Capital and Financial Reporting Requirements for Swap Dealers and Major Swap Participants

COMMODITY FUTURES TRADING COMMISSION <CFR>17 CFR Part 23</CFR> <RIN>RIN 3038-AF33</RIN> <SUBJECT>Capital and Financial Reporting Requirements for Swap Dealers and Major Swap Participants</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Commodity Futures Trading Commission. <HD SOURCE="HED">ACTION:</HD> Proposed rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Commodity Futures Trading Commission (“Commission” or “CFTC”) proposes to amend certain of the Commission's regulations that impose minimum capital requirements and financial reporting obligations on swap dealers (“SDs”) and major swap participants (“MSPs”). The Commission proposes to do this by codifying parts of staff interpretive letter 21-15 to SDs addressing the Tangible Net Worth Capital Approach for calculating capital under the applicable Commission regulation and no-action letter 21-18 (and its successor no-action letter 23-11) regarding alternative financial reporting by SDs subject to the capital requirements of a prudential regulator (together, “CFTC Letters”). The Commission is also proposing to amend certain of its regulations applicable to SDs, in areas including the required timing of certain notifications, the process for approval of subordinated debt for capital, and the revision of financial reporting forms to conform to the rules. The proposed amendments are intended to make it easier for SDs to comply with the Commission's financial reporting obligations and demonstrate compliance with minimum capital requirements. </SUM> <DATES> <HD SOURCE="HED">DATES:</HD> Comments must be received on or before February 13, 2024. </DATES> <HD SOURCE="HED">ADDRESSES:</HD> You may submit comments, which must be in writing and identified by RIN 3038-AF33, by any of the following methods: • <E T="03">CFTC Comments Portal: https://comments.cftc.gov</E> . Select the “Submit Comments” link for this rulemaking and follow the instructions on the Public Comment Form. • <E T="03">Mail:</E> Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • <E T="03">Hand Delivery/Courier:</E> Follow the same instruction as for Mail, above. Please submit your comments using only one of these methods. Submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to <E T="03">https://comments.cftc.gov</E> . You should only submit information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures in § 145.9 of the Commission's regulations. The Commission reserves the right, but shall have no obligation, to review, prescreen, filter, redact, refuse, or remove any or all of your submission from <E T="03">https://comments.cftc.gov</E> that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act (APA) and other applicable laws and may be accessible under the FOIA. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Amanda L. Olear, Director, 202-418-5283, <E T="03">aolear@cftc.gov;</E> Thomas Smith, Deputy Director, 202-418-5495, <E T="03">tsmith@cftc.gov;</E> Joshua Beale, Associate Director, 202-418-5446, <E T="03">jbeale@cftc.gov;</E> Jennifer Bauer, Special Counsel, 202-418-5472, <E T="03">jbauer@cftc.gov;</E> Maria Aguilar-Rocha, Attorney Advisor, 202-418-5840, <E T="03">maguilar-rocha@cftc.gov;</E> Andrew Pai, Attorney Advisor, 646-746-9893, <E T="03">apai@cftc.gov;</E> Market Participants Division; Lihong McPhail, Research Economist, 202-418-5722, <E T="03">lmcphail@cftc.gov,</E> Office of the Chief Economist; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> On September 15, 2020, the Commission published in the <E T="04">Federal Register</E> final rules adopting capital and financial reporting requirements for SDs and MSPs. <SU>1</SU> <FTREF/> The Final Rules accomplished the Congressional mandate  <SU>2</SU> <FTREF/> directing the Commission to adopt rules imposing both capital requirements and initial and variation margin requirements on SDs and MSPs that are not subject to a prudential regulator (“nonbank SDs” and “nonbank MSPs”, respectively). <SU>3</SU> <FTREF/> The Final Rules included amendments to existing capital rules for futures commission merchants (“FCMs”) to provide explicit additional capital requirements for proprietary positions in swaps and security-based swaps that are not cleared by a clearing organization. The Final Rules also included a detailed capital model application process whereby eligible nonbank SDs and nonbank MSPs could apply to the Commission or a registered futures association (“RFA”) of which they are a member for approval. Further, the Final Rules adopted a capital comparability determination process for certain eligible foreign domiciled nonbank SDs and nonbank MSPs to seek substituted compliance for the Commission's capital and financial reporting requirements. <SU>4</SU> <FTREF/> Finally, the Final Rules adopted detailed financial reporting, recordkeeping and notification requirements, including limited financial reporting requirements for SDs and MSPs subject to the capital requirements of prudential regulators (“bank SDs” and “bank MSPs”, respectively). <FTNT> <SU>1</SU>  Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020) (the “Final Rule” or the “Final Rules”). </FTNT> <FTNT> <SU>2</SU>  Section 4s(e) of the Commodity Exchange Act (“CEA” or the “Act”), 7 U.S.C. 6s(e), which is contained in section 731 of the Dodd-Frank Act, requires the Commission to adopt minimum capital and margin requirements for SDs and MSPs that are not subject to a prudential regulator. Section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”). The text of the Dodd-Frank Act is available at <E T="03">https://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm</E> . </FTNT> <FTNT> <SU>3</SU>  The term “prudential regulator” is defined as the Board of Governors of the Federal Reserve System (“Federal Reserve Board”); the Office of the Comptroller of the Currency (“OCC”); the Federal Deposit Insurance Corporation (“FDIC”); the Farm Credit Administration; and the Federal Housing Finance Agency. Section 1a(39) of the CEA, 7 U.S.C. 1a(39). </FTNT> <FTNT> <SU>4</SU>  To date, the Commission has issued proposals for substituted compliance for eligible nonbank SDs domiciled in Japan, Mexico, and the European Union for public comment. Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination From the Financial Services Agency of Japan, 87 FR 48092 (Aug. 8, 2022); Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Subject to Regulation by the Mexican Comision Nacional Bancaria y de Valores, 87 FR 76374 (Dec. 13, 2022); Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination Submitted on Behalf of Nonbank Swap Dealers Domiciled in the French Republic and Federal Republic of Germany and Subject to Capital and Financial Reporting Requirements of the European Union, 88 FR 41774 (June 27, 2023). </FTNT> The Commission initially proposed capital and financial reporting requirements for nonbank SDs and nonbank MSPs, and financial reporting requirements for bank SDs and bank MSPs, in 2011. <SU>5</SU> <FTREF/> After extensive comment, in 2016 the Commission re-proposed the rules for comment. <SU>6</SU> <FTREF/> The Commission received numerous comments from a broad spectrum of market participants in response to the re-proposal. <SU>7</SU> <FTREF/> In addition, following the 2016 re-proposal, the SEC adopted a final set of capital, margin and financial reporting requirements for security-based swap dealers and major security- based swap participants (“SBSDs” and “MSBSPs,” respectively). <SU>8</SU> <FTREF/> In December 2019, the Commission re-opened the proposed rules for comment in light of the SEC's final rules, and requested commenters to provide detailed data and information regarding several critical areas of the Commission's proposed approach. <SU>9</SU> <FTREF/> <FTNT> <SU>5</SU>  Capital Requirements of Swap Dealers and Major Swap Participants, 76 FR 27802 (May 12, 2011). </FTNT> <FTNT> <SU>6</SU>  Capital Requirements of Swap Dealers and Major Swap Participants, 81 FR 91252 (Dec. 16, 2016) (the “2016 Capital Proposal”). </FTNT> <FTNT> <SU>7</SU>  The comment letters for the <E T="03">2016 Capital Proposal</E> are available at <E T="03">https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1769</E> (the public comment file). </FTNT> <FTNT> <SU>8</SU>  Capital, Margin and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, 84 FR 43872 (Aug. 22, 2019) (the “SEC Final Capital Rule”). </FTNT> <FTNT> <SU>9</SU>  Capital Requirements of Swap Dealers and Major Swap Participants, 8 ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 148k characters. 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