# Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination From the Financial Services Agency of Japan

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2022-16684

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** August 8, 2022
- **Citation:** 87 FR 48092

## Text

COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Notice of Proposed Order and Request for Comment on an Application for a Capital Comparability Determination From the Financial Services Agency of Japan

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 Financial Services Agency of Japan requesting that the Commission determine that registered swap dealers organized and domiciled in Japan that are subject to, and comply with, certain capital and financial reporting requirements in Japan may comply with certain capital and financial reporting requirements under the Commodity Exchange Act via compliance with corresponding capital and financial reporting requirements of Japan. The Commission also is soliciting public comment on a proposed order providing for the conditional availability of substituted compliance in connection with the application.

DATES:

Comments must be received on or before October 7, 2022.

ADDRESSES:

You may submit comments, identified by “Japan 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 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 at
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,
aolear@cftc.gov;
Thomas Smith, Deputy Director, 202-418-5495,
tsmith@cftc.gov;
Rafael Martinez, Associate Director, 202-418-5462,
rmartinez@cftc.gov;
Joshua Beale, Associate Director, 202-418-5446,
jbeale@cftc.gov;
Warren Gorlick, Associate Director, 202-418-5195,
wgorlick@cftc.gov;
Jennifer C.P. Bauer, Special Counsel, 202-418-5472,
jbauer@cftc.gov;
Carmen Moncada-Terry, Special Counsel, 202-418-5795,
cmoncadaterry@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 submitted by the Financial Services Agency of Japan (“FSA”), dated September 30, 2021 (“FSA Application”), requesting that the Commission determine that registered nonbank
2

swap dealers (“SDs”) organized and domiciled in Japan (“Japanese nonbank SDs”) may satisfy certain capital and financial reporting requirements under the Commodity Exchange Act (“CEA”)
3

by being subject to and complying with comparable capital and financial reporting requirements under Japanese laws and regulations.
4

The Commission also is soliciting public comment on a proposed Commission Comparability Determination order that would allow Japanese nonbank SDs, subject to certain conditions, to comply with certain CFTC SD capital and financial reporting requirements in the manner as set forth in the proposed order.

2
As discussed in Section I.A. below, the Commission has capital jurisdiction over registered SDs that are not subject to the regulation of a U.S. banking regulator (
i.e.,
nonbank SDs).

3
7 U.S.C. 1
et seq.
The CEA may be accessed through the Commission's website,
www.cftc.gov.

4

See
Letter from Yuji Yamashita, Deputy Commissioner for International Affairs, Financial Services Agency of Japan, dated September 30, 2021. The FSA Application is available on the Commission's website at:
https://www.cftc.gov/LawRegulation/DoddFrankAct/CDSCP/index.htm.

I. Introduction

A. Regulatory Background—CFTC Capital, Margin, and Financial Reporting Requirements for Swap Dealers and Major Swap Participants

Section 4s(e) of the CEA
5

directs the Commission and “prudential regulators”
6

to impose capital requirements on SDs and major swap participants (“MSPs”) registered with the Commission. Section 4s(e) of the CEA also directs the Commission and prudential regulators to adopt regulations imposing initial and variation margin requirements on swaps entered into by SDs and MSPs that are not cleared by a registered derivatives clearing organization (“uncleared swaps”).

5
7 U.S.C. 6s(e).

6
The term “prudential regulators” is defined in the CEA to mean the Board of Governors of the Federal Reserve System (“Federal Reserve Board”); the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the Farm Credit Administration; and the Federal Housing Finance Agency.
See
7 U.S.C. 1a(39).

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.
7

Therefore, the Commission's authority to impose capital requirements and margin requirements for uncleared swap transactions extends to nonbank SDs and nonbank MSPs, including nonbanking subsidiaries of bank holding companies regulated by the Federal Reserve Board.

7
7 U.S.C. 6s(e)(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.
8

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.
9

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”).
10

8

See Margin and Capital Requirements for Covered Swap Entities,
80 FR 74840 (Nov. 30, 2015).

9

See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants,
81 FR 636 (Jan. 6, 2016).

10

See Capital Requirements of Swap Dealers and Major Swap Participants,
85 FR 57462 (Sept. 15, 2020).

Section 4s(f) of the CEA addresses SD and MSP financial reporting requirements.
11

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.
12

The Commission's financial reporting obligations were adopted with the Commission's nonbank SD and nonbank MSP capital requirements, and also had a compliance date of October 6, 2021 (“CFTC Financial Reporting Rules”).
13

11
7 U.S.C. 6s(f).

12
7 U.S.C. 6s(f)(1)(A).

13

See
85 FR 57462.

B. Commission Capital Comparability Determinations for Non-U.S. Nonbank Swap Dealers and Non-U.S. Nonbank Major Swap Participants

Regulation 23.106 establishes a substituted compliance framework whereby the Commission may determine that compliance by a non-U.S. domiciled nonbank SD or non-U.S. domiciled nonbank MSP with its home country's capital and financial reporting requirements will satisfy all or parts of the CFTC Capital Rules and all or parts of the CFTC Financial Reporting Rules (such a determination referred to as a “Capital Comparability Determination”).
14

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 and reporting 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”).
15

14
17 CFR 23.106. Regulation 23.106(a)(1) provides that a request for a Capital Comparability Determination may be submitted by a non-U.S. nonbank SD or non-US 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-US nonbank SDs or non-U.S. nonbank MSPs. Commission regulations provide that any non-U.S. nonbank SD or non-U.S. nonbank MSP that is dually-registered with the Commission as a futures commission merchant (“FCM”) is subject to the capital requirements of Regulation 1.17 and may not petition the Commission for a Capital Comparability Determination.
See
17 CFR 23.101(a)(5) and (b)(4), respectively. Furthermore, non-U.S. bank SDs and non-U.S. bank MSPs may not petition the Commission for a Capital Comparability Determination with respect to their respective financial reporting requirements under Regulation 23.105(p) (17 CFR 23.105(p)). Commission staff has issued, however, a time-limited no-action letter stating the Market Participants Division will not recommend enforcement action against a non-U.S. bank SD that files with the Commission certain financial information that is provided to its home country regulator in lieu of certain financial reports required by Regulation 23.105(p).
See
CFTC Staff Letter 21-18, issued on August 31, 2021.

15
17 CFR 23.106(a)(3).

The Commission's approach for conducting a comparability determination with respect to the CFTC Capital Rules and the CFTC Financial Reporting Rules is a principles-based, holistic approach that focuses on whether the applicable foreign jurisdiction's capital and financial reporting requirements achieve comparable outcomes to the corresponding CFTC requirements.
16

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.
17

In performing the analysis, the Commission recognizes that jurisdictions may adopt differing approaches to achieving comparable outcomes, and the Commission will focus on whether the foreign jurisdiction's capital and financial reporting requirements are comparable to the Commission's in purpose and effect, and not whether they are comparable in every aspect or contain identical elements.

16
17 CFR 23.106(a)(3)(ii).
See also
85 FR 57462 at 57521.

17

See
85 FR 57521.

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.
18

18
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.
19

19

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,
20

the Commission's review will include the extent to which the foreign jurisdiction's requirements address: (1) the process of establishing minimum capital requirements for nonbank MSPs 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.

20
Regulation 23.101(b) requires a nonbank MSP to maintain positive tangible net worth. There are no MSPs currently registered with the 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.
21

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.

21

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 and 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) in order 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.
22

Notices must be filed electronically with the Commission's Market Participants Division (“MPD”).
23

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,
24

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 the foreign laws and regulations cited in the Capital Comparability Determination in lieu of complying with the CFTC Capital Rules and CFTC Financial Reporting Rules upon MPD's determination that the firm is subject to and complies with such foreign laws and regulations, is subject to the jurisdiction of the applicable foreign regulatory authority (or authorities), and can meet all of the conditions in the Capital Comparability Determination.

22
17 CFR 23.106(a)(4).

23
Notices must be filed in electronic form to the following email address:
MPDFinancialRequirements@cftc.gov.

24

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, 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.
25

Accordingly, if a nonbank SD or nonbank MSP fails to comply with the foreign jurisdiction's capital adequacy and/or financial reporting requirements, the Commission may initiate an action for a violation of the corresponding CFTC Capital Rules and/or CFTC Financial Reporting Rules.
26

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.
27

25
17 CFR 23.106(a)(4)(ii). Confirmation will be issued by MPD under authority delegated by the Commission.
See
Regulation 140.91(a)(11) (17 CFR 140.91(a)(11)).

26

Id.

27

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.
28

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 Order.

28
The Commission has provided the FSA with an opportunity to review for accuracy and completeness, and comment on, the Commission's description of relevant Japanese laws and regulations on which this proposed Capital Comparability Determination is based. The Commission relies on this review and any corrections received from the FSA in making its proposal. A comparability determination based on an inaccurate description of foreign laws and regulations may not be valid.

C. Japan Financial Services Agency's Application for a Capital Comparability Determination for Japanese-Domiciled Nonbank Swap Dealers

The FSA Application requests that the Commission issue a Capital Comparability Determination finding that compliance with certain designated capital requirements of Japan (the “Japanese Capital Rules”) and certain designated financial reporting requirements of Japan (the “Japanese Financial Reporting Rules”) by a Japanese nonbank SD registered with the FSA as a Type I Financial Instruments Business Operator (“FIBO”) satisfies corresponding CFTC Capital Rules and CFTC Financial Reporting Rules applicable to a nonbank SD under Sections 4s(e) and (f) of the CEA and Regulations 23.101 and 23.105.
29

There are currently three Japanese nonbank SDs registered with Commission, and the FSA has represented that each of the three Japanese nonbank SDs are FSA-registered and regulated FIBOs.
30

The FSA Application requests that the Commission's Capital Comparability Determination cover each of the three Japanese nonbank SDs and any future Japanese registered and domiciled FIBOs that register with the Commission as nonbank SDs.

29
The FSA's application did not request a Capital Comparability Determination with respect to nonbank MSPs as currently there are no MSPs registered with the Commission and, accordingly, no nonbank MSPs domiciled in Japan and registered with the FSA. Accordingly, the Commission's Capital Comparability Determination and proposed Order does not address nonbank MSPs.

30
FSA Application, pp. 4-5 (footnote 11).

The FSA has represented that the capital adequacy and financial reporting requirements for swap activities in Japan are governed by the Japanese legal framework for financial regulation, which is mainly composed of Acts, Cabinet Orders, Ministerial Orders, and FSA Notices.
31

With regard to the Japanese Capital Rules and the Japanese Financial Reporting Rules, the Financial Instruments and Exchange Act (Act No. 25 of 1948) (“FIEA”) and its related order, Cabinet Office Order on Financial Instruments Business (Cabinet Office Order No. 52 of 2007) (“COO”), stipulate the prudential capital and financial reporting requirements applicable to FIBOs, including Japanese nonbank SDs.
32

FIEA, COO, and related FSA Notices impose mandatory capital and reporting requirements on FIBOs, including Japanese nonbank SDs. Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. (“Supervisory Guidelines for FIBO”) also supplement the framework.
33

The technical requirements for FIBOs, including Japanese nonbank SDs, to calculate capital adequacy ratios are specified in the FSA Notice No. 59 of 2007 (“Notice on Capital”) in accordance with Article 177(8) and Article 178(1) of the COO.

31

Id.,
p. 4.

32
Businesses categorized as Type I Financial Instruments Business (Article 28(1) of the FIEA) can only be conducted by Type I FIBOs registered under Article 29 of the FIEA. Type I Financial Instruments Business includes market transactions of derivatives and foreign market derivatives transactions pertaining to certain highly liquid securities and over-the-counter transactions of derivatives.

33
In order to implement and reinforce the legal framework, the FSA has developed and published supervisory guidelines. The supervisory guidelines are meant for FSA staff, but are public documents, which are expected to be followed by the applicable financial institutions. Financial institutions are consulted in connection with the establishment of, and any amendments to, the supervisory guidelines. Supervision and enforcement are conducted based on the supervisory guidelines.

II. General Overview of CFTC and Japanese Nonbank Swap Dealer Capital Rules

A. General Overview of 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”).
34

34
17 CFR 23.101.

Nonbank SDs that are “predominantly engaged in non-financial activities” may elect the TNW Approach.
35

The TNW Approach requires a nonbank SD to maintain a level of “tangible net worth”
36

equal to or greater than the higher of: (i) $20 million plus the amount of the nonbank SD's “market risk exposure requirement”
37

and “credit risk exposure requirement”
38

associated with the nonbank SD's swap

and related hedge positions that are part of the nonbank SD's swap dealing activities; (ii) eight percent of the nonbank SD's “uncleared swap margin” amount;
39

or (iii) the amount of capital required by a registered futures association of which the nonbank SD is a member.
40

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.

35
17 CFR 23.101(a)(2). The term “predominantly engaged in non-financial activities” is defined in Regulation 23.100 (17 CFR 23.100) and generally provides that: (i) the nonbank SD's, or its parent entity's, annual gross financial revenues for either of the previous two completed fiscal years represents less than 15 percent of the nonbank SD's or the nonbank SD's parent's, annual gross revenues for all operations (
i.e.,
commercial and financial) for such years, and (ii) the nonbank SD's, or its parent entity's, total financial assets at the end of its two most recently completed fiscal years represents less than 15 percent of the nonbank SD's, or its parent's, total consolidated financial and nonfinancial assets as of the end of such years.

36
The term “tangible net worth” is defined in Regulation 23.100 and generally means the net worth (
i.e.,
assets less liabilities) of a nonbank SD, computed in accordance with applicable accounting principles, with assets further reduced by a nonbank SD's recorded goodwill and other intangible assets.

37
The terms “market risk exposure” and “market risk exposure requirement” are defined in Regulation 23.100 (17 CFR 23.100) and generally mean the risk of loss in a financial position or portfolio of financial positions resulting from movements in market prices and other factors. Market risk exposure is the sum of: (i) general market risks including changes in the market value of a particular asset that 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.

38
The term “credit risk exposure requirement” is defined in Regulation 23.100 (17 CFR 23.100) and generally reflects the amount at risk if a counterparty defaults before the final settlement of a swap transaction's cash flows.

39
The term “uncleared swap margin” is defined in Regulation 23.100 (17 CFR 23.100) to generally mean the amount of initial margin that a nonbank SD would be required to collect from each counterparty for each outstanding swap position of the nonbank SD. A nonbank SD must include all swap positions in the calculation of the uncleared swap margin amount, including swaps that are exempt or excluded from the scope of the Commission's uncleared swap margin regulations. A nonbank SD must compute the uncleared swap margin amount in accordance with the Commission's margin rules for uncleared swaps.
See
17 CFR 23.154.

40
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.

The TNW approach requires a nonbank SD to compute its market risk exposure requirement and credit risk exposure requirement using standardized capital charges set forth in Securities and Exchange Commission (“SEC”) Rule 18a-1 (17 CFR 240.18a-1) that are applicable to entities registered with the SEC as security-based swap dealers (“SBSDs”) or standardized capital charges set forth in CFTC Regulation 1.17 applicable to entities registered as FCMs or entities dually-registered as an FCM and nonbank SD.
41

Nonbank SDs that have received Commission or NFA approval pursuant to Regulation 23.102 may use internal models to compute market risk and/or credit risk capital charges in lieu of the SEC or CFTC standardized capital charges.
42

41
17 CFR 23.101(a)(2)(ii)(A).

42

Id.

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.
43

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.

43
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.”

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.
44

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 (17 CFR 240.18a-1) as modified by the Commission's rule.
45

44

See
17 CFR 240.18a-1(c) and (d).

45

See
17 CFR 23.101(a)(1)(ii).

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.
46

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.”
47

46

See
17 CFR 23.102.

47
17 CFR 23.101(a)(1)(ii)(A)(
1
). The term “tentative net capital” is defined in Regulation 23.101(a)(1)(ii)(A)(
1)
by reference to SEC Rule 18a-1 and generally means a nonbank SD's net capital prior to deducting market risk and credit risk capital charges.

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.
48

The Bank-Based Approach also is consistent with the Basel Committee on Banking Supervision's (“BCBS”) international framework for bank capital requirements.
49

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.
50

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.

48

See
17 CFR 23.101(a)(1)(i).

49
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.

50
17 CFR 23.101(a)(1)(i).

The terms used in the Commission's Bank-Based Approach are defined by reference to regulations of the Federal Reserve Board.
51

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.
52

The term “additional tier 1 capital” is defined to include the nonbank SD's common equity tier 1 capital and further includes such additional equity instruments as preferred stock.
53

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).
54

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.
55

51

Id.
Regulation 23.101(a)(1)(i) references Federal Reserve Board Rule 217.20 (12 CFR 217.20) for purposes of defining the terms used in establishing the minimum capital requirements under the Bank-Based Approach.

52

See
12 CFR 217.20(b).

53

See
12 CFR 217.20(c).

54

See
12 CFR 217.20(d).

55
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).

Common equity tier 1 capital, additional tier 1 capital, and tier 2 capital are unencumbered and generally long-term or permanent forms of capital that help ensure that a nonbank SD will be able to absorb losses resulting from its operations and maintain confidence in the nonbank SD as a going concern. In addition, in setting an equity ratio requirement, this limits the amount of asset growth and leverage a nonbank SD can incur, as a nonbank SD must fund its asset growth with a certain percentage of regulatory capital.

A nonbank SD also must compute its risk-weighted assets using standardized capital charges or, if approved, internal models. Risk-weighting assets involves adjusting the notional or carrying value of each asset based on the inherent risk of the asset. Less risky assets are adjusted to lower values (
i.e.,
have less risk-weight) than more risky assets. As a result, nonbank SDs are required to hold lower levels of regulatory capital for less risky assets and higher levels of regulatory capital for riskier assets.

Nonbank SDs not approved to use internal models to risk-weight their assets must compute market risk capital charges using the standardized charges contained in CFTC 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 (Subpart D of 17 CFR part 217).
56

56

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 CFTC 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.
57

Standardized credit risk charges require the nonbank SD to multiply on-balance sheet and off-balance sheet exposures (such as receivables from counterparties, debt instruments, and exposures from derivatives) by predefined percentages set forth in the applicable Federal Reserve Board regulations contained in Subpart D of 17 CFR part 217.

57

See
17 CFR 1.17(c)(5) and 17 CFR 240.15c3-1(c)(2).

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.
58

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 (Subpart E and F, respectively, of 17 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.

58

See
17 CFR 23.102.

B. General Overview of Capital Rules for Japanese Nonbank SDs

The Japanese Capital Rules impose bank-like capital requirements on a Japanese nonbank SD that are consistent with the BCBS framework for international bank-based capital standards.
59

The Japanese Capital Rules are intended to require each Japanese nonbank SD to hold a sufficient amount of qualifying equity and subordinated debt to absorb decreases in the value of firm assets and to cover losses from its activities, including possible counterparty defaults and margin collateral shortfalls associated with its swap dealing activities, without the firm becoming insolvent.

59
FSA Application, p. 9.

The Japanese Capital Rules require each Japanese nonbank SD to hold and maintain a “capital adequacy amount” equal to 120 percent or more of the Japanese nonbank SD's “risk equivalent amount.”
60

A Japanese nonbank SD's “capital adequacy amount” is composed of the firm's equity classified as “Basic Items” and “Supplemental Items.”
61

Basic Items are composed of the firm's balance sheet capital including: (i) issued and outstanding shares; (ii) the payment for an application for new shares; (iii) the capital surplus; (iv) the earned surplus; (v) the negative valuation difference on available-for-sale securities; and (vi) the firm's own treasury stock.
62

Supplemental Items provide an additional layer of capital beyond Basic Items and are composed of the positive valuation difference on available-for-sale securities and certain subordinated debt instruments.
63

60
Article 46-6(2) of the FIEA, Article 176 of the COO and Section IV-2-1 (Preciseness of Capital Adequacy Ratio) of the Supervisory Guidelines for FIBO.

61
FSA Application, p. 14.

62
Article 176(1)(i) through (vi) of the COO.

63
Article 176(1)(vii) of the COO.

A Japanese nonbank SD's capital adequacy amount must be composed of at least 50 percent Basic Items, and limits are imposed on the aggregate amount of subordinated debt that may be used to meet the capital adequacy amount.
64

Subordinated debt also must satisfy specified conditions in order to be included in the Japanese nonbank SD's capital. Specifically, the subordinated debt instrument must: (i) contain special provisions subordinating the rights of the lender to the payment of principal and interest; (ii) not be secured by the Japanese nonbank SD; (iii) have a minimum original maturity of more than five years for long term subordinated debt, and at least two years for short term subordinated debt; (iv) provide that any early redemption must be done voluntarily by the Japanese nonbank SD and must be approved by the FSA; and (v) contain special provisions setting forth that no interest payment shall be made to the lender if such payment would result in the Japanese nonbank SD capital adequacy ratio falling below certain thresholds.
65

64
The Japanese Capital Rules provide that the total amount of Supplemental Items must be less than the total amount of the Japanese nonbank SD's Basic Items.
See
Article 176(1)(vii) of the COO.

65
Article 176(2) and (3) of the COO.

A Japanese nonbank SD's “risk equivalent amount” is calculated as the sum of the firm's: (i) market risk equivalent amount, which is the amount equivalent to possible risks which may accrue due to fluctuations in the prices of securities and other proprietary assets and transactions held;
66

(ii) counterparty risk equivalent amount, which is the amount equivalent to possible risks which may accrue due to the default in performance of contracts by the counterparties to transactions or any other reason;
67

and (iii) basic risk equivalent amount, which is the amount equivalent to possible risk which may accrue in the ordinary course of

executing business, such as errors in business handling.
68

The risk equivalent amount is a method of risk-weighting the Japanese nonbank SD's assets by adjusting the notional or carrying value of each asset based on the inherent risk of the asset. Less risky assets have a lower risk equivalent amount than assets with higher risk. As a result, Japanese nonbank SDs are required to hold lower levels of regulatory capital for assets with a lower risk equivalent amount and higher levels of regulatory capital for assets with a higher level of risk equivalent amount.

66
Article 178(1)(i) of the COO and Article 10 through 14 of the Notice on Capital. The “market risk equivalent amount” corresponds to “market risk” in the BCBS and Bank-Based Approach frameworks.

67
Article 178(1)(ii) of the COO and Article 15 through 15-7 of the Notice on Capital. The “counterparty risk equivalent amount” corresponds to “credit risk” in the BCBS and Bank-Based Approach frameworks.

68
Article 178(1)(iii) of the COO and Article 16 of the Notice on Capital.

To calculate its risk equivalent amount, a Japanese nonbank SD risk-weights its assets and exposures using specified standardized weights or approved internal model-based methodologies. The Japanese Capital Rules, including various ordinances, notices
69

and guidelines,
70

set out quantitative and qualitative requirements that internal models must meet in order to obtain and maintain approval. Topics addressed by the quantitative and qualitative requirements include model governance, validation, monitoring, and review.

69
Article 13 of the Notice on Capital.

70

Principles for Model Risk Management,
Financial Services Agency of Japan (November 12, 2021).

Modeled credit risk and market risk capital charges require the estimation of potential losses, with a certain degree of likelihood, within a specified time period, of a portfolio of assets.
71

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.

71
The Japanese Capital Rules require Japanese nonbank SDs with model approval for market risk to use a VaR model with a 99 percent, one-tailed confidence interval with (i) price changes equivalent to a ten 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
Article 13(3)(i), (ii), and (iv) of the Notice on Capital. Japanese nonbank SDs approved to use credit risk models are required to use specified formulas to calculate the expected exposure at default of the counterparty.
See
Article 15-2 of the Notice on Capital.

III. Commission Analysis of the Comparability of the Japanese Capital Rules and Japanese Financial Reporting Rules With the CFTC Capital Rules and CFTC Financial Reporting Rules

The following section provides a description and comparative analysis of the regulatory requirements of the Japanese Capital Rules and Japanese 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 FSA, the Commission provides a description of Japan's corresponding laws, regulations, or rules. The Commission then provides a comparative analysis of the Japanese Capital Rules or the Japanese Financial Reporting Rules with the corresponding CFTC Capital Rules or CFTC Financial Reporting Rules. The Commission identifies any material differences between the respective rules.

The Commission performed this proposed Capital Comparability Determination by assessing the comparability of the Japanese Capital Rules for Japanese nonbank SDs as set forth in the FSA Application and in the English language translation of certain Japanese laws and regulations, with the Commission's Bank-Based Approach. For clarity, the Commission did not assess the comparability of the Japanese Capital Rules to the Commission's TNW Approach or NLA Approach as the Commission understands that all Japanese nonbank SDs, as of the date of the FSA Application, are subject to the current bank-based capital approach of the Japanese Capital Rules. Accordingly, for clarity, when the Commission makes a preliminary determination herein about the comparability of the Japanese Capital Rules with the CFTC Capital Rules, the determination pertains to the comparability of the Japanese Capital Rules with the Bank-Based Approach under the CFTC Capital Rules.

As described below, it is proposed that any material changes to the Japanese Capital Rules will require notification to the Commission. Therefore, if there are subsequent material changes to the Japanese 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.
72

72
The Commission also may amend or supplement the Order to address any material changes to the CFTC Capital Rules and CFTC Financial Reporting Rules that are adopted after a final Order is issued.

In addition, although the BCBS bank capital standards establish minimum capital standards that are consistent with the requirements of the Commission's Bank-Based Approach, the Commission notes that consistency with the BCBS standards is not determinative of a finding of comparability with the CFTC Capital Rules. In the Commission's view, a foreign jurisdiction's consistency with the BCBS international bank 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 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 the CFTC Financial Reporting Rules into key categories that focus the analysis on whether the Japanese capital and financial reporting requirements are comparable to the Commission's requirements in purpose and effect, and not whether the Japanese 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 Japanese 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 Japanese nonbank SD to its relevant regulatory authorities to effectively monitor the financial condition of the firm; and (iv) the regulatory notices and other communications between the Japanese nonbank SD and its relevant regulatory authorities that detail

potential adverse financial or operational issues that may impact the firm. The Commission also reviewed the manner in which compliance by a Japanese nonbank SD with the Japanese Capital Rules and Japanese Financial Reporting Rules is monitored and enforced. The Commission invites public comment on all aspects of the FSA 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 Japanese Capital Rules and Japanese 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.
73

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 and from losses, including losses resulting from counterparty defaults and margin collateral failures, by requiring the firm to maintain an appropriate level of 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.

73

See
7 U.S.C. 6s(e)(3)(A).

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 swaps market, or impact the firm's solvency.

2. Regulatory Objective of Japanese Capital Rules and Japanese Financial Reporting Rules

The regulatory objective of the Japanese Capital Rules is to ensure the safety and soundness of FIBOs, including Japanese nonbank SDs. The Japanese Capital Rules are designed to preserve the financial stability and solvency of a Japanese nonbank SD by requiring the firm to maintain a sufficient amount of qualifying equity and subordinated debt to absorb decreases in the value of firm assets and to cover losses from business activities, including counterparty defaults and margin collateral shortfalls associated with the firm's swap dealing activities. The Japanese Capital Rules also place an emphasis on high quality equity, as a Japanese nonbank SD must maintain at least 50 percent of its minimum capital requirement in the form of Basic Items.
74

The Japanese Capital Rules further enhance a Japanese nonbank SD's capital available to meet its minimum capital requirements by requiring the firm to subtract the balance sheet carrying value of its fixed assets from the firm's Basic Items in computing its minimum capital.
75

74
The Japanese Capital Rules provide that the total amount of Supplemental Items must be less than the total amount of the Japanese nonbank SD's Basic Items.
See
Article 176(1)(vii) of the COO.

75
Article 177 of the COO. The Japanese Capital Rules require a Japanese nonbank SD to deduct fixed assets from the firm's Basic Items to better ensure that the Japanese nonbank's regulatory capital represents more liquid assets that may be promptly liquidated at values comparable to carrying value to meet obligations to creditors and to cover losses.

The objective of the Japanese Financial Reporting Rules is to enable the FSA to assess the financial condition and safety and soundness of Japanese nonbank SDs. The Japanese Financial Reporting Rules aim to achieve this objective by requiring each Japanese nonbank SD to provide financial reports and other financial position and capital information to the FSA on a regular basis. The financial reporting by a Japanese nonbank SD provides the FSA with information necessary to effectively monitor the Japanese nonbank SD's overall financial condition and its ability to meet its regulatory obligations as a FIBO.

3. Commission Analysis

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the overall objectives of Japanese 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 without the nonbank SDs becoming insolvent. The Japanese Capital Rules and CFTC Capital Rules are also based on, and consistent with, the BCBS international bank capital framework, which was designed to ensure that banking entities hold sufficient levels of capital to absorb losses and decreases in the value of assets without the banks becoming insolvent.

The Japanese Capital Rules are comparable in purpose and effect to the CFTC Capital Rules in that both regulatory approaches compute the minimum capital requirements based on the level of a nonbank SD's on-balance sheet and off-balance sheet exposures, with the objective and purpose of ensuring that the nonbank SD's capital is adequate to absorb losses resulting from such exposures. The Japanese Capital Rules and CFTC Capital Rules also provide for a comparable approach to the calculation of on-balance sheet and off-balance sheet risk exposures using standardized or internal model-based approaches that result in comparable risk exposure amounts. The Japanese Capital Rules' and CFTC Capital Rules' requirements for identifying and measuring on-balance sheet and off-balance sheet exposures under standardized or internal model-based approaches are also consistent with the requirements set forth under the BCBS international bank capital framework for identifying and measuring on-balance sheet and off-balance sheet exposures.

The Japanese Capital Rules and CFTC Capital Rules further achieve comparable outcomes and are comparable in purpose and effect in that both limit the types of capital instruments that may qualify as regulatory capital to cover the on-balance sheet and off-balance sheet risk exposures to high quality equity capital and qualifying subordinated debt instruments that meet conditions designed to ensure that the holders of

the debt have effectively subordinated their claims to other creditors of the nonbank SD. Both the Japanese Capital Rules and the CFTC Capital Rules define high quality capital by the degree to which the capital represents permanent capital that is contributed, or readily available to a nonbank SD, on an unrestricted basis to absorb unexpected losses, including losses from swaps trading and other activities, without the nonbank SD becoming insolvent.

The Japanese Financial Reporting Rules are also comparable in purpose and effect with the CFTC Financial Reporting Rules as both the FSA and CFTC require nonbank SDs to file periodic financial reports, including unaudited financial reports and an annual audited financial report, detailing their financial operations and demonstrating their compliance with minimum capital requirements. In addition to providing the CFTC and FSA with information necessary to comprehensively assess the financial condition of a nonbank SD on an ongoing basis, the financial reports further provide the CFTC and FSA 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 FSA in meeting their respective objectives of ensuring the safety and soundness of nonbank SDs. In this connection, the early identification of potential financial issues provides the Commission and FSA with an opportunity to address such issues with the nonbank SD before they develop to a state where the financial condition of the firm is impaired such that it may no longer hold a sufficient amount of qualifying regulatory capital to absorb decreases in the value of firm assets or cover losses from its 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 FSA Application and relevant Japanese laws and regulations.

B. Nonbank Swap Dealer Qualifying Capital

1. CFTC Capital Rules: Qualifying Capital Under Bank-Based Approach

The CFTC Capital Rules require a nonbank SD electing the Bank-Based Approach to maintain regulatory capital in the form of common equity tier 1 capital, additional tier 1 capital, and tier 2 capital in amounts that meet certain stated minimum requirements set forth in Regulation 23.101.
76

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.
77

The Commission's requirement for a nonbank SD to maintain a minimum amount of defined qualifying capital and subordinated debt is intended to ensure that the firm maintains a sufficient amount of regulatory capital to absorb decreases in the value of the firm's assets and to cover losses resulting from the firm's swap dealing and other activities, without the firm becoming insolvent.

76

See
17 CFR 23.101(a)(1)(i).

77
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.

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.
78

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.
79

Total tier 1 capital is composed of common equity tier 1 capital and further includes additional tier 1 capital.
80

Tier 2 capital includes certain types of instruments that include both debt and equity characteristics such as qualifying subordinated debt.
81

78
12 CFR 217.20.

79

Id.

80

Id.

81

Id.

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.
82

82
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).

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 losses from business activities, including swap dealing activities, without the firm becoming insolvent.

2. Japanese Capital Rules: Qualifying Capital

The Japanese Capital Rules require each Japanese nonbank SD to maintain a “capital adequacy amount” (
i.e.,
Basic Items and Supplemental Items) that equals or exceeds 120 percent of the firm's “risk equivalent amount,” which is the sum of the firm's market risk, credit risk, and basic risk.
83

Basic Items are composed of the Japanese nonbank SD's balance sheet capital including: issued and outstanding shares; (ii) the payment for an application for new shares; (iii) the capital surplus; (iv) the earned surplus; (v) the negative valuation difference on available-for-sale securities; and (vi) the firm's own treasury stock.
84

Supplemental Items include the positive valuation difference on available-for-sale securities and certain subordinated debt instruments.
85

Subordinated debt instruments also must meet certain conditions to qualify as Supplemental Items under the Japanese Capital Rules, including containing appropriate provisions subordinating the rights of the lender to the payment of principal and interest to other creditors of the Japanese nonbank SD.
86

The Japanese Capital Rules also provide that a minimum of 50 percent of a Japanese nonbank SD's capital adequacy amount must be composed of Basic Items.
87

83

See
Article 46-6-2 of the FIEA, Article 176 of the COO and Section IV-2-1 (Preciseness of Capital Adequacy Ratio) of the Supervisory Guidelines for FIBO.

84

See
Article 176(1)(i) through (vi) of the COO.

85

See
Article 176(1)(vii) of the COO.

86
Article 176(2) and (3) of the COO.

87
FSA Application, pp. 14-15.

The Japanese Capital Rules further require a Japanese nonbank SD, in computing its capital adequacy amount, to deduct the balance sheet carrying

value of fixed assets from its Basic Items.
88

The deduction of the carrying value of fixed assets is a conservative approach to the computation of a Japanese nonbank SD's capital adequacy amount as it excludes the value of non-liquid fixed assets from the firm's total Basic Items. The deduction of the carrying value of fixed assets from a Japanese nonbank SD's Basic Items reduces the amount of regulatory capital that the firm may recognize in meeting its capital requirements, and places an emphasis on the Japanese nonbank SD maintaining liquid assets to meet its minimum capital requirement to absorb business losses and decreases in the value of firm assets, and to satisfy financial obligations to counterparties and creditors.
89

88

See
Article 177 of the COO for a breakdown of the fixed assets to be deducted from the Basic Items.

89
The Japanese Capital Rules require a Japanese nonbank SD to deduct illiquid fixed assets from its regulatory capital to better ensure that the firm's regulatory capital reflects assets that may be more promptly liquidated at values comparable to carrying values to meet losses. As discussed
infra,
under the CFTC Capital Rules, fixed assets are not deducted from regulatory capital, and are included in the nonbank SD's risk weighted assets.

3. Commission Analysis

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the Japanese Capital Rules are comparable in purpose and effect to CFTC Capital Rules with regard to the types and characteristics of a nonbank SD's equity that qualifies as regulatory capital in meeting its minimum requirements. The Japanese Capital Rules and the CFTC Capital Rules for nonbank SDs both require a nonbank SD to maintain a quantity of high-quality and permanent capital 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 without resulting in the firm becoming insolvent.

The Japanese Capital Rules and the CFTC Capital Rules permit nonbank SDs to recognize comparable forms of equity capital and qualifying subordinated debt instruments toward meeting minimum capital requirements, with both the Japanese Capital Rules and the CFTC Capital Rules placing an emphasis on high quality equity capital instruments. In this regard, the types and characteristics of the equity instruments included in Basic Items under the Japanese Capital Rules are comparable to the types and characteristics of equity instruments comprising common equity tier 1 capital and additional tier 1 capital under the CFTC Capital Rules. Specifically, the Japanese Capital Rules' Basic Items and the CFTC Capital Rules' common equity tier 1 capital and additional tier 1 capital are comparable in that these forms of equity capital have similar characteristics (
e.g.,
the equity must be in the form of high-quality, committed, and permanent capital) and these forms of capital represent contributed equity capital that generally has no priority to the distribution of firm assets or income with respect to other shareholders or creditors of the firm, which allows a nonbank SD to use this equity to absorb decreases in the value of firm assets and cover losses from business activities, including the firm's swap dealing activities.

Supplemental Items under the Japanese Capital Rules are also comparable to tier 2 capital under the CFTC Capital Rules. Specifically, the qualifying conditions imposed on subordinated debt instruments are comparable under the Japanese Capital Rules and the CFTC Capital Rules and ensure that the debt has qualities that support its recognition by a nonbank SD as equity for capital purposes, including that the debt lenders have effectively subordinated their claims for repayment on the debt to other creditors of the nonbank SD. Qualifying subordinated debt under the Japanese Capital Rules and CFTC Capital Rules also must contain provisions limiting or restricting repayment of the subordinated loans if such repayments result in the nonbank SD's equity falling below certain defined thresholds. These terms and conditions provide assurances that the subordinated debt is appropriate to be recognized as regulatory capital available to a nonbank SD to meet its obligations and to absorb business losses and decreases in the value of firm assets.

The Japanese Capital Rules differ from the CFTC Capital Rules, however, in that the Japanese Capital Rules require Japanese nonbank SDs to exclude the carrying value of fixed assets from the sum of the Basic Items in computing the capital adequacy amount. The CFTC Capital Rules do not require a nonbank SD to exclude fixed assets from the firm's common equity tier 1 capital or additional tier 1 capital. The deduction of the carrying value of fixed assets is a stricter capital standard as it imposes an obligation on Japanese nonbank SDs to meet minimum regulatory capital requirements with assets that are more liquid than fixed assets.

Having reviewed the FSA Application and the relevant Japanese laws and regulations, the Commission has made a preliminary determination that the Japanese Capital Rules and CFTC Capital Rules impose comparable requirements on Japanese 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 FSA Application and relevant Japanese 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 1 capital of at least $20 million; (ii) an aggregate of common equity tier 1 capital, additional tier 1 capital, and tier 2 capital in an amount equal to or in excess of 8 percent of the nonbank SD's uncleared swap margin amount: (iii) an aggregate amount of common equity tier 1 capital, additional tier 1 capital, and tier 2 capital equal to or greater than 8 percent of the nonbank SD's total risk-weighted assets, provided that common equity tier 1 capital comprises at least 6.5 percent of the 8 percent; and (iv) the amount of capital required by the NFA.
90

90

See
17 CFR 23.101(a)(1)(i). NFA has not adopted a separate capital requirement for a nonbank SD.

Prong (i) above requires each nonbank SD electing the Bank-Based Approach to maintain a minimum of $20 million of common equity tier 1 capital in order to operate as a nonbank SD. The requirement that each nonbank SD electing the CFTC Bank-Based Approach maintain a minimum of $20 million of common equity tier 1 capital is also consistent with the minimum capital requirement for nonbank SDs electing the NLA Approach and the TNW Approach.
91

The Commission adopted this minimum requirement as it believed that the role a nonbank SD performs in the financial markets by engaging in swap dealing activities warranted a minimum level of capital, stated as a fixed dollar amount that does not fluctuate with the level of the firm's

dealing activities, to help ensure that the firm meets its financial commitments to swap counterparties and creditors without the firm becoming insolvent.
92

91
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).

92

See, e.g.,
85 FR 57492.

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 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.
93

93

See,
85 FR 57462.

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 adequacy 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 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.
94

For standardized market risk charges, the Commission adopts by reference the standardized market risk charges set forth in Regulation 1.17 for FCMs and SEC Rule 18a-1 for nonbank SBSDs.
95

The standardized market risk charges under Regulation 1.17 and SEC Rule 18a-1 are calculated as a percentage of the market value or notional value of the nonbank SD's marketable securities and derivatives positions, with the percentages applied to the market value or notional value increasing as the expected or anticipated risk of the positions increases.
96

As stated above, the nonbank SD must maintain qualifying capital in an amount that equals or exceeds 8 percent of the firm's total market risk-weighted assets.
97

94

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.

95
See paragraph (3) of the definition of the term
BHC equivalent risk-weighted assets
in 17 CFR 23.100.

96

See
17 CFR 1.17(c)(5) and 17 CFR 240.18a-1(c)(1).

97

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 is market risk-weighted assets by requiring the nonbank SD to multiply its market-risk weighted assets by a factor of 12.5.

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.
98

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.
99

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.
100

98

See
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.

99

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)).

100

See
17 CFR 217.33.

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”).
101

Both CEM and SA-CCR are non-model, rules-based, approaches to calculating counterparty credit risk for derivatives positions. Credit risk under CEM is the sum of: (i) the current exposure (
i.e.,
the positive mark-to-market) of the derivatives contract; and (ii) the potential future exposure, which is calculated as the product of the notional principal amount of the derivatives contract multiplied by a standard credit risk conversion factor set forth in the rules of the Federal Reserve Board.
102

Credit risk under SA-CCR is defined as the exposure at default amount of a derivatives contract, which is computed as the sum of: (i) the replacement costs of the contract (
i.e.,
the positive mark-to market); and (ii) the potential future exposure of the contract multiplied by a factor of 1.4.
103

101

See
17 CFR 217.34.
See also,
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 to use CEM or SA-CCR under the Federal Reserve Board's capital rules.

102

See
12 CFR 217.34.

103

See
12 CFR 217.132(c).

A nonbank SD also may 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 application to the Commission or NFA.
104

The application is required to include, among other things, a list of categories of positions that the nonbank SD holds in its proprietary accounts and a brief description of the methods that the nonbank SD will use to calculate deductions for market risk and/or credit risk charges for such positions, as well as a description of the mathematical models used to compute market risk and credit risk charges.

104

See
17 CFR 23.102(c).

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”).
105

Subpart F is based on models that are consistent with the BCBS Basel 2.5 capital framework.
106

The Commission's qualitative and quantitative requirements for internal capital models also are comparable to the SEC's existing internal capital model requirements for broker-dealers in securities and SBSDs,
107

which are also broadly based on the BCBS Basel 2.5 capital framework.

105

See
paragraph (4) of the definition of
BHC equivalent risk-weighted assets
in 17 CFR 23.100.

106
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 RWAs 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).

107
The SEC internal model requirements for SBSDs are listed in 17 CFR 240.18a-1(d).
See also
SEC FOCUS Report Part II, Computation of Net Capital (Filer Authorized to Use Models) (providing for inclusion of a market risk exposure section for Basel 2.5 firms).

A nonbank SD approved to use internal models to compute credit risk is required to perform such computation in accordance with Subpart E of the Federal Reserve Board's Part 217 regulations.
108

These internal credit risk modeling requirements are also based on the Basel 2.5 capital framework and the Basel 3 capital framework.

108
12 CFR 217 Subpart E.

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.
109

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.
110

109

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.

110
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.

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. Japanese Capital Rules: Japanese Nonbank Swap Dealer Minimum Capital Requirements

The Japanese Capital Rules impose bank-like capital requirements on a Japanese nonbank SD that, consistent with the BCBS international bank capital framework, require the Japanese nonbank SD to hold a sufficient amount of qualifying equity capital and subordinated debt to absorb decreases in the value of a firm assets and to cover losses from its business activities, including the firm's swap dealing activities, without the firm becoming insolvent. Specifically, the Japanese Capital Rules require each Japanese nonbank SD to maintain a “capital adequacy amount” that equals or exceeds 120 percent of the firm's “risk equivalent amount.”
111

The “capital adequacy amount” is calculated as the Japanese nonbank SD's qualifying balance sheet equity capital in the form of Basic Items and Supplemental Items. The Japanese Capital Rules further require that at least 50 percent of the Japanese nonbank SD's capital used to meet the 120 percent minimum requirement must be composed of Basic Items, and any subordinated debt included in Supplemental Items must meet regulatory requirements designed to ensure that the debt is adequately subordinated to claims of other potential creditors of the firm.
112

111
Article 46-6(2) of the FIEA, Article 176 of the COO and Section IV-2-1 (Preciseness of Capital Adequacy Ratio) of the Supervisory Guidelines for FIBO.

112
Article 176(1)(vii) of the COO.

The Japanese nonbank SD's “risk equivalent amount” is calculated as the sum of the: (i) market risk equivalent amount; (ii) counterparty risk equivalent amount; and (iii) basic risk equivalent amount.
113

Comparable to nonbank SDs under the CFTC Bank-Based Approach, the Japanese Capital Rules require Japanese nonbank SDs to compute market risk and/or credit risk using a standardized approach or, if approved to use internal models, market risk and/or credit risk models. The basic risk equivalent amount is computed as an amount equal to 25 percent of the Japanese nonbank SD's defined annual operating expenses, and is intended to provide a capital cushion to cover risks that may accrue in the course of executing ordinary business operations, such as error in business transactions.
114

113
Article 46-6(2) of the FIEA, Article 176 of the COO and Section IV-2-1 (Preciseness of Capital Adequacy Ratio) of the Supervisory Guidelines for FIBO.

114
Article 178(1)(iii) of the COO and Article 16 of the Notice on Capital.

For standardized market risk charges, the Japanese Capital Rules require a Japanese nonbank SD to calculate a market risk equivalent amount to reflect possible decreases in value of the firm's financial positions including equity risk, interest rate risk, foreign exchange risk, commodity risk, crypto asset risk, and option risk.
115

The market risk equivalent amount is calculated by the Japanese nonbank SD by multiplying specified market risk charges set forth in the Japanese Capital Rules by the notional or market value of the relevant assets and positions. A Japanese nonbank SD is further required to include the full value of its market risk equivalent amount in its aggregate risk equivalent amount, which effectively requires the Japanese nonbank SD to hold qualifying equity capital and subordinated debt in an amount that equals or exceeds 120 percent of the market risk equivalent amount.

115
FSA Notice No. 59 of 2007, Chapter III, Section 2, Article 4.

With respect to credit risk for non-derivatives positions, the Japanese Capital Rules require a Japanese nonbank SD to calculate its standardized counterparty risk equivalent amount by multiplying its exposure under a given transaction by the specific risk weight applicable to the counterparty under the provisions of the

Japanese Capital Rules. In this regard, the Japanese Capital Rules impose risk-weights ranging from 0 percent to 25 percent on exposures to governmental financial institutions, non-governmental financial institutions, general corporations, and individuals.
116

For certain exposures, credit ratings are used to determine the percentage of the counterparty credit risk exposure and, if no credit ratings are available, the Japanese nonbank SD generally applies a 25 percent risk-weight.

116
Article 15(3) of the Notice on Capital.

A Japanese nonbank SD is required to include the full amount of the counterparty risk equivalent in its aggregate risk equivalent amount. Therefore, a Japanese nonbank SD is effectively required to maintain a capital adequacy amount that is equal to or in excess of 120 percent of its credit risk equivalent amount.

With respect to credit risk for derivatives positions, the Japanese Capital Rules require a Japanese nonbank SD that is not approved to use credit risk models to calculate its exposure using the CEM, which is one of the standardized 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.
117

Under the CEM, a Japanese nonbank SD calculates its exposures for over-the-counter derivatives using a standardized rules-based approach, and is required to hold an amount of qualifying capital that equals or exceeds 120 percent of the aggregate derivatives exposures.

117

See
17 CFR 23.101(a)(1)(i) and
supra,
note 78.

Japanese nonbank SDs may use internal models approved by the FSA to calculate their market risk equivalent amount and/or counterparty risk equivalent amount in lieu of the standardized charges. Japanese Capital Rules set out qualitative and quantitative requirements
118

that internal models must meet in order to be approved for use. The Japanese Capital Rules also require Japanese nonbank SDs to satisfy qualitative and quantitative requirements in order to continue to use models after obtaining the initial approval. These qualitative and quantitative requirements address: the effective review and assessment of models during development, validation, and periodic examinations; identification of key assumptions and limitations; and management of model risk. In this regard, Japanese nonbank SDs approved to use internal models for capital purposes are subject to principles for model risk management.
119

The principles lay out practices for nonbank SDs, covering model governance, model risk rating, documentation, testing, monitoring, independent validation, controls of vendor products and external resources, and internal audit. The ongoing monitoring includes frequent tests, such as stress testing, backtesting and benchmarking. The FSA periodically confirms that firms using models are adhering to the conditions set.

118
Article 13 of the Notice on Capital.

119

Principles for Model Risk Management,
Financial Services Agency (November 12, 2021). The principles are available at:
https://www.fsa.go.jp/en/news/2021/2021112en.html.

The internal market risk model-based methodology contained in the Japanese Capital Rules is based on the Basel 2.5 standard,
120

and requires a Japanese nonbank SD 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.
121

The Japanese Capital Rules require a Japanese nonbank SD using approved internal models for market risk to calculate a stressed VaR, specific risk, incremental risk, and comprehensive risk of correlation trading.
122

120
Compare Article 1 through 14-11 of the Notice on Capital with Revisions to the Basel II Market Risk Framework.

121
Article 13(3)(i), (ii) and (iv) of the Notice on Capital.

122
Article 13-2 and 14-9 of the Notice on Capital.

The Japanese Capital Rules' internal credit risk model-based methodology is also based on the Basel 2.5 standard. The Japanese Capital Rules allow for the estimation of expected exposure, as a measure of potential future exposure, based on VaR techniques as well, with adjustments to the period of risk, as appropriate to the asset and counterparty.
123

Credit risk models may include internal ratings based on the estimation of default probabilities, consistent with the Basel framework and subject to the same model risk management guidelines.

123
FSA Notice 15.2-2.

3. Commission Analysis

The Commission has reviewed the FSA Application and the relevant Japanese laws and regulations, and has preliminarily determined that the Japanese Capital Rules are comparable in purpose and effect to CFTC Capital Rules with regard to the establishment of a nonbank SD's minimum capital requirement and the calculation of the nonbank SD's amount of regulatory capital. Although there are differences in the minimum capital requirements and calculation of regulatory capital between the Japanese Capital Rules and the CFTC Capital Rules, as discussed below, the Commission preliminarily believes that the Japanese Capital Rules and CFTC Capital Rules are designed to ensure the safety and soundness of a nonbank SD and, subject to the proposed condition discussed below, will achieve comparable outcomes by requiring the firm to maintain a minimum level of qualifying regulatory capital and subordinated debt to absorb losses from the firm's business activities, including its swap dealing activities, and decreases in the value of the firm's assets, without the nonbank SD becoming insolvent.

The CFTC Capital Rules require a nonbank SD electing the Bank-Based Approach to maintain regulatory capital in an amount that meets or exceeds each of the following requirements: (i) $20 million of common equity tier 1 capital; (ii) 8 percent of the nonbank SD's uncleared swap margin amount; (iii) 8 percent of the nonbank SD's risk-weighted assets (with common equity tier 1 capital comprising at least 6.5 percent of the 8 percent);and (iv) the amount of capital required by NFA.
124

The Japanese Capital Rules require a Japanese nonbank SD to maintain regulatory capital in an amount equal to or in excess of 9.6 percent of the market risk, credit risk, and operational risk of the firm.
125

124
17 CFR 23.101(a)(1)(i). NFA has not adopted additional capital requirements for nonbank SDs and, therefore, an analysis of the comparability of this element of the CFTC Capital Rules with the Japanese Capital Rules is not applicable.

125
The Japanese Capital Rules require a Japanese nonbank SD to maintain a capital adequacy amount that equals or exceeds 120 percent of its risk-weighted assets. Adjusting the Japanese Capital Rules approach to be consistent with the CFTC Capital Rules approach results in a Japanese nonbank SD having an effective minimum capital requirement of 9.6 percent of its risk weighted assets.

The Japanese Capital Rules differ from the CFTC Capital Rules in that the Japanese Capital Rules do not impose a capital requirement on Japanese nonbank SDs based on a minimum dollar amount or based on a percentage of the margin for uncleared swap transactions. However, the approach for conducting a Capital Comparability Determination is a principles-based, holistic approach that focuses on whether the applicable foreign jurisdiction's capital requirements achieve comparable outcomes to the corresponding CFTC requirements for nonbank SDs.
126

The focus of the comparability determination is on

whether the foreign jurisdiction's capital requirements are comparable to the Commission's in purpose and effect, and not on whether the foreign jurisdiction's capital requirements are comparable in every aspect or contain identical elements based on a line-by-line assessment or comparison of the foreign jurisdiction's regulatory requirements with the Commission's regulatory requirements.
127

126
17 CFR 23.106(a)(3)(ii).
See also
85 FR 57520 at 57521.

127

Id.

Based on a principles-based assessment, the Commission preliminarily believes, 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 Japanese Capital Rules and the CFTC Capital Rules are comparable. In this connection, the Japanese Capital Rules and 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. As discussed below, the Commission specifically seeks public comment on the question of whether requirements under the Japanese 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.

The Commission preliminarily believes that the Japanese Capital Rules and CFTC Capital Rules impose a comparable approach by requiring a nonbank SD to maintain qualifying equity capital and qualifying subordinated debt in an amount that equals or exceeds the nonbank SD's risk-weighted assets, which are composed of the aggregate of the firm's market risk and credit risk charges. The Japanese Capital Rules, however, require a Japanese nonbank SD to maintain a higher percentage of regulatory capital relative to the firm's risk-weighted assets than the CFTC Capital Rules require. Specifically, the Japanese Capital Rules require a Japanese nonbank SD to maintain regulatory capital equal to or greater than 9.6 percent of the firm's risk-weighted assets.
128

128
As previously noted, the Japanese Capital Rules require a Japanese nonbank SD to maintain a capital adequacy amount that equals or exceeds 120 percent of its risk-weighted assets. For purposes of comparison of the two rules, the Japanese Capital Rules effectively require a Japanese nonbank SD to maintain an effective minimum capital ratio of 9.6 percent of the firm's risk-weighted assets and the CFTC Capital Rules require a nonbank SD to maintain a minimum capital ratio of 8 percent of the firm's risk-weighted assets.

Furthermore, the Japanese Capital Rules add operational risk to the market risk and credit risk charges in setting the minimum capital requirements whereas the CFTC Capital Rules sets operational risk as a separate minimum capital requirement from the market risk and credit risk calculation of the risk weighted assets.
129

Specifically, as noted above, under the Japanese Capital Rules the basic risk equivalent amount is computed as an amount equal to 25 percent of the Japanese nonbank SD's defined annual operating expenses, and is intended to provide a capital cushion to cover risks that may accrue in the course of executing ordinary business operations, such as error in business transactions.
130

In addition, the Japanese Capital Rules require a Japanese nonbank SD to deduct the carrying value of fixed assets from its Basic Items in computing its regulatory capital, which promotes a degree of liquidity into the Japanese nonbank SD's regulatory capital. The Commission preliminarily believes the inclusion of an operational risk charge with the market risk and credit risk charges, and the deduction of the carrying value of fixed assets from regulatory capital, 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. The Commission specifically seeks public comment below on the comparability of this Commission requirement with the Japanese requirements designed to address operational risk.

129
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, the Commission stated that the intent of the uncleared swap margin amount was to establish a method of developing a minimum amount of capital for a nonbank SD to meet all of its obligations as a SD to market participants, and to cover potential operational risk, legal risk and liquidity risk, and not just the risks of its trading portfolio.
See,
85 FR 57462 at 57485.

130
Article 178(1)(iii) of the COO and Article 16 of the Notice on Capital. The basic risk equivalent amount is calculated as 25 percent of certain defined operating expenses incurred by the Japanese nonbank SD over a 12-month period, and includes general expenses, selling expenses, and financial expenses.

The calculation of market risk charges and credit risk charges is also comparable under the Japanese Capital Rules and the CFTC Capital Rules. 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: allocating assets to categories according to risk and assigning each a risk weight; allocating counterparties to categories according to risk assessments and assigning each a risk factor; calculating gross exposures based on the valuation of assets; calculating a net exposure allowing offsets following well defined procedures and subject to clear limitations; adjusting the net exposure by the market risk weights; and finally, for credit risk exposures, multiplying the sum of net exposures to each counterparty by the corresponding risk factor. After reviewing the standardized risk weights contained in the Japanese Capital Rules and the CFTC Capital Rules, the Commission preliminarily believes that the resulting risk charges are comparable for corresponding categories of instruments and credit exposures.

Internal market risk and credit risk models under the Japanese Capital Rules and the CFTC Capital Rules are based on the BCBS framework and contain comparable quantitative and qualitative requirements covering the same risks, including comparable model risk management requirements. As both rule sets address the same types of risk, with similar allowed methodologies, calibrated to similar risk levels and under similar controls, the Commission preliminarily believes that these requirements are comparable, as they produce similar market and credit risk charges for comparable exposures. Market risk charges increase capital requirements, or conversely are deducted from available capital, in full amount. Credit risk charges increase capital requirements, or conversely are deducted from available capital, with an adjustment. This adjustment to credit risk charges is applied in the CFTC Capital Rules as a final multiplication of credit risk weights by 8 percent, while the Japanese Capital Rules apply a comparable adjustment directly via the counterparty risk weights. The Japanese Capital Rules and the CFTC Capital Rules contain comparable requirements for the management of model risk, which depend on a series of controls, including the independence of validation, ongoing monitoring and audit. The ongoing monitoring includes frequent tests, such as stress testing, backtesting and benchmarking.

The Japanese Capital Rules differ from the CFTC Capital Rules in that the Japanese Capital Rules do not contain a requirement that each Japanese nonbank

SD maintain a fixed amount of regulatory capital. As noted previously, the requirement in the CFTC Capital Rules for a non-bank SD to maintain a minimum of $20 million of common equity tier 1 capital is intended to ensure that each nonbank SD maintains a level of capital, without regard to the firm's level of dealing activities, sufficient to meet its obligations to swap market participants given the firm's status as a registered SD.

The Commission preliminarily believes that each CFTC-registered nonbank SD should maintain a minimum level of regulatory capital to help ensure that it satisfies its regulatory obligations and meets is financial commitments to swap counterparties and creditors without the firm becoming insolvent. Therefore, the Commission is proposing to condition the proposed Capital Comparability Determination Order to require each Japanese nonbank SD to maintain a minimum level of regulatory capital in the form of Basic Items, as defined in Article 176 of the COO. Specifically, the proposed condition would require each Japanese nonbank SD to maintain at all times regulatory capital in the form of Basic Items in an amount denominated in yen that is equivalent to or greater than $20 million in U.S. dollars. The Commission is also proposing that a Japanese nonbank SD may convert the yen-denominated amount of its Basic Items to the U.S. dollar equivalent based on a commercially reasonable and observed exchange rate.

Having compared the minimum capital requirements and the calculation of regulatory capital under the Japanese Capital Rules for Japanese nonbank SDs with the corresponding minimum capital requirements and calculation of regulatory capital under the CFTC's Capital Rules for nonbank SDs, the Commission preliminarily finds that, subject to the proposed condition discussed above, the minimum capital requirements and calculation of regulatory capital are comparable. The Commission invites public comment on its analysis above, including comment on the FSA Application and Japanese laws and regulations, and the Commission's preliminary determination that the Japanese Capital Rules and the CFTC Capital Rules are comparable in purpose and effect and achieve comparable outcomes with respect to the minimum regulatory capital requirements and the calculation of regulatory capital for nonbank SDs.

The Commission also specifically seeks public comment on the question of whether the requirement under the Japanese Capital Rules for a Japanese nonbank SD to hold qualifying capital in an amount equal to 25 percent of its defined annual operating expenses is sufficiently comparable in purpose and effect to the CFTC's requirement for a nonbank SD to hold qualifying capital in amount equal to at least 8 percent of the nonbank SD's uncleared swap margin amount.

The Commission further requests comment on the proposed condition that each Japanese nonbank SD maintains a minimum level of regulatory capital in the form of yen-denominated Basic Items (as defined in Article 176 of the COO) that equals or exceeds the equivalent of $20 million U.S. dollars. Lastly, the Commission requests comment on the proposed requirement that a Japanese nonbank SD determine the amount of yen-denominated Basic Items it holds in U.S. dollars by using a commercially reasonable and observed yen/U.S. dollar exchange rate.

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. In this regard, 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.
131

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.
132

131
17 CFR 23.105(b).

132

Id.

The CFTC Financial Reporting Rules also require each nonbank SD to prepare and file with the Commission and NFA periodic unaudited and annual audited financial statements.
133

A nonbank SD that elects the TNW Approach is required to file unaudited financial statements within 17 business days of the close of each fiscal quarter, and its annual audited financial statements within 90 days of its fiscal year-end.
134

A nonbank SD that elects either 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 its annual audited financial statements within 60 days of the end of its fiscal year.
135

133
17 CFR 23.105(d) and (e).

134
17 CFR 23.105(d)(1) and (e)(1).

135

Id.

The CFTC Financial Reporting Rules further 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 minimum capital requirement; and (vi) such further material information necessary to make the required statements not misleading.
136

The annual audited financial statements must include: (i) a statement of financial condition; (ii) a statement of income/loss; (iii) a statement of cash flows; (iv) a statement of changes in liabilities subordinated to claims of general creditors; (v) a statement of changes in ownership equity; (vi) a statement demonstrating the calculation of, and compliance with, the applicable regulatory minimum capital requirement; (vii) appropriate footnote disclosures; and (vii) a reconciliation of any material differences between the annual audited financial statements and the unaudited financial statements prepared as of the nonbank SD's year-end date.
137

136
17 CFR 23.105(d)(2).

137
17 CFR 23.105(e)(4).

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.
138

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.
139

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 geographic

distribution of derivatives exposures for the 10 largest countries.
140

138
17 CFR 23.105(k) and (l) and Appendix B to Subpart E of Part 23.

139
17 CFR 23.105(l) and Appendix B to Subpart E of Part 23.

140
17 CFR 23.105(l) in Schedules 2, 3, and 4, respectively.

The CFTC Financial Reporting Rules also require a nonbank SD to attach to each unaudited and audited financial report an oath or affirmation that to the best knowledge and belief of the individual making the affirmation the information contained in the financial report is true and correct.
141

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.
142

141
17 CFR 23.105(f).

142

Id.

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.
143

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.
144

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.
145

A nonbank SD also must obtain written approval from NFA to change the date of its fiscal year-end for financial reporting.
146

143
17 CFR 23.105(i).

144

Id.

145

Id.

146
17 CFR 23.105(g).

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”).
147

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.
148

The Commission requires this information in order to monitor the use of custodians by nonbank SDs and their swap counterparties. Such information assists the Commission in monitoring the safety and soundness of a nonbank SD by monitoring whether the firm is current with its swap counterparties with respect to the posting and collecting of margin required by the uncleared margin rules. By requiring the nonbank SD to report the required amount of margin to be posted and collected, and the amount of margin that is actually posted and collected, the Commission could identify potential issues with the margin practices and compliance by nonbank SDs that may hinder the ability of the firm to meet its 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.

147
17 CFR 23.105(m).

148

Id.

2. Japanese Nonbank Swap Dealer Financial Reporting Requirements

The Japanese Financial Reporting Rules impose financial reporting requirements on FIBOs, including Japanese nonbank SDs. Specifically, the Japanese Financial Reporting Rules require each of the Japanese nonbank SDs to submit monthly monitoring survey reports (“Monthly Monitoring Reports”) to the FSA.
149

The Monthly Monitoring Reports are required to report on the Japanese nonbank SD's balance sheet, profit and loss statement, capital adequacy ratio, market risk, counterparty risk and liquidity risk.
150

The Monthly Monitoring Reports are typically submitted by the Japanese nonbank SDs within 2-3 weeks of the end of each month.
151

149

See
II-1-4 (General Supervisory Processes) of the Supervisory Guidelines for FIBO, which directs the FSA (and other supervisors) as part of its offsite monitoring to require FIBOs (including the Japanese nonbank SDs) to submit a monitoring survey report regarding the following matters: capital adequacy ratio, status of business operations and accounting (including a balance sheet and profit and loss statement), status of segregated management of customer assets, market risk, counterparty risk, operational risk, and liquidity risk. The FSA has, pursuant to Article 56-2(1) of the FIEA, ordered the Japanese nonbank SDs to submit monthly monitoring reports to the FSA.

150

Id.

151
There are vario

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2022-16684. Public record. Not legal advice.