital requirements of a prudential regulator, along
with the swap dealers and major swap participants for which there is
a prudential regulator. See Capital Requirements of Swap Dealers and
Major Swap Participants, 85 FR 57462 (Sept. 15, 2020).
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Therefore, when considering solutions to challenges that have
arisen while implementing the capital rules, we must remember that
we are not a prudential banking regulator like the Fed, OCC, or
FDIC, nor are we a primarily disclosures-based market regulator like
the SEC.\6\ Today's proposal offers a pragmatic solution to
challenges faced by our market participants that respects the
differences among the financial regulators.
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\6\ Concurring Statement of Commissioner Caroline D. Pham
Regarding the CFTC Request for Information on Climate-Related
Financial Risk (June 2, 2022). I reiterate the importance of keeping
our focus on our markets, products, and purpose to avoid the risk of
diluting our limited resources and potentially straying from our
core expertise and responsibilities into areas already tasked to
others.
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The extent of capitalization and reach of financial reporting
were decided years ago and are not the subject of today's Proposal.
Rather, today we consider, primarily, fixing issues that arose when
implementing the capital and financial reporting rules,\7\ and
secondarily, miscellaneous technical changes to make the rules more
workable.
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\7\ During that time, staff worked to develop processes,
procedures, and forms to accept the financial reports and
notifications required by the capital and financial reporting rules.
In so doing, CFTC staff received several compliance related
questions, and as a result, issued eight staff letters, all
available at the Commission's website, www.cftc.gov: CFTC Letter
Numbers 21-15 (June 29, 2021); 21-18 (Aug. 31, 2021); 21-20 (Sept.
30, 2021); 21-21 (Sept. 30, 2021); 21-22 (Sept. 30, 2021); 21-23
(Sept. 30, 2021); 22-01 (Jan. 5, 2022); 22-02 (Jan. 5, 2022).
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I support the entire Proposal, but will focus my comments on the
codification of: (1) CFTC Staff Interpretative Letter No. 21-15 for
commercial swap dealers and major swap participants electing the
Tangible Net Worth Capital Approach; \8\ and (2) the time-limited,
no-action relief in CFTC Letter No. 21-18 \9\ regarding financial
reporting requirements for bank swap dealers and major swap
participants.\10\
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\8\ CFTC Letter No. 21-15 (June 29, 2021), https://www.cftc.gov/csl/21-15/download.
\9\ Staff extended the relief in CFTC Letter No. 21-18 until the
earlier of October 6, 2025 or the adoption of any revised financial
reporting requirements for bank swap dealers and major swap
participants under Regulation 23.105(p). CFTC Letter No. 23-11 (July
10, 2023), available at https://www.cftc.gov/csl/23-11/download.
\10\ CFTC Letter No. 21-18 (Aug. 31, 2021), https://www.cftc.gov/csl/21-18/download. Bank swap dealers and major swap
participants have limited financial reporting obligations,
recognizing that prudential regulators have an obligation to impose
their capital requirements and are primarily responsible for
monitoring bank swap dealer and major swap participant capital under
the CEA. 7 U.S.C. 6s(e)(2)(i).
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Before I begin, I want to draw attention to a bigger issue
relating to capital for the coming year. The broad impacts of the
Basel III Endgame are being widely reported and discussed,\11\
including impact to CFTC swap dealers and major swap
participants.\12\ I am deeply concerned about this issue for our
markets, which is why I expect that under my sponsorship, the Global
Markets Advisory Committee (GMAC) will work on offering actionable
recommendations for the Commission in this area. I encourage
everyone to watch the presentation made on the subject at the recent
November 6th meeting via the meeting's archived webcast,\13\ and
look forward to working with the GMAC and all of you on the issue in
2024.
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\11\ Recent coverage has focused on what the Federal Reserve
Board supports and could look to do. Victoria Guida, ``Fed's Waller:
Support for Final Basel Rule `a Possibility' '' PoliticoPro (Nov.
28, 2023).
\12\ Luke Clancy, ``US Basel Endgame Hits Clearing with Op Risk
Capital Charges'' Risk.net (Sept. 25, 2023), https://www.risk.net/regulation/7957815/us-basel-endgame-hits-clearing-with-op-risk-capital-charges.
\13\ The CFTC maintains the archived webcast at: https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.
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A. Codifying CFTC Letter No. 21-15
Nonbank swap dealers and major swap participants can elect one
of three approaches to calculating their regulatory capital.\14\ One
option allows certain qualifying nonbank swap dealers and major swap
participants to use a regulatory capital approach that is based on
the firm's tangible net worth.\15\ Generally, these nonbank swap
dealers and major swap participants have to be ``predominantly
engaged in non-financial activities'' and maintain positive tangible
net worth according to U.S. generally accepted accounting practices
(GAAP) at all times.\16\
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\14\ 17 CFR 23.101.
\15\ 17 CFR 23.101(a)(2).
\16\ Id.
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When the rules were being implemented, nonbank swap dealers
identified three problems: (1) the rule's preamble expanded the
definition of ``predominantly engaged in financial activities'' to
permit these nonbank swap dealers and major swap participants to
meet the regulation's tangible net worth test directly or through
its ultimate consolidated parent entity, but the text of regulation
Sec. 23.100 was unclear about it; (2) regulation Sec. 23.105(b)
allowed books and records to be maintained in accordance with
International Financial Reporting Standards (IFRS) but the
``tangible net worth'' definition in regulation Sec. 23.100 only
referenced U.S. GAAP; and (3) there was an inconsistency in the
timelines of certain financial reports required by regulation Sec.
23.105(l).\17\
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\17\ CFTC Letter No. 21-15.
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To fix these issues, the Commission is proposing to adopt the
remedies provided in Letter No. 21-15: revise the definitions of
``tangible net worth'' and ``predominantly engaged in non-financial
activities'' and regulation Sec. 23.105 to clarify the test can be
applied at the parent or entity level, as well as using U.S. GAAP or
IFRS; and amend regulation Sec. 23.105(l) to clarify that position
and other related exposure reporting must be
[[Page 2581]]
made at the same frequency as financial reporting, which in this
instance is quarterly.
B. Codifying CFTC Letter No. 21-18
Bank swap dealers and major swap participants must file
unaudited quarterly financial information with the CFTC within 30
calendar days of the end of their fiscal quarter.\18\ The
information should be submitted via the specific forms in Appendix C
to subpart E of part 23. The Commission intended that these forms
would be identical to those filed by banks with their prudential
regulator. However, when the capital and financial reporting rules
were being implemented, it became evident that there were some
differences in the forms, as well as with the timelines for filing.
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\18\ 17 CFR 23.105(p)(2). The required financial information
consists of a statement of financial condition, a statement of
regulatory capital, and a schedule of the aggregate positions in
security-based swaps, mixed swaps, swaps, and other derivatives.
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Therefore, CFTC Letter No. 21-18 let bank swap dealers and major
swap participants provide home country regulator reports and
comparable schedules on the prudential regulators' timeline; foreign
bank swap dealers and major swap participants provide home country
regulator balance sheets and statements of regulatory capital
information as long as they are in English, USD, and within 15 days
of filing with home country regulator; and SEC dually-registered
foreign bank swap dealers and major swap participants file
comparable SEC approved financial reports and schedules.
To fix these issues, the Commission is proposing to adopt the
remedies provided in CFTC Letter No. 21-18: amend regulation Sec.
23.105(p) to allow foreign bank swap dealers and major swap
participants to file the applicable financial reporting within 90
days of the end of the financial reporting period; accept balance
sheet and regulatory capital schedules under prudential regulator
reports for U.S. bank swap dealers and major swap participants; and
to accept the filing of such schedules at the same time as filed
with prudential regulators. For foreign swap dealers, the Commission
is proposing to permit the filing of a balance sheet and statement
of regulatory capital schedules in the format provided to their home
country regulator, as long as they are in English and converted to
USD, and filed no later than 90 days following the reporting period
end date.
I support this rule because codifying well-tailored relief helps
provide market certainty while avoiding imposing unnecessary burdens
and creating compliance complications. I also support this rule
because the Commission does so while also continuing to respect the
differences between our rules and those of the other regulators
overseeing swap dealers on capital. It is a laudable achievement. I
again commend staff in the Market Participants Division for their
hard work on this rule, and look forward to reviewing the comments.
[FR Doc. 2023-28649 Filed 1-11-24; 8:45 am]
BILLING CODE 6351-01-P
