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

<RULE> 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> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Commodity Futures Trading Commission (“Commission” or “CFTC”) is adopting amendments to 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 is adopting amendments consistent with previously issued staff letters addressing the Tangible Net Worth Capital Approach for calculating capital under the applicable Commission regulation and alternative financial reporting by SDs subject to the capital requirements of a prudential regulator. The Commission is also adopting amendments to 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 amendments are intended to facilitate SDs' compliance with the Commission's financial reporting obligations and minimum capital requirements. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> This rule is effective June 24, 2024. <E T="03">Compliance date:</E> September 30, 2024. The compliance date applies to all financial reports with an “as of” reporting date of September 30, 2024 or later, to allow for sufficient time to effectuate amendments discussed herein. </EFFDATE> <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, Special Counsel, 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> Christine McKeveny, Attorney-Advisor, 646-746-3923, <E T="03">cmckeveny@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> <HD SOURCE="HD1">Table of Contents</HD> <EXTRACT> <FP SOURCE="FP-2">I. Background</FP> <FP SOURCE="FP-2">II. Amendments to Commission Regulations</FP> <FP SOURCE="FP1-2">A. CFTC Staff Letters and Other Amendments</FP> <FP SOURCE="FP1-2">1. Amendments to Tangible Net Worth Capital Approach—CFTC Staff Letter No. 21-15</FP> <FP SOURCE="FP1-2">2. Amendments to Bank SD Financial Reporting Requirements—CFTC Staff Letter No. 21-18</FP> <FP SOURCE="FP1-2">3. Amendments Regarding Financial Reporting and Other Requirements of SDs</FP> <FP SOURCE="FP1-2">a. Amendments to Schedules in Financial Reporting</FP> <FP SOURCE="FP1-2">b. Changes to Public Disclosure Requirements</FP> <FP SOURCE="FP1-2">c. Changes to Form 1-FR-FCM</FP> <FP SOURCE="FP1-2">d. Additional Cross References To Clarify Applicable Market and Credit Risk Charges</FP> <FP SOURCE="FP1-2">B. Other Amendments</FP> <FP SOURCE="FP1-2">1. Notice of Substantial Reduction in Capital</FP> <FP SOURCE="FP1-2">2. Subordinated Debt Approval</FP> <FP SOURCE="FP1-2">3. Statement of No Material Difference</FP> <FP SOURCE="FP-2">III. Related Matters</FP> <FP SOURCE="FP1-2">A. Regulatory Flexibility Act</FP> <FP SOURCE="FP1-2">B. Paperwork Reduction Act</FP> <FP SOURCE="FP1-2">1. Background</FP> <FP SOURCE="FP1-2">2. OMB Collection 3038-0024—Regulations and Forms Pertaining to Financial Integrity of the Market Place; Margin Requirements for SDs/MSPs</FP> <FP SOURCE="FP1-2">C. Section 15(b) Antitrust Laws</FP> <FP SOURCE="FP-2">IV. Cost-Benefit Considerations</FP> <FP SOURCE="FP1-2">A. Background</FP> <FP SOURCE="FP1-2">B. CFTC Staff Letters and Other Amendments</FP> <FP SOURCE="FP1-2">1. Benefits</FP> <FP SOURCE="FP1-2">2. Costs</FP> <FP SOURCE="FP1-2">3. Section 15(a) Factors</FP> <FP SOURCE="FP1-2">a. Protection of Market Participants and the Public</FP> <FP SOURCE="FP1-2">b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets</FP> <FP SOURCE="FP1-2">c. Price Discovery</FP> <FP SOURCE="FP1-2">d. Sound Risk Management Practices</FP> <FP SOURCE="FP1-2">e. Other Public Interest Considerations</FP> <FP SOURCE="FP1-2">C. Other Amendments</FP> <FP SOURCE="FP1-2">1. Benefits</FP> <FP SOURCE="FP1-2">2. Costs</FP> <FP SOURCE="FP1-2">3. Section 15(a) Factors</FP> <FP SOURCE="FP1-2">a. Protection of Market Participants and the Public</FP> <FP SOURCE="FP1-2">b. Efficiency, Competitiveness, and Financial Integrity of Swaps Markets</FP> <FP SOURCE="FP1-2">c. Price Discovery</FP> <FP SOURCE="FP1-2">d. Sound Risk Management Practices</FP> <FP SOURCE="FP1-2">e. Other Public Interest Considerations</FP> </EXTRACT> <HD SOURCE="HD1">I. Background</HD> Section 4s(e) of the Commodity Exchange Act (“CEA” or the “Act”) requires the Commission to adopt minimum capital and margin requirements for SDs and MSPs. <SU>1</SU> <FTREF/> On September 15, 2020, the Commission issued final rules adopting such requirements under part 23 of the Commission's regulations (the “Final Rule” or the “Final Rules”). <SU>2</SU> <FTREF/> The Final Rules became effective on November 16, 2020, with an extended compliance date of October 6, 2021 (“2021 Compliance Date”). <SU>3</SU> <FTREF/> The Final Rules imposed capital requirements on SDs and MSPs that are not subject to a prudential regulator (“nonbank SDs” and “nonbank MSPs,” respectively). <SU>4</SU> <FTREF/> The Final Rules 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. <SU>5</SU> <FTREF/> The Final Rules also 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>6</SU> <FTREF/> Further, 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 a prudential regulator (“bank SDs” and “bank MSPs,” respectively). <SU>7</SU> <FTREF/> The Final Rules also 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. <SU>8</SU> <FTREF/> Finally, the Final Rules required that financial reports and notices be filed with both the Commission and the NFA  <SU>9</SU> <FTREF/> and explicitly recognized NFA's ability to adopt standardized forms and processes to carry out the Commission's financial reporting and notification requirements for SDs. <SU>10</SU> <FTREF/> <FTNT> <SU>1</SU>  7 U.S.C. 6s(e). </FTNT> <FTNT> <SU>2</SU>  Capital Requirements of Swap Dealers and Major Swap Participants, 85 FR 57462 (Sept. 15, 2020) (the “Final Rule” or the “Final Rules”). Commission regulations referred to herein are found at 17 CFR chapter I. Commission regulations are accessible on the Commission's website at <E T="03">https://www.cftc.gov.</E> </FTNT> <FTNT> <SU>3</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>4</SU>   <E T="03">Id.</E> 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>5</SU>   <E T="03">See generally</E> Final Rules, 85 FR 57467. The three methods discussed in detail in the Final Rules include the Bank-Based Capital Approach, the Tangible Net Worth Capital Approach, and the Net Liquid Assets Capital Approach (as defined therein). Each method permits the use of models upon approval of the Commission or an RFA and determines the frequency and type of financial reporting information to be provided to the Commission by each nonbank SD and nonbank MSP. </FTNT> <FTNT> <SU>6</SU>  17 CFR 23.106. </FTNT> <FTNT> <SU>7</SU>  Final Rules, 85 FR 57463. Bank SDs, which are not subject to the capital requirements of the Commission, are required to provide the Commission and National Futures Association (“NFA”) with limited financial information regarding the capital and swap positions of the firms. 17 CFR 23.105(p). </FTNT> <FTNT> <SU>8</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>9</SU>   <E T="03">Id.</E> at 57515. </FTNT> <FTNT> <SU>10</SU>   <E T="03">Id.</E> at 57518. </FTNT> In the period leading up to the 2021 Compliance Date, Commission, NFA, and SEC staff worked together to develop a process for collecting financial reports and responding to market participant inquiries regarding compliance with financial reporting and notice requirements. The Commission also approved NFA's capital model requirements and review process, <SU>11</SU> <FTREF/> and NFA adopted new Financial Requirements Section 18, <SU>12</SU> <FTREF/> ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 151k characters. 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