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 Capital and Financial Reporting Requirements of the United Kingdom and Regulated by the United Kingdom Prudential Regulation Authority, 8026-8063 [2024-02070]
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8026
Federal Register / Vol. 89, No. 24 / Monday, February 5, 2024 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Chapter I
Notice of Proposed Order and Request
for Comment on an Application for a
Capital Comparability Determination
Submitted on Behalf of Nonbank Swap
Dealers Subject to Capital and
Financial Reporting Requirements of
the United Kingdom and Regulated by
the United Kingdom Prudential
Regulation Authority
Commodity Futures Trading
Commission.
ACTION: Proposed order and request for
comment.
AGENCY:
The Commodity Futures
Trading Commission is soliciting public
comment on an application submitted
by the Institute of International Bankers,
International Swaps and Derivatives
Association, and Securities Industry and
Financial Markets Association
requesting that the Commission
determine that the capital and financial
reporting laws and regulations of the
United Kingdom applicable to CFTCregistered swap dealers organized and
domiciled in the United Kingdom,
which are licensed under the United
Kingdom Financial Services and
Markets Act 2000 as investment firms
and designated for prudential
supervision by the United Kingdom
Prudential Regulation Authority,
provide sufficient bases for an
affirmative finding of comparability
with respect to the Commission’s swap
dealer capital and financial reporting
requirements adopted under the
Commodity Exchange Act. The
Commission is also soliciting public
comment on a proposed order providing
for the conditional availability of
substituted compliance in connection
with the application.
DATES: Comments must be received on
or before March 24, 2024.
ADDRESSES: You may submit comments,
identified by ‘‘UK–PRA Swap Dealer
Capital Comparability Determination,’’
by any of the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this proposed order
and follow the instructions on the
Public Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
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SUMMARY:
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Please submit your comments using
only one of these methods. To avoid
possible delays with mail or in-person
deliveries, submissions through the
CFTC Comments Portal are encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish the
Commission to consider information
that you believe is exempt from
disclosure under the Freedom of
Information Act (‘‘FOIA’’), a petition for
confidential treatment of the exempt
information may be submitted according
to the procedures established in
Commission Regulation 145.9.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the proposed
determination and order will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the FOIA.
FOR FURTHER INFORMATION CONTACT:
Amanda L. Olear, Director, 202–418–
5283, aolear@cftc.gov; Thomas Smith,
Deputy Director, 202–418–5495,
tsmith@cftc.gov; Rafael Martinez,
Associate Director, 202–418–5462,
rmartinez@cftc.gov; Liliya Bozhanova,
Special Counsel, 202–418–6232,
lbozhanova@cftc.gov; Joo Hong, Risk
Analyst, 202–418–6221, jhong@cftc.gov;
Justin McPhee, Risk Analyst, 202–418–
6223; jmchpee@cftc.gov, Market
Participants Division; Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION: The
Commodity Futures Trading
Commission (‘‘Commission’’ or
‘‘CFTC’’) is soliciting public comment
on an application dated May 4, 2021
(the ‘‘UK Application’’) submitted by
the Institute of International Bankers,
International Swaps and Derivatives
Association, and Securities Industry and
Financial Markets Association (together,
1 17 CFR 145.9. Commission regulations referred
to in this release are found at 17 CFR chapter I, and
are accessible on the Commission’s website: https://
www.cftc.gov/LawRegulation/
CommodityExchangeAct/index.htm.
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the ‘‘Applicants’’).2 The Applicants
request that the Commission determine
that registered nonbank swap dealers 3
(‘‘nonbank SDs’’) organized and
domiciled within the United Kingdom
(‘‘UK’’), which are licensed as
investment firms and designated for
prudential supervision by the UK
Prudential Regulation Authority
(‘‘PRA’’) (‘‘PRA-designated UK nonbank
SDs’’), may satisfy certain capital and
financial reporting requirements under
the Commodity Exchange Act (‘‘CEA’’) 4
by being subject to, and complying with,
comparable capital and financial
reporting requirements under UK laws
and regulations.5 The Commission also
is soliciting public comment on a
proposed order under which PRAdesignated UK nonbank SDs would be
able, subject to defined conditions, to
comply with certain CFTC nonbank SD
capital and financial reporting
requirements in the manner set forth in
the proposed order.
I. Introduction
A. Regulatory Background—Swap
Dealer and Major Swap Participant
Capital and Financial Reporting
Requirements
Section 4s(e) of the CEA 6 directs the
Commission and ‘‘prudential
regulators’’ 7 to impose capital
2 See Letter dated May 4, 2021 from Stephanie
Webster, General Counsel, Institute of International
Bankers, Steven Kennedy, Global Head of Public
Policy, International Swaps and Derivatives
Association, and Kyle Brandon, Managing Director,
Head of Derivatives Policy, Securities Industry and
Financial Markets Association. The UK Application
is available on the Commission’s website at: https://
www.cftc.gov/LawRegulation/DoddFrankAct/
CDSCP/index.htm.
3 As discussed in Section I.A. immediately below,
the Commission has the authority to impose capital
requirements on registered swap dealers (‘‘SDs’’)
that are not subject to regulation by a U.S.
prudential regulator (i.e., nonbank SDs).
4 7 U.S.C. 1 et seq. The CEA may be accessed
through the Commission’s website at: https://
www.cftc.gov/LawRegulation/
CommodityExchangeAct/index.htm.
5 The Applicants also requested that the
Commission determine that nonbank SDs licensed
as investment firms and prudentially regulated by
the UK Financial Conduct Authority (‘‘FCA’’)
(‘‘FCA-regulated UK nonbank SDs’’) may satisfy
certain capital and financial reporting requirements
under the CEA by being subject to, and complying
with, comparable capital and financial reporting
requirements under UK laws and regulations. Due
to the differences between the capital and financial
reporting regimes applicable to PRA-designated UK
nonbank SD and FCA-regulated UK nonbank SDs,
the Commission anticipates assessing the
comparability of the rules applicable to FCAregulated UK nonbank SDs through a separate
capital comparability determination.
6 7 U.S.C. 6s(e).
7 The term ‘‘prudential regulator’’ is defined in
the CEA to mean the Board of Governors of the
Federal Reserve System (‘‘Federal Reserve Board’’);
the Office of the Comptroller of the Currency; the
Federal Deposit Insurance Corporation; the Farm
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requirements on all SDs and major swap
participants (‘‘MSPs’’) registered with
the Commission.8 Section 4s(e) of the
CEA also directs the Commission and
prudential regulators to adopt
regulations imposing initial and
variation margin requirements on swaps
entered into by SDs and MSPs that are
not cleared by a registered derivatives
clearing organization (‘‘uncleared
swaps’’).
Section 4s(e) applies a bifurcated
approach with respect to the above
Congressional directives, requiring each
SD and MSP that is subject to the
regulation of a prudential regulator
(‘‘bank SD’’ and ‘‘bank MSP,’’
respectively) to meet the minimum
capital requirements and uncleared
swaps margin requirements adopted by
the applicable prudential regulator, and
requiring each SD and MSP that is not
subject to the regulation of a prudential
regulator (‘‘nonbank SD’’ and ‘‘nonbank
MSP,’’ respectively) to meet the
minimum capital requirements and
uncleared swaps margin requirements
adopted by the Commission.9 Therefore,
the Commission’s authority to impose
capital requirements and margin
requirements for uncleared swap
transactions extends to nonbank SDs
and nonbank MSPs, including
nonbanking subsidiaries of bank
holding companies regulated by the
Federal Reserve Board.10
The prudential regulators
implemented Section 4s(e) in 2015 by
amending existing capital requirements
applicable to bank SDs and bank MSPs
to incorporate swap transactions into
their respective bank capital
frameworks, and by adopting rules
imposing initial and variation margin
requirements on bank SDs and bank
MSPs that engage in uncleared swap
Credit Administration; and the Federal Housing
Finance Agency. See 7 U.S.C. 1a(39).
8 Subject to certain exceptions, the term ‘‘swap
dealer’’ is generally defined as any person that: (i)
holds itself out as a dealer in swaps; (ii) makes a
market in swaps; (iii) regularly enters into swaps
with counterparties as an ordinary course of
business for its own account; or (iv) engages in any
activity causing the person to be commonly known
in the trade as a dealer or market maker in swaps.
See 7 U.S.C. 1a(49). The term ‘‘major swap
participant’’ is generally defined as any person who
is not an SD, and: (i) subject to certain exclusions,
maintains a substantial position in swaps for any
of the major swap categories as determined by the
Commission; (ii) whose outstanding swaps create
substantial counterparty exposure that could have
serious adverse effects on the financial stability of
the U.S. banking system or financial markets; or (iii)
maintains a substantial position in outstanding
swaps in any major swap category as determined by
the Commission. See 7 U.S.C. 1a(33).
9 7 U.S.C. 6s(e)(2).
10 7 U.S.C. 6s(e)(1) and (2).
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transactions.11 The Commission
adopted final rules imposing initial and
variation margin obligations on nonbank
SDs and nonbank MSPs for uncleared
swap transactions on January 6, 2016.12
The Commission also approved final
capital requirements for nonbank SDs
and nonbank MSPs on July 24, 2020,
which were published in the Federal
Register on September 15, 2020 with a
compliance date of October 6, 2021
(‘‘CFTC Capital Rules’’).13
Section 4s(f) of the CEA addresses SD
and MSP financial reporting
requirements.14 Section 4s(f) of the CEA
authorizes the Commission to adopt
rules imposing financial condition
reporting obligations on all SDs and
MSPs (i.e., nonbank SDs, nonbank
MSPs, bank SDs, and bank MSPs).
Specifically, Section 4s(f)(1)(A) of the
CEA provides, in relevant part, that each
registered SD and MSP must make
financial condition reports as required
by regulations adopted by the
Commission.15 The Commission’s
financial reporting obligations were
adopted with the Commission’s
nonbank SD and nonbank MSP capital
requirements, and have a compliance
date of October 6, 2021 (‘‘CFTC
Financial Reporting Rules’’).16
B. Commission Capital Comparability
Determinations for Non-U.S. Nonbank
Swap Dealers and Non-U.S. Nonbank
Major Swap Participants
Commission Regulation 23.106
establishes a substituted compliance
framework whereby the Commission
may determine that compliance by a
non-U.S. domiciled nonbank SD or nonU.S. domiciled nonbank MSP with its
home country’s capital and financial
reporting requirements will satisfy all or
parts of the CFTC Capital Rules and all
or parts of the CFTC Financial Reporting
Rules (such a determination referred to
as a ‘‘Capital Comparability
Determination’’).17 The availability of
11 See Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30,
2015).
12 See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81
FR 636 (Jan. 6, 2016).
13 See Capital Requirements of Swap Dealers and
Major Swap Participants, 85 FR 57462 (Sept. 15,
2020).
14 7 U.S.C. 6s(f).
15 7 U.S.C. 6s(f)(1)(A).
16 See 85 FR 57462.
17 17 CFR 23.106. Commission Regulation
23.106(a)(1) provides that a request for a Capital
Comparability Determination may be submitted by
a non-U.S. nonbank SD or a non-U.S. nonbank
MSP, a trade association or other similar group on
behalf of its SD or MSP members, or a foreign
regulatory authority that has direct supervisory
authority over one or more non-U.S. nonbank SDs
or non-U.S. nonbank MSPs. In addition,
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such substituted compliance is
conditioned upon the Commission
issuing a determination that the relevant
foreign jurisdiction’s capital adequacy
and financial reporting requirements,
and related financial recordkeeping
requirements, for non-U.S. nonbank SDs
and/or non-U.S. nonbank MSPs are
comparable to the corresponding CFTC
Capital Rules and CFTC Financial
Reporting Rules. The Commission will
issue a Capital Comparability
Determination in the form of a
Commission order (‘‘Capital
Comparability Determination Order’’).18
The Commission’s approach for
conducting a Capital Comparability
Determination with respect to the CFTC
Capital Rules and the CFTC Financial
Reporting Rules is a principles-based,
holistic approach that focuses on
whether the applicable foreign
jurisdiction’s capital and financial
reporting requirements achieve
comparable outcomes to the
corresponding CFTC requirements.19 In
this regard, the approach is not a lineby-line assessment or comparison of a
foreign jurisdiction’s regulatory
requirements with the Commission’s
requirements.20 In performing the
analysis, the Commission recognizes
that jurisdictions may adopt differing
approaches to achieving comparable
outcomes, and the Commission will
focus on whether the foreign
Commission regulations provide that any non-U.S.
nonbank SD or non-U.S. nonbank MSP that is
dually-registered with the Commission as a futures
commission merchant (‘‘FCM’’) is subject to the
capital requirements of Commission Regulation
1.17 (17 CFR 1.17) and may not petition the
Commission for a Capital Comparability
Determination. See 17 CFR 23.101(a)(5) and (b)(4),
respectively. Furthermore, non-U.S. bank SDs and
non-U.S. bank MSPs may not petition the
Commission for a Capital Comparability
Determination with respect to their respective
financial reporting requirements under Commission
Regulation 23.105(p) (17 CFR 23.105(p)).
Commission staff has issued, however, a timelimited no-action letter stating that the Market
Participants Division will not recommend
enforcement action against a non-U.S. bank SD that
files with the Commission certain financial
information that is provided to its home country
regulator in lieu of certain financial reports required
by Commission Regulation 23.105(p). See CFTC
Staff Letter 21–18, issued on August 31, 2021, and
CFTC Staff Letter 23–11, issued on July 10, 2023
(extending the expiration of CFTC Staff Letter 21–
18 until the earlier of October 6, 2025 or the
adoption of any revised financial reporting
requirements applicable to bank SDs under
Regulation 23.105(p)). On December 15, 2023, the
Commission issued for public comment proposed
amendments to Regulation 23.105(p) addressing the
financial reporting requirements applicable to bank
SDs in a manner consistent with the position taken
in CFTC Letters 21–18 and 23–11. See CFTC Press
Release 8836–23 issued on December 15, 2023,
available at cftc.gov.
18 17 CFR 23.106(a)(3).
19 See 85 FR 57462 at 57521.
20 Id.
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jurisdiction’s capital and financial
reporting requirements are comparable
to the Commission’s in purpose and
effect, and not whether they are
comparable in every aspect or contain
identical elements.
A person requesting a Capital
Comparability Determination is required
to submit an application to the
Commission containing: (i) a
description of the objectives of the
relevant foreign jurisdiction’s capital
adequacy and financial reporting
requirements applicable to entities that
are subject to the CFTC Capital Rules
and the CFTC Financial Reporting
Rules; (ii) a description (including
specific legal and regulatory provisions)
of how the relevant foreign
jurisdiction’s capital adequacy and
financial reporting requirements address
the elements of the CFTC Capital Rules
and CFTC Financial Reporting Rules,
including, at a minimum, the
methodologies for establishing and
calculating capital adequacy
requirements and whether such
methodologies comport with any
international standards; and (iii) a
description of the ability of the relevant
foreign regulatory authority to supervise
and enforce compliance with the
relevant foreign jurisdiction’s capital
adequacy and financial reporting
requirements. The applicant must also
submit, upon request, such other
information and documentation as the
Commission deems necessary to
evaluate the comparability of the capital
adequacy and financial reporting
requirements of the foreign
jurisdiction.21
The Commission may consider all
relevant factors in making a Capital
Comparability Determination,
including: (i) the scope and objectives of
the relevant foreign jurisdiction’s capital
and financial reporting requirements;
(ii) whether the relevant foreign
jurisdiction’s capital and financial
reporting requirements achieve
comparable outcomes to the
Commission’s corresponding capital
requirements and financial reporting
requirements; (iii) the ability of the
relevant foreign regulatory authority or
authorities to supervise and enforce
compliance with the relevant foreign
jurisdiction’s capital adequacy and
financial reporting requirements; and
(iv) any other facts or circumstances the
Commission deems relevant, including
whether the Commission and foreign
regulatory authority or authorities have
a memorandum of understanding
(‘‘MOU’’) or similar arrangement that
21 17
CFR 23.106(a)(2).
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would facilitate supervisory
cooperation.22
In performing the comparability
assessment for foreign nonbank SDs, the
Commission’s review will include the
extent to which the foreign
jurisdiction’s requirements address: (i)
the process of establishing minimum
capital requirements for nonbank SDs
and how such process addresses risk,
including market risk and credit risk of
the nonbank SD’s on-balance sheet and
off-balance sheet exposures; (ii) the
types of equity and debt instruments
that qualify as regulatory capital in
meeting minimum requirements; (iii)
the financial reports and other financial
information submitted by a nonbank SD
to its relevant regulatory authority and
whether such information provides the
regulatory authority with the means
necessary to effectively monitor the
financial condition of the nonbank SD;
and (iv) the regulatory notices and other
communications between a nonbank SD
and its foreign regulatory authority that
address potential adverse financial or
operational issues that may impact the
firm. With respect to the ability of the
relevant foreign regulatory authority to
supervise and enforce compliance with
the foreign jurisdiction’s capital
adequacy and financial reporting
requirements, the Commission’s review
will include a review of the foreign
jurisdiction’s surveillance program for
monitoring nonbank SDs’ compliance
with such capital adequacy and
financial reporting requirements, and
the disciplinary process imposed on
firms that fail to comply with such
requirements.
In performing the comparability
assessment for foreign nonbank MSPs,23
the Commission’s review will include
the extent to which the foreign
jurisdiction’s requirements address: (i)
the process of establishing minimum
capital requirements for a nonbank MSP
and how such process establishes a
minimum level of capital to ensure the
safety and soundness of the nonbank
MSP; (ii) the financial reports and other
financial information submitted by a
nonbank MSP to its relevant regulatory
authority and whether such information
provides the regulatory authority with
the means necessary to effectively
monitor the financial condition of the
nonbank MSP; and (iii) the regulatory
notices and other communications
between a nonbank MSP and its foreign
regulatory authority that address
22 See 17 CFR 23.106(a)(3) and 85 FR 57520–
57522.
23 Commission Regulation 23.101(b) requires a
nonbank MSP to maintain positive tangible net
worth. There are no MSPs currently registered with
the Commission. 17 CFR 23.101(b).
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potential adverse financial or
operational issues that may impact the
firm. With respect to the ability of the
relevant foreign regulatory authority to
supervise and enforce compliance with
the foreign jurisdiction’s capital
adequacy and financial reporting
requirements, the Commission’s review
will include a review of the foreign
jurisdiction’s surveillance program for
monitoring nonbank MSPs’ compliance
with such capital adequacy and
financial reporting requirements, and
the disciplinary process imposed on
firms that fail to comply with such
requirements.
Commission Regulation 23.106
further provides that the Commission
may impose any terms or conditions
that it deems appropriate in issuing a
Capital Comparability Determination.24
Any specific terms or conditions with
respect to capital adequacy or financial
reporting requirements will be set forth
in the Commission’s Capital
Comparability Determination Order. As
a general condition to all Capital
Comparability Determination Orders,
the Commission expects to require
notification from applicants of any
material changes to information
submitted by the applicants in support
of a comparability finding, including,
but not limited to, changes in the
relevant foreign jurisdiction’s
supervisory or regulatory regime.
The Commission’s capital adequacy
and financial reporting requirements are
designed to address and manage risks
that arise from a firm’s operation as a SD
or MSP. Given their functions, both sets
of requirements and rules must be
applied on an entity-level basis
(meaning that the rules apply on a firmwide basis, irrespective of the type of
transactions involved) to effectively
address risk to the firm as a whole.
Therefore, in order to rely on a Capital
Comparability Determination, a
nonbank SD or nonbank MSP domiciled
in the foreign jurisdiction and subject to
supervision by the relevant regulatory
authority (or authorities) in the foreign
jurisdiction must file a notice with the
Commission of its intent to comply with
the applicable capital adequacy and
financial reporting requirements of the
foreign jurisdiction set forth in the
Capital Comparability Determination in
lieu of all or parts of the CFTC Capital
Rules and/or CFTC Financial Reporting
Rules.25 Notices must be filed
electronically with the Commission’s
24 See
25 17
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17 CFR 23.106(a)(5).
CFR 23.106(a)(4).
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Market Participants Division (‘‘MPD’’).26
The filing of a notice by a non-U.S.
nonbank SD or non-U.S. nonbank MSP
provides MPD staff, acting pursuant to
authority delegated by the
Commission,27 with the opportunity to
engage with the firm and to obtain
representations that it is subject to, and
complies with, the laws and regulations
cited in the Capital Comparability
Determination and that it will comply
with any listed conditions. MPD will
issue a letter under its delegated
authority from the Commission
confirming that the non-U.S. nonbank
SD or non-U.S. nonbank MSP may
comply with foreign laws and
regulations cited in the Capital
Comparability Determination in lieu of
complying with the CFTC Capital Rules
and the CFTC Financial Reporting Rules
upon MPD’s determination that the firm
is subject to and complies with the
applicable foreign laws and regulations,
is subject to the jurisdiction of the
applicable foreign regulatory authority
(or authorities), and can meet any
conditions in the Capital Comparability
Determination.
Each non-U.S. nonbank SD and/or
non-U.S. nonbank MSP that receives, in
accordance with the applicable
Commission Capital Comparability
Determination Order, confirmation from
the Commission that it may comply
with a foreign jurisdiction’s capital
adequacy and/or financial reporting
requirements will be deemed by the
Commission to be in compliance with
the corresponding CFTC Capital Rules
and/or CFTC Financial Reporting
Rules.28 Accordingly, if a nonbank SD
or a nonbank MSP fails to comply with
the foreign jurisdiction’s capital
adequacy and/or financial reporting
requirements, the Commission may
initiate an action for a violation of the
corresponding CFTC Capital Rules and
or CFTC Financial Reporting Rules.29 In
addition, a non-U.S. nonbank SD or
non-U.S. nonbank MSP that receives
confirmation of its ability to use
substituted compliance remains subject
to the Commission’s examination and
enforcement authority.30 A finding of a
violation by a foreign jurisdiction’s
regulatory authority is not a prerequisite
for the exercise of such examination and
enforcement authority by the
Commission.
The Commission will consider an
application for a Capital Comparability
26 Notices must be filed in electronic form to the
following email address:
MPDFinancialRequirements@cftc.gov.
27 See 17 CFR 140.91(a)(11).
28 17 CFR 23.106(a)(4).
29 Id.
30 Id.
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Determination to be a representation by
the applicant that the laws and
regulations of the foreign jurisdiction
that are submitted in support of the
application are finalized and in force,
that the description of such laws and
regulations is accurate and complete,
and that, unless otherwise noted, the
scope of such laws and regulations
encompasses the relevant non-U.S.
nonbank SDs and/or non-U.S. nonbank
MSPs domiciled in the foreign
jurisdiction.31 A non-U.S. nonbank SD
or non-U.S. nonbank MSP that is not
legally required to comply with a
foreign jurisdiction’s laws or regulations
determined to be comparable in a
Capital Comparability Determination
may not voluntarily comply with such
laws or regulations in lieu of
compliance with the CFTC Capital
Rules or the CFTC Financial Reporting
Rules. Each non-U.S. nonbank SD or
non-U.S. nonbank MSP that seeks to
rely on a Capital Comparability
Determination Order is responsible for
determining whether it is subject to the
foreign laws and regulations found
comparable in the Capital Comparability
Determination and the Capital
Comparability Determination Order.
C. Application for a Capital
Comparability Determination for PRADesignated UK Nonbank Swap Dealers
The Applicants submitted the UK
Application requesting that the
Commission issue a Capital
Comparability Determination finding
that a PRA-designated UK nonbank SD’s
compliance with the capital
requirements of the UK and the
financial reporting requirements of the
UK, as specified in the UK Application
and applicable to PRA-designated UK
nonbank SDs, satisfies corresponding
CFTC Capital Rules and the CFTC
Financial Reporting Rules applicable to
a nonbank SD under sections 4s(e)–(f) of
the CEA and Commission Regulations
23.101 and 23.105.32
31 The Commission has provided the Applicants
with an opportunity to review for accuracy and
completeness, and comment on, the Commission’s
description of relevant UK laws and regulations on
which this proposed Capital Comparability
Determination is based. The Commission relies on
this review and any corrections received from the
Applicants in making its proposal. Thus, to the
extent that the Commission relies on an inaccurate
description of foreign laws and regulations
submitted by the Applicants, the comparability
determination may not be valid.
32 UK Application, p. 1. There are currently no
MSPs registered with the Commission, and the
Applicants have not requested that the Commission
issue a Capital Comparability Determination
concerning UK nonbank MSPs. Accordingly, the
Commission’s Capital Comparability Determination
and proposed Capital Comparability Determination
Order do not address UK nonbank MSPs.
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To be designated for prudential
supervision by the PRA, a UK-domiciled
investment firm must be authorized, or
have requested authorization, to deal in
investments as principal.33 For an
investment firm that is authorized, or
has requested authorization, to deal in
investments as principal, the PRA may
designate the firm for prudential
supervision if the PRA determines that
the dealing activities of the firm should
be a PRA-regulated activity. The PRA
considers the following in determining
whether an investment firm should be
subject to PRA supervision: (i) the assets
of the investment firm; and (ii) where
the investment firm is a member of a
group, (a) the assets of other firms
within the group that are authorized, or
have sought authorization, to deal in
investments as principal, (b) whether
any other member of the group is
subject to prudential supervision by the
PRA, and (c) whether the investment
firm’s activities have, or might have, a
material impact on the ability of the
PRA to advance any of its objectives in
relation to PRA-authorized person in its
group.34 The PRA also must consult
with the FCA before designating a
person for prudential supervision.35
The PRA also has issued a Statement
of Policy providing further detail
regarding the factors that are considered
in assessing an investment firm for
prudential supervision.36 The factors
include: (i) whether the firm’s balance
sheet exceeds an average of GBP 15
billion total gross assets over four
quarters; (ii) where the investment firm
is part of a group, whether the sum of
the balance sheets of all firms within the
group that are authorized, or have
requested authorization, to deal in
investments as principals exceeds an
average of GBP 15 billion over four
quarters; and/or (iii) where the firm is
part of a group subject to PRA
supervision, whether the investment
firm’s revenues, balance sheet and risk
taking is significant relative to the
group’s revenues, balance sheet, and
risk-taking.37 There are currently six
PRA-designated UK nonbank SDs
registered with the Commission:
33 Article 3(1) and (2) of The Financial Services
and Markets Act 2000 (PRA-regulated Activities)
Order 2013.
34 Id., Article 3(4).
35 Id., Article 3(6).
36 See PRA, Statement of Policy, Designation of
Investment Firms for Prudential Supervision by the
Prudential Regulation Authority, December 2021,
available here: https://www.bankofengland.co.uk/-/
media/boe/files/prudential-regulation/statement-ofpolicy/2021/designation-of-investment-firms-forprudential-supervision-by-the-pra-december2021.pdf?la=en&hash=007EB17EDF2FA84
714D372095F9E03627355776F.
37 Id., at p. 5.
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Citigroup Global Markets Limited,
Goldman Sachs International, Merrill
Lynch International, Morgan Stanley &
Co. International Plc, MUFG Securities
EMEA Plc, and Nomura International
Plc.
The Applicants represent that the
capital and financial reporting
framework applicable to PRAdesignated UK nonbank SDs is
primarily based on the framework
established by the European Union’s
(‘‘EU’’) Capital Requirements
Regulation 38 and Capital Requirements
Directive,39 which set forth capital and
financial reporting requirements
applicable to ‘‘credit institutions’’ 40 and
‘‘investment firms.’’ 41 CRR, as a
regulation, is directly applicable in all
member states of the EU (‘‘EU Member
States’’) and was, therefore, binding law
in the UK during the UK’s membership
in the EU.42 CRD, as a directive, was
required to be transposed into EU
Member States’ national law, including
UK law.43 With regard to PRA38 Regulation (EU) No 575/2013 of the European
Parliament and of the Council of 26 June 2013 on
prudential requirements for credit institutions and
amending Regulation (EU) No 648/2012 (‘‘Capital
Requirements Regulation’’ or ‘‘CRR’’).
39 Directive 2013/36/EU of the European
Parliament and of the Council of 26 June 2013 on
access to the activity of credit institutions and the
prudential supervision of credit institutions,
amending Directive 2002/87/EC and repealing
Directives 2006/48/EC and 2006/49/EC (‘‘Capital
Requirements Directive’’ or ‘‘CRD’’).
40 The term ‘‘credit institution’’ is defined as an
entity whose business consists of taking deposits
and other repayable funds from the public and
granting credits. CRR, Article 4(1), as applicable in
the UK. For a reference to CRR provisions
applicable in the UK, see infra notes 49 and 50.
41 The term ‘‘investment firm’’ is defined as an
entity authorized under Directive 2014/65/EU of the
European Parliament and of the Council of 15 May
2014 on markets in financial instruments and
amending Directive 2002/92/EC and Directive 2011/
61/EU (‘‘Markets in Financial Instruments
Directive’’ or ‘‘MiFID’’), and whose regular business
is the provision of one or more investment services
to third parties and/or the performance of one or
more investment-related activities on a professional
basis, which includes dealing in derivatives for its
own account. CRR, Article 4(1)(2) cross-referencing
Article 4(1)(1) of MiFID.
42 Consolidated Version of the Treaty on the
Functioning of the European Union, OJ (C 326) 171,
Oct. 26, 2012 (‘‘TFEU’’), Article 288.
43 Id., Article 288 (stating that a directive is
binding as to the result to be achieved upon each
EU Member State to which the directive is
addressed, and further provides, however, that each
EU Member State elects the form and method of
implementing the directive). In this connection, EU
Member States were required to implement and
start applying amendments to CRD, introduced by
Directive (EU) 2019/878 of the European Parliament
and of the Council of 20 May 2019 amending
Directive 2013/36/EU as regards exempted entities,
financial holding companies, mixed financial
holding companies, remuneration, supervisory
measures and powers and capital conservation
measures (‘‘CRD V’’) by December 29, 2020. Some
CRD V provisions were subject to delayed
implementation deadlines of June 28, 2021 and
January 1, 2022. CRD V, Article 2.
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designated UK nonbank SDs, the UK
implemented CRD primarily through a
series of regulations, including the
Capital Requirements Regulations
2013 44 and the Capital Requirements
(Capital Buffers and Macro-prudential
Measures) Regulations 2014,45 and the
rules of the PRA.46
Following the UK’s withdrawal from
EU membership (‘‘Brexit’’), EU laws that
were in effect and applicable as of
December 31, 2020, were retained in UK
law subject to certain non-substantive
amendments seeking to reflect the UK’s
new position outside of the EU.47 As
such, directly applicable EU law, such
as CRR, was converted into domestic
UK law and UK legislation
implementing EU directives, such as
CRD, was preserved. The UK
subsequently adopted additional
changes, generally consistent with
amendments introduced by the EU to
CRR, CRD and other relevant EU
provisions,48 and incorporated certain
CRR provisions in the PRA Rulebook.49
The CRR provisions as applicable in the
UK are referred hereafter as ‘‘UK
CRR.’’ 50 The UK capital and financial
reporting framework also comprises UKspecific requirements in respect of
certain matters. Requirements
applicable to PRA-designated UK
nonbank SDs are included in the PRA
Rulebook. In addition, Commission
Delegated Regulation (EU) 2015/61,51
44 Capital Requirements Regulations 2013,
Statutory Instrument 2013 No. 3115 (‘‘Capital
Requirements Regulations 2013’’).
45 Capital Requirements (Capital Buffers and
Macro-prudential Measures) Regulations 2014,
Statutory Instrument 2014 No. 894 (‘‘Capital
Requirements (Capital Buffers and Macroprudential Measures) Regulations 2014’’).
46 The PRA’s rules (‘‘PRA Rulebook’’) are
available here: https://www.prarulebook.co.uk/.
47 See, An Act to Repeal the European
Communities Act 1972 and make other provisions
in connection with the withdrawal of the United
Kingdom from the EU (2018 c.16) (‘‘European
Union (Withdrawal) Act 2018’’).
48 See PRA, Policy Statement 21/21—The UK
Leverage Framework, October 2021, available here:
https://www.bankofengland.co.uk/prudentialregulation/publication/2021/june/changes-to-theuk-leverage-ratio-framework, and Policy Statement
22/21—Implementation of Basel standards: Final
rules, October 2021, available here: https://
www.bankofengland.co.uk/prudential-regulation/
publication/2021/october/implementation-of-baselstandards.
49 Pursuant to the Financial Services and Markets
Act 2023 (‘‘FSMA 2023’’), the UK revoked CRR and
replaced it with: (i) PRA rules adopted under
Section 144 of the Financial Services and Markets
Act 2000 (‘‘FSMA’’) and (ii) UK regulations,
adopted under Section 4 of FSMA 2023, restating
CRR provisions.
50 The UK CRR is available here: https://
www.legislation.gov.uk/eur/2013/575/contents. The
provisions that were incorporated in the PRA
Rulebook are no longer part of UK CRR and appear
instead in the PRA Rulebook.
51 Commission Delegated Regulation (EU) 2015/
61 of 10 October 2014 to supplement Regulation
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which supplements UK CRR with regard
to liquidity coverage requirement for
credit institutions, applies to PRAdesignated UK nonbank SDs and
imposes separate liquidity requirements
to these firms.52
The Applicants also represent that in
addition to UK CRR and the PRA
Rulebook, the Banking Act 2009 and its
related secondary legislation, through
which the UK transposed the Bank
Recovery and Resolution Directive
(‘‘BRRD’’), include relevant UK capital
requirements.53 Specifically, pursuant
to the Banking Act 2009 and its
secondary legislation, the Bank of
England, in its role as resolution
authority, requires certain investment
firms, including PRA-designated UK
nonbank SDs, to satisfy a firm-specific
minimum requirement for own funds
and eligible liabilities (‘‘MREL’’).54
UK CRR, Capital Requirements
Regulations 2013, Capital Requirements
(Capital Buffers and Macro-prudential
Measures) Regulations 2014, Liquidity
Coverage Delegated Regulation, the
Banking Act 2009 and its secondary
legislation, and relevant parts of the
PRA Rulebook are referred to hereafter
as the ‘‘UK PRA Capital Rules.’’
The Applicants further represent that
with respect to supervisory financial
reporting, the framework applicable to
PRA-designated UK nonbank SDs is also
based on the EU requirements. In
addition, the framework comprises
PRA-specific rules for matters not
addressed by the EU-based
requirements. Specifically, Commission
Implementing Regulation (EU) 680/
2014,55 which was initially retained in
UK law following Brexit, supplemented
CRR with implementing technical
standards (‘‘CRR Reporting ITS’’)
(EU) No 575/2013 of the European Parliament and
the Council with regard to liquidity coverage
requirement for Credit Institutions (‘‘Liquidity
Coverage Delegated Regulation’’).
52 See PRA Rulebook, CRR Firms, Liquidity
Coverage Requirement—UK Designated Investment
Firms Part.
53 Directive 2014/59/EU of the European
Parliament and of the Council of 15 May 2014
establishing a framework for the recovery and
resolution of credit institutions and investment
firms and amending Council Directive 82/891/EEC,
and Directives 2001/24/EC, 2002/47/EC, 2004/25/
EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/
EU and 2013/36/EU, and Regulations (EU) No
1093/2010 and (EU) No 648/2012, of the European
Parliament and of the Council. See UK Application,
p. 7.
54 Banking Act 2009, Section 3A(4) and (4B);
Bank Recovery and Resolution (No 2) Order 2014,
Statutory Instrument No. 3348 (‘‘Bank Recovery and
Resolution (No 2) Order 2014’’), Part 9.
55 Commission Implementing Regulation (EU)
680/2014 of 16 April 2014 laying down
implementing technical standards with regard to
supervisory reporting of institutions according to
Regulation (EU) No 575/2013 of the European
Parliament and of the Council.
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specifying, among other things, uniform
formats and frequencies for the financial
and capital requirements reporting
required under CRR.56 CRR Reporting
ITS included templates for the common
reporting (‘‘COREP’’) and the financial
reporting (‘‘FINREP’’) that specify the
contents of the EU-based supervisory
reporting requirements. As part of the
regulatory reforms that followed Brexit
and sought to implement Basel III
standards, the PRA incorporated the
entire body of the UK version of COREP
and FINREP requirements into the PRA
Rulebook to create a single source for
reporting requirements for firms.57 For
PRA-designated UK nonbank SDs that
are not subject to the EU-based FINREP
requirements, the PRA Rulebook
includes PRA-specific requirements.58
The Applicants also represent that the
Companies Act 2006 contains
provisions related to financial reporting,
including a mandate that entities of a
certain size be required to prepare
annual audited financial statements and
a strategic report.59 UK CRR, relevant
provisions of the PRA Rulebook, and
relevant provisions of the Companies
Act 2006, are collectively referred to
hereafter as the ‘‘UK PRA Financial
Reporting Rules.’’
The Applicants also note that the U.S.
Securities and Exchange Commission
(‘‘SEC’’) has issued orders permitting an
SEC-registered nonbank security-based
swap dealer domiciled in the UK (‘‘UK
nonbank SBSD’’) 60 to satisfy SEC
capital 61 and financial reporting
requirements via substituted
compliance with applicable UK capital
and financial reporting.62 The UK Order
56 UK Application, p. 24 and Responses to Staff
Questions dated October 5, 2023.
57 PRA Rulebook, CRR Firms, Reporting (CRR)
Part.
58 PRA Rulebook, CRR Firms, Regulatory
Reporting Part.
59 UK Application, p.7. Companies Act 2006, Part
15 and 16. The Companies Act 2006 is available
here: https://www.legislation.gov.uk/ukpga/2006/
46/contents.
60 All six of the PRA-designated UK nonbank SDs
currently registered with the Commission are also
UK nonbank SBSDs.
61 Section 15F(e)(1)(B) of the Exchange Act (15
U.S.C. 78o–10) directs the SEC to adopt capital
rules for security-based swap dealers (‘‘SBSDs’’)
that do not have a prudential regulator.
62 See Order Granting Conditional Substituted
Compliance in Connection with Certain
Requirements Applicable to Non-U.S. SecurityBased Swap Dealers and Major Security-Based
Swap Participants Subject to Regulation in the
United Kingdom, 86 FR 43318 (July 30, 2021)
(‘‘Final UK Order’’); Amended and Restated Order
Granting Conditional Substituted Compliance in
Connection with Certain Requirements Applicable
to Non-U.S. Security-Based Swap Dealers and
Major Security-Based Swap Participants Subject to
Regulation in the Federal Republic of Germany;
Amended Orders Addressing Non-U.S. SecurityBased Swap Entities Subject to Regulation in the
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conditioned substituted compliance for
capital requirements on a UK nonbank
SBSD complying with specified laws
and regulations, including relevant parts
of UK CRR and the PRA Rulebook, and
also maintaining total liquid assets in an
amount that exceeds the UK nonbank
SBSD’s total liabilities by at least $100
million and by at least $20 million after
applying certain deductions to the value
of the liquid assets to reflect market,
credit, and other potential risks to the
value of the assets.63
II. General Overview of Commission
and UK PRA Nonbank Swap Dealer
Capital Rules
A. General Overview of the CFTC
Nonbank Swap Dealer Capital Rules
The CFTC Capital Rules provide
nonbank SDs with three alternative
capital approaches: (i) the Tangible Net
Worth Capital Approach (‘‘TNW
Approach’’); (ii) the Net Liquid Assets
Capital Approach (‘‘NLA Approach’’);
and (iii) the Bank-Based Capital
Approach (‘‘Bank-Based Approach’’).64
Nonbank SDs that are ‘‘predominantly
engaged in non-financial activities’’ may
elect the TNW Approach.65 The TNW
Approach requires a nonbank SD to
maintain a level of ‘‘tangible net
French Republic or the United Kingdom; and Order
Extending the Time to Meet Certain Conditions
Relating to Capital and Margin, 86 FR 59797 (Oct.
28, 2021) (‘‘Amended UK Order,’’ together with the
Final UK Order, ‘‘UK Order’’); and Order Specifying
the Manner and Format of Filing Unaudited
Financial and Operational Information by SecurityBased Swap Dealers and Major Security-Based
Swap Participants that are not U.S. Persons and are
Relying on Substituted Compliance with Respect to
Rule 18a–7, 86 FR 59208 (Oct. 26, 2021) (‘‘SEC
Order on Manner and Format of Filing Unaudited
Financial and Operational Information’’).
63 The conditioning of the UK substituted
compliance order on UK nonbank SBSDs
maintaining liquid assets in an amount that exceeds
the UK nonbank SBSD’s total liabilities by at least
$100 million and by at least $20 million after
applying certain deductions to the value of the
liquid assets reflects that the SEC’s capital rule for
nonbank SBSDs is a liquidity-based requirement
and that the SEC capital requirements are not based
on the Basel bank capital standards. See 17 CFR
240.18a–1(a)(1) (requiring a SBSD to maintain, in
relevant part, net capital of $20 million or, if
approved to use capital models, $100 million of
tentative net capital and $20 million of net capital).
64 17 CFR 23.101.
65 17 CFR 23.101(a)(2). The term ‘‘predominantly
engaged in non-financial activities’’ is defined in
Commission Regulation 23.100 and generally
provides that: (i) the nonbank SD’s, or its parent
entity’s, annual gross financial revenues for either
of the previous two completed fiscal years
represents less than 15 percent of the nonbank SD’s
or the nonbank SD’s parent’s, annual gross revenues
for all operations (i.e., commercial and financial) for
such years; and (ii) the nonbank SD’s, or its parent
entity’s, total financial assets at the end of its two
most recently completed fiscal years represents less
than 15 percent of the nonbank SD’s, or its parent’s,
total consolidated financial and nonfinancial assets
as of the end of such years. 17 CFR 23.100.
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worth’’ 66 equal to or greater than the
higher of: (i) $20 million plus the
amount of the nonbank SD’s ‘‘market
risk exposure requirement’’ 67 and
‘‘credit risk exposure requirement’’ 68
associated with the nonbank SD’s swap
and related hedge positions that are part
of the nonbank SD’s swap dealing
activities; (ii) 8 percent of the nonbank
SD’s ‘‘uncleared swap margin’’
amount; 69 or (iii) the amount of capital
required by a registered futures
association of which the nonbank SD is
a member.70 The TNW Approach is
intended to ensure the safety and
soundness of a qualifying nonbank SD
by requiring the firm to maintain a
minimum level of tangible net worth
that is based on the nonbank SD’s swap
dealing activities to provide a sufficient
level of capital to absorb losses resulting
from its swap dealing and other
business activities.
The TNW approach requires a
nonbank SD to compute its market risk
exposure requirement and credit risk
66 The term ‘‘tangible net worth’’ is defined in
Commission Regulation 23.100 and generally means
the net worth (i.e., assets less liabilities) of a
nonbank SD, computed in accordance with
applicable accounting principles, with assets
further reduced by a nonbank SD’s recorded
goodwill and other intangible assets. 17 CFR
23.100.
67 The terms ‘‘market risk exposure’’ and ‘‘market
risk exposure requirement’’ are defined in
Commission Regulation 23.100 and generally mean
the risk of loss in a financial position or portfolio
of financial positions resulting from movements in
market prices and other factors. 17 CFR 23.100.
Market risk exposure is the sum of: (i) general
market risks including changes in the market value
of a particular asset that results from broad market
movements, which may include an additive for
changes in market value under stressed conditions;
(ii) specific risk, which includes risks that affect the
market value of a specific instrument but do not
materially alter broad market conditions; (iii)
incremental risk, which means the risk of loss on
a position that could result from the failure of an
obligor to make timely payments of principal and
interest; and (iv) comprehensive risk, which is the
measure of all material price risks of one or more
portfolios of correlation trading positions.
68 The term ‘‘credit risk exposure requirement’’ is
defined in Commission Regulation 23.100 and
generally reflects the amount at risk if a
counterparty defaults before the final settlement of
a swap transaction’s cash flows. 17 CFR 23.100.
69 The term ‘‘uncleared swap margin’’ is defined
in Commission Regulation 23.100 to generally mean
the amount of initial margin that a nonbank SD
would be required to collect from each counterparty
for each outstanding swap position of the nonbank
SD. 17 CFR 23.100. A nonbank SD must include all
swap positions in the calculation of the uncleared
swap margin amount, including swaps that are
exempt or excluded from the scope of the
Commission’s uncleared swap margin regulations.
A nonbank SD must compute the uncleared swap
margin amount in accordance with the
Commission’s margin rules for uncleared swaps.
See 17 CFR 23.154.
70 The National Futures Association (‘‘NFA’’) is
currently the only entity that is a registered futures
association. The Commission will refer to NFA in
this document when referring to the requirements
or obligations of a registered futures association.
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exposure requirement using
standardized capital charges set forth in
SEC Rule 18a–1 71 that are applicable to
entities registered with the SEC as
SBSDs or standardized capital charges
set forth in Commission Regulation 1.17
applicable to entities registered as FCMs
or entities dually-registered as an FCM
and nonbank SD.72 Nonbank SDs that
have received Commission or NFA
approval pursuant to Commission
Regulation 23.102 may use internal
models to compute market risk and/or
credit risk capital charges in lieu of the
SEC or CFTC standardized capital
charges.73
A nonbank SD that elects the NLA
Approach is required to maintain ‘‘net
capital’’ in an amount that equals or
exceeds the greater of: (i) $20 million;
(ii) 2 percent of the nonbank SD’s
uncleared swap margin amount; or (iii)
the amount of capital required by
NFA.74 The NLA Approach is intended
to ensure the safety and soundness of a
nonbank SD by requiring the firm to
maintain at all times at least one dollar
of highly liquid assets to cover each
dollar of the nonbank SD’s liabilities.
A nonbank SD is required to reduce
the value of its highly liquid assets by
the market risk exposure requirement
and/or the credit risk exposure
requirement in computing its net
capital.75 A nonbank SD that does not
have Commission or NFA approval to
use internal models must compute its
market risk exposure requirement and/
or credit risk exposure requirement
using the standardized capital charges
contained in SEC Rule 18a–1 as
modified by the Commission’s rule.76
A nonbank SD that has obtained
Commission or NFA approval, may use
internal market risk and/or credit risk
models to compute market risk and/or
credit risk capital charges in lieu of the
standardized capital charges.77 A
nonbank SD that is approved to use
internal market risk and/or credit risk
models is further required to maintain a
minimum of $100 million of ‘‘tentative
net capital.’’ 78
71 17
72 17
CFR 240.18a–1.
CFR 23.101(a)(2)(ii)(A).
The Commission’s NLA Approach is
consistent with the SEC’s SBSD capital
rule, and is based on the Commission’s
capital rule for FCMs and the SEC’s
capital rule for securities broker-dealers
(‘‘BDs’’). The quantitative and
qualitative requirements for NLA
Approach internal market and credit
risk models are also consistent with the
quantitative and qualitative
requirements of the Commission’s BankBased Approach as described below.
The Commission’s Bank-Based
Approach for computing regulatory
capital for nonbank SDs is based on
certain capital requirements imposed by
the Federal Reserve Board for bank
holding companies.79 The Bank-Based
Approach also is consistent with the
Basel Committee on Banking
Supervision’s (‘‘BCBS’’) international
framework for bank capital
requirements.80 The Bank-Based
Approach requires a nonbank SD to
maintain regulatory capital equal to or
in excess of each of the following
requirements: (i) $20 million of common
equity tier 1 capital; (ii) an aggregate of
common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital
(including qualifying subordinated debt)
equal to or greater than 8 percent of the
nonbank SD’s risk-weighted assets
(provided that common equity tier 1
capital comprises at least 6.5 percent of
the 8 percent minimum requirement);
(iii) an aggregate of common equity tier
1 capital, additional tier 1 capital, and
tier 2 capital equal to or greater than 8
percent of the nonbank SD’s uncleared
swap margin amount; and (iv) an
amount of capital required by NFA.81
The Bank-Based Approach is intended
to ensure that the safety and soundness
of a nonbank SD by requiring the firm
to maintain at all times qualifying
capital in an amount sufficient to absorb
unexpected losses, expenses, decrease
in firm assets, or increases in firm
liabilities without the firm becoming
insolvent.
The terms used in the Commission’s
Bank-Based Approach are defined by
reference to regulations of the Federal
Reserve Board.82 Specifically, the term
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73 Id.
74 17 CFR 23.101(a)(1)(ii)(A). ‘‘Net capital’’
consists of a nonbank SD’s highly liquid assets
(subject to haircuts) less all of the firm’s liabilities,
excluding certain qualified subordinated debt. See
17 CFR 240.18a–1 for the calculation of ‘‘net
capital.’’
75 See 17 CFR 240.18a–1(c) and (d).
76 See 17 CFR 23.101(a)(1)(ii).
77 See 17 CFR 23.102.
78 17 CFR 23.101(a)(1)(ii)(A)(1). The term
‘‘tentative net capital’’ is defined in Commission
Regulation 23.101(a)(1)(ii)(A)(1) by reference to SEC
Rule 18a–1 and generally means a nonbank SD’s net
capital prior to deducting market risk and credit
risk capital charges.
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17 CFR 23.101(a)(1)(i).
BCBS is the primary global standard-setter
for the prudential regulation of banks and provides
a forum for cooperation on banking supervisory
matters. Institutions represented on the BCBS
include the Federal Reserve Board, the European
Central Bank, Deutsche Bundesbank, Bank of
England, Bank of France, Bank of Japan, Banco de
Mexico, and Bank of Canada. The BCBS framework
is available at https://www.bis.org/basel_
framework/index.htm.
81 17 CFR 23.101(a)(1)(i).
82 Id. Commission Regulation 23.101(a)(1)(i)
references Federal Reserve Board Rule 217.20 for
purposes of defining the terms used in establishing
‘‘common equity tier 1 capital’’ is
defined for purposes of the CFTC
Capital Rules to generally mean the sum
of a nonbank SD’s common stock
instruments and any related surpluses,
retained earnings, and accumulated
other comprehensive income.83 The
term ‘‘additional tier 1 capital’’ is
defined to include equity instruments
that are subordinated to claims of
general creditors and subordinated debt
holders, but contain certain provisions
that are not available to common stock,
such as the right of nonbank SD to call
the instruments for redemption or to
convert the instruments to other forms
of equity.84 The term ‘‘tier 2 capital’’ is
defined to include certain types of
instruments that include both debt and
equity characteristics (e.g., certain
perpetual preferred stock instruments
and subordinated term debt
instruments).85 Subordinated debt also
must meet certain requirements to
qualify as tier 2 capital, including that
the term of the subordinated debt
instrument is for a minimum of one year
(with the exception of approved
revolving subordinated debt agreements
which may have a maturity term that is
less than one year), and the debt
instrument is an effective subordination
of the rights of the lender to receive any
payment, including accrued interest, to
other creditors.86
Common equity tier 1 capital,
additional tier 1 capital, and tier 2
capital are unencumbered and generally
long-term or permanent forms of capital
that help ensure that a nonbank SD will
be able to absorb losses resulting from
its operations and maintain confidence
in the nonbank SD as a going concern.
In addition, in setting an equity ratio
requirement, this limits the amount of
asset growth and leverage a nonbank SD
can incur, as a nonbank SD must fund
its asset growth with a certain
percentage of regulatory capital.
A nonbank SD also must compute its
risk-weighted assets using standardized
capital charges or, if approved, internal
models. Risk-weighting assets involves
adjusting the notional or carrying value
of each asset based on the inherent risk
of the asset. Less risky assets are
79 See
80 The
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the minimum capital requirements under the BankBased Approach. 17 CFR 23.101(a)(1)(i) and 12 CFR
217.20.
83 See 12 CFR 217.20(b).
84 See 12 CFR 217.20(c).
85 See 12 CFR 217.20(d).
86 The subordinated debt must meet the
requirements set forth in SEC Rule 18a–1d (17 CFR
240.18a–1d). See 17 CFR 23.101(a)(1)(i)(B)
providing that the subordinated debt used by a
nonbank SD to meet its minimum capital
requirement under the Bank-Based Approach must
satisfy the conditions for subordinated debt under
SEC Rule 18a–1d.
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adjusted to lower values (i.e., have less
risk-weight) than more risky assets. As
a result, nonbank SDs are required to
hold lower levels of regulatory capital
for less risky assets and higher levels of
regulatory capital for riskier assets.
Nonbank SDs not approved to use
internal models to risk-weight their
assets must compute market risk capital
charges using the standardized charges
contained in Commission Regulation
1.17 and SEC Rule 18a–1, and must
compute their credit risk charges using
the standardized capital charges set
forth in regulations of the Federal
Reserve Board for bank holding
companies in subpart D of 12 CFR part
217.87
Standardized market risk charges are
computed under Commission
Regulation 1.17 and SEC Rule 18a–1 by
multiplying, as appropriate to the
specific asset schedule, the notional
value or market value of the nonbank
SD’s proprietary financial positions
(such as swaps, security-based swaps,
futures, equities, and U.S. Treasuries) by
fixed percentages set forth in the
Regulation or Rule.88 Standardized
credit risk charges require the nonbank
SD to multiply on-balance sheet and offbalance sheet exposures (such as
receivables from counterparties, debt
instruments, and exposures from
derivatives) by predefined percentages
set forth in the applicable Federal
Reserve Board regulations contained in
subpart D of 12 CFR part 217.
A nonbank SD also may apply to the
Commission or NFA for approval to use
internal models to compute market risk
exposure and/or credit risk exposure for
purposes of determining its total riskweighted assets.89 Nonbank SDs
approved to use internal models for the
calculation of credit risk or market risk,
or both, must follow the model
requirements set forth in Federal
Reserve Board regulations for bank
holding companies codified in subpart E
and F, respectively, of 12 CFR part 217.
Credit risk and market risk capital
charges computed with internal models
require the estimation of potential
losses, with a certain degree of
likelihood, within a specified time
period, of a portfolio of assets. Internal
models allow for consideration of
potential co-movement of prices across
assets in the portfolio, leading to offsets
of gains and losses. Internal credit risk
models can also further include
87 See 17 CFR 23.101(a)(1)(i)(B) and the definition
of the term BHC risk-weighted assets in 17 CFR
23.100.
88 See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3–
1(c)(2).
89 See 17 CFR 23.102.
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estimation of the likelihood of default of
counterparties.
B. General Overview of UK PRA Capital
Rules for PRA-Designated UK Nonbank
SDs
The Applicants state that the UK PRA
Capital Rules impose bank-like capital
requirements on a PRA-designated UK
nonbank SD that are consistent with the
BCBS framework for international bankbased capital standards.90 The
Applicants further state that the UK
PRA Capital Rules are intended to
require each PRA-designated UK
nonbank SD to hold a sufficient amount
of qualifying equity capital and
subordinated debt based on the PRAdesignated UK nonbank SD’s activities,
to absorb decreases in the value of firm
assets, increases in the value of firm
liabilities, and to cover losses from
business activities, including possible
counterparty defaults and margin
collateral shortfalls associated with
swap dealing activities, without the firm
becoming insolvent.91
The UK PRA Capital Rules require
each PRA-designated UK nonbank SD to
hold and maintain regulatory capital in
the form of qualifying common equity
tier 1 capital, additional tier 1 capital,
and tier 2 capital in an aggregate amount
that equals or exceeds 8 percent of the
PRA-designated UK nonbank SD’s total
risk exposure amount, which is
calculated as a sum of the firm’s riskweighted assets and exposures.92
Common equity tier 1 capital must
comprise a minimum of 4.5 percent of
the 8 percent capital ratio,93 and tier 1
capital (which is the aggregate of
common equity tier 1 capital and
additional tier 1 capital) must comprise
a minimum of 6 percent of the total 8
percent capital ratio.94 Tier 2 capital
may comprise a maximum of 2 percent
of the total 8 percent capital ratio.95
Under the UK PRA Capital Rules,
common equity tier 1 capital is
composed of common equity capital
instruments, retained earnings,
accumulated other comprehensive
income, and other reserves of the PRA90 See
UK Application, p. 12.
UK Application, pp. 7 and 12.
92 UK CRR, Articles 26, 28, 50–52, 61–63 and 92.
93 Id., Article 92(1)(a).
94 Id., Article 92(1)(b).
95 Id., Article 92(1)(c) (providing that the total
capital ratio must be equal to or greater than 8
percent, with a minimum common equity and
additional tier 1 capital comprising at least 6
percent of the 8 percent minimum requirement). In
addition to the requirement to maintain minimum
capital ratios, a PRA-designated UK nonbank SD
must maintain at all times capital resources equal
to or in excess of GBP 750,000. PRA Rulebook, CRR
Firms, Definition of Capital Part, Chapter 12 Base
Capital Resource Requirement, Rule 12.1.
91 See
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designated UK nonbank SD.96
Additional tier 1 capital is composed of
capital instruments other than common
equity and retained earnings (i.e.,
common equity tier 1 capital), and
includes certain long-term convertible
debt securities.97 Tier 2 capital
instruments, which provide an
additional layer of supplementary
capital, include other reserves, hybrid
capital instruments, and certain
subordinated debt.98
To qualify as tier 2 regulatory capital,
capital instruments and subordinated
debt must meet certain conditions
including that: (i) the capital
instruments are issued by the PRAdesignated UK nonbank SD and are
fully paid-up; (ii) the capital
instruments are not purchased by the
PRA-designated UK nonbank SD or its
subsidiaries; (iii) the claims on the
principal amount of the capital
instruments rank below any claim from
instruments that are ‘‘eligible
liabilities,’’ 99 meaning that they are
effectively subordinated to claims of all
non-subordinated creditors of the PRAdesignated UK nonbank SD; (iv) the
capital instruments have an original
maturity of at least five years; and (v)
the provisions governing the capital
instruments do not include any
incentive for the principal amount to be
redeemed or repaid by the PRAdesignated UK nonbank SD prior to the
capital instruments’ respective
maturities.100
In addition to the requirement to
maintain total regulatory capital in an
amount equal to or in excess of 8
percent of its risk-weighted assets, the
UK PRA Capital Rules also require a
PRA-designated UK nonbank SD to
maintain a capital conservation buffer
composed exclusively of common
equity tier 1 capital in an amount equal
to 2.5 percent of the firm’s total risk96 UK CRR, Articles 26 and 28. Retained earnings,
accumulated other comprehensive income and
other reserves qualify as common equity tier 1
capital only where the funds are available to the
PRA-designated UK nonbank SD for unrestricted
and immediate use to cover risks or losses as such
risks or losses occur. See UK CRR, Article 26(1).
97 Id., Articles 51–52.
98 Id., Articles 62–63.
99 ‘‘Eligible liabilities’’ are non-capital
instruments, including instruments that are directly
issued by the PRA-designated UK nonbank SD and
fully paid up with remaining maturities of at least
a year. Bank Recovery and Resolution (No. 2) Order
2014, Article 123. In addition, the liabilities cannot
be owned, secured, or guaranteed, by the PRAdesignated UK nonbank SD itself, and the PRAdesignated UK nonbank SD cannot have either
directly or indirectly funded their purchase. Id.
100 UK CRR, Article 63 (listing the conditions that
capital instruments must meet to qualify as tier 2
instruments) and Bank Recovery and Resolution
(No. 2) Order 2014, Article 123. See also infra note
121.
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weighted assets.101 The common equity
tier 1 capital used to meet the 2.5
percent capital conservation buffer must
be separate and independent of the 4.5
percent of common equity tier 1 capital
used to meet the 8 percent core capital
requirement.102
The UK PRA Capital Rules also
impose a 3.25 percent leverage ratio
floor on PRA-designated UK nonbank
SDs that hold significant amounts of
non-UK assets, as an additional element
to the capital requirements.103
Specifically, a PRA-designated UK
nonbank SD that has non-UK assets
equal to or greater than GBP 10 billion
is required to maintain an aggregate
amount of common equity tier 1 capital
and additional tier 1 capital equal to or
in excess of 3.25 percent of the firm’s
on-balance sheet and off-balance sheet
exposures, including exposures on
101 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 2 Capital Conservation Buffer, Rule
2.1.
102 Id. In effect, the UK PRA Capital Rules require
a PRA-designated UK nonbank SD to hold common
equity tier 1 capital equal to or in excess of 7
percent of the firm’s risk-weighted assets, and total
capital equal to or in excess of 10.5 percent of the
firm’s risk-weighted assets.
In addition, a PRA-designated nonbank SD may
also be subject to a firm-specific countercyclical
capital buffer, whose rate consists of the weighted
average of the countercyclical buffer rates that
apply to exposures in the jurisdictions where the
firm’s relevant credit exposures are located. The
rate for each jurisdiction is determined by the UK
Financial Policy Committee or a third country
countercyclical buffer authority, as applicable. See
PRA Rulebook, CRR Firms, Capital Buffers Part,
Chapter 3 Countercyclical Capital Buffer, Rule 3.1.,
and Capital Requirements (Capital Buffers and
Macro-prudential Measures) Regulations 2014,
Articles 7–20. The sum of the capital conservation
buffer and the countercyclical buffer is referred to
as the ‘‘combined buffer.’’ PRA Rulebook, CRR
Firms, Capital Buffers Part, Chapter 1 Application
and Definitions, Rule 1.2. To meet these additional
capital buffer requirements, the PRA-designated UK
nonbank SD must maintain a level of common
equity tier 1 capital that is in addition to the
common equity tier 1 capital required to meet its
core capital requirement of 4.5 percent of its riskweighted assets and the common equity tier 1
capital required to meet its capital conservation
buffer. See PRA Rulebook, CRR Firms, Capital
Buffers Part, Chapter 1 Application and Definitions,
Rule 1.2, and Capital Buffers Part, Chapter 4 Capital
Conservation Measures, Rule 4.1. In practice, the
countercyclical buffer rate in the UK, as of July
2023, is 2 percent of risk-weighted assets. Several
EU Member States of relevance to the UK have also
implemented countercyclical capital buffers with
rates ranging from 0.5 percent to 2.5 percent of riskweighted assets. The countercyclical capital buffer
rate is published by the Bank of England, and is
available at: https://bankofengland.co.uk/financialstability/the-countercyclical-capital-buffer.
103 PRA Rulebook, CRR Firms, Leverage Ratio—
Capital Requirements and Buffers Part, Chapter 1
Application and Definitions and Chapter 3
Minimum Leverage Ratio. The Applicants
represented that the six PRA-designated UK
nonbank SDs currently registered with the
Commission are subject to a leverage ratio floor
requirement. See Responses to Staff Questions
dated October 5, 2023.
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uncleared swaps but excluding certain
exposures to central banks, without
regard to any risk-weighting.104 The
leverage ratio is a non-risk based
minimum capital requirement that is
intended to prevent a PRA-designated
UK nonbank SD from engaging in
excessive leverage, and complements
the risk-based minimum capital
requirement that is based on the PRAdesignated UK nonbank SD’s riskweighted assets.
As noted above, the amount of
regulatory capital that a PRA-designated
UK nonbank SD is required to hold is
determined by calculating the firm’s
total risk exposure, which requires the
PRA-designated UK nonbank SD to riskweight its on-balance sheet and offbalance sheet assets and exposures
using specified standardized weights or,
if approved for use by the PRA, internal
model-based methodologies.105 Riskweighting assets and exposures involves
adjusting the notional or carrying value
of each asset and risk exposure based on
the inherent risk of the asset or
exposure. Less risky assets and
exposures are adjusted to lower values
(i.e., have less weight) than more risky
assets or exposures. As a result, PRAdesignated UK nonbank SDs are
required to hold lower levels of
regulatory capital for less risky assets
and exposures and higher levels of
regulatory capital for riskier assets and
exposures. The categories of risk charges
that a PRA-designated UK nonbank SD
must include in determining its total
risk exposure include charges reflecting:
(i) market risk; (ii) credit risk; (iii)
settlement risk; (iv) CVA risk of OTC
derivative instruments; and (v)
operational risk.106 The methods for
calculating such risk charges are based
on the BCBS framework.107
104 Total exposures are required to be computed
in accordance with PRA Rulebook, CRR Firms,
Leverage Ratio (CRR) Part, Chapter 3 Leverage Ratio
(Part Seven CRR), Article 429 et seq. A PRAdesignated UK nonbank SD may also be subject to
a countercyclical leverage ratio buffer of common
equity tier 1 capital equal to the firm’s institutionspecific countercyclical capital buffer rate
multiplied by 35 percent, multiplied by the firm’s
total exposures. PRA Rulebook, CRR Firms,
Leverage Ratio—Capital Requirements and Buffers
Part, Chapter 4 Countercyclical Leverage Ratio
Buffer.
105 With regulator permission, PRA-designated
UK nonbank SDs may use internal models to
calculate credit risk (UK CRR, Article 143),
including certain counterparty credit risk exposures
(UK CRR, Article 283), operational risk (UK CRR,
Article 312(2)), market risk (UK CRR, Article 363),
and credit valuation adjustment risk (‘‘CVA risk’’)
of over-the-counter (‘‘OTC’’) derivatives
instruments (UK CRR, Article 383). The permission
to use, and continue using, internal models is
subject to strict criteria and supervisory oversight
by the PRA.
106 UK CRR, Article 92(3).
107 UK Application, pp. 12–15.
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Standardized market risk charges are
generally calculated by multiplying the
notional or carrying amount of net
positions or of adjusted net positions by
risk-weighting factors, which are based
on the underlying market risk of each
asset or exposure. The sum of the
calculated amounts comprises the
portion of the risk exposure amount
attributable to market risk.108
Standardized credit risk charges are
generally calculated by multiplying the
notional or carrying value of the PRAdesignated UK nonbank SD’s on-balance
sheet and off-balance sheet assets and
exposures by clearly defined riskweighting factors, which are based on
the underlying credit risk of each asset
or exposure. The sum of the calculated
amounts comprises the portion of the
risk exposure amount attributable to
credit risk.109
Settlement risk charges are intended
to account for the price difference to
which a PRA-designated UK nonbank
SD is exposed if its transactions remain
unsettled after the respective
transaction’s due delivery date.110 CVA
risk charges reflect the current market
value of the credit risk of the
counterparty to the PRA-designated UK
nonbank SD in an OTC derivatives
transaction.111 Operational risk charges
reflect the risk of loss resulting from
inadequate or failed internal processes,
people and systems or from external
events, and includes legal risk.112
As noted above, PRA-designated UK
nonbank SDs may use internal modelbased methodologies to calculate certain
categories of risk charges in lieu of
standardized charges if they have
obtained the requisite regulatory
approval.113 The UK PRA Capital Rules
set out quantitative and qualitative
requirements that internal models must
meet in order to obtain and maintain
approval.114 Quantitative and
qualitative requirements address, among
other issues, governance, validation,
monitoring, and review. Modeled risk
charges generally require the estimation
of potential losses, with a certain degree
of likelihood, within a specified time
108 UK
CRR, Articles 326–361.
Articles 111–134 and PRA Rulebook, CRR
Firms, Standardised Approach and Internal Ratings
Based Approach to Credit Risk (CRR) Part, Chapter
3 Credit Risk (Part Three Title Two Chapters Two
and Three CRR), Article 132.
110 UK CRR, Article 378.
111 Id., Article 381.
112 Id., Article 4(1)(52).
113 Id., Articles 143 (credit risk), 283
(counterparty credit risk); 312(2) (operational risk),
363 (market risk), and 383 (CVA risk).
114 See e.g., UK CRR, Articles 144, 283; 321–322
and 365–369.
109 Id.,
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period, of a portfolio of assets.115
Internal models allow for consideration
of potential co-movement of prices
across assets in the portfolio, leading to
offsets of gains and losses. Credit risk
models can also further include
estimation of the likelihood of default of
counterparties.
Furthermore, the UK PRA Capital
Rules also impose separate requirements
on an PRA-designated UK nonbank SD
to address liquidity risk. More
specifically, PRA-designated UK
nonbank SDs are subject to the liquidity
coverage requirement applicable under
UK CRR to credit institutions.116 The
liquidity coverage requirement provides
that PRA-designated UK nonbank SDs
must hold liquid assets in an amount
sufficient to cover liquidity outflows
(less liquidity inflows) under stressed
conditions over a period of 30 days.117
For purposes of the liquidity coverage
requirement, the term ‘‘stressed’’ means
a sudden or severe deterioration in the
solvency or liquidity position of a firm
due to changes in market conditions or
idiosyncratic factors as a result of which
there is a significant risk that the firm
115 The UK PRA Capital Rules require PRAdesignated UK nonbank SDs with internal model
approval for market risk to use a VaR model with
a 99 percent, one-tailed confidence interval with: (i)
price change equivalent to 10 business-day
movement in rates and prices; (ii) effective
historical observation periods of at least one year;
and (iii) at least monthly data set updates. See UK
CRR, Article 365(1). PRA-designated UK nonbank
SDs approved to use internal ratings-based credit
risk models must support the assessment of credit
risk, the assignment of exposures to rating grades
or pools, and the quantification of default and loss
estimates that have been developed for a certain
type of exposures, among other conditions. See UK
CRR, Articles 142–144. In addition, when PRAdesignated UK nonbank SDs are approved to use a
model to calculate counterparty credit risk
exposures for OTC derivatives transactions, the
model must specify the forecasting distribution for
changes in the market value of a netting set
attributable to joint changes in relevant market
variables and calculate the exposure value for the
netting set at each of the future dates on the basis
of the joint changes in the market variables. See UK
CRR, Article 284. PRA-designated nonbank SDs
allowed to follow the ‘‘advanced method’’ of
calculating CVA risk charges for OTC derivatives
transactions must also use an internal market risk
model to simulate changes in the credit spreads of
counterparties, applying a 99 percent confidence
interval and a 10-day equivalent holding period.
See UK CRR, Article 383. Finally, PRA-designated
UK nonbank SDs using ‘‘advanced measurement
approaches’’ based on their own measurement
systems to compute operational risk exposures must
calculate capital requirements as comprising both
expected loss and unexpected loss and capture
potentially severe tail events, achieving a sound
standard comparable to a 99.9 confidence interval
over a one-year period. See UK CRR, Article 322.
116 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part and PRA Rulebook, CRR Firms, Liquidity
Coverage Requirement—UK Designated Investment
Firms Part.
117 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article
412(1).
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becomes unable to meet its
commitments as they become due
within the next 30 days.118
In addition, Article 413 of UK CRR,
which has been incorporated into the
PRA Rulebook, establishes a general
requirement that firms ensure that longterm obligations and off-balance sheet
items are adequately met with a diverse
set of funding instruments that are
stable under both normal and stressed
conditions.119
In addition, the Bank of England, in
its capacity of resolution authority,120
requires that PRA-designated UK
nonbank SDs satisfy a firm-specific
MREL pursuant to provisions of the
Banking Act 2009 and the Bank
Recovery and Resolution (No. 2) Order
2014, which transposed BRRD.121 The
MREL requirement is separate from the
minimum capital requirements imposed
on PRA-designated UK nonbank SDs
under UK CRR and PRA Rulebook and
is designed to ensure that PRAdesignated UK nonbank SDs maintain at
all times sufficient eligible instruments
to facilitate resolution consistently with
the resolution objectives under the
preferred resolution strategy.122
Specifically, the MREL is intended to
permit loss absorption, where
appropriate, such that the PRAdesignated UK nonbank SD’s capital
ratio could be restored to the level
necessary for compliance with its
118 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article
411(10).
119 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article
413(1).
120 In application of BRRD, Article 3, EU Member
States designate resolution authorities that are
empowered to apply the resolution tools and
exercise the resolution powers described in BRRD.
In the UK, the resolution authority is the Bank of
England.
121 Banking Act 2009, Section 3A(4) and (4B) and
the Bank Recovery and Resolution (No. 2) Order
2014, Part 9. Eligible liabilities include, among
others items, instruments that are directly issued by
the PRA-designated UK nonbank SD and fully paid
up with remaining maturities of at least a year. See
Bank Recovery and Resolution (No. 2) Order 2014,
Part 9, Article 123(4). In addition, the liabilities
cannot arise from a derivative, be owned, secured
or guaranteed by the PRA-designated UK nonbank
SD itself, and the PRA-designated UK nonbank SD
cannot have either directly or indirectly funded its
purchase. Id.
122 The Bank of England’s Approach to Setting a
Minimum Requirement for Own Funds and Eligible
Liabilities (MREL), Statement of Policy, 3 December
2021, at 3, available at: https://
www.bankofengland.co.uk/-/media/boe/files/paper/
2021/mrel-statement-of-policy-december-2021updating-2018.pdf. See also The Minimum
Requirement for Own Funds and Eligible Liabilities
(MREL)—Buffers and Threshold Conditions,
Supervisory Statement 16/16, 28 December 2020,
available at: https://www.bankofengland.co.uk/-/
media/boe/files/prudential-regulation/supervisorystatement/2020/ss1616-update-dec-2020.pdf.
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capital requirements.123 The Bank of
England calculates a firm’s baseline
MREL as the sum of two component: a
loss absorption amount and a
recapitalization amount.124 The loss
absorption amount is equal to a firm’s
capital requirements plus its capital
buffers.125 The Bank of England has
some discretion to adjust the amount.
The MREL amount varies depending on
the entity’s size, funding model, and
risk profile, among other
considerations.126
III. Commission Analysis of the
Comparability of the UK PRA Capital
Rules and UK PRA Financial Reporting
Rules With CFTC Capital Rules and
CFTC Financial Reporting Rules
The following section provides a
description and comparative analysis of
the regulatory requirements of the UK
PRA Capital Rules and UK PRA
Financial Reporting Rules to the CFTC
Capital Rules and CFTC Financial
Reporting Rules. Immediately following
a description of the requirement(s) of
the CFTC Capital Rules or the CFTC
Financial Reporting Rules for which a
comparability determination was
requested by the Applicants, the
Commission provides a description of
the UK’s corresponding laws,
regulations, or rules. The Commission
then provides a comparative analysis of
the UK PRA Capital Rules or the UK
PRA Financial Reporting Rules with the
corresponding CFTC Capital Rules or
CFTC Financial Reporting Rules and
identifies any material differences
between the respective rules.
The Commission performed this
proposed Capital Comparability
Determination by assessing the
comparability of the UK PRA Capital
Rules for PRA-designated UK nonbank
SDs as set forth in the UK Application
with the Commission’s Bank-Based
Approach. For clarity, the Commission
did not assess the comparability of the
UK PRA Capital Rules to the
Commission’s TNW Approach or NLA
Approach as the Commission
understands that PRA-designated UK
nonbank SDs, as of the date of the UK
Application, are subject to bank-based
capital requirements pursuant to the UK
123 Bank Recovery and Resolution (No. 2) Order
2014, Part 9, Article 123(6).
124 See The Bank of England’s Approach to
Setting a Minimum Requirement for Own Funds
and Eligible Liabilities (MREL), Statement of Policy,
Dec. 3, 2021, at 5.
125 Id. The reference to ‘‘capital requirements’’ in
this context means the amount of capital the PRA
thinks the firm should maintain at all times under
PRA Rulebook, CRR Firms, Internal Capital
Adequacy Assessment.
126 Bank Recovery and Resolution (No. 2) Order
2014, Part 9, Article 123(6).
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PRA Capital Rules. In addition, as noted
above, due to the differences between
the capital and financial reporting
regimes applicable to PRA-designated
UK nonbank SD and FCA-regulated UK
nonbank SDs, the Commission
anticipates assessing the comparability
of the rules applicable to FCA-regulated
UK nonbank SDs through a separate
capital comparability determination.127
Accordingly, when the Commission
makes a preliminary determination
herein regarding the comparability of
the UK PRA Capital Rules with the
CFTC Capital Rules, the determination
solely pertains to the comparability of
the UK PRA Capital Rules as applicable
to PRA-designated UK nonbank SD with
the Bank-Based Approach under the
CFTC Capital Rules.
As described below, it is proposed
that any material changes to the UK
PRA Capital Rules would require
notification to the Commission.
Therefore, if there are subsequent
material changes to the UK PRA Capital
Rules to include, for example, another
capital approach, the Commission will
review and assess the impact of such
changes on the Capital Comparability
Determination Order as it is then in
effect, and may amend or supplement
the Order.128
In addition, although the BCBS bank
capital standards establish minimum
capital standards that are consistent
with the requirements of the
Commission’s Bank-Based Approach,
the Commission notes that consistency
with the international standards is not
determinative of a finding of
comparability with the CFTC Capital
Rules. In the Commission’s view, a
foreign jurisdiction’s consistency with
the BCBS international bank capital
standards is an element in the
127 See
supra note 5.
Commission also may amend or
supplement the Capital Comparability
Determination Order to address any material
changes to the CFTC Capital Rules and CFTC
Financial Reporting Rules that are adopted after a
final Order is issued.
The Commission is aware that the UK PRA is
considering changes to the PRA Capital Rules to
implement Basel 3.1 standards. See PRA, PS17/23—
Implementation of the Basel 3.1 Standards NearFinal Part 1, December 12, 2023, available here:
https://www.bankofengland.co.uk/news/2023/
december/pra-publishes-first-of-two-policystatements-for-basel-3-1-standards-implementation.
If the UK PRA proceeds with the implementation
of the Basel 3.1 standards as proposed, the
regulatory changes would be applicable after July 1,
2025 with a 4.5-year transitional period ending on
January 1, 2030. The Commission will monitor
progress on the UK PRA’s proposed regulatory
changes and may amend or supplement the Capital
Comparability Determination Order, as appropriate,
after a final Order is issued. As noted, the
Commission proposes to require notification of any
material changes to the UK PRA Capital Rules,
including any Basel 3.1 implementing provisions.
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128 The
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Commission’s comparability
assessment, but, in and of itself, it may
not be sufficient to demonstrate
comparability with the CFTC Capital
Rules without an assessment of the
individual elements of the foreign
jurisdiction’s capital framework.
Capital and financial reporting
regimes are complex structures
comprised of a number of interrelated
regulatory components. Differences in
how jurisdictions approach and
implement these regimes are expected,
even among jurisdictions that base their
requirements on the principles and
standards set forth in the BCBS
international bank capital framework.
Therefore, the Commission’s
comparability determination involves a
detailed assessment of the relevant
requirements of the foreign jurisdiction
and whether those requirements,
viewed in the aggregate, lead to an
outcome that is comparable to the
outcome of the CFTC’s corresponding
requirements. Consistent with this
approach, the Commission has grouped
the CFTC Capital Rules and CFTC
Financial Reporting Rules into the key
categories that focus the analysis on
whether the UK PRA capital and
financial reporting requirements are
comparable to the Commission’s SD
requirements in purpose and effect, and
not whether the UK PRA requirements
meet every aspect or contain identical
elements as the Commission’s
requirements.
Specifically, as discussed in detail
below, the Commission used the
following key categories in its review: (i)
the quality of the equity and debt
instruments that qualify as regulatory
capital, and the extent to which the
regulatory capital represents committed
and permanent capital that would be
available to absorb unexpected losses or
counterparty defaults; (ii) the process of
establishing minimum capital
requirements for a PRA-designated UK
nonbank SD and how such process
addresses market risk and credit risk of
the firm’s on-balance sheet and offbalance sheet exposures; (iii) the
financial reports and other financial
information submitted by a PRAdesignated nonbank SD to the PRA to
effectively monitor the financial
condition of the firm; and (iv) the
regulatory notices and other
communications between the PRAdesignated UK nonbank SD and the PRA
that detail potential adverse financial or
operational issues that may impact the
firm. The Commission also reviewed the
manner in which compliance by a PRAdesignated UK nonbank SD with the UK
PRA Capital Rules and UK PRA
Financial Reporting rules is monitored
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and enforced. The Commission invites
public comment on all aspects of the UK
Application and on the Commission’s
proposed Capital Comparability
Determination discussed below.
A. Regulatory Objectives of CFTC
Capital Rules and CFTC Financial
Reporting Rules and UK PRA Capital
Rules and UK PRA Financial Reporting
Rules
1. Regulatory Objectives of CFTC
Capital Rules and CFTC Financial
Reporting Rules
The regulatory objectives of the CFTC
Capital Rules and the CFTC Financial
Reporting Rules are to further the
Congressional mandate to ensure the
safety and soundness of nonbank SDs to
mitigate the greater risk to nonbank SDs
and the financial system arising from
the use of swaps that are not cleared.129
A primary function of the nonbank SD’s
capital is to protect the solvency of the
firm from decreases in the value of firm
assets, increases in the value of firm
liabilities, and from losses, including
losses resulting from counterparty
defaults and margin collateral failures,
by requiring the firm to maintain an
appropriate level of quality capital,
including qualifying subordinated debt,
to absorb such losses without becoming
insolvent. With respect to swap
positions, capital and margin perform
complementary risk mitigation
functions by protecting nonbank SDs,
containing the amount of risk in the
financial system as a whole, and
reducing the potential for contagion
arising from uncleared swaps.
The objective of the CFTC Financial
Reporting Rules is to provide the
Commission with the means to monitor
and assess a nonbank SD’s financial
condition, including the nonbank SD’s
compliance with minimum capital
requirements. The CFTC Financial
Reporting Rules are designed to provide
the Commission and NFA, which, along
with the Commission, oversees nonbank
SDs’ compliance with Commission
regulations, with a comprehensive view
of the financial health and activities of
the nonbank SD. The Commission’s
rules require nonbank SDs to file
financial information, including
periodic unaudited and annual audited
financial statements, specific financial
position information, and notices of
certain events that may indicate a
potential financial or operational issue
that may adversely impact the nonbank
SD’s ability to meet its obligations to
counterparties and other creditors in the
129 See
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swaps market, or impact the firm’s
solvency.130
2. Regulatory Objective of UK PRA
Capital Rules and UK PRA Financial
Reporting Rules
The regulatory objective of the UK
PRA Capital Rules is to ensure the safety
and soundness of PRA-designated UK
nonbank SDs.131 The UK PRA Capital
Rules are designed to preserve the
financial stability and solvency of a
PRA-designated UK nonbank SD by
requiring the firm to maintain a
sufficient amount of qualifying equity
capital and subordinated debt based on
the PRA-designated UK nonbank SD’s
activities to absorb decreases in the
value of firm assets, increases in the
value of firm liabilities, and to cover
losses from business activities,
including possible counterparty defaults
and margin collateral shortfalls
associated with the firm’s swap dealing
activities.132 The UK PRA Capital Rules
are also designed to ensure that the
PRA-designated UK nonbank SDs have
sufficient liquidity to meet their
financial obligations to counterparties
and other creditors in a distress scenario
by requiring each firm to hold an
amount of liquid assets to ensure that
the firm could face any possible
imbalance between liquidity inflows
and outflows under gravely stressed
conditions over a period of 30 days 133
and to hold a diversity of stable funding
instruments sufficient to meet long-term
obligations under both normal and
stressed conditions.134
With respect to financial reporting,
the objective of the UK PRA Financial
Reporting Rules is to enable the PRA to
assess the financial condition and safety
and soundness of PRA-designated UK
130 See
17 CFR 23.105.
PRA, The Prudential Regulation
Authority’s Approach to Banking Supervision, July
2023, available here: https://
www.bankofengland.co.uk/prudential-regulation/
publication/pras-approach-to-supervision-of-thebanking-and-insurance-sectors.
132 Id.
133 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article 412
(Liquidity Coverage Requirement). Liquid assets
primarily include cash, exposures to central banks,
government-backed assets and other highly liquid
assets with high credit quality. PRA Rulebook, CRR
Firms, Liquidity (CRR) Part, Chapter 4 Liquidity
(Part Six CRR), Article 416 (Reporting on Liquid
Assets).
134 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article 413
(Stable Funding Requirement). Stable funding
instruments include common equity tier 1 capital
instruments, additional tier 1 capital instruments,
tier 2 capital instruments, and other preferred
shares and capital instruments in excess of the tier
2 allowable amount with an effective maturity of
one year or greater. PRA Rulebook, CRR Firms
Liquidity (CRR) Part, Chapter 4 Liquidity (Part Six
CRR), Article 427 (Reporting on Stable Funding).
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131 See
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nonbank SDs.135 The UK PRA Financial
Reporting Rules aim to achieve this
objective by requiring a PRA-designated
nonbank SD to provide financial reports
and other financial position and capital
information to the PRA on a regular
basis.136 The financial reporting by a
PRA-designated UK nonbank SD
provides the PRA with information
necessary to effectively monitor the
PRA-designated UK nonbank SD’s
overall financial condition and its
ability to meet its regulatory obligations
as a nonbank SD.
3. Commission Analysis
The Commission has reviewed the UK
Application and the relevant UK laws
and regulations, and has preliminarily
determined that the overall objectives of
the UK PRA Capital Rules and CFTC
Capital Rules are comparable in that
both sets of rules are intended to ensure
the safety and soundness of nonbank
SDs by establishing a regulatory regime
that requires nonbank SDs to maintain
a sufficient amount of qualifying
regulatory capital to absorb losses,
including losses from swaps and other
trading activities, and to absorb
decreases in the value of firm assets and
increases in the value of firm liabilities
without the nonbank SDs becoming
insolvent. The UK PRA Capital Rules
and CFTC Capital Rules are also based
on, and consistent with, the BCBS
international bank capital framework,
which is designed to ensure that
banking entities hold sufficient levels of
capital to absorb losses and decreases in
the value of assets without the banks
becoming insolvent.
The Commission further preliminarily
believes that the UK PRA Financial
Reporting Rules have comparable
objectives with the CFTC Financial
Reporting Rules as both sets of rules
require nonbank SDs to file and/or
publish, as applicable, periodic
financial reports, including unaudited
financial reports and an annual audited
financial report, detailing their financial
operations and demonstrating their
compliance with minimum capital
requirements, with the goal of providing
the PRA and the CFTC staff with
information necessary to
comprehensively assess the financial
condition of a nonbank SD on an
ongoing basis. In addition, to achieve
this objective, the financial reports
135 See generally PRA, The Prudential Regulation
Authority’s Approach to Banking Supervision, July
2023, available here: https://
www.bankofengland.co.uk/prudential-regulation/
publication/pras-approach-to-supervision-of-thebanking-and-insurance-sectors.
136 PRA Rulebook, CRR Firms, Reporting (CRR)
Part.
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8037
further provide the CFTC and the PRA
with information regarding potential
changes in a nonbank SD’s risk profile
by disclosing changes in account
balances reported over a period of time.
Such changes in account balances may
indicate that the nonbank SD has
entered into new lines of business, has
increased its activity in an existing line
of business relative to other activities, or
has terminated a previous line of
business.
The prompt and effective monitoring
of the financial condition of nonbank
SDs through the receipt and review of
periodic financial reports supports the
Commission and the PRA in meeting
their respective objectives of ensuring
the safety and soundness of nonbank
SDs. In connection with these
objectives, the early identification of
potential financial issues provides the
Commission and the PRA with an
opportunity to address such issues with
the nonbank SD before the issues
develop to a state where the financial
condition of the firm is impaired such
that it may no longer hold a sufficient
amount of qualifying regulatory capital
to absorb decreases in the value of firm
assets or increases in the value of firm
liabilities, or to cover losses from the
firm’s business activities, including the
firm’s swap dealing activities and
obligations to swap counterparties.
The Commission invites public
comment on its analysis above,
including comment on the UK
Application and relevant UK laws and
regulations.
B. Nonbank Swap Dealer Qualifying
Capital
1. CFTC Capital Rules: Qualifying
Capital Under Bank-Based Approach
The CFTC Capital Rules require a
nonbank SD electing the Bank-Based
Approach to maintain regulatory capital
in the form of common equity tier 1
capital, additional tier 1 capital, and tier
2 capital in amounts that meet certain
stated minimum requirements set forth
in Commission Regulation 23.101.137
Common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital are
composed of certain defined forms of
equity of the nonbank SD, including
common stock, retained earnings, and
qualifying subordinated debt.138 The
Commission’s requirement for a
nonbank SD to maintain a minimum
amount of defined qualifying capital
and subordinated debt is intended to
137 See
17 CFR 23.101(a)(1)(i).
terms ‘‘common equity tier 1 capital,’’
‘‘additional tier 1 capital,’’ and ‘‘tier 2 capital’’ are
defined in the bank holding company regulations of
the Federal Reserve Board. See 12 CFR 217.20.
138 The
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ensure that the firm maintains a
sufficient amount of regulatory capital
to absorb decreases in the value of the
firm’s assets and increases in the value
of the firm’s liabilities, and to cover
losses resulting from the firm’s swap
dealing and other activities, including
possible counterparty defaults and
margin collateral shortfalls, without the
firm becoming insolvent.
Common equity tier 1 capital is
generally composed of an entity’s
common stock instruments and any
related surpluses, retained earnings, and
accumulated other comprehensive
income, and is a more conservative or
permanent form of capital than
additional tier 1 and tier 2 capital.139
Additional tier 1 capital is generally
composed of equity instruments such as
preferred stock and certain hybrid
securities that may be converted to
common stock if triggering events
occur.140 Total tier 1 capital is
composed of common equity tier 1
capital and further includes additional
tier 1 capital.141 Tier 2 capital includes
certain types of instruments that include
both debt and equity characteristics
such as qualifying subordinated debt.142
Subordinated debt must meet certain
conditions to qualify as tier 2 capital
under the CFTC Capital Rules.
Specifically, subordinated debt
instruments must have a term of at least
one year (with the exception of
approved revolving subordinated debt
agreements which may have a maturity
term that is less than one year), and
contain terms that effectively
subordinate the rights of lenders to
receive any payments, including
accrued interest, to other creditors of the
firm.143
Common equity tier 1 capital,
additional tier 1 capital, and tier 2
capital are permitted to be included in
a nonbank SD’s regulatory capital and
used to meet the firm’s minimum
capital requirement due to their
characteristics of being permanent forms
of capital that are subordinate to the
claims of other creditors, which ensures
that a nonbank SD will have this
regulatory capital to absorb decreases in
the value of the firm’s assets and
increases in the value of the firm’s
liabilities, and to cover losses from
139 12
CFR 217.20.
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140 Id.
141 Id.
142 Id.
143 The subordinated debt must meet the
requirements set forth in SEC Rule 18a–1d (17 CFR
240.18a–1d). See 17 CFR 23.101(a)(1)(i)(B)
(providing that the subordinated debt used by a
nonbank SD to meet its minimum capital
requirement under the Bank-Based Approach must
satisfy the conditions for subordinated debt under
SEC Rule 18a–1d).
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business activities, including swap
dealing activities, without the firm
becoming insolvent.
2. UK PRA Capital Rules: Qualifying
Capital
The UK PRA Capital Rules require a
PRA-designated nonbank SD to
maintain an amount of regulatory
capital (i.e., equity capital and
qualifying subordinated debt) equal to
or greater than 8 percent of the PRAdesignated UK nonbank SD’s total risk
exposure, which is calculated as the
sum of the firm’s: (i) capital charges for
market risk; (ii) risk-weighted exposure
amounts for credit risk; (iii) capital
charges for settlement risk; (iv) CVA risk
of OTC derivatives instruments; and (v)
capital charges for operational risk.144
The UK Capital Rules limit the
composition of regulatory capital to
common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital in a
manner consistent with the BCBS bank
capital framework.145 In this regard, the
UK PRA Capital Rules provide that a
PRA-designated UK nonbank SD’s
regulatory capital may be composed of:
(i) common equity tier 1 capital
instruments, which generally include
the PRA-designated UK nonbank SD’s
common equity, retained earnings, and
accumulated other comprehensive
income; 146 (ii) additional tier 1 capital
instruments, which include other forms
of capital instruments and certain longterm convertible debt instruments; 147
and (iii) tier 2 capital instruments,
which includes other reserves, hybrid
144 UK
148 Id.,
CRR, Article 92.
146 UK CRR, Articles 26 and 28. Capital
instruments that qualify as common equity tier 1
capital under the UK PRA Capital Rules include
instruments that: (i) are issued directly by the PRAdesignated UK nonbank SD; (ii) are paid in full and
not funded directly or indirectly by the PRAdesignated UK nonbank SD; and (iii) are perpetual.
In addition, the principal amount of the
instruments may not be reduced or repaid, except
in the liquidation of the PRA-designated UK
nonbank SD.
147 Id., Articles 51–52. To qualify as additional
tier 1 capital, the instruments must meet certain
conditions including: (i) the instruments are issued
directly by the PRA-designated UK nonbank SD and
paid in full; (ii) the instruments are not owned by
the PRA-designated UK nonbank SD or its
subsidiaries; (iii) the purchase of the instruments is
not funded directly or indirectly by the PRAdesignated UK nonbank SD; (iv) the instruments
rank below tier 2 instruments in the event of the
insolvency of the PRA-designated UK nonbank SD;
(v) the instruments are not secured or guaranteed
by the PRA-designated UK nonbank SD or an
affiliate; (vi) the instruments are perpetual and do
not include an incentive for the PRA-designated UK
nonbank SD to redeem them; and (vii) distributions
under the instruments are pursuant to defined
terms and may be cancelled under the full
discretion of the PRA-designated UK nonbank SD.
Frm 00014
Fmt 4701
Articles 62–63.
CRR, Article 63.
150 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 2 Capital Conservation Buffer, Rule
2.1. In addition, a PRA-designated nonbank SD may
also be subject to a firm-specific countercyclical
capital buffer, which requires the PRA-designated
UK nonbank SD to hold an additional amount of
common equity tier 1 capital equal to its total riskweighted assets multiplied by the weighted average
of the countercyclical buffer rates that apply to
exposures in the jurisdictions where the firm’s
relevant credit exposures are located. The rate for
each jurisdiction is determined by the UK Financial
Policy Committee or a third country countercyclical
buffer authority, as applicable. See PRA Rulebook,
CRR Firms, Capital Buffers Part, Chapter 3
Countercyclical Capital Buffer, Rule 3.1., and
Capital Requirements (Capital Buffers and Macroprudential Measures) Regulations 2014, Articles 7–
20. In practice, the countercyclical buffer rate in the
UK, as of July 2023, is 2 percent of risk-weighted
assets. The countercyclical capital buffer rate is
published by the Bank of England, and is available
at: https://bankofengland.co.uk/financial-stability/
the-countercyclical-capital-buffer. Several EU
Member States of relevance to the UK have also
implemented countercyclical capital buffers with
rates ranging from 0.5 percent to 2.5 percent of riskweighted assets.
151 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 2 Capital Conservation Buffer, Rule
2.1.
149 UK
145 Id.
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capital instruments, and certain
qualifying subordinated term debt.148
Furthermore, subordinated debt
instruments must meet certain
conditions to qualify as tier 2 regulatory
capital under the UK PRA Capital Rules,
including that the: (i) loans are not
granted by the PRA-designated UK
nonbank SD or its subsidiaries; (ii)
claims on the principal amount of the
subordinated loans under the provisions
governing the subordinated loan
agreement rank below any claim from
eligible liabilities instruments (i.e.,
certain non-capital instruments),
meaning that they are effectively
subordinated to claims of all nonsubordinated creditors of the PRAdesignated UK nonbank SD; (iii)
subordinated loans are not secured, or
subject to a guarantee that enhances the
seniority of the claim, by the PRAdesignated UK nonbank SD, its
subsidiaries, or affiliates; (iv) loans have
an original maturity of at least five
years; and (v) provisions governing the
loans do not include any incentive for
the principal amount to be repaid by the
PRA-designated UK nonbank SD prior
to the loans’ maturity.149
A PRA-designated UK nonbank SD
must also maintain a capital
conservation buffer equal to 2.5 percent
of the firm’s total risk exposure in
addition to the requirement to maintain
qualifying regulatory capital in excess of
8 percent of its total risk exposure.150
The 2.5 percent capital conservation
buffer must be met with common equity
tier 1 capital.151 Common equity tier 1
capital, as noted above, is limited to the
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PRA-designated UK nonbank SD’s
common equity, retained earnings, and
accumulated other comprehensive
income, and represents a more
permanent form of capital than equity
instruments that qualify as additional
tier 1 capital and tier 2 capital.
The UK PRA Capital Rules also
impose different ratios for the various
components of regulatory capital that
are consistent with the BCBS bank
capital framework.152 In this regard, the
UK PRA Capital Rules provide that a
PRA-designated UK nonbank SD’s
minimum regulatory capital must satisfy
the following requirements: (i) common
equity tier 1 capital ratio of 4.5 percent
of the firm’s total risk exposure amount;
(ii) total tier 1 capital (i.e., common
equity tier 1 capital plus additional tier
1 capital) ratio of 6 percent of the firm’s
total risk exposure amount; and (iii)
total capital (i.e., an aggregate amount of
common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital) ratio of
8 percent of the firm’s total risk
exposure amount. As noted above, a
PRA-designated UK nonbank SD must
also maintain a capital conservation
buffer of 2.5 percent of its total risk
exposure amount that must be met with
common equity tier 1 capital.153 With
the addition of the capital conservation
buffer, each PRA-designated UK
nonbank SD is required to maintain
minimum regulatory capital that equals
or exceeds 10.5 percent of the firm’s
total risk exposure amount, with
common equity tier 1 capital comprising
at least 7 percent of the 10.5 percent
minimum regulatory capital
requirement.154
Common equity tier 1 capital,
additional tier 1 capital, and tier 2
capital are permitted to be included in
a PRA-designated UK nonbank SD’s
regulatory capital and used to meet the
firm’s minimum capital requirement
due to their characteristics of being
permanent forms of capital that are
subordinate to the claims of other
creditors, which ensures that a PRAdesignated UK nonbank SD will have
this regulatory capital to absorb
decreases in the value of the firm’s
assets and increases in the value of the
firm’s liabilities, and to cover losses
from business activities, including swap
dealing activities, without the firm
becoming insolvent.
152 UK
CRR, Article 92(1).
Rulebook, CRR Firms, Capital Buffers
Part, Chapter 2 Capital Conservation Buffer, Rule
2.1.
154 The countercyclical capital buffer is not
included in the analysis given that it is firm-specific
and its rate depends on the location of the firm’s
exposures.
153 PRA
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3. Commission Analysis
The Commission has reviewed the UK
Application and the relevant UK laws
and regulations, and has preliminarily
determined that the UK PRA Capital
Rules are comparable in purpose and
effect to the CFTC Capital Rules with
regard to the types and characteristics of
a nonbank SD’s equity that qualifies as
regulatory capital in meeting its
minimum requirements. The UK PRA
Capital Rules and the CFTC Capital
Rules for nonbank SDs both require a
nonbank SD to maintain a quantity of
high-quality capital and permanent
capital, all defined in a manner that is
consistent with the BCBS international
bank capital framework, that based on
the firm’s activities and on-balance
sheet and off-balance sheet exposures, is
sufficient to absorb losses and decreases
in the value of the firm’s assets and
increases in the value of the firm’s
liabilities without resulting in the firm
becoming insolvent. Specifically, equity
instruments that qualify as common
equity tier 1 capital and additional tier
1 capital under the UK PRA Capital
Rules and the CFTC Capital Rules have
similar characteristics (e.g., the equity
must be in the form of high-quality,
committed and permanent capital) and
the equity instruments generally have
no priority in distribution of firm assets
or income with respect to other
shareholders or creditors of the firm,
which makes the equity available to a
nonbank SD to absorb unexpected
losses, including counterparty
defaults.155
In addition, the Commission has
preliminarily determined that the
conditions imposed on subordinated
debt instruments under the UK PRA
Capital Rules and the CFTC Capital
Rules are comparable and are designed
to ensure that the subordinated debt has
qualities that support its recognition by
a nonbank SD as equity for regulatory
capital purposes. Specifically, in both
sets of rules, the conditions include a
requirement that the debt holders have
effectively subordinated their claims for
repayment of the debt to the claims of
other creditors of the nonbank SD.156
155 Compare
12 CFR 217.20(b) (defining capital
instruments that qualify as common equity tier 1
capital under the rules of the Federal Reserve
Board) and 12 CFR 217.20(c) (defining capital
instruments that qualify as additional tier 1 capital
under the rules of the Federal Reserve Board) with
UK CRR, Articles 26 and 28 (defining items and
capital instruments that qualify as common equity
tier 1 capital under the UK PRA Capital Rules) and
UK CRR, Article 52 (defining capital instruments
that qualify as additional tier 1 capital under the
UK PRA Capital Rules).
156 Compare 17 CFR 240.18a–1d with UK CRR,
Article 63(d).
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Having reviewed the UK Application
and the relevant UK laws and
regulations, the Commission has made a
preliminary determination that the UK
PRA Capital Rules and CFTC Capital
Rules impose comparable requirements
on PRA-designated UK nonbank SDs
with respect to the types and
characteristics of equity capital that
must be used to meet minimum
regulatory capital requirements. The
Commission invites public comment on
its analysis above, including comment
on the UK Application and relevant UK
laws and regulations.
C. Nonbank Swap Dealer Minimum
Capital Requirement
1. CFTC Capital Rules: Nonbank SD
Minimum Capital Requirement
The CFTC Capital Rules require a
nonbank SD electing the Bank-Based
Approach to maintain regulatory capital
that satisfies each of the following
criteria: (i) an amount of common equity
tier 1capital of at least $20 million; (ii)
an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier
2 capital in an amount equal to or in
excess of 8 percent of the nonbank SD’s
uncleared swap margin amount; (iii) an
aggregate amount of common equity tier
1 capital, additional tier 1 capital, and
tier 2 capital equal to or greater than 8
percent of the nonbank SD’s total riskweighted assets, provided that common
equity tier 1 capital comprises at least
6.5 percent of the 8 percent; and (iv) the
amount of capital required by the
NFA.157
Prong (i) above requires each nonbank
SD electing the Bank-Based Approach to
maintain a minimum of $20 million of
common equity tier 1 capital to operate
as a nonbank SD. The requirement that
each nonbank SD electing the CFTC
Bank-Based Approach maintain a
minimum of $20 million of common
equity tier 1 capital is also consistent
with the minimum capital requirement
for nonbank SDs electing the NLA
Approach and the TNW Approach.158
The Commission adopted this minimum
requirement as it believed that the role
a nonbank SD performs in the financial
157 See 17 CFR 23.101(a)(1)(i). NFA has adopted
the CFTC minimum capital requirements for
nonbank SDs, but has not adopted additional
capital requirements at this time.
158 Nonbank SDs electing the NLA Approach are
subject to a minimum capital requirement that
includes a fixed minimum dollar amount of net
capital of $20 million. See 17 CFR
23.101(a)(1)(ii)(A)(1). Nonbank SDs electing the
TNW Approach are required to maintain levels of
tangible net worth that equals or exceeds $20
million plus the amount of the nonbank SDs’
market risk and credit risk associated with the
firms’ dealing activities. See 17 CFR
23.101(a)(2)(ii)(A).
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markets by engaging in swap dealing
activities warranted a minimum level of
capital, stated as a fixed dollar amount
that does not fluctuate with the level of
the firm’s dealing activities to help
ensure the safety and soundness of the
nonbank SD.159
Prong (ii) above is a minimum capital
requirement that is based on the amount
of uncleared margin for swap
transactions entered into by the
nonbank SD and is computed on a
counterparty by counterparty basis. The
requirement for a nonbank SD to
maintain minimum capital equal to or
greater than 8 percent of the firm’s
uncleared swap margin provides a
capital floor based on a measure of the
risk and volume of the swap positions,
and the number of counterparties and
the complexity of operations, of the
nonbank SD. The intent of the minimum
capital requirement based on a
percentage of the nonbank SD’s
uncleared swap margin was to establish
a minimum capital requirement that
would help ensure that the nonbank SD
meets all of its obligations as a SD to
market participants, and to cover
potential operational risk, legal risk, and
liquidity risk in addition to the risks
associated with its trading portfolio.160
Prong (iii) above is a minimum capital
requirement that is based on the Federal
Reserve Board’s capital requirements for
bank holding companies and is
consistent with the BCBS international
capital framework for banking
institutions. As noted above, a nonbank
SD under prong (iii) must maintain an
aggregate of common equity tier 1
capital, additional tier 1 capital, and tier
2 capital in an amount equal to or
greater than 8 percent of the nonbank
SD’s total risk-weighted assets, with
common equity tier 1 capital comprising
at least 6.5 percent of the 8 percent.
Risk-weighted assets are a nonbank SD’s
on-balance sheet and off-balance sheet
exposures, including proprietary swap,
security-based swap, equity, and futures
positions, weighted according to risk.
The Bank-Based Approach requires each
nonbank SD to maintain regulatory
capital in an amount that equals or
exceeds 8 percent of the firm’s total riskweighted assets to help ensure that the
nonbank SD’s level of capital is
sufficient to absorb decreases in the
value of the firm’s assets and increases
in the value of the firm’s liabilities, and
to cover unexpected losses resulting
from business activities, including
uncollateralized defaults from swap
counterparties, without the nonbank SD
becoming insolvent.
159 See,
160 See
e.g., 85 FR 57492.
85 FR 57462.
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A nonbank SD must compute its riskweighted assets using standardized
market risk and/or credit risk charges,
unless the nonbank SD has been
approved by the Commission or NFA to
use internal models.161 For standardized
market risk charges, the Commission
incorporates by reference the
standardized market risk charges set
forth in Commission Regulation 1.17 for
FCMs and SEC Rule 18a–1 for nonbank
SBSDs.162 The standardized market risk
charges under Commission Regulation
1.17 and SEC Rule 18a–1 are calculated
as a percentage of the market value or
notional value of the nonbank SD’s
marketable securities and derivatives
positions, with the percentages applied
to the market value or notional value
increasing as the expected or
anticipated risk of the positions
increases.163 The resulting total market
risk exposure amount is multiplied by a
factor of 12.5 to cancel the effect of the
8 percent multiplication factor applied
to all of the nonbank SD’s risk-weighted
assets, which effectively requires a
nonbank SD to hold qualifying
regulatory capital equal to or greater
than 100 percent of the amount of its
market risk exposure.164
With respect to standardized credit
risk charges for exposures from nonderivatives positions, a nonbank SD
computes its on-balance sheet and offbalance sheet exposures in accordance
with the standardized credit risk
charges adopted by the Federal Reserve
Board and set forth in subpart D of 12
CFR 217 as if the SD itself were a bank
holding company subject to subpart
D.165 Standardized credit risk charges
are computed by multiplying the
amount of the exposure by defined
counterparty credit risk factors that
range from 0 percent to 150 percent.166
161 See 17 CFR 23.101(a)(1)(i)(B) and the
definition of the term BHC equivalent risk-weighted
assets in 17 CFR 23.100.
162 See paragraph (3) of the definition of the term
BHC equivalent risk-weighted assets in 17 CFR
23.100.
163 See 17 CFR 240.18a–1(c)(1).
164 See 17 CFR 23.100 (Definition of BHC
equivalent risk-weighted assets). As noted, a
nonbank SD is required to maintain qualifying
capital (i.e., an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital)
in an amount that exceeds 8 percent of its market
risk-weighted assets and credit-risk-weighted assets.
The regulations, however, require the nonbank SD
to effectively maintain qualifying capital in excess
of 100 percent of its market risk-weighted assets by
requiring the nonbank SD to multiply its marketrisk-weighted assets by 12.5.
165 See 17 CFR 23.101(a)(1)(i)(B) and paragraph
(1) of the definition of the term BHC equivalent riskweighted assets in 17 CFR 23.100.
166 See 17 CFR 217.32. Lower credit risk factors
are assigned to entities with lower credit risk and
higher credit risk factors are assigned to entities
with higher credit risk. For example, a credit risk
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A nonbank SD with off-balance sheet
exposures is required to calculate a
credit risk charge by multiplying each
exposure by a credit conversion factor
that ranges from 0 percent to 100
percent, depending on the type of
exposure.167 In addition to the riskweighted assets for general credit risk, a
nonbank SD calculating risk charges
under subpart D of 12 CFR 217 must
also calculate risk-weighted assets for
unsettled transactions involving
securities, foreign exchange
instruments, and commodities that have
a risk of delayed settlement or delivery.
A nonbank SD may compute
standardized credit risk charges for
derivatives positions, including
uncleared swaps and non-cleared
security-based swaps, using either the
current exposure method (‘‘CEM’’) or
the standardized approach for
measuring counterparty credit risk
(‘‘SA–CCR’’).168 Both CEM and SA–CCR
are non-model, rules-based, approaches
to calculating counterparty credit risk
exposures for derivatives positions.
Credit risk exposure under CEM is the
sum of: (i) the current exposure (i.e., the
positive mark-to-market) of the
derivatives contract; and (ii) the
potential future exposure, which is
calculated as the product of the notional
principal amount of the derivatives
contract multiplied by a standard credit
risk conversion factor set forth in the
rules of the Federal Reserve Board.169
Credit risk exposure under SA–CCR is
defined as the exposure at default
amount of a derivatives contract, which
is computed by multiplying a factor of
1.4 by the sum of: (i) the replacement
costs of the contract (i.e., the positive
mark-to market); and (ii) the potential
future exposure of the contract.170
A nonbank SD may also obtain
approval from the Commission or NFA
to use internal models to compute
market risk and/or credit risk charges in
lieu of the standardized charges. A
nonbank SD seeking approval to use an
internal model is required to submit an
factor of 0% is applied to exposures to the U.S.
government, the Federal Reserve Bank, and U.S.
government agencies (see 12 CFR 217.32 (a)(1)), and
a credit risk factor of 100% is assigned to an
exposure to foreign sovereigns that are not members
of the Organization of Economic Co-operation and
Development (see 12 CFR 217.32(a)(2)).
167 See 17 CFR 217.33.
168 See 17 CFR 217.34. See also, Commission
Regulation 23.100 (17 CFR 23.100) defining the
term BHC risk-weighted assets, which provides that
a nonbank SD that does not have model approval
may use either CEM or SA–CCR to compute its
exposures for over-the-counter derivative contracts
without regard to the status of its affiliate entities
with respect to the use of a calculation approach
under the Federal Reserve Board’s capital rules.
169 See 12 CFR 217.34.
170 See 12 CFR 217.132(c).
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application to the Commission or
NFA.171 The application is required to
include, among other things, a list of
categories of positions that the nonbank
SD holds in its proprietary accounts and
a brief description of the methods that
the nonbank SD will use to calculate
market risk and/or credit risk charges
for such positions, as well as a
description of the mathematical models
used to compute market risk and credit
risk charges.
A nonbank SD approved by the
Commission or NFA to use internal
models to compute market risk is
required to comply with subpart F of the
Federal Reserve Board’s Part 217
regulations (‘‘Subpart F’’).172 Subpart F
is based on models that are consistent
with the BCBS Basel 2.5 capital
framework.173 The Commission’s
qualitative and quantitative
requirements for internal capital models
are also comparable to the SEC’s
existing internal capital model
requirements for broker-dealers in
securities and SBSDs,174 which are
broadly based on the BCBS Basel 2.5
capital framework.
A nonbank SD approved to use
internal models to compute credit risk
charges is required to perform such
computation in accordance with subpart
E of the Federal Reserve Board’s Part
217 regulations 175 as if the SD itself
were a bank holding company subject to
subpart E.176 The internal credit risk
modeling requirements are also based
on the Basel 2.5 capital framework and
the Basel 3 capital framework. A
nonbank SD that computes its credit
risk charges using internal models must
multiply the resulting capital
requirement by a factor of 12.5.177
In adopting the final Bank-Based
Approach rules, the Commission also
noted that in choosing an alternative
calculation, the nonbank SD must adopt
the entirety of the alternative. As such,
171 See
17 CFR 23.102(c).
paragraph (4) of the definition of BHC
equivalent risk-weighted assets in 17 CFR 23.100.
173 Compare 17 CFR 23.100 (providing for a
nonbank SD that is approved to use internal models
to calculate market and credit risk to calculate its
risk-weighted assets using subparts E and F of 12
CFR part 217), subpart F of 12 CFR, 17 CFR
23.101(a)(1)(ii) (providing for an SD that elects the
Net Liquid Assets Approach to calculate its net
capital in accordance with Rule 18a–1), and 17 CFR
23.102(a), with Basel Committee on Banking
Supervision, Revisions to the Basel II Market Risk
Framework (2011), https://www.bis.org/publ/
bcbs193.pdf (describing the revised internal model
approach under Basel 2.5).
174 The SEC internal model requirements for
SBSDs are listed in 17 CFR 240.18a–1(d).
175 12 CFR 217 subpart E.
176 See 85 FR 57462 at 57496.
177 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv),
and 217.132(d)(9)(iii).
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if the nonbank SD is calculating its riskweighted assets using the regulations in
subpart E of 12 CFR 217, the nonbank
SD must include charges reflecting all
categories of risk-weighted assets
applicable under these regulations,
which include among other things,
charges for operational risk, CVA of
OTC derivatives contracts, and
unsettled transactions involving
securities, foreign exchange
instruments, and commodities that have
a risk of delayed settlement or
delivery.178 The capital charge for
operational risk and CVA of OTC
derivatives contracts calculated in
accordance with subpart E of 12 CFR
217 must also be multiplied by a factor
of 12.5.179
Under the Basel 2.5 capital
framework, nonbank SDs have
flexibility in developing their internal
models, but must follow certain
minimum standards. Internal market
risk and credit risk models must follow
a Value-at-Risk (‘‘VaR’’) structure to
compute, on a daily basis, a 99th
percentile, one-tailed confidence
interval for the potential losses resulting
from an instantaneous price shock
equivalent to a 10-day movement in
prices (unless a different time-frame is
specifically indicated). The simulation
of this price shock must be based on a
historical observation period of
minimum length of one year, but there
is flexibility on the method used to
render simulations, such as variancecovariance matrices, historical
simulations, or Monte Carlo.
The Commission and the Basel
standards for internal models also have
requirements on the selection of
appropriate risk factors as well as on
data quality and update frequency.180
One specific concern is that internal
models must capture the non-linear
price characteristics of options
positions, including but not limited to,
relevant volatilities at different
maturities.181
In addition, BCBS standards for
market risk models include a series of
178 Settlement risk for OTC derivatives contracts
is addressed as part of the counterparty-credit risk
calculation methodology described in 12 CFR
217.132.
179 12 CFR 217.162(c) (operational risk) and
217.132(e)(4) (CVA of OTC derivative contracts).
180 See 17 CFR appendix A to subpart E of part
23(i)(2)(iii), and Basel Committee on Banking
Supervision, Revisions to the Basel II Market Risk
Framework (2011), paragraph 718(Lxxvi)(e),
available at: https://www.bis.org/publ/bcbs193.pdf.
181 The Commission’s requirement is set forth in
paragraph (i)(2)(iv)(A) of appendix A to subpart E
of 17 CFR part 23. See also, Basel Committee on
Banking Supervision, Revisions to the Basel II
Market Risk Framework (2011), paragraph
718(Lxxvi)(h), available at: https://www.bis.org/
publ/bcbs193.pdf.
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additive components for risks for which
the broad VaR is ill-suited or that may
need targeted calculation. These include
the calculation of a Stressed VaR
measure (with the same specifications
as the VaR, but calibrated to historical
data from a continuous 12-month period
of significant financial stress relevant to
the firm’s portfolio); a Specific Risk
measure (which includes the effect of a
specific instrument); an Incremental
Risk measure (which addresses changes
in the credit rating of a specific obligor
which may appear as a reference in an
asset); and a Comprehensive Risk
measure (which addresses risk of
correlation trading positions).
2. UK PRA Capital Rules: PRADesignated UK Nonbank Swap Dealer
Minimum Capital Requirements
The UK PRA Capital Rules impose
bank-like capital requirements on a
PRA-designated UK nonbank SD that,
consistent with the BCBS international
bank capital framework, require the
PRA-designated UK nonbank SD to hold
a sufficient amount of qualifying equity
capital and subordinated debt based on
the PRA-designated UK nonbank SD’s
activities to absorb decreases in the
value of firm assets and increases in the
value of the firm’s liabilities, and to
cover losses from its business activities,
including possible counterparty defaults
and margin collateral shortfalls
associated with the firm’s swap dealing
activities, without the firm becoming
insolvent. Specifically, the UK PRA
Capital Rules require each PRAdesignated UK nonbank SD to maintain
sufficient levels of capital to satisfy the
following capital ratios, expressed as a
percentage of the PRA-designated UK
nonbank SD’s total risk exposure
amount (i.e., the sum of the PRAdesignated UK nonbank SD’s riskweighted assets and exposures): (i) a
common equity tier 1 capital ratio of 4.5
percent; 182 (ii) a tier 1 capital ratio of
6 percent; 183 and (iii) a total capital
ratio of 8 percent.184 The UK PRA
Capital Rules further require a PRAdesignated UK nonbank SD to maintain
a capital conservation buffer composed
of common equity capital tier 1 capital
in amount equal to 2.5 percent of the
firm’s total risk exposure.185 The
common equity tier 1 capital used to
182 UK
CRR, Article 92(1)(a).
Article 92(1)(b). Tier 1 capital is the sum
of the PRA-designated UK nonbank SD’s common
equity tier 1 capital and additional tier 1 capital.
184 Id., Article 92(1)(c). The total capital is the
sum of the PRA-designated UK nonbank SD’s tier
1 capital and tier 2 capital.
185 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 2 Capital Conservation Buffer, Rule
2.1.
183 Id.,
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meet the capital conservation buffer
must be separate and in addition to the
4.5 percent of common equity tier 1
capital that the PRA-designated UK
nonbank is required to maintain in
meeting its core 8 percent capital
requirement.186 Thus, a PRA-designated
UK nonbank SD is required to maintain
regulatory capital equal to at least 10.5
percent of its total risk exposure
amount, with common equity tier 1
capital comprising at least 7 percent of
the regulatory capital (4.5 percent of the
core capital plus the 2.5 percent capital
conservation buffer).
A PRA-designated UK nonbank SD’s
total risk exposure amount is calculated
as the sum of the firm’s: (i) capital
requirements for market risk; (ii) riskweighted exposure amounts for credit
risk; (iii) capital requirements for
settlement risk; (iv) capital requirements
for CVA risk of OTC derivatives
instruments; and (v) capital
requirements for operational risk.187
Capital charges for market risk and riskweighted exposures for credit risk are
computed based on the PRA-designated
UK nonbank SD’s on-balance sheet and
off-balance sheet exposures, including
proprietary swap, security-based swap,
equity, and futures positions, weighted
according to risk.188 Settlement risk
186 Id. A PRA-designated UK nonbank SD may
also be required to maintain a countercyclical
capital buffer composed of common equity tier 1
capital equal to the firm’s total risk exposure
multiplied by an institution-specific countercyclical
buffer rate. The institution-specific countercyclical
capital buffer rate is determined by calculating the
weighted average of the countercyclical buffer rates
that apply in the jurisdictions in which the PRAdesignated UK nonbank SD has relevant credit
exposures. See PRA Rulebook, CRR Firms, Capital
Buffers Part, Chapter 3 Countercyclical Capital
Buffer. The rate for each jurisdiction is determined
by the UK Financial Policy Committee or a third
country countercyclical buffer authority, as
applicable. See PRA Rulebook, CRR Firms, Capital
Buffers Part, Chapter 3 Countercyclical Capital
Buffer, Rule 3.1., and Capital Requirements (Capital
Buffers and Macro-prudential Measures)
Regulations 2014, Articles 7–20. In practice, the
countercyclical buffer rate in the UK, as of July
2023, is 2 percent of risk-weighted assets. The
countercyclical capital buffer rate is published by
the Bank of England, and is available at: https://
bankofengland.co.uk/financial-stability/thecountercyclical-capital-buffer. Several EU Member
States of relevance to the UK have also
implemented countercyclical capital buffers with
rates ranging from 0.5 percent to 2.5 percent of riskweighted assets.
187 UK CRR, Article 92(3).
188 To compute capital requirements for market
risk, PRA-designated UK nonbank SDs are required
to calculate capital charges for all trading book
positions and non-trading book positions that are
subject to foreign exchange or commodity risk. See
UK CRR, Article 325. The risk-weighted exposure
amounts for credit risk include: (i) risk-weighted
exposure amounts for credit risk and dilution risk
in respect of all the business activities of the PRAdesignated UK nonbank SD, excluding riskweighted exposure amounts from the trading book
business of the firm; and (ii) risk-weighted exposure
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capital charges reflect the price
difference to which a PRA-designated
UK nonbank SD is exposed if its
transactions in debt instruments, equity,
foreign currency, and commodities
remain unsettled after the respective
product’s due delivery date.189 CVA is
an adjustment to the mid-market value
of the portfolio of OTC derivative
transactions with a counterparty and
reflects the current market value of the
credit risk of the counterparty to the
PRA-designated UK nonbank SD.190
Operational risk capital charges reflect
the risk of loss resulting from
inadequate or failed internal processes,
people and systems or from external
events, and includes legal risk.191
To compute its total risk exposure
amount, a PRA-designated UK nonbank
SDs is also required to multiply the
capital requirements for market risk,
settlement risk, CVA risk, and
operational risk, calculated in
accordance with the UK PRA Capital
Rules, by a factor of 12.5, which
effectively requires a PRA-designated
UK nonbank SD to hold qualifying
regulatory capital equal to or greater
than the full amount of the relevant risk
exposures.192 The formulae for
calculating risk-weighted exposure
amounts for credit risk also include a
12.5 multiplication factor.193
Consistent with the Commission’s
Bank-Based Approach and the BCBS
capital framework, the UK PRA Capital
Rules require PRA-designated UK
nonbank SDs to compute market risk
exposures and credit risk exposures
using a standardized approach or, if
approved by the PRA, internal risk
models.194 In addition, UK PRA Capital
Rules, consistent with the BCBS capital
framework, require PRA-designated UK
nonbank SDs to compute capital charges
for CVA risk and operational risk using
standardized approaches, unless
amounts for counterparty risk arising from the
trading book business for certain derivatives
transactions, repurchase agreements, securities or
commodities lending or borrowing transactions,
margin lending or long settlement transactions. See
UK CRR, Article 92(3)(a) and (f).
189 UK CRR, Article 378. Settlement risk is
calculated as 8 percent, 50 percent, 75 percent, or
100 percent of the price difference for transactions
that are not settled within 5 to 15 business days,
16 to 30 business days, 31 to 45 business days, or
46 or more business days, respectively, from the
due settlement date.
190 Id., Article 381.
191 Id., Article 4(1)(52).
192 Id., Article 92(4).
193 Id., Article 153 et seq.
194 With the permission of the PRA, a PRAdesignated UK nonbank SD may use internal
models to calculate market risk (see UK CRR,
Article 363) and credit risk (see UK CRR, Articles
143 and 283).
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approved to use internal models by the
PRA.195
PRA-designated UK nonbank SDs
calculate standardized market risk
charges generally by multiplying the
notional or carrying amount of net
positions by risk-weighting factors,
which are based on the underlying
market risk of each asset or exposure
and increase as the expected risk of the
positions increase. Market risk
requirements for debt instruments and
equity instruments are calculated
separately under the standardized
approach, and are each calculated as the
sum of specific risk and general risk of
the positions.196 Securitizations are
treated as debt instruments for market
risk requirements,197 whereas derivative
positions are generally treated as
exposures on their underlying assets,198
with options being delta-adjusted.199
The UK PRA Capital Rules also
require PRA-designated UK nonbank
SDs to include in their risk-weighted
assets market risk exposures to certain
foreign currency and gold positions.
Specifically, a PRA-designated UK
nonbank SD with net positions in
foreign exchange and gold that exceed 2
percent of the firm’s total capital must
calculate capital requirements for
foreign exchange risk.200 The capital
requirement for foreign exchange risk
under the standardized approach is 8
percent of the PRA-designated UK
nonbank SD’s net positions in foreign
exchange and gold.201
The UK PRA Capital Rules further
require PRA-designated UK nonbank
SDs to include exposures to commodity
positions in calculating the firm’s riskweighted assets. The standardized
calculation of commodity risk exposures
may follow one of three approaches
depending on type of position or
exposure. The first is the sum of a flat
percentage rate for net positions, with
netting allowed among tightly defined
sets, plus another flat percentage rate for
the gross position.202 The other two
standardized approaches are based on
maturity-ladders, where unmatched
portions of each maturity band (i.e.,
portions that do not net out to zero) are
charged at a step-up rate in comparison
195 See UK CRR, Articles 382–384 for CVA risk
calculations; and Article 312(2) for operational risk.
196 Id., Article 326.
197 Id. See also UK CRR, Articles 334–340
(provisions related to debt instruments) and 341–
343 (provisions related to equities).
198 Id., Articles 328–330, 358.
199 Id., Article 329.
200 Id., Article 351.
201 Id.
202 Id., Article 360.
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to the base charges for matched
portions.203
With respect to credit risk, the UK
PRA Capital Rules require a PRAdesignated UK nonbank SD to calculate
its standardized credit risk exposure in
a manner aligned with the
Commission’s Bank-Based Approach
and the BCBS framework by taking the
carrying value or notional value of each
of the PRA-designated UK nonbank SD’s
on-balance sheet and off-balance sheet
exposures, making certain additional
credit risk adjustments, and then
applying specific risk-weights based on
the type of counterparty and the asset’s
credit quality.204 For instance, credit
exposures to the ECB, the UK
government, and the Bank of England
carry a zero percent risk-weight;
exposures to other central governments
and central banks may carry riskweights between 0 and 150, depending
on the credit rating available for the
central government or central bank; and
exposures to banks, PRA-designated
investment firms, or other businesses
may carry risk-weights between 20
percent and 150 percent depending on
the credit ratings available for the entity
or, for exposures to banks and
investment firms, for the central
government of the jurisdiction in which
the entity is incorporated.205 If no credit
rating is available, the PRA-designated
UK nonbank SD must generally apply a
100 percent risk-weight, meaning the
total accounting value of the exposure is
used.206
With respect to counterparty credit
risk for derivatives transactions and
certain other agreements that give rise to
bilateral credit risk, the UK PRA Capital
Rules require a PRA-designated UK
nonbank SD that is not approved to use
credit risk models to calculate its
exposure using the standardized
approach for counterparty credit risk
(i.e., SA–CCR),207 which is one of the
203 Id.,
Articles 359 and 361.
Articles 111 and 113(1).
205 Id., Articles 114–122.
206 Id., Articles 121(2) and 122(2).
207 UK CRR, Articles 92(3)(f) and PRA Rulebook,
CRR Firms, Counterparty Credit Risk (CRR) Part,
Chapter 3 Counterparty Credit Risk (Part Three,
Title Two, Chapter Six CRR). PRA-designated UK
nonbank SDs with smaller-sized derivatives
business may also use a ‘‘simplified standardized
approach to counterparty credit risk’’ or an
‘‘original exposure method’’ as simpler methods for
calculating exposure values. PRA Rulebook, CRR
Firms, Counterparty Credit Risk (CRR) Part, Chapter
3 Counterparty Credit Risk (Part Three, Title Two,
Chapter Six CRR), Articles 281–282. To use either
of these alternative methods, an entity’s on-and offbalance sheet derivatives business must be equal or
less than 10 percent of the entity’s total assets and
GBP 260 million or 5 percent of the entity’s total
assets and GBP 88 million, respectively. PRA
Rulebook, CRR Firms, Counterparty Credit Risk
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methods that a nonbank SD may use to
calculate its credit risk exposure under
a derivatives transaction pursuant to the
Commission’s Bank-Based Approach.208
The exposure amount under the SA–
CCR is computed, under both the UK
PRA Capital Rules and the
Commission’s Bank-Based Approach, as
the sum of the replacement cost of the
contract and the potential future
exposure of the contract, multiplied by
a factor of 1.4.209
UK PRA Capital Rules also require a
PRA-designated UK nonbank SD to
calculate capital requirements for
settlement risk.210 Consistent with the
BCBS framework, the capital charge for
settlement risk for transactions settled
on a delivery-versus-payment basis is
computed by multiplying the price
difference to which a PRA-designated
UK nonbank SD is exposed as a result
of an unsettled transaction by a
percentage factor that varies from 8
percent to 100 percent based on the
number of working days after the due
settlement date during which the
transaction remains unsettled.211 The
CFTC’s Bank-Based Approach provides
for a similar calculation methodology
for risk-weighted asset amounts for
unsettled transactions involving
securities, foreign exchange
instruments, and commodities.212
Consistent with the BCBS framework,
a PRA-designated UK nonbank SD is
also required to calculate capital charges
for CVA risk for OTC derivative
instruments 213 to reflect the current
market value of the credit risk of the
counterparty to the PRA-designated UK
(CRR) Part, Chapter 3 Counterparty Credit Risk (Part
Three, Title Two, Chapter Six CRR), Article 273a.
208 12 CFR 217.34.
209 PRA Rulebook, CRR Firms, Counterparty
Credit Risk (CRR) Part, Chapter 3 Counterparty
Credit Risk (Part Three, Title Two, Chapter Six
CRR), Article 274 and 12 CFR 217.132(c).
210 UK CRR, Article 378 (indicating that if
transactions in which debt instruments, equities,
foreign currencies and commodities excluding
repurchase transactions and securities or
commodities lending and securities or commodities
borrowing are unsettled after their due delivery
dates, a PRA-designated UK nonbank SD must
calculate the price difference to which it is
exposed).
211 Id. The price difference to which a PRAdesignated UK nonbank SD is exposed is the
difference between the agreed settlement price for
an instrument (i.e., a debt instrument, equity,
foreign currency or commodity) and the
instrument’s current market value, where the
difference could involve a loss for the firm. UK
CRR, Article 378.
212 17 CFR 23.100 (definition of BHC equivalent
risk-weighted assets), 12 CFR 217.38 and 12 CFR
217.136.
213 UK CRR, Article 382 (1). CVA risk charges
need not be calculated for credit derivatives
recognized to reduce risk-weighted exposure
amounts for credit risk. Id.
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nonbank SD.214 CVA can be calculated
following similar methodologies as
those described in subpart E of the
Federal Reserve Board’s part 217
regulations.215
A PRA-designated UK nonbank SD’s
total risk exposure amount also includes
operational risk charges. Consistent
with the BCBS framework, PRAdesignated UK nonbank SDs may
calculate standardized operational risk
charges using either one of two
approaches—the Basic Indicator
Approach or the Standardized
Approach.216 Both the Basic Indicator
Approach and the Standardized
Approach use as a calculation basis the
three-year average of the ‘‘relevant
indicator,’’ which is the sum of certain
items on the statement of income/loss
(i.e., the firm’s net interest income and
net non-interest income). Under the
Basic Indicator Approach, PRAdesignated UK nonbank SDs are
required to multiply the relevant
indicator by a factor of 15 percent.
When using the Standardized
Approach, firms need to allocate the
relevant indicator into eight business
lines specified by regulation (e.g.,
trading and sales; retail brokerage;
corporate finance) and multiply the
corresponding portion by a percentage
factor ranging from 12 to 18 percent
depending on the business line. The
capital requirements for operational risk
are calculated as the sum of the
individual business lines’ charges.
As noted above, if approved by the
PRA, a PRA-designated UK nonbank SD
may use internal models to calculate its
market risk charges, credit risk charges,
including counterparty credit risk
charges, CVA risk charges, and
operational risk charges in lieu of using
a standardized approach.217 To obtain
permission, a PRA-designated UK
nonbank SD must demonstrate to the
satisfaction of the PRA that it meets
214 Id., Article 381. CVA is defined to exclude
debit valuation adjustment.
215 See UK CRR, Articles 383–384 and 12 CFR
217.132(e)(5) and (6). Under the CFTC’s Bank-Based
Approach, nonbank SDs calculating their credit
risk-weighted assets using the regulations in
subpart D of the Federal Reserve Board’s part 217
regulations, do not calculate CVA of OTC
derivatives instruments.
216 UK CRR, Article 312 and PRA Rulebook, CRR
Firms, Operational Risk (CRR) Part.
217 UK CRR, Articles 143 (credit risk), 283
(counterparty credit risk), 312 (operational risk),
363 (market risk) and 383 (CVA risk). PRAdesignated UK nonbank SDs are not permitted,
however, to calculated counterparty credit risk
charges using internal models when calculating
large exposures. PRA Rulebook, CRR Firms, Large
Exposures (CRR) Part, Chapter 4 Large Exposures
(Part Four CRR), Article 390.
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certain conditions for the use of
models.218
With respect to market risk, the PRA
may grant a PRA-designated UK
nonbank SD permission to use internal
models to calculate one or more of the
following risk categories: (i) general risk
of equity instruments, (ii) specific risk
of equity instruments, (iii) general risk
of debt instruments, (iv) specific risk of
debt instruments, (v) foreign exchange
risk, or (vi) commodities risk,219 along
with interest rate risk on derivatives.220
To obtain approval to use a market risk
model, a PRA-designated UK nonbank
SD must meet conditions related to
specified model elements and controls
including risk and stressed risk
calculations,221 back-testing and
multiplication factors,222 risk
measurement requirements,223
governance and qualitative
requirements,224 internal validation,225
and specific requirements by risk
categories.226 A PRA-designated UK
nonbank SD approved to use models
must also obtain approval from the PRA
to implement a material change to the
model or make a material extension to
the use of the model.227 The UK PRA
Capital Rules’ market risk model-based
methodology is based on the Basel 2.5
standard 228 and incorporates relevant
aspects of the BCBS framework in terms
of requiring PRA-designated UK
nonbank SDs with model approval to
use a VaR model with a 99 percent, onetailed confidence level with: (i) price
changes equivalent to a 10-business day
movement in rates and prices, (ii)
effective historical observation periods
of at least one year, and (iii) at least
monthly data set updates.229 The UK
PRA Capital Rules also include a
framework for governance that includes
requirements related to the
implementation of independent risk
management,230 senior management’s
involvement in the risk-control
process,231 establishment of procedures
for monitoring and ensuring compliance
with a documented set of internal
policies and controls,232 and the
conducting of independent review of
the models as part of the internal audit
process.233
With regulatory permission, PRAdesignated UK nonbank SDs may also
use models to calculate credit risk
exposures.234 Credit risk models may
include internal ratings based on the
estimation of default probabilities and
loss given default, consistent with the
BCBS framework and subject to similar
model risk management guidelines.235
To obtain approval for the use of
internal ratings-based models, a PRAdesignated UK nonbank SD must meet
requirements related to, among other
things, the structure of its rating systems
and its criteria for assigning exposures
to grades and pools within a rating
system, the parameters of risk
quantification, the validation of internal
estimates, and the internal governance
and oversight of the rating systems and
estimation processes.236
In addition, subject to regulatory
approval, PRA-designated UK nonbank
SDs may use internal models to
calculate counterparty credit risk
exposures for derivatives, securities
financing, and long settlement
transactions.237 The prerequisites for
approval for such models include
requirements related to the
establishment and maintenance of a
counterparty credit risk management
framework, stress testing, the integrity
of the modelling process, the risk
management system, and validation.238
The UK PRA Capital Rules’ internal
counterparty credit risk model-based
methodology is also based on the Basel
2.5 standard.239 The UK PRA Capital
Rules allow for the estimation of
expected exposure as a measure of the
average of the distribution of exposures
at a particular future date,240 with
adjustments to the period of risk, as
appropriate to the asset and
counterparty.
PRA-designated UK nonbank SDs may
also obtain regulatory permission to use
‘‘advanced measurement approaches’’
233 Id.,
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218 UK
CRR, Articles 143, 283, 312(2) and 363(1).
219 Id., Article 363(1).
220 Id., Article 331(1), using sensitivity models.
221 Id., Articles 364–365.
222 Id., Article 366.
223 Id., Article 367.
224 Id., Article 368.
225 Id., Article 369.
226 Id., Articles 364–377.
227 Id., Article 363(3).
228 Compare UK CRR, Articles 362–377 with
Revisions to the Basel II Market Risk Framework.
229 UK CRR, Article 365(1).
230 Id., Articles 368 (1)(b).
231 Id., Articles 368 (1)(c).
232 Id., Articles 368 (1)(e).
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234 Id.,
Articles 368 (1)(h).
Article 143.
235 Id.
236 Id., Articles 170–177 (rating systems), 178–184
(risk quantification), 185 (validation of internal
estimates), and 189–191 (internal governance and
oversight).
237 Id., Article 283. As noted above, however,
PRA-designated UK nonbank SDs are not permitted
to calculate counterparty credit risk charges using
internal models when calculating large exposures.
PRA Rulebook, CRR Firms, Large Exposures (CRR)
Part, Chapter 4 Large Exposures (Part Four CRR),
Article 390.
238 Id., Articles 283–294.
239 Compare UK CRR, Article 362–377 with
Revisions to the Basel II Market Risk Framework.
240 UK CRR, Article 272(19), 283–285.
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based on their own operational risk
measurement systems, to calculate
capital charges for operational risk. To
obtain such permission, PRA-designated
UK nonbank SDs must meet qualitative
and quantitative standards, as well as
general risk management standards set
forth in the UK PRA Capital Rules.241
Specifically, among other qualitative
standards, PRA-designated UK nonbank
SDs must meet requirements related to
the governance and documentation of
their operational risk management
processes and measurement systems.242
In addition, PRA-designated UK
nonbank SDs must meet quantitative
standards related to process, data,
scenario analysis, business environment
and internal control factors laid down in
the UK PRA Capital Rules.243
As an additional element to the
capital requirements, the UK PRA
Capital Rules further impose a 3.25
percent leverage ratio floor on PRAdesignated UK nonbank SDs that hold
significant amounts of non-UK assets.244
Specifically, a PRA-designated UK
nonbank SD that has non-UK assets
equal to or greater than GBP 10 billion
is required to maintain an aggregate
amount of common equity tier 1 capital
and additional tier 1 capital equal to or
in excess of 3.25 percent of the firm’s
on-balance sheet and off-balance sheet
exposures, including exposures on
uncleared swaps but excluding certain
exposures to central banks, without
regard to any risk-weighting.245 For the
purposes of complying with the leverage
ratio requirement, at least 75 percent of
the firm’s tier 1 capital must consist of
common equity tier 1 capital.246 The
leverage ratio is a non-risk based
minimum capital requirement that is
intended to prevent a PRA-designated
241 UK CRR, Article 312(1), cross-referencing UK
CRR, Articles 321 and 322; PRA Rulebook, CRR
Firms, General Organizational Requirements Part,
Rules 2.1 and 2.2; and PRA Rulebook, CRR Firms,
Internal Liquidity Adequacy Assessment Part.
242 UK CRR, Article 321.
243 Id., Article 322.
244 PRA Rulebook, CRR Firms, Leverage Ratio—
Capital Requirements and Buffers Part, Chapter 1
Application and Definitions and Chapter 3
Minimum Leverage Ratio.
245 Total exposures are required to be computed
in accordance with PRA Rulebook, CRR Firms,
Leverage Ratio (CRR) Part, Chapter 3 Leverage Ratio
(Part Seven CRR), Article 429 et seq. A PRAdesignated UK nonbank SD may also be subject to
a countercyclical leverage ratio buffer of common
equity tier 1 capital equal to the firm’s institutionspecific countercyclical capital buffer rate
multiplied by 35 percent, multiplied by the firm’s
total exposures. PRA Rulebook, CRR Firms,
Leverage Ratio—Capital Requirements and Buffers
Part, Chapter 4 Countercyclical Leverage Ratio
Buffer.
246 PRA Rulebook, CRR Firms, Leverage Ratio—
Capital Requirements and Buffers Part, Chapter 3
Minimum Leverage Ratio, Rule 3.2.
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UK nonbank SD from engaging in
excessive leverage, and complements
the risk-based minimum capital
requirement that is based on the PRAdesignated UK nonbank SD’s riskweighted assets.
Furthermore, the UK PRA Capital
Rules also impose a separate liquidity
coverage requirement on a PRAdesignated UK nonbank SD to address
liquidity risk. The liquidity coverage
requirement provides that PRAdesignated UK nonbank SDs must hold
liquid assets in an amount sufficient to
cover liquidity outflows (less liquidity
inflows) under stressed conditions over
a period of 30 days.247 For purposes of
the liquidity coverage requirement, the
term ‘‘stressed’’ means a sudden or
severe deterioration in the solvency or
liquidity position of a firm due to
changes in market conditions or
idiosyncratic factors as a result of which
there is a significant risk that the firm
becomes unable to meet its
commitments as they become due
within the next 30 days.248 In addition,
Article 413 of UK CRR, which has been
incorporated into the PRA Rulebook,
establishes a general requirement that
firms ensure that long-term obligations
and off-balance sheet items are
adequately met with a diverse set of
funding instruments that are stable
under both normal and stressed
conditions.249
The UK PRA Capital Rules also
require PRA-designated UK nonbank
SDs to maintain at all times a minimum
base capital requirement of GBP
750,000.250
3. Commission Analysis
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The Commission has reviewed the UK
Application and the relevant UK laws
and regulations, and has preliminarily
determined that the UK PRA Capital
Rules are comparable in purpose and
effect to the CFTC Capital Rules with
regard to the establishment of the
nonbank SD’s minimum capital
requirement and the calculation of the
nonbank SD’s amount of regulatory
capital to meet that requirement.251
247 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article
412(1).
248 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article
411(10).
249 PRA Rulebook, CRR Firms, Liquidity (CRR)
Part, Chapter 4 Liquidity (Part Six CRR), Article
413(1).
250 PRA Rulebook, CRR Firms, Definition of
Capital Part, Chapter 12 Base Capital Resource
Requirement, Rule 12.1.
251 The Commission notes that pursuant to Article
7 of UK CRR, the PRA may exempt an entity subject
to UK CRR from the applicable capital
requirements, provided certain conditions are met.
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Although there are differences between
the UK PRA Capital Rules and the CFTC
Capital Rules, as discussed below, the
Commission preliminarily believes that
the UK PRA Capital Rules and the CFTC
Capital Rules are designed to ensure the
safety and soundness of a nonbank SD
and, subject to the proposed conditions
discussed below, will achieve
comparable outcomes by requiring the
firm to maintain a minimum level of
qualifying regulatory capital, including
subordinated debt, to absorb losses from
the firm’s business activities, including
swap dealing activities, and decreases in
the value of the firm’s assets and
increases in the value of the firm’s
liabilities, without the nonbank SD
becoming insolvent. The Commission’s
preliminary finding of comparability is
based on a comparative analysis of the
three minimum capital requirements
thresholds of the CFTC Capital Rules’
Bank-Based Approach (i.e., the three
prongs recited in Section III.C.1. above)
and the respective elements of the UK
PRA Capital Rules’ requirements, as
discussed below.
a. Fixed Amount Minimum Capital
Requirement
CFTC Capital Rules and the UK PRA
Capital Rules both require nonbank SDs
to hold a minimum amount of
regulatory capital that is not based on
the risk-weighted assets of the firms.
Prong (i) of the CFTC Capital Rules
requires each nonbank SD electing the
Bank-Based Approach to maintain a
minimum of $20 million of common
equity tier 1 capital. The CFTC’s $20
million fixed-dollar minimum capital
requirement is intended to ensure that
each nonbank SD maintains a level of
regulatory capital, without regard to the
level of the firm’s dealing and other
activities, sufficient to meet its
obligations to swap market participants
given the firm’s status as a CFTCregistered nonbank SD and to help
ensure the safety and soundness of the
nonbank SD.252 The UK PRA Capital
Rules also contain a requirement that a
PRA-designated UK nonbank SD
maintain a fixed amount of minimum
initial capital of GBP 750,000.253
The Commission recognizes that the
$20 million fixed-dollar minimum
In such case, the relevant requirements would
apply to the entity’s parent entity, on a consolidated
basis. The Commission’s assessment does not cover
the application of Article 7 of UK CRR and therefore
an entity that benefits from an exemption under
Article 7 of UK CRR would not qualify for
substituted compliance under the Capital
Comparability Determination Order.
252 85 FR 57492.
253 PRA Rulebook, CRR Firms, Definition of
Capital Part, Chapter 12 Base Capital Resource
Requirement, Rule 12.1.
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capital required under the CFTC Capital
Rules is substantially higher than the
GBP 750,000 minimum base capital
required under the UK PRA Capital
Rules and the Commission preliminarily
believes that the $20 million represents
a more appropriate level of minimum
capital to help ensure the safety and
soundness of the nonbank SD that is
engaging in uncleared swap
transactions. Accordingly, the
Commission is proposing to condition
the Capital Comparability
Determination Order to require each
PRA-designated UK nonbank SD to
maintain, at all times, a minimum level
of $20 million regulatory capital in the
form of common equity tier 1 items as
defined in Article 26 of UK CRR.254 The
proposed condition would require each
PRA-designated UK nonbank SD to
maintain an amount of common equity
tier 1 capital denominated in British
pound that is equivalent to the $20
million in U.S. dollars.255 The
Commission is also proposing that a
PRA-designated UK nonbank SD may
convert the pound-denominated
common equity tier 1 capital amount to
the U.S. dollar equivalent based on a
commercially reasonable and observable
exchange rate.
b. Minimum Capital Requirement Based
on Risk-Weighted Assets
Prong (iii) of the CFTC Capital Rules
requires each nonbank SD to maintain
an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier
2 capital in an amount equal to or
254 The Commission notes that the proposed
requirement that PRA-designated UK nonbank SDs
maintain a minimum level of $20 million of
common equity tier 1 capital is consistent with
conditions set forth in the proposed Capital
Comparability Determination Orders for Japan,
Mexico, and the EU, respectively. See, Notice of
Proposed Order and Request for Comment on an
Application for a Capital Comparability
Determination from the Financial Services Agency
of Japan, 87 FR 48092 (Aug. 8, 2022) (‘‘Proposed
Japan Order’’); 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)
(‘‘Proposed Mexico Order’’); and 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 (June 27, 2023) (‘‘Proposed EU Order’’).
255 Each of the six current PRA-designated UK
nonbank SDs currently maintains common equity
tier 1 capital in excess of $20 million based on
financial filings made with the Commission.
Therefore, the Commission does not anticipate that
the proposed condition would have any material
impact on the PRA-designated UK nonbank SDs
currently registered with the Commission.
Nonetheless, the Commission requests comment on
the proposed condition.
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greater than 8 percent of the nonbank
SD’s total risk-weighted assets, with
common equity tier 1 capital comprising
at least 6.5 percent of the 8 percent.256
Risk-weighted assets are a nonbank SD’s
on-balance sheet and off-balance sheet
market risk and credit risk exposures,
including exposures associated with
proprietary swap, security-based swap,
equity, and futures positions, weighted
according to risk. The requirements and
capital ratios set forth in prong (iii) are
based on the Federal Reserve Board’s
capital requirements for bank holding
companies and are consistent with the
BCBS international bank capital
adequacy framework. The requirement
for each nonbank SD to maintain
regulatory capital in an amount that
equals or exceeds 8 percent of the firm’s
total risk-weighted assets is intended to
help ensure that the nonbank SD’s level
of capital is sufficient to absorb
decreases in the value of the firm’s
assets and increases in the value of the
firm’s liabilities, and to cover
unexpected losses resulting from the
firm’s business activities, including
losses resulting from uncollateralized
defaults from swap counterparties,
without the nonbank SD becoming
insolvent.
The UK PRA Capital Rules contain
capital requirements for PRA-designated
UK nonbank SDs that the Commission
preliminarily believes are comparable to
the requirements contained in prong
(iii) of the CFTC Capital Rules.
Specifically, the UK PRA Capital Rules
require a PRA-designated UK nonbank
SD to maintain: (i) common equity tier
1 capital equal to at least 4.5 percent of
the PRA-designated UK nonbank SD’s
total risk exposure amount; (ii) total tier
1 capital (i.e., common equity tier 1
capital plus additional tier 1 capital)
equal to at least 6 percent of the PRAdesignated UK nonbank SD’s total risk
exposure amount; and (iii) total capital
(i.e., an aggregate amount of common
equity tier 1 capital, additional tier 1
capital, and tier 2 capital) equal to at
least 8 percent of the PRA-designated
UK nonbank SD’s total risk exposure
amount.257 In addition, the UK PRA
Capital Rules further require each PRAdesignated UK nonbank SD to maintain
an additional capital conservation buffer
equal to 2.5 percent of the PRAdesignated UK nonbank SD’s total risk
exposure amount, which must be met
with common equity tier 1 capital.258
Thus, a PRA-designated UK nonbank SD
is effectively required to maintain total
CFR 23.101(a)(1)(B).
CRR, Article 92(1).
258 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 2 Capital Conservation Buffer.
qualifying regulatory capital in an
amount equal to or in excess of 10.5
percent of the market risk, credit risk,
CVA risk, settlement risk and
operational risk of the firm (i.e., total
capital requirement of 8 percent of riskweighted assets and an additional 2.5
percent of risk-weighted assets as a
capital conservation buffer), which is
higher than the 8 percent required of
nonbank SDs under prong (iii) of the
CFTC Capital Rules.259
The Commission also preliminarily
believes that the UK PRA Capital Rules
and the CFTC Capital Rules are
comparable with respect to the
calculation of capital charges for market
risk and credit risk (including as it
relates to aspects of settlement risk and
CVA risk), in determining the nonbank
SD’s risk-weighted assets. More
specifically, with respect to the
calculation of market risk charges and
general credit risk charges, both regimes
require a nonbank SD to use
standardized approaches to compute
market and credit risk, unless the firms
are approved to use internal models.
The standardized approaches follow the
same structure that is now the common
global standard: (i) allocating assets to
categories according to risk and
assigning each a risk-weight; (ii)
allocating counterparties according to
risk assessments and assigning each a
risk factor; (iii) calculating gross
exposures based on valuation of assets;
(iv) calculating a net exposure allowing
offsets following well-defined
procedures and subject to clear
limitations; (v) adjusting the net
exposure by the market risk-weights;
and (vi) finally, for credit risk
exposures, multiplying the sum of net
exposures to each counterparty by their
corresponding risk factor.
Internal market risk and credit risk
models under the UK PRA Capital Rules
and the CFTC Capital Rules are based
on the BCBS framework and contain
comparable quantitative and qualitative
requirements, covering the same risks,
though with slightly different
categorization, and including
comparable model risk management
requirements. As both rule sets address
the same types of risk, with similar
allowed methodologies and under
similar controls, the Commission
preliminarily believes that these
requirements are comparable.
The Commission also preliminarily
believes that the UK PRA Capital Rules
and CFTC Capital Rules are comparable
in that nonbank SDs are required to
256 17
257 UK
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259 UK CRR, Article 92(1) and PRA Rulebook,
CRR Firms, Capital Buffers Part, Chapter 2 Capital
Conservation Buffer.
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account for operational risk in
computing their minimum capital
requirements. In this connection, the
UK PRA Capital Rules require a PRAdesignated UK nonbank SD to calculate
an operational risk exposure as a
component of the firm’s total risk
exposure amount.260 PRA-designated
UK nonbank SDs may use either a
standardized approach or, if the PRAdesignated UK nonbank SD has
obtained regulatory permission, an
internal approach based on the firm’s
own measurement systems, to calculate
their capital charges for operational risk.
The CFTC Capital Rules address
operational risk both as a stand-alone,
separate minimum capital requirement
that a nonbank SD is required to meet
under prong (ii) of the Bank-Based
Approach 261 and as a component of the
calculation of risk-weighted assets for
nonbank SDs that use subpart E of the
Federal Reserve Board’s Part 217
regulations to calculate their credit riskweighted assets via internal models.262
c. Minimum Capital Requirement Based
on the Uncleared Swap Margin Amount
As noted above, prong (ii) of the CFTC
Capital Rules’ Bank-Based Approach
requires a nonbank SD to maintain
regulatory capital in an amount equal to
or greater than 8 percent of the firm’s
total uncleared swaps margin amount
associated with its uncleared swap
transactions to address potential
operational, legal, and liquidity risks.
The UK PRA Capital Rules differ from
the CFTC Capital Rules in that they do
not impose a capital requirement on
PRA-designated UK nonbank SDs based
260 UK
CRR, Article 92(3).
as further discussed below, prong
(ii) of the CFTC Capital Rules’ Bank-Based
Approach requires a nonbank SD to maintain
regulatory capital in an amount equal to or greater
than 8 percent of the firm’s total uncleared swaps
margin amount associated with its uncleared swap
transactions to address potential operational, legal,
and liquidity risks. 17 CFR 101(a)(i)(C). The term
‘‘uncleared swap margin’’ is defined by
Commission Regulation 23.100 as the amount of
initial margin, computed in accordance with the
Commission’s margin rules for uncleared swaps,
that a nonbank SD would be required to collect
from each counterparty for each outstanding swap
position of the nonbank SD. 17 CFR 23.100 and
23.154. A nonbank SD must include all swap
positions in the calculation of the uncleared swap
margin amount, including swaps that are exempt or
excluded from the scope of the Commission’s
margin regulations for uncleared swaps pursuant to
Commission Regulation 23.150, exempt foreign
exchange swaps or foreign exchange forwards, or
netting set of swaps or foreign exchange swaps, for
each counterparty, as if that counterparty was an
unaffiliated swap dealer. 17 CFR 23.100 and 23.150.
Furthermore, in computing the uncleared swap
margin amount, a nonbank SD may not exclude any
de minis thresholds contained in Commission
Regulation 23.151. 17 CFR 23.100 and 23.151.
262 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100
(definition of BHC equivalent risk-weighted assets).
261 Specifically,
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on a percentage of the margin for
uncleared swap transactions. The
Commission notes, however, that the
UK PRA Capital Rules impose capital
and liquidity requirements that may
compensate for the lack of direct
analogue to the 8 percent uncleared
swap margin requirement. Specifically,
as discussed above, under the UK PRA
Capital Rules, the total risk exposure
amount is computed as the sum of the
PRA-designated UK nonbank SD’s
capital charges for market risk, credit
risk, settlement risk, CVA risk of OTC
derivatives instruments, and operational
risk.263 Notably, the UK PRA Capital
Rules require that PRA-designated UK
nonbank SDs, including firms that do
not use internal models, calculate
capital charges for operational risk as a
separate component of the total risk
exposure amount. The UK PRA Capital
Rules also impose separate liquidity
requirements designed to ensure that
the PRA-designated UK nonbank SDs
can meet both short- and long-term
obligations, in addition to the general
requirement to maintain processes and
systems for the identification of
liquidity risk.264 In comparison, the
Commission requires nonbank SDs to
maintain a risk management program
covering liquidity risk, among other risk
categories, but does not have a distinct
liquidity requirement.265
As such, the Commission
preliminarily believes the inclusion of
an operational risk charge in the PRAdesignated UK nonbank SD’s total risk
exposure amount in all circumstances,
and the existence of separate liquidity
requirements, will achieve a comparable
263 UK
CRR, Article 92(3).
specifically, the UK PRA Capital Rules
impose separate liquidity buffers and ‘‘stable
funding’’ requirements designed to ensure that
PRA-designated UK nonbank SDs can cover both
long-term obligations and short-term payment
obligations under stressed conditions for 30 days.
PRA Rulebook, CRR Firms, Liquidity (CRR) Part,
Chapter 4 Liquidity (Part Six CRR), Article 412–413.
In addition, PRA-designated UK nonbank SDs are
required to maintain robust strategies, policies,
processes, and systems for the identification of
liquidity risk over an appropriate set of time
horizons, including intra-day. PRA Rulebook, CRR
Firms, Internal Liquidity Adequacy Assessment
Part.
265 Specifically, CFTC Regulation 23.600(b)
requires each SD to establish, document, maintain,
and enforce a system of risk management policies
and procedures designed to monitor and manage
the risks related to swaps, and any products used
to hedge swaps, including futures, options, swaps,
security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other
derivatives. The elements of the SD’s risk
management program are required to include the
identification of risks and risk tolerance limits with
respect to applicable risks, including operational,
liquidity, and legal risk, together with a description
of the risk tolerance limits set by the SD and the
underlying methodology in written policies and
procedures. 17 CFR 23.600.
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outcome to the Commission’s
requirement for nonbank SDs to hold
regulatory capital in excess of 8 percent
of its uncleared swap margin amount. In
that regard, the Commission, in
establishing the requirement that a
nonbank SD must maintain a level of
regulatory capital in excess of 8 percent
of the uncleared swap margin amount
associated with the firm’s swap
transactions, stated that the intent of the
requirement was to establish a method
of developing a minimum amount of
required capital for a nonbank SD to
meet its obligations as an SD to market
participants, and to cover potential
operational, legal, and liquidity risks.266
d. Preliminary Finding of Comparability
Based on a principles-based, holistic
assessment, the Commission has
preliminarily determined, subject to the
proposed condition below, and further
subject to its consideration of public
comments to the proposed Capital
Comparability Determination and Order,
that the purpose and effect of the UK
PRA Capital Rules and the CFTC Capital
Rules are comparable. In this regard, the
UK PRA Capital Rules and the CFTC
Capital Rules are both designed to
require a nonbank SD to maintain a
sufficient amount of qualifying
regulatory capital and subordinated debt
to absorb losses resulting from the firm’s
business activities, and decreases in the
value of firm assets, without the
nonbank SD becoming insolvent.
The Commission invites comment on
the UK Application, the relevant UK
laws and regulations, and the
Commission’s analysis above regarding
its preliminary determination that,
subject to the $20 million minimum
capital requirement, the UK PRA Capital
Rules and the CFTC Capital Rules are
comparable in purpose and effect and
achieve comparable outcomes with
respect to the minimum regulatory
capital requirements and the calculation
of regulatory capital for nonbank SDs.
The Commission also specifically seeks
public comment on the question of
whether the requirements under the UK
PRA Capital Rules that PRA-designated
UK nonbank SDs calculate an
operational risk exposure as part of the
firm’s total risk exposure amount and
meet separate liquidity requirements are
sufficiently comparable in purpose and
effect to the Commission’s requirement
for a nonbank SD to hold regulatory
capital equal to or greater than 8 percent
of its uncleared swap margin amount.
D. Nonbank Swap Dealer Financial
Reporting Requirements
1. CFTC Financial Recordkeeping and
Reporting Rules for Nonbank Swap
Dealers
The CFTC Financial Reporting Rules
impose financial recordkeeping and
reporting requirements on nonbank SDs.
The CFTC Financial Reporting Rules
require each nonbank SD to prepare and
keep current ledgers or similar records
summarizing each transaction affecting
the nonbank SD’s asset, liability,
income, expense, and capital
accounts.267 The nonbank SD’s ledgers
and similar records must be prepared in
accordance with generally accepted
accounting principles as adopted in the
United States (‘‘U.S. GAAP’’), except
that if the nonbank SD is not otherwise
required to prepare financial statements
in accordance with U.S. GAAP, the
nonbank SD may prepare and maintain
its accounting records in accordance
with International Financial Reporting
Standards (‘‘IFRS’’) issued by the
International Accounting Standards
Board.268
The CFTC Financial Reporting Rules
also require each nonbank SD to prepare
and file with the Commission and with
NFA periodic unaudited and annual
audited financial statements.269 A
nonbank SD that elects the TNW
Approach is required to file unaudited
financial statements within 17 business
days of the close of each quarter, and its
annual audited financial statements
within 90 days of its fiscal year-end.270
A nonbank SD that elects the NLA
Approach or the Bank-Based Approach
is required to file unaudited financial
statements within 17 business days of
the end of each month, and to file its
annual audited financial statements
within 60 days of its fiscal year-end.271
The CFTC Financial Reporting Rules
provide that a nonbank SD’s unaudited
financial statements must include: (i) a
statement of financial condition; (ii) a
statement of income/loss; (iii) a
statement of changes in liabilities
subordinated to claims of general
creditors; (iv) a statement of changes in
ownership equity; (v) a statement
demonstrating compliance with and
calculation of the applicable regulatory
requirement; and (vi) such further
material information necessary to make
the required statements not
misleading.272 The annual audited
267 17
CFR 23.105(b).
268 Id.
269 17
270 17
CFR 23.105(d) and (e).
CFR 23.105(d)(1) and (e)(1).
271 Id.
266 See
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financial statements must include: (i) a
statement of financial condition; (ii) a
statement of income/loss; (iii) a
statement of cash flows; (iv) a statement
of changes in liabilities subordinated to
claims of general creditors; (v) a
statement of changes in ownership
equity; (vi) a statement demonstrating
compliance with and calculation of the
applicable regulatory capital
requirement; (vii) appropriate footnote
disclosures; and (viii) a reconciliation of
any material differences from the
unaudited financial report prepared as
of the nonbank SD’s year-end date.273
A nonbank SD that has obtained
approval from the Commission or NFA
to use internal capital models also must
submit certain model metrics, such as
aggregate VaR and counterparty credit
risk information, each month to the
Commission and NFA.274 A nonbank SD
also is required to provide the
Commission and NFA with a detailed
list of financial positions reported at fair
market value as part of its monthly
unaudited financial statements.275 Each
nonbank SD is also required to provide
information to the Commission and
NFA regarding its counterparty credit
concentration for the 15 largest
exposures in derivatives, a summary of
its derivatives exposures by internal
credit ratings, and the geographical
distribution of derivatives exposures for
the 10 largest countries.276
CFTC Financial Reporting Rules also
require a nonbank SD to attach to each
unaudited and audited financial report
an oath or affirmation that to the best
knowledge and belief of the individual
making the affirmation the information
contained in the financial report is true
and correct.277 The individual making
the oath or affirmation must be a duly
authorized officer if the nonbank SD is
a corporation, or one of the persons
specified in the regulation for business
organizations that are not
corporations.278
The CFTC Financial Reporting Rules
further require a nonbank SD to make
certain financial information publicly
available by posting the information on
its public website.279 Specifically, a
nonbank SD must post on its website a
statement of financial condition and a
statement detailing the amount of the
nonbank SD’s regulatory capital and the
273 17
CFR 23.105(e)(4).
CFR 23.105(k) and (l) and appendix B to
subpart E of part 23.
275 17 CFR 23.105(l) and appendix B to subpart
E of part 23.
276 17 CFR 23.105(l) in Schedules 2, 3, and 4,
respectively.
277 17 CFR 23.105(f).
278 Id.
279 17 CFR 23.105(i).
274 17
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minimum regulatory capital
requirement based on its audited
financial statements and based on its
unaudited financial statements that are
as of a date that is six months after the
nonbank SD’s audited financial
statements.280 Such public disclosure is
required to be made within 10 business
days of the filing of the audited
financial statements with the
Commission, and within 30 calendar
days of the filing of the unaudited
financial statements required with the
Commission.281 A nonbank SD also
must obtain written approval from NFA
to change the date of its fiscal year-end
for financial reporting.282
The CFTC Financial Reporting Rules
also require a nonbank SD to provide
the Commission and NFA with
information regarding the custodianship
of margin for uncleared swap
transactions (‘‘Margin Report’’).283 The
Margin Report must contain: (i) the
name and address of each custodian
holding initial margin or variation
margin that is required for uncleared
swaps subject to the CFTC margin rules
(‘‘uncleared margin rules’’), on behalf of
the nonbank SD or its swap
counterparties; (ii) the amount of initial
and variation margin required by the
uncleared margin rules held by each
custodian on behalf of the nonbank SD
and on behalf its swap counterparties;
and (iii) the aggregate amount of initial
margin that the nonbank SD is required
to collect from, or post with, swap
counterparties for uncleared swap
transactions subject to the uncleared
margin rules.284 The Commission
requires this information in order to
monitor the use of custodians by
nonbank SDs and their swap
counterparties. Such information assists
the Commission in monitoring the
safety and soundness of a nonbank SD
by verifying whether the firm is current
with its swap counterparties with
respect to the posting and collecting of
margin required by the uncleared
margin rules. By requiring the nonbank
SD to report the required amount of
margin to be posted and collected, and
the amount of margin that is actually
posted and collected, the Commission
could identify potential issues with the
margin practices and compliance by
nonbank SDs that may hinder the ability
of the firm to meet its obligations to
market participants. The Margin Report
also allows the Commission to identify
custodians used by nonbank SDs and
280 Id.
281 Id.
282 17
283 17
CFR 23.105(g).
CFR 23.105(m).
284 Id.
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their counterparties, which may permit
the Commission to assess potential
market issues, including a concentration
of custodial services by a limited
number of banks.
2. PRA-Designated UK Nonbank Swap
Dealer Financial Reporting
Requirements
The UK PRA Financial Reporting
Rules impose financial reporting
requirements on a PRA-designated UK
nonbank SD that are designed to
provide the PRA with a comprehensive
view of the financial information and
capital position of the firm.
Specifically, Article 430 of the
Reporting (CRR) Part of the PRA
Rulebook requires a PRA-designated UK
nonbank SD to report information
concerning its capital and financial
condition, including information on the
firm’s capital requirements, leverage
ratio, large exposures, and liquidity
requirements.285 PRA-designated UK
nonbank SDs must follow the templates
and instructions provided in the PRA
Rulebook for purposes of the prudential
requirements reporting referred to
COREP.286 Under the COREP
requirements, PRA-designated UK
nonbank SDs are required to provide, on
a quarterly basis,287 calculations in
relation to the PRA-designated UK
nonbank SD’s capital and capital
requirements,288 capital ratios and
capital levels,289 and market risk,290
among other items.
In addition to the prudential
requirements reporting, Article 430(3) of
the Reporting (CRR) Part of the PRA
Rulebook imposes financial information
reporting on PRA-designated UK
nonbank SDs that are subject to Section
403(1) of the Companies Act 2006 (i.e.,
entities that are parent companies 291
and report on a consolidated basis using
UK-adopted IFRS and that issue
securities admitted to trading on a UK285 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 4 Reporting (Part Seven A CRR), Rule
1.
286 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions.
287 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, 5 Reporting Requirements, Chapter 3 Format
and Frequency of Reporting on Own Funds, Own
Funds Requirements.
288 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions, Annex
I, Templates C 01.00 and C 02.00.
289 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions, Annex
I, Template C 03.00.
290 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions, Annex
I, Template C 02.00.
291 A parent company (i.e., ‘‘parent undertaking’’)
is defined in Companies Act 2006, Section 1162.
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regulated market).292 The relevant
reporting templates and instructions,
referred to as FINREP, are included in
Chapter 6 of the Reporting (CRR) Part of
the PRA Rulebook. Under the FINREP
requirements, PRA-designated UK
nonbank SDs subject to the
requirements of Article 430(3) of the
Reporting (CRR) Part of the PRA
Rulebook are required to provide the
following documents to the PRA, among
other items: (i) on a quarterly basis, a
balance sheet statement (or statement of
financial position) that reflects the PRAdesignated UK nonbank SD’s financial
condition; 293 (ii) on a quarterly basis, a
statement of profit or loss; 294 (iii) on a
quarterly basis, a breakdown of financial
liabilities by product and by
counterparty sector; 295 (iv) on a
quarterly basis, a listing of subordinated
financial liabilities; 296 and (v) on an
annual basis, a statement of changes in
equity.297
Under the FINREP requirements, a
PRA-designated UK nonbank SD subject
to the requirements of Article 430(3) of
the Reporting (CRR) Part of the PRA
Rulebook is also required to provide the
PRA with additional financial
information, including a breakdown of
its loans and advances by product and
type of counterparty,298 as well as
detailed information regarding its
292 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 4 Reporting (Part Seven A CRR),
Article 430, Rule 3.
293 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Templates 1.1., 1.2., and 1.3 at Annex III (for
reporting according to IFRS) and Templates 1.1.,
1.2., and 1.3 at Annex IV (for reporting according
to national accounting frameworks).
294 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Template 2 at Annex III (for reporting according to
IFRS) and Template 2 at Annex IV (for reporting
according to national accounting frameworks).
295 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Template 8.1 at Annex III (for reporting according
to IFRS) and Template 8.1 at Annex IV (for
reporting according to national accounting
frameworks).
296 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Template 8.2 at Annex III (for reporting according
to IFRS) and Template 8.2. at Template 8.2 at
Annex IV (for reporting according to national
accounting frameworks).
297 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Template 46 at Annex III (for reporting according
to IFRS) and Template 46 at Annex IV (for reporting
according to national accounting frameworks).
298 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Templates 5.1 and 6.1 at Annex III (for reporting
according to IFRS) and Templates 5.1 and 6.1 at
Annex IV (for reporting according to national
accounting frameworks).
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derivatives trading activities,299
collateral and guarantees.300
For PRA-designated UK nonbank SD
that are not subject to financial
information reporting under Article
430(3) of the Reporting (CRR) Part of the
PRA Rulebook, the Regulatory Reporting
Part of the PRA Rulebook dictates the
applicable reporting requirements.301
Specifically, as firms that fall into
Regulated Activity Group 3 (‘‘RAG 3’’),
PRA-designated UK nonbank SDs are
required to provide the following
documents to the PRA, among other
items: (i) on a quarterly basis, a balance
sheet statement (or statement of
financial position) that reflects the PRAdesignated UK nonbank SD’s financial
condition; 302 (ii) on a quarterly basis, a
statement of profit or loss; 303 and (iii)
on an annual basis, an annual report
and accounts.304 The Applicants
represented that the six UK PRAdesignated nonbank SDs currently
registered with the Commission are
designated as RAG 3 firms and are
required to provide the aforementioned
documents.305
Furthermore, all PRA-designated UK
nonbank SDs are required to prepare
annual audited accounts and a strategic
report (together, ‘‘annual audited
financial report’’) pursuant to Parts 15
299 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Template 10 at Annex III (for reporting according
to IFRS) and Template 10 at Annex IV (for reporting
according to national accounting frameworks).
300 PRA Rulebook, CRR Firms, Reporting (CRR)
Part, Chapter 6 Templates and Instructions,
Template 13 at Annex III (for reporting according
to IFRS) and Template 13 at Annex IV (for reporting
according to national accounting frameworks).
301 As indicated by the Applicants, the Regulatory
Reporting Part of the PRA Rulebook applies to all
PRA-designated UK nonbank SDs. See Responses to
Staff Questions dated October 5, 2023.
302 PRA Rulebook, CRR Firms, Regulatory
Reporting Part, Chapter 9 Regulated Activity Group
3, Rule 9.2 (referencing Templates 1.1., 1.2., and 1.3
at Annex III and Templates 1.1., 1.2., and 1.3 at
Annex IV of Chapter 6 of the Reporting (CRR) Part)
and Rule 9.3.
303 PRA Rulebook, CRR Firms, Regulatory
Reporting Part, Chapter 9 Regulated Activity Group
3, Rule 9.2 (referencing Template 2 at Annex III and
Template 2 at Annex IV of Chapter 6 of the
Reporting (CRR) Part) and Rule 9.3.
304 PRA Rulebook, CRR Firms, Regulatory
Reporting Part, Chapter 9 Regulated Activity Group
3, Rule 9.2 and Rule 9.3.
305 See Response to Staff Questions of October 5,
2023. For the avoidance of doubt, as represented by
the Applicants, the six PRA-designated UK
nonbank SDs currently registered with the
Commission are subject to the RAG 3 requirements
in the Regulatory Reporting Part of the PRA
Rulebook but are not subject the FINREP
requirements set forth in Article 430(3) of the
Reporting (CRR) Part of the PRA Rulebook. As such,
the six PRA-designated UK nonbank SDs currently
registered with the Commission are required to
submit to the PRA only Templates 1 through 3 of
FINREP.
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8049
and 16 of the Companies Act 2006.306
The audit of the accounts and report is
required to be performed by one or more
independent statutory auditors, which
have the required skill, resources, and
experience to perform their duties based
on the complexity of the firm’s business
and the regulatory requirements to
which the firm is subject.307 PRAdesignated UK nonbank SDs must
submit the annual audited financial
report to the PRA within 80 business
days from the firm’s accounting
reference date.308 In addition, under
generally applicable company law
requirements, PRA-designated UK
nonbank SDs are required to submit the
annual audited financial report to the
UK Registrar of Companies.309 The
registrar makes the report available to
the public on its website, free of
charge.310
The annual audited accounts must
comprise, at a minimum, a balance
sheet, a profit and loss statement, and
notes about the accounts.311 The
auditor’s audit report must include: (i)
a description of the annual accounts
subject to the audit and the financial
reporting framework that was applied in
their preparation; (ii) a description of
the scope of the audit, which must
specify the auditing standards used to
conduct the audit; (iii) an audit opinion
stating whether the annual accounts
give a true and fair view of the state of
affairs and/or the profit and loss of the
firm, as applicable, and whether the
annual accounts have been prepared in
accordance with the relevant financial
reporting framework; and (iv) a
306 Companies Act 2006, Sections 393 to 414D
and 475. Section 475 provides for an exemption
from the audit requirement for certain entities (i.e.,
‘‘small companies’’, qualifying ‘‘subsidiary
companies’’ and ‘‘dormant companies.’’) None of
the six PRA-designated UK nonbank SD, however,
falls into the exempt categories. See Responses to
Staff Questions dated October 5, 2023.
307 Companies Act 2006, Section 485 et seq.; see
also PRA Rulebook, CRR Firms, Auditors Part, Rule
3 Auditors’ Qualifications, and Rule 4 Auditors’
Independence.
308 PRA Rulebook, CRR Firms, Regulatory
Reporting Part, Chapter 9 Regulatory Activity Group
3, Rules 9.1. and 9.4. The ‘‘accounting reference
date’’ is determined in accordance with Section 391
of the Companies Act 2006 and depending on the
firm’s date of incorporation.
309 See Companies Act 2006, Section 441. The
deadline for filing the annual audited financial
report with the UK Registrar of Companies is nine
months from the firm’s accounting reference date
for private companies and six months from the
firm’s accounting reference date for public
companies. Id., Articles 442 (setting forth the filing
deadlines by category of firm) and 391 (defining the
terms ‘‘accounting reference period’’ and
accounting reference date’’).
310 See Companies Act 2006, Sections 1080 and
1085. Information filed with the UK Registrar of
Companies is available at: https://www.gov.uk/
government/organisations/companies-house.
311 Companies Act 2006, Section 396.
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reference to any matters emphasized by
the auditor that did not qualify the audit
opinion.312
The strategic report is required to
include a review of the development
and performance of the PRA-designated
UK nonbank SD’s during the financial
year and a description of the principal
risks and uncertainties that the firm
faces.313 The auditors are required to
express an opinion on whether the
strategic report is consistent with the
accounts for the same financial year,
and whether the strategic report has
been prepared in accordance with
applicable legal requirements.314 The
opinion also must state whether the
auditor has identified material
misstatements in the strategic report
and, if so, describe the misstatement.315
In addition, the SEC’s UK Order
granting substituted compliance for
financial reporting to UK nonbank
SBSDs, as supplemented by the SEC
Order on Manner and Format of Filing
Unaudited Financial and Operational
Information, require a UK nonbank
SBSD to file an unaudited SEC Form X–
17A–5 Part II (‘‘FOCUS Report’’) with
the SEC on a monthly basis.316 The
FOCUS Report is required to include,
among other statements and schedules:
(i) a statement of financial condition; (ii)
a statement of the UK nonbank SBSD’s
capital computation in accordance with
home country Basel-Based
requirements; (iii) a statement of
income/loss; and (iv) a statement of
capital withdrawals.317 A UK nonbank
SBDS is required to file its FOCUS
Report with the SEC within 35 calendar
days of the month end.318
3. Commission Analysis
The Commission has reviewed the UK
Application and the relevant UK laws
and regulations, and has preliminarily
determined that, subject to the proposed
conditions described below, the
financial reporting requirements of the
UK PRA Financial Reporting Rules are
comparable to CFTC Financial
Reporting Rules in purpose and effect as
they are intended to provide the PRA
and the Commission, respectively, with
financial information to monitor and
assess the financial condition of
nonbank SDs and their ability to absorb
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312 Id.,
Section 495.
Section 414C.
314 Id., Section 496.
315 Id.
316 See, UK Order. See also, SEC Order on
Manner and Format of Filing Unaudited Financial
and Operational Information.
317 See, SEC Order on Manner and Format of
Filing Unaudited Financial and Operational
Information.
318 Id.
313 Id.,
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decreases in firm assets and increases in
firm liabilities, and to cover losses from
business activities, including swap
dealing activities, without the firm
becoming insolvent.
The UK PRA Financial Reporting
Rules require PRA-designated UK
nonbank SDs to prepare and submit to
the PRA on a quarterly basis unaudited
financial information that includes a
statement of financial condition and a
statement of profit or loss. Under the
FINREP reporting requirements, a PRAdesignated UK nonbank SD subject to
the requirements set forth in Article
430(3) of the Reporting (CRR) Part of the
PRA Rulebook is also required to
provide the PRA with additional
financial information, including: (i) a
schedule of the breakdown of financial
liabilities by product and by
counterparty sector; (ii) a breakdown of
its loans and advances by product and
type of counterparty; and (iii) detailed
information regarding its derivatives
trading activities, collateral, and
guarantees. PRA-designated UK
nonbank SDs subject to the Regulatory
Reporting Part of the PRA Rulebook are
not required to submit such additional
financial information. To the extent the
Commission believes some of this
additional information is necessary to
the exercise of its and NFA’s oversight
function, the Commission is proposing,
as noted below, to require the
submission of such information as a
condition to the Capital Comparability
Determination Order.
In addition, under the COREP
reporting requirement, all PRAdesignated UK nonbank SDs are
required to provide the PRA on a
quarterly basis with calculations in
relation to the PRA-designated UK
nonbank SD’s capital requirements and
capital ratios, among other items. The
UK PRA Financial Reporting Rules
further require all PRA-designated UK
nonbank SDs to prepare and publish an
annual audited financial report. The
annual audited financial report is
required to include a statement of
financial condition and a statement of
profit or loss, and must also include
relevant notes to the financial
statements.319
The Commission preliminarily finds
that the UK PRA Financial Reporting
Rules impose reporting requirements
that are comparable with respect to
overall form and content to the CFTC
Financial Reporting Rules, which
require each nonbank SD to file, among
other items, periodic unaudited
financial reports with the Commission
and NFA that contain at a minimum: (i)
319 Companies
PO 00000
Frm 00026
Act 2006, Section 396.
Fmt 4701
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a statement of financial condition; (ii) a
statement of profit or loss; and (iii) a
statement demonstrating compliance
with the capital requirements.
Accordingly, the Commission has
preliminarily determined that a PRAdesignated UK nonbank SD may comply
with the financial reporting
requirements contained in Commission
Regulation 23.105 by complying with
the corresponding UK PRA Financial
Reporting Rules, subject to the
conditions set forth below.320
The Commission is proposing to
condition the Capital Comparability
Determination Order on a PRAdesignated UK nonbank SD providing
the Commission and NFA with copies of
the relevant templates of the FINREP
reports and COREP reports that
correspond to the PRA-designated UK
nonbank SD’s statement of financial
condition, statement of income/loss,
and statement of regulatory capital, total
risk exposure, and capital ratios. These
templates consist of FINREP templates
1.1 (Balance Sheet Statement: assets),
1.2 (Balance Sheet Statement:
liabilities), 1.3 (Balance Sheet
Statement: equity), and 2 (Statement of
profit or loss), and COREP templates 1
(Own Funds), 2 (Own Funds
Requirements) and 3 (Capital Ratios).
The Commission also notes that PRAdesignated UK nonbank SDs submit
COREP templates in addition to the
ones listed above to the PRA. These
templates generally provide supporting
detail to the core templates that the
Commission is proposing to require
from each PRA-designated UK nonbank
SD. The Commission is not proposing to
require a PRA-designated UK nonbank
SD to file these additional COREP
templates as a condition to the Capital
Comparability Order, and alternatively
would exercise its authority under
Commission Regulation 23.105(h) to
direct PRA-designated UK nonbank SDs
to provide such additional information
to the Commission and NFA on an ad
hoc basis as necessary to oversee the
financial condition of the firms.321
As noted in Section D.2. of this
Determination, the UK PRA Financial
Reporting Rules require PRA-designated
UK nonbank SDs to submit the
unaudited FINREP and COREP
templates to PRA on a quarterly basis.
320 A PRA-designated UK nonbank SD that
qualifies and elects to seek substituted compliance
with the UK PRA Capital Rules must also seek
substituted compliance with the UK PRA Financial
Reporting Rules.
321 Commission Regulation 23.105(h) provides
that the Commission or NFA may, by written
notice, require any nonbank SD to file financial or
operational information as may be specified by the
Commission or NFA. 17 CFR 23.105(h).
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The CFTC Financial Reporting Rules
contain a more frequent reporting
requirement by requiring nonbank SDs
that elect the Bank-Based Approach to
file unaudited financial information
with the Commission and NFA, on a
monthly basis.322 The financial
statement reporting requirements are an
integral part of the Commission’s and
NFA’s oversight programs to effectively
and timely monitor nonbank SDs’
compliance with capital and other
financial requirements, and for
Commission and NFA staff to assess the
overall financial condition and business
operations of nonbank SDs. The
Commission has extensive experience
with monitoring the financial condition
of registrants through the receipt of
financial statements, including FCMs
and, more recently, nonbank SDs. Both
FCMs and nonbank SDs that elect the
Bank-Based Approach or NLA
Approach file financial statements with
the Commission and NFA on a monthly
basis. The Commission preliminarily
believes that receiving financial
information from PRA-designated UK
nonbank SDs on a quarterly basis is not
comparable with the CFTC Financial
Reporting Rules and would impede the
Commission’s and NFA’s ability to
effectively and timely monitor the
financial condition of PRA-designated
UK nonbank SDs for the purposes of
assessing their safety and soundness, as
well as their ability to meet obligations
to creditors and counterparties without
becoming insolvent. Therefore, the
Commission is preliminarily proposing
to include a condition in the Capital
Comparability Determination Order to
require PRA-designated UK nonbank
SDs to file the applicable templates of
the FINREP reports and COREP reports
with the Commission and NFA on a
monthly basis. The Commission also is
proposing to condition the Capital
Comparability Determination Order on
the PRA-designated UK nonbank SD
filing the above-listed templates of the
FINREP reports and COREP reports with
the Commission and NFA within 35
calendar days of the end of each
month.323
The Commission is further proposing
that in lieu of filing such FINREP and
COREP reports, PRA-designated UK
nonbank SDs that are registered with the
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322 Commission
Regulation 23.105(d) (17 CFR
23.105(d)).
323 The proposed condition for PRA-designated
UK nonbank SDs to file monthly unaudited
financial information with the Commission and
NFA is consistent with proposed conditions
contained in the Commission’s proposed Capital
Comparability Determinations for Japanese nonbank
SDs, Mexican nonbank SDs, and EU nonbank SDs.
See Proposed Japan Order, Proposed Mexico Order,
and Proposed EU Order.
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SEC as UK nonbank SBSDs could satisfy
this condition by filing with the CFTC
and NFA, on a monthly basis, copies of
the unaudited FOCUS Reports that the
PRA-designated UK nonbank SDs are
required to file with the SEC pursuant
to the SEC UK Order, as supplemented
by the SEC Order on Manner and
Format of Filing Unaudited Financial
and Operational Information. The
FOCUS Report is required to include,
among other statements and schedules:
(i) a statement of financial condition; (ii)
a statement of the UK nonbank SBSD’s
capital computation in accordance with
home country Basel-Based
requirements; (iii) a statement of
income/loss; and (iv) a statement of
capital withdrawals.324
The filing of a FOCUS Report would
be at the election of the PRA-designated
UK nonbank SD as an alternative to the
filing of unaudited FINREP and COREP
templates that such firms would
otherwise be required to file with the
Commission and NFA pursuant to the
proposed Order. All six of the PRAdesignated UK nonbank SDs are
currently registered with the SEC as UK
nonbank SBSDs and would be eligible
to file copies of their monthly FOCUS
Report with the Commission and NFA
in lieu of the FINREP and COREP
templates and Schedule 1. A PRAdesignated UK nonbank SD electing to
file copies of its monthly FOCUS Report
would be required to submit the reports
to the Commission and NFA within 35
calendar days of the end of each
month.325
In addition, the Commission is
proposing to condition the Capital
Comparability Determination Order on a
PRA-designated UK nonbank SD
submitting to the Commission and NFA
copies of the PRA-designated UK
nonbank SD’s annual audited financial
report that is required to be prepared
pursuant to the Companies Act 2006.326
PRA-designated UK nonbank SDs would
324 See, SEC Order on Manner and Format of
Filing Unaudited Financial and Operational
Information.
325 Commission Regulation 23.105(d)(3) currently
provides that a nonbank SD or nonbank MSP that
is also registered with the SEC as a broker or dealer,
an SBSD, or a major security-based swap
participant may elect to file a FOCUS Report in lieu
of the financial reports required by the Commission.
In a separate rulemaking, the Commission has
proposed to amend Regulation 23.105(d)(3) to
mandate the filing of a FOCUS Report by such
dually-registered entities, including duallyregistered non-U.S. nonbank SDs, in lieu of the
Commission’s financial reports. See CFTC Press
Release 8836–23 issued on December 15, 2023,
available at cftc.gov. If the Commission adopts such
a requirement, the Commission would also require
PRA-designated UK nonbank SDs that are registered
with the SEC as UK nonbank SBSDs to file FOCUS
Reports with the Commission.
326 Companies Act 2006, Parts 15 and 16.
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8051
be required to file the annual audited
financial report with the Commission
and NFA on the earlier of the date the
report is filed with the PRA or the date
the report is required to be filed with
the PRA.327
The Commission is also proposing to
condition the Capital Comparability
Determination Order on the PRAdesignated UK nonbank SD providing
the reports and statements with
balances converted to U.S. dollars.328
The Commission, however, recognizes
that the requirement to convert accounts
denominated in British pound to U.S.
dollars on the annual audited financial
report may impact the opinion provided
by the independent auditor. The
Commission is therefore proposing to
accept the annual audited financial
report denominated in British pound.
The Commission is proposing to
impose these conditions as they are
necessary to ensuring that the CFTC
Financial Reporting Rules and UK PRA
Financial Reporting Rules,
supplemented by the proposed
conditions, are comparable and provide
the Commission and NFA with
appropriate financial information to
effectively monitor the financial
condition of PRA-designated UK
nonbank SDs. Frequent financial
reporting is a central component of the
Commission’s and NFA’s programs for
monitoring and assessing the safety and
soundness of nonbank SDs as required
under section 4s(e) of the CEA.
Although, as further discussed in
Section F.2. below, the Commission
preliminarily believes that the PRA has
the necessary powers to supervise and
enforce compliance by PRA-designated
UK nonbank SDs with applicable capital
and financial reporting requirements,
the Commission is proposing the
conditions to facilitate the timely access
to information allowing the Commission
and NFA to effectively monitor and
assess the ongoing financial condition of
all nonbank SDs, including PRAdesignated UK nonbank SDs, to help
ensure their safety and soundness and
their ability to meet their financial
obligations to customers, counterparties,
and creditors.
The Commission preliminarily
considers that its approach of requiring
327 PRA-designated UK nonbank SDs are required
to submit the annual audited financial report to the
PRA within 80 business days of the firm’s
accounting reference date. See PRA Rulebook,
Regulatory Reporting Part, Rule 9.1.
328 The conversion of account balances from
British pound to U.S. dollars is not required to be
subject to the audit of the independent auditor. A
PRA-designated UK nonbank SD must report the
exchange rate that it used to convert balances from
British pound to U.S. dollars to the Commission
and NFA as part of the financial reporting.
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PRA-designated UK nonbank SDs to
provide the Commission and NFA with
the selected FINREP and COREP
templates and the annual audited
financial report that the firms currently
file with the PRA strikes an appropriate
balance of ensuring that the
Commission receives the financial
reporting necessary for the effective
monitoring of the financial condition of
the nonbank SDs, while also recognizing
the existing regulatory structure of the
UK PRA Financial Reporting Rules.
Under the proposed conditions, with
limited exceptions, the PRA-designated
UK nonbank SD would not be required
to prepare different financial reports
and statements for filing with the
Commission, but would be required to
prepare selected reports and statements
in the content and format used for
submissions to the PRA and convert the
balances to U.S. dollars so that
Commission staff may efficiently
analyze the financial information.
Although the Commission is proposing
to require submission of certain reports
(i.e., selected FINREP and COREP
templates) on a more frequent basis
(monthly instead of quarterly as
required by the UK PRA Financial
Reporting Rules), the proposed
conditions provide the PRA-designated
UK nonbank SDs with 35 calendar days
from the end of each month to convert
balances to U.S. dollars. In addition,
PRA-designated UK nonbank SDs that
are registered as SBSDs with the SEC
would have the option of filing a copy
of the FOCUS Report they submit to the
SEC in lieu of the FINREP and COREP
templates. The Commission
preliminarily believes that by requiring
that PRA-designated UK nonbank SDs
file unaudited financial reports on a
monthly basis instead of quarterly, the
Commission would help ensure that the
CFTC Financial Reporting Rules and the
UK PRA Financial Reporting Rules
achieve a comparable outcome.
The Commission is also proposing to
condition the Capital Comparability
Determination Order on PRA-designated
UK nonbank SDs filing with the
Commission and NFA, on a monthly
basis, the aggregate securities,
commodities, and swap positions
information set forth in Schedule 1 of
appendix B to subpart E of part 23.329
The Commission is proposing to require
329 Schedule 1 of appendix B to subpart E of part
23 includes a nonbank SD’s holding of U.S Treasury
securities, U.S. government agency debt securities,
foreign debt and equity securities, money market
instruments, corporate obligations, spot
commodities, cleared and uncleared swaps, cleared
and non-cleared security-based swaps, and cleared
and uncleared mixed swaps in addition to other
position information.
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that Schedule 1 be filed with the
Commission and NFA as part of the
PRA-designated UK nonbank SD’s
monthly submission of selected FINREP
and COREP templates or FOCUS Report,
as applicable. Schedule 1 provides the
Commission and NFA with detailed
information regarding the financial
positions that a nonbank SD holds as of
the end of each month, including the
firm’s swap positions, which will allow
the Commission and NFA to monitor
the types of investments and other
activities that the firm engages in and
will enhance the Commission’s and
NFA’s ability to monitor the safety and
soundness of the firm.
The Commission is also proposing to
condition the Capital Comparability
Determination Order on a PRAdesignated UK nonbank SD submitting
with each set of selected FINREP and
COREP templates, annual audited
financial report, and the applicable
Schedule 1, a statement by an
authorized representative or
representatives of the PRA-designated
UK nonbank SD that to the best
knowledge and belief of the person(s)
the information contained in the
respective reports and statements is true
and correct, including the conversion of
balances in the statements to U.S.
dollars, as applicable. The statement by
the authorized representative or
representatives of the PRA-designated
UK nonbank SD is in lieu of the oath or
affirmation required of nonbank SDs
under Commission Regulation 23.105(f),
and is intended to ensure that reports
and statements filed with the
Commission and NFA are prepared and
submitted by firm personnel with
knowledge of the financial reporting of
the firm who can attest to the accuracy
of the reporting and translation.
The Commission is further proposing
to condition the Capital Comparability
Determination Order on a PRAdesignated UK nonbank SD filing the
Margin Report specified in Commission
Regulation 23.105(m) with the
Commission and NFA. The Margin
Report contains: (i) the name and
address of each custodian holding
initial margin or variation margin on
behalf of the nonbank SD or its swap
counterparties; (ii) the amount of initial
and variation margin held by each
custodian on behalf of the nonbank SD
and on behalf its swap counterparties;
and (iii) the aggregate amount of initial
margin that the nonbank SD is required
to collect from, or post with, swap
counterparties for uncleared swap
transactions.330
330 17
PO 00000
331 See Proposed Japan Order, Proposed Mexico
Order, and Proposed EU Order.
CFR 23.105(m).
Frm 00028
Fmt 4701
The Commission preliminarily
believes that receiving this margin
information from PRA-designated UK
nonbank SDs will assist in the
Commission’s assessment of the safety
and soundness of the PRA-designated
UK nonbank SDs. Specifically, the
Margin Report would provide the
Commission with information regarding
a PRA-designated UK nonbank SD’s
swap book, the extent to which it has
uncollateralized exposures to
counterparties or has not met its
financial obligations to counterparties.
This information, along with the list of
custodians holding both the firms’ and
counterparties’ collateral for swap
transactions, is expected to assist the
Commission in assessing and
monitoring potential financial impacts
to the nonbank SD resulting from
defaults on its swap transactions. The
Commission is further proposing to
require a PRA-designated UK nonbank
SD to file the Margin Report with the
Commission and NFA within 35
calendar days of the end of each month,
which corresponds with the proposed
timeframe for the PRA-designated UK
nonbank SD to file the selected FINREP
and COREP templates or FOCUS Report,
as applicable, and proposing to require
the Margin Report to be provided with
balances reported in U.S. dollars.
The Commission notes that the
proposed conditions in the UK PRA
Capital Comparability Determination
Order are consistent with the proposed
conditions set forth in the proposed
Capital Comparability Determination
Orders for Japan, Mexico, and the EU,331
and reflects the Commission’s approach
of preliminarily determining that nonU.S. nonbank SDs could meet their
financial statement reporting obligations
to the Commission by filing financial
reports currently prepared for home
country regulators, albeit in the case of
certain financial reports under a more
frequent submission schedule, and, in
certain circumstances, with balances
expressed in U.S. dollars. The
Commission’s proposed conditions also
include certain financial information
and notices that the Commission
believes are necessary for effective
monitoring of PRA-designated UK
nonbank SDs that are not currently part
of the PRA’s supervision regimes.
The Commission is not proposing to
require that a PRA-designated UK
nonbank SD that has been approved by
the PRA to use capital models files with
the Commission or NFA the monthly
model metric information contained in
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Commission Regulation 23.105(k) 332 or
that a PRA-designated UK nonbank SD
files with the Commission or NFA the
monthly counterparty credit exposure
information specified in Commission
Regulation 23.105(l) and Schedules 2, 3,
and 4 of appendix B to subpart E of part
23.333
The Commission, in making the
preliminary determination to not
require a PRA-designated UK nonbank
SD to file the model metrics and
counterparty exposures required by
Commission Regulations 23.105(k) and
(l), respectively, recognizes that NFA’s
current risk monitoring program
requires each bank SD and each
nonbank SD, including each PRAdesignated UK nonbank SD, to file risk
metrics addressing market risk and
credit risk with NFA on a monthly
basis. NFA’s monthly risk metric
information includes: (i) VaR for interest
rates, credit, foreign exchange, equities,
commodities, and total VaR; (ii) total
stressed VaR; (iii) interest rate, credit
spread, foreign exchange market, and
commodity sensitivities; (iv) total swaps
current exposure both before and after
offsetting against collateral held by the
firm; and (v) a list of the 15 largest
swaps counterparty current exposures
before collateral and net of collateral.334
Although there are differences in the
information required under Commission
Regulations 23.105(k) and (l), the NFA
risk metrics provide a level of
information that allows NFA to identify
SDs that may pose heightened risk and
to allocate appropriate NFA regulatory
oversight resources. The Commission
preliminarily believes that the proposed
financial statement reporting set forth in
the proposed Capital Comparability
Determination Order, and the risk
metric and counterparty exposure
information currently reported by
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332 Commission
Regulation 23.105(k) requires a
nonbank SD that has obtained approval from the
Commission or NFA to use internal capital models
to submit to the Commission and NFA each month
information regarding its risk exposures, including
VaR and credit risk exposure information when
applicable. The model metrics are intended to
provide the Commission and NFA with information
that would assist with the ongoing oversight and
assessment of internal market risk and credit risk
models that have been approved for use by a
nonbank SD. 17 CFR 23.105(k).
333 Commission Regulation 23.105(l) requires
each nonbank SD to provide information to the
Commission and NFA regarding its counterparty
credit concentration for the 15 largest exposures in
derivatives, a summary of its derivatives exposures
by internal credit ratings, and the geographic
distribution of derivatives exposures for the 10
largest countries in Schedules 2, 3, and 4,
respectively. 17 CFR 23.105(l).
334 See NFA Financial Requirements, Section
17—Swap Dealer and Major Swap Participant
Reporting Requirements, and Notice to Members—
Monthly Risk Data Reporting for Swap Dealers (May
30, 2017).
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nonbank SDs (including PRAdesignated UK nonbank SDs) under
NFA rules, provide the appropriate
balance of recognizing the comparability
of the UK PRA Financial Reporting
Rules to the CFTC Financial Reporting
Rules while also ensuring that the
Commission and NFA receive sufficient
data to monitor and assess the overall
financial condition of PRA-designated
UK nonbank SDs. The Commission has
access to the monthly risk metric filings
collected by NFA. In addition, the
Commission retains authority to request
PRA-designated UK nonbank SDs to
provide information regarding their
model metrics and counterparty
exposures on an ad hoc basis.
Furthermore, the Commission notes
that although the UK PRA Financial
Reporting Rules do not contain an
analogue to the CFTC’s requirements for
nonbank SDs to file monthly model
metric information and counterparty
exposures information, the PRA has
access to comparable information. More
specifically, under the UK PRA
Financial Reporting Rules, the PRA has
broad powers to request any information
necessary for the exercise of its
functions.335 As such, the PRA has
access to information allowing it to
assess the ongoing performance of risk
models and to monitor the PRAdesignated UK nonbank SD’s credit
exposures, which may be comprised of
credit exposures to primarily other UK
and EU counterparties. In addition, the
COREP reports, which PRA-designated
UK nonbank SDs are required to file
with the PRA on a quarterly basis,
include information regarding the PRAdesignated UK nonbank SD’s risk
exposure amounts, including riskweighted exposure amounts for credit
risk.336
The Commission invites public
comment on its analysis above,
including comment on the UK
Application and relevant UK PRA
Financial Reporting Rules. The
Commission also invites comment on
the proposed conditions listed above
and on the Commission’s proposal to
exclude PRA-designated UK nonbank
SDs from certain reporting requirements
outlined above. Specifically, the
Commission requests comment on its
preliminary determination to not
require PRA-designated UK nonbank
SDs to submit the information set forth
in Commission Regulations 23.105(k)
and (l). Are there specific elements of
335 See FSMA, Part XI (indicating that the PRA
has broad information gathering powers).
336 See PRA Rulebook, CRR Firms, Reporting
(CRR) Part, Chapter 6 Templates and Instructions,
Annex I.
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8053
the data required under Commission
Regulations 23.105(k) and (l) that the
Commission should require of PRAdesignated UK nonbank SDs for
purposes of monitoring model
performance?
The Commission requests comment
on the proposed filing dates for the
reports and information specified above.
Specifically, do the proposed filing
dates provide sufficient time for PRAdesignated UK nonbank SDs to prepare
the reports, and, where required,
convert balances into U.S. dollars? If
not, what period of time should the
Commission consider imposing on one
or more of the reports?
The Commission also requests
specific comment regarding the setting
of compliance dates for any new
reporting obligations that the proposed
Capital Comparability Determination
Order would impose on PRA-designated
UK nonbank SDs. In this connection, if
the Commission were to require PRAdesignated UK nonbank SDs to file the
Margin Report discussed above and
included in the proposed Order below,
how much time would PRA-designated
UK nonbank SDs need to develop new
systems or processes to capture
information that is required? Would
PRA-designated UK nonbank SDs need
a period of time to develop any systems
or processes to meet any other reporting
obligations in the proposed Capital
Comparability Determination Order? If
so, what would be an appropriate
amount of time for a PRA-designated
UK nonbank SD to develop and
implement such systems or processes?
E. Notice Requirements
1. CFTC Nonbank SD Notice Reporting
Requirements
The CFTC Financial Reporting Rules
require nonbank SDs to provide the
Commission and NFA with written
notice of certain defined events.337 The
notice provisions are intended to
provide the Commission and NFA with
an opportunity to assess whether the
information contained in the notices
indicates the existence of actual or
potential financial and/or operational
issues at a nonbank SD, and, when
necessary, allows the Commission and
NFA to engage the nonbank SD in an
effort to minimize potential adverse
impacts on swap counterparties and the
larger swaps market. The notice
provisions are part of the Commission’s
overall program for helping to ensure
the safety and soundness of nonbank
SDs and the swaps markets in general.
337 17
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The CFTC Financial Reporting Rules
require a nonbank SD to provide written
notice within specified timeframes if the
firm is: (i) undercapitalized; (ii) fails to
maintain capital at a level that is in
excess of 120 percent of its minimum
capital requirement; or (iii) fails to
maintain current books and records.338
A nonbank SD is also required to
provide written notice if the firm
experiences a 30 percent or more
decrease in excess regulatory capital
from its most recent financial report
filed with the Commission.339 A
nonbank SD also is required to provide
notice if the firm fails to post or collect
initial margin for uncleared swap and
non-cleared security-based swap
transactions or exchange variation
margin for uncleared swap and noncleared security-based swap
transactions as required by the
Commission’s uncleared swaps margin
rules or the SEC’s non-cleared securitybased swaps margin rules, respectively,
if the aggregate is equal to or greater
than: (i) 25 percent of the nonbank SD’s
required capital under Commission
Regulation 23.101 calculated for a single
counterparty or group of counterparties
that are under common ownership or
control; or (ii) 50 percent of the nonbank
SD’s required capital under Commission
Regulation 23.101 calculated for all of
the firm’s counterparties.340
The CFTC Financial Reporting Rules
further require a nonbank SD to provide
notice two business days prior to a
withdrawal of capital by an equity
holder that would exceed 30 percent of
the firm’s excess regulatory capital.341
Finally, a nonbank SD that is duallyregistered with the SEC as an SBSD or
major security based swap participant
(‘‘MSBSP’’) must file a copy of any
notice with the Commission and NFA
that the SBSD or MSBSP is required to
file with the SEC under SEC Rule 18a–
8 (17 CFR 240.18a–8).342 SEC Rule 18a–
8 requires SBSDs and MSBSPs to
provide written notice to the SEC for
comparable reporting events as in the
CFTC Capital Rule in Commission
Regulation 23.105(c), including if a
SBSD or MSBSP is undercapitalized or
fails to maintain current books and
records.
2. PRA-Designated UK Nonbank Swap
Dealer Notice Requirements
The UK capital and resolution
frameworks require PRA-designated UK
nonbank SDs to provide certain notices
338 17
CFR 23.105(c)(1), (2), and (3).
CFR 23.105(c)(4).
340 17 CFR 23.105(c)(7).
341 17 CFR 23.105(c)(5).
342 17 CFR 23.105(c)(6).
339 17
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to the PRA concerning the firm’s
compliance with relevant laws and
regulations. Specifically, the UK PRA
Financial Reporting Rules require a
PRA-designated UK nonbank SD to
provide notice to the PRA within five
business days if the firm fails to meet its
combined buffer requirement, which at
a minimum consists of a capital
conservation buffer of 2.5 percent of the
PRA-designated UK nonbank SD’s total
risk exposure amount.343 As noted
earlier, to meet its capital buffer
requirements, a PRA-designated UK
nonbank SDs must hold common equity
tier 1 capital in addition to the
minimum common equity tier 1 ratio
requirement of 4.5 percent of the firm’s
core capital requirement of 8 percent of
the firm’s total risk exposure amount.
The notice to the PRA must be
accompanied by a capital conservation
plan that sets out how the PRAdesignated UK nonbank SD will restore
its capital levels.344 The capital
conservation plan is required to include:
(i) the ‘‘maximum distributable amount’’
calculated in accordance with the PRA
rules; (ii) estimates of income and
expenditures and a forecast balance
sheet; (iii) measures to increase the
capital ratios of the PRA-designated UK
nonbank SD; and (iv) a plan and
timeframe for the increase in the capital
of the PRA-designated UK nonbank SD
with the objective of meeting fully the
combined buffer requirement.345
The PRA assesses the capital
conservation plan and will approve the
plan only if it considers that the plan
would be reasonably likely to conserve
or raise sufficient capital to enable the
PRA-designated UK nonbank SD to meet
its combined capital buffer requirement
within a timeframe that the PRA
considers to be appropriate.346 A PRAdesignated UK nonbank SD is required
to notify the PRA as early as possible
where it has identified a material risk to
its ability to meet the combined buffer
according to the capital conservation
343 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 4 Capital Conservation Measures, Rule
4.4. The combined capital buffer requirement is the
total common equity tier 1 capital required to meet
the sum of the capital conservation buffer and the
institution-specific countercyclical capital buffer.
PRA Rulebook, Capital Buffers Part, Chapter 1
Application and Definitions, Rule 1.2.
344 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 4 Capital Conservation Measures,
Rules 4.4 and 4.5.
345 PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 4 Capital Conservation Measures, Rule
4.5.
346 Supervisory Statement SS6/14 Implementing
Capital Buffers, Prudential Regulation Authority,
January 2021 (‘‘SS6/14’’), available here: https://
www.bankofengland.co.uk/prudential-regulation/
publication/2014/implementing-crdiv-capitalbuffers-ss.
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plan and timeframe approved by the
PRA.347
In addition, a PRA-designated UK
nonbank SD must notify the PRA if the
firm’s management considers that the
firm is failing or will in the near future
fail to satisfy one or more of the
‘‘threshold conditions,’’ which are the
minimum requirements that a PRAdesignated UK nonbank SD must meet
in order to be permitted to carry the
regulated activities in which it
engages.348 In broad terms, the PRA’s
threshold conditions include, among
other things, requirements that the firm
has appropriate financial resources and
capacity to measure, monitor and
manage risks.349
3. Commission Analysis
The Commission has reviewed the UK
Application and the relevant UK laws
and regulations, and has preliminarily
determined that the UK PRA Financial
Reporting Rules related to notice
provisions, subject to the conditions
specified below, are comparable to the
notice provisions of the CFTC Financial
Reporting Rules. The Commission is
therefore proposing to issue a Capital
Comparability Determination Order
providing that a PRA-designated UK
nonbank SD may comply with the
notice provisions required under UK
laws and regulations in lieu of certain
notice provisions required of nonbank
SDs under Commission Regulation
23.105(c),350 subject to the conditions
set forth below.
The notice provisions contained in
Commission Regulation 23.105(c) are
intended to provide the Commission
and NFA with information in a prompt
manner regarding actual or potential
financial or operational issues that may
adversely impact the safety and
soundness of a nonbank SD by
impairing the firm’s ability to meet its
obligations to counterparties, creditors,
and the general swaps market. Upon the
receipt of a notice from a nonbank SD
under Commission Regulation
23.105(c), the Commission and NFA
initiate reviews of the facts and
circumstances that resulted in the notice
being filed including, as appropriate,
communicating with personnel of the
nonbank SD. The review of the facts and
the interaction with the personnel of the
nonbank SD provide the Commission
and NFA with information to develop
an assessment of whether it is necessary
for the nonbank SD to take remedial
347 See
id.
Rulebook, CRR Firms, Notifications Part,
Chapter 8 Specific Notifications, Rule 8.3.
349 FSMA, Part 4A and Schedule 6.
350 17 CFR 23.105(c).
348 PRA
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action to address potential financial or
operational issues, and whether the
remedial actions instituted by the
nonbank SD properly address the issues
that are the root cause of the operational
or financial issues. Such actions may
include the infusion of additional
capital into the firm, or the development
and implementation of additional
internal controls to address operational
issues. The notice filings further allow
the Commission and NFA to monitor
the firm’s performance after the
implementation of remedial actions to
assess the effectiveness of such actions.
The UK PRA Financial Reporting
Rules require a PRA-designated UK
nonbank SD to provide notice to the
PRA if the firm fails to maintain a
minimum capital ratio of common
equity tier 1 capital to risk-weighted
assets equal or greater than 7 percent
(4.5 percent of the core capital
requirement plus the 2.5 percent capital
conservation buffer requirement,
assuming no other capital buffer
requirements apply). The PRAdesignated UK nonbank SD is also
required to file a capital conservation
plan with its notice to the PRA. The
capital conservation plan is required to
contain information regarding actions
that the PRA-designated UK nonbank
SD will take to ensure proper capital
adequacy.
The Commission has preliminarily
determined that the requirement for a
PRA-designated UK nonbank SD to
provide notice of a breach of its capital
buffer requirements to the PRA is not
sufficiently comparable in purpose and
effect to the CFTC notice provisions
contained in Commission Regulation
23.105(c)(1) and (2),351 which require a
nonbank SD to provide notice to the
Commission and to NFA if the firm fails
to meet its minimum capital
requirement or if the firm’s regulatory
capital falls below 120 percent of its
minimum capital requirement (‘‘Early
Warning Level’’). The requirement for a
PRA-designated UK nonbank SD to
provide notice of a breach of its capital
buffer requirements does not achieve a
comparable outcome to the CFTC’s
Early Warning Level requirement due to
the difference in the thresholds
triggering a notice requirement in the
respective rule sets.
The requirement for a nonbank SD to
file notice with the Commission and
NFA if the firm becomes
undercapitalized or if the firm
experiences a decrease of excess
regulatory capital below defined levels
is a central component of the
Commission’s and NFA’s oversight
351 17
CFR 23.105(c)(1) and (2).
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program for nonbank SDs.352 Therefore,
the Commission preliminarily believes
that it is necessary for the Commission
and NFA to receive copies of notices
filed under the Capital Buffers Part of
the PRA Rulebook by PRA-designated
UK nonbank SDs alerting the PRA of a
breach of the PRA-designated UK
nonbank SD’s combined capital buffer.
The notice must be filed by the PRAdesignated UK nonbank SD within 24
hours of the filing of the notice with the
PRA, and the Commission expects that,
upon the receipt of a notice,
Commission staff and NFA staff will
engage with staff of the PRA-designated
UK nonbank SD to obtain an
understanding of the facts that led to the
filing of the notice and will discuss with
the PRA-designated UK nonbank SD the
firm’s capital conservation plan. The
proposed condition would not require
the PRA-designated UK nonbank SD to
file copies of its capital conservation
plan with the Commission or NFA. To
the extent Commission staff needs
further information from the PRAdesignated UK nonbank SD, the
Commission expects to request such
information as part of its assessment of
the notice and its communications with
the PRA-designated UK nonbank SD.
In addition, due to the lack of a
sufficiently comparable analogue to the
CFTC Financial Reporting Rules’ Early
Warning Level requirement, the
Commission is proposing to condition
the Capital Comparability
Determination Order to require a PRAdesignated UK nonbank SD to file a
notice with the Commission and NFA if
the firm’s capital ratio does not equal or
exceed 12.6 percent.353 The proposed
condition would further require the
PRA-designated UK nonbank SD to file
the notice with the Commission and
NFA within 24 hours of when the firm
knows or should have known that its
regulatory capital was below 120
percent of its minimum capital
requirement. The timing requirement for
352 See Commission Regulation 23.105(c)(4),
which requires a nonbank SD to file notice with the
Commission and NFA if it experiences decrease in
excess capital of 30 percent or more from the excess
capital reported in its last financial filing with the
Commission. 17 CFR 23.105(c)(4).
353 The Commission’s proposed reporting level of
12.6 percent reflects the aggregate of the PRAdesignated UK nonbank SD’s core capital
requirement of 8 percent and capital conservation
buffer requirement of 2.5 percent, multiplied by a
factor of 1.20. For purposes of the calculation, the
Commission proposes that the 20 percent capital
increase must be comprised of common equity tier
1 capital (i.e., common equity tier 1 capital must
comprise a minimum of 8.4 percent, which reflects
the aggregate of the 4.5 percent core common equity
tier 1 capital requirement and the 2.5 percent
capital conservation buffer requirement, multiplied
by a factor of 1.20).
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the filing of the proposed notice with
the Commission and NFA is consistent
with the Commission’s requirements for
an FCM or a nonbank SD, which are
both required to file an Early Warning
Level notice with the Commission and
NFA when the firm knows or should
have known that its regulatory capital is
below specified reporting levels.354 The
requirement for a firm to file a notice
with the Commission when it knows or
should have known that its capital is
below the reporting level is designed to
prevent a situation where a firm’s
deficient recordkeeping leads to an
inadequate monitoring of the Early
Warning Level threshold. More
generally, the ‘‘should have known’’
part of the timing standard for the filing
of the proposed notice is intended to
cover facts and circumstances that
should reasonably lead the firm to
believe that its regulatory capital is
below 120 percent of the minimum
requirement.355 In practice, even if the
PRA-designated UK nonbank SD’s books
and records do not reflect a decrease of
regulatory capital below 120 percent of
the minimum requirement or if the
computations that may reveal a decrease
of regulatory capital below 120 percent
have not been made yet, the firm would
be expected to provide notice if it
became aware of deficiencies in its
recordkeeping processes that could
result in inaccurate recording of the
firm’s capital levels or if it had other
reasons to believe its regulatory capital
is below the Early Warning Level
threshold.356
As noted above, a purpose of the
proposed Early Warning Level notice
provision is to allow the Commission
and NFA to initiate conversations and
fact finding with a registrant that may be
experiencing operational or financial
issues that may adversely impact the
firm’s ability to meet its obligations to
354 17
CFR 1.12(b) and 17 CFR 23.105(c)(ii)(2).
interpretation is consistent with the
Commission’s discussion of the timing standard in
the preamble to the 1998 final rule adopting
amendments to Commission Regulation 1.12, where
the Commission noted that the part of the standard
requiring an FCM to report when it ‘‘should know’’
of a problem may be defined as the point at which
a party, in the exercise of reasonable diligence,
should become aware of an event. See 63 FR 45711
at 45713.
356 To that point, in discussing the standard
applicable to the timing requirement for the filing
of a notice by an FCM to report an undersegregated
or undersecured condition (i.e., situation where the
FCM has insufficient funds in accounts segregated
for the benefit of customers trading on U.S. contract
markets or has insufficient funds set aside for
customers trading on non-U.S. markets to meet the
FCM’s obligations to its customers), the
Commission noted that an obligation to file a notice
could arise even before the required computations
that would reveal deficiencies must be made. See
id.
355 This
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market participants, including
customers or swap counterparties. The
notice filing is a central component of
the Commission’s and NFA’s oversight
program, and the Commission believes
that a firm that is experiencing
operational challenges that prevent the
firm from definitively computing its
capital level during a period when it
recognizes from the facts and
circumstances that the firm’s capital
level may be below the reporting
threshold should file the notice with the
Commission and NFA. Therefore, the
Commission preliminarily deems it
appropriate to include a similar early
warning notice condition in the Capital
Comparability Determination Order.
The UK PRA Financial Reporting
Rules also do not contain an explicit
requirement for a PRA-designated UK
nonbank SD to notify the PRA if the
firm fails to maintain current books and
records, experiences a decrease in
regulatory capital over levels previously
reported, or fails to collect or post initial
margin with uncleared swap
counterparties that exceed certain
threshold levels.357 The UK PRA
Financial Reporting Rules also do not
require a PRA-designated UK nonbank
SD to provide the PRA with advance
notice of equity withdrawals initiated
by equity holders that exceed defined
amounts or percentages of the firm’s
excess regulatory capital.358
To ensure that the Commission and
NFA receive prompt information
concerning potential operational or
financial issues that may adversely
impact the safety and soundness of a
PRA-designated UK nonbank SD, the
Commission is proposing to condition
the Capital Comparability
Determination Order to require PRAdesignated UK nonbank SDs to file
certain notices required under the CFTC
Financial Reporting Rules with the
Commission and NFA. In this
connection, the Commission is
proposing to condition the Capital
Comparability Determination Order on a
PRA-designated UK nonbank SD
providing the Commission and NFA
with notice if the firm fails to maintain
current books and records with respect
to its financial condition and financial
reporting requirements. For avoidance
of doubt, in this context the
Commission believes that books and
records would include current ledgers
357 17
CFR 23.105(c)(3), (4), and (7).
Regulation 23.105(c)(5) requires a
nonbank SD to provide written notice to the
Commission and NFA two business days prior to
the withdrawal of capital by action of the equity
holders if the amount of the withdrawal exceeds 30
percent of the nonbank SD’s excess regulatory
capital. 17 CFR 23.105(c)(5).
358 Commission
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or other similar records which show or
summarize, with appropriate references
to supporting documents, each
transaction affecting the PRA-designated
UK nonbank SD’s asset, liability,
income, expense, and capital accounts
in accordance with the accounting
principles accepted by the relevant
authorities.359 The Commission
preliminarily believes that the
maintenance of current books and
records is a fundamental and essential
component of operating as a registered
nonbank SD and that the failure to
comply with such a requirement may
indicate an inability of the firm to
promptly and accurately record
transactions and to ensure compliance
with regulatory requirements, including
regulatory capital requirements.
Therefore, the proposed Order would
require a PRA-designated UK nonbank
SD to provide the Commission and NFA
with a written notice within 24 hours if
the firm fails to maintain books and
records on a current basis.
The proposed Capital Comparability
Determination Order would also require
a PRA-designated UK nonbank SD to
file notice with the Commission and
NFA if: (i) a single counterparty, or
group of counterparties under common
ownership or control, fails to post
required initial margin or pay required
variation margin on uncleared swap and
security-based swap positions that, in
the aggregate, exceeds 25 percent of the
PRA-designated UK nonbank SD’s
minimum capital requirement; (ii)
counterparties fail to post required
initial margin or pay required variation
margin to the PRA-designated UK
nonbank SD for uncleared swap and
security-based swap positions that, in
the aggregate, exceeds 50 percent of the
PRA-designated UK nonbank SD’s
minimum capital requirement; (iii) a
PRA-designated UK nonbank SD fails to
post required initial margin or pay
required variation margin for uncleared
swap and security-based swap positions
to a single counterparty or group of
counterparties under common
ownership and control that, in the
aggregate, exceeds 25 percent of the
PRA-designated UK nonbank SD’s
minimum capital requirement; and (iv)
a PRA-designated UK nonbank SD fails
to post required initial margin or pay
required variation margin to
counterparties for uncleared swap and
security-based swap positions that, in
the aggregate, exceeds 50 percent of the
PRA-designated UK nonbank SD’s
359 For comparison, see Commission Regulation
23.105(b), which similarly defines the term ‘‘current
books and records’’ as used in the context of the
Commission’s requirements. 17 CFR 23.105(b).
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minimum capital requirement. The
Commission is proposing to require this
notice so that it and the NFA may
commence communication with the
PRA-designated UK nonbank SD and
the PRA in order to obtain an
understanding of the facts that have led
to the failure to exchange material
amounts of initial margin and variation
margin in accordance with the
applicable margin rules, and to assess
whether there is a concern regarding the
financial condition of the firm that may
impair its ability to meet its financial
obligations to customers, counterparties,
creditors, and general market
participants, or otherwise adversely
impact the firm’s safety and soundness.
The proposed Capital Determination
Order would not require a PRAdesignated UK nonbank SD to file
notices with the Commission and NFA
concerning withdrawals of capital or
changes in capital levels as such
information will be reflected in the
financial statement reporting filed with
the Commission and NFA as conditions
of the Order, and because the PRAdesignated UK nonbank SD’s capital
levels are monitored by the PRA, which
the Commission preliminarily believes
renders the separate reporting to the
Commission superfluous.
The proposed Capital Comparability
Determination Order would require a
PRA-designated UK nonbank SD to file
any notices required under the Order
with the Commission and NFA
reflecting any balances, where
applicable, in U.S. dollars. Each notice
required by the proposed Capital
Comparability Determination Order
must be filed in accordance with
instructions issued by the Commission
or NFA.360
The Commission invites public
comment on its analysis above,
including comment on the UK
Application and relevant UK Financial
Reporting Rules. The Commission also
invites comment on the proposed
conditions to the Capital Comparability
Determination Order that are listed
above.
The Commission requests comment
on the timeframes set forth in the
proposed conditions for PRA-designated
UK nonbank SDs to file notices with the
Commission and NFA. In this regard,
360 The proposed conditions for PRA-designated
UK nonbank SDs to file a notice with the
Commission and NFA if the firm fails to maintain
current books and records or fails to collect or post
margin with uncleared swap counterparties that
exceed the above-referenced threshold levels are
consistent with the proposed conditions in the
proposed Capital Comparability Determination
Orders for Japan, Mexico, and the EU. See Proposed
Japan Order, Proposed Mexico Order, and Proposed
EU Order.
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the proposed conditions would require
PRA-designated UK nonbank SDs to file
certain written notices with the
Commission within 24 hours of the
occurrence of a reportable event or of
being alerted to a reportable event by
the PRA. The Commission requests
comment on the issues PRA-designated
UK nonbank SDs may face meeting the
filing requirements given time-zone
difference or governance issues. The
Commission also requests specific
comment regarding the setting of
compliance dates for the notice
reporting conditions that the proposed
Capital Comparability Determination
Order would impose on PRA-designated
UK nonbank SDs.
F. Supervision and Enforcement
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1. Commission and NFA Supervision
and Enforcement of Nonbank SDs
The Commission and NFA conduct
ongoing supervision of nonbank SDs to
assess their compliance with the CEA,
Commission regulations, and NFA rules
by reviewing financial reports, notices,
risk exposure reports, and other filings
that nonbank SDs are required to file
with the Commission and NFA. The
Commission and/or NFA also conduct
periodic examinations as part of the
supervision of nonbank SDs, including
routine onsite examinations of nonbank
SDs’ books, records, and operations to
ensure compliance with CFTC and NFA
requirements.361
As noted in Section D.1. above,
financial reports filed by a nonbank SD
provide the Commission and NFA with
information necessary to ensure the
firm’s compliance with minimum
capital requirements and to assess the
firm’s overall safety and soundness and
its ability to meet its financial
obligations to customers, counterparties,
and creditors. A nonbank SD is also
required to provide written notice to the
Commission and NFA if certain defined
events occur, including that the firm is
undercapitalized or maintains a level of
capital that is less than 120 percent of
the firm’s minimum capital
requirements.362 The notice provisions,
as stated in Section E.1. above, are
intended to provide the Commission
and NFA with information of potential
issues at a nonbank SD that may impact
the firm’s ability to maintain
361 Section
17(p)(2) of the CEA requires NFA as
a registered futures association to establish
minimum capital and financial requirements for
non-bank SDs and to implement a program to audit
and enforce compliance with such requirements. 7
U.S.C. 21(p)(2). Section 17(p)(2) further provides
that NFA’s capital and financial requirements may
not be less stringent than the capital and financial
requirements imposed by the Commission.
362 See 17 CFR 23.105(c).
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compliance with the CEA and
Commission regulations. The
Commission and NFA also have the
authority to require a nonbank SD to
provide any additional financial and/or
operational information on a daily basis
or at such other times as the
Commission or NFA may specify to
monitor the safety and soundness of the
firm.363
The Commission also has authority to
take disciplinary actions against a
nonbank SD for failing to comply with
the CEA and Commission regulations.
Section 4b–1(a) of the CEA 364 provides
the Commission with exclusive
authority to enforce the capital
requirements imposed on nonbank SDs
adopted under section 4s(e) of the
CEA.365
2. PRA’s Supervision and Enforcement
of PRA-Designated UK Nonbank SDs
The PRA has supervision, audit, and
investigation powers with respect to
PRA-designated UK nonbank SDs,
which include the powers to obtain
specified information reasonably
required in connection with the exercise
of the PRA’s functions, the power to
conduct or order investigations, and the
power to impose sanctions on PRAdesignated UK nonbank SDs that breach
their regulatory obligations, including
those deriving from the UK PRA Capital
Rules and the UK PRA Financial
Reporting Rules.366
The PRA also monitors the capital
adequacy of PRA-designated UK
nonbank SDs through supervisory
measures on an ongoing basis. The
monitoring includes assessing the
notices and the capital conservation
plan discussed in Section E.2. above. In
addition, the PRA is empowered with a
variety of measures to address a PRAdesignated UK nonbank SD’s financial
deterioration.367 Under its general
supervisory powers, the PRA may
impose new requirements to a PRAdesignated UK nonbank SD if the firm
is failing, or likely to fail, to satisfy the
threshold conditions for which the PRA
is responsible.368 More specifically, a
breach in a PRA-designated UK
nonbank SD’s capital buffers
automatically triggers restrictions on the
firm’s ability to make certain
363 See
17 CFR 23.105(h).
U.S.C. 6b–1(a).
365 7 U.S.C. 6s(e).
366 FSMA, Parts 4A, XI, and XIV.
367 See PRA, The Prudential Regulation
Authority’s approach to banking supervision, July
2023, available at: https://
www.bankofengland.co.uk/prudential-regulation/
publication/pras-approach-to-supervision-of-thebanking-and-insurance-sectors.
368 FSMA, Part 4A, Section 55M.
364 7
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distributions (e.g., pay certain dividends
or employee bonuses).369 In addition,
the PRA may impose administrative
penalties or other administrative
measures, including prudential charges,
if a PRA-designated nonbank SD’s
liquidity position falls below the
liquidity and stable funding
requirements.370
In case of non-compliance with the
capital and liquidity thresholds, the
PRA may also order PRA-designated UK
nonbank SDs to comply with additional
requirements, including: (i) maintaining
additional capital in excess of the
minimum requirements, if certain
conditions are met; (ii) requiring that
the PRA-designated UK nonbank SD
submit a plan to restore compliance
with applicable capital or liquidity
thresholds; (iii) imposing restrictions on
the business or operations of the PRAdesignated UK nonbank SD; (iv)
imposing restrictions or prohibitions on
distributions or interest payments to
shareholders or holders of additional
tier 1 capital instruments; (v) requiring
additional or more frequent reporting
requirements; and (vi) imposing
additional specific liquidity
requirements.371 The PRA may also
sanction the PRA-designated UK
nonbank SD if the firm’s capital or
liquidity fall below the applicable
thresholds or the PRA has evidence that
the firm will breach such thresholds in
the next 12 months.372 The PRA may
also withdraw a PRA-designated UK
nonbank SD’s authorization if the firm
no longer meets its minimum capital
requirements.373
In addition, if the capital and
liquidity requirements are breached, the
PRA may take early measures to
intervene, such as requiring
management to take certain actions,
order members of management to be
removed or replaced, or require changes
to the firm’s business strategy or legal or
369 See PRA Rulebook, CRR Firms, Capital Buffers
Part, Chapter 4 Capital Conservation Measures, Rule
4.3.
370 See Capital Requirements Regulations 2013,
Regulation 35B and FSMA, Part XIV Disciplinary
Measures (setting forth the PRA’s disciplinary
power with respect to all rules adopted under
FSMA). The Applicants represented that ‘‘CRR
rules’’ (i.e., general PRA rules applying to CRR
firms, including PRA-designated UK nonbank SDs)
are adopted pursuant to FSMA, Part 9D, and as
such the PRA has power to impose disciplinary
measures in connection with these rules. See
Response to Staff Questions dated October 5, 2023.
371 FSMA, Parts 4A, Sections 55M and 55P, and
Capital Requirements Regulation 2013, Regulation
35B.
372 FSMA, Parts 4A and XIV.
373 FSMA, Part 4A, Sections 55J–55K.
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operational structure, among other
measures.374
Although the PRA generally has broad
discretion as to what powers it may
exercise, the UK PRA Capital Rules and
the UK PRA Financial Reporting Rules
specifically mandate that the PRA
require PRA-designated UK nonbank
SDs to hold increased capital when: (i)
risks or elements of risks are not
covered by the capital requirements
imposed by the UK PRA Capital Rules;
(ii) the PRA-designated UK nonbank SD
lacks robust governance arrangements,
appropriate resolution and recovery
plans, processes to manage large
exposures or effective processes to
maintain on an ongoing basis the
amounts, types, and distribution of
capital needed to cover the nature and
level of risks to which they might be
exposed; or (iii) the sole application of
other administrative measures would be
unlikely to timely and sufficiently
improve the firm’s arrangements and
processes.375
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3. Commission Analysis
Based on the above, the Commission
preliminarily finds that the PRA has the
necessary powers to supervise,
investigate, and discipline PRAdesignated UK nonbank SDs for
compliance with the applicable capital,
financial and reporting requirements,
and to detect and deter violations of,
and ensure compliance with, the
applicable capital and financial
reporting requirements in the UK.
The Commission would expect to
communicate and consult, to the fullest
extent permissible under applicable
law, with the PRA regarding the
supervision of the financial and
operational condition of the PRAdesignated UK nonbank SDs. An
appropriate MOU or similar
arrangement with the PRA would
facilitate cooperation and information
sharing in the context of supervising the
PRA-designated UK nonbank SDs. Such
an arrangement would enhance
communication with respect to entities
within the arrangement’s scope
(‘‘Covered Firms’’), as appropriate,
374 Bank Recovery and Resolution (No. 2) Order
2014, Article 2 (defining ‘‘conditions for early
intervention’’ in case of breach of UK CRR
requirements or requirements derived from CRD)
and Part 8 (laying down the procedure to be
followed by the PRA to determine whether early
intervention measures should be taken under
FSMA). If additional requirements are met, it is also
possible that the Bank of England, as the resolution
authority, may assess the PRA-designated UK
nonbank SD as ‘‘failing or likely to fail,’’ triggering
a resolution action, which could occur even before
the firm actually breached its minimum capital
requirements. Banking Act 2009, Sections 4 to 83.
375 Capital Requirements Regulation 2013,
Section 34.
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regarding: (i) general supervisory issues,
including regulatory, oversight, or other
related developments; (ii) issues
relevant to the operations, activities,
and regulation of Covered Firms; and
(iii) any other areas of mutual
supervisory interest, and would
anticipate periodic meetings to discuss
relevant functions and regulatory
oversight programs. The arrangement
would provide for the Commission and
the PRA to inform each other of certain
events, including any material events
that could adversely impact the
financial or operational stability of a
Covered Firm, and would provide a
procedure for any on-site examinations
of Covered Firms.
In the absence of an MOU or similar
information sharing arrangement, the
Commission is proposing to condition
the Capital Comparability
Determination Order on a PRAdesignated UK nonbank SD providing
notice to the Commission and NFA if
the PRA has required the PRAdesignated UK nonbank SD to: (i)
maintain additional capital in excess of
the minimum requirements; (ii) require
that the PRA-designated UK nonbank
SD submit a plan to restore compliance
with applicable capital or liquidity
thresholds; (iii) impose restrictions on
the business or operations of the PRAdesignated UK nonbank SD; (iv) impose
restrictions or prohibitions on
distributions or interest payments to
shareholders or holders of additional
tier 1 capital instruments; (v) require
additional or more frequent reporting
requirements; or (vi) impose additional
specific liquidity requirements.376 Upon
receipt of such notice, the Commission
and NFA would communicate with the
PRA-designated UK nonbank SD to
obtain further information regarding the
underlying issues that prompted the
PRA to direct the PRA-designated UK
nonbank SD to take such actions and
would obtain information regarding
how the PRA-designated UK nonbank
SD would address the underlying
issues.
The Commission invites public
comment on the UK Application, the
UK laws and regulations, and the
Commission’s analysis above regarding
its preliminary determination that the
PRA and the CFTC have supervision
programs and enforcement authority
that are comparable in that the purpose
of the relevant programs and authority
is to ensure that nonbank SDs maintain
376 PRA’s authority to impose such conditions or
requirements is set forth in FSMA, Part 4A,
Sections 55M and 55P, and Capital Requirements
Regulation 2013, Regulation 35B.
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compliance with applicable capital and
financial reporting requirements.
IV. Proposed Capital Comparability
Determination Order
A. Commission’s Proposed
Comparability Determination
The Commission’s preliminary view,
based on the UK Application and the
Commission’s review of applicable UK
laws and regulations, is that the UK
PRA Capital Rules and the UK PRA
Financial Reporting Rules, subject to the
conditions set forth in the proposed
Capital Comparability Determination
Order below, achieve comparable
outcomes and are comparable in
purpose and effect to the CFTC Capital
Rules and CFTC Financial Reporting
Rules. In reaching this preliminary
conclusion, the Commission recognizes
that there are certain differences
between the UK PRA Capital Rules and
CFTC Capital Rules and certain
differences between the UK PRA
Financial Reporting Rules and the CFTC
Financial Reporting Rules. The
proposed Capital Comparability
Determination Order is subject to
proposed conditions that are
preliminarily deemed necessary to
promote consistency in regulatory
outcomes, or to reflect the scope of
substituted compliance that would be
available notwithstanding certain
differences. In the Commission’s
preliminary view, the differences
between the two rules sets would not be
inconsistent with providing a
substituted compliance framework for
PRA-designated UK nonbank SDs
subject to the conditions specified in the
proposed Order below.
Furthermore, the proposed Capital
Comparability Determination Order is
limited to the comparison of the UK
PRA Capital Rules to the Bank-Based
Approach contained within the CFTC
Capital Rules. As noted previously, the
Applicants have not requested, and the
Commission has not performed, a
comparison of the UK PRA Capital
Rules to the Commission’s NAL
Approach or TNW Approach. In
addition, as discussed in Section I.C.
above, due to the differences between
the capital and financial reporting
regimes applicable to PRA-designated
UK nonbank SD and FCA-regulated UK
nonbank SDs, the Commission
anticipates assessing the comparability
of the rules applicable to FCA-regulated
UK nonbank SDs through a separate
capital comparability determination.
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B. Proposed Capital Comparability
Determination Order
The Commission invites comments on
all aspects of the UK Application,
relevant UK laws and regulations, the
Commission’s preliminary views
expressed above, the question of
whether requirements under the UK
PRA Capital Rules are comparable in
purpose and effect to the Commission’s
requirement for a nonbank SD to hold
regulatory capital equal to or greater
than 8 percent of its uncleared swap
margin amount, and the Commission’s
proposed Capital Comparability
Determination Order, including the
proposed conditions included in the
proposed Order, set forth below.
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C. Proposed Order Providing
Conditional Capital Comparability
Determination for PRA-Designated UK
Nonbank Swap Dealers
It is hereby determined and ordered,
pursuant to Commodity Futures Trading
Commission (‘‘CFTC’’ or
‘‘Commission’’) Regulation 23.106 (17
CFR 23.106) under the Commodity
Exchange Act (‘‘CEA’’) (7 U.S.C. 1 et
seq.) that a swap dealer (‘‘SD’’) subject
to the Commission’s capital and
financial reporting requirements under
sections 4s(e) and (f) of the CEA (7
U.S.C. 6s(e) and (f)), that is organized
and domiciled in the United Kingdom
(‘‘UK’’) and designated for prudential
supervision by the UK Prudential
Regulation Authority (‘‘PRA’’), may
satisfy the capital requirements under
section 4s(e) of the CEA and
Commission Regulation 23.101(a)(1)(i)
(17 CFR 23.101(a)(1)(i)) (‘‘CFTC Capital
Rules’’), and the financial reporting
rules under section 4s(f) of the CEA and
Commission Regulation 23.105 (17 CFR
23.105) (‘‘CFTC Financial Reporting
Rules’’), by complying with certain
specified requirements of the UK laws
and regulations cited below and
otherwise complying with the following
conditions, as amended or superseded
from time to time:
(1) The SD is not subject to regulation
by a prudential regulator defined in
section 1a(39) of the CEA (7 U.S.C.
1a(39));
(2) The SD is organized under the
laws of the UK and is domiciled in the
UK;
(3) The SD is licensed as an
investment firm in the UK and is
designated for prudential supervision by
the PRA (‘‘PRA-designated UK nonbank
SD’’);
(4) The PRA-designated UK nonbank
SD is subject to and complies with:
Regulation (EU) No 575/2013 of the
European Parliament and of the Council
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of 26 June 2013 on prudential
requirements for credit institutions and
amending Regulation (EU) No 648/2012
as restated and applicable in the UK
(‘‘UK CRR’’), the provisions
implementing the Directive 2013/36/EU
of the European Parliament and of the
Council of 26 June 2013 on access to the
activity of credit institutions and the
prudential supervision of credit
institutions, amending Directive 2002/
87/EC and repealing Directives 2006/48/
EC and 2006/49/EC (‘‘CRD’’), including
Capital Requirements Regulations 2013
and Capital Requirements (Capital
Buffers and Macro-prudential Measures)
Regulations 2014, Commission
Delegated Regulation (EU) 2015/61 of 10
October 2014 to supplement Regulation
(EU) No 575/2013 of the European
Parliament and the Council with regard
to liquidity coverage requirement for
Credit Institutions (‘‘Liquidity Coverage
Delegated Regulation’’), the Banking Act
2009 and its secondary legislation, and
the rules of the PRA as reflected in the
PRA Rulebook (collectively the ‘‘UK
PRA Capital Rules’’);
(5) The PRA-designated UK nonbank
SD satisfies at all times applicable
capital ratio and leverage ratio
requirements set forth in Article 92 of
UK CRR and the rules in PRA Rulebook,
CRR Firms, Leverage Ratio—Capital
Requirements and Buffers Part, Chapter
3 Minimum Leverage Ratio, the capital
conservation buffer requirements set
forth in PRA Rulebook, CRR Firms,
Capital Buffers Part, and applicable
liquidity requirements set forth in PRA
Rulebook, CRR Firms, Liquidity
Coverage Requirement—UK Designated
Investment Firms Part and PRA
Rulebook, CRR Firms, Liquidity (CRR)
Part, and otherwise complies with the
requirements to maintain a liquidity risk
management program as required under
PRA Rulebook, CRR Firms, Internal
Liquidity Adequacy Assessment Part;
(6) The PRA-designated UK nonbank
SD is subject to and complies with:
Reporting (CRR) and Regulatory
Reporting parts of the PRA Rulebook
and the Companies Act 2006, Parts 15
and 16 (collectively and together with
UK CRR, the ‘‘UK PRA Financial
Reporting Rules’’);
(7) The PRA-designated UK nonbank
SD maintains at all times an amount of
regulatory capital in the form of
common equity tier 1 capital as defined
in Article 26 of UK CRR, equal to or in
excess of the equivalent of $20 million
in United States dollars (‘‘U.S. dollars’’).
The PRA-designated UK nonbank SD
shall use a commercially reasonable and
observable British pound/U.S. dollar
exchange rate to convert the value of the
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8059
pound-denominated common equity tier
1 capital to U.S. dollars;
(8) The PRA-designated UK nonbank
SD has filed with the Commission a
notice stating its intention to comply
with the UK PRA Capital Rules and the
UK PRA Financial Reporting Rules in
lieu of the CFTC Capital Rules and the
CFTC Financial Reporting Rules. The
notice of intent must include the PRAdesignated UK nonbank SD’s
representation that the firm is organized
and domiciled in the UK, is a licensed
investment firm designated for
prudential supervision by the PRA, and
is subject to, and complies with, the UK
PRA Capital Rules and UK PRA
Financial Reporting Rules. A PRAdesignated UK nonbank SD may not rely
on this Capital Comparability
Determination Order until it receives
confirmation from Commission staff,
acting pursuant to authority delegated
by the Commission, that the PRAdesignated UK nonbank SD may comply
with the applicable UK PRA Capital
Rules and UK PRA Financial Reporting
Rules in lieu of the CFTC Capital Rules
and CFTC Reporting Rules. Each notice
filed pursuant to this condition must be
submitted to the Commission via email
to the following address:
MPDFinancialRequirements@cftc.gov;
(9) The PRA-designated UK nonbank
SD prepares and keeps current ledgers
and other similar records in accordance
with the PRA Rulebook, General
Organisational Requirements Part, Rule
2.2 and Record Keeping Part, Rule 2.1
and 2.2, and conforming with the
applicable accounting principles;
(10) The PRA-designated UK nonbank
SD files with the Commission and with
the National Futures Association
(‘‘NFA’’) a copy of templates 1.1
(Balance Sheet Statement: assets), 1.2
(Balance Sheet Statement: liabilities),
1.3 (Balance Sheet Statement: equity),
and 2 (Statement of profit or loss) of the
financial reports (‘‘FINREP’’) that PRAdesignated UK nonbank SDs are
required to submit pursuant to PRA
Rulebook, CRR Firms, Regulatory
Reporting Part, Chapter 9 Regulatory
Activity Group 3, Rule 9.2, and
templates 1 (Own Funds), 2 (Own
Funds Requirements) and 3 (Capital
Ratios) of the common reports
(‘‘COREP’’) that PRA-designated UK
nonbank SDs are required to submit
pursuant to PRA Rulebook, CRR Firms,
Reporting (CRR) Part, Chapter 4
Reporting (Part Seven A CRR), Article
430 Reporting on Prudential
Requirements and Financial
Information, Rule 1. The FINREP and
COREP templates must be provided
with balances converted to U.S. dollars
and must be filed with the Commission
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and NFA within 35 calendar days of the
end of each month. PRA-designated UK
nonbank SDs that are registered as
security-based swap dealers (‘‘SBSDs’’)
with the U.S. Securities and Exchange
Commission (‘‘SEC’’) may comply with
this condition by filing with the
Commission and NFA a copy of Form
X–17A–5 (‘‘FOCUS Report’’) that the
PRA-designated UK nonbank SD is
required to file with the SEC or its
designee pursuant to an order granting
conditional substituted compliance with
respect to Securities Exchange Act of
1934 Rule 18a–7. The copy of the
FOCUS Report must be filed with the
Commission and NFA within 35
calendar days after the end of each
month in the manner, format and
conditions specified by the SEC in
Order Specifying the Manner and
Format of Filing Unaudited Financial
and Operational Information by
Security-Based Swap Dealers and Major
Security-Based Swap Participants that
are not U.S. Persons and are Relying on
Substituted Compliance with Respect to
Rule 18a–7, 86 FR 59208 (Oct. 26, 2021);
(11) The PRA-designated UK nonbank
SD files with the Commission and with
NFA a copy of its annual audited
accounts and strategic report (together,
‘‘annual audited financial report’’) that
are required to be prepared and
published pursuant to Parts 15 and 16
of Companies Act 2006. The annual
audited financial report may be reported
in British pound. The annual audited
financial report must be filed with the
Commission and NFA on the earlier of
the date the report is filed with the PRA
or the date the report is required to be
filed with the PRA pursuant to the UK
PRA Financial Reporting Rules;
(12) The PRA-designated UK nonbank
SD files Schedule 1 of appendix B to
subpart E of part 23 of the CFTC’s
regulations (17 CFR 23 subpart E—
appendix B) with the Commission and
NFA on a monthly basis. Schedule 1
must be prepared with balances
reported in U.S. dollars and must be
filed with the Commission and NFA
within 35 calendar days of the end of
each month;
(13) The PRA-designated UK nonbank
SD submits with each set of FINREP and
COREP templates, annual audited
financial report, and Schedule 1 of
appendix B to subpart E of part 23 of the
CFTC’s regulations, a statement by an
authorized representative or
representatives of the PRA-designated
UK nonbank SD that to the best
knowledge and belief of the
representative or representatives, the
information contained in the reports,
including the conversion of balances in
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the reports to U.S. dollars, is true and
correct;
(14) The PRA-designated UK nonbank
SD files a margin report containing the
information specified in Commission
Regulation 23.105(m) (17 CFR
23.105(m)) with the Commission and
with NFA within 35 calendar days of
the end of each month. The margin
report balances must be reported in U.S.
dollars;
(15) The PRA-designated UK nonbank
SD files a notice with the Commission
and NFA within 24 hours of being
informed by the PRA that the firm is not
in compliance with any component of
the UK PRA Capital Rules or the UK
PRA Financial Reporting Rules;
(16) The PRA-designated UK nonbank
SD files a notice within 24 hours with
the Commission and NFA if it fails to
maintain regulatory capital in the form
of common equity tier 1 capital as
defined in Article 26 of UK CRR, equal
to or in excess of the U.S. dollar
equivalent of $20 million using a
commercially reasonable and observable
British pound/U.S. dollar exchange rate;
(17) The PRA-designated UK nonbank
SD provides the Commission and NFA
with notice within 24 hours of filing a
capital conservation plan with the PRA
pursuant to PRA Rulebook, CRR Firms,
Capital Buffers Part, Chapter 4 Capital
Conservation Measures, Rule 4.4,
indicating that the firm has breached its
combined capital buffer requirement;
(18) The PRA-designated UK nonbank
SD provides the Commission and NFA
with notice within 24 hours if it is
required by the PRA to maintain
additional capital or additional liquidity
requirements, or to restrict its business
operations, or to comply with other
requirements pursuant to Financial
Services and Markets Act 2000, Part 4A
or the Capital Requirements Regulation
2013, Regulation 35B;
(19) The PRA-designated UK nonbank
SD files a notice with the Commission
and NFA within 24 hours if it fails to
maintain its minimum requirement for
own funds and eligible liabilities
(‘‘MREL’’), if the PRA-designated UK
nonbank SD is subject to such
requirement as set forth by the Bank of
England pursuant to the Banking Act
2009, Section 3A and the Bank Recovery
and Resolution (No. 2) Order 2014, Part
9;
(20) The PRA-designated UK nonbank
SD files a notice with the Commission
and NFA within 24 hours of when the
firm knew or should have known that
its regulatory capital fell below 120
percent of its minimum capital
requirement, comprised of the firm’s
core capital requirements and any
applicable capital buffer requirements.
PO 00000
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For purposes of the calculation, the 20
percent excess capital must be in the
form of common equity tier 1 capital;
(21) The PRA-designated UK nonbank
SD files a notice with the Commission
and NFA within 24 hours if it fails to
make or keep current the financial
books and records;
(22) The PRA-designated UK nonbank
SD files a notice with the Commission
and NFA within 24 hours of the
occurrence of any of the following:
(i) A single counterparty, or group of
counterparties under common
ownership or control, fails to post
required initial margin or pay required
variation margin on uncleared swap and
non-cleared security-based swap
positions that, in the aggregate, exceeds
25 percent of the PRA-designated UK
nonbank SD’s minimum capital
requirement;
(ii) Counterparties fail to post
required initial margin or pay required
variation margin to the PRA-designated
UK nonbank SD for uncleared swap and
non-cleared security-based swap
positions that, in the aggregate, exceeds
50 percent of the PRA-designated UK
nonbank SD’s minimum capital
requirement;
(iii) The PRA-designated UK nonbank
SD fails to post required initial margin
or pay required variation margin for
uncleared swap and non-cleared
security-based swap positions to a
single counterparty or group of
counterparties under common
ownership and control that, in the
aggregate, exceeds 25 percent of the
PRA-designated UK nonbank SD’s
minimum capital requirement; or
(iv) The PRA-designated UK nonbank
SD fails to post required initial margin
or pay required variation margin to
counterparties for uncleared swap and
non-cleared security-based swap
positions that, in the aggregate, exceeds
50 percent of the PRA-designated UK
nonbank SD’s minimum capital
requirement;
(23) The PRA-designated UK nonbank
SD files a notice with the Commission
and NFA of a change in its fiscal yearend approved or permitted to go into
effect by the PRA. The notice required
by this paragraph will satisfy the
requirement for a nonbank SD to obtain
the approval of NFA for a change in
fiscal year-end under Commission
Regulation 23.105(g) (17 CFR 23.105(g)).
The notice of change in fiscal year-end
must be filed with the Commission and
NFA at least 15 business days prior to
the effective date of the PRA-designated
UK nonbank SD’s change in fiscal yearend;
(24) The PRA-designated UK nonbank
SD or an entity acting on its behalf
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notifies the Commission of any material
changes to the information submitted in
the application for capital comparability
determination, including, but not
limited to, material changes to the UK
PRA Capital Rules or UK PRA Financial
Reporting Rules imposed on PRAdesignated UK nonbank SDs, the PRA’s
supervisory authority or supervisory
regime over PRA-designated UK
nonbank SDs, and proposed or final
material changes to the UK PRA Capital
Rules or UK PRA Financial Reporting
Rules as they apply to PRA-designated
UK nonbank SDs; and
(25) Unless otherwise noted in the
conditions above, the reports, notices,
and other statements required to be filed
by the PRA-designated UK nonbank SD
with the Commission and NFA pursuant
to the conditions of this Capital
Comparability Determination Order
must be submitted electronically to the
Commission and NFA in accordance
with instructions provided by the
Commission or NFA.
Issued in Washington, DC, on January 29,
2024, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Notice of Proposed
Order and Request for Comment on an
Application for a Capital Comparability
Determination Submitted on Behalf of
Nonbank Swap Dealers Subject to
Capital and Financial Reporting
Requirements of the United Kingdom
and Regulated by the United Kingdom
Prudential Regulation Authority—
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.
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Appendix 2—Statement of Support of
Chairman Rostin Behnam
I support the Commission’s proposed order
and request for comment on an application
for a preliminary capital comparability
determination on behalf of six nonbank swap
dealers that are domiciled in the United
Kingdom (UK) and registered with the CFTC.
All six of these UK nonbank SDs are subject
to, and comply with, the UK capital and
financial reporting rules as implemented by
the UK Prudential Regulation Authority,
which the Commission has preliminarily
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determined are comparable to certain capital
and financial reporting requirements under
the Commodity Exchange Act and the
Commission’s regulations, subject to certain
conditions. This preliminary capital
comparability determination for these UK
nonbank SDs is the fourth proposed order
and request for comment to come before the
Commission since it adopted its substituted
compliance framework for non-U.S.
domiciled nonbank swap dealers in July
2020.
I greatly appreciate the work of staff in the
Market Participant Division, the Office of the
General Counsel, and the Office of
International Affairs on this matter.
I look forward to reviewing the public’s
comments on the proposed rule. The 60-day
comment period will begin upon the
Commission’s publication of the proposed
rule on its website.
Appendix 3—Statement of Support of
Commissioner Kristin N. Johnson
I support the Commodity Futures Trading
Commission’s (Commission or CFTC)
issuance of the proposed conditional capital
comparability determination order for
comment (Proposed Comparability
Determination) pursuant to Commission
Regulation 23.106.1 The Proposed
Comparability Determination, if approved,
will allow registered nonbank swap dealers
(SDs) organized and domiciled in the United
Kingdom (UK) and designated for prudential
supervision by the UK Prudential Regulation
Authority (PRA-designated non-bank SDs) to
satisfy certain capital and financial reporting
requirements under the Commodity
Exchange Act (CEA) by complying with
comparable capital and financial reporting
requirements under UK laws and regulations.
It is imperative that we carefully review
the capital and financial reporting
requirements for PRA-designated non-bank
SDs in a manner consistent with the
Commission’s mandate under the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) to ensure
that foreign swap activities that have a
‘‘direct and significant’’ effect on U.S.
markets are subject to regulatory
requirements as sufficiently robust as our
own.2
1 The application here is by three trade
associations (the Institute of International Bankers,
the International Swaps and Derivatives
Association, and the Securities Industry and
Financial Markets Association). There are currently
six PRA-designated non-bank SDs eligible to take
advantage of a comparability determination, if the
Commission approves the Proposed Comparability
Determination. These six PRA-designated non-bank
SDs include Citigroup Global Markets Limited,
Goldman Sachs International, Merrill Lynch
International, Morgan Stanley & Co. International
Plc, MUFG Securities EMEA Plc, and Nomura
International Plc.
2 7 U.S.C. 2(i). Section 2(i)(1) of the CEA applies
the swaps provisions of both the Dodd-Frank Act
and Commission regulations promulgated under
those provisions to activities outside the United
States that have a direct and significant connection
with activities in, or effect on, commerce of the
United States.
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8061
In 2010, the Dodd-Frank Act amended the
CEA to create a new regulatory framework for
swaps, including adding Section 2(i) to
address the cross-border application of the
CEA’s swap provisions. In recognition of the
value of global regulatory coordination in the
swaps markets and international comity, the
Commission in 2020 set out a framework for
substituted compliance and comparability
determinations for a given foreign
jurisdiction that afforded ‘‘due consideration
[to] international comity principles’’ while
being ‘‘consistent with . . . the
Commission’s interest in focusing its
authority on potential significant risks to the
U.S. financial system.’’ 3
Sections 4s(e) and 4s(f) of the CEA instruct
the Commission to impose capital
requirements on non-bank SDs and financial
condition reporting obligations on all
registered SDs, which have been codified by
the Commission.4 These requirements aim to
ensure the integrity of domestic and foreign
entities operating in our markets, to facilitate
the rapid identification and remediation of
liquidity crises, and to mitigate the threat of
systemic risks that may threaten the stability
of domestic and global financial markets. As
I previously stated:
The Commission’s capital and financial
reporting requirements adopted pursuant to
these sections of the CEA are critical to
ensuring the safety and soundness of our
markets by addressing and managing risks
that arise from a firm’s operation as an SD.
Ensuring necessary levels of capital, as well
as accurate and timely reporting about
financial conditions, helps to protect [SDs]
and the broader financial markets ecosystem
from shocks, thereby ensuring solvency and
resiliency. This, in turn, protects the
financial system as a whole, reducing the risk
of contagion that could arise from uncleared
swaps. Financial reporting requirements
work with the capital requirements by
allowing the Commission to monitor and
assess an SD’s financial condition, including
compliance with minimum capital
requirements. The Commission uses the
information it receives pursuant to these
requirements to detect potential risks before
they materialize. Capital adequacy and
financial reporting are pillars of risk
management oversight for any business, and,
for firms operating in our markets, it is of the
utmost importance that rules governing these
risk management tools are effectively
calibrated, continuously assessed, and fit for
purpose.5
3 Cross-Border Application of the Registration
Thresholds and Certain Requirements Applicable to
Swap Dealers and Major Swap Participants, 85 FR
56924, 56924 (Sept. 14, 2020); see Capital
Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
4 7 U.S.C. 6s(e), (f); 17 CFR part 23, subpart E.
5 Kristin N. Johnson, Commissioner, CFTC,
Statement in Support of Notice and Order on EU
Capital Comparability Determination (June 7, 2023),
https://www.cftc.gov/PressRoom/
SpeechesTestimony/johnsonstatement060723c.
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Systemic risks transcend national borders.
Successful mitigation of systemic risks,
therefore, requires careful, engaged
collaboration.
I support acknowledging market
participants’ compliance with the laws and
regulations of their UK regulator when the
requirements lead to an outcome that is
comparable to the outcome of complying
with the CFTC’s corresponding requirements.
Mutual understanding and respect for partner
regulators in other countries advances the
Commission’s goal of setting a global
standard for sound derivatives regulation that
both enhances market stability and is also
deeply rigorous, reflecting the Commission’s
commitment to safe swaps markets.
As global standard setting authorities and
federal prudential regulators refine and
reinforce the regulatory framework for capital
requirements globally, it will be important to
ensure continued alignment among
jurisdictions, as with the ongoing
implementation of the Basel III capital
framework (Basel III).
While prudential regulators continue to
debate the implementation of a final set of
regulations under Basel III, the Commission’s
capital comparability determinations closes a
gap in our regulatory framework. Today’s
successful adoption of the Proposed
Comparability Determination enables the
Commission to deploy an enforceable regime
immediately in the context of our UK-based
registrants and is reflective of a desire to
engage and harmonize regulation globally.
I commend the work of the staff of the
Market Participants Division—Amanda
Olear, Tom Smith, Rafael Martinez, Liliya
Bozhanova, Joo Hong, and Justin McPhee, as
well as the members of the Office of
International Affairs—for their careful
consideration of this application.
The Commission’s efforts in considering
the Proposed Comparability Determination
reflect thoughtful evaluation of the
comparability of relevant standards and an
attempt to coordinate our efforts to bring
transparency to the swaps market and reduce
its risks to the public. I look forward to
reviewing the comments that the
Commission will receive in response to the
Proposed Comparability Determination.
lotter on DSK11XQN23PROD with PROPOSALS3
Appendix 4—Statement of
Commissioner Christy Goldsmith
Romero
Today [January 23, 2024], the Commission
considers a proposal intended to safeguard
the resilience of six swap dealers in the
United Kingdom (‘‘UK’’) supervised by the
Prudential Regulation Authority (‘‘PRA’’).1
The proposal is part of the Commission’s
‘‘substituted compliance’’ framework.
Substituted compliance must leave U.S.
markets at no greater risk than full
compliance with our rules. It is a framework
that promotes global harmonization with
1 The six swap dealers are Citigroup Global
Markets Limited, Goldman Sachs International,
Merrill Lynch International, Morgan Stanley & Co.
International Plc, MUFG Securities EMEA Plc, and
Nomura International Plc. The determination does
not cover other UK nonbank swap dealers
supervised by the Financial Conduct Authority.
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like-minded foreign regulators that have
rules, supervision, and enforcement that are
comparable in purpose and effect to the
CFTC. Our capital rules are a critical pillar
of the Dodd-Frank Act reforms, ones that
continue to evolve with the risks that our
financial system faces. We must ensure that
our comparability assessments are sound and
do not increase risk to U.S. markets.
The CFTC’s capital framework for swap
dealers heeds the lessons of the 2008
financial crisis.
The 2008 financial crisis precipitated the
failure or near-failure of almost every major
investment bank and a number of
systemically important banks. It
demonstrated all too clearly the financial
stability risks presented by undercapitalized
financial institutions, including a sprawling
network of globally interconnected
derivatives dealers. That is why Congress
mandated that the Commission establish
capital requirements for non-bank swap
dealers. The Dodd-Frank Act provided that
swap dealer capital requirements should
‘‘offset the greater risk to the swap dealer. . .
and the financial system arising from the use
of swaps that are not cleared’’ 2 and ‘‘help
ensure the safety and soundness of the swap
dealer.’’ 3 The Commission’s capital
requirements, adopted in 2020,4 are intended
to do exactly that.
Our capital requirements promote the
resilience of swap dealers and protect the
U.S. financial system. They ensure that swap
dealers can weather economic downturns,
and remain resilient during periods of stress
to continue their critical market functions.
Our capital requirements also help prevent
contagion of losses spreading to other
financial institutions.
The CFTC must ensure that capital
requirements eligible for substituted
compliance are comparable in outcomes,
supervision, and enforcement.
The Commission has to proceed cautiously
in making a substituted compliance
determination given the importance of
capital to financial stability and the
complexity of capital frameworks. The
Commission also has to consider the
interconnected nature of global derivatives
markets, and the speed of contagion in the
global financial system.
Four of the swap dealers who would be
able to avail themselves of our determination
today are affiliated with the largest Troubled
Asset Relief Program recipients. That fact
alone is a good reminder of what is at stake
in terms of risk. It is not just danger to
financial institutions, but also American
families and businesses. Under this proposal
in addition to the Commission’s three prior
capital comparability proposals,5 16 of 106
27
U.S.C. 6s(e)(3)(A).
U.S.C. 6s(e)(3)(A)(i). The capital requirements
also must ‘‘be appropriate to the risk associated
with non-cleared swaps.’’ 7 U.S.C. 6s(e)(3)(A)(ii).
4 See Commodity Futures Trading Commission,
Capital Requirements of Swap Dealers and Major
Swap Participants, 85 FR 57462 (Sept. 15, 2020).
5 See Commodity Futures Trading Commission,
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); see also
37
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Fmt 4701
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registered swap dealers would be eligible to
rely on substituted compliance.6 We have a
responsibility to ensure that our substituted
compliance framework recognizes only those
frameworks that are legitimately a substitute
for the capital protections provided by U.S.
law.
The fact that a foreign regulator may have
comparable capital rules will not be enough
on its own. We have to look beyond the four
corners of rules. Substituted compliance
requires a like-minded foreign regulator with
comparable supervision and enforcement to
the CFTC. The CFTC and the Prudential
Regulation Authority (PRA) are already
cooperating on supervision and oversight of
clearinghouses.7 The PRA also has a long
history of regulatory and supervisory
coordination with the U.S. banking
regulators. I am cognizant that the PRA
recently received a secondary mandate to
promote the UK economy’s international
competitiveness and growth. The PRA issued
a statement that it will only advance this
mandate when it does not conflict with safety
and soundness of regulated entities.8 I expect
our staff will continue to work closely with
the PRA to understand how it will
implement this mandate, and work with the
PRA to safeguard the safety and soundness of
non-bank swap dealers and the stability of
our global financial system.
Our substituted compliance decisions
should not allow for regulatory arbitrage for
swap dealers to escape strong U.S. capital
rules—a situation that could erode DoddFrank Act post-crisis reforms. Today’s
determination is grounded in the PRA’s
capital rules being comparable to the CFTC’s
‘‘Bank-Based Capital Approach’’ to swap
dealer capital requirements, which reflects
requirements the Federal Reserve imposes for
bank holding companies.
The Federal Reserve and other U.S.
prudential banking regulators have proposed
updates to the U.S. capital rules to
implement international standards known as
‘‘Basel Endgame’’ or Basel 3.1.9 The U.S.
Commodity Futures Trading Commission, 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); see also 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).
6 55 of the 107 swap dealers are subject to U.S.
prudential regulatory capital requirements.
7 See CFTC, CFTC and BoE Sign New MOU for
Supervision of Cross-Border Clearing Organizations,
https://www.cftc.gov/PressRoom/PressReleases/
8289-20 (Oct. 20, 2020).
8 Prudential Regulation Authority, The Prudential
Regulation Authority’s Approach to Policy, DP4/22,
https://www.bankofengland.co.uk/prudentialregulation/publication/2022/september/praapproach-to-policy (Sept. 2022).
9 Federal Reserve System, Federal Deposit
Insurance Corporation, and Comptroller of the
Currency, Regulatory Capital Rule: Large Banking
Organizations and Banking Organizations with
Significant Trading Activity, 88 FR 64028 (Sept. 18,
2023).
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lotter on DSK11XQN23PROD with PROPOSALS3
updates are also informed by the failure of
several banks in early 2023.10 The current
proposal includes proposed changes that
could affect capital requirements for swap
dealers subject to prudential regulation. I
would expect the Commission to monitor
these changes and update its own capital
rules for swap dealers to remain harmonized
with the U.S. prudential regulators. The PRA
is also updating its capital requirements to
implement the Basel standards.11 As updates
are finalized in the U.S. and globally, the
Commission should review whether capital
requirements imposed by jurisdictions with
comparability determinations remain aligned
with capital requirements imposed by other
U.S. financial regulators and with the
changes that the Commission makes to align
its own capital requirements.
Strong capital requirements and areas
where the Commission would particularly
benefit from public comment.
All six of the UK swap dealers are dualregistered with the U.S. Securities and
Exchange Commission (‘‘SEC’’). The SEC has
issued final comparability determination
orders permitting them to satisfy certain SEC
capital requirements through substituted
compliance with applicable UK
requirements.12
In conducting the CFTC’s own analysis, it
is important to remember that substituted
compliance is not an all-or-nothing
proposition. The Commission retains
examinations and enforcement authority and
it can, should, and will, impose any
conditions and take all actions appropriate to
protect the safety and soundness of swap
dealers and the U.S. financial system. Today,
the Commission proposes 25 conditions,
including conditions requiring capital
10 See Statement by Vice Chair for Supervision
Michael S. Barr, https://www.federalreserve.gov/
newsevents/pressreleases/barr-statement20230727.htm (July 27, 2023) (‘‘Additionally,
following the banking turmoil in March 2023, the
proposal seeks to further strengthen the banking
system by applying a broader set of capital
requirements to more large banks.’’).
11 Prudential Regulation Authority, PS17/23—
Implementation of the Basel 3.1 standards nearfinal part 1, https://www.bankofengland.co.uk/
prudential-regulation/publication/2023/december/
implementation-of-the-basel-3-1-standards-nearfinal-policy-statement-part-1 (Dec. 12, 2023).
12 See Order Granting Conditional Substituted
Compliance in Connection with Certain
Requirements Applicable to Non-U.S. SecurityBased Swap Dealers and Major Security-Based
Swap Participants Subject to Regulation in the
United Kingdom, 86 FR 43318 (July 30, 2021);
Amended and Restated Order Granting Conditional
Substituted Compliance in Connection with Certain
Requirements Applicable to Non-U.S. SecurityBased Swap Dealers and Major Security-Based
Swap Participants Subject to Regulation in the
Federal Republic of Germany; Amended Orders
Addressing Non-U.S. Security-Based Swap Entities
Subject to Regulation in the French Republic or the
United Kingdom; and Order Extending the Time to
Meet Certain Conditions Relating to Capital and
Margin, 86 FR 59797 (Oct. 28, 2021); and Order
Specifying the Manner and Format of Filing
Unaudited Financial and Operational Information
by Security-Based Swap Dealers and Major
Security-Based Swap Participants that are not U.S.
Persons and are Relying on Substituted Compliance
with Respect to Rule 18a–7, 86 FR 59208 (Oct. 26,
2021).
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reporting and Commission notification that
are essential to monitoring the financial
condition and capital adequacy of swap
dealers.
Just as with swap dealers in Japan, Mexico
and the European Union,13 one of the most
important conditions is that the Commission
will continue to require compliance with the
CFTC’s minimum capital requirement of $20
million in common equity tier 1 capital.14
This is one of the most critical components
of the CFTC’s capital requirements. It helps
to ensure that each nonbank swap dealer,
whether current or a future new entrant,
maintains at all times, $20 million of the
highest quality capital to meet its financial
obligations without becoming insolvent.
Today, the Commission preliminarily finds
that UK capital rules requiring 8 percent of
risk-weighted assets and an additional 2.5
percent buffer, for a total of 10.5 percent, are
higher than the CFTC’s requirement of 8
percent of risk-weighted assets. This capital
requirement helps ensure that the swap
dealer has sufficient capital levels to cover
for example, unexpected losses from business
activities.
There are proposed deviations from the
Commission’s bank-based capital
requirements that should be closely
scrutinized. Some of these deviations are
similar to those raised by commenters to
other proposed determinations.15 For
example, the Commission proposes to permit
compliance with UK capital rules that are not
necessarily anchored by a threshold
percentage of uncleared swap margin as the
CFTC requires. The proposed determination
discusses that UK capital rules address
liquidity, operational risks, as well as other
risks arising from derivatives exposures,
through other mechanisms. I look forward to
public comment on the comparability of the
approaches and expect the Commission to
publish additional analysis to address
concerns raised by commenters as part of any
final determination.
In these areas, and others, public
comments will be tremendously beneficial. I
approve.
13 See CFTC Commissioner Christy Goldsmith
Romero, Proposal for Strong Capital Requirements
and Financial Reporting for Swap Dealers in Japan,
https://www.cftc.gov/PressRoom/
SpeechesTestimony/romerostatement072722b (July
27, 2022); See also CFTC Commissioner Christy
Goldsmith Romero, Promoting the Resilience of
Swap Dealers in Mexico Through Strong Capital
Requirements and Financial Reporting, https://
www.cftc.gov/PressRoom/SpeechesTestimony/
romerostatment111022b (Nov. 10, 2022); CFTC
Commissioner Christy Goldsmith Romero,
Promoting the Resilience of Swap Dealers in Europe
Through Strong Capital Requirements and
Financial Reporting, https://www.cftc.gov/
PressRoom/SpeechesTestimony/romerostatement
060723e (June 7, 2023).
14 This CFTC capital rule substantially exceeds
the EUR 5 million minimum capital required under
EU capital rules.
15 See 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) (Comment of Better Markets).
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8063
Appendix 5—Statement of Support of
Commissioner Caroline D. Pham
I support the Commission’s proposed order
and request for comment on a comparability
determination for nonbank swap dealers
subject to capital and financial reporting
requirements of the United Kingdom and
regulated by the United Kingdom Prudential
Regulation Authority (PRA). I would like to
thank Justin McPhee, Joo Hong, Liliya
Bozhanova, Rafael Martinez, Tom Smith, and
Amanda Olear in the Market Participants
Division (MPD) for their hard work on these
technical and detailed requirements.
This proposal is the staff’s fourth proposed
capital adequacy and financial reporting
comparability determination.1 Each involves
significant engagement with the
corresponding authority, in this case the UK
Prudential Regulation Authority, as well as
CFTC registrants. As I have previously said,
the Commission, its staff, and our regulatory
counterparts around the world need to
adhere to the recommendations in IOSCO’s
2020 report on Good Practices on Processes
for Deference, which was developed to
provide solutions to the challenges and
drivers of market fragmentation.2 As set forth
in the IOSCO 2020 report, such processes for
deference 3 are typically outcomes-based; risk
sensitive; transparent; cooperative; and
sufficiently flexible.
I continue to stress that this work by CFTC
staff creates the underpinnings of global
markets that enable governments, central
banks and commercial banks, asset managers
and investors, and companies to manage the
risks inherent in international flows of
capital that fuel economic growth and
prosperity in both developed and developing
economies.4 I am pleased to continue to
support this work, and also encourage staff
to finalize these proposals in 2024.
[FR Doc. 2024–02070 Filed 2–2–24; 8:45 am]
BILLING CODE 6351–01–P
1 The prior three were for Japan, Mexico, and the
EU. The Commission maintains its list of
comparability determinations for substituted
compliance purposes at https://www.cftc.gov/
LawRegulation/DoddFrankAct/CDSCP/index.htm.
2 Statement of Commissioner Caroline D. Pham in
Support of Proposed Order and Request for
Comment on Comparability Determination for EU
Nonbank Swap Dealer Capital and Financial
Reporting Requirements (June 9, 2023); IOSCO
Report, ‘‘Good Practices on Processes for
Deference’’ (June 2020).
3 IOSCO uses ‘‘deference’’ as an ‘‘overarching
concept to describe the reliance that authorities
place on one another when carrying out regulation
or supervision of participants operating crossborder.’’ Id. at 1. The CFTC’s use of substituted
compliance for swaps regulation is an example of
regulatory deference mechanisms.
4 Statement of Commissioner Caroline D. Pham in
Support of Proposed Order and Request for
Comment on Comparability Determination for EU
Nonbank Swap Dealer Capital and Financial
Reporting Requirements (June 9, 2023); see also
Concurring Statement of Commissioner Caroline D.
Pham Regarding Proposed Swap Dealer Capital and
Financial Reporting Comparability Determination
(July 27, 2022); Concurring Statement of
Commissioner Caroline D. Pham Regarding
Proposed Order and Request for Comment on an
Application for a Capital Comparability
Determination (Nov. 10, 2022).
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Agencies
[Federal Register Volume 89, Number 24 (Monday, February 5, 2024)]
[Proposed Rules]
[Pages 8026-8063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02070]
[[Page 8025]]
Vol. 89
Monday,
No. 24
February 5, 2024
Part III
Commodity Futures Trading Commission
-----------------------------------------------------------------------
17 CFR Chapter I
Notice of Proposed Order and Request for Comment on an Application for
a Capital Comparability Determination Submitted on Behalf of Nonbank
Swap Dealers Subject to Capital and Financial Reporting Requirements of
the United Kingdom and Regulated by the United Kingdom Prudential
Regulation Authority; Proposed Rule
Federal Register / Vol. 89 , No. 24 / Monday, February 5, 2024 /
Proposed Rules
[[Page 8026]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Capital and Financial
Reporting Requirements of the United Kingdom and Regulated by the
United Kingdom Prudential Regulation Authority
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed order and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission is soliciting public
comment on an application submitted by the Institute of International
Bankers, International Swaps and Derivatives Association, and
Securities Industry and Financial Markets Association requesting that
the Commission determine that the capital and financial reporting laws
and regulations of the United Kingdom applicable to CFTC-registered
swap dealers organized and domiciled in the United Kingdom, which are
licensed under the United Kingdom Financial Services and Markets Act
2000 as investment firms and designated for prudential supervision by
the United Kingdom Prudential Regulation Authority, provide sufficient
bases for an affirmative finding of comparability with respect to the
Commission's swap dealer capital and financial reporting requirements
adopted under the Commodity Exchange Act. The Commission is also
soliciting public comment on a proposed order providing for the
conditional availability of substituted compliance in connection with
the application.
DATES: Comments must be received on or before March 24, 2024.
ADDRESSES: You may submit comments, identified by ``UK-PRA Swap Dealer
Capital Comparability Determination,'' by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this proposed order and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Commission Regulation 145.9.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9. Commission regulations referred to in this
release are found at 17 CFR chapter I, and are accessible on the
Commission's website: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the proposed determination and order will be retained in
the public comment file and will be considered as required under the
Administrative Procedure Act and other applicable laws, and may be
accessible under the FOIA.
FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, cftc.gov">aolear@cftc.gov; Thomas Smith, Deputy Director, 202-418-5495,
cftc.gov">tsmith@cftc.gov; Rafael Martinez, Associate Director, 202-418-5462,
cftc.gov">rmartinez@cftc.gov; Liliya Bozhanova, Special Counsel, 202-418-6232,
cftc.gov">lbozhanova@cftc.gov; Joo Hong, Risk Analyst, 202-418-6221,
cftc.gov">jhong@cftc.gov; Justin McPhee, Risk Analyst, 202-418-6223;
cftc.gov">jmchpee@cftc.gov, Market Participants Division; Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') is soliciting public comment on an
application dated May 4, 2021 (the ``UK Application'') submitted by the
Institute of International Bankers, International Swaps and Derivatives
Association, and Securities Industry and Financial Markets Association
(together, the ``Applicants'').\2\ The Applicants request that the
Commission determine that registered nonbank swap dealers \3\
(``nonbank SDs'') organized and domiciled within the United Kingdom
(``UK''), which are licensed as investment firms and designated for
prudential supervision by the UK Prudential Regulation Authority
(``PRA'') (``PRA-designated UK nonbank SDs''), may satisfy certain
capital and financial reporting requirements under the Commodity
Exchange Act (``CEA'') \4\ by being subject to, and complying with,
comparable capital and financial reporting requirements under UK laws
and regulations.\5\ The Commission also is soliciting public comment on
a proposed order under which PRA-designated UK nonbank SDs would be
able, subject to defined conditions, to comply with certain CFTC
nonbank SD capital and financial reporting requirements in the manner
set forth in the proposed order.
---------------------------------------------------------------------------
\2\ See Letter dated May 4, 2021 from Stephanie Webster, General
Counsel, Institute of International Bankers, Steven Kennedy, Global
Head of Public Policy, International Swaps and Derivatives
Association, and Kyle Brandon, Managing Director, Head of
Derivatives Policy, Securities Industry and Financial Markets
Association. The UK Application is available on the Commission's
website at: https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
\3\ As discussed in Section I.A. immediately below, the
Commission has the authority to impose capital requirements on
registered swap dealers (``SDs'') that are not subject to regulation
by a U.S. prudential regulator (i.e., nonbank SDs).
\4\ 7 U.S.C. 1 et seq. The CEA may be accessed through the
Commission's website at: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
\5\ The Applicants also requested that the Commission determine
that nonbank SDs licensed as investment firms and prudentially
regulated by the UK Financial Conduct Authority (``FCA'') (``FCA-
regulated UK nonbank SDs'') may satisfy certain capital and
financial reporting requirements under the CEA by being subject to,
and complying with, comparable capital and financial reporting
requirements under UK laws and regulations. Due to the differences
between the capital and financial reporting regimes applicable to
PRA-designated UK nonbank SD and FCA-regulated UK nonbank SDs, the
Commission anticipates assessing the comparability of the rules
applicable to FCA-regulated UK nonbank SDs through a separate
capital comparability determination.
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I. Introduction
A. Regulatory Background--Swap Dealer and Major Swap Participant
Capital and Financial Reporting Requirements
Section 4s(e) of the CEA \6\ directs the Commission and
``prudential regulators'' \7\ to impose capital
[[Page 8027]]
requirements on all SDs and major swap participants (``MSPs'')
registered with the Commission.\8\ Section 4s(e) of the CEA also
directs the Commission and prudential regulators to adopt regulations
imposing initial and variation margin requirements on swaps entered
into by SDs and MSPs that are not cleared by a registered derivatives
clearing organization (``uncleared swaps'').
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\6\ 7 U.S.C. 6s(e).
\7\ The term ``prudential regulator'' is defined in the CEA to
mean the Board of Governors of the Federal Reserve System (``Federal
Reserve Board''); the Office of the Comptroller of the Currency; the
Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency. See 7 U.S.C.
1a(39).
\8\ Subject to certain exceptions, the term ``swap dealer'' is
generally defined as any person that: (i) holds itself out as a
dealer in swaps; (ii) makes a market in swaps; (iii) regularly
enters into swaps with counterparties as an ordinary course of
business for its own account; or (iv) engages in any activity
causing the person to be commonly known in the trade as a dealer or
market maker in swaps. See 7 U.S.C. 1a(49). The term ``major swap
participant'' is generally defined as any person who is not an SD,
and: (i) subject to certain exclusions, maintains a substantial
position in swaps for any of the major swap categories as determined
by the Commission; (ii) whose outstanding swaps create substantial
counterparty exposure that could have serious adverse effects on the
financial stability of the U.S. banking system or financial markets;
or (iii) maintains a substantial position in outstanding swaps in
any major swap category as determined by the Commission. See 7
U.S.C. 1a(33).
---------------------------------------------------------------------------
Section 4s(e) applies a bifurcated approach with respect to the
above Congressional directives, requiring each SD and MSP that is
subject to the regulation of a prudential regulator (``bank SD'' and
``bank MSP,'' respectively) to meet the minimum capital requirements
and uncleared swaps margin requirements adopted by the applicable
prudential regulator, and requiring each SD and MSP that is not subject
to the regulation of a prudential regulator (``nonbank SD'' and
``nonbank MSP,'' respectively) to meet the minimum capital requirements
and uncleared swaps margin requirements adopted by the Commission.\9\
Therefore, the Commission's authority to impose capital requirements
and margin requirements for uncleared swap transactions extends to
nonbank SDs and nonbank MSPs, including nonbanking subsidiaries of bank
holding companies regulated by the Federal Reserve Board.\10\
---------------------------------------------------------------------------
\9\ 7 U.S.C. 6s(e)(2).
\10\ 7 U.S.C. 6s(e)(1) and (2).
---------------------------------------------------------------------------
The prudential regulators implemented Section 4s(e) in 2015 by
amending existing capital requirements applicable to bank SDs and bank
MSPs to incorporate swap transactions into their respective bank
capital frameworks, and by adopting rules imposing initial and
variation margin requirements on bank SDs and bank MSPs that engage in
uncleared swap transactions.\11\ The Commission adopted final rules
imposing initial and variation margin obligations on nonbank SDs and
nonbank MSPs for uncleared swap transactions on January 6, 2016.\12\
The Commission also approved final capital requirements for nonbank SDs
and nonbank MSPs on July 24, 2020, which were published in the Federal
Register on September 15, 2020 with a compliance date of October 6,
2021 (``CFTC Capital Rules'').\13\
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\11\ See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840 (Nov. 30, 2015).
\12\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
\13\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 85 FR 57462 (Sept. 15, 2020).
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Section 4s(f) of the CEA addresses SD and MSP financial reporting
requirements.\14\ Section 4s(f) of the CEA authorizes the Commission to
adopt rules imposing financial condition reporting obligations on all
SDs and MSPs (i.e., nonbank SDs, nonbank MSPs, bank SDs, and bank
MSPs). Specifically, Section 4s(f)(1)(A) of the CEA provides, in
relevant part, that each registered SD and MSP must make financial
condition reports as required by regulations adopted by the
Commission.\15\ The Commission's financial reporting obligations were
adopted with the Commission's nonbank SD and nonbank MSP capital
requirements, and have a compliance date of October 6, 2021 (``CFTC
Financial Reporting Rules'').\16\
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\14\ 7 U.S.C. 6s(f).
\15\ 7 U.S.C. 6s(f)(1)(A).
\16\ See 85 FR 57462.
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B. Commission Capital Comparability Determinations for Non-U.S. Nonbank
Swap Dealers and Non-U.S. Nonbank Major Swap Participants
Commission Regulation 23.106 establishes a substituted compliance
framework whereby the Commission may determine that compliance by a
non-U.S. domiciled nonbank SD or non-U.S. domiciled nonbank MSP with
its home country's capital and financial reporting requirements will
satisfy all or parts of the CFTC Capital Rules and all or parts of the
CFTC Financial Reporting Rules (such a determination referred to as a
``Capital Comparability Determination'').\17\ The availability of such
substituted compliance is conditioned upon the Commission issuing a
determination that the relevant foreign jurisdiction's capital adequacy
and financial reporting requirements, and related financial
recordkeeping requirements, for non-U.S. nonbank SDs and/or non-U.S.
nonbank MSPs are comparable to the corresponding CFTC Capital Rules and
CFTC Financial Reporting Rules. The Commission will issue a Capital
Comparability Determination in the form of a Commission order
(``Capital Comparability Determination Order'').\18\
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\17\ 17 CFR 23.106. Commission Regulation 23.106(a)(1) provides
that a request for a Capital Comparability Determination may be
submitted by a non-U.S. nonbank SD or a non-U.S. nonbank MSP, a
trade association or other similar group on behalf of its SD or MSP
members, or a foreign regulatory authority that has direct
supervisory authority over one or more non-U.S. nonbank SDs or non-
U.S. nonbank MSPs. In addition, Commission regulations provide that
any non-U.S. nonbank SD or non-U.S. nonbank MSP that is dually-
registered with the Commission as a futures commission merchant
(``FCM'') is subject to the capital requirements of Commission
Regulation 1.17 (17 CFR 1.17) and may not petition the Commission
for a Capital Comparability Determination. See 17 CFR 23.101(a)(5)
and (b)(4), respectively. Furthermore, non-U.S. bank SDs and non-
U.S. bank MSPs may not petition the Commission for a Capital
Comparability Determination with respect to their respective
financial reporting requirements under Commission Regulation
23.105(p) (17 CFR 23.105(p)). Commission staff has issued, however,
a time-limited no-action letter stating that the Market Participants
Division will not recommend enforcement action against a non-U.S.
bank SD that files with the Commission certain financial information
that is provided to its home country regulator in lieu of certain
financial reports required by Commission Regulation 23.105(p). See
CFTC Staff Letter 21-18, issued on August 31, 2021, and CFTC Staff
Letter 23-11, issued on July 10, 2023 (extending the expiration of
CFTC Staff Letter 21-18 until the earlier of October 6, 2025 or the
adoption of any revised financial reporting requirements applicable
to bank SDs under Regulation 23.105(p)). On December 15, 2023, the
Commission issued for public comment proposed amendments to
Regulation 23.105(p) addressing the financial reporting requirements
applicable to bank SDs in a manner consistent with the position
taken in CFTC Letters 21-18 and 23-11. See CFTC Press Release 8836-
23 issued on December 15, 2023, available at cftc.gov.
\18\ 17 CFR 23.106(a)(3).
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The Commission's approach for conducting a Capital Comparability
Determination with respect to the CFTC Capital Rules and the CFTC
Financial Reporting Rules is a principles-based, holistic approach that
focuses on whether the applicable foreign jurisdiction's capital and
financial reporting requirements achieve comparable outcomes to the
corresponding CFTC requirements.\19\ In this regard, the approach is
not a line-by-line assessment or comparison of a foreign jurisdiction's
regulatory requirements with the Commission's requirements.\20\ In
performing the analysis, the Commission recognizes that jurisdictions
may adopt differing approaches to achieving comparable outcomes, and
the Commission will focus on whether the foreign
[[Page 8028]]
jurisdiction's capital and financial reporting requirements are
comparable to the Commission's in purpose and effect, and not whether
they are comparable in every aspect or contain identical elements.
---------------------------------------------------------------------------
\19\ See 85 FR 57462 at 57521.
\20\ Id.
---------------------------------------------------------------------------
A person requesting a Capital Comparability Determination is
required to submit an application to the Commission containing: (i) a
description of the objectives of the relevant foreign jurisdiction's
capital adequacy and financial reporting requirements applicable to
entities that are subject to the CFTC Capital Rules and the CFTC
Financial Reporting Rules; (ii) a description (including specific legal
and regulatory provisions) of how the relevant foreign jurisdiction's
capital adequacy and financial reporting requirements address the
elements of the CFTC Capital Rules and CFTC Financial Reporting Rules,
including, at a minimum, the methodologies for establishing and
calculating capital adequacy requirements and whether such
methodologies comport with any international standards; and (iii) a
description of the ability of the relevant foreign regulatory authority
to supervise and enforce compliance with the relevant foreign
jurisdiction's capital adequacy and financial reporting requirements.
The applicant must also submit, upon request, such other information
and documentation as the Commission deems necessary to evaluate the
comparability of the capital adequacy and financial reporting
requirements of the foreign jurisdiction.\21\
---------------------------------------------------------------------------
\21\ 17 CFR 23.106(a)(2).
---------------------------------------------------------------------------
The Commission may consider all relevant factors in making a
Capital Comparability Determination, including: (i) the scope and
objectives of the relevant foreign jurisdiction's capital and financial
reporting requirements; (ii) whether the relevant foreign
jurisdiction's capital and financial reporting requirements achieve
comparable outcomes to the Commission's corresponding capital
requirements and financial reporting requirements; (iii) the ability of
the relevant foreign regulatory authority or authorities to supervise
and enforce compliance with the relevant foreign jurisdiction's capital
adequacy and financial reporting requirements; and (iv) any other facts
or circumstances the Commission deems relevant, including whether the
Commission and foreign regulatory authority or authorities have a
memorandum of understanding (``MOU'') or similar arrangement that would
facilitate supervisory cooperation.\22\
---------------------------------------------------------------------------
\22\ See 17 CFR 23.106(a)(3) and 85 FR 57520-57522.
---------------------------------------------------------------------------
In performing the comparability assessment for foreign nonbank SDs,
the Commission's review will include the extent to which the foreign
jurisdiction's requirements address: (i) the process of establishing
minimum capital requirements for nonbank SDs and how such process
addresses risk, including market risk and credit risk of the nonbank
SD's on-balance sheet and off-balance sheet exposures; (ii) the types
of equity and debt instruments that qualify as regulatory capital in
meeting minimum requirements; (iii) the financial reports and other
financial information submitted by a nonbank SD to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank SD; and (iv) the regulatory
notices and other communications between a nonbank SD and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's review will include
a review of the foreign jurisdiction's surveillance program for
monitoring nonbank SDs' compliance with such capital adequacy and
financial reporting requirements, and the disciplinary process imposed
on firms that fail to comply with such requirements.
In performing the comparability assessment for foreign nonbank
MSPs,\23\ the Commission's review will include the extent to which the
foreign jurisdiction's requirements address: (i) the process of
establishing minimum capital requirements for a nonbank MSP and how
such process establishes a minimum level of capital to ensure the
safety and soundness of the nonbank MSP; (ii) the financial reports and
other financial information submitted by a nonbank MSP to its relevant
regulatory authority and whether such information provides the
regulatory authority with the means necessary to effectively monitor
the financial condition of the nonbank MSP; and (iii) the regulatory
notices and other communications between a nonbank MSP and its foreign
regulatory authority that address potential adverse financial or
operational issues that may impact the firm. With respect to the
ability of the relevant foreign regulatory authority to supervise and
enforce compliance with the foreign jurisdiction's capital adequacy and
financial reporting requirements, the Commission's review will include
a review of the foreign jurisdiction's surveillance program for
monitoring nonbank MSPs' compliance with such capital adequacy and
financial reporting requirements, and the disciplinary process imposed
on firms that fail to comply with such requirements.
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\23\ Commission Regulation 23.101(b) requires a nonbank MSP to
maintain positive tangible net worth. There are no MSPs currently
registered with the Commission. 17 CFR 23.101(b).
---------------------------------------------------------------------------
Commission Regulation 23.106 further provides that the Commission
may impose any terms or conditions that it deems appropriate in issuing
a Capital Comparability Determination.\24\ Any specific terms or
conditions with respect to capital adequacy or financial reporting
requirements will be set forth in the Commission's Capital
Comparability Determination Order. As a general condition to all
Capital Comparability Determination Orders, the Commission expects to
require notification from applicants of any material changes to
information submitted by the applicants in support of a comparability
finding, including, but not limited to, changes in the relevant foreign
jurisdiction's supervisory or regulatory regime.
---------------------------------------------------------------------------
\24\ See 17 CFR 23.106(a)(5).
---------------------------------------------------------------------------
The Commission's capital adequacy and financial reporting
requirements are designed to address and manage risks that arise from a
firm's operation as a SD or MSP. Given their functions, both sets of
requirements and rules must be applied on an entity-level basis
(meaning that the rules apply on a firm-wide basis, irrespective of the
type of transactions involved) to effectively address risk to the firm
as a whole. Therefore, in order to rely on a Capital Comparability
Determination, a nonbank SD or nonbank MSP domiciled in the foreign
jurisdiction and subject to supervision by the relevant regulatory
authority (or authorities) in the foreign jurisdiction must file a
notice with the Commission of its intent to comply with the applicable
capital adequacy and financial reporting requirements of the foreign
jurisdiction set forth in the Capital Comparability Determination in
lieu of all or parts of the CFTC Capital Rules and/or CFTC Financial
Reporting Rules.\25\ Notices must be filed electronically with the
Commission's
[[Page 8029]]
Market Participants Division (``MPD'').\26\ The filing of a notice by a
non-U.S. nonbank SD or non-U.S. nonbank MSP provides MPD staff, acting
pursuant to authority delegated by the Commission,\27\ with the
opportunity to engage with the firm and to obtain representations that
it is subject to, and complies with, the laws and regulations cited in
the Capital Comparability Determination and that it will comply with
any listed conditions. MPD will issue a letter under its delegated
authority from the Commission confirming that the non-U.S. nonbank SD
or non-U.S. nonbank MSP may comply with foreign laws and regulations
cited in the Capital Comparability Determination in lieu of complying
with the CFTC Capital Rules and the CFTC Financial Reporting Rules upon
MPD's determination that the firm is subject to and complies with the
applicable foreign laws and regulations, is subject to the jurisdiction
of the applicable foreign regulatory authority (or authorities), and
can meet any conditions in the Capital Comparability Determination.
---------------------------------------------------------------------------
\25\ 17 CFR 23.106(a)(4).
\26\ Notices must be filed in electronic form to the following
email address: cftc.gov">MPDFinancialRequirements@cftc.gov.
\27\ See 17 CFR 140.91(a)(11).
---------------------------------------------------------------------------
Each non-U.S. nonbank SD and/or non-U.S. nonbank MSP that receives,
in accordance with the applicable Commission Capital Comparability
Determination Order, confirmation from the Commission that it may
comply with a foreign jurisdiction's capital adequacy and/or financial
reporting requirements will be deemed by the Commission to be in
compliance with the corresponding CFTC Capital Rules and/or CFTC
Financial Reporting Rules.\28\ Accordingly, if a nonbank SD or a
nonbank MSP fails to comply with the foreign jurisdiction's capital
adequacy and/or financial reporting requirements, the Commission may
initiate an action for a violation of the corresponding CFTC Capital
Rules and or CFTC Financial Reporting Rules.\29\ In addition, a non-
U.S. nonbank SD or non-U.S. nonbank MSP that receives confirmation of
its ability to use substituted compliance remains subject to the
Commission's examination and enforcement authority.\30\ A finding of a
violation by a foreign jurisdiction's regulatory authority is not a
prerequisite for the exercise of such examination and enforcement
authority by the Commission.
---------------------------------------------------------------------------
\28\ 17 CFR 23.106(a)(4).
\29\ Id.
\30\ Id.
---------------------------------------------------------------------------
The Commission will consider an application for a Capital
Comparability Determination to be a representation by the applicant
that the laws and regulations of the foreign jurisdiction that are
submitted in support of the application are finalized and in force,
that the description of such laws and regulations is accurate and
complete, and that, unless otherwise noted, the scope of such laws and
regulations encompasses the relevant non-U.S. nonbank SDs and/or non-
U.S. nonbank MSPs domiciled in the foreign jurisdiction.\31\ A non-U.S.
nonbank SD or non-U.S. nonbank MSP that is not legally required to
comply with a foreign jurisdiction's laws or regulations determined to
be comparable in a Capital Comparability Determination may not
voluntarily comply with such laws or regulations in lieu of compliance
with the CFTC Capital Rules or the CFTC Financial Reporting Rules. Each
non-U.S. nonbank SD or non-U.S. nonbank MSP that seeks to rely on a
Capital Comparability Determination Order is responsible for
determining whether it is subject to the foreign laws and regulations
found comparable in the Capital Comparability Determination and the
Capital Comparability Determination Order.
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\31\ The Commission has provided the Applicants with an
opportunity to review for accuracy and completeness, and comment on,
the Commission's description of relevant UK laws and regulations on
which this proposed Capital Comparability Determination is based.
The Commission relies on this review and any corrections received
from the Applicants in making its proposal. Thus, to the extent that
the Commission relies on an inaccurate description of foreign laws
and regulations submitted by the Applicants, the comparability
determination may not be valid.
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C. Application for a Capital Comparability Determination for PRA-
Designated UK Nonbank Swap Dealers
The Applicants submitted the UK Application requesting that the
Commission issue a Capital Comparability Determination finding that a
PRA-designated UK nonbank SD's compliance with the capital requirements
of the UK and the financial reporting requirements of the UK, as
specified in the UK Application and applicable to PRA-designated UK
nonbank SDs, satisfies corresponding CFTC Capital Rules and the CFTC
Financial Reporting Rules applicable to a nonbank SD under sections
4s(e)-(f) of the CEA and Commission Regulations 23.101 and 23.105.\32\
---------------------------------------------------------------------------
\32\ UK Application, p. 1. There are currently no MSPs
registered with the Commission, and the Applicants have not
requested that the Commission issue a Capital Comparability
Determination concerning UK nonbank MSPs. Accordingly, the
Commission's Capital Comparability Determination and proposed
Capital Comparability Determination Order do not address UK nonbank
MSPs.
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To be designated for prudential supervision by the PRA, a UK-
domiciled investment firm must be authorized, or have requested
authorization, to deal in investments as principal.\33\ For an
investment firm that is authorized, or has requested authorization, to
deal in investments as principal, the PRA may designate the firm for
prudential supervision if the PRA determines that the dealing
activities of the firm should be a PRA-regulated activity. The PRA
considers the following in determining whether an investment firm
should be subject to PRA supervision: (i) the assets of the investment
firm; and (ii) where the investment firm is a member of a group, (a)
the assets of other firms within the group that are authorized, or have
sought authorization, to deal in investments as principal, (b) whether
any other member of the group is subject to prudential supervision by
the PRA, and (c) whether the investment firm's activities have, or
might have, a material impact on the ability of the PRA to advance any
of its objectives in relation to PRA-authorized person in its
group.\34\ The PRA also must consult with the FCA before designating a
person for prudential supervision.\35\
---------------------------------------------------------------------------
\33\ Article 3(1) and (2) of The Financial Services and Markets
Act 2000 (PRA-regulated Activities) Order 2013.
\34\ Id., Article 3(4).
\35\ Id., Article 3(6).
---------------------------------------------------------------------------
The PRA also has issued a Statement of Policy providing further
detail regarding the factors that are considered in assessing an
investment firm for prudential supervision.\36\ The factors include:
(i) whether the firm's balance sheet exceeds an average of GBP 15
billion total gross assets over four quarters; (ii) where the
investment firm is part of a group, whether the sum of the balance
sheets of all firms within the group that are authorized, or have
requested authorization, to deal in investments as principals exceeds
an average of GBP 15 billion over four quarters; and/or (iii) where the
firm is part of a group subject to PRA supervision, whether the
investment firm's revenues, balance sheet and risk taking is
significant relative to the group's revenues, balance sheet, and risk-
taking.\37\ There are currently six PRA-designated UK nonbank SDs
registered with the Commission:
[[Page 8030]]
Citigroup Global Markets Limited, Goldman Sachs International, Merrill
Lynch International, Morgan Stanley & Co. International Plc, MUFG
Securities EMEA Plc, and Nomura International Plc.
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\36\ See PRA, Statement of Policy, Designation of Investment
Firms for Prudential Supervision by the Prudential Regulation
Authority, December 2021, available here: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/statement-of-policy/2021/designation-of-investment-firms-for-prudential-supervision-by-the-pra-december-2021.pdf?la=en&hash=007EB17EDF2FA84714D372095F9E03627355776F.
\37\ Id., at p. 5.
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The Applicants represent that the capital and financial reporting
framework applicable to PRA-designated UK nonbank SDs is primarily
based on the framework established by the European Union's (``EU'')
Capital Requirements Regulation \38\ and Capital Requirements
Directive,\39\ which set forth capital and financial reporting
requirements applicable to ``credit institutions'' \40\ and
``investment firms.'' \41\ CRR, as a regulation, is directly applicable
in all member states of the EU (``EU Member States'') and was,
therefore, binding law in the UK during the UK's membership in the
EU.\42\ CRD, as a directive, was required to be transposed into EU
Member States' national law, including UK law.\43\ With regard to PRA-
designated UK nonbank SDs, the UK implemented CRD primarily through a
series of regulations, including the Capital Requirements Regulations
2013 \44\ and the Capital Requirements (Capital Buffers and Macro-
prudential Measures) Regulations 2014,\45\ and the rules of the
PRA.\46\
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\38\ Regulation (EU) No 575/2013 of the European Parliament and
of the Council of 26 June 2013 on prudential requirements for credit
institutions and amending Regulation (EU) No 648/2012 (``Capital
Requirements Regulation'' or ``CRR'').
\39\ Directive 2013/36/EU of the European Parliament and of the
Council of 26 June 2013 on access to the activity of credit
institutions and the prudential supervision of credit institutions,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC
and 2006/49/EC (``Capital Requirements Directive'' or ``CRD'').
\40\ The term ``credit institution'' is defined as an entity
whose business consists of taking deposits and other repayable funds
from the public and granting credits. CRR, Article 4(1), as
applicable in the UK. For a reference to CRR provisions applicable
in the UK, see infra notes 49 and 50.
\41\ The term ``investment firm'' is defined as an entity
authorized under Directive 2014/65/EU of the European Parliament and
of the Council of 15 May 2014 on markets in financial instruments
and amending Directive 2002/92/EC and Directive 2011/61/EU
(``Markets in Financial Instruments Directive'' or ``MiFID''), and
whose regular business is the provision of one or more investment
services to third parties and/or the performance of one or more
investment-related activities on a professional basis, which
includes dealing in derivatives for its own account. CRR, Article
4(1)(2) cross-referencing Article 4(1)(1) of MiFID.
\42\ Consolidated Version of the Treaty on the Functioning of
the European Union, OJ (C 326) 171, Oct. 26, 2012 (``TFEU''),
Article 288.
\43\ Id., Article 288 (stating that a directive is binding as to
the result to be achieved upon each EU Member State to which the
directive is addressed, and further provides, however, that each EU
Member State elects the form and method of implementing the
directive). In this connection, EU Member States were required to
implement and start applying amendments to CRD, introduced by
Directive (EU) 2019/878 of the European Parliament and of the
Council of 20 May 2019 amending Directive 2013/36/EU as regards
exempted entities, financial holding companies, mixed financial
holding companies, remuneration, supervisory measures and powers and
capital conservation measures (``CRD V'') by December 29, 2020. Some
CRD V provisions were subject to delayed implementation deadlines of
June 28, 2021 and January 1, 2022. CRD V, Article 2.
\44\ Capital Requirements Regulations 2013, Statutory Instrument
2013 No. 3115 (``Capital Requirements Regulations 2013'').
\45\ Capital Requirements (Capital Buffers and Macro-prudential
Measures) Regulations 2014, Statutory Instrument 2014 No. 894
(``Capital Requirements (Capital Buffers and Macro-prudential
Measures) Regulations 2014'').
\46\ The PRA's rules (``PRA Rulebook'') are available here:
https://www.prarulebook.co.uk/.
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Following the UK's withdrawal from EU membership (``Brexit''), EU
laws that were in effect and applicable as of December 31, 2020, were
retained in UK law subject to certain non-substantive amendments
seeking to reflect the UK's new position outside of the EU.\47\ As
such, directly applicable EU law, such as CRR, was converted into
domestic UK law and UK legislation implementing EU directives, such as
CRD, was preserved. The UK subsequently adopted additional changes,
generally consistent with amendments introduced by the EU to CRR, CRD
and other relevant EU provisions,\48\ and incorporated certain CRR
provisions in the PRA Rulebook.\49\ The CRR provisions as applicable in
the UK are referred hereafter as ``UK CRR.'' \50\ The UK capital and
financial reporting framework also comprises UK-specific requirements
in respect of certain matters. Requirements applicable to PRA-
designated UK nonbank SDs are included in the PRA Rulebook. In
addition, Commission Delegated Regulation (EU) 2015/61,\51\ which
supplements UK CRR with regard to liquidity coverage requirement for
credit institutions, applies to PRA-designated UK nonbank SDs and
imposes separate liquidity requirements to these firms.\52\
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\47\ See, An Act to Repeal the European Communities Act 1972 and
make other provisions in connection with the withdrawal of the
United Kingdom from the EU (2018 c.16) (``European Union
(Withdrawal) Act 2018'').
\48\ See PRA, Policy Statement 21/21--The UK Leverage Framework,
October 2021, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2021/june/changes-to-the-uk-leverage-ratio-framework, and Policy Statement 22/21--Implementation
of Basel standards: Final rules, October 2021, available here:
https://www.bankofengland.co.uk/prudential-regulation/publication/2021/october/implementation-of-basel-standards.
\49\ Pursuant to the Financial Services and Markets Act 2023
(``FSMA 2023''), the UK revoked CRR and replaced it with: (i) PRA
rules adopted under Section 144 of the Financial Services and
Markets Act 2000 (``FSMA'') and (ii) UK regulations, adopted under
Section 4 of FSMA 2023, restating CRR provisions.
\50\ The UK CRR is available here: https://www.legislation.gov.uk/eur/2013/575/contents. The provisions that
were incorporated in the PRA Rulebook are no longer part of UK CRR
and appear instead in the PRA Rulebook.
\51\ Commission Delegated Regulation (EU) 2015/61 of 10 October
2014 to supplement Regulation (EU) No 575/2013 of the European
Parliament and the Council with regard to liquidity coverage
requirement for Credit Institutions (``Liquidity Coverage Delegated
Regulation'').
\52\ See PRA Rulebook, CRR Firms, Liquidity Coverage
Requirement--UK Designated Investment Firms Part.
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The Applicants also represent that in addition to UK CRR and the
PRA Rulebook, the Banking Act 2009 and its related secondary
legislation, through which the UK transposed the Bank Recovery and
Resolution Directive (``BRRD''), include relevant UK capital
requirements.\53\ Specifically, pursuant to the Banking Act 2009 and
its secondary legislation, the Bank of England, in its role as
resolution authority, requires certain investment firms, including PRA-
designated UK nonbank SDs, to satisfy a firm-specific minimum
requirement for own funds and eligible liabilities (``MREL'').\54\
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\53\ Directive 2014/59/EU of the European Parliament and of the
Council of 15 May 2014 establishing a framework for the recovery and
resolution of credit institutions and investment firms and amending
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC,
2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/
36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of
the European Parliament and of the Council. See UK Application, p.
7.
\54\ Banking Act 2009, Section 3A(4) and (4B); Bank Recovery and
Resolution (No 2) Order 2014, Statutory Instrument No. 3348 (``Bank
Recovery and Resolution (No 2) Order 2014''), Part 9.
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UK CRR, Capital Requirements Regulations 2013, Capital Requirements
(Capital Buffers and Macro-prudential Measures) Regulations 2014,
Liquidity Coverage Delegated Regulation, the Banking Act 2009 and its
secondary legislation, and relevant parts of the PRA Rulebook are
referred to hereafter as the ``UK PRA Capital Rules.''
The Applicants further represent that with respect to supervisory
financial reporting, the framework applicable to PRA-designated UK
nonbank SDs is also based on the EU requirements. In addition, the
framework comprises PRA-specific rules for matters not addressed by the
EU-based requirements. Specifically, Commission Implementing Regulation
(EU) 680/2014,\55\ which was initially retained in UK law following
Brexit, supplemented CRR with implementing technical standards (``CRR
Reporting ITS'')
[[Page 8031]]
specifying, among other things, uniform formats and frequencies for the
financial and capital requirements reporting required under CRR.\56\
CRR Reporting ITS included templates for the common reporting
(``COREP'') and the financial reporting (``FINREP'') that specify the
contents of the EU-based supervisory reporting requirements. As part of
the regulatory reforms that followed Brexit and sought to implement
Basel III standards, the PRA incorporated the entire body of the UK
version of COREP and FINREP requirements into the PRA Rulebook to
create a single source for reporting requirements for firms.\57\ For
PRA-designated UK nonbank SDs that are not subject to the EU-based
FINREP requirements, the PRA Rulebook includes PRA-specific
requirements.\58\
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\55\ Commission Implementing Regulation (EU) 680/2014 of 16
April 2014 laying down implementing technical standards with regard
to supervisory reporting of institutions according to Regulation
(EU) No 575/2013 of the European Parliament and of the Council.
\56\ UK Application, p. 24 and Responses to Staff Questions
dated October 5, 2023.
\57\ PRA Rulebook, CRR Firms, Reporting (CRR) Part.
\58\ PRA Rulebook, CRR Firms, Regulatory Reporting Part.
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The Applicants also represent that the Companies Act 2006 contains
provisions related to financial reporting, including a mandate that
entities of a certain size be required to prepare annual audited
financial statements and a strategic report.\59\ UK CRR, relevant
provisions of the PRA Rulebook, and relevant provisions of the
Companies Act 2006, are collectively referred to hereafter as the ``UK
PRA Financial Reporting Rules.''
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\59\ UK Application, p.7. Companies Act 2006, Part 15 and 16.
The Companies Act 2006 is available here: https://www.legislation.gov.uk/ukpga/2006/46/contents.
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The Applicants also note that the U.S. Securities and Exchange
Commission (``SEC'') has issued orders permitting an SEC-registered
nonbank security-based swap dealer domiciled in the UK (``UK nonbank
SBSD'') \60\ to satisfy SEC capital \61\ and financial reporting
requirements via substituted compliance with applicable UK capital and
financial reporting.\62\ The UK Order conditioned substituted
compliance for capital requirements on a UK nonbank SBSD complying with
specified laws and regulations, including relevant parts of UK CRR and
the PRA Rulebook, and also maintaining total liquid assets in an amount
that exceeds the UK nonbank SBSD's total liabilities by at least $100
million and by at least $20 million after applying certain deductions
to the value of the liquid assets to reflect market, credit, and other
potential risks to the value of the assets.\63\
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\60\ All six of the PRA-designated UK nonbank SDs currently
registered with the Commission are also UK nonbank SBSDs.
\61\ Section 15F(e)(1)(B) of the Exchange Act (15 U.S.C. 78o-10)
directs the SEC to adopt capital rules for security-based swap
dealers (``SBSDs'') that do not have a prudential regulator.
\62\ See Order Granting Conditional Substituted Compliance in
Connection with Certain Requirements Applicable to Non-U.S.
Security-Based Swap Dealers and Major Security-Based Swap
Participants Subject to Regulation in the United Kingdom, 86 FR
43318 (July 30, 2021) (``Final UK Order''); Amended and Restated
Order Granting Conditional Substituted Compliance in Connection with
Certain Requirements Applicable to Non-U.S. Security-Based Swap
Dealers and Major Security-Based Swap Participants Subject to
Regulation in the Federal Republic of Germany; Amended Orders
Addressing Non-U.S. Security-Based Swap Entities Subject to
Regulation in the French Republic or the United Kingdom; and Order
Extending the Time to Meet Certain Conditions Relating to Capital
and Margin, 86 FR 59797 (Oct. 28, 2021) (``Amended UK Order,''
together with the Final UK Order, ``UK Order''); and Order
Specifying the Manner and Format of Filing Unaudited Financial and
Operational Information by Security-Based Swap Dealers and Major
Security-Based Swap Participants that are not U.S. Persons and are
Relying on Substituted Compliance with Respect to Rule 18a-7, 86 FR
59208 (Oct. 26, 2021) (``SEC Order on Manner and Format of Filing
Unaudited Financial and Operational Information'').
\63\ The conditioning of the UK substituted compliance order on
UK nonbank SBSDs maintaining liquid assets in an amount that exceeds
the UK nonbank SBSD's total liabilities by at least $100 million and
by at least $20 million after applying certain deductions to the
value of the liquid assets reflects that the SEC's capital rule for
nonbank SBSDs is a liquidity-based requirement and that the SEC
capital requirements are not based on the Basel bank capital
standards. See 17 CFR 240.18a-1(a)(1) (requiring a SBSD to maintain,
in relevant part, net capital of $20 million or, if approved to use
capital models, $100 million of tentative net capital and $20
million of net capital).
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II. General Overview of Commission and UK PRA Nonbank Swap Dealer
Capital Rules
A. General Overview of the CFTC Nonbank Swap Dealer Capital Rules
The CFTC Capital Rules provide nonbank SDs with three alternative
capital approaches: (i) the Tangible Net Worth Capital Approach (``TNW
Approach''); (ii) the Net Liquid Assets Capital Approach (``NLA
Approach''); and (iii) the Bank-Based Capital Approach (``Bank-Based
Approach'').\64\
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\64\ 17 CFR 23.101.
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Nonbank SDs that are ``predominantly engaged in non-financial
activities'' may elect the TNW Approach.\65\ The TNW Approach requires
a nonbank SD to maintain a level of ``tangible net worth'' \66\ equal
to or greater than the higher of: (i) $20 million plus the amount of
the nonbank SD's ``market risk exposure requirement'' \67\ and ``credit
risk exposure requirement'' \68\ associated with the nonbank SD's swap
and related hedge positions that are part of the nonbank SD's swap
dealing activities; (ii) 8 percent of the nonbank SD's ``uncleared swap
margin'' amount; \69\ or (iii) the amount of capital required by a
registered futures association of which the nonbank SD is a member.\70\
The TNW Approach is intended to ensure the safety and soundness of a
qualifying nonbank SD by requiring the firm to maintain a minimum level
of tangible net worth that is based on the nonbank SD's swap dealing
activities to provide a sufficient level of capital to absorb losses
resulting from its swap dealing and other business activities.
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\65\ 17 CFR 23.101(a)(2). The term ``predominantly engaged in
non-financial activities'' is defined in Commission Regulation
23.100 and generally provides that: (i) the nonbank SD's, or its
parent entity's, annual gross financial revenues for either of the
previous two completed fiscal years represents less than 15 percent
of the nonbank SD's or the nonbank SD's parent's, annual gross
revenues for all operations (i.e., commercial and financial) for
such years; and (ii) the nonbank SD's, or its parent entity's, total
financial assets at the end of its two most recently completed
fiscal years represents less than 15 percent of the nonbank SD's, or
its parent's, total consolidated financial and nonfinancial assets
as of the end of such years. 17 CFR 23.100.
\66\ The term ``tangible net worth'' is defined in Commission
Regulation 23.100 and generally means the net worth (i.e., assets
less liabilities) of a nonbank SD, computed in accordance with
applicable accounting principles, with assets further reduced by a
nonbank SD's recorded goodwill and other intangible assets. 17 CFR
23.100.
\67\ The terms ``market risk exposure'' and ``market risk
exposure requirement'' are defined in Commission Regulation 23.100
and generally mean the risk of loss in a financial position or
portfolio of financial positions resulting from movements in market
prices and other factors. 17 CFR 23.100. Market risk exposure is the
sum of: (i) general market risks including changes in the market
value of a particular asset that results from broad market
movements, which may include an additive for changes in market value
under stressed conditions; (ii) specific risk, which includes risks
that affect the market value of a specific instrument but do not
materially alter broad market conditions; (iii) incremental risk,
which means the risk of loss on a position that could result from
the failure of an obligor to make timely payments of principal and
interest; and (iv) comprehensive risk, which is the measure of all
material price risks of one or more portfolios of correlation
trading positions.
\68\ The term ``credit risk exposure requirement'' is defined in
Commission Regulation 23.100 and generally reflects the amount at
risk if a counterparty defaults before the final settlement of a
swap transaction's cash flows. 17 CFR 23.100.
\69\ The term ``uncleared swap margin'' is defined in Commission
Regulation 23.100 to generally mean the amount of initial margin
that a nonbank SD would be required to collect from each
counterparty for each outstanding swap position of the nonbank SD.
17 CFR 23.100. A nonbank SD must include all swap positions in the
calculation of the uncleared swap margin amount, including swaps
that are exempt or excluded from the scope of the Commission's
uncleared swap margin regulations. A nonbank SD must compute the
uncleared swap margin amount in accordance with the Commission's
margin rules for uncleared swaps. See 17 CFR 23.154.
\70\ The National Futures Association (``NFA'') is currently the
only entity that is a registered futures association. The Commission
will refer to NFA in this document when referring to the
requirements or obligations of a registered futures association.
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The TNW approach requires a nonbank SD to compute its market risk
exposure requirement and credit risk
[[Page 8032]]
exposure requirement using standardized capital charges set forth in
SEC Rule 18a-1 \71\ that are applicable to entities registered with the
SEC as SBSDs or standardized capital charges set forth in Commission
Regulation 1.17 applicable to entities registered as FCMs or entities
dually-registered as an FCM and nonbank SD.\72\ Nonbank SDs that have
received Commission or NFA approval pursuant to Commission Regulation
23.102 may use internal models to compute market risk and/or credit
risk capital charges in lieu of the SEC or CFTC standardized capital
charges.\73\
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\71\ 17 CFR 240.18a-1.
\72\ 17 CFR 23.101(a)(2)(ii)(A).
\73\ Id.
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A nonbank SD that elects the NLA Approach is required to maintain
``net capital'' in an amount that equals or exceeds the greater of: (i)
$20 million; (ii) 2 percent of the nonbank SD's uncleared swap margin
amount; or (iii) the amount of capital required by NFA.\74\ The NLA
Approach is intended to ensure the safety and soundness of a nonbank SD
by requiring the firm to maintain at all times at least one dollar of
highly liquid assets to cover each dollar of the nonbank SD's
liabilities.
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\74\ 17 CFR 23.101(a)(1)(ii)(A). ``Net capital'' consists of a
nonbank SD's highly liquid assets (subject to haircuts) less all of
the firm's liabilities, excluding certain qualified subordinated
debt. See 17 CFR 240.18a-1 for the calculation of ``net capital.''
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A nonbank SD is required to reduce the value of its highly liquid
assets by the market risk exposure requirement and/or the credit risk
exposure requirement in computing its net capital.\75\ A nonbank SD
that does not have Commission or NFA approval to use internal models
must compute its market risk exposure requirement and/or credit risk
exposure requirement using the standardized capital charges contained
in SEC Rule 18a-1 as modified by the Commission's rule.\76\
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\75\ See 17 CFR 240.18a-1(c) and (d).
\76\ See 17 CFR 23.101(a)(1)(ii).
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A nonbank SD that has obtained Commission or NFA approval, may use
internal market risk and/or credit risk models to compute market risk
and/or credit risk capital charges in lieu of the standardized capital
charges.\77\ A nonbank SD that is approved to use internal market risk
and/or credit risk models is further required to maintain a minimum of
$100 million of ``tentative net capital.'' \78\
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\77\ See 17 CFR 23.102.
\78\ 17 CFR 23.101(a)(1)(ii)(A)(1). The term ``tentative net
capital'' is defined in Commission Regulation 23.101(a)(1)(ii)(A)(1)
by reference to SEC Rule 18a-1 and generally means a nonbank SD's
net capital prior to deducting market risk and credit risk capital
charges.
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The Commission's NLA Approach is consistent with the SEC's SBSD
capital rule, and is based on the Commission's capital rule for FCMs
and the SEC's capital rule for securities broker-dealers (``BDs''). The
quantitative and qualitative requirements for NLA Approach internal
market and credit risk models are also consistent with the quantitative
and qualitative requirements of the Commission's Bank-Based Approach as
described below.
The Commission's Bank-Based Approach for computing regulatory
capital for nonbank SDs is based on certain capital requirements
imposed by the Federal Reserve Board for bank holding companies.\79\
The Bank-Based Approach also is consistent with the Basel Committee on
Banking Supervision's (``BCBS'') international framework for bank
capital requirements.\80\ The Bank-Based Approach requires a nonbank SD
to maintain regulatory capital equal to or in excess of each of the
following requirements: (i) $20 million of common equity tier 1
capital; (ii) an aggregate of common equity tier 1 capital, additional
tier 1 capital, and tier 2 capital (including qualifying subordinated
debt) equal to or greater than 8 percent of the nonbank SD's risk-
weighted assets (provided that common equity tier 1 capital comprises
at least 6.5 percent of the 8 percent minimum requirement); (iii) an
aggregate of common equity tier 1 capital, additional tier 1 capital,
and tier 2 capital equal to or greater than 8 percent of the nonbank
SD's uncleared swap margin amount; and (iv) an amount of capital
required by NFA.\81\ The Bank-Based Approach is intended to ensure that
the safety and soundness of a nonbank SD by requiring the firm to
maintain at all times qualifying capital in an amount sufficient to
absorb unexpected losses, expenses, decrease in firm assets, or
increases in firm liabilities without the firm becoming insolvent.
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\79\ See 17 CFR 23.101(a)(1)(i).
\80\ The BCBS is the primary global standard-setter for the
prudential regulation of banks and provides a forum for cooperation
on banking supervisory matters. Institutions represented on the BCBS
include the Federal Reserve Board, the European Central Bank,
Deutsche Bundesbank, Bank of England, Bank of France, Bank of Japan,
Banco de Mexico, and Bank of Canada. The BCBS framework is available
at https://www.bis.org/basel_framework/index.htm.
\81\ 17 CFR 23.101(a)(1)(i).
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The terms used in the Commission's Bank-Based Approach are defined
by reference to regulations of the Federal Reserve Board.\82\
Specifically, the term ``common equity tier 1 capital'' is defined for
purposes of the CFTC Capital Rules to generally mean the sum of a
nonbank SD's common stock instruments and any related surpluses,
retained earnings, and accumulated other comprehensive income.\83\ The
term ``additional tier 1 capital'' is defined to include equity
instruments that are subordinated to claims of general creditors and
subordinated debt holders, but contain certain provisions that are not
available to common stock, such as the right of nonbank SD to call the
instruments for redemption or to convert the instruments to other forms
of equity.\84\ The term ``tier 2 capital'' is defined to include
certain types of instruments that include both debt and equity
characteristics (e.g., certain perpetual preferred stock instruments
and subordinated term debt instruments).\85\ Subordinated debt also
must meet certain requirements to qualify as tier 2 capital, including
that the term of the subordinated debt instrument is for a minimum of
one year (with the exception of approved revolving subordinated debt
agreements which may have a maturity term that is less than one year),
and the debt instrument is an effective subordination of the rights of
the lender to receive any payment, including accrued interest, to other
creditors.\86\
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\82\ Id. Commission Regulation 23.101(a)(1)(i) references
Federal Reserve Board Rule 217.20 for purposes of defining the terms
used in establishing the minimum capital requirements under the
Bank-Based Approach. 17 CFR 23.101(a)(1)(i) and 12 CFR 217.20.
\83\ See 12 CFR 217.20(b).
\84\ See 12 CFR 217.20(c).
\85\ See 12 CFR 217.20(d).
\86\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See 17 CFR
23.101(a)(1)(i)(B) providing that the subordinated debt used by a
nonbank SD to meet its minimum capital requirement under the Bank-
Based Approach must satisfy the conditions for subordinated debt
under SEC Rule 18a-1d.
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Common equity tier 1 capital, additional tier 1 capital, and tier 2
capital are unencumbered and generally long-term or permanent forms of
capital that help ensure that a nonbank SD will be able to absorb
losses resulting from its operations and maintain confidence in the
nonbank SD as a going concern. In addition, in setting an equity ratio
requirement, this limits the amount of asset growth and leverage a
nonbank SD can incur, as a nonbank SD must fund its asset growth with a
certain percentage of regulatory capital.
A nonbank SD also must compute its risk-weighted assets using
standardized capital charges or, if approved, internal models. Risk-
weighting assets involves adjusting the notional or carrying value of
each asset based on the inherent risk of the asset. Less risky assets
are
[[Page 8033]]
adjusted to lower values (i.e., have less risk-weight) than more risky
assets. As a result, nonbank SDs are required to hold lower levels of
regulatory capital for less risky assets and higher levels of
regulatory capital for riskier assets.
Nonbank SDs not approved to use internal models to risk-weight
their assets must compute market risk capital charges using the
standardized charges contained in Commission Regulation 1.17 and SEC
Rule 18a-1, and must compute their credit risk charges using the
standardized capital charges set forth in regulations of the Federal
Reserve Board for bank holding companies in subpart D of 12 CFR part
217.\87\
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\87\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the
term BHC risk-weighted assets in 17 CFR 23.100.
---------------------------------------------------------------------------
Standardized market risk charges are computed under Commission
Regulation 1.17 and SEC Rule 18a-1 by multiplying, as appropriate to
the specific asset schedule, the notional value or market value of the
nonbank SD's proprietary financial positions (such as swaps, security-
based swaps, futures, equities, and U.S. Treasuries) by fixed
percentages set forth in the Regulation or Rule.\88\ Standardized
credit risk charges require the nonbank SD to multiply on-balance sheet
and off-balance sheet exposures (such as receivables from
counterparties, debt instruments, and exposures from derivatives) by
predefined percentages set forth in the applicable Federal Reserve
Board regulations contained in subpart D of 12 CFR part 217.
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\88\ See 17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).
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A nonbank SD also may apply to the Commission or NFA for approval
to use internal models to compute market risk exposure and/or credit
risk exposure for purposes of determining its total risk-weighted
assets.\89\ Nonbank SDs approved to use internal models for the
calculation of credit risk or market risk, or both, must follow the
model requirements set forth in Federal Reserve Board regulations for
bank holding companies codified in subpart E and F, respectively, of 12
CFR part 217. Credit risk and market risk capital charges computed with
internal models require the estimation of potential losses, with a
certain degree of likelihood, within a specified time period, of a
portfolio of assets. Internal models allow for consideration of
potential co-movement of prices across assets in the portfolio, leading
to offsets of gains and losses. Internal credit risk models can also
further include estimation of the likelihood of default of
counterparties.
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\89\ See 17 CFR 23.102.
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B. General Overview of UK PRA Capital Rules for PRA-Designated UK
Nonbank SDs
The Applicants state that the UK PRA Capital Rules impose bank-like
capital requirements on a PRA-designated UK nonbank SD that are
consistent with the BCBS framework for international bank-based capital
standards.\90\ The Applicants further state that the UK PRA Capital
Rules are intended to require each PRA-designated UK nonbank SD to hold
a sufficient amount of qualifying equity capital and subordinated debt
based on the PRA-designated UK nonbank SD's activities, to absorb
decreases in the value of firm assets, increases in the value of firm
liabilities, and to cover losses from business activities, including
possible counterparty defaults and margin collateral shortfalls
associated with swap dealing activities, without the firm becoming
insolvent.\91\
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\90\ See UK Application, p. 12.
\91\ See UK Application, pp. 7 and 12.
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The UK PRA Capital Rules require each PRA-designated UK nonbank SD
to hold and maintain regulatory capital in the form of qualifying
common equity tier 1 capital, additional tier 1 capital, and tier 2
capital in an aggregate amount that equals or exceeds 8 percent of the
PRA-designated UK nonbank SD's total risk exposure amount, which is
calculated as a sum of the firm's risk-weighted assets and
exposures.\92\ Common equity tier 1 capital must comprise a minimum of
4.5 percent of the 8 percent capital ratio,\93\ and tier 1 capital
(which is the aggregate of common equity tier 1 capital and additional
tier 1 capital) must comprise a minimum of 6 percent of the total 8
percent capital ratio.\94\ Tier 2 capital may comprise a maximum of 2
percent of the total 8 percent capital ratio.\95\
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\92\ UK CRR, Articles 26, 28, 50-52, 61-63 and 92.
\93\ Id., Article 92(1)(a).
\94\ Id., Article 92(1)(b).
\95\ Id., Article 92(1)(c) (providing that the total capital
ratio must be equal to or greater than 8 percent, with a minimum
common equity and additional tier 1 capital comprising at least 6
percent of the 8 percent minimum requirement). In addition to the
requirement to maintain minimum capital ratios, a PRA-designated UK
nonbank SD must maintain at all times capital resources equal to or
in excess of GBP 750,000. PRA Rulebook, CRR Firms, Definition of
Capital Part, Chapter 12 Base Capital Resource Requirement, Rule
12.1.
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Under the UK PRA Capital Rules, common equity tier 1 capital is
composed of common equity capital instruments, retained earnings,
accumulated other comprehensive income, and other reserves of the PRA-
designated UK nonbank SD.\96\ Additional tier 1 capital is composed of
capital instruments other than common equity and retained earnings
(i.e., common equity tier 1 capital), and includes certain long-term
convertible debt securities.\97\ Tier 2 capital instruments, which
provide an additional layer of supplementary capital, include other
reserves, hybrid capital instruments, and certain subordinated
debt.\98\
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\96\ UK CRR, Articles 26 and 28. Retained earnings, accumulated
other comprehensive income and other reserves qualify as common
equity tier 1 capital only where the funds are available to the PRA-
designated UK nonbank SD for unrestricted and immediate use to cover
risks or losses as such risks or losses occur. See UK CRR, Article
26(1).
\97\ Id., Articles 51-52.
\98\ Id., Articles 62-63.
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To qualify as tier 2 regulatory capital, capital instruments and
subordinated debt must meet certain conditions including that: (i) the
capital instruments are issued by the PRA-designated UK nonbank SD and
are fully paid-up; (ii) the capital instruments are not purchased by
the PRA-designated UK nonbank SD or its subsidiaries; (iii) the claims
on the principal amount of the capital instruments rank below any claim
from instruments that are ``eligible liabilities,'' \99\ meaning that
they are effectively subordinated to claims of all non-subordinated
creditors of the PRA-designated UK nonbank SD; (iv) the capital
instruments have an original maturity of at least five years; and (v)
the provisions governing the capital instruments do not include any
incentive for the principal amount to be redeemed or repaid by the PRA-
designated UK nonbank SD prior to the capital instruments' respective
maturities.\100\
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\99\ ``Eligible liabilities'' are non-capital instruments,
including instruments that are directly issued by the PRA-designated
UK nonbank SD and fully paid up with remaining maturities of at
least a year. Bank Recovery and Resolution (No. 2) Order 2014,
Article 123. In addition, the liabilities cannot be owned, secured,
or guaranteed, by the PRA-designated UK nonbank SD itself, and the
PRA-designated UK nonbank SD cannot have either directly or
indirectly funded their purchase. Id.
\100\ UK CRR, Article 63 (listing the conditions that capital
instruments must meet to qualify as tier 2 instruments) and Bank
Recovery and Resolution (No. 2) Order 2014, Article 123. See also
infra note 121.
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In addition to the requirement to maintain total regulatory capital
in an amount equal to or in excess of 8 percent of its risk-weighted
assets, the UK PRA Capital Rules also require a PRA-designated UK
nonbank SD to maintain a capital conservation buffer composed
exclusively of common equity tier 1 capital in an amount equal to 2.5
percent of the firm's total risk-
[[Page 8034]]
weighted assets.\101\ The common equity tier 1 capital used to meet the
2.5 percent capital conservation buffer must be separate and
independent of the 4.5 percent of common equity tier 1 capital used to
meet the 8 percent core capital requirement.\102\
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\101\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2
Capital Conservation Buffer, Rule 2.1.
\102\ Id. In effect, the UK PRA Capital Rules require a PRA-
designated UK nonbank SD to hold common equity tier 1 capital equal
to or in excess of 7 percent of the firm's risk-weighted assets, and
total capital equal to or in excess of 10.5 percent of the firm's
risk-weighted assets.
In addition, a PRA-designated nonbank SD may also be subject to
a firm-specific countercyclical capital buffer, whose rate consists
of the weighted average of the countercyclical buffer rates that
apply to exposures in the jurisdictions where the firm's relevant
credit exposures are located. The rate for each jurisdiction is
determined by the UK Financial Policy Committee or a third country
countercyclical buffer authority, as applicable. See PRA Rulebook,
CRR Firms, Capital Buffers Part, Chapter 3 Countercyclical Capital
Buffer, Rule 3.1., and Capital Requirements (Capital Buffers and
Macro-prudential Measures) Regulations 2014, Articles 7-20. The sum
of the capital conservation buffer and the countercyclical buffer is
referred to as the ``combined buffer.'' PRA Rulebook, CRR Firms,
Capital Buffers Part, Chapter 1 Application and Definitions, Rule
1.2. To meet these additional capital buffer requirements, the PRA-
designated UK nonbank SD must maintain a level of common equity tier
1 capital that is in addition to the common equity tier 1 capital
required to meet its core capital requirement of 4.5 percent of its
risk-weighted assets and the common equity tier 1 capital required
to meet its capital conservation buffer. See PRA Rulebook, CRR
Firms, Capital Buffers Part, Chapter 1 Application and Definitions,
Rule 1.2, and Capital Buffers Part, Chapter 4 Capital Conservation
Measures, Rule 4.1. In practice, the countercyclical buffer rate in
the UK, as of July 2023, is 2 percent of risk-weighted assets.
Several EU Member States of relevance to the UK have also
implemented countercyclical capital buffers with rates ranging from
0.5 percent to 2.5 percent of risk-weighted assets. The
countercyclical capital buffer rate is published by the Bank of
England, and is available at: https://bankofengland.co.uk/financial-stability/the-countercyclical-capital-buffer.
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The UK PRA Capital Rules also impose a 3.25 percent leverage ratio
floor on PRA-designated UK nonbank SDs that hold significant amounts of
non-UK assets, as an additional element to the capital
requirements.\103\ Specifically, a PRA-designated UK nonbank SD that
has non-UK assets equal to or greater than GBP 10 billion is required
to maintain an aggregate amount of common equity tier 1 capital and
additional tier 1 capital equal to or in excess of 3.25 percent of the
firm's on-balance sheet and off-balance sheet exposures, including
exposures on uncleared swaps but excluding certain exposures to central
banks, without regard to any risk-weighting.\104\ The leverage ratio is
a non-risk based minimum capital requirement that is intended to
prevent a PRA-designated UK nonbank SD from engaging in excessive
leverage, and complements the risk-based minimum capital requirement
that is based on the PRA-designated UK nonbank SD's risk-weighted
assets.
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\103\ PRA Rulebook, CRR Firms, Leverage Ratio--Capital
Requirements and Buffers Part, Chapter 1 Application and Definitions
and Chapter 3 Minimum Leverage Ratio. The Applicants represented
that the six PRA-designated UK nonbank SDs currently registered with
the Commission are subject to a leverage ratio floor requirement.
See Responses to Staff Questions dated October 5, 2023.
\104\ Total exposures are required to be computed in accordance
with PRA Rulebook, CRR Firms, Leverage Ratio (CRR) Part, Chapter 3
Leverage Ratio (Part Seven CRR), Article 429 et seq. A PRA-
designated UK nonbank SD may also be subject to a countercyclical
leverage ratio buffer of common equity tier 1 capital equal to the
firm's institution-specific countercyclical capital buffer rate
multiplied by 35 percent, multiplied by the firm's total exposures.
PRA Rulebook, CRR Firms, Leverage Ratio--Capital Requirements and
Buffers Part, Chapter 4 Countercyclical Leverage Ratio Buffer.
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As noted above, the amount of regulatory capital that a PRA-
designated UK nonbank SD is required to hold is determined by
calculating the firm's total risk exposure, which requires the PRA-
designated UK nonbank SD to risk-weight its on-balance sheet and off-
balance sheet assets and exposures using specified standardized weights
or, if approved for use by the PRA, internal model-based
methodologies.\105\ Risk-weighting assets and exposures involves
adjusting the notional or carrying value of each asset and risk
exposure based on the inherent risk of the asset or exposure. Less
risky assets and exposures are adjusted to lower values (i.e., have
less weight) than more risky assets or exposures. As a result, PRA-
designated UK nonbank SDs are required to hold lower levels of
regulatory capital for less risky assets and exposures and higher
levels of regulatory capital for riskier assets and exposures. The
categories of risk charges that a PRA-designated UK nonbank SD must
include in determining its total risk exposure include charges
reflecting: (i) market risk; (ii) credit risk; (iii) settlement risk;
(iv) CVA risk of OTC derivative instruments; and (v) operational
risk.\106\ The methods for calculating such risk charges are based on
the BCBS framework.\107\
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\105\ With regulator permission, PRA-designated UK nonbank SDs
may use internal models to calculate credit risk (UK CRR, Article
143), including certain counterparty credit risk exposures (UK CRR,
Article 283), operational risk (UK CRR, Article 312(2)), market risk
(UK CRR, Article 363), and credit valuation adjustment risk (``CVA
risk'') of over-the-counter (``OTC'') derivatives instruments (UK
CRR, Article 383). The permission to use, and continue using,
internal models is subject to strict criteria and supervisory
oversight by the PRA.
\106\ UK CRR, Article 92(3).
\107\ UK Application, pp. 12-15.
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Standardized market risk charges are generally calculated by
multiplying the notional or carrying amount of net positions or of
adjusted net positions by risk-weighting factors, which are based on
the underlying market risk of each asset or exposure. The sum of the
calculated amounts comprises the portion of the risk exposure amount
attributable to market risk.\108\ Standardized credit risk charges are
generally calculated by multiplying the notional or carrying value of
the PRA-designated UK nonbank SD's on-balance sheet and off-balance
sheet assets and exposures by clearly defined risk-weighting factors,
which are based on the underlying credit risk of each asset or
exposure. The sum of the calculated amounts comprises the portion of
the risk exposure amount attributable to credit risk.\109\
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\108\ UK CRR, Articles 326-361.
\109\ Id., Articles 111-134 and PRA Rulebook, CRR Firms,
Standardised Approach and Internal Ratings Based Approach to Credit
Risk (CRR) Part, Chapter 3 Credit Risk (Part Three Title Two
Chapters Two and Three CRR), Article 132.
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Settlement risk charges are intended to account for the price
difference to which a PRA-designated UK nonbank SD is exposed if its
transactions remain unsettled after the respective transaction's due
delivery date.\110\ CVA risk charges reflect the current market value
of the credit risk of the counterparty to the PRA-designated UK nonbank
SD in an OTC derivatives transaction.\111\ Operational risk charges
reflect the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events, and includes
legal risk.\112\
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\110\ UK CRR, Article 378.
\111\ Id., Article 381.
\112\ Id., Article 4(1)(52).
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As noted above, PRA-designated UK nonbank SDs may use internal
model-based methodologies to calculate certain categories of risk
charges in lieu of standardized charges if they have obtained the
requisite regulatory approval.\113\ The UK PRA Capital Rules set out
quantitative and qualitative requirements that internal models must
meet in order to obtain and maintain approval.\114\ Quantitative and
qualitative requirements address, among other issues, governance,
validation, monitoring, and review. Modeled risk charges generally
require the estimation of potential losses, with a certain degree of
likelihood, within a specified time
[[Page 8035]]
period, of a portfolio of assets.\115\ Internal models allow for
consideration of potential co-movement of prices across assets in the
portfolio, leading to offsets of gains and losses. Credit risk models
can also further include estimation of the likelihood of default of
counterparties.
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\113\ Id., Articles 143 (credit risk), 283 (counterparty credit
risk); 312(2) (operational risk), 363 (market risk), and 383 (CVA
risk).
\114\ See e.g., UK CRR, Articles 144, 283; 321-322 and 365-369.
\115\ The UK PRA Capital Rules require PRA-designated UK nonbank
SDs with internal model approval for market risk to use a VaR model
with a 99 percent, one-tailed confidence interval with: (i) price
change equivalent to 10 business-day movement in rates and prices;
(ii) effective historical observation periods of at least one year;
and (iii) at least monthly data set updates. See UK CRR, Article
365(1). PRA-designated UK nonbank SDs approved to use internal
ratings-based credit risk models must support the assessment of
credit risk, the assignment of exposures to rating grades or pools,
and the quantification of default and loss estimates that have been
developed for a certain type of exposures, among other conditions.
See UK CRR, Articles 142-144. In addition, when PRA-designated UK
nonbank SDs are approved to use a model to calculate counterparty
credit risk exposures for OTC derivatives transactions, the model
must specify the forecasting distribution for changes in the market
value of a netting set attributable to joint changes in relevant
market variables and calculate the exposure value for the netting
set at each of the future dates on the basis of the joint changes in
the market variables. See UK CRR, Article 284. PRA-designated
nonbank SDs allowed to follow the ``advanced method'' of calculating
CVA risk charges for OTC derivatives transactions must also use an
internal market risk model to simulate changes in the credit spreads
of counterparties, applying a 99 percent confidence interval and a
10-day equivalent holding period. See UK CRR, Article 383. Finally,
PRA-designated UK nonbank SDs using ``advanced measurement
approaches'' based on their own measurement systems to compute
operational risk exposures must calculate capital requirements as
comprising both expected loss and unexpected loss and capture
potentially severe tail events, achieving a sound standard
comparable to a 99.9 confidence interval over a one-year period. See
UK CRR, Article 322.
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Furthermore, the UK PRA Capital Rules also impose separate
requirements on an PRA-designated UK nonbank SD to address liquidity
risk. More specifically, PRA-designated UK nonbank SDs are subject to
the liquidity coverage requirement applicable under UK CRR to credit
institutions.\116\ The liquidity coverage requirement provides that
PRA-designated UK nonbank SDs must hold liquid assets in an amount
sufficient to cover liquidity outflows (less liquidity inflows) under
stressed conditions over a period of 30 days.\117\ For purposes of the
liquidity coverage requirement, the term ``stressed'' means a sudden or
severe deterioration in the solvency or liquidity position of a firm
due to changes in market conditions or idiosyncratic factors as a
result of which there is a significant risk that the firm becomes
unable to meet its commitments as they become due within the next 30
days.\118\
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\116\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part and PRA
Rulebook, CRR Firms, Liquidity Coverage Requirement--UK Designated
Investment Firms Part.
\117\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 412(1).
\118\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 411(10).
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In addition, Article 413 of UK CRR, which has been incorporated
into the PRA Rulebook, establishes a general requirement that firms
ensure that long-term obligations and off-balance sheet items are
adequately met with a diverse set of funding instruments that are
stable under both normal and stressed conditions.\119\
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\119\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 413(1).
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In addition, the Bank of England, in its capacity of resolution
authority,\120\ requires that PRA-designated UK nonbank SDs satisfy a
firm-specific MREL pursuant to provisions of the Banking Act 2009 and
the Bank Recovery and Resolution (No. 2) Order 2014, which transposed
BRRD.\121\ The MREL requirement is separate from the minimum capital
requirements imposed on PRA-designated UK nonbank SDs under UK CRR and
PRA Rulebook and is designed to ensure that PRA-designated UK nonbank
SDs maintain at all times sufficient eligible instruments to facilitate
resolution consistently with the resolution objectives under the
preferred resolution strategy.\122\ Specifically, the MREL is intended
to permit loss absorption, where appropriate, such that the PRA-
designated UK nonbank SD's capital ratio could be restored to the level
necessary for compliance with its capital requirements.\123\ The Bank
of England calculates a firm's baseline MREL as the sum of two
component: a loss absorption amount and a recapitalization amount.\124\
The loss absorption amount is equal to a firm's capital requirements
plus its capital buffers.\125\ The Bank of England has some discretion
to adjust the amount. The MREL amount varies depending on the entity's
size, funding model, and risk profile, among other considerations.\126\
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\120\ In application of BRRD, Article 3, EU Member States
designate resolution authorities that are empowered to apply the
resolution tools and exercise the resolution powers described in
BRRD. In the UK, the resolution authority is the Bank of England.
\121\ Banking Act 2009, Section 3A(4) and (4B) and the Bank
Recovery and Resolution (No. 2) Order 2014, Part 9. Eligible
liabilities include, among others items, instruments that are
directly issued by the PRA-designated UK nonbank SD and fully paid
up with remaining maturities of at least a year. See Bank Recovery
and Resolution (No. 2) Order 2014, Part 9, Article 123(4). In
addition, the liabilities cannot arise from a derivative, be owned,
secured or guaranteed by the PRA-designated UK nonbank SD itself,
and the PRA-designated UK nonbank SD cannot have either directly or
indirectly funded its purchase. Id.
\122\ The Bank of England's Approach to Setting a Minimum
Requirement for Own Funds and Eligible Liabilities (MREL), Statement
of Policy, 3 December 2021, at 3, available at: https://www.bankofengland.co.uk/-/media/boe/files/paper/2021/mrel-statement-of-policy-december-2021-updating-2018.pdf. See also The Minimum
Requirement for Own Funds and Eligible Liabilities (MREL)--Buffers
and Threshold Conditions, Supervisory Statement 16/16, 28 December
2020, available at: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2020/ss1616-update-dec-2020.pdf.
\123\ Bank Recovery and Resolution (No. 2) Order 2014, Part 9,
Article 123(6).
\124\ See The Bank of England's Approach to Setting a Minimum
Requirement for Own Funds and Eligible Liabilities (MREL), Statement
of Policy, Dec. 3, 2021, at 5.
\125\ Id. The reference to ``capital requirements'' in this
context means the amount of capital the PRA thinks the firm should
maintain at all times under PRA Rulebook, CRR Firms, Internal
Capital Adequacy Assessment.
\126\ Bank Recovery and Resolution (No. 2) Order 2014, Part 9,
Article 123(6).
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III. Commission Analysis of the Comparability of the UK PRA Capital
Rules and UK PRA Financial Reporting Rules With CFTC Capital Rules and
CFTC Financial Reporting Rules
The following section provides a description and comparative
analysis of the regulatory requirements of the UK PRA Capital Rules and
UK PRA Financial Reporting Rules to the CFTC Capital Rules and CFTC
Financial Reporting Rules. Immediately following a description of the
requirement(s) of the CFTC Capital Rules or the CFTC Financial
Reporting Rules for which a comparability determination was requested
by the Applicants, the Commission provides a description of the UK's
corresponding laws, regulations, or rules. The Commission then provides
a comparative analysis of the UK PRA Capital Rules or the UK PRA
Financial Reporting Rules with the corresponding CFTC Capital Rules or
CFTC Financial Reporting Rules and identifies any material differences
between the respective rules.
The Commission performed this proposed Capital Comparability
Determination by assessing the comparability of the UK PRA Capital
Rules for PRA-designated UK nonbank SDs as set forth in the UK
Application with the Commission's Bank-Based Approach. For clarity, the
Commission did not assess the comparability of the UK PRA Capital Rules
to the Commission's TNW Approach or NLA Approach as the Commission
understands that PRA-designated UK nonbank SDs, as of the date of the
UK Application, are subject to bank-based capital requirements pursuant
to the UK
[[Page 8036]]
PRA Capital Rules. In addition, as noted above, due to the differences
between the capital and financial reporting regimes applicable to PRA-
designated UK nonbank SD and FCA-regulated UK nonbank SDs, the
Commission anticipates assessing the comparability of the rules
applicable to FCA-regulated UK nonbank SDs through a separate capital
comparability determination.\127\ Accordingly, when the Commission
makes a preliminary determination herein regarding the comparability of
the UK PRA Capital Rules with the CFTC Capital Rules, the determination
solely pertains to the comparability of the UK PRA Capital Rules as
applicable to PRA-designated UK nonbank SD with the Bank-Based Approach
under the CFTC Capital Rules.
---------------------------------------------------------------------------
\127\ See supra note 5.
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As described below, it is proposed that any material changes to the
UK PRA Capital Rules would require notification to the Commission.
Therefore, if there are subsequent material changes to the UK PRA
Capital Rules to include, for example, another capital approach, the
Commission will review and assess the impact of such changes on the
Capital Comparability Determination Order as it is then in effect, and
may amend or supplement the Order.\128\
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\128\ The Commission also may amend or supplement the Capital
Comparability Determination Order to address any material changes to
the CFTC Capital Rules and CFTC Financial Reporting Rules that are
adopted after a final Order is issued.
The Commission is aware that the UK PRA is considering changes
to the PRA Capital Rules to implement Basel 3.1 standards. See PRA,
PS17/23--Implementation of the Basel 3.1 Standards Near-Final Part
1, December 12, 2023, available here: https://www.bankofengland.co.uk/news/2023/december/pra-publishes-first-of-two-policy-statements-for-basel-3-1-standards-implementation. If the
UK PRA proceeds with the implementation of the Basel 3.1 standards
as proposed, the regulatory changes would be applicable after July
1, 2025 with a 4.5-year transitional period ending on January 1,
2030. The Commission will monitor progress on the UK PRA's proposed
regulatory changes and may amend or supplement the Capital
Comparability Determination Order, as appropriate, after a final
Order is issued. As noted, the Commission proposes to require
notification of any material changes to the UK PRA Capital Rules,
including any Basel 3.1 implementing provisions.
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In addition, although the BCBS bank capital standards establish
minimum capital standards that are consistent with the requirements of
the Commission's Bank-Based Approach, the Commission notes that
consistency with the international standards is not determinative of a
finding of comparability with the CFTC Capital Rules. In the
Commission's view, a foreign jurisdiction's consistency with the BCBS
international bank capital standards is an element in the Commission's
comparability assessment, but, in and of itself, it may not be
sufficient to demonstrate comparability with the CFTC Capital Rules
without an assessment of the individual elements of the foreign
jurisdiction's capital framework.
Capital and financial reporting regimes are complex structures
comprised of a number of interrelated regulatory components.
Differences in how jurisdictions approach and implement these regimes
are expected, even among jurisdictions that base their requirements on
the principles and standards set forth in the BCBS international bank
capital framework. Therefore, the Commission's comparability
determination involves a detailed assessment of the relevant
requirements of the foreign jurisdiction and whether those
requirements, viewed in the aggregate, lead to an outcome that is
comparable to the outcome of the CFTC's corresponding requirements.
Consistent with this approach, the Commission has grouped the CFTC
Capital Rules and CFTC Financial Reporting Rules into the key
categories that focus the analysis on whether the UK PRA capital and
financial reporting requirements are comparable to the Commission's SD
requirements in purpose and effect, and not whether the UK PRA
requirements meet every aspect or contain identical elements as the
Commission's requirements.
Specifically, as discussed in detail below, the Commission used the
following key categories in its review: (i) the quality of the equity
and debt instruments that qualify as regulatory capital, and the extent
to which the regulatory capital represents committed and permanent
capital that would be available to absorb unexpected losses or
counterparty defaults; (ii) the process of establishing minimum capital
requirements for a PRA-designated UK nonbank SD and how such process
addresses market risk and credit risk of the firm's on-balance sheet
and off-balance sheet exposures; (iii) the financial reports and other
financial information submitted by a PRA-designated nonbank SD to the
PRA to effectively monitor the financial condition of the firm; and
(iv) the regulatory notices and other communications between the PRA-
designated UK nonbank SD and the PRA that detail potential adverse
financial or operational issues that may impact the firm. The
Commission also reviewed the manner in which compliance by a PRA-
designated UK nonbank SD with the UK PRA Capital Rules and UK PRA
Financial Reporting rules is monitored and enforced. The Commission
invites public comment on all aspects of the UK Application and on the
Commission's proposed Capital Comparability Determination discussed
below.
A. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules and UK PRA Capital Rules and UK PRA Financial Reporting
Rules
1. Regulatory Objectives of CFTC Capital Rules and CFTC Financial
Reporting Rules
The regulatory objectives of the CFTC Capital Rules and the CFTC
Financial Reporting Rules are to further the Congressional mandate to
ensure the safety and soundness of nonbank SDs to mitigate the greater
risk to nonbank SDs and the financial system arising from the use of
swaps that are not cleared.\129\ A primary function of the nonbank SD's
capital is to protect the solvency of the firm from decreases in the
value of firm assets, increases in the value of firm liabilities, and
from losses, including losses resulting from counterparty defaults and
margin collateral failures, by requiring the firm to maintain an
appropriate level of quality capital, including qualifying subordinated
debt, to absorb such losses without becoming insolvent. With respect to
swap positions, capital and margin perform complementary risk
mitigation functions by protecting nonbank SDs, containing the amount
of risk in the financial system as a whole, and reducing the potential
for contagion arising from uncleared swaps.
---------------------------------------------------------------------------
\129\ See 7 U.S.C. 6s(e)(3)(A).
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The objective of the CFTC Financial Reporting Rules is to provide
the Commission with the means to monitor and assess a nonbank SD's
financial condition, including the nonbank SD's compliance with minimum
capital requirements. The CFTC Financial Reporting Rules are designed
to provide the Commission and NFA, which, along with the Commission,
oversees nonbank SDs' compliance with Commission regulations, with a
comprehensive view of the financial health and activities of the
nonbank SD. The Commission's rules require nonbank SDs to file
financial information, including periodic unaudited and annual audited
financial statements, specific financial position information, and
notices of certain events that may indicate a potential financial or
operational issue that may adversely impact the nonbank SD's ability to
meet its obligations to counterparties and other creditors in the
[[Page 8037]]
swaps market, or impact the firm's solvency.\130\
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\130\ See 17 CFR 23.105.
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2. Regulatory Objective of UK PRA Capital Rules and UK PRA Financial
Reporting Rules
The regulatory objective of the UK PRA Capital Rules is to ensure
the safety and soundness of PRA-designated UK nonbank SDs.\131\ The UK
PRA Capital Rules are designed to preserve the financial stability and
solvency of a PRA-designated UK nonbank SD by requiring the firm to
maintain a sufficient amount of qualifying equity capital and
subordinated debt based on the PRA-designated UK nonbank SD's
activities to absorb decreases in the value of firm assets, increases
in the value of firm liabilities, and to cover losses from business
activities, including possible counterparty defaults and margin
collateral shortfalls associated with the firm's swap dealing
activities.\132\ The UK PRA Capital Rules are also designed to ensure
that the PRA-designated UK nonbank SDs have sufficient liquidity to
meet their financial obligations to counterparties and other creditors
in a distress scenario by requiring each firm to hold an amount of
liquid assets to ensure that the firm could face any possible imbalance
between liquidity inflows and outflows under gravely stressed
conditions over a period of 30 days \133\ and to hold a diversity of
stable funding instruments sufficient to meet long-term obligations
under both normal and stressed conditions.\134\
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\131\ See PRA, The Prudential Regulation Authority's Approach to
Banking Supervision, July 2023, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
\132\ Id.
\133\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 412 (Liquidity Coverage
Requirement). Liquid assets primarily include cash, exposures to
central banks, government-backed assets and other highly liquid
assets with high credit quality. PRA Rulebook, CRR Firms, Liquidity
(CRR) Part, Chapter 4 Liquidity (Part Six CRR), Article 416
(Reporting on Liquid Assets).
\134\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 413 (Stable Funding Requirement).
Stable funding instruments include common equity tier 1 capital
instruments, additional tier 1 capital instruments, tier 2 capital
instruments, and other preferred shares and capital instruments in
excess of the tier 2 allowable amount with an effective maturity of
one year or greater. PRA Rulebook, CRR Firms Liquidity (CRR) Part,
Chapter 4 Liquidity (Part Six CRR), Article 427 (Reporting on Stable
Funding).
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With respect to financial reporting, the objective of the UK PRA
Financial Reporting Rules is to enable the PRA to assess the financial
condition and safety and soundness of PRA-designated UK nonbank
SDs.\135\ The UK PRA Financial Reporting Rules aim to achieve this
objective by requiring a PRA-designated nonbank SD to provide financial
reports and other financial position and capital information to the PRA
on a regular basis.\136\ The financial reporting by a PRA-designated UK
nonbank SD provides the PRA with information necessary to effectively
monitor the PRA-designated UK nonbank SD's overall financial condition
and its ability to meet its regulatory obligations as a nonbank SD.
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\135\ See generally PRA, The Prudential Regulation Authority's
Approach to Banking Supervision, July 2023, available here: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
\136\ PRA Rulebook, CRR Firms, Reporting (CRR) Part.
---------------------------------------------------------------------------
3. Commission Analysis
The Commission has reviewed the UK Application and the relevant UK
laws and regulations, and has preliminarily determined that the overall
objectives of the UK PRA Capital Rules and CFTC Capital Rules are
comparable in that both sets of rules are intended to ensure the safety
and soundness of nonbank SDs by establishing a regulatory regime that
requires nonbank SDs to maintain a sufficient amount of qualifying
regulatory capital to absorb losses, including losses from swaps and
other trading activities, and to absorb decreases in the value of firm
assets and increases in the value of firm liabilities without the
nonbank SDs becoming insolvent. The UK PRA Capital Rules and CFTC
Capital Rules are also based on, and consistent with, the BCBS
international bank capital framework, which is designed to ensure that
banking entities hold sufficient levels of capital to absorb losses and
decreases in the value of assets without the banks becoming insolvent.
The Commission further preliminarily believes that the UK PRA
Financial Reporting Rules have comparable objectives with the CFTC
Financial Reporting Rules as both sets of rules require nonbank SDs to
file and/or publish, as applicable, periodic financial reports,
including unaudited financial reports and an annual audited financial
report, detailing their financial operations and demonstrating their
compliance with minimum capital requirements, with the goal of
providing the PRA and the CFTC staff with information necessary to
comprehensively assess the financial condition of a nonbank SD on an
ongoing basis. In addition, to achieve this objective, the financial
reports further provide the CFTC and the PRA with information regarding
potential changes in a nonbank SD's risk profile by disclosing changes
in account balances reported over a period of time. Such changes in
account balances may indicate that the nonbank SD has entered into new
lines of business, has increased its activity in an existing line of
business relative to other activities, or has terminated a previous
line of business.
The prompt and effective monitoring of the financial condition of
nonbank SDs through the receipt and review of periodic financial
reports supports the Commission and the PRA in meeting their respective
objectives of ensuring the safety and soundness of nonbank SDs. In
connection with these objectives, the early identification of potential
financial issues provides the Commission and the PRA with an
opportunity to address such issues with the nonbank SD before the
issues develop to a state where the financial condition of the firm is
impaired such that it may no longer hold a sufficient amount of
qualifying regulatory capital to absorb decreases in the value of firm
assets or increases in the value of firm liabilities, or to cover
losses from the firm's business activities, including the firm's swap
dealing activities and obligations to swap counterparties.
The Commission invites public comment on its analysis above,
including comment on the UK Application and relevant UK laws and
regulations.
B. Nonbank Swap Dealer Qualifying Capital
1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach
The CFTC Capital Rules require a nonbank SD electing the Bank-Based
Approach to maintain regulatory capital in the form of common equity
tier 1 capital, additional tier 1 capital, and tier 2 capital in
amounts that meet certain stated minimum requirements set forth in
Commission Regulation 23.101.\137\ Common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital are composed of certain
defined forms of equity of the nonbank SD, including common stock,
retained earnings, and qualifying subordinated debt.\138\ The
Commission's requirement for a nonbank SD to maintain a minimum amount
of defined qualifying capital and subordinated debt is intended to
[[Page 8038]]
ensure that the firm maintains a sufficient amount of regulatory
capital to absorb decreases in the value of the firm's assets and
increases in the value of the firm's liabilities, and to cover losses
resulting from the firm's swap dealing and other activities, including
possible counterparty defaults and margin collateral shortfalls,
without the firm becoming insolvent.
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\137\ See 17 CFR 23.101(a)(1)(i).
\138\ The terms ``common equity tier 1 capital,'' ``additional
tier 1 capital,'' and ``tier 2 capital'' are defined in the bank
holding company regulations of the Federal Reserve Board. See 12 CFR
217.20.
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Common equity tier 1 capital is generally composed of an entity's
common stock instruments and any related surpluses, retained earnings,
and accumulated other comprehensive income, and is a more conservative
or permanent form of capital than additional tier 1 and tier 2
capital.\139\ Additional tier 1 capital is generally composed of equity
instruments such as preferred stock and certain hybrid securities that
may be converted to common stock if triggering events occur.\140\ Total
tier 1 capital is composed of common equity tier 1 capital and further
includes additional tier 1 capital.\141\ Tier 2 capital includes
certain types of instruments that include both debt and equity
characteristics such as qualifying subordinated debt.\142\
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\139\ 12 CFR 217.20.
\140\ Id.
\141\ Id.
\142\ Id.
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Subordinated debt must meet certain conditions to qualify as tier 2
capital under the CFTC Capital Rules. Specifically, subordinated debt
instruments must have a term of at least one year (with the exception
of approved revolving subordinated debt agreements which may have a
maturity term that is less than one year), and contain terms that
effectively subordinate the rights of lenders to receive any payments,
including accrued interest, to other creditors of the firm.\143\
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\143\ The subordinated debt must meet the requirements set forth
in SEC Rule 18a-1d (17 CFR 240.18a-1d). See 17 CFR
23.101(a)(1)(i)(B) (providing that the subordinated debt used by a
nonbank SD to meet its minimum capital requirement under the Bank-
Based Approach must satisfy the conditions for subordinated debt
under SEC Rule 18a-1d).
---------------------------------------------------------------------------
Common equity tier 1 capital, additional tier 1 capital, and tier 2
capital are permitted to be included in a nonbank SD's regulatory
capital and used to meet the firm's minimum capital requirement due to
their characteristics of being permanent forms of capital that are
subordinate to the claims of other creditors, which ensures that a
nonbank SD will have this regulatory capital to absorb decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities, and to cover losses from business activities, including
swap dealing activities, without the firm becoming insolvent.
2. UK PRA Capital Rules: Qualifying Capital
The UK PRA Capital Rules require a PRA-designated nonbank SD to
maintain an amount of regulatory capital (i.e., equity capital and
qualifying subordinated debt) equal to or greater than 8 percent of the
PRA-designated UK nonbank SD's total risk exposure, which is calculated
as the sum of the firm's: (i) capital charges for market risk; (ii)
risk-weighted exposure amounts for credit risk; (iii) capital charges
for settlement risk; (iv) CVA risk of OTC derivatives instruments; and
(v) capital charges for operational risk.\144\ The UK Capital Rules
limit the composition of regulatory capital to common equity tier 1
capital, additional tier 1 capital, and tier 2 capital in a manner
consistent with the BCBS bank capital framework.\145\ In this regard,
the UK PRA Capital Rules provide that a PRA-designated UK nonbank SD's
regulatory capital may be composed of: (i) common equity tier 1 capital
instruments, which generally include the PRA-designated UK nonbank SD's
common equity, retained earnings, and accumulated other comprehensive
income; \146\ (ii) additional tier 1 capital instruments, which include
other forms of capital instruments and certain long-term convertible
debt instruments; \147\ and (iii) tier 2 capital instruments, which
includes other reserves, hybrid capital instruments, and certain
qualifying subordinated term debt.\148\
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\144\ UK CRR, Article 92.
\145\ Id.
\146\ UK CRR, Articles 26 and 28. Capital instruments that
qualify as common equity tier 1 capital under the UK PRA Capital
Rules include instruments that: (i) are issued directly by the PRA-
designated UK nonbank SD; (ii) are paid in full and not funded
directly or indirectly by the PRA-designated UK nonbank SD; and
(iii) are perpetual. In addition, the principal amount of the
instruments may not be reduced or repaid, except in the liquidation
of the PRA-designated UK nonbank SD.
\147\ Id., Articles 51-52. To qualify as additional tier 1
capital, the instruments must meet certain conditions including: (i)
the instruments are issued directly by the PRA-designated UK nonbank
SD and paid in full; (ii) the instruments are not owned by the PRA-
designated UK nonbank SD or its subsidiaries; (iii) the purchase of
the instruments is not funded directly or indirectly by the PRA-
designated UK nonbank SD; (iv) the instruments rank below tier 2
instruments in the event of the insolvency of the PRA-designated UK
nonbank SD; (v) the instruments are not secured or guaranteed by the
PRA-designated UK nonbank SD or an affiliate; (vi) the instruments
are perpetual and do not include an incentive for the PRA-designated
UK nonbank SD to redeem them; and (vii) distributions under the
instruments are pursuant to defined terms and may be cancelled under
the full discretion of the PRA-designated UK nonbank SD.
\148\ Id., Articles 62-63.
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Furthermore, subordinated debt instruments must meet certain
conditions to qualify as tier 2 regulatory capital under the UK PRA
Capital Rules, including that the: (i) loans are not granted by the
PRA-designated UK nonbank SD or its subsidiaries; (ii) claims on the
principal amount of the subordinated loans under the provisions
governing the subordinated loan agreement rank below any claim from
eligible liabilities instruments (i.e., certain non-capital
instruments), meaning that they are effectively subordinated to claims
of all non-subordinated creditors of the PRA-designated UK nonbank SD;
(iii) subordinated loans are not secured, or subject to a guarantee
that enhances the seniority of the claim, by the PRA-designated UK
nonbank SD, its subsidiaries, or affiliates; (iv) loans have an
original maturity of at least five years; and (v) provisions governing
the loans do not include any incentive for the principal amount to be
repaid by the PRA-designated UK nonbank SD prior to the loans'
maturity.\149\
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\149\ UK CRR, Article 63.
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A PRA-designated UK nonbank SD must also maintain a capital
conservation buffer equal to 2.5 percent of the firm's total risk
exposure in addition to the requirement to maintain qualifying
regulatory capital in excess of 8 percent of its total risk
exposure.\150\ The 2.5 percent capital conservation buffer must be met
with common equity tier 1 capital.\151\ Common equity tier 1 capital,
as noted above, is limited to the
[[Page 8039]]
PRA-designated UK nonbank SD's common equity, retained earnings, and
accumulated other comprehensive income, and represents a more permanent
form of capital than equity instruments that qualify as additional tier
1 capital and tier 2 capital.
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\150\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2
Capital Conservation Buffer, Rule 2.1. In addition, a PRA-designated
nonbank SD may also be subject to a firm-specific countercyclical
capital buffer, which requires the PRA-designated UK nonbank SD to
hold an additional amount of common equity tier 1 capital equal to
its total risk-weighted assets multiplied by the weighted average of
the countercyclical buffer rates that apply to exposures in the
jurisdictions where the firm's relevant credit exposures are
located. The rate for each jurisdiction is determined by the UK
Financial Policy Committee or a third country countercyclical buffer
authority, as applicable. See PRA Rulebook, CRR Firms, Capital
Buffers Part, Chapter 3 Countercyclical Capital Buffer, Rule 3.1.,
and Capital Requirements (Capital Buffers and Macro-prudential
Measures) Regulations 2014, Articles 7-20. In practice, the
countercyclical buffer rate in the UK, as of July 2023, is 2 percent
of risk-weighted assets. The countercyclical capital buffer rate is
published by the Bank of England, and is available at: https://bankofengland.co.uk/financial-stability/the-countercyclical-capital-buffer. Several EU Member States of relevance to the UK have also
implemented countercyclical capital buffers with rates ranging from
0.5 percent to 2.5 percent of risk-weighted assets.
\151\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2
Capital Conservation Buffer, Rule 2.1.
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The UK PRA Capital Rules also impose different ratios for the
various components of regulatory capital that are consistent with the
BCBS bank capital framework.\152\ In this regard, the UK PRA Capital
Rules provide that a PRA-designated UK nonbank SD's minimum regulatory
capital must satisfy the following requirements: (i) common equity tier
1 capital ratio of 4.5 percent of the firm's total risk exposure
amount; (ii) total tier 1 capital (i.e., common equity tier 1 capital
plus additional tier 1 capital) ratio of 6 percent of the firm's total
risk exposure amount; and (iii) total capital (i.e., an aggregate
amount of common equity tier 1 capital, additional tier 1 capital, and
tier 2 capital) ratio of 8 percent of the firm's total risk exposure
amount. As noted above, a PRA-designated UK nonbank SD must also
maintain a capital conservation buffer of 2.5 percent of its total risk
exposure amount that must be met with common equity tier 1
capital.\153\ With the addition of the capital conservation buffer,
each PRA-designated UK nonbank SD is required to maintain minimum
regulatory capital that equals or exceeds 10.5 percent of the firm's
total risk exposure amount, with common equity tier 1 capital
comprising at least 7 percent of the 10.5 percent minimum regulatory
capital requirement.\154\
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\152\ UK CRR, Article 92(1).
\153\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2
Capital Conservation Buffer, Rule 2.1.
\154\ The countercyclical capital buffer is not included in the
analysis given that it is firm-specific and its rate depends on the
location of the firm's exposures.
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Common equity tier 1 capital, additional tier 1 capital, and tier 2
capital are permitted to be included in a PRA-designated UK nonbank
SD's regulatory capital and used to meet the firm's minimum capital
requirement due to their characteristics of being permanent forms of
capital that are subordinate to the claims of other creditors, which
ensures that a PRA-designated UK nonbank SD will have this regulatory
capital to absorb decreases in the value of the firm's assets and
increases in the value of the firm's liabilities, and to cover losses
from business activities, including swap dealing activities, without
the firm becoming insolvent.
3. Commission Analysis
The Commission has reviewed the UK Application and the relevant UK
laws and regulations, and has preliminarily determined that the UK PRA
Capital Rules are comparable in purpose and effect to the CFTC Capital
Rules with regard to the types and characteristics of a nonbank SD's
equity that qualifies as regulatory capital in meeting its minimum
requirements. The UK PRA Capital Rules and the CFTC Capital Rules for
nonbank SDs both require a nonbank SD to maintain a quantity of high-
quality capital and permanent capital, all defined in a manner that is
consistent with the BCBS international bank capital framework, that
based on the firm's activities and on-balance sheet and off-balance
sheet exposures, is sufficient to absorb losses and decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities without resulting in the firm becoming insolvent.
Specifically, equity instruments that qualify as common equity tier 1
capital and additional tier 1 capital under the UK PRA Capital Rules
and the CFTC Capital Rules have similar characteristics (e.g., the
equity must be in the form of high-quality, committed and permanent
capital) and the equity instruments generally have no priority in
distribution of firm assets or income with respect to other
shareholders or creditors of the firm, which makes the equity available
to a nonbank SD to absorb unexpected losses, including counterparty
defaults.\155\
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\155\ Compare 12 CFR 217.20(b) (defining capital instruments
that qualify as common equity tier 1 capital under the rules of the
Federal Reserve Board) and 12 CFR 217.20(c) (defining capital
instruments that qualify as additional tier 1 capital under the
rules of the Federal Reserve Board) with UK CRR, Articles 26 and 28
(defining items and capital instruments that qualify as common
equity tier 1 capital under the UK PRA Capital Rules) and UK CRR,
Article 52 (defining capital instruments that qualify as additional
tier 1 capital under the UK PRA Capital Rules).
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In addition, the Commission has preliminarily determined that the
conditions imposed on subordinated debt instruments under the UK PRA
Capital Rules and the CFTC Capital Rules are comparable and are
designed to ensure that the subordinated debt has qualities that
support its recognition by a nonbank SD as equity for regulatory
capital purposes. Specifically, in both sets of rules, the conditions
include a requirement that the debt holders have effectively
subordinated their claims for repayment of the debt to the claims of
other creditors of the nonbank SD.\156\
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\156\ Compare 17 CFR 240.18a-1d with UK CRR, Article 63(d).
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Having reviewed the UK Application and the relevant UK laws and
regulations, the Commission has made a preliminary determination that
the UK PRA Capital Rules and CFTC Capital Rules impose comparable
requirements on PRA-designated UK nonbank SDs with respect to the types
and characteristics of equity capital that must be used to meet minimum
regulatory capital requirements. The Commission invites public comment
on its analysis above, including comment on the UK Application and
relevant UK laws and regulations.
C. Nonbank Swap Dealer Minimum Capital Requirement
1. CFTC Capital Rules: Nonbank SD Minimum Capital Requirement
The CFTC Capital Rules require a nonbank SD electing the Bank-Based
Approach to maintain regulatory capital that satisfies each of the
following criteria: (i) an amount of common equity tier 1capital of at
least $20 million; (ii) an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital in an amount equal to or
in excess of 8 percent of the nonbank SD's uncleared swap margin
amount; (iii) an aggregate amount of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital equal to or greater than
8 percent of the nonbank SD's total risk-weighted assets, provided that
common equity tier 1 capital comprises at least 6.5 percent of the 8
percent; and (iv) the amount of capital required by the NFA.\157\
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\157\ See 17 CFR 23.101(a)(1)(i). NFA has adopted the CFTC
minimum capital requirements for nonbank SDs, but has not adopted
additional capital requirements at this time.
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Prong (i) above requires each nonbank SD electing the Bank-Based
Approach to maintain a minimum of $20 million of common equity tier 1
capital to operate as a nonbank SD. The requirement that each nonbank
SD electing the CFTC Bank-Based Approach maintain a minimum of $20
million of common equity tier 1 capital is also consistent with the
minimum capital requirement for nonbank SDs electing the NLA Approach
and the TNW Approach.\158\ The Commission adopted this minimum
requirement as it believed that the role a nonbank SD performs in the
financial
[[Page 8040]]
markets by engaging in swap dealing activities warranted a minimum
level of capital, stated as a fixed dollar amount that does not
fluctuate with the level of the firm's dealing activities to help
ensure the safety and soundness of the nonbank SD.\159\
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\158\ Nonbank SDs electing the NLA Approach are subject to a
minimum capital requirement that includes a fixed minimum dollar
amount of net capital of $20 million. See 17 CFR
23.101(a)(1)(ii)(A)(1). Nonbank SDs electing the TNW Approach are
required to maintain levels of tangible net worth that equals or
exceeds $20 million plus the amount of the nonbank SDs' market risk
and credit risk associated with the firms' dealing activities. See
17 CFR 23.101(a)(2)(ii)(A).
\159\ See, e.g., 85 FR 57492.
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Prong (ii) above is a minimum capital requirement that is based on
the amount of uncleared margin for swap transactions entered into by
the nonbank SD and is computed on a counterparty by counterparty basis.
The requirement for a nonbank SD to maintain minimum capital equal to
or greater than 8 percent of the firm's uncleared swap margin provides
a capital floor based on a measure of the risk and volume of the swap
positions, and the number of counterparties and the complexity of
operations, of the nonbank SD. The intent of the minimum capital
requirement based on a percentage of the nonbank SD's uncleared swap
margin was to establish a minimum capital requirement that would help
ensure that the nonbank SD meets all of its obligations as a SD to
market participants, and to cover potential operational risk, legal
risk, and liquidity risk in addition to the risks associated with its
trading portfolio.\160\
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\160\ See 85 FR 57462.
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Prong (iii) above is a minimum capital requirement that is based on
the Federal Reserve Board's capital requirements for bank holding
companies and is consistent with the BCBS international capital
framework for banking institutions. As noted above, a nonbank SD under
prong (iii) must maintain an aggregate of common equity tier 1 capital,
additional tier 1 capital, and tier 2 capital in an amount equal to or
greater than 8 percent of the nonbank SD's total risk-weighted assets,
with common equity tier 1 capital comprising at least 6.5 percent of
the 8 percent. Risk-weighted assets are a nonbank SD's on-balance sheet
and off-balance sheet exposures, including proprietary swap, security-
based swap, equity, and futures positions, weighted according to risk.
The Bank-Based Approach requires each nonbank SD to maintain regulatory
capital in an amount that equals or exceeds 8 percent of the firm's
total risk-weighted assets to help ensure that the nonbank SD's level
of capital is sufficient to absorb decreases in the value of the firm's
assets and increases in the value of the firm's liabilities, and to
cover unexpected losses resulting from business activities, including
uncollateralized defaults from swap counterparties, without the nonbank
SD becoming insolvent.
A nonbank SD must compute its risk-weighted assets using
standardized market risk and/or credit risk charges, unless the nonbank
SD has been approved by the Commission or NFA to use internal
models.\161\ For standardized market risk charges, the Commission
incorporates by reference the standardized market risk charges set
forth in Commission Regulation 1.17 for FCMs and SEC Rule 18a-1 for
nonbank SBSDs.\162\ The standardized market risk charges under
Commission Regulation 1.17 and SEC Rule 18a-1 are calculated as a
percentage of the market value or notional value of the nonbank SD's
marketable securities and derivatives positions, with the percentages
applied to the market value or notional value increasing as the
expected or anticipated risk of the positions increases.\163\ The
resulting total market risk exposure amount is multiplied by a factor
of 12.5 to cancel the effect of the 8 percent multiplication factor
applied to all of the nonbank SD's risk-weighted assets, which
effectively requires a nonbank SD to hold qualifying regulatory capital
equal to or greater than 100 percent of the amount of its market risk
exposure.\164\
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\161\ See 17 CFR 23.101(a)(1)(i)(B) and the definition of the
term BHC equivalent risk-weighted assets in 17 CFR 23.100.
\162\ See paragraph (3) of the definition of the term BHC
equivalent risk-weighted assets in 17 CFR 23.100.
\163\ See 17 CFR 240.18a-1(c)(1).
\164\ See 17 CFR 23.100 (Definition of BHC equivalent risk-
weighted assets). As noted, a nonbank SD is required to maintain
qualifying capital (i.e., an aggregate of common equity tier 1
capital, additional tier 1 capital, and tier 2 capital) in an amount
that exceeds 8 percent of its market risk-weighted assets and
credit-risk-weighted assets. The regulations, however, require the
nonbank SD to effectively maintain qualifying capital in excess of
100 percent of its market risk-weighted assets by requiring the
nonbank SD to multiply its market-risk-weighted assets by 12.5.
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With respect to standardized credit risk charges for exposures from
non-derivatives positions, a nonbank SD computes its on-balance sheet
and off-balance sheet exposures in accordance with the standardized
credit risk charges adopted by the Federal Reserve Board and set forth
in subpart D of 12 CFR 217 as if the SD itself were a bank holding
company subject to subpart D.\165\ Standardized credit risk charges are
computed by multiplying the amount of the exposure by defined
counterparty credit risk factors that range from 0 percent to 150
percent.\166\ A nonbank SD with off-balance sheet exposures is required
to calculate a credit risk charge by multiplying each exposure by a
credit conversion factor that ranges from 0 percent to 100 percent,
depending on the type of exposure.\167\ In addition to the risk-
weighted assets for general credit risk, a nonbank SD calculating risk
charges under subpart D of 12 CFR 217 must also calculate risk-weighted
assets for unsettled transactions involving securities, foreign
exchange instruments, and commodities that have a risk of delayed
settlement or delivery.
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\165\ See 17 CFR 23.101(a)(1)(i)(B) and paragraph (1) of the
definition of the term BHC equivalent risk-weighted assets in 17 CFR
23.100.
\166\ See 17 CFR 217.32. Lower credit risk factors are assigned
to entities with lower credit risk and higher credit risk factors
are assigned to entities with higher credit risk. For example, a
credit risk factor of 0% is applied to exposures to the U.S.
government, the Federal Reserve Bank, and U.S. government agencies
(see 12 CFR 217.32 (a)(1)), and a credit risk factor of 100% is
assigned to an exposure to foreign sovereigns that are not members
of the Organization of Economic Co-operation and Development (see 12
CFR 217.32(a)(2)).
\167\ See 17 CFR 217.33.
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A nonbank SD may compute standardized credit risk charges for
derivatives positions, including uncleared swaps and non-cleared
security-based swaps, using either the current exposure method
(``CEM'') or the standardized approach for measuring counterparty
credit risk (``SA-CCR'').\168\ Both CEM and SA-CCR are non-model,
rules-based, approaches to calculating counterparty credit risk
exposures for derivatives positions. Credit risk exposure under CEM is
the sum of: (i) the current exposure (i.e., the positive mark-to-
market) of the derivatives contract; and (ii) the potential future
exposure, which is calculated as the product of the notional principal
amount of the derivatives contract multiplied by a standard credit risk
conversion factor set forth in the rules of the Federal Reserve
Board.\169\ Credit risk exposure under SA-CCR is defined as the
exposure at default amount of a derivatives contract, which is computed
by multiplying a factor of 1.4 by the sum of: (i) the replacement costs
of the contract (i.e., the positive mark-to market); and (ii) the
potential future exposure of the contract.\170\
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\168\ See 17 CFR 217.34. See also, Commission Regulation 23.100
(17 CFR 23.100) defining the term BHC risk-weighted assets, which
provides that a nonbank SD that does not have model approval may use
either CEM or SA-CCR to compute its exposures for over-the-counter
derivative contracts without regard to the status of its affiliate
entities with respect to the use of a calculation approach under the
Federal Reserve Board's capital rules.
\169\ See 12 CFR 217.34.
\170\ See 12 CFR 217.132(c).
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A nonbank SD may also obtain approval from the Commission or NFA to
use internal models to compute market risk and/or credit risk charges
in lieu of the standardized charges. A nonbank SD seeking approval to
use an internal model is required to submit an
[[Page 8041]]
application to the Commission or NFA.\171\ The application is required
to include, among other things, a list of categories of positions that
the nonbank SD holds in its proprietary accounts and a brief
description of the methods that the nonbank SD will use to calculate
market risk and/or credit risk charges for such positions, as well as a
description of the mathematical models used to compute market risk and
credit risk charges.
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\171\ See 17 CFR 23.102(c).
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A nonbank SD approved by the Commission or NFA to use internal
models to compute market risk is required to comply with subpart F of
the Federal Reserve Board's Part 217 regulations (``Subpart F'').\172\
Subpart F is based on models that are consistent with the BCBS Basel
2.5 capital framework.\173\ The Commission's qualitative and
quantitative requirements for internal capital models are also
comparable to the SEC's existing internal capital model requirements
for broker-dealers in securities and SBSDs,\174\ which are broadly
based on the BCBS Basel 2.5 capital framework.
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\172\ See paragraph (4) of the definition of BHC equivalent
risk-weighted assets in 17 CFR 23.100.
\173\ Compare 17 CFR 23.100 (providing for a nonbank SD that is
approved to use internal models to calculate market and credit risk
to calculate its risk-weighted assets using subparts E and F of 12
CFR part 217), subpart F of 12 CFR, 17 CFR 23.101(a)(1)(ii)
(providing for an SD that elects the Net Liquid Assets Approach to
calculate its net capital in accordance with Rule 18a-1), and 17 CFR
23.102(a), with Basel Committee on Banking Supervision, Revisions to
the Basel II Market Risk Framework (2011), https://www.bis.org/publ/bcbs193.pdf (describing the revised internal model approach under
Basel 2.5).
\174\ The SEC internal model requirements for SBSDs are listed
in 17 CFR 240.18a-1(d).
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A nonbank SD approved to use internal models to compute credit risk
charges is required to perform such computation in accordance with
subpart E of the Federal Reserve Board's Part 217 regulations \175\ as
if the SD itself were a bank holding company subject to subpart E.\176\
The internal credit risk modeling requirements are also based on the
Basel 2.5 capital framework and the Basel 3 capital framework. A
nonbank SD that computes its credit risk charges using internal models
must multiply the resulting capital requirement by a factor of
12.5.\177\
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\175\ 12 CFR 217 subpart E.
\176\ See 85 FR 57462 at 57496.
\177\ 12 CFR 217.131(e)(1)(iii), 217.131(e)(2)(iv), and
217.132(d)(9)(iii).
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In adopting the final Bank-Based Approach rules, the Commission
also noted that in choosing an alternative calculation, the nonbank SD
must adopt the entirety of the alternative. As such, if the nonbank SD
is calculating its risk-weighted assets using the regulations in
subpart E of 12 CFR 217, the nonbank SD must include charges reflecting
all categories of risk-weighted assets applicable under these
regulations, which include among other things, charges for operational
risk, CVA of OTC derivatives contracts, and unsettled transactions
involving securities, foreign exchange instruments, and commodities
that have a risk of delayed settlement or delivery.\178\ The capital
charge for operational risk and CVA of OTC derivatives contracts
calculated in accordance with subpart E of 12 CFR 217 must also be
multiplied by a factor of 12.5.\179\
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\178\ Settlement risk for OTC derivatives contracts is addressed
as part of the counterparty-credit risk calculation methodology
described in 12 CFR 217.132.
\179\ 12 CFR 217.162(c) (operational risk) and 217.132(e)(4)
(CVA of OTC derivative contracts).
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Under the Basel 2.5 capital framework, nonbank SDs have flexibility
in developing their internal models, but must follow certain minimum
standards. Internal market risk and credit risk models must follow a
Value-at-Risk (``VaR'') structure to compute, on a daily basis, a 99th
percentile, one-tailed confidence interval for the potential losses
resulting from an instantaneous price shock equivalent to a 10-day
movement in prices (unless a different time-frame is specifically
indicated). The simulation of this price shock must be based on a
historical observation period of minimum length of one year, but there
is flexibility on the method used to render simulations, such as
variance-covariance matrices, historical simulations, or Monte Carlo.
The Commission and the Basel standards for internal models also
have requirements on the selection of appropriate risk factors as well
as on data quality and update frequency.\180\ One specific concern is
that internal models must capture the non-linear price characteristics
of options positions, including but not limited to, relevant
volatilities at different maturities.\181\
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\180\ See 17 CFR appendix A to subpart E of part 23(i)(2)(iii),
and Basel Committee on Banking Supervision, Revisions to the Basel
II Market Risk Framework (2011), paragraph 718(Lxxvi)(e), available
at: https://www.bis.org/publ/bcbs193.pdf.
\181\ The Commission's requirement is set forth in paragraph
(i)(2)(iv)(A) of appendix A to subpart E of 17 CFR part 23. See
also, Basel Committee on Banking Supervision, Revisions to the Basel
II Market Risk Framework (2011), paragraph 718(Lxxvi)(h), available
at: https://www.bis.org/publ/bcbs193.pdf.
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In addition, BCBS standards for market risk models include a series
of additive components for risks for which the broad VaR is ill-suited
or that may need targeted calculation. These include the calculation of
a Stressed VaR measure (with the same specifications as the VaR, but
calibrated to historical data from a continuous 12-month period of
significant financial stress relevant to the firm's portfolio); a
Specific Risk measure (which includes the effect of a specific
instrument); an Incremental Risk measure (which addresses changes in
the credit rating of a specific obligor which may appear as a reference
in an asset); and a Comprehensive Risk measure (which addresses risk of
correlation trading positions).
2. UK PRA Capital Rules: PRA-Designated UK Nonbank Swap Dealer Minimum
Capital Requirements
The UK PRA Capital Rules impose bank-like capital requirements on a
PRA-designated UK nonbank SD that, consistent with the BCBS
international bank capital framework, require the PRA-designated UK
nonbank SD to hold a sufficient amount of qualifying equity capital and
subordinated debt based on the PRA-designated UK nonbank SD's
activities to absorb decreases in the value of firm assets and
increases in the value of the firm's liabilities, and to cover losses
from its business activities, including possible counterparty defaults
and margin collateral shortfalls associated with the firm's swap
dealing activities, without the firm becoming insolvent. Specifically,
the UK PRA Capital Rules require each PRA-designated UK nonbank SD to
maintain sufficient levels of capital to satisfy the following capital
ratios, expressed as a percentage of the PRA-designated UK nonbank SD's
total risk exposure amount (i.e., the sum of the PRA-designated UK
nonbank SD's risk-weighted assets and exposures): (i) a common equity
tier 1 capital ratio of 4.5 percent; \182\ (ii) a tier 1 capital ratio
of 6 percent; \183\ and (iii) a total capital ratio of 8 percent.\184\
The UK PRA Capital Rules further require a PRA-designated UK nonbank SD
to maintain a capital conservation buffer composed of common equity
capital tier 1 capital in amount equal to 2.5 percent of the firm's
total risk exposure.\185\ The common equity tier 1 capital used to
[[Page 8042]]
meet the capital conservation buffer must be separate and in addition
to the 4.5 percent of common equity tier 1 capital that the PRA-
designated UK nonbank is required to maintain in meeting its core 8
percent capital requirement.\186\ Thus, a PRA-designated UK nonbank SD
is required to maintain regulatory capital equal to at least 10.5
percent of its total risk exposure amount, with common equity tier 1
capital comprising at least 7 percent of the regulatory capital (4.5
percent of the core capital plus the 2.5 percent capital conservation
buffer).
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\182\ UK CRR, Article 92(1)(a).
\183\ Id., Article 92(1)(b). Tier 1 capital is the sum of the
PRA-designated UK nonbank SD's common equity tier 1 capital and
additional tier 1 capital.
\184\ Id., Article 92(1)(c). The total capital is the sum of the
PRA-designated UK nonbank SD's tier 1 capital and tier 2 capital.
\185\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2
Capital Conservation Buffer, Rule 2.1.
\186\ Id. A PRA-designated UK nonbank SD may also be required to
maintain a countercyclical capital buffer composed of common equity
tier 1 capital equal to the firm's total risk exposure multiplied by
an institution-specific countercyclical buffer rate. The
institution-specific countercyclical capital buffer rate is
determined by calculating the weighted average of the
countercyclical buffer rates that apply in the jurisdictions in
which the PRA-designated UK nonbank SD has relevant credit
exposures. See PRA Rulebook, CRR Firms, Capital Buffers Part,
Chapter 3 Countercyclical Capital Buffer. The rate for each
jurisdiction is determined by the UK Financial Policy Committee or a
third country countercyclical buffer authority, as applicable. See
PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 3
Countercyclical Capital Buffer, Rule 3.1., and Capital Requirements
(Capital Buffers and Macro-prudential Measures) Regulations 2014,
Articles 7-20. In practice, the countercyclical buffer rate in the
UK, as of July 2023, is 2 percent of risk-weighted assets. The
countercyclical capital buffer rate is published by the Bank of
England, and is available at: https://bankofengland.co.uk/financial-stability/the-countercyclical-capital-buffer. Several EU Member
States of relevance to the UK have also implemented countercyclical
capital buffers with rates ranging from 0.5 percent to 2.5 percent
of risk-weighted assets.
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A PRA-designated UK nonbank SD's total risk exposure amount is
calculated as the sum of the firm's: (i) capital requirements for
market risk; (ii) risk-weighted exposure amounts for credit risk; (iii)
capital requirements for settlement risk; (iv) capital requirements for
CVA risk of OTC derivatives instruments; and (v) capital requirements
for operational risk.\187\ Capital charges for market risk and risk-
weighted exposures for credit risk are computed based on the PRA-
designated UK nonbank SD's on-balance sheet and off-balance sheet
exposures, including proprietary swap, security-based swap, equity, and
futures positions, weighted according to risk.\188\ Settlement risk
capital charges reflect the price difference to which a PRA-designated
UK nonbank SD is exposed if its transactions in debt instruments,
equity, foreign currency, and commodities remain unsettled after the
respective product's due delivery date.\189\ CVA is an adjustment to
the mid-market value of the portfolio of OTC derivative transactions
with a counterparty and reflects the current market value of the credit
risk of the counterparty to the PRA-designated UK nonbank SD.\190\
Operational risk capital charges reflect the risk of loss resulting
from inadequate or failed internal processes, people and systems or
from external events, and includes legal risk.\191\
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\187\ UK CRR, Article 92(3).
\188\ To compute capital requirements for market risk, PRA-
designated UK nonbank SDs are required to calculate capital charges
for all trading book positions and non-trading book positions that
are subject to foreign exchange or commodity risk. See UK CRR,
Article 325. The risk-weighted exposure amounts for credit risk
include: (i) risk-weighted exposure amounts for credit risk and
dilution risk in respect of all the business activities of the PRA-
designated UK nonbank SD, excluding risk-weighted exposure amounts
from the trading book business of the firm; and (ii) risk-weighted
exposure amounts for counterparty risk arising from the trading book
business for certain derivatives transactions, repurchase
agreements, securities or commodities lending or borrowing
transactions, margin lending or long settlement transactions. See UK
CRR, Article 92(3)(a) and (f).
\189\ UK CRR, Article 378. Settlement risk is calculated as 8
percent, 50 percent, 75 percent, or 100 percent of the price
difference for transactions that are not settled within 5 to 15
business days, 16 to 30 business days, 31 to 45 business days, or 46
or more business days, respectively, from the due settlement date.
\190\ Id., Article 381.
\191\ Id., Article 4(1)(52).
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To compute its total risk exposure amount, a PRA-designated UK
nonbank SDs is also required to multiply the capital requirements for
market risk, settlement risk, CVA risk, and operational risk,
calculated in accordance with the UK PRA Capital Rules, by a factor of
12.5, which effectively requires a PRA-designated UK nonbank SD to hold
qualifying regulatory capital equal to or greater than the full amount
of the relevant risk exposures.\192\ The formulae for calculating risk-
weighted exposure amounts for credit risk also include a 12.5
multiplication factor.\193\
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\192\ Id., Article 92(4).
\193\ Id., Article 153 et seq.
---------------------------------------------------------------------------
Consistent with the Commission's Bank-Based Approach and the BCBS
capital framework, the UK PRA Capital Rules require PRA-designated UK
nonbank SDs to compute market risk exposures and credit risk exposures
using a standardized approach or, if approved by the PRA, internal risk
models.\194\ In addition, UK PRA Capital Rules, consistent with the
BCBS capital framework, require PRA-designated UK nonbank SDs to
compute capital charges for CVA risk and operational risk using
standardized approaches, unless approved to use internal models by the
PRA.\195\
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\194\ With the permission of the PRA, a PRA-designated UK
nonbank SD may use internal models to calculate market risk (see UK
CRR, Article 363) and credit risk (see UK CRR, Articles 143 and
283).
\195\ See UK CRR, Articles 382-384 for CVA risk calculations;
and Article 312(2) for operational risk.
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PRA-designated UK nonbank SDs calculate standardized market risk
charges generally by multiplying the notional or carrying amount of net
positions by risk-weighting factors, which are based on the underlying
market risk of each asset or exposure and increase as the expected risk
of the positions increase. Market risk requirements for debt
instruments and equity instruments are calculated separately under the
standardized approach, and are each calculated as the sum of specific
risk and general risk of the positions.\196\ Securitizations are
treated as debt instruments for market risk requirements,\197\ whereas
derivative positions are generally treated as exposures on their
underlying assets,\198\ with options being delta-adjusted.\199\
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\196\ Id., Article 326.
\197\ Id. See also UK CRR, Articles 334-340 (provisions related
to debt instruments) and 341-343 (provisions related to equities).
\198\ Id., Articles 328-330, 358.
\199\ Id., Article 329.
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The UK PRA Capital Rules also require PRA-designated UK nonbank SDs
to include in their risk-weighted assets market risk exposures to
certain foreign currency and gold positions. Specifically, a PRA-
designated UK nonbank SD with net positions in foreign exchange and
gold that exceed 2 percent of the firm's total capital must calculate
capital requirements for foreign exchange risk.\200\ The capital
requirement for foreign exchange risk under the standardized approach
is 8 percent of the PRA-designated UK nonbank SD's net positions in
foreign exchange and gold.\201\
---------------------------------------------------------------------------
\200\ Id., Article 351.
\201\ Id.
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The UK PRA Capital Rules further require PRA-designated UK nonbank
SDs to include exposures to commodity positions in calculating the
firm's risk-weighted assets. The standardized calculation of commodity
risk exposures may follow one of three approaches depending on type of
position or exposure. The first is the sum of a flat percentage rate
for net positions, with netting allowed among tightly defined sets,
plus another flat percentage rate for the gross position.\202\ The
other two standardized approaches are based on maturity-ladders, where
unmatched portions of each maturity band (i.e., portions that do not
net out to zero) are charged at a step-up rate in comparison
[[Page 8043]]
to the base charges for matched portions.\203\
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\202\ Id., Article 360.
\203\ Id., Articles 359 and 361.
---------------------------------------------------------------------------
With respect to credit risk, the UK PRA Capital Rules require a
PRA-designated UK nonbank SD to calculate its standardized credit risk
exposure in a manner aligned with the Commission's Bank-Based Approach
and the BCBS framework by taking the carrying value or notional value
of each of the PRA-designated UK nonbank SD's on-balance sheet and off-
balance sheet exposures, making certain additional credit risk
adjustments, and then applying specific risk-weights based on the type
of counterparty and the asset's credit quality.\204\ For instance,
credit exposures to the ECB, the UK government, and the Bank of England
carry a zero percent risk-weight; exposures to other central
governments and central banks may carry risk-weights between 0 and 150,
depending on the credit rating available for the central government or
central bank; and exposures to banks, PRA-designated investment firms,
or other businesses may carry risk-weights between 20 percent and 150
percent depending on the credit ratings available for the entity or,
for exposures to banks and investment firms, for the central government
of the jurisdiction in which the entity is incorporated.\205\ If no
credit rating is available, the PRA-designated UK nonbank SD must
generally apply a 100 percent risk-weight, meaning the total accounting
value of the exposure is used.\206\
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\204\ Id., Articles 111 and 113(1).
\205\ Id., Articles 114-122.
\206\ Id., Articles 121(2) and 122(2).
---------------------------------------------------------------------------
With respect to counterparty credit risk for derivatives
transactions and certain other agreements that give rise to bilateral
credit risk, the UK PRA Capital Rules require a PRA-designated UK
nonbank SD that is not approved to use credit risk models to calculate
its exposure using the standardized approach for counterparty credit
risk (i.e., SA-CCR),\207\ which is one of the methods that a nonbank SD
may use to calculate its credit risk exposure under a derivatives
transaction pursuant to the Commission's Bank-Based Approach.\208\ The
exposure amount under the SA-CCR is computed, under both the UK PRA
Capital Rules and the Commission's Bank-Based Approach, as the sum of
the replacement cost of the contract and the potential future exposure
of the contract, multiplied by a factor of 1.4.\209\
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\207\ UK CRR, Articles 92(3)(f) and PRA Rulebook, CRR Firms,
Counterparty Credit Risk (CRR) Part, Chapter 3 Counterparty Credit
Risk (Part Three, Title Two, Chapter Six CRR). PRA-designated UK
nonbank SDs with smaller-sized derivatives business may also use a
``simplified standardized approach to counterparty credit risk'' or
an ``original exposure method'' as simpler methods for calculating
exposure values. PRA Rulebook, CRR Firms, Counterparty Credit Risk
(CRR) Part, Chapter 3 Counterparty Credit Risk (Part Three, Title
Two, Chapter Six CRR), Articles 281-282. To use either of these
alternative methods, an entity's on-and off-balance sheet
derivatives business must be equal or less than 10 percent of the
entity's total assets and GBP 260 million or 5 percent of the
entity's total assets and GBP 88 million, respectively. PRA
Rulebook, CRR Firms, Counterparty Credit Risk (CRR) Part, Chapter 3
Counterparty Credit Risk (Part Three, Title Two, Chapter Six CRR),
Article 273a.
\208\ 12 CFR 217.34.
\209\ PRA Rulebook, CRR Firms, Counterparty Credit Risk (CRR)
Part, Chapter 3 Counterparty Credit Risk (Part Three, Title Two,
Chapter Six CRR), Article 274 and 12 CFR 217.132(c).
---------------------------------------------------------------------------
UK PRA Capital Rules also require a PRA-designated UK nonbank SD to
calculate capital requirements for settlement risk.\210\ Consistent
with the BCBS framework, the capital charge for settlement risk for
transactions settled on a delivery-versus-payment basis is computed by
multiplying the price difference to which a PRA-designated UK nonbank
SD is exposed as a result of an unsettled transaction by a percentage
factor that varies from 8 percent to 100 percent based on the number of
working days after the due settlement date during which the transaction
remains unsettled.\211\ The CFTC's Bank-Based Approach provides for a
similar calculation methodology for risk-weighted asset amounts for
unsettled transactions involving securities, foreign exchange
instruments, and commodities.\212\
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\210\ UK CRR, Article 378 (indicating that if transactions in
which debt instruments, equities, foreign currencies and commodities
excluding repurchase transactions and securities or commodities
lending and securities or commodities borrowing are unsettled after
their due delivery dates, a PRA-designated UK nonbank SD must
calculate the price difference to which it is exposed).
\211\ Id. The price difference to which a PRA-designated UK
nonbank SD is exposed is the difference between the agreed
settlement price for an instrument (i.e., a debt instrument, equity,
foreign currency or commodity) and the instrument's current market
value, where the difference could involve a loss for the firm. UK
CRR, Article 378.
\212\ 17 CFR 23.100 (definition of BHC equivalent risk-weighted
assets), 12 CFR 217.38 and 12 CFR 217.136.
---------------------------------------------------------------------------
Consistent with the BCBS framework, a PRA-designated UK nonbank SD
is also required to calculate capital charges for CVA risk for OTC
derivative instruments \213\ to reflect the current market value of the
credit risk of the counterparty to the PRA-designated UK nonbank
SD.\214\ CVA can be calculated following similar methodologies as those
described in subpart E of the Federal Reserve Board's part 217
regulations.\215\
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\213\ UK CRR, Article 382 (1). CVA risk charges need not be
calculated for credit derivatives recognized to reduce risk-weighted
exposure amounts for credit risk. Id.
\214\ Id., Article 381. CVA is defined to exclude debit
valuation adjustment.
\215\ See UK CRR, Articles 383-384 and 12 CFR 217.132(e)(5) and
(6). Under the CFTC's Bank-Based Approach, nonbank SDs calculating
their credit risk-weighted assets using the regulations in subpart D
of the Federal Reserve Board's part 217 regulations, do not
calculate CVA of OTC derivatives instruments.
---------------------------------------------------------------------------
A PRA-designated UK nonbank SD's total risk exposure amount also
includes operational risk charges. Consistent with the BCBS framework,
PRA-designated UK nonbank SDs may calculate standardized operational
risk charges using either one of two approaches--the Basic Indicator
Approach or the Standardized Approach.\216\ Both the Basic Indicator
Approach and the Standardized Approach use as a calculation basis the
three-year average of the ``relevant indicator,'' which is the sum of
certain items on the statement of income/loss (i.e., the firm's net
interest income and net non-interest income). Under the Basic Indicator
Approach, PRA-designated UK nonbank SDs are required to multiply the
relevant indicator by a factor of 15 percent. When using the
Standardized Approach, firms need to allocate the relevant indicator
into eight business lines specified by regulation (e.g., trading and
sales; retail brokerage; corporate finance) and multiply the
corresponding portion by a percentage factor ranging from 12 to 18
percent depending on the business line. The capital requirements for
operational risk are calculated as the sum of the individual business
lines' charges.
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\216\ UK CRR, Article 312 and PRA Rulebook, CRR Firms,
Operational Risk (CRR) Part.
---------------------------------------------------------------------------
As noted above, if approved by the PRA, a PRA-designated UK nonbank
SD may use internal models to calculate its market risk charges, credit
risk charges, including counterparty credit risk charges, CVA risk
charges, and operational risk charges in lieu of using a standardized
approach.\217\ To obtain permission, a PRA-designated UK nonbank SD
must demonstrate to the satisfaction of the PRA that it meets
[[Page 8044]]
certain conditions for the use of models.\218\
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\217\ UK CRR, Articles 143 (credit risk), 283 (counterparty
credit risk), 312 (operational risk), 363 (market risk) and 383 (CVA
risk). PRA-designated UK nonbank SDs are not permitted, however, to
calculated counterparty credit risk charges using internal models
when calculating large exposures. PRA Rulebook, CRR Firms, Large
Exposures (CRR) Part, Chapter 4 Large Exposures (Part Four CRR),
Article 390.
\218\ UK CRR, Articles 143, 283, 312(2) and 363(1).
---------------------------------------------------------------------------
With respect to market risk, the PRA may grant a PRA-designated UK
nonbank SD permission to use internal models to calculate one or more
of the following risk categories: (i) general risk of equity
instruments, (ii) specific risk of equity instruments, (iii) general
risk of debt instruments, (iv) specific risk of debt instruments, (v)
foreign exchange risk, or (vi) commodities risk,\219\ along with
interest rate risk on derivatives.\220\ To obtain approval to use a
market risk model, a PRA-designated UK nonbank SD must meet conditions
related to specified model elements and controls including risk and
stressed risk calculations,\221\ back-testing and multiplication
factors,\222\ risk measurement requirements,\223\ governance and
qualitative requirements,\224\ internal validation,\225\ and specific
requirements by risk categories.\226\ A PRA-designated UK nonbank SD
approved to use models must also obtain approval from the PRA to
implement a material change to the model or make a material extension
to the use of the model.\227\ The UK PRA Capital Rules' market risk
model-based methodology is based on the Basel 2.5 standard \228\ and
incorporates relevant aspects of the BCBS framework in terms of
requiring PRA-designated UK nonbank SDs with model approval to use a
VaR model with a 99 percent, one-tailed confidence level with: (i)
price changes equivalent to a 10-business day movement in rates and
prices, (ii) effective historical observation periods of at least one
year, and (iii) at least monthly data set updates.\229\ The UK PRA
Capital Rules also include a framework for governance that includes
requirements related to the implementation of independent risk
management,\230\ senior management's involvement in the risk-control
process,\231\ establishment of procedures for monitoring and ensuring
compliance with a documented set of internal policies and
controls,\232\ and the conducting of independent review of the models
as part of the internal audit process.\233\
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\219\ Id., Article 363(1).
\220\ Id., Article 331(1), using sensitivity models.
\221\ Id., Articles 364-365.
\222\ Id., Article 366.
\223\ Id., Article 367.
\224\ Id., Article 368.
\225\ Id., Article 369.
\226\ Id., Articles 364-377.
\227\ Id., Article 363(3).
\228\ Compare UK CRR, Articles 362-377 with Revisions to the
Basel II Market Risk Framework.
\229\ UK CRR, Article 365(1).
\230\ Id., Articles 368 (1)(b).
\231\ Id., Articles 368 (1)(c).
\232\ Id., Articles 368 (1)(e).
\233\ Id., Articles 368 (1)(h).
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With regulatory permission, PRA-designated UK nonbank SDs may also
use models to calculate credit risk exposures.\234\ Credit risk models
may include internal ratings based on the estimation of default
probabilities and loss given default, consistent with the BCBS
framework and subject to similar model risk management guidelines.\235\
To obtain approval for the use of internal ratings-based models, a PRA-
designated UK nonbank SD must meet requirements related to, among other
things, the structure of its rating systems and its criteria for
assigning exposures to grades and pools within a rating system, the
parameters of risk quantification, the validation of internal
estimates, and the internal governance and oversight of the rating
systems and estimation processes.\236\
---------------------------------------------------------------------------
\234\ Id., Article 143.
\235\ Id.
\236\ Id., Articles 170-177 (rating systems), 178-184 (risk
quantification), 185 (validation of internal estimates), and 189-191
(internal governance and oversight).
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In addition, subject to regulatory approval, PRA-designated UK
nonbank SDs may use internal models to calculate counterparty credit
risk exposures for derivatives, securities financing, and long
settlement transactions.\237\ The prerequisites for approval for such
models include requirements related to the establishment and
maintenance of a counterparty credit risk management framework, stress
testing, the integrity of the modelling process, the risk management
system, and validation.\238\ The UK PRA Capital Rules' internal
counterparty credit risk model-based methodology is also based on the
Basel 2.5 standard.\239\ The UK PRA Capital Rules allow for the
estimation of expected exposure as a measure of the average of the
distribution of exposures at a particular future date,\240\ with
adjustments to the period of risk, as appropriate to the asset and
counterparty.
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\237\ Id., Article 283. As noted above, however, PRA-designated
UK nonbank SDs are not permitted to calculate counterparty credit
risk charges using internal models when calculating large exposures.
PRA Rulebook, CRR Firms, Large Exposures (CRR) Part, Chapter 4 Large
Exposures (Part Four CRR), Article 390.
\238\ Id., Articles 283-294.
\239\ Compare UK CRR, Article 362-377 with Revisions to the
Basel II Market Risk Framework.
\240\ UK CRR, Article 272(19), 283-285.
---------------------------------------------------------------------------
PRA-designated UK nonbank SDs may also obtain regulatory permission
to use ``advanced measurement approaches'' based on their own
operational risk measurement systems, to calculate capital charges for
operational risk. To obtain such permission, PRA-designated UK nonbank
SDs must meet qualitative and quantitative standards, as well as
general risk management standards set forth in the UK PRA Capital
Rules.\241\ Specifically, among other qualitative standards, PRA-
designated UK nonbank SDs must meet requirements related to the
governance and documentation of their operational risk management
processes and measurement systems.\242\ In addition, PRA-designated UK
nonbank SDs must meet quantitative standards related to process, data,
scenario analysis, business environment and internal control factors
laid down in the UK PRA Capital Rules.\243\
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\241\ UK CRR, Article 312(1), cross-referencing UK CRR, Articles
321 and 322; PRA Rulebook, CRR Firms, General Organizational
Requirements Part, Rules 2.1 and 2.2; and PRA Rulebook, CRR Firms,
Internal Liquidity Adequacy Assessment Part.
\242\ UK CRR, Article 321.
\243\ Id., Article 322.
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As an additional element to the capital requirements, the UK PRA
Capital Rules further impose a 3.25 percent leverage ratio floor on
PRA-designated UK nonbank SDs that hold significant amounts of non-UK
assets.\244\ Specifically, a PRA-designated UK nonbank SD that has non-
UK assets equal to or greater than GBP 10 billion is required to
maintain an aggregate amount of common equity tier 1 capital and
additional tier 1 capital equal to or in excess of 3.25 percent of the
firm's on-balance sheet and off-balance sheet exposures, including
exposures on uncleared swaps but excluding certain exposures to central
banks, without regard to any risk-weighting.\245\ For the purposes of
complying with the leverage ratio requirement, at least 75 percent of
the firm's tier 1 capital must consist of common equity tier 1
capital.\246\ The leverage ratio is a non-risk based minimum capital
requirement that is intended to prevent a PRA-designated
[[Page 8045]]
UK nonbank SD from engaging in excessive leverage, and complements the
risk-based minimum capital requirement that is based on the PRA-
designated UK nonbank SD's risk-weighted assets.
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\244\ PRA Rulebook, CRR Firms, Leverage Ratio--Capital
Requirements and Buffers Part, Chapter 1 Application and Definitions
and Chapter 3 Minimum Leverage Ratio.
\245\ Total exposures are required to be computed in accordance
with PRA Rulebook, CRR Firms, Leverage Ratio (CRR) Part, Chapter 3
Leverage Ratio (Part Seven CRR), Article 429 et seq. A PRA-
designated UK nonbank SD may also be subject to a countercyclical
leverage ratio buffer of common equity tier 1 capital equal to the
firm's institution-specific countercyclical capital buffer rate
multiplied by 35 percent, multiplied by the firm's total exposures.
PRA Rulebook, CRR Firms, Leverage Ratio--Capital Requirements and
Buffers Part, Chapter 4 Countercyclical Leverage Ratio Buffer.
\246\ PRA Rulebook, CRR Firms, Leverage Ratio--Capital
Requirements and Buffers Part, Chapter 3 Minimum Leverage Ratio,
Rule 3.2.
---------------------------------------------------------------------------
Furthermore, the UK PRA Capital Rules also impose a separate
liquidity coverage requirement on a PRA-designated UK nonbank SD to
address liquidity risk. The liquidity coverage requirement provides
that PRA-designated UK nonbank SDs must hold liquid assets in an amount
sufficient to cover liquidity outflows (less liquidity inflows) under
stressed conditions over a period of 30 days.\247\ For purposes of the
liquidity coverage requirement, the term ``stressed'' means a sudden or
severe deterioration in the solvency or liquidity position of a firm
due to changes in market conditions or idiosyncratic factors as a
result of which there is a significant risk that the firm becomes
unable to meet its commitments as they become due within the next 30
days.\248\ In addition, Article 413 of UK CRR, which has been
incorporated into the PRA Rulebook, establishes a general requirement
that firms ensure that long-term obligations and off-balance sheet
items are adequately met with a diverse set of funding instruments that
are stable under both normal and stressed conditions.\249\
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\247\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 412(1).
\248\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 411(10).
\249\ PRA Rulebook, CRR Firms, Liquidity (CRR) Part, Chapter 4
Liquidity (Part Six CRR), Article 413(1).
---------------------------------------------------------------------------
The UK PRA Capital Rules also require PRA-designated UK nonbank SDs
to maintain at all times a minimum base capital requirement of GBP
750,000.\250\
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\250\ PRA Rulebook, CRR Firms, Definition of Capital Part,
Chapter 12 Base Capital Resource Requirement, Rule 12.1.
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3. Commission Analysis
The Commission has reviewed the UK Application and the relevant UK
laws and regulations, and has preliminarily determined that the UK PRA
Capital Rules are comparable in purpose and effect to the CFTC Capital
Rules with regard to the establishment of the nonbank SD's minimum
capital requirement and the calculation of the nonbank SD's amount of
regulatory capital to meet that requirement.\251\ Although there are
differences between the UK PRA Capital Rules and the CFTC Capital
Rules, as discussed below, the Commission preliminarily believes that
the UK PRA Capital Rules and the CFTC Capital Rules are designed to
ensure the safety and soundness of a nonbank SD and, subject to the
proposed conditions discussed below, will achieve comparable outcomes
by requiring the firm to maintain a minimum level of qualifying
regulatory capital, including subordinated debt, to absorb losses from
the firm's business activities, including swap dealing activities, and
decreases in the value of the firm's assets and increases in the value
of the firm's liabilities, without the nonbank SD becoming insolvent.
The Commission's preliminary finding of comparability is based on a
comparative analysis of the three minimum capital requirements
thresholds of the CFTC Capital Rules' Bank-Based Approach (i.e., the
three prongs recited in Section III.C.1. above) and the respective
elements of the UK PRA Capital Rules' requirements, as discussed below.
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\251\ The Commission notes that pursuant to Article 7 of UK CRR,
the PRA may exempt an entity subject to UK CRR from the applicable
capital requirements, provided certain conditions are met. In such
case, the relevant requirements would apply to the entity's parent
entity, on a consolidated basis. The Commission's assessment does
not cover the application of Article 7 of UK CRR and therefore an
entity that benefits from an exemption under Article 7 of UK CRR
would not qualify for substituted compliance under the Capital
Comparability Determination Order.
---------------------------------------------------------------------------
a. Fixed Amount Minimum Capital Requirement
CFTC Capital Rules and the UK PRA Capital Rules both require
nonbank SDs to hold a minimum amount of regulatory capital that is not
based on the risk-weighted assets of the firms. Prong (i) of the CFTC
Capital Rules requires each nonbank SD electing the Bank-Based Approach
to maintain a minimum of $20 million of common equity tier 1 capital.
The CFTC's $20 million fixed-dollar minimum capital requirement is
intended to ensure that each nonbank SD maintains a level of regulatory
capital, without regard to the level of the firm's dealing and other
activities, sufficient to meet its obligations to swap market
participants given the firm's status as a CFTC-registered nonbank SD
and to help ensure the safety and soundness of the nonbank SD.\252\ The
UK PRA Capital Rules also contain a requirement that a PRA-designated
UK nonbank SD maintain a fixed amount of minimum initial capital of GBP
750,000.\253\
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\252\ 85 FR 57492.
\253\ PRA Rulebook, CRR Firms, Definition of Capital Part,
Chapter 12 Base Capital Resource Requirement, Rule 12.1.
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The Commission recognizes that the $20 million fixed-dollar minimum
capital required under the CFTC Capital Rules is substantially higher
than the GBP 750,000 minimum base capital required under the UK PRA
Capital Rules and the Commission preliminarily believes that the $20
million represents a more appropriate level of minimum capital to help
ensure the safety and soundness of the nonbank SD that is engaging in
uncleared swap transactions. Accordingly, the Commission is proposing
to condition the Capital Comparability Determination Order to require
each PRA-designated UK nonbank SD to maintain, at all times, a minimum
level of $20 million regulatory capital in the form of common equity
tier 1 items as defined in Article 26 of UK CRR.\254\ The proposed
condition would require each PRA-designated UK nonbank SD to maintain
an amount of common equity tier 1 capital denominated in British pound
that is equivalent to the $20 million in U.S. dollars.\255\ The
Commission is also proposing that a PRA-designated UK nonbank SD may
convert the pound-denominated common equity tier 1 capital amount to
the U.S. dollar equivalent based on a commercially reasonable and
observable exchange rate.
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\254\ The Commission notes that the proposed requirement that
PRA-designated UK nonbank SDs maintain a minimum level of $20
million of common equity tier 1 capital is consistent with
conditions set forth in the proposed Capital Comparability
Determination Orders for Japan, Mexico, and the EU, respectively.
See, Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination from the
Financial Services Agency of Japan, 87 FR 48092 (Aug. 8, 2022)
(``Proposed Japan Order''); 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) (``Proposed Mexico Order''); and 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 (June 27, 2023) (``Proposed EU Order'').
\255\ Each of the six current PRA-designated UK nonbank SDs
currently maintains common equity tier 1 capital in excess of $20
million based on financial filings made with the Commission.
Therefore, the Commission does not anticipate that the proposed
condition would have any material impact on the PRA-designated UK
nonbank SDs currently registered with the Commission. Nonetheless,
the Commission requests comment on the proposed condition.
---------------------------------------------------------------------------
b. Minimum Capital Requirement Based on Risk-Weighted Assets
Prong (iii) of the CFTC Capital Rules requires each nonbank SD to
maintain an aggregate of common equity tier 1 capital, additional tier
1 capital, and tier 2 capital in an amount equal to or
[[Page 8046]]
greater than 8 percent of the nonbank SD's total risk-weighted assets,
with common equity tier 1 capital comprising at least 6.5 percent of
the 8 percent.\256\ Risk-weighted assets are a nonbank SD's on-balance
sheet and off-balance sheet market risk and credit risk exposures,
including exposures associated with proprietary swap, security-based
swap, equity, and futures positions, weighted according to risk. The
requirements and capital ratios set forth in prong (iii) are based on
the Federal Reserve Board's capital requirements for bank holding
companies and are consistent with the BCBS international bank capital
adequacy framework. The requirement for each nonbank SD to maintain
regulatory capital in an amount that equals or exceeds 8 percent of the
firm's total risk-weighted assets is intended to help ensure that the
nonbank SD's level of capital is sufficient to absorb decreases in the
value of the firm's assets and increases in the value of the firm's
liabilities, and to cover unexpected losses resulting from the firm's
business activities, including losses resulting from uncollateralized
defaults from swap counterparties, without the nonbank SD becoming
insolvent.
---------------------------------------------------------------------------
\256\ 17 CFR 23.101(a)(1)(B).
---------------------------------------------------------------------------
The UK PRA Capital Rules contain capital requirements for PRA-
designated UK nonbank SDs that the Commission preliminarily believes
are comparable to the requirements contained in prong (iii) of the CFTC
Capital Rules. Specifically, the UK PRA Capital Rules require a PRA-
designated UK nonbank SD to maintain: (i) common equity tier 1 capital
equal to at least 4.5 percent of the PRA-designated UK nonbank SD's
total risk exposure amount; (ii) total tier 1 capital (i.e., common
equity tier 1 capital plus additional tier 1 capital) equal to at least
6 percent of the PRA-designated UK nonbank SD's total risk exposure
amount; and (iii) total capital (i.e., an aggregate amount of common
equity tier 1 capital, additional tier 1 capital, and tier 2 capital)
equal to at least 8 percent of the PRA-designated UK nonbank SD's total
risk exposure amount.\257\ In addition, the UK PRA Capital Rules
further require each PRA-designated UK nonbank SD to maintain an
additional capital conservation buffer equal to 2.5 percent of the PRA-
designated UK nonbank SD's total risk exposure amount, which must be
met with common equity tier 1 capital.\258\ Thus, a PRA-designated UK
nonbank SD is effectively required to maintain total qualifying
regulatory capital in an amount equal to or in excess of 10.5 percent
of the market risk, credit risk, CVA risk, settlement risk and
operational risk of the firm (i.e., total capital requirement of 8
percent of risk-weighted assets and an additional 2.5 percent of risk-
weighted assets as a capital conservation buffer), which is higher than
the 8 percent required of nonbank SDs under prong (iii) of the CFTC
Capital Rules.\259\
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\257\ UK CRR, Article 92(1).
\258\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 2
Capital Conservation Buffer.
\259\ UK CRR, Article 92(1) and PRA Rulebook, CRR Firms, Capital
Buffers Part, Chapter 2 Capital Conservation Buffer.
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The Commission also preliminarily believes that the UK PRA Capital
Rules and the CFTC Capital Rules are comparable with respect to the
calculation of capital charges for market risk and credit risk
(including as it relates to aspects of settlement risk and CVA risk),
in determining the nonbank SD's risk-weighted assets. More
specifically, with respect to the calculation of market risk charges
and general credit risk charges, both regimes require a nonbank SD to
use standardized approaches to compute market and credit risk, unless
the firms are approved to use internal models. The standardized
approaches follow the same structure that is now the common global
standard: (i) allocating assets to categories according to risk and
assigning each a risk-weight; (ii) allocating counterparties according
to risk assessments and assigning each a risk factor; (iii) calculating
gross exposures based on valuation of assets; (iv) calculating a net
exposure allowing offsets following well-defined procedures and subject
to clear limitations; (v) adjusting the net exposure by the market
risk-weights; and (vi) finally, for credit risk exposures, multiplying
the sum of net exposures to each counterparty by their corresponding
risk factor.
Internal market risk and credit risk models under the UK PRA
Capital Rules and the CFTC Capital Rules are based on the BCBS
framework and contain comparable quantitative and qualitative
requirements, covering the same risks, though with slightly different
categorization, and including comparable model risk management
requirements. As both rule sets address the same types of risk, with
similar allowed methodologies and under similar controls, the
Commission preliminarily believes that these requirements are
comparable.
The Commission also preliminarily believes that the UK PRA Capital
Rules and CFTC Capital Rules are comparable in that nonbank SDs are
required to account for operational risk in computing their minimum
capital requirements. In this connection, the UK PRA Capital Rules
require a PRA-designated UK nonbank SD to calculate an operational risk
exposure as a component of the firm's total risk exposure amount.\260\
PRA-designated UK nonbank SDs may use either a standardized approach
or, if the PRA-designated UK nonbank SD has obtained regulatory
permission, an internal approach based on the firm's own measurement
systems, to calculate their capital charges for operational risk. The
CFTC Capital Rules address operational risk both as a stand-alone,
separate minimum capital requirement that a nonbank SD is required to
meet under prong (ii) of the Bank-Based Approach \261\ and as a
component of the calculation of risk-weighted assets for nonbank SDs
that use subpart E of the Federal Reserve Board's Part 217 regulations
to calculate their credit risk-weighted assets via internal
models.\262\
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\260\ UK CRR, Article 92(3).
\261\ Specifically, as further discussed below, prong (ii) of
the CFTC Capital Rules' Bank-Based Approach requires a nonbank SD to
maintain regulatory capital in an amount equal to or greater than 8
percent of the firm's total uncleared swaps margin amount associated
with its uncleared swap transactions to address potential
operational, legal, and liquidity risks. 17 CFR 101(a)(i)(C). The
term ``uncleared swap margin'' is defined by Commission Regulation
23.100 as the amount of initial margin, computed in accordance with
the Commission's margin rules for uncleared swaps, that a nonbank SD
would be required to collect from each counterparty for each
outstanding swap position of the nonbank SD. 17 CFR 23.100 and
23.154. A nonbank SD must include all swap positions in the
calculation of the uncleared swap margin amount, including swaps
that are exempt or excluded from the scope of the Commission's
margin regulations for uncleared swaps pursuant to Commission
Regulation 23.150, exempt foreign exchange swaps or foreign exchange
forwards, or netting set of swaps or foreign exchange swaps, for
each counterparty, as if that counterparty was an unaffiliated swap
dealer. 17 CFR 23.100 and 23.150. Furthermore, in computing the
uncleared swap margin amount, a nonbank SD may not exclude any de
minis thresholds contained in Commission Regulation 23.151. 17 CFR
23.100 and 23.151.
\262\ 17 CFR 23.101(a)(1)(i) and 17 CFR 23.100 (definition of
BHC equivalent risk-weighted assets).
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c. Minimum Capital Requirement Based on the Uncleared Swap Margin
Amount
As noted above, prong (ii) of the CFTC Capital Rules' Bank-Based
Approach requires a nonbank SD to maintain regulatory capital in an
amount equal to or greater than 8 percent of the firm's total uncleared
swaps margin amount associated with its uncleared swap transactions to
address potential operational, legal, and liquidity risks.
The UK PRA Capital Rules differ from the CFTC Capital Rules in that
they do not impose a capital requirement on PRA-designated UK nonbank
SDs based
[[Page 8047]]
on a percentage of the margin for uncleared swap transactions. The
Commission notes, however, that the UK PRA Capital Rules impose capital
and liquidity requirements that may compensate for the lack of direct
analogue to the 8 percent uncleared swap margin requirement.
Specifically, as discussed above, under the UK PRA Capital Rules, the
total risk exposure amount is computed as the sum of the PRA-designated
UK nonbank SD's capital charges for market risk, credit risk,
settlement risk, CVA risk of OTC derivatives instruments, and
operational risk.\263\ Notably, the UK PRA Capital Rules require that
PRA-designated UK nonbank SDs, including firms that do not use internal
models, calculate capital charges for operational risk as a separate
component of the total risk exposure amount. The UK PRA Capital Rules
also impose separate liquidity requirements designed to ensure that the
PRA-designated UK nonbank SDs can meet both short- and long-term
obligations, in addition to the general requirement to maintain
processes and systems for the identification of liquidity risk.\264\ In
comparison, the Commission requires nonbank SDs to maintain a risk
management program covering liquidity risk, among other risk
categories, but does not have a distinct liquidity requirement.\265\
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\263\ UK CRR, Article 92(3).
\264\ More specifically, the UK PRA Capital Rules impose
separate liquidity buffers and ``stable funding'' requirements
designed to ensure that PRA-designated UK nonbank SDs can cover both
long-term obligations and short-term payment obligations under
stressed conditions for 30 days. PRA Rulebook, CRR Firms, Liquidity
(CRR) Part, Chapter 4 Liquidity (Part Six CRR), Article 412-413. In
addition, PRA-designated UK nonbank SDs are required to maintain
robust strategies, policies, processes, and systems for the
identification of liquidity risk over an appropriate set of time
horizons, including intra-day. PRA Rulebook, CRR Firms, Internal
Liquidity Adequacy Assessment Part.
\265\ Specifically, CFTC Regulation 23.600(b) requires each SD
to establish, document, maintain, and enforce a system of risk
management policies and procedures designed to monitor and manage
the risks related to swaps, and any products used to hedge swaps,
including futures, options, swaps, security-based swaps, debt or
equity securities, foreign currency, physical commodities, and other
derivatives. The elements of the SD's risk management program are
required to include the identification of risks and risk tolerance
limits with respect to applicable risks, including operational,
liquidity, and legal risk, together with a description of the risk
tolerance limits set by the SD and the underlying methodology in
written policies and procedures. 17 CFR 23.600.
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As such, the Commission preliminarily believes the inclusion of an
operational risk charge in the PRA-designated UK nonbank SD's total
risk exposure amount in all circumstances, and the existence of
separate liquidity requirements, will achieve a comparable outcome to
the Commission's requirement for nonbank SDs to hold regulatory capital
in excess of 8 percent of its uncleared swap margin amount. In that
regard, the Commission, in establishing the requirement that a nonbank
SD must maintain a level of regulatory capital in excess of 8 percent
of the uncleared swap margin amount associated with the firm's swap
transactions, stated that the intent of the requirement was to
establish a method of developing a minimum amount of required capital
for a nonbank SD to meet its obligations as an SD to market
participants, and to cover potential operational, legal, and liquidity
risks.\266\
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\266\ See 85 FR 57462 at 57485.
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d. Preliminary Finding of Comparability
Based on a principles-based, holistic assessment, the Commission
has preliminarily determined, subject to the proposed condition below,
and further subject to its consideration of public comments to the
proposed Capital Comparability Determination and Order, that the
purpose and effect of the UK PRA Capital Rules and the CFTC Capital
Rules are comparable. In this regard, the UK PRA Capital Rules and the
CFTC Capital Rules are both designed to require a nonbank SD to
maintain a sufficient amount of qualifying regulatory capital and
subordinated debt to absorb losses resulting from the firm's business
activities, and decreases in the value of firm assets, without the
nonbank SD becoming insolvent.
The Commission invites comment on the UK Application, the relevant
UK laws and regulations, and the Commission's analysis above regarding
its preliminary determination that, subject to the $20 million minimum
capital requirement, the UK PRA Capital Rules and the CFTC Capital
Rules are comparable in purpose and effect and achieve comparable
outcomes with respect to the minimum regulatory capital requirements
and the calculation of regulatory capital for nonbank SDs. The
Commission also specifically seeks public comment on the question of
whether the requirements under the UK PRA Capital Rules that PRA-
designated UK nonbank SDs calculate an operational risk exposure as
part of the firm's total risk exposure amount and meet separate
liquidity requirements are sufficiently comparable in purpose and
effect to the Commission's requirement for a nonbank SD to hold
regulatory capital equal to or greater than 8 percent of its uncleared
swap margin amount.
D. Nonbank Swap Dealer Financial Reporting Requirements
1. CFTC Financial Recordkeeping and Reporting Rules for Nonbank Swap
Dealers
The CFTC Financial Reporting Rules impose financial recordkeeping
and reporting requirements on nonbank SDs. The CFTC Financial Reporting
Rules require each nonbank SD to prepare and keep current ledgers or
similar records summarizing each transaction affecting the nonbank SD's
asset, liability, income, expense, and capital accounts.\267\ The
nonbank SD's ledgers and similar records must be prepared in accordance
with generally accepted accounting principles as adopted in the United
States (``U.S. GAAP''), except that if the nonbank SD is not otherwise
required to prepare financial statements in accordance with U.S. GAAP,
the nonbank SD may prepare and maintain its accounting records in
accordance with International Financial Reporting Standards (``IFRS'')
issued by the International Accounting Standards Board.\268\
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\267\ 17 CFR 23.105(b).
\268\ Id.
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The CFTC Financial Reporting Rules also require each nonbank SD to
prepare and file with the Commission and with NFA periodic unaudited
and annual audited financial statements.\269\ A nonbank SD that elects
the TNW Approach is required to file unaudited financial statements
within 17 business days of the close of each quarter, and its annual
audited financial statements within 90 days of its fiscal year-
end.\270\ A nonbank SD that elects the NLA Approach or the Bank-Based
Approach is required to file unaudited financial statements within 17
business days of the end of each month, and to file its annual audited
financial statements within 60 days of its fiscal year-end.\271\
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\269\ 17 CFR 23.105(d) and (e).
\270\ 17 CFR 23.105(d)(1) and (e)(1).
\271\ Id.
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The CFTC Financial Reporting Rules provide that a nonbank SD's
unaudited financial statements must include: (i) a statement of
financial condition; (ii) a statement of income/loss; (iii) a statement
of changes in liabilities subordinated to claims of general creditors;
(iv) a statement of changes in ownership equity; (v) a statement
demonstrating compliance with and calculation of the applicable
regulatory requirement; and (vi) such further material information
necessary to make the required statements not misleading.\272\ The
annual audited
[[Page 8048]]
financial statements must include: (i) a statement of financial
condition; (ii) a statement of income/loss; (iii) a statement of cash
flows; (iv) a statement of changes in liabilities subordinated to
claims of general creditors; (v) a statement of changes in ownership
equity; (vi) a statement demonstrating compliance with and calculation
of the applicable regulatory capital requirement; (vii) appropriate
footnote disclosures; and (viii) a reconciliation of any material
differences from the unaudited financial report prepared as of the
nonbank SD's year-end date.\273\
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\272\ 17 CFR 23.105(d)(2).
\273\ 17 CFR 23.105(e)(4).
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A nonbank SD that has obtained approval from the Commission or NFA
to use internal capital models also must submit certain model metrics,
such as aggregate VaR and counterparty credit risk information, each
month to the Commission and NFA.\274\ A nonbank SD also is required to
provide the Commission and NFA with a detailed list of financial
positions reported at fair market value as part of its monthly
unaudited financial statements.\275\ Each nonbank SD is also required
to provide information to the Commission and NFA regarding its
counterparty credit concentration for the 15 largest exposures in
derivatives, a summary of its derivatives exposures by internal credit
ratings, and the geographical distribution of derivatives exposures for
the 10 largest countries.\276\
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\274\ 17 CFR 23.105(k) and (l) and appendix B to subpart E of
part 23.
\275\ 17 CFR 23.105(l) and appendix B to subpart E of part 23.
\276\ 17 CFR 23.105(l) in Schedules 2, 3, and 4, respectively.
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CFTC Financial Reporting Rules also require a nonbank SD to attach
to each unaudited and audited financial report an oath or affirmation
that to the best knowledge and belief of the individual making the
affirmation the information contained in the financial report is true
and correct.\277\ The individual making the oath or affirmation must be
a duly authorized officer if the nonbank SD is a corporation, or one of
the persons specified in the regulation for business organizations that
are not corporations.\278\
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\277\ 17 CFR 23.105(f).
\278\ Id.
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The CFTC Financial Reporting Rules further require a nonbank SD to
make certain financial information publicly available by posting the
information on its public website.\279\ Specifically, a nonbank SD must
post on its website a statement of financial condition and a statement
detailing the amount of the nonbank SD's regulatory capital and the
minimum regulatory capital requirement based on its audited financial
statements and based on its unaudited financial statements that are as
of a date that is six months after the nonbank SD's audited financial
statements.\280\ Such public disclosure is required to be made within
10 business days of the filing of the audited financial statements with
the Commission, and within 30 calendar days of the filing of the
unaudited financial statements required with the Commission.\281\ A
nonbank SD also must obtain written approval from NFA to change the
date of its fiscal year-end for financial reporting.\282\
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\279\ 17 CFR 23.105(i).
\280\ Id.
\281\ Id.
\282\ 17 CFR 23.105(g).
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The CFTC Financial Reporting Rules also require a nonbank SD to
provide the Commission and NFA with information regarding the
custodianship of margin for uncleared swap transactions (``Margin
Report'').\283\ The Margin Report must contain: (i) the name and
address of each custodian holding initial margin or variation margin
that is required for uncleared swaps subject to the CFTC margin rules
(``uncleared margin rules''), on behalf of the nonbank SD or its swap
counterparties; (ii) the amount of initial and variation margin
required by the uncleared margin rules held by each custodian on behalf
of the nonbank SD and on behalf its swap counterparties; and (iii) the
aggregate amount of initial margin that the nonbank SD is required to
collect from, or post with, swap counterparties for uncleared swap
transactions subject to the uncleared margin rules.\284\ The Commission
requires this information in order to monitor the use of custodians by
nonbank SDs and their swap counterparties. Such information assists the
Commission in monitoring the safety and soundness of a nonbank SD by
verifying whether the firm is current with its swap counterparties with
respect to the posting and collecting of margin required by the
uncleared margin rules. By requiring the nonbank SD to report the
required amount of margin to be posted and collected, and the amount of
margin that is actually posted and collected, the Commission could
identify potential issues with the margin practices and compliance by
nonbank SDs that may hinder the ability of the firm to meet its
obligations to market participants. The Margin Report also allows the
Commission to identify custodians used by nonbank SDs and their
counterparties, which may permit the Commission to assess potential
market issues, including a concentration of custodial services by a
limited number of banks.
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\283\ 17 CFR 23.105(m).
\284\ Id.
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2. PRA-Designated UK Nonbank Swap Dealer Financial Reporting
Requirements
The UK PRA Financial Reporting Rules impose financial reporting
requirements on a PRA-designated UK nonbank SD that are designed to
provide the PRA with a comprehensive view of the financial information
and capital position of the firm.
Specifically, Article 430 of the Reporting (CRR) Part of the PRA
Rulebook requires a PRA-designated UK nonbank SD to report information
concerning its capital and financial condition, including information
on the firm's capital requirements, leverage ratio, large exposures,
and liquidity requirements.\285\ PRA-designated UK nonbank SDs must
follow the templates and instructions provided in the PRA Rulebook for
purposes of the prudential requirements reporting referred to
COREP.\286\ Under the COREP requirements, PRA-designated UK nonbank SDs
are required to provide, on a quarterly basis,\287\ calculations in
relation to the PRA-designated UK nonbank SD's capital and capital
requirements,\288\ capital ratios and capital levels,\289\ and market
risk,\290\ among other items.
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\285\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4
Reporting (Part Seven A CRR), Rule 1.
\286\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions.
\287\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, 5 Reporting
Requirements, Chapter 3 Format and Frequency of Reporting on Own
Funds, Own Funds Requirements.
\288\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Annex I, Templates C 01.00 and C 02.00.
\289\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Annex I, Template C 03.00.
\290\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Annex I, Template C 02.00.
---------------------------------------------------------------------------
In addition to the prudential requirements reporting, Article
430(3) of the Reporting (CRR) Part of the PRA Rulebook imposes
financial information reporting on PRA-designated UK nonbank SDs that
are subject to Section 403(1) of the Companies Act 2006 (i.e., entities
that are parent companies \291\ and report on a consolidated basis
using UK-adopted IFRS and that issue securities admitted to trading on
a UK-
[[Page 8049]]
regulated market).\292\ The relevant reporting templates and
instructions, referred to as FINREP, are included in Chapter 6 of the
Reporting (CRR) Part of the PRA Rulebook. Under the FINREP
requirements, PRA-designated UK nonbank SDs subject to the requirements
of Article 430(3) of the Reporting (CRR) Part of the PRA Rulebook are
required to provide the following documents to the PRA, among other
items: (i) on a quarterly basis, a balance sheet statement (or
statement of financial position) that reflects the PRA-designated UK
nonbank SD's financial condition; \293\ (ii) on a quarterly basis, a
statement of profit or loss; \294\ (iii) on a quarterly basis, a
breakdown of financial liabilities by product and by counterparty
sector; \295\ (iv) on a quarterly basis, a listing of subordinated
financial liabilities; \296\ and (v) on an annual basis, a statement of
changes in equity.\297\
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\291\ A parent company (i.e., ``parent undertaking'') is defined
in Companies Act 2006, Section 1162.
\292\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4
Reporting (Part Seven A CRR), Article 430, Rule 3.
\293\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Templates 1.1., 1.2., and 1.3 at Annex
III (for reporting according to IFRS) and Templates 1.1., 1.2., and
1.3 at Annex IV (for reporting according to national accounting
frameworks).
\294\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Template 2 at Annex III (for reporting
according to IFRS) and Template 2 at Annex IV (for reporting
according to national accounting frameworks).
\295\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Template 8.1 at Annex III (for reporting
according to IFRS) and Template 8.1 at Annex IV (for reporting
according to national accounting frameworks).
\296\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Template 8.2 at Annex III (for reporting
according to IFRS) and Template 8.2. at Template 8.2 at Annex IV
(for reporting according to national accounting frameworks).
\297\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Template 46 at Annex III (for reporting
according to IFRS) and Template 46 at Annex IV (for reporting
according to national accounting frameworks).
---------------------------------------------------------------------------
Under the FINREP requirements, a PRA-designated UK nonbank SD
subject to the requirements of Article 430(3) of the Reporting (CRR)
Part of the PRA Rulebook is also required to provide the PRA with
additional financial information, including a breakdown of its loans
and advances by product and type of counterparty,\298\ as well as
detailed information regarding its derivatives trading activities,\299\
collateral and guarantees.\300\
---------------------------------------------------------------------------
\298\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Templates 5.1 and 6.1 at Annex III (for
reporting according to IFRS) and Templates 5.1 and 6.1 at Annex IV
(for reporting according to national accounting frameworks).
\299\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Template 10 at Annex III (for reporting
according to IFRS) and Template 10 at Annex IV (for reporting
according to national accounting frameworks).
\300\ PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 6
Templates and Instructions, Template 13 at Annex III (for reporting
according to IFRS) and Template 13 at Annex IV (for reporting
according to national accounting frameworks).
---------------------------------------------------------------------------
For PRA-designated UK nonbank SD that are not subject to financial
information reporting under Article 430(3) of the Reporting (CRR) Part
of the PRA Rulebook, the Regulatory Reporting Part of the PRA Rulebook
dictates the applicable reporting requirements.\301\ Specifically, as
firms that fall into Regulated Activity Group 3 (``RAG 3''), PRA-
designated UK nonbank SDs are required to provide the following
documents to the PRA, among other items: (i) on a quarterly basis, a
balance sheet statement (or statement of financial position) that
reflects the PRA-designated UK nonbank SD's financial condition; \302\
(ii) on a quarterly basis, a statement of profit or loss; \303\ and
(iii) on an annual basis, an annual report and accounts.\304\ The
Applicants represented that the six UK PRA-designated nonbank SDs
currently registered with the Commission are designated as RAG 3 firms
and are required to provide the aforementioned documents.\305\
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\301\ As indicated by the Applicants, the Regulatory Reporting
Part of the PRA Rulebook applies to all PRA-designated UK nonbank
SDs. See Responses to Staff Questions dated October 5, 2023.
\302\ PRA Rulebook, CRR Firms, Regulatory Reporting Part,
Chapter 9 Regulated Activity Group 3, Rule 9.2 (referencing
Templates 1.1., 1.2., and 1.3 at Annex III and Templates 1.1., 1.2.,
and 1.3 at Annex IV of Chapter 6 of the Reporting (CRR) Part) and
Rule 9.3.
\303\ PRA Rulebook, CRR Firms, Regulatory Reporting Part,
Chapter 9 Regulated Activity Group 3, Rule 9.2 (referencing Template
2 at Annex III and Template 2 at Annex IV of Chapter 6 of the
Reporting (CRR) Part) and Rule 9.3.
\304\ PRA Rulebook, CRR Firms, Regulatory Reporting Part,
Chapter 9 Regulated Activity Group 3, Rule 9.2 and Rule 9.3.
\305\ See Response to Staff Questions of October 5, 2023. For
the avoidance of doubt, as represented by the Applicants, the six
PRA-designated UK nonbank SDs currently registered with the
Commission are subject to the RAG 3 requirements in the Regulatory
Reporting Part of the PRA Rulebook but are not subject the FINREP
requirements set forth in Article 430(3) of the Reporting (CRR) Part
of the PRA Rulebook. As such, the six PRA-designated UK nonbank SDs
currently registered with the Commission are required to submit to
the PRA only Templates 1 through 3 of FINREP.
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Furthermore, all PRA-designated UK nonbank SDs are required to
prepare annual audited accounts and a strategic report (together,
``annual audited financial report'') pursuant to Parts 15 and 16 of the
Companies Act 2006.\306\ The audit of the accounts and report is
required to be performed by one or more independent statutory auditors,
which have the required skill, resources, and experience to perform
their duties based on the complexity of the firm's business and the
regulatory requirements to which the firm is subject.\307\ PRA-
designated UK nonbank SDs must submit the annual audited financial
report to the PRA within 80 business days from the firm's accounting
reference date.\308\ In addition, under generally applicable company
law requirements, PRA-designated UK nonbank SDs are required to submit
the annual audited financial report to the UK Registrar of
Companies.\309\ The registrar makes the report available to the public
on its website, free of charge.\310\
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\306\ Companies Act 2006, Sections 393 to 414D and 475. Section
475 provides for an exemption from the audit requirement for certain
entities (i.e., ``small companies'', qualifying ``subsidiary
companies'' and ``dormant companies.'') None of the six PRA-
designated UK nonbank SD, however, falls into the exempt categories.
See Responses to Staff Questions dated October 5, 2023.
\307\ Companies Act 2006, Section 485 et seq.; see also PRA
Rulebook, CRR Firms, Auditors Part, Rule 3 Auditors' Qualifications,
and Rule 4 Auditors' Independence.
\308\ PRA Rulebook, CRR Firms, Regulatory Reporting Part,
Chapter 9 Regulatory Activity Group 3, Rules 9.1. and 9.4. The
``accounting reference date'' is determined in accordance with
Section 391 of the Companies Act 2006 and depending on the firm's
date of incorporation.
\309\ See Companies Act 2006, Section 441. The deadline for
filing the annual audited financial report with the UK Registrar of
Companies is nine months from the firm's accounting reference date
for private companies and six months from the firm's accounting
reference date for public companies. Id., Articles 442 (setting
forth the filing deadlines by category of firm) and 391 (defining
the terms ``accounting reference period'' and accounting reference
date'').
\310\ See Companies Act 2006, Sections 1080 and 1085.
Information filed with the UK Registrar of Companies is available
at: https://www.gov.uk/government/organisations/companies-house.
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The annual audited accounts must comprise, at a minimum, a balance
sheet, a profit and loss statement, and notes about the accounts.\311\
The auditor's audit report must include: (i) a description of the
annual accounts subject to the audit and the financial reporting
framework that was applied in their preparation; (ii) a description of
the scope of the audit, which must specify the auditing standards used
to conduct the audit; (iii) an audit opinion stating whether the annual
accounts give a true and fair view of the state of affairs and/or the
profit and loss of the firm, as applicable, and whether the annual
accounts have been prepared in accordance with the relevant financial
reporting framework; and (iv) a
[[Page 8050]]
reference to any matters emphasized by the auditor that did not qualify
the audit opinion.\312\
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\311\ Companies Act 2006, Section 396.
\312\ Id., Section 495.
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The strategic report is required to include a review of the
development and performance of the PRA-designated UK nonbank SD's
during the financial year and a description of the principal risks and
uncertainties that the firm faces.\313\ The auditors are required to
express an opinion on whether the strategic report is consistent with
the accounts for the same financial year, and whether the strategic
report has been prepared in accordance with applicable legal
requirements.\314\ The opinion also must state whether the auditor has
identified material misstatements in the strategic report and, if so,
describe the misstatement.\315\
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\313\ Id., Section 414C.
\314\ Id., Section 496.
\315\ Id.
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In addition, the SEC's UK Order granting substituted compliance for
financial reporting to UK nonbank SBSDs, as supplemented by the SEC
Order on Manner and Format of Filing Unaudited Financial and
Operational Information, require a UK nonbank SBSD to file an unaudited
SEC Form X-17A-5 Part II (``FOCUS Report'') with the SEC on a monthly
basis.\316\ The FOCUS Report is required to include, among other
statements and schedules: (i) a statement of financial condition; (ii)
a statement of the UK nonbank SBSD's capital computation in accordance
with home country Basel-Based requirements; (iii) a statement of
income/loss; and (iv) a statement of capital withdrawals.\317\ A UK
nonbank SBDS is required to file its FOCUS Report with the SEC within
35 calendar days of the month end.\318\
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\316\ See, UK Order. See also, SEC Order on Manner and Format of
Filing Unaudited Financial and Operational Information.
\317\ See, SEC Order on Manner and Format of Filing Unaudited
Financial and Operational Information.
\318\ Id.
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3. Commission Analysis
The Commission has reviewed the UK Application and the relevant UK
laws and regulations, and has preliminarily determined that, subject to
the proposed conditions described below, the financial reporting
requirements of the UK PRA Financial Reporting Rules are comparable to
CFTC Financial Reporting Rules in purpose and effect as they are
intended to provide the PRA and the Commission, respectively, with
financial information to monitor and assess the financial condition of
nonbank SDs and their ability to absorb decreases in firm assets and
increases in firm liabilities, and to cover losses from business
activities, including swap dealing activities, without the firm
becoming insolvent.
The UK PRA Financial Reporting Rules require PRA-designated UK
nonbank SDs to prepare and submit to the PRA on a quarterly basis
unaudited financial information that includes a statement of financial
condition and a statement of profit or loss. Under the FINREP reporting
requirements, a PRA-designated UK nonbank SD subject to the
requirements set forth in Article 430(3) of the Reporting (CRR) Part of
the PRA Rulebook is also required to provide the PRA with additional
financial information, including: (i) a schedule of the breakdown of
financial liabilities by product and by counterparty sector; (ii) a
breakdown of its loans and advances by product and type of
counterparty; and (iii) detailed information regarding its derivatives
trading activities, collateral, and guarantees. PRA-designated UK
nonbank SDs subject to the Regulatory Reporting Part of the PRA
Rulebook are not required to submit such additional financial
information. To the extent the Commission believes some of this
additional information is necessary to the exercise of its and NFA's
oversight function, the Commission is proposing, as noted below, to
require the submission of such information as a condition to the
Capital Comparability Determination Order.
In addition, under the COREP reporting requirement, all PRA-
designated UK nonbank SDs are required to provide the PRA on a
quarterly basis with calculations in relation to the PRA-designated UK
nonbank SD's capital requirements and capital ratios, among other
items. The UK PRA Financial Reporting Rules further require all PRA-
designated UK nonbank SDs to prepare and publish an annual audited
financial report. The annual audited financial report is required to
include a statement of financial condition and a statement of profit or
loss, and must also include relevant notes to the financial
statements.\319\
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\319\ Companies Act 2006, Section 396.
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The Commission preliminarily finds that the UK PRA Financial
Reporting Rules impose reporting requirements that are comparable with
respect to overall form and content to the CFTC Financial Reporting
Rules, which require each nonbank SD to file, among other items,
periodic unaudited financial reports with the Commission and NFA that
contain at a minimum: (i) a statement of financial condition; (ii) a
statement of profit or loss; and (iii) a statement demonstrating
compliance with the capital requirements. Accordingly, the Commission
has preliminarily determined that a PRA-designated UK nonbank SD may
comply with the financial reporting requirements contained in
Commission Regulation 23.105 by complying with the corresponding UK PRA
Financial Reporting Rules, subject to the conditions set forth
below.\320\
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\320\ A PRA-designated UK nonbank SD that qualifies and elects
to seek substituted compliance with the UK PRA Capital Rules must
also seek substituted compliance with the UK PRA Financial Reporting
Rules.
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The Commission is proposing to condition the Capital Comparability
Determination Order on a PRA-designated UK nonbank SD providing the
Commission and NFA with copies of the relevant templates of the FINREP
reports and COREP reports that correspond to the PRA-designated UK
nonbank SD's statement of financial condition, statement of income/
loss, and statement of regulatory capital, total risk exposure, and
capital ratios. These templates consist of FINREP templates 1.1
(Balance Sheet Statement: assets), 1.2 (Balance Sheet Statement:
liabilities), 1.3 (Balance Sheet Statement: equity), and 2 (Statement
of profit or loss), and COREP templates 1 (Own Funds), 2 (Own Funds
Requirements) and 3 (Capital Ratios).
The Commission also notes that PRA-designated UK nonbank SDs submit
COREP templates in addition to the ones listed above to the PRA. These
templates generally provide supporting detail to the core templates
that the Commission is proposing to require from each PRA-designated UK
nonbank SD. The Commission is not proposing to require a PRA-designated
UK nonbank SD to file these additional COREP templates as a condition
to the Capital Comparability Order, and alternatively would exercise
its authority under Commission Regulation 23.105(h) to direct PRA-
designated UK nonbank SDs to provide such additional information to the
Commission and NFA on an ad hoc basis as necessary to oversee the
financial condition of the firms.\321\
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\321\ Commission Regulation 23.105(h) provides that the
Commission or NFA may, by written notice, require any nonbank SD to
file financial or operational information as may be specified by the
Commission or NFA. 17 CFR 23.105(h).
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As noted in Section D.2. of this Determination, the UK PRA
Financial Reporting Rules require PRA-designated UK nonbank SDs to
submit the unaudited FINREP and COREP templates to PRA on a quarterly
basis.
[[Page 8051]]
The CFTC Financial Reporting Rules contain a more frequent reporting
requirement by requiring nonbank SDs that elect the Bank-Based Approach
to file unaudited financial information with the Commission and NFA, on
a monthly basis.\322\ The financial statement reporting requirements
are an integral part of the Commission's and NFA's oversight programs
to effectively and timely monitor nonbank SDs' compliance with capital
and other financial requirements, and for Commission and NFA staff to
assess the overall financial condition and business operations of
nonbank SDs. The Commission has extensive experience with monitoring
the financial condition of registrants through the receipt of financial
statements, including FCMs and, more recently, nonbank SDs. Both FCMs
and nonbank SDs that elect the Bank-Based Approach or NLA Approach file
financial statements with the Commission and NFA on a monthly basis.
The Commission preliminarily believes that receiving financial
information from PRA-designated UK nonbank SDs on a quarterly basis is
not comparable with the CFTC Financial Reporting Rules and would impede
the Commission's and NFA's ability to effectively and timely monitor
the financial condition of PRA-designated UK nonbank SDs for the
purposes of assessing their safety and soundness, as well as their
ability to meet obligations to creditors and counterparties without
becoming insolvent. Therefore, the Commission is preliminarily
proposing to include a condition in the Capital Comparability
Determination Order to require PRA-designated UK nonbank SDs to file
the applicable templates of the FINREP reports and COREP reports with
the Commission and NFA on a monthly basis. The Commission also is
proposing to condition the Capital Comparability Determination Order on
the PRA-designated UK nonbank SD filing the above-listed templates of
the FINREP reports and COREP reports with the Commission and NFA within
35 calendar days of the end of each month.\323\
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\322\ Commission Regulation 23.105(d) (17 CFR 23.105(d)).
\323\ The proposed condition for PRA-designated UK nonbank SDs
to file monthly unaudited financial information with the Commission
and NFA is consistent with proposed conditions contained in the
Commission's proposed Capital Comparability Determinations for
Japanese nonbank SDs, Mexican nonbank SDs, and EU nonbank SDs. See
Proposed Japan Order, Proposed Mexico Order, and Proposed EU Order.
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The Commission is further proposing that in lieu of filing such
FINREP and COREP reports, PRA-designated UK nonbank SDs that are
registered with the SEC as UK nonbank SBSDs could satisfy this
condition by filing with the CFTC and NFA, on a monthly basis, copies
of the unaudited FOCUS Reports that the PRA-designated UK nonbank SDs
are required to file with the SEC pursuant to the SEC UK Order, as
supplemented by the SEC Order on Manner and Format of Filing Unaudited
Financial and Operational Information. The FOCUS Report is required to
include, among other statements and schedules: (i) a statement of
financial condition; (ii) a statement of the UK nonbank SBSD's capital
computation in accordance with home country Basel-Based requirements;
(iii) a statement of income/loss; and (iv) a statement of capital
withdrawals.\324\
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\324\ See, SEC Order on Manner and Format of Filing Unaudited
Financial and Operational Information.
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The filing of a FOCUS Report would be at the election of the PRA-
designated UK nonbank SD as an alternative to the filing of unaudited
FINREP and COREP templates that such firms would otherwise be required
to file with the Commission and NFA pursuant to the proposed Order. All
six of the PRA-designated UK nonbank SDs are currently registered with
the SEC as UK nonbank SBSDs and would be eligible to file copies of
their monthly FOCUS Report with the Commission and NFA in lieu of the
FINREP and COREP templates and Schedule 1. A PRA-designated UK nonbank
SD electing to file copies of its monthly FOCUS Report would be
required to submit the reports to the Commission and NFA within 35
calendar days of the end of each month.\325\
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\325\ Commission Regulation 23.105(d)(3) currently provides that
a nonbank SD or nonbank MSP that is also registered with the SEC as
a broker or dealer, an SBSD, or a major security-based swap
participant may elect to file a FOCUS Report in lieu of the
financial reports required by the Commission. In a separate
rulemaking, the Commission has proposed to amend Regulation
23.105(d)(3) to mandate the filing of a FOCUS Report by such dually-
registered entities, including dually-registered non-U.S. nonbank
SDs, in lieu of the Commission's financial reports. See CFTC Press
Release 8836-23 issued on December 15, 2023, available at cftc.gov.
If the Commission adopts such a requirement, the Commission would
also require PRA-designated UK nonbank SDs that are registered with
the SEC as UK nonbank SBSDs to file FOCUS Reports with the
Commission.
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In addition, the Commission is proposing to condition the Capital
Comparability Determination Order on a PRA-designated UK nonbank SD
submitting to the Commission and NFA copies of the PRA-designated UK
nonbank SD's annual audited financial report that is required to be
prepared pursuant to the Companies Act 2006.\326\ PRA-designated UK
nonbank SDs would be required to file the annual audited financial
report with the Commission and NFA on the earlier of the date the
report is filed with the PRA or the date the report is required to be
filed with the PRA.\327\
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\326\ Companies Act 2006, Parts 15 and 16.
\327\ PRA-designated UK nonbank SDs are required to submit the
annual audited financial report to the PRA within 80 business days
of the firm's accounting reference date. See PRA Rulebook,
Regulatory Reporting Part, Rule 9.1.
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The Commission is also proposing to condition the Capital
Comparability Determination Order on the PRA-designated UK nonbank SD
providing the reports and statements with balances converted to U.S.
dollars.\328\ The Commission, however, recognizes that the requirement
to convert accounts denominated in British pound to U.S. dollars on the
annual audited financial report may impact the opinion provided by the
independent auditor. The Commission is therefore proposing to accept
the annual audited financial report denominated in British pound.
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\328\ The conversion of account balances from British pound to
U.S. dollars is not required to be subject to the audit of the
independent auditor. A PRA-designated UK nonbank SD must report the
exchange rate that it used to convert balances from British pound to
U.S. dollars to the Commission and NFA as part of the financial
reporting.
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The Commission is proposing to impose these conditions as they are
necessary to ensuring that the CFTC Financial Reporting Rules and UK
PRA Financial Reporting Rules, supplemented by the proposed conditions,
are comparable and provide the Commission and NFA with appropriate
financial information to effectively monitor the financial condition of
PRA-designated UK nonbank SDs. Frequent financial reporting is a
central component of the Commission's and NFA's programs for monitoring
and assessing the safety and soundness of nonbank SDs as required under
section 4s(e) of the CEA. Although, as further discussed in Section
F.2. below, the Commission preliminarily believes that the PRA has the
necessary powers to supervise and enforce compliance by PRA-designated
UK nonbank SDs with applicable capital and financial reporting
requirements, the Commission is proposing the conditions to facilitate
the timely access to information allowing the Commission and NFA to
effectively monitor and assess the ongoing financial condition of all
nonbank SDs, including PRA-designated UK nonbank SDs, to help ensure
their safety and soundness and their ability to meet their financial
obligations to customers, counterparties, and creditors.
The Commission preliminarily considers that its approach of
requiring
[[Page 8052]]
PRA-designated UK nonbank SDs to provide the Commission and NFA with
the selected FINREP and COREP templates and the annual audited
financial report that the firms currently file with the PRA strikes an
appropriate balance of ensuring that the Commission receives the
financial reporting necessary for the effective monitoring of the
financial condition of the nonbank SDs, while also recognizing the
existing regulatory structure of the UK PRA Financial Reporting Rules.
Under the proposed conditions, with limited exceptions, the PRA-
designated UK nonbank SD would not be required to prepare different
financial reports and statements for filing with the Commission, but
would be required to prepare selected reports and statements in the
content and format used for submissions to the PRA and convert the
balances to U.S. dollars so that Commission staff may efficiently
analyze the financial information. Although the Commission is proposing
to require submission of certain reports (i.e., selected FINREP and
COREP templates) on a more frequent basis (monthly instead of quarterly
as required by the UK PRA Financial Reporting Rules), the proposed
conditions provide the PRA-designated UK nonbank SDs with 35 calendar
days from the end of each month to convert balances to U.S. dollars. In
addition, PRA-designated UK nonbank SDs that are registered as SBSDs
with the SEC would have the option of filing a copy of the FOCUS Report
they submit to the SEC in lieu of the FINREP and COREP templates. The
Commission preliminarily believes that by requiring that PRA-designated
UK nonbank SDs file unaudited financial reports on a monthly basis
instead of quarterly, the Commission would help ensure that the CFTC
Financial Reporting Rules and the UK PRA Financial Reporting Rules
achieve a comparable outcome.
The Commission is also proposing to condition the Capital
Comparability Determination Order on PRA-designated UK nonbank SDs
filing with the Commission and NFA, on a monthly basis, the aggregate
securities, commodities, and swap positions information set forth in
Schedule 1 of appendix B to subpart E of part 23.\329\ The Commission
is proposing to require that Schedule 1 be filed with the Commission
and NFA as part of the PRA-designated UK nonbank SD's monthly
submission of selected FINREP and COREP templates or FOCUS Report, as
applicable. Schedule 1 provides the Commission and NFA with detailed
information regarding the financial positions that a nonbank SD holds
as of the end of each month, including the firm's swap positions, which
will allow the Commission and NFA to monitor the types of investments
and other activities that the firm engages in and will enhance the
Commission's and NFA's ability to monitor the safety and soundness of
the firm.
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\329\ Schedule 1 of appendix B to subpart E of part 23 includes
a nonbank SD's holding of U.S Treasury securities, U.S. government
agency debt securities, foreign debt and equity securities, money
market instruments, corporate obligations, spot commodities, cleared
and uncleared swaps, cleared and non-cleared security-based swaps,
and cleared and uncleared mixed swaps in addition to other position
information.
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The Commission is also proposing to condition the Capital
Comparability Determination Order on a PRA-designated UK nonbank SD
submitting with each set of selected FINREP and COREP templates, annual
audited financial report, and the applicable Schedule 1, a statement by
an authorized representative or representatives of the PRA-designated
UK nonbank SD that to the best knowledge and belief of the person(s)
the information contained in the respective reports and statements is
true and correct, including the conversion of balances in the
statements to U.S. dollars, as applicable. The statement by the
authorized representative or representatives of the PRA-designated UK
nonbank SD is in lieu of the oath or affirmation required of nonbank
SDs under Commission Regulation 23.105(f), and is intended to ensure
that reports and statements filed with the Commission and NFA are
prepared and submitted by firm personnel with knowledge of the
financial reporting of the firm who can attest to the accuracy of the
reporting and translation.
The Commission is further proposing to condition the Capital
Comparability Determination Order on a PRA-designated UK nonbank SD
filing the Margin Report specified in Commission Regulation 23.105(m)
with the Commission and NFA. The Margin Report contains: (i) the name
and address of each custodian holding initial margin or variation
margin on behalf of the nonbank SD or its swap counterparties; (ii) the
amount of initial and variation margin held by each custodian on behalf
of the nonbank SD and on behalf its swap counterparties; and (iii) the
aggregate amount of initial margin that the nonbank SD is required to
collect from, or post with, swap counterparties for uncleared swap
transactions.\330\
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\330\ 17 CFR 23.105(m).
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The Commission preliminarily believes that receiving this margin
information from PRA-designated UK nonbank SDs will assist in the
Commission's assessment of the safety and soundness of the PRA-
designated UK nonbank SDs. Specifically, the Margin Report would
provide the Commission with information regarding a PRA-designated UK
nonbank SD's swap book, the extent to which it has uncollateralized
exposures to counterparties or has not met its financial obligations to
counterparties. This information, along with the list of custodians
holding both the firms' and counterparties' collateral for swap
transactions, is expected to assist the Commission in assessing and
monitoring potential financial impacts to the nonbank SD resulting from
defaults on its swap transactions. The Commission is further proposing
to require a PRA-designated UK nonbank SD to file the Margin Report
with the Commission and NFA within 35 calendar days of the end of each
month, which corresponds with the proposed timeframe for the PRA-
designated UK nonbank SD to file the selected FINREP and COREP
templates or FOCUS Report, as applicable, and proposing to require the
Margin Report to be provided with balances reported in U.S. dollars.
The Commission notes that the proposed conditions in the UK PRA
Capital Comparability Determination Order are consistent with the
proposed conditions set forth in the proposed Capital Comparability
Determination Orders for Japan, Mexico, and the EU,\331\ and reflects
the Commission's approach of preliminarily determining that non-U.S.
nonbank SDs could meet their financial statement reporting obligations
to the Commission by filing financial reports currently prepared for
home country regulators, albeit in the case of certain financial
reports under a more frequent submission schedule, and, in certain
circumstances, with balances expressed in U.S. dollars. The
Commission's proposed conditions also include certain financial
information and notices that the Commission believes are necessary for
effective monitoring of PRA-designated UK nonbank SDs that are not
currently part of the PRA's supervision regimes.
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\331\ See Proposed Japan Order, Proposed Mexico Order, and
Proposed EU Order.
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The Commission is not proposing to require that a PRA-designated UK
nonbank SD that has been approved by the PRA to use capital models
files with the Commission or NFA the monthly model metric information
contained in
[[Page 8053]]
Commission Regulation 23.105(k) \332\ or that a PRA-designated UK
nonbank SD files with the Commission or NFA the monthly counterparty
credit exposure information specified in Commission Regulation
23.105(l) and Schedules 2, 3, and 4 of appendix B to subpart E of part
23.\333\
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\332\ Commission Regulation 23.105(k) requires a nonbank SD that
has obtained approval from the Commission or NFA to use internal
capital models to submit to the Commission and NFA each month
information regarding its risk exposures, including VaR and credit
risk exposure information when applicable. The model metrics are
intended to provide the Commission and NFA with information that
would assist with the ongoing oversight and assessment of internal
market risk and credit risk models that have been approved for use
by a nonbank SD. 17 CFR 23.105(k).
\333\ Commission Regulation 23.105(l) requires each nonbank SD
to provide information to the Commission and NFA regarding its
counterparty credit concentration for the 15 largest exposures in
derivatives, a summary of its derivatives exposures by internal
credit ratings, and the geographic distribution of derivatives
exposures for the 10 largest countries in Schedules 2, 3, and 4,
respectively. 17 CFR 23.105(l).
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The Commission, in making the preliminary determination to not
require a PRA-designated UK nonbank SD to file the model metrics and
counterparty exposures required by Commission Regulations 23.105(k) and
(l), respectively, recognizes that NFA's current risk monitoring
program requires each bank SD and each nonbank SD, including each PRA-
designated UK nonbank SD, to file risk metrics addressing market risk
and credit risk with NFA on a monthly basis. NFA's monthly risk metric
information includes: (i) VaR for interest rates, credit, foreign
exchange, equities, commodities, and total VaR; (ii) total stressed
VaR; (iii) interest rate, credit spread, foreign exchange market, and
commodity sensitivities; (iv) total swaps current exposure both before
and after offsetting against collateral held by the firm; and (v) a
list of the 15 largest swaps counterparty current exposures before
collateral and net of collateral.\334\
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\334\ See NFA Financial Requirements, Section 17--Swap Dealer
and Major Swap Participant Reporting Requirements, and Notice to
Members--Monthly Risk Data Reporting for Swap Dealers (May 30,
2017).
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Although there are differences in the information required under
Commission Regulations 23.105(k) and (l), the NFA risk metrics provide
a level of information that allows NFA to identify SDs that may pose
heightened risk and to allocate appropriate NFA regulatory oversight
resources. The Commission preliminarily believes that the proposed
financial statement reporting set forth in the proposed Capital
Comparability Determination Order, and the risk metric and counterparty
exposure information currently reported by nonbank SDs (including PRA-
designated UK nonbank SDs) under NFA rules, provide the appropriate
balance of recognizing the comparability of the UK PRA Financial
Reporting Rules to the CFTC Financial Reporting Rules while also
ensuring that the Commission and NFA receive sufficient data to monitor
and assess the overall financial condition of PRA-designated UK nonbank
SDs. The Commission has access to the monthly risk metric filings
collected by NFA. In addition, the Commission retains authority to
request PRA-designated UK nonbank SDs to provide information regarding
their model metrics and counterparty exposures on an ad hoc basis.
Furthermore, the Commission notes that although the UK PRA
Financial Reporting Rules do not contain an analogue to the CFTC's
requirements for nonbank SDs to file monthly model metric information
and counterparty exposures information, the PRA has access to
comparable information. More specifically, under the UK PRA Financial
Reporting Rules, the PRA has broad powers to request any information
necessary for the exercise of its functions.\335\ As such, the PRA has
access to information allowing it to assess the ongoing performance of
risk models and to monitor the PRA-designated UK nonbank SD's credit
exposures, which may be comprised of credit exposures to primarily
other UK and EU counterparties. In addition, the COREP reports, which
PRA-designated UK nonbank SDs are required to file with the PRA on a
quarterly basis, include information regarding the PRA-designated UK
nonbank SD's risk exposure amounts, including risk-weighted exposure
amounts for credit risk.\336\
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\335\ See FSMA, Part XI (indicating that the PRA has broad
information gathering powers).
\336\ See PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter
6 Templates and Instructions, Annex I.
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The Commission invites public comment on its analysis above,
including comment on the UK Application and relevant UK PRA Financial
Reporting Rules. The Commission also invites comment on the proposed
conditions listed above and on the Commission's proposal to exclude
PRA-designated UK nonbank SDs from certain reporting requirements
outlined above. Specifically, the Commission requests comment on its
preliminary determination to not require PRA-designated UK nonbank SDs
to submit the information set forth in Commission Regulations 23.105(k)
and (l). Are there specific elements of the data required under
Commission Regulations 23.105(k) and (l) that the Commission should
require of PRA-designated UK nonbank SDs for purposes of monitoring
model performance?
The Commission requests comment on the proposed filing dates for
the reports and information specified above. Specifically, do the
proposed filing dates provide sufficient time for PRA-designated UK
nonbank SDs to prepare the reports, and, where required, convert
balances into U.S. dollars? If not, what period of time should the
Commission consider imposing on one or more of the reports?
The Commission also requests specific comment regarding the setting
of compliance dates for any new reporting obligations that the proposed
Capital Comparability Determination Order would impose on PRA-
designated UK nonbank SDs. In this connection, if the Commission were
to require PRA-designated UK nonbank SDs to file the Margin Report
discussed above and included in the proposed Order below, how much time
would PRA-designated UK nonbank SDs need to develop new systems or
processes to capture information that is required? Would PRA-designated
UK nonbank SDs need a period of time to develop any systems or
processes to meet any other reporting obligations in the proposed
Capital Comparability Determination Order? If so, what would be an
appropriate amount of time for a PRA-designated UK nonbank SD to
develop and implement such systems or processes?
E. Notice Requirements
1. CFTC Nonbank SD Notice Reporting Requirements
The CFTC Financial Reporting Rules require nonbank SDs to provide
the Commission and NFA with written notice of certain defined
events.\337\ The notice provisions are intended to provide the
Commission and NFA with an opportunity to assess whether the
information contained in the notices indicates the existence of actual
or potential financial and/or operational issues at a nonbank SD, and,
when necessary, allows the Commission and NFA to engage the nonbank SD
in an effort to minimize potential adverse impacts on swap
counterparties and the larger swaps market. The notice provisions are
part of the Commission's overall program for helping to ensure the
safety and soundness of nonbank SDs and the swaps markets in general.
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\337\ 17 CFR 23.105(c).
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[[Page 8054]]
The CFTC Financial Reporting Rules require a nonbank SD to provide
written notice within specified timeframes if the firm is: (i)
undercapitalized; (ii) fails to maintain capital at a level that is in
excess of 120 percent of its minimum capital requirement; or (iii)
fails to maintain current books and records.\338\ A nonbank SD is also
required to provide written notice if the firm experiences a 30 percent
or more decrease in excess regulatory capital from its most recent
financial report filed with the Commission.\339\ A nonbank SD also is
required to provide notice if the firm fails to post or collect initial
margin for uncleared swap and non-cleared security-based swap
transactions or exchange variation margin for uncleared swap and non-
cleared security-based swap transactions as required by the
Commission's uncleared swaps margin rules or the SEC's non-cleared
security-based swaps margin rules, respectively, if the aggregate is
equal to or greater than: (i) 25 percent of the nonbank SD's required
capital under Commission Regulation 23.101 calculated for a single
counterparty or group of counterparties that are under common ownership
or control; or (ii) 50 percent of the nonbank SD's required capital
under Commission Regulation 23.101 calculated for all of the firm's
counterparties.\340\
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\338\ 17 CFR 23.105(c)(1), (2), and (3).
\339\ 17 CFR 23.105(c)(4).
\340\ 17 CFR 23.105(c)(7).
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The CFTC Financial Reporting Rules further require a nonbank SD to
provide notice two business days prior to a withdrawal of capital by an
equity holder that would exceed 30 percent of the firm's excess
regulatory capital.\341\ Finally, a nonbank SD that is dually-
registered with the SEC as an SBSD or major security based swap
participant (``MSBSP'') must file a copy of any notice with the
Commission and NFA that the SBSD or MSBSP is required to file with the
SEC under SEC Rule 18a-8 (17 CFR 240.18a-8).\342\ SEC Rule 18a-8
requires SBSDs and MSBSPs to provide written notice to the SEC for
comparable reporting events as in the CFTC Capital Rule in Commission
Regulation 23.105(c), including if a SBSD or MSBSP is undercapitalized
or fails to maintain current books and records.
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\341\ 17 CFR 23.105(c)(5).
\342\ 17 CFR 23.105(c)(6).
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2. PRA-Designated UK Nonbank Swap Dealer Notice Requirements
The UK capital and resolution frameworks require PRA-designated UK
nonbank SDs to provide certain notices to the PRA concerning the firm's
compliance with relevant laws and regulations. Specifically, the UK PRA
Financial Reporting Rules require a PRA-designated UK nonbank SD to
provide notice to the PRA within five business days if the firm fails
to meet its combined buffer requirement, which at a minimum consists of
a capital conservation buffer of 2.5 percent of the PRA-designated UK
nonbank SD's total risk exposure amount.\343\ As noted earlier, to meet
its capital buffer requirements, a PRA-designated UK nonbank SDs must
hold common equity tier 1 capital in addition to the minimum common
equity tier 1 ratio requirement of 4.5 percent of the firm's core
capital requirement of 8 percent of the firm's total risk exposure
amount. The notice to the PRA must be accompanied by a capital
conservation plan that sets out how the PRA-designated UK nonbank SD
will restore its capital levels.\344\ The capital conservation plan is
required to include: (i) the ``maximum distributable amount''
calculated in accordance with the PRA rules; (ii) estimates of income
and expenditures and a forecast balance sheet; (iii) measures to
increase the capital ratios of the PRA-designated UK nonbank SD; and
(iv) a plan and timeframe for the increase in the capital of the PRA-
designated UK nonbank SD with the objective of meeting fully the
combined buffer requirement.\345\
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\343\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4
Capital Conservation Measures, Rule 4.4. The combined capital buffer
requirement is the total common equity tier 1 capital required to
meet the sum of the capital conservation buffer and the institution-
specific countercyclical capital buffer. PRA Rulebook, Capital
Buffers Part, Chapter 1 Application and Definitions, Rule 1.2.
\344\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4
Capital Conservation Measures, Rules 4.4 and 4.5.
\345\ PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter 4
Capital Conservation Measures, Rule 4.5.
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The PRA assesses the capital conservation plan and will approve the
plan only if it considers that the plan would be reasonably likely to
conserve or raise sufficient capital to enable the PRA-designated UK
nonbank SD to meet its combined capital buffer requirement within a
timeframe that the PRA considers to be appropriate.\346\ A PRA-
designated UK nonbank SD is required to notify the PRA as early as
possible where it has identified a material risk to its ability to meet
the combined buffer according to the capital conservation plan and
timeframe approved by the PRA.\347\
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\346\ Supervisory Statement SS6/14 Implementing Capital Buffers,
Prudential Regulation Authority, January 2021 (``SS6/14''),
available here: https://www.bankofengland.co.uk/prudential-regulation/publication/2014/implementing-crdiv-capital-buffers-ss.
\347\ See id.
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In addition, a PRA-designated UK nonbank SD must notify the PRA if
the firm's management considers that the firm is failing or will in the
near future fail to satisfy one or more of the ``threshold
conditions,'' which are the minimum requirements that a PRA-designated
UK nonbank SD must meet in order to be permitted to carry the regulated
activities in which it engages.\348\ In broad terms, the PRA's
threshold conditions include, among other things, requirements that the
firm has appropriate financial resources and capacity to measure,
monitor and manage risks.\349\
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\348\ PRA Rulebook, CRR Firms, Notifications Part, Chapter 8
Specific Notifications, Rule 8.3.
\349\ FSMA, Part 4A and Schedule 6.
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3. Commission Analysis
The Commission has reviewed the UK Application and the relevant UK
laws and regulations, and has preliminarily determined that the UK PRA
Financial Reporting Rules related to notice provisions, subject to the
conditions specified below, are comparable to the notice provisions of
the CFTC Financial Reporting Rules. The Commission is therefore
proposing to issue a Capital Comparability Determination Order
providing that a PRA-designated UK nonbank SD may comply with the
notice provisions required under UK laws and regulations in lieu of
certain notice provisions required of nonbank SDs under Commission
Regulation 23.105(c),\350\ subject to the conditions set forth below.
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\350\ 17 CFR 23.105(c).
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The notice provisions contained in Commission Regulation 23.105(c)
are intended to provide the Commission and NFA with information in a
prompt manner regarding actual or potential financial or operational
issues that may adversely impact the safety and soundness of a nonbank
SD by impairing the firm's ability to meet its obligations to
counterparties, creditors, and the general swaps market. Upon the
receipt of a notice from a nonbank SD under Commission Regulation
23.105(c), the Commission and NFA initiate reviews of the facts and
circumstances that resulted in the notice being filed including, as
appropriate, communicating with personnel of the nonbank SD. The review
of the facts and the interaction with the personnel of the nonbank SD
provide the Commission and NFA with information to develop an
assessment of whether it is necessary for the nonbank SD to take
remedial
[[Page 8055]]
action to address potential financial or operational issues, and
whether the remedial actions instituted by the nonbank SD properly
address the issues that are the root cause of the operational or
financial issues. Such actions may include the infusion of additional
capital into the firm, or the development and implementation of
additional internal controls to address operational issues. The notice
filings further allow the Commission and NFA to monitor the firm's
performance after the implementation of remedial actions to assess the
effectiveness of such actions.
The UK PRA Financial Reporting Rules require a PRA-designated UK
nonbank SD to provide notice to the PRA if the firm fails to maintain a
minimum capital ratio of common equity tier 1 capital to risk-weighted
assets equal or greater than 7 percent (4.5 percent of the core capital
requirement plus the 2.5 percent capital conservation buffer
requirement, assuming no other capital buffer requirements apply). The
PRA-designated UK nonbank SD is also required to file a capital
conservation plan with its notice to the PRA. The capital conservation
plan is required to contain information regarding actions that the PRA-
designated UK nonbank SD will take to ensure proper capital adequacy.
The Commission has preliminarily determined that the requirement
for a PRA-designated UK nonbank SD to provide notice of a breach of its
capital buffer requirements to the PRA is not sufficiently comparable
in purpose and effect to the CFTC notice provisions contained in
Commission Regulation 23.105(c)(1) and (2),\351\ which require a
nonbank SD to provide notice to the Commission and to NFA if the firm
fails to meet its minimum capital requirement or if the firm's
regulatory capital falls below 120 percent of its minimum capital
requirement (``Early Warning Level''). The requirement for a PRA-
designated UK nonbank SD to provide notice of a breach of its capital
buffer requirements does not achieve a comparable outcome to the CFTC's
Early Warning Level requirement due to the difference in the thresholds
triggering a notice requirement in the respective rule sets.
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\351\ 17 CFR 23.105(c)(1) and (2).
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The requirement for a nonbank SD to file notice with the Commission
and NFA if the firm becomes undercapitalized or if the firm experiences
a decrease of excess regulatory capital below defined levels is a
central component of the Commission's and NFA's oversight program for
nonbank SDs.\352\ Therefore, the Commission preliminarily believes that
it is necessary for the Commission and NFA to receive copies of notices
filed under the Capital Buffers Part of the PRA Rulebook by PRA-
designated UK nonbank SDs alerting the PRA of a breach of the PRA-
designated UK nonbank SD's combined capital buffer. The notice must be
filed by the PRA-designated UK nonbank SD within 24 hours of the filing
of the notice with the PRA, and the Commission expects that, upon the
receipt of a notice, Commission staff and NFA staff will engage with
staff of the PRA-designated UK nonbank SD to obtain an understanding of
the facts that led to the filing of the notice and will discuss with
the PRA-designated UK nonbank SD the firm's capital conservation plan.
The proposed condition would not require the PRA-designated UK nonbank
SD to file copies of its capital conservation plan with the Commission
or NFA. To the extent Commission staff needs further information from
the PRA-designated UK nonbank SD, the Commission expects to request
such information as part of its assessment of the notice and its
communications with the PRA-designated UK nonbank SD.
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\352\ See Commission Regulation 23.105(c)(4), which requires a
nonbank SD to file notice with the Commission and NFA if it
experiences decrease in excess capital of 30 percent or more from
the excess capital reported in its last financial filing with the
Commission. 17 CFR 23.105(c)(4).
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In addition, due to the lack of a sufficiently comparable analogue
to the CFTC Financial Reporting Rules' Early Warning Level requirement,
the Commission is proposing to condition the Capital Comparability
Determination Order to require a PRA-designated UK nonbank SD to file a
notice with the Commission and NFA if the firm's capital ratio does not
equal or exceed 12.6 percent.\353\ The proposed condition would further
require the PRA-designated UK nonbank SD to file the notice with the
Commission and NFA within 24 hours of when the firm knows or should
have known that its regulatory capital was below 120 percent of its
minimum capital requirement. The timing requirement for the filing of
the proposed notice with the Commission and NFA is consistent with the
Commission's requirements for an FCM or a nonbank SD, which are both
required to file an Early Warning Level notice with the Commission and
NFA when the firm knows or should have known that its regulatory
capital is below specified reporting levels.\354\ The requirement for a
firm to file a notice with the Commission when it knows or should have
known that its capital is below the reporting level is designed to
prevent a situation where a firm's deficient recordkeeping leads to an
inadequate monitoring of the Early Warning Level threshold. More
generally, the ``should have known'' part of the timing standard for
the filing of the proposed notice is intended to cover facts and
circumstances that should reasonably lead the firm to believe that its
regulatory capital is below 120 percent of the minimum
requirement.\355\ In practice, even if the PRA-designated UK nonbank
SD's books and records do not reflect a decrease of regulatory capital
below 120 percent of the minimum requirement or if the computations
that may reveal a decrease of regulatory capital below 120 percent have
not been made yet, the firm would be expected to provide notice if it
became aware of deficiencies in its recordkeeping processes that could
result in inaccurate recording of the firm's capital levels or if it
had other reasons to believe its regulatory capital is below the Early
Warning Level threshold.\356\
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\353\ The Commission's proposed reporting level of 12.6 percent
reflects the aggregate of the PRA-designated UK nonbank SD's core
capital requirement of 8 percent and capital conservation buffer
requirement of 2.5 percent, multiplied by a factor of 1.20. For
purposes of the calculation, the Commission proposes that the 20
percent capital increase must be comprised of common equity tier 1
capital (i.e., common equity tier 1 capital must comprise a minimum
of 8.4 percent, which reflects the aggregate of the 4.5 percent core
common equity tier 1 capital requirement and the 2.5 percent capital
conservation buffer requirement, multiplied by a factor of 1.20).
\354\ 17 CFR 1.12(b) and 17 CFR 23.105(c)(ii)(2).
\355\ This interpretation is consistent with the Commission's
discussion of the timing standard in the preamble to the 1998 final
rule adopting amendments to Commission Regulation 1.12, where the
Commission noted that the part of the standard requiring an FCM to
report when it ``should know'' of a problem may be defined as the
point at which a party, in the exercise of reasonable diligence,
should become aware of an event. See 63 FR 45711 at 45713.
\356\ To that point, in discussing the standard applicable to
the timing requirement for the filing of a notice by an FCM to
report an undersegregated or undersecured condition (i.e., situation
where the FCM has insufficient funds in accounts segregated for the
benefit of customers trading on U.S. contract markets or has
insufficient funds set aside for customers trading on non-U.S.
markets to meet the FCM's obligations to its customers), the
Commission noted that an obligation to file a notice could arise
even before the required computations that would reveal deficiencies
must be made. See id.
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As noted above, a purpose of the proposed Early Warning Level
notice provision is to allow the Commission and NFA to initiate
conversations and fact finding with a registrant that may be
experiencing operational or financial issues that may adversely impact
the firm's ability to meet its obligations to
[[Page 8056]]
market participants, including customers or swap counterparties. The
notice filing is a central component of the Commission's and NFA's
oversight program, and the Commission believes that a firm that is
experiencing operational challenges that prevent the firm from
definitively computing its capital level during a period when it
recognizes from the facts and circumstances that the firm's capital
level may be below the reporting threshold should file the notice with
the Commission and NFA. Therefore, the Commission preliminarily deems
it appropriate to include a similar early warning notice condition in
the Capital Comparability Determination Order.
The UK PRA Financial Reporting Rules also do not contain an
explicit requirement for a PRA-designated UK nonbank SD to notify the
PRA if the firm fails to maintain current books and records,
experiences a decrease in regulatory capital over levels previously
reported, or fails to collect or post initial margin with uncleared
swap counterparties that exceed certain threshold levels.\357\ The UK
PRA Financial Reporting Rules also do not require a PRA-designated UK
nonbank SD to provide the PRA with advance notice of equity withdrawals
initiated by equity holders that exceed defined amounts or percentages
of the firm's excess regulatory capital.\358\
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\357\ 17 CFR 23.105(c)(3), (4), and (7).
\358\ Commission Regulation 23.105(c)(5) requires a nonbank SD
to provide written notice to the Commission and NFA two business
days prior to the withdrawal of capital by action of the equity
holders if the amount of the withdrawal exceeds 30 percent of the
nonbank SD's excess regulatory capital. 17 CFR 23.105(c)(5).
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To ensure that the Commission and NFA receive prompt information
concerning potential operational or financial issues that may adversely
impact the safety and soundness of a PRA-designated UK nonbank SD, the
Commission is proposing to condition the Capital Comparability
Determination Order to require PRA-designated UK nonbank SDs to file
certain notices required under the CFTC Financial Reporting Rules with
the Commission and NFA. In this connection, the Commission is proposing
to condition the Capital Comparability Determination Order on a PRA-
designated UK nonbank SD providing the Commission and NFA with notice
if the firm fails to maintain current books and records with respect to
its financial condition and financial reporting requirements. For
avoidance of doubt, in this context the Commission believes that books
and records would include current ledgers or other similar records
which show or summarize, with appropriate references to supporting
documents, each transaction affecting the PRA-designated UK nonbank
SD's asset, liability, income, expense, and capital accounts in
accordance with the accounting principles accepted by the relevant
authorities.\359\ The Commission preliminarily believes that the
maintenance of current books and records is a fundamental and essential
component of operating as a registered nonbank SD and that the failure
to comply with such a requirement may indicate an inability of the firm
to promptly and accurately record transactions and to ensure compliance
with regulatory requirements, including regulatory capital
requirements. Therefore, the proposed Order would require a PRA-
designated UK nonbank SD to provide the Commission and NFA with a
written notice within 24 hours if the firm fails to maintain books and
records on a current basis.
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\359\ For comparison, see Commission Regulation 23.105(b), which
similarly defines the term ``current books and records'' as used in
the context of the Commission's requirements. 17 CFR 23.105(b).
---------------------------------------------------------------------------
The proposed Capital Comparability Determination Order would also
require a PRA-designated UK nonbank SD to file notice with the
Commission and NFA if: (i) a single counterparty, or group of
counterparties under common ownership or control, fails to post
required initial margin or pay required variation margin on uncleared
swap and security-based swap positions that, in the aggregate, exceeds
25 percent of the PRA-designated UK nonbank SD's minimum capital
requirement; (ii) counterparties fail to post required initial margin
or pay required variation margin to the PRA-designated UK nonbank SD
for uncleared swap and security-based swap positions that, in the
aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's
minimum capital requirement; (iii) a PRA-designated UK nonbank SD fails
to post required initial margin or pay required variation margin for
uncleared swap and security-based swap positions to a single
counterparty or group of counterparties under common ownership and
control that, in the aggregate, exceeds 25 percent of the PRA-
designated UK nonbank SD's minimum capital requirement; and (iv) a PRA-
designated UK nonbank SD fails to post required initial margin or pay
required variation margin to counterparties for uncleared swap and
security-based swap positions that, in the aggregate, exceeds 50
percent of the PRA-designated UK nonbank SD's minimum capital
requirement. The Commission is proposing to require this notice so that
it and the NFA may commence communication with the PRA-designated UK
nonbank SD and the PRA in order to obtain an understanding of the facts
that have led to the failure to exchange material amounts of initial
margin and variation margin in accordance with the applicable margin
rules, and to assess whether there is a concern regarding the financial
condition of the firm that may impair its ability to meet its financial
obligations to customers, counterparties, creditors, and general market
participants, or otherwise adversely impact the firm's safety and
soundness.
The proposed Capital Determination Order would not require a PRA-
designated UK nonbank SD to file notices with the Commission and NFA
concerning withdrawals of capital or changes in capital levels as such
information will be reflected in the financial statement reporting
filed with the Commission and NFA as conditions of the Order, and
because the PRA-designated UK nonbank SD's capital levels are monitored
by the PRA, which the Commission preliminarily believes renders the
separate reporting to the Commission superfluous.
The proposed Capital Comparability Determination Order would
require a PRA-designated UK nonbank SD to file any notices required
under the Order with the Commission and NFA reflecting any balances,
where applicable, in U.S. dollars. Each notice required by the proposed
Capital Comparability Determination Order must be filed in accordance
with instructions issued by the Commission or NFA.\360\
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\360\ The proposed conditions for PRA-designated UK nonbank SDs
to file a notice with the Commission and NFA if the firm fails to
maintain current books and records or fails to collect or post
margin with uncleared swap counterparties that exceed the above-
referenced threshold levels are consistent with the proposed
conditions in the proposed Capital Comparability Determination
Orders for Japan, Mexico, and the EU. See Proposed Japan Order,
Proposed Mexico Order, and Proposed EU Order.
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The Commission invites public comment on its analysis above,
including comment on the UK Application and relevant UK Financial
Reporting Rules. The Commission also invites comment on the proposed
conditions to the Capital Comparability Determination Order that are
listed above.
The Commission requests comment on the timeframes set forth in the
proposed conditions for PRA-designated UK nonbank SDs to file notices
with the Commission and NFA. In this regard,
[[Page 8057]]
the proposed conditions would require PRA-designated UK nonbank SDs to
file certain written notices with the Commission within 24 hours of the
occurrence of a reportable event or of being alerted to a reportable
event by the PRA. The Commission requests comment on the issues PRA-
designated UK nonbank SDs may face meeting the filing requirements
given time-zone difference or governance issues. The Commission also
requests specific comment regarding the setting of compliance dates for
the notice reporting conditions that the proposed Capital Comparability
Determination Order would impose on PRA-designated UK nonbank SDs.
F. Supervision and Enforcement
1. Commission and NFA Supervision and Enforcement of Nonbank SDs
The Commission and NFA conduct ongoing supervision of nonbank SDs
to assess their compliance with the CEA, Commission regulations, and
NFA rules by reviewing financial reports, notices, risk exposure
reports, and other filings that nonbank SDs are required to file with
the Commission and NFA. The Commission and/or NFA also conduct periodic
examinations as part of the supervision of nonbank SDs, including
routine onsite examinations of nonbank SDs' books, records, and
operations to ensure compliance with CFTC and NFA requirements.\361\
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\361\ Section 17(p)(2) of the CEA requires NFA as a registered
futures association to establish minimum capital and financial
requirements for non-bank SDs and to implement a program to audit
and enforce compliance with such requirements. 7 U.S.C. 21(p)(2).
Section 17(p)(2) further provides that NFA's capital and financial
requirements may not be less stringent than the capital and
financial requirements imposed by the Commission.
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As noted in Section D.1. above, financial reports filed by a
nonbank SD provide the Commission and NFA with information necessary to
ensure the firm's compliance with minimum capital requirements and to
assess the firm's overall safety and soundness and its ability to meet
its financial obligations to customers, counterparties, and creditors.
A nonbank SD is also required to provide written notice to the
Commission and NFA if certain defined events occur, including that the
firm is undercapitalized or maintains a level of capital that is less
than 120 percent of the firm's minimum capital requirements.\362\ The
notice provisions, as stated in Section E.1. above, are intended to
provide the Commission and NFA with information of potential issues at
a nonbank SD that may impact the firm's ability to maintain compliance
with the CEA and Commission regulations. The Commission and NFA also
have the authority to require a nonbank SD to provide any additional
financial and/or operational information on a daily basis or at such
other times as the Commission or NFA may specify to monitor the safety
and soundness of the firm.\363\
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\362\ See 17 CFR 23.105(c).
\363\ See 17 CFR 23.105(h).
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The Commission also has authority to take disciplinary actions
against a nonbank SD for failing to comply with the CEA and Commission
regulations. Section 4b-1(a) of the CEA \364\ provides the Commission
with exclusive authority to enforce the capital requirements imposed on
nonbank SDs adopted under section 4s(e) of the CEA.\365\
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\364\ 7 U.S.C. 6b-1(a).
\365\ 7 U.S.C. 6s(e).
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2. PRA's Supervision and Enforcement of PRA-Designated UK Nonbank SDs
The PRA has supervision, audit, and investigation powers with
respect to PRA-designated UK nonbank SDs, which include the powers to
obtain specified information reasonably required in connection with the
exercise of the PRA's functions, the power to conduct or order
investigations, and the power to impose sanctions on PRA-designated UK
nonbank SDs that breach their regulatory obligations, including those
deriving from the UK PRA Capital Rules and the UK PRA Financial
Reporting Rules.\366\
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\366\ FSMA, Parts 4A, XI, and XIV.
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The PRA also monitors the capital adequacy of PRA-designated UK
nonbank SDs through supervisory measures on an ongoing basis. The
monitoring includes assessing the notices and the capital conservation
plan discussed in Section E.2. above. In addition, the PRA is empowered
with a variety of measures to address a PRA-designated UK nonbank SD's
financial deterioration.\367\ Under its general supervisory powers, the
PRA may impose new requirements to a PRA-designated UK nonbank SD if
the firm is failing, or likely to fail, to satisfy the threshold
conditions for which the PRA is responsible.\368\ More specifically, a
breach in a PRA-designated UK nonbank SD's capital buffers
automatically triggers restrictions on the firm's ability to make
certain distributions (e.g., pay certain dividends or employee
bonuses).\369\ In addition, the PRA may impose administrative penalties
or other administrative measures, including prudential charges, if a
PRA-designated nonbank SD's liquidity position falls below the
liquidity and stable funding requirements.\370\
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\367\ See PRA, The Prudential Regulation Authority's approach to
banking supervision, July 2023, available at: https://www.bankofengland.co.uk/prudential-regulation/publication/pras-approach-to-supervision-of-the-banking-and-insurance-sectors.
\368\ FSMA, Part 4A, Section 55M.
\369\ See PRA Rulebook, CRR Firms, Capital Buffers Part, Chapter
4 Capital Conservation Measures, Rule 4.3.
\370\ See Capital Requirements Regulations 2013, Regulation 35B
and FSMA, Part XIV Disciplinary Measures (setting forth the PRA's
disciplinary power with respect to all rules adopted under FSMA).
The Applicants represented that ``CRR rules'' (i.e., general PRA
rules applying to CRR firms, including PRA-designated UK nonbank
SDs) are adopted pursuant to FSMA, Part 9D, and as such the PRA has
power to impose disciplinary measures in connection with these
rules. See Response to Staff Questions dated October 5, 2023.
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In case of non-compliance with the capital and liquidity
thresholds, the PRA may also order PRA-designated UK nonbank SDs to
comply with additional requirements, including: (i) maintaining
additional capital in excess of the minimum requirements, if certain
conditions are met; (ii) requiring that the PRA-designated UK nonbank
SD submit a plan to restore compliance with applicable capital or
liquidity thresholds; (iii) imposing restrictions on the business or
operations of the PRA-designated UK nonbank SD; (iv) imposing
restrictions or prohibitions on distributions or interest payments to
shareholders or holders of additional tier 1 capital instruments; (v)
requiring additional or more frequent reporting requirements; and (vi)
imposing additional specific liquidity requirements.\371\ The PRA may
also sanction the PRA-designated UK nonbank SD if the firm's capital or
liquidity fall below the applicable thresholds or the PRA has evidence
that the firm will breach such thresholds in the next 12 months.\372\
The PRA may also withdraw a PRA-designated UK nonbank SD's
authorization if the firm no longer meets its minimum capital
requirements.\373\
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\371\ FSMA, Parts 4A, Sections 55M and 55P, and Capital
Requirements Regulation 2013, Regulation 35B.
\372\ FSMA, Parts 4A and XIV.
\373\ FSMA, Part 4A, Sections 55J-55K.
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In addition, if the capital and liquidity requirements are
breached, the PRA may take early measures to intervene, such as
requiring management to take certain actions, order members of
management to be removed or replaced, or require changes to the firm's
business strategy or legal or
[[Page 8058]]
operational structure, among other measures.\374\
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\374\ Bank Recovery and Resolution (No. 2) Order 2014, Article 2
(defining ``conditions for early intervention'' in case of breach of
UK CRR requirements or requirements derived from CRD) and Part 8
(laying down the procedure to be followed by the PRA to determine
whether early intervention measures should be taken under FSMA). If
additional requirements are met, it is also possible that the Bank
of England, as the resolution authority, may assess the PRA-
designated UK nonbank SD as ``failing or likely to fail,''
triggering a resolution action, which could occur even before the
firm actually breached its minimum capital requirements. Banking Act
2009, Sections 4 to 83.
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Although the PRA generally has broad discretion as to what powers
it may exercise, the UK PRA Capital Rules and the UK PRA Financial
Reporting Rules specifically mandate that the PRA require PRA-
designated UK nonbank SDs to hold increased capital when: (i) risks or
elements of risks are not covered by the capital requirements imposed
by the UK PRA Capital Rules; (ii) the PRA-designated UK nonbank SD
lacks robust governance arrangements, appropriate resolution and
recovery plans, processes to manage large exposures or effective
processes to maintain on an ongoing basis the amounts, types, and
distribution of capital needed to cover the nature and level of risks
to which they might be exposed; or (iii) the sole application of other
administrative measures would be unlikely to timely and sufficiently
improve the firm's arrangements and processes.\375\
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\375\ Capital Requirements Regulation 2013, Section 34.
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3. Commission Analysis
Based on the above, the Commission preliminarily finds that the PRA
has the necessary powers to supervise, investigate, and discipline PRA-
designated UK nonbank SDs for compliance with the applicable capital,
financial and reporting requirements, and to detect and deter
violations of, and ensure compliance with, the applicable capital and
financial reporting requirements in the UK.
The Commission would expect to communicate and consult, to the
fullest extent permissible under applicable law, with the PRA regarding
the supervision of the financial and operational condition of the PRA-
designated UK nonbank SDs. An appropriate MOU or similar arrangement
with the PRA would facilitate cooperation and information sharing in
the context of supervising the PRA-designated UK nonbank SDs. Such an
arrangement would enhance communication with respect to entities within
the arrangement's scope (``Covered Firms''), as appropriate, regarding:
(i) general supervisory issues, including regulatory, oversight, or
other related developments; (ii) issues relevant to the operations,
activities, and regulation of Covered Firms; and (iii) any other areas
of mutual supervisory interest, and would anticipate periodic meetings
to discuss relevant functions and regulatory oversight programs. The
arrangement would provide for the Commission and the PRA to inform each
other of certain events, including any material events that could
adversely impact the financial or operational stability of a Covered
Firm, and would provide a procedure for any on-site examinations of
Covered Firms.
In the absence of an MOU or similar information sharing
arrangement, the Commission is proposing to condition the Capital
Comparability Determination Order on a PRA-designated UK nonbank SD
providing notice to the Commission and NFA if the PRA has required the
PRA-designated UK nonbank SD to: (i) maintain additional capital in
excess of the minimum requirements; (ii) require that the PRA-
designated UK nonbank SD submit a plan to restore compliance with
applicable capital or liquidity thresholds; (iii) impose restrictions
on the business or operations of the PRA-designated UK nonbank SD; (iv)
impose restrictions or prohibitions on distributions or interest
payments to shareholders or holders of additional tier 1 capital
instruments; (v) require additional or more frequent reporting
requirements; or (vi) impose additional specific liquidity
requirements.\376\ Upon receipt of such notice, the Commission and NFA
would communicate with the PRA-designated UK nonbank SD to obtain
further information regarding the underlying issues that prompted the
PRA to direct the PRA-designated UK nonbank SD to take such actions and
would obtain information regarding how the PRA-designated UK nonbank SD
would address the underlying issues.
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\376\ PRA's authority to impose such conditions or requirements
is set forth in FSMA, Part 4A, Sections 55M and 55P, and Capital
Requirements Regulation 2013, Regulation 35B.
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The Commission invites public comment on the UK Application, the UK
laws and regulations, and the Commission's analysis above regarding its
preliminary determination that the PRA and the CFTC have supervision
programs and enforcement authority that are comparable in that the
purpose of the relevant programs and authority is to ensure that
nonbank SDs maintain compliance with applicable capital and financial
reporting requirements.
IV. Proposed Capital Comparability Determination Order
A. Commission's Proposed Comparability Determination
The Commission's preliminary view, based on the UK Application and
the Commission's review of applicable UK laws and regulations, is that
the UK PRA Capital Rules and the UK PRA Financial Reporting Rules,
subject to the conditions set forth in the proposed Capital
Comparability Determination Order below, achieve comparable outcomes
and are comparable in purpose and effect to the CFTC Capital Rules and
CFTC Financial Reporting Rules. In reaching this preliminary
conclusion, the Commission recognizes that there are certain
differences between the UK PRA Capital Rules and CFTC Capital Rules and
certain differences between the UK PRA Financial Reporting Rules and
the CFTC Financial Reporting Rules. The proposed Capital Comparability
Determination Order is subject to proposed conditions that are
preliminarily deemed necessary to promote consistency in regulatory
outcomes, or to reflect the scope of substituted compliance that would
be available notwithstanding certain differences. In the Commission's
preliminary view, the differences between the two rules sets would not
be inconsistent with providing a substituted compliance framework for
PRA-designated UK nonbank SDs subject to the conditions specified in
the proposed Order below.
Furthermore, the proposed Capital Comparability Determination Order
is limited to the comparison of the UK PRA Capital Rules to the Bank-
Based Approach contained within the CFTC Capital Rules. As noted
previously, the Applicants have not requested, and the Commission has
not performed, a comparison of the UK PRA Capital Rules to the
Commission's NAL Approach or TNW Approach. In addition, as discussed in
Section I.C. above, due to the differences between the capital and
financial reporting regimes applicable to PRA-designated UK nonbank SD
and FCA-regulated UK nonbank SDs, the Commission anticipates assessing
the comparability of the rules applicable to FCA-regulated UK nonbank
SDs through a separate capital comparability determination.
[[Page 8059]]
B. Proposed Capital Comparability Determination Order
The Commission invites comments on all aspects of the UK
Application, relevant UK laws and regulations, the Commission's
preliminary views expressed above, the question of whether requirements
under the UK PRA Capital Rules are comparable in purpose and effect to
the Commission's requirement for a nonbank SD to hold regulatory
capital equal to or greater than 8 percent of its uncleared swap margin
amount, and the Commission's proposed Capital Comparability
Determination Order, including the proposed conditions included in the
proposed Order, set forth below.
C. Proposed Order Providing Conditional Capital Comparability
Determination for PRA-Designated UK Nonbank Swap Dealers
It is hereby determined and ordered, pursuant to Commodity Futures
Trading Commission (``CFTC'' or ``Commission'') Regulation 23.106 (17
CFR 23.106) under the Commodity Exchange Act (``CEA'') (7 U.S.C. 1 et
seq.) that a swap dealer (``SD'') subject to the Commission's capital
and financial reporting requirements under sections 4s(e) and (f) of
the CEA (7 U.S.C. 6s(e) and (f)), that is organized and domiciled in
the United Kingdom (``UK'') and designated for prudential supervision
by the UK Prudential Regulation Authority (``PRA''), may satisfy the
capital requirements under section 4s(e) of the CEA and Commission
Regulation 23.101(a)(1)(i) (17 CFR 23.101(a)(1)(i)) (``CFTC Capital
Rules''), and the financial reporting rules under section 4s(f) of the
CEA and Commission Regulation 23.105 (17 CFR 23.105) (``CFTC Financial
Reporting Rules''), by complying with certain specified requirements of
the UK laws and regulations cited below and otherwise complying with
the following conditions, as amended or superseded from time to time:
(1) The SD is not subject to regulation by a prudential regulator
defined in section 1a(39) of the CEA (7 U.S.C. 1a(39));
(2) The SD is organized under the laws of the UK and is domiciled
in the UK;
(3) The SD is licensed as an investment firm in the UK and is
designated for prudential supervision by the PRA (``PRA-designated UK
nonbank SD'');
(4) The PRA-designated UK nonbank SD is subject to and complies
with: Regulation (EU) No 575/2013 of the European Parliament and of the
Council of 26 June 2013 on prudential requirements for credit
institutions and amending Regulation (EU) No 648/2012 as restated and
applicable in the UK (``UK CRR''), the provisions implementing the
Directive 2013/36/EU of the European Parliament and of the Council of
26 June 2013 on access to the activity of credit institutions and the
prudential supervision of credit institutions, amending Directive 2002/
87/EC and repealing Directives 2006/48/EC and 2006/49/EC (``CRD''),
including Capital Requirements Regulations 2013 and Capital
Requirements (Capital Buffers and Macro-prudential Measures)
Regulations 2014, Commission Delegated Regulation (EU) 2015/61 of 10
October 2014 to supplement Regulation (EU) No 575/2013 of the European
Parliament and the Council with regard to liquidity coverage
requirement for Credit Institutions (``Liquidity Coverage Delegated
Regulation''), the Banking Act 2009 and its secondary legislation, and
the rules of the PRA as reflected in the PRA Rulebook (collectively the
``UK PRA Capital Rules'');
(5) The PRA-designated UK nonbank SD satisfies at all times
applicable capital ratio and leverage ratio requirements set forth in
Article 92 of UK CRR and the rules in PRA Rulebook, CRR Firms, Leverage
Ratio--Capital Requirements and Buffers Part, Chapter 3 Minimum
Leverage Ratio, the capital conservation buffer requirements set forth
in PRA Rulebook, CRR Firms, Capital Buffers Part, and applicable
liquidity requirements set forth in PRA Rulebook, CRR Firms, Liquidity
Coverage Requirement--UK Designated Investment Firms Part and PRA
Rulebook, CRR Firms, Liquidity (CRR) Part, and otherwise complies with
the requirements to maintain a liquidity risk management program as
required under PRA Rulebook, CRR Firms, Internal Liquidity Adequacy
Assessment Part;
(6) The PRA-designated UK nonbank SD is subject to and complies
with: Reporting (CRR) and Regulatory Reporting parts of the PRA
Rulebook and the Companies Act 2006, Parts 15 and 16 (collectively and
together with UK CRR, the ``UK PRA Financial Reporting Rules'');
(7) The PRA-designated UK nonbank SD maintains at all times an
amount of regulatory capital in the form of common equity tier 1
capital as defined in Article 26 of UK CRR, equal to or in excess of
the equivalent of $20 million in United States dollars (``U.S.
dollars''). The PRA-designated UK nonbank SD shall use a commercially
reasonable and observable British pound/U.S. dollar exchange rate to
convert the value of the pound-denominated common equity tier 1 capital
to U.S. dollars;
(8) The PRA-designated UK nonbank SD has filed with the Commission
a notice stating its intention to comply with the UK PRA Capital Rules
and the UK PRA Financial Reporting Rules in lieu of the CFTC Capital
Rules and the CFTC Financial Reporting Rules. The notice of intent must
include the PRA-designated UK nonbank SD's representation that the firm
is organized and domiciled in the UK, is a licensed investment firm
designated for prudential supervision by the PRA, and is subject to,
and complies with, the UK PRA Capital Rules and UK PRA Financial
Reporting Rules. A PRA-designated UK nonbank SD may not rely on this
Capital Comparability Determination Order until it receives
confirmation from Commission staff, acting pursuant to authority
delegated by the Commission, that the PRA-designated UK nonbank SD may
comply with the applicable UK PRA Capital Rules and UK PRA Financial
Reporting Rules in lieu of the CFTC Capital Rules and CFTC Reporting
Rules. Each notice filed pursuant to this condition must be submitted
to the Commission via email to the following address:
cftc.gov">MPDFinancialRequirements@cftc.gov;
(9) The PRA-designated UK nonbank SD prepares and keeps current
ledgers and other similar records in accordance with the PRA Rulebook,
General Organisational Requirements Part, Rule 2.2 and Record Keeping
Part, Rule 2.1 and 2.2, and conforming with the applicable accounting
principles;
(10) The PRA-designated UK nonbank SD files with the Commission and
with the National Futures Association (``NFA'') a copy of templates 1.1
(Balance Sheet Statement: assets), 1.2 (Balance Sheet Statement:
liabilities), 1.3 (Balance Sheet Statement: equity), and 2 (Statement
of profit or loss) of the financial reports (``FINREP'') that PRA-
designated UK nonbank SDs are required to submit pursuant to PRA
Rulebook, CRR Firms, Regulatory Reporting Part, Chapter 9 Regulatory
Activity Group 3, Rule 9.2, and templates 1 (Own Funds), 2 (Own Funds
Requirements) and 3 (Capital Ratios) of the common reports (``COREP'')
that PRA-designated UK nonbank SDs are required to submit pursuant to
PRA Rulebook, CRR Firms, Reporting (CRR) Part, Chapter 4 Reporting
(Part Seven A CRR), Article 430 Reporting on Prudential Requirements
and Financial Information, Rule 1. The FINREP and COREP templates must
be provided with balances converted to U.S. dollars and must be filed
with the Commission
[[Page 8060]]
and NFA within 35 calendar days of the end of each month. PRA-
designated UK nonbank SDs that are registered as security-based swap
dealers (``SBSDs'') with the U.S. Securities and Exchange Commission
(``SEC'') may comply with this condition by filing with the Commission
and NFA a copy of Form X-17A-5 (``FOCUS Report'') that the PRA-
designated UK nonbank SD is required to file with the SEC or its
designee pursuant to an order granting conditional substituted
compliance with respect to Securities Exchange Act of 1934 Rule 18a-7.
The copy of the FOCUS Report must be filed with the Commission and NFA
within 35 calendar days after the end of each month in the manner,
format and conditions specified by the SEC in Order Specifying the
Manner and Format of Filing Unaudited Financial and Operational
Information by Security-Based Swap Dealers and Major Security-Based
Swap Participants that are not U.S. Persons and are Relying on
Substituted Compliance with Respect to Rule 18a-7, 86 FR 59208 (Oct.
26, 2021);
(11) The PRA-designated UK nonbank SD files with the Commission and
with NFA a copy of its annual audited accounts and strategic report
(together, ``annual audited financial report'') that are required to be
prepared and published pursuant to Parts 15 and 16 of Companies Act
2006. The annual audited financial report may be reported in British
pound. The annual audited financial report must be filed with the
Commission and NFA on the earlier of the date the report is filed with
the PRA or the date the report is required to be filed with the PRA
pursuant to the UK PRA Financial Reporting Rules;
(12) The PRA-designated UK nonbank SD files Schedule 1 of appendix
B to subpart E of part 23 of the CFTC's regulations (17 CFR 23 subpart
E--appendix B) with the Commission and NFA on a monthly basis. Schedule
1 must be prepared with balances reported in U.S. dollars and must be
filed with the Commission and NFA within 35 calendar days of the end of
each month;
(13) The PRA-designated UK nonbank SD submits with each set of
FINREP and COREP templates, annual audited financial report, and
Schedule 1 of appendix B to subpart E of part 23 of the CFTC's
regulations, a statement by an authorized representative or
representatives of the PRA-designated UK nonbank SD that to the best
knowledge and belief of the representative or representatives, the
information contained in the reports, including the conversion of
balances in the reports to U.S. dollars, is true and correct;
(14) The PRA-designated UK nonbank SD files a margin report
containing the information specified in Commission Regulation 23.105(m)
(17 CFR 23.105(m)) with the Commission and with NFA within 35 calendar
days of the end of each month. The margin report balances must be
reported in U.S. dollars;
(15) The PRA-designated UK nonbank SD files a notice with the
Commission and NFA within 24 hours of being informed by the PRA that
the firm is not in compliance with any component of the UK PRA Capital
Rules or the UK PRA Financial Reporting Rules;
(16) The PRA-designated UK nonbank SD files a notice within 24
hours with the Commission and NFA if it fails to maintain regulatory
capital in the form of common equity tier 1 capital as defined in
Article 26 of UK CRR, equal to or in excess of the U.S. dollar
equivalent of $20 million using a commercially reasonable and
observable British pound/U.S. dollar exchange rate;
(17) The PRA-designated UK nonbank SD provides the Commission and
NFA with notice within 24 hours of filing a capital conservation plan
with the PRA pursuant to PRA Rulebook, CRR Firms, Capital Buffers Part,
Chapter 4 Capital Conservation Measures, Rule 4.4, indicating that the
firm has breached its combined capital buffer requirement;
(18) The PRA-designated UK nonbank SD provides the Commission and
NFA with notice within 24 hours if it is required by the PRA to
maintain additional capital or additional liquidity requirements, or to
restrict its business operations, or to comply with other requirements
pursuant to Financial Services and Markets Act 2000, Part 4A or the
Capital Requirements Regulation 2013, Regulation 35B;
(19) The PRA-designated UK nonbank SD files a notice with the
Commission and NFA within 24 hours if it fails to maintain its minimum
requirement for own funds and eligible liabilities (``MREL''), if the
PRA-designated UK nonbank SD is subject to such requirement as set
forth by the Bank of England pursuant to the Banking Act 2009, Section
3A and the Bank Recovery and Resolution (No. 2) Order 2014, Part 9;
(20) The PRA-designated UK nonbank SD files a notice with the
Commission and NFA within 24 hours of when the firm knew or should have
known that its regulatory capital fell below 120 percent of its minimum
capital requirement, comprised of the firm's core capital requirements
and any applicable capital buffer requirements. For purposes of the
calculation, the 20 percent excess capital must be in the form of
common equity tier 1 capital;
(21) The PRA-designated UK nonbank SD files a notice with the
Commission and NFA within 24 hours if it fails to make or keep current
the financial books and records;
(22) The PRA-designated UK nonbank SD files a notice with the
Commission and NFA within 24 hours of the occurrence of any of the
following:
(i) A single counterparty, or group of counterparties under common
ownership or control, fails to post required initial margin or pay
required variation margin on uncleared swap and non-cleared security-
based swap positions that, in the aggregate, exceeds 25 percent of the
PRA-designated UK nonbank SD's minimum capital requirement;
(ii) Counterparties fail to post required initial margin or pay
required variation margin to the PRA-designated UK nonbank SD for
uncleared swap and non-cleared security-based swap positions that, in
the aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's
minimum capital requirement;
(iii) The PRA-designated UK nonbank SD fails to post required
initial margin or pay required variation margin for uncleared swap and
non-cleared security-based swap positions to a single counterparty or
group of counterparties under common ownership and control that, in the
aggregate, exceeds 25 percent of the PRA-designated UK nonbank SD's
minimum capital requirement; or
(iv) The PRA-designated UK nonbank SD fails to post required
initial margin or pay required variation margin to counterparties for
uncleared swap and non-cleared security-based swap positions that, in
the aggregate, exceeds 50 percent of the PRA-designated UK nonbank SD's
minimum capital requirement;
(23) The PRA-designated UK nonbank SD files a notice with the
Commission and NFA of a change in its fiscal year-end approved or
permitted to go into effect by the PRA. The notice required by this
paragraph will satisfy the requirement for a nonbank SD to obtain the
approval of NFA for a change in fiscal year-end under Commission
Regulation 23.105(g) (17 CFR 23.105(g)). The notice of change in fiscal
year-end must be filed with the Commission and NFA at least 15 business
days prior to the effective date of the PRA-designated UK nonbank SD's
change in fiscal year-end;
(24) The PRA-designated UK nonbank SD or an entity acting on its
behalf
[[Page 8061]]
notifies the Commission of any material changes to the information
submitted in the application for capital comparability determination,
including, but not limited to, material changes to the UK PRA Capital
Rules or UK PRA Financial Reporting Rules imposed on PRA-designated UK
nonbank SDs, the PRA's supervisory authority or supervisory regime over
PRA-designated UK nonbank SDs, and proposed or final material changes
to the UK PRA Capital Rules or UK PRA Financial Reporting Rules as they
apply to PRA-designated UK nonbank SDs; and
(25) Unless otherwise noted in the conditions above, the reports,
notices, and other statements required to be filed by the PRA-
designated UK nonbank SD with the Commission and NFA pursuant to the
conditions of this Capital Comparability Determination Order must be
submitted electronically to the Commission and NFA in accordance with
instructions provided by the Commission or NFA.
Issued in Washington, DC, on January 29, 2024, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Notice of Proposed Order and Request for Comment on an
Application for a Capital Comparability Determination Submitted on
Behalf of Nonbank Swap Dealers Subject to Capital and Financial
Reporting Requirements of the United Kingdom and Regulated by the
United Kingdom Prudential Regulation Authority--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 Commission's proposed order and request for
comment on an application for a preliminary capital comparability
determination on behalf of six nonbank swap dealers that are
domiciled in the United Kingdom (UK) and registered with the CFTC.
All six of these UK nonbank SDs are subject to, and comply with, the
UK capital and financial reporting rules as implemented by the UK
Prudential Regulation Authority, which the Commission has
preliminarily determined are comparable to certain capital and
financial reporting requirements under the Commodity Exchange Act
and the Commission's regulations, subject to certain conditions.
This preliminary capital comparability determination for these UK
nonbank SDs is the fourth proposed order and request for comment to
come before the Commission since it adopted its substituted
compliance framework for non-U.S. domiciled nonbank swap dealers in
July 2020.
I greatly appreciate the work of staff in the Market Participant
Division, the Office of the General Counsel, and the Office of
International Affairs on this matter.
I look forward to reviewing the public's comments on the
proposed rule. The 60-day comment period will begin upon the
Commission's publication of the proposed rule on its website.
Appendix 3--Statement of Support of Commissioner Kristin N. Johnson
I support the Commodity Futures Trading Commission's (Commission
or CFTC) issuance of the proposed conditional capital comparability
determination order for comment (Proposed Comparability
Determination) pursuant to Commission Regulation 23.106.\1\ The
Proposed Comparability Determination, if approved, will allow
registered nonbank swap dealers (SDs) organized and domiciled in the
United Kingdom (UK) and designated for prudential supervision by the
UK Prudential Regulation Authority (PRA-designated non-bank SDs) to
satisfy certain capital and financial reporting requirements under
the Commodity Exchange Act (CEA) by complying with comparable
capital and financial reporting requirements under UK laws and
regulations.
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\1\ The application here is by three trade associations (the
Institute of International Bankers, the International Swaps and
Derivatives Association, and the Securities Industry and Financial
Markets Association). There are currently six PRA-designated non-
bank SDs eligible to take advantage of a comparability
determination, if the Commission approves the Proposed Comparability
Determination. These six PRA-designated non-bank SDs include
Citigroup Global Markets Limited, Goldman Sachs International,
Merrill Lynch International, Morgan Stanley & Co. International Plc,
MUFG Securities EMEA Plc, and Nomura International Plc.
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It is imperative that we carefully review the capital and
financial reporting requirements for PRA-designated non-bank SDs in
a manner consistent with the Commission's mandate under the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) to ensure that foreign swap activities that have a ``direct and
significant'' effect on U.S. markets are subject to regulatory
requirements as sufficiently robust as our own.\2\
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\2\ 7 U.S.C. 2(i). Section 2(i)(1) of the CEA applies the swaps
provisions of both the Dodd-Frank Act and Commission regulations
promulgated under those provisions to activities outside the United
States that have a direct and significant connection with activities
in, or effect on, commerce of the United States.
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In 2010, the Dodd-Frank Act amended the CEA to create a new
regulatory framework for swaps, including adding Section 2(i) to
address the cross-border application of the CEA's swap provisions.
In recognition of the value of global regulatory coordination in the
swaps markets and international comity, the Commission in 2020 set
out a framework for substituted compliance and comparability
determinations for a given foreign jurisdiction that afforded ``due
consideration [to] international comity principles'' while being
``consistent with . . . the Commission's interest in focusing its
authority on potential significant risks to the U.S. financial
system.'' \3\
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\3\ Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to Swap Dealers and Major Swap
Participants, 85 FR 56924, 56924 (Sept. 14, 2020); see Capital
Requirements of Swap Dealers and Major Swap Participants, 85 FR
57462 (Sept. 15, 2020).
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Sections 4s(e) and 4s(f) of the CEA instruct the Commission to
impose capital requirements on non-bank SDs and financial condition
reporting obligations on all registered SDs, which have been
codified by the Commission.\4\ These requirements aim to ensure the
integrity of domestic and foreign entities operating in our markets,
to facilitate the rapid identification and remediation of liquidity
crises, and to mitigate the threat of systemic risks that may
threaten the stability of domestic and global financial markets. As
I previously stated:
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\4\ 7 U.S.C. 6s(e), (f); 17 CFR part 23, subpart E.
The Commission's capital and financial reporting requirements
adopted pursuant to these sections of the CEA are critical to
ensuring the safety and soundness of our markets by addressing and
managing risks that arise from a firm's operation as an SD. Ensuring
necessary levels of capital, as well as accurate and timely
reporting about financial conditions, helps to protect [SDs] and the
broader financial markets ecosystem from shocks, thereby ensuring
solvency and resiliency. This, in turn, protects the financial
system as a whole, reducing the risk of contagion that could arise
from uncleared swaps. Financial reporting requirements work with the
capital requirements by allowing the Commission to monitor and
assess an SD's financial condition, including compliance with
minimum capital requirements. The Commission uses the information it
receives pursuant to these requirements to detect potential risks
before they materialize. Capital adequacy and financial reporting
are pillars of risk management oversight for any business, and, for
firms operating in our markets, it is of the utmost importance that
rules governing these risk management tools are effectively
calibrated, continuously assessed, and fit for purpose.\5\
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\5\ Kristin N. Johnson, Commissioner, CFTC, Statement in Support
of Notice and Order on EU Capital Comparability Determination (June
7, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement060723c.
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[[Page 8062]]
Systemic risks transcend national borders. Successful mitigation
of systemic risks, therefore, requires careful, engaged
collaboration.
I support acknowledging market participants' compliance with the
laws and regulations of their UK regulator when the requirements
lead to an outcome that is comparable to the outcome of complying
with the CFTC's corresponding requirements. Mutual understanding and
respect for partner regulators in other countries advances the
Commission's goal of setting a global standard for sound derivatives
regulation that both enhances market stability and is also deeply
rigorous, reflecting the Commission's commitment to safe swaps
markets.
As global standard setting authorities and federal prudential
regulators refine and reinforce the regulatory framework for capital
requirements globally, it will be important to ensure continued
alignment among jurisdictions, as with the ongoing implementation of
the Basel III capital framework (Basel III).
While prudential regulators continue to debate the
implementation of a final set of regulations under Basel III, the
Commission's capital comparability determinations closes a gap in
our regulatory framework. Today's successful adoption of the
Proposed Comparability Determination enables the Commission to
deploy an enforceable regime immediately in the context of our UK-
based registrants and is reflective of a desire to engage and
harmonize regulation globally.
I commend the work of the staff of the Market Participants
Division--Amanda Olear, Tom Smith, Rafael Martinez, Liliya
Bozhanova, Joo Hong, and Justin McPhee, as well as the members of
the Office of International Affairs--for their careful consideration
of this application.
The Commission's efforts in considering the Proposed
Comparability Determination reflect thoughtful evaluation of the
comparability of relevant standards and an attempt to coordinate our
efforts to bring transparency to the swaps market and reduce its
risks to the public. I look forward to reviewing the comments that
the Commission will receive in response to the Proposed
Comparability Determination.
Appendix 4--Statement of Commissioner Christy Goldsmith Romero
Today [January 23, 2024], the Commission considers a proposal
intended to safeguard the resilience of six swap dealers in the
United Kingdom (``UK'') supervised by the Prudential Regulation
Authority (``PRA'').\1\ The proposal is part of the Commission's
``substituted compliance'' framework.
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\1\ The six swap dealers are Citigroup Global Markets Limited,
Goldman Sachs International, Merrill Lynch International, Morgan
Stanley & Co. International Plc, MUFG Securities EMEA Plc, and
Nomura International Plc. The determination does not cover other UK
nonbank swap dealers supervised by the Financial Conduct Authority.
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Substituted compliance must leave U.S. markets at no greater
risk than full compliance with our rules. It is a framework that
promotes global harmonization with like-minded foreign regulators
that have rules, supervision, and enforcement that are comparable in
purpose and effect to the CFTC. Our capital rules are a critical
pillar of the Dodd-Frank Act reforms, ones that continue to evolve
with the risks that our financial system faces. We must ensure that
our comparability assessments are sound and do not increase risk to
U.S. markets.
The CFTC's capital framework for swap dealers heeds the lessons
of the 2008 financial crisis.
The 2008 financial crisis precipitated the failure or near-
failure of almost every major investment bank and a number of
systemically important banks. It demonstrated all too clearly the
financial stability risks presented by undercapitalized financial
institutions, including a sprawling network of globally
interconnected derivatives dealers. That is why Congress mandated
that the Commission establish capital requirements for non-bank swap
dealers. The Dodd-Frank Act provided that swap dealer capital
requirements should ``offset the greater risk to the swap dealer. .
. and the financial system arising from the use of swaps that are
not cleared'' \2\ and ``help ensure the safety and soundness of the
swap dealer.'' \3\ The Commission's capital requirements, adopted in
2020,\4\ are intended to do exactly that.
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\2\ 7 U.S.C. 6s(e)(3)(A).
\3\ 7 U.S.C. 6s(e)(3)(A)(i). The capital requirements also must
``be appropriate to the risk associated with non-cleared swaps.'' 7
U.S.C. 6s(e)(3)(A)(ii).
\4\ See Commodity Futures Trading Commission, Capital
Requirements of Swap Dealers and Major Swap Participants, 85 FR
57462 (Sept. 15, 2020).
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Our capital requirements promote the resilience of swap dealers
and protect the U.S. financial system. They ensure that swap dealers
can weather economic downturns, and remain resilient during periods
of stress to continue their critical market functions. Our capital
requirements also help prevent contagion of losses spreading to
other financial institutions.
The CFTC must ensure that capital requirements eligible for
substituted compliance are comparable in outcomes, supervision, and
enforcement.
The Commission has to proceed cautiously in making a substituted
compliance determination given the importance of capital to
financial stability and the complexity of capital frameworks. The
Commission also has to consider the interconnected nature of global
derivatives markets, and the speed of contagion in the global
financial system.
Four of the swap dealers who would be able to avail themselves
of our determination today are affiliated with the largest Troubled
Asset Relief Program recipients. That fact alone is a good reminder
of what is at stake in terms of risk. It is not just danger to
financial institutions, but also American families and businesses.
Under this proposal in addition to the Commission's three prior
capital comparability proposals,\5\ 16 of 106 registered swap
dealers would be eligible to rely on substituted compliance.\6\ We
have a responsibility to ensure that our substituted compliance
framework recognizes only those frameworks that are legitimately a
substitute for the capital protections provided by U.S. law.
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\5\ See Commodity Futures Trading Commission, 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); see also Commodity Futures
Trading Commission, 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); see also 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).
\6\ 55 of the 107 swap dealers are subject to U.S. prudential
regulatory capital requirements.
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The fact that a foreign regulator may have comparable capital
rules will not be enough on its own. We have to look beyond the four
corners of rules. Substituted compliance requires a like-minded
foreign regulator with comparable supervision and enforcement to the
CFTC. The CFTC and the Prudential Regulation Authority (PRA) are
already cooperating on supervision and oversight of
clearinghouses.\7\ The PRA also has a long history of regulatory and
supervisory coordination with the U.S. banking regulators. I am
cognizant that the PRA recently received a secondary mandate to
promote the UK economy's international competitiveness and growth.
The PRA issued a statement that it will only advance this mandate
when it does not conflict with safety and soundness of regulated
entities.\8\ I expect our staff will continue to work closely with
the PRA to understand how it will implement this mandate, and work
with the PRA to safeguard the safety and soundness of non-bank swap
dealers and the stability of our global financial system.
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\7\ See CFTC, CFTC and BoE Sign New MOU for Supervision of
Cross-Border Clearing Organizations, https://www.cftc.gov/PressRoom/PressReleases/8289-20 (Oct. 20, 2020).
\8\ Prudential Regulation Authority, The Prudential Regulation
Authority's Approach to Policy, DP4/22, https://www.bankofengland.co.uk/prudential-regulation/publication/2022/september/pra-approach-to-policy (Sept. 2022).
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Our substituted compliance decisions should not allow for
regulatory arbitrage for swap dealers to escape strong U.S. capital
rules--a situation that could erode Dodd-Frank Act post-crisis
reforms. Today's determination is grounded in the PRA's capital
rules being comparable to the CFTC's ``Bank-Based Capital Approach''
to swap dealer capital requirements, which reflects requirements the
Federal Reserve imposes for bank holding companies.
The Federal Reserve and other U.S. prudential banking regulators
have proposed updates to the U.S. capital rules to implement
international standards known as ``Basel Endgame'' or Basel 3.1.\9\
The U.S.
[[Page 8063]]
updates are also informed by the failure of several banks in early
2023.\10\ The current proposal includes proposed changes that could
affect capital requirements for swap dealers subject to prudential
regulation. I would expect the Commission to monitor these changes
and update its own capital rules for swap dealers to remain
harmonized with the U.S. prudential regulators. The PRA is also
updating its capital requirements to implement the Basel
standards.\11\ As updates are finalized in the U.S. and globally,
the Commission should review whether capital requirements imposed by
jurisdictions with comparability determinations remain aligned with
capital requirements imposed by other U.S. financial regulators and
with the changes that the Commission makes to align its own capital
requirements.
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\9\ Federal Reserve System, Federal Deposit Insurance
Corporation, and Comptroller of the Currency, Regulatory Capital
Rule: Large Banking Organizations and Banking Organizations with
Significant Trading Activity, 88 FR 64028 (Sept. 18, 2023).
\10\ See Statement by Vice Chair for Supervision Michael S.
Barr, https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20230727.htm (July 27, 2023) (``Additionally, following
the banking turmoil in March 2023, the proposal seeks to further
strengthen the banking system by applying a broader set of capital
requirements to more large banks.'').
\11\ Prudential Regulation Authority, PS17/23--Implementation of
the Basel 3.1 standards near-final part 1, https://www.bankofengland.co.uk/prudential-regulation/publication/2023/december/implementation-of-the-basel-3-1-standards-near-final-policy-statement-part-1 (Dec. 12, 2023).
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Strong capital requirements and areas where the Commission would
particularly benefit from public comment.
All six of the UK swap dealers are dual-registered with the U.S.
Securities and Exchange Commission (``SEC''). The SEC has issued
final comparability determination orders permitting them to satisfy
certain SEC capital requirements through substituted compliance with
applicable UK requirements.\12\
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\12\ See Order Granting Conditional Substituted Compliance in
Connection with Certain Requirements Applicable to Non-U.S.
Security-Based Swap Dealers and Major Security-Based Swap
Participants Subject to Regulation in the United Kingdom, 86 FR
43318 (July 30, 2021); Amended and Restated Order Granting
Conditional Substituted Compliance in Connection with Certain
Requirements Applicable to Non-U.S. Security-Based Swap Dealers and
Major Security-Based Swap Participants Subject to Regulation in the
Federal Republic of Germany; Amended Orders Addressing Non-U.S.
Security-Based Swap Entities Subject to Regulation in the French
Republic or the United Kingdom; and Order Extending the Time to Meet
Certain Conditions Relating to Capital and Margin, 86 FR 59797 (Oct.
28, 2021); and Order Specifying the Manner and Format of Filing
Unaudited Financial and Operational Information by Security-Based
Swap Dealers and Major Security-Based Swap Participants that are not
U.S. Persons and are Relying on Substituted Compliance with Respect
to Rule 18a-7, 86 FR 59208 (Oct. 26, 2021).
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In conducting the CFTC's own analysis, it is important to
remember that substituted compliance is not an all-or-nothing
proposition. The Commission retains examinations and enforcement
authority and it can, should, and will, impose any conditions and
take all actions appropriate to protect the safety and soundness of
swap dealers and the U.S. financial system. Today, the Commission
proposes 25 conditions, including conditions requiring capital
reporting and Commission notification that are essential to
monitoring the financial condition and capital adequacy of swap
dealers.
Just as with swap dealers in Japan, Mexico and the European
Union,\13\ one of the most important conditions is that the
Commission will continue to require compliance with the CFTC's
minimum capital requirement of $20 million in common equity tier 1
capital.\14\ This is one of the most critical components of the
CFTC's capital requirements. It helps to ensure that each nonbank
swap dealer, whether current or a future new entrant, maintains at
all times, $20 million of the highest quality capital to meet its
financial obligations without becoming insolvent.
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\13\ See CFTC Commissioner Christy Goldsmith Romero, Proposal
for Strong Capital Requirements and Financial Reporting for Swap
Dealers in Japan, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072722b (July 27, 2022); See also CFTC Commissioner
Christy Goldsmith Romero, Promoting the Resilience of Swap Dealers
in Mexico Through Strong Capital Requirements and Financial
Reporting, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatment111022b (Nov. 10, 2022); CFTC Commissioner Christy
Goldsmith Romero, Promoting the Resilience of Swap Dealers in Europe
Through Strong Capital Requirements and Financial Reporting, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement060723e
(June 7, 2023).
\14\ This CFTC capital rule substantially exceeds the EUR 5
million minimum capital required under EU capital rules.
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Today, the Commission preliminarily finds that UK capital rules
requiring 8 percent of risk-weighted assets and an additional 2.5
percent buffer, for a total of 10.5 percent, are higher than the
CFTC's requirement of 8 percent of risk-weighted assets. This
capital requirement helps ensure that the swap dealer has sufficient
capital levels to cover for example, unexpected losses from business
activities.
There are proposed deviations from the Commission's bank-based
capital requirements that should be closely scrutinized. Some of
these deviations are similar to those raised by commenters to other
proposed determinations.\15\ For example, the Commission proposes to
permit compliance with UK capital rules that are not necessarily
anchored by a threshold percentage of uncleared swap margin as the
CFTC requires. The proposed determination discusses that UK capital
rules address liquidity, operational risks, as well as other risks
arising from derivatives exposures, through other mechanisms. I look
forward to public comment on the comparability of the approaches and
expect the Commission to publish additional analysis to address
concerns raised by commenters as part of any final determination.
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\15\ See 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) (Comment of Better Markets).
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In these areas, and others, public comments will be tremendously
beneficial. I approve.
Appendix 5--Statement of Support of Commissioner Caroline D. Pham
I support the Commission's proposed order and request for
comment on a comparability determination for nonbank swap dealers
subject to capital and financial reporting requirements of the
United Kingdom and regulated by the United Kingdom Prudential
Regulation Authority (PRA). I would like to thank Justin McPhee, Joo
Hong, Liliya Bozhanova, Rafael Martinez, Tom Smith, and Amanda Olear
in the Market Participants Division (MPD) for their hard work on
these technical and detailed requirements.
This proposal is the staff's fourth proposed capital adequacy
and financial reporting comparability determination.\1\ Each
involves significant engagement with the corresponding authority, in
this case the UK Prudential Regulation Authority, as well as CFTC
registrants. As I have previously said, the Commission, its staff,
and our regulatory counterparts around the world need to adhere to
the recommendations in IOSCO's 2020 report on Good Practices on
Processes for Deference, which was developed to provide solutions to
the challenges and drivers of market fragmentation.\2\ As set forth
in the IOSCO 2020 report, such processes for deference \3\ are
typically outcomes-based; risk sensitive; transparent; cooperative;
and sufficiently flexible.
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\1\ The prior three were for Japan, Mexico, and the EU. The
Commission maintains its list of comparability determinations for
substituted compliance purposes at https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.
\2\ Statement of Commissioner Caroline D. Pham in Support of
Proposed Order and Request for Comment on Comparability
Determination for EU Nonbank Swap Dealer Capital and Financial
Reporting Requirements (June 9, 2023); IOSCO Report, ``Good
Practices on Processes for Deference'' (June 2020).
\3\ IOSCO uses ``deference'' as an ``overarching concept to
describe the reliance that authorities place on one another when
carrying out regulation or supervision of participants operating
cross-border.'' Id. at 1. The CFTC's use of substituted compliance
for swaps regulation is an example of regulatory deference
mechanisms.
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I continue to stress that this work by CFTC staff creates the
underpinnings of global markets that enable governments, central
banks and commercial banks, asset managers and investors, and
companies to manage the risks inherent in international flows of
capital that fuel economic growth and prosperity in both developed
and developing economies.\4\ I am pleased to continue to support
this work, and also encourage staff to finalize these proposals in
2024.
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\4\ Statement of Commissioner Caroline D. Pham in Support of
Proposed Order and Request for Comment on Comparability
Determination for EU Nonbank Swap Dealer Capital and Financial
Reporting Requirements (June 9, 2023); see also Concurring Statement
of Commissioner Caroline D. Pham Regarding Proposed Swap Dealer
Capital and Financial Reporting Comparability Determination (July
27, 2022); Concurring Statement of Commissioner Caroline D. Pham
Regarding Proposed Order and Request for Comment on an Application
for a Capital Comparability Determination (Nov. 10, 2022).
[FR Doc. 2024-02070 Filed 2-2-24; 8:45 am]
BILLING CODE 6351-01-P